The Adverse Consequences from a Forestry Standards Certification Monopoly
By Donald Rieck and Wayne Winegarden, PhD*
Before policy is changed, the potential economic consequences that they can cause should also be considered. The Community Reinvestment Act and other affordable housing regulations, for instance, were supposed to increase loan availability to under-served communities. Unintentionally, these regulations played an important role in creating the housing boom and bust experienced during the 2000s.[i] Another example is minimum wage laws. In 2009, the minimum wage was increased to $7.25. While the intended consequence was greater incomes for working families, the unintended consequences are increased unemployment and fewer economic opportunities.
Negative economic consequences also results when policies transform competitive markets into a monopoly. Currently, there is competition between alternative forestry certification programs. Certification programs are self-regulatory, competitive and voluntary structures where forest owners choose a forestry certification program, and then, in order to obtain the desired certification, abide by its rules and regulations. Some activist environmental groups, however, are lobbying to thwart the competitive market. Instead, these groups would prefer that the Forest Stewardship Council (FSC) certification program be granted a monopoly over the current certification market.
A new EconoSTATS paper, authored by Brooks Mendell, PhD and Amanda Hamsley Lang (available here), analyzed the impacts of mandating the use of a specific land management program in various regions of the U.S., and how it potentially affects timber markets. The paper examines the costs of implementing various forest certification programs. The Mendell and Lang study found that an FSC monopoly on certification could result in tens of thousands of job losses and harm forest economies in the U.S. Pacific Northwest and South. Such a monopoly threatens the employment stability of foresters, loggers and millworkers, among other positions.
Mendell and Lang examine the impacts for specific forests in the South (Arkansas/Louisiana) and the Pacific Northwest (Oregon) and then generalize their findings to provide specific insights for Arkansas and Oregon, which represent approximately 14 percent of the private forestlands and 10 percent of forest owners in the South and Pacific Northwest.
The forced imposition of FSC standards in these areas was found by Mendell and Lang to have significant and adverse economic consequences. Mendell and Lang found that the FSC standards significantly reduced landowners’ economic returns. FSC certification restricts the amount of output that can be produced from the same amount of acreage compared to the other certification programs. The reduced acreage available for timber harvests leads to smaller harvests of U.S. produced timber compared with other scenarios (e.g., base case and SFI or Sustainable Forestry Initiative). The reduced output leads to income losses that result in lost employment and tax revenues. Jobs lost include not only direct positions such as foresters, loggers, millworkers, and forestry consultants and contractors, but also indirect jobs that support the forest industry, such as motor freight transportation, machinery repair, and wholesale trade. Indirect job impacts also include “induced” jobs created by the spending of workers in the forest industry.
The size of the economic consequences varied across the two regions studied and by forest designation.
In the Arkansas case study, the FSC-Plantation standard imposed higher costs than the base case and SFI scenarios. Under FSC, forests can be managed as either plantations or natural stands. Landowners that managed their forests as plantations in Arkansas experienced significantly larger economic losses than those who managed their forests as natural stands. These significantly larger economic losses associated with the FSC-Plantation standard creates a tremendous incentive to avoid classification as a plantation as defined by FSC in Arkansas. In fact, an earlier review of this issue showed that this is exactly what occurs; FSC auditors sometimes classify these regions as “semi-natural” forests instead of what are traditionally thought of as plantations.
In the Oregon case study, regardless of whether the forests were managed as plantations or natural stands, the FSC standard imposes significant economic consequences. Compared to the other scenarios, forest owners who managed their forests under the FSC program experienced lower total revenues estimated to be between 31 percent and 46 percent.
According to Mendell and Lang, these impacts could be quite significant if a FSC monopoly were adopted. For instance, state-level implementation of the FSC-Natural standard in Oregon could reduce direct and indirect forest industry employment by over 31,000 jobs and reduce annual severance taxes by over $6 million. State-level implementation of the FSC-Plantation standard in Arkansas could eliminate direct and indirect forest industry employment by up to 10,000 jobs and reduce annual severance taxes by over $600,000.
Given that forest land covers one-third of the U.S., the nationwide impact on an FSC monopoly could be staggering for landowners, consumers of American-grown wood, and the economy alike. Earlier research found that a FSC monopoly would lead to a $34 billion annual loss to the domestic wood and paper market, while increasing product costs for American consumers by as much as 20 percent.
Balancing the competing needs of forests owners, consumers of timber products, and environmental concerns is complex. And, as documented by Mendell and Lang, geographical differences across regions (the South versus the Pacific Northwest for instance) add greater complexity because each region may require different standards to successfully balance the competing needs. Competitive certification programs create a system where different interests can consistently interact with one another, account for geographical differences, and adjust to material economic or technological changes. Such a system helps ensure that the most efficient forestry standards results. The Mendell and Lang study makes an important contribution towards a greater understanding about the economic impact of forest certification standards and how these standards – especially how an FSC monopoly – could affect the ways the private forest owners manage their lands. .
By demonstrating the benefits created by maintaining a competitive certification standard market, the Mendell and Lang study has broader applicability as well. Forestry management is not the only industry facing competing interests across diverse groups of constituents. A deeper understanding of how the forestry certification programs balance these risks can help other industries develop a dynamic and responsive regulatory system as well. As such, we also believe that this Mendell and Lang study provides an important case study that illustrates the benefits that can be gained through competitive regulatory structures.
Competitive forestry certification programs are uniquely qualified to balance the competing interests and establish the optimal regulatory practices. Striking the optimal balance requires reliable information on the alternative costs and benefits created by the different forest certification programs. We believe that this EconoSTATS study makes an important contribution toward this goal for policymakers and other interested parties.
* Donald Rieck is Executive Director of EconoSTATS; Wayne Winegarden, PhD, is a Contributing Editor to EconoSTATS and a Fellow in Business and Economics with the Pacific Research Institute.
[i] Sperry, Paul (2012) “New Study Finds CRA ‘Clearly’ Did Lead To Risky Lending” Investor’s Business Daily, December 20; news.investors.com/ibd-editorials-perspective/122012-637924-faults-community-reinvestment-act-cra-mortgage-defaults.htm?p=full.