International environmental negotiations have been notoriously slow, prompting individual countries and in particular the EU to occasionally consider implement-ing policies unilaterally. An important question is then whether the unilateral-ism can hinder the continued multilateral efforts for global environmental agree-ments.
A particularly complex test case for this question is the maritime sector, which is perhaps the sector in which climate policy has progressed least across all indus-tries.3 In this chapter, we have shown that the availability of a unilateral outside option for taxing maritime emissions makes the achievement of a global agree-ment for taxing these emissions more likely. The availability of an alternative mechanism can help overcome hold-up problems which exist as long as a global unanimous agreement is the only way to tax maritime emissions.
This insight carries lessons that apply more widely than to the maritime sector.
Current international environment negotiations have a strong preference for un-animity. However, not all countries value environmental protection equally. In such circumstances, a requirement for consensus can be used strategically to ex-tract concessions for agreement. If, however, scholars can create economically and legally feasible unilateral mechanisms, the risks of hold-ups can be reduced, thus helping to speed up our long-delayed efforts of global climate change mitig-ation.
3Given that all other industries are covered by NDCs under the Paris Agreement or CORSIA in the case of the aviation industry.
Chapter 9
Taxing embodied emissions of imported goods:
The forestry case ∗
Several countries with large end-consumer markets for timber have the declared objective of supporting forest sustainability around the globe, but the world’s most important forests are, in fact, outside their jurisdictions. Actions to protect these forests are therefore constrained by the territorial boundaries of jurisdic-tions. To legally act outside their borders, these countries support voluntary cer-tificates on production practices and price-based instruments, but, unfortunately, neither of those instruments reaches beyond niche market shares, administrative and compliance costs are high, the environmental gains are variable, and the two types of instruments work alongside each other without much synergy.
This chapter designs a mechanism that integrates forestry certificates with price-based instruments, in a way that exploits synergies, and provides dynamic
incent-∗This chapter is based on Heine, Dirk, Faure, Michael., & Lan, Chih-Ching. 2017. Augmenting forest sustainability certificates with fiscal instruments, Rotterdam Institute of Law and Economics Working Paper 2015/7. However, to ease evaluation of the author’s contribution, the content from co-authors has completely been taken out apart from Box 1. All remaining content is thus single-authored but it benefited from significant advice by Michael Faure. Contents from this chapter will be published in the forthcoming joint book “Fiscal Policies for Sustainable Forests” by the World Bank and the International Tropical Timber Organization.
Chapter 9. Taxing embodied emissions of imported goods: The forestry case ives for the sustainable use of forests while keeping down the costs of compliance and administration. It is a mechanism that satisfies legal constraints on extra-territorial regulation while nevertheless allowing countries to act outside their borders.
The mechanism consists of a tax imposed by a timber-importing country on a default assumption regarding the sustainability of the timber, combined with a tax discount that is provided on the receipt of proof that the sustainability was higher than assumed. The proof is established by showing a sustainability certificate to the customs authority when the timber is imported.
This ’Feebate’ mechanism reduces standard problems in the literature on the cer-tification and taxation of overseas forestry, such as the problems of threshold costs, free-riding and consumer recognition in markets with competing sustain-ability certificates, and the problem of how to compute efficient Pigouvian tax rates in a sector plagued by a lack of available data. We show that a combination of price-based instruments with certificates can lead to better incentives for sus-tainable timber production than each of the instruments alone, without infringing the sovereignty of forest nations.
9.1 Introduction
Despite a plenitude of policy initiatives for forest protection,1deforestation and forest degradation remain key sources of global carbon emissions and biodiversity losses. In the continued absence of an effective international forestry treaty, other means of protecting dwindling global forests need to be explored, including uni-lateral action by individual countries with greater ambitions. Such uniuni-lateral ac-tion can come from countries with large forests, as well as from countries which have few forests of their own but large end-consumer markets for imported tim-ber. The first group of countries has comparatively straightforward policy options for improving global forest sustainability through domestic action(e.g. Busch &
1These instruments include the Forest Principles, Chapter 11 of Agenda 21, the Non-Legally Bind-ing Instrument on All Types of Forests by the UN General Assembly, the Convention on Biological Diversity, the United Nations Convention on Combating Desertification, the Convention on Interna-tional Trade in Endangered Species of Wild Fauna and Flora, the United Nations Framework Con-vention on Climate Change, the ConCon-vention on Wetlands of International Importance (Ramsar), the World Heritage Convention, and others.
9.1. Introduction Ferretti-Gallon, 2014), whereas the policy options for the second group of coun-tries are more constrained. In this chapter, we investigate whether a Smart Mix of policy instruments2may also enable this second group of countries to contribute effectively to global forest sustainability, even in the absence of a global forestry treaty.
Several countries with large end-consumer markets for timber products have voiced their intention to spur efforts toward forest protection internationally,3 but the effectiveness of unilateral action by most of these countries may be small unless those unilateral actions have a global reach. This is because most of the remaining great forests in the world, as well as most of the deforestation, lie outside their borders. All countries have interests in the protection of the world’s forests (see Box 1) but when these forests are outside a country’s jurisdictions, it is unable to effectively enforce their protection. This legal restriction on the ability of coun-tries to protect forests overseas furthermore undermines their ability to protect their own forests, due to problems of carbon leakage. It is, therefore, essential to find an effective solution for how countries wanting to act for global forest protec-tion can effectively do that also in the continued absence of effective internaprotec-tional treaties.
Two mechanisms used towards this end are voluntary forest certification sys-tems and price-based instruments. Regrettably, none of these instruments had sufficient uptake, so deforestation continues at unsustainable rates (McDermott et al., 2007). This chapter describes a way in which sustainability certificates and price-based instruments could be combined to be more effective than each of these instruments alone, and enable individual countries to raise forest protection glob-ally even in the continued absence of an effective international treaty.
The chapter is organised as follows. Section 9.2 explains why early movers in forestry policy must apply their policy instruments across borders – why it is not sufficient to merely protect forests domestically – and recounts the policy
2The concept of a Smart Mix (Gunningham & Grabovsky, 1998) is based on the recognition that all policy instruments on their own can produce suboptimal results, and that a policy objective may be reached more efficiently and effectively by “harnessing the strengths of individual mechanisms while compensating for their weaknesses through the use of additional and complementary instruments” (Gunningham & Sinclair, 1999, p. 49). Besides these opportunities, such mixes of policy instruments carry the risk of negative interaction effects and thus require careful analysis.
3EU countries, for instance, have continuously set targets since the 1990s to “promote sustainable forest management (...) globally” (European Commission 2013a, p. 13; similarly European Commission 2003, p. 1)