Augmenting Forest Sustainability Certificates with Fiscal Instruments

Many developed countries 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 legal problem of extraterritoriality. To legally act outside their borders, developed countries have supported voluntary certificates on production practices and price-based instruments, but, unfortunately, neither instrument reached beyond niche market shares, administration and compliance costs were high, the environmental gains variable, and the two types of instruments work alongside each other without much synergies.In this paper, we use a Law and Economics methodology to develop a mechanism design that integrates forestry certificates with price-based instruments, in a way that exploits synergies, and provides dynamic incentives for sustainable use of forests while keeping down the costs of compliance and administration. It is a mechanism that satisfies legal extraterritoriality constraints 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 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 a range of standard problems in the literatures on certification and taxation of overseas forestry, such as the problems of threshold costs, free-riding and consumer recognition in markets with competing sustainability certificates, and the problem to compute efficient Pigouvian tax rates in a sector marked by data unavailability. We show that a combination of price-based instruments with certificates can lead to greater sustainability of timber production than each of the instruments alone, without infringing the sovereignty of nations in the South in an extraterritorial manner.