Regulation Impact Statement
This chapter considers the Regulation Impact Statement (RIS) and the
options put forward to meet the government's policy on illegal logging. It
focuses primarily on the co-regulatory option which the government seeks to
realise through an Illegal Logging Prohibition Bill 2011.
The national policy framework in relation to Australia's forest and
timber industry is provided by the Environmental Protection and Biodiversity
Conservation Act (1999), Regional Forest Agreements Act (2002), and National
Forest Policy Statement (1992). This framework is underpinned by relevant
state and territory legislation. Each state and territory is responsible for
defining and regulating legal timber harvesting within their jurisdictions. Compliance
with the laws requires that domestic timber products are derived from
According to the explanatory memorandum, voluntary forest certification
standards including those of the Forest Stewardship Council or Australian
Forestry Certification Scheme can be used to provide an assurance that domestic
timber is legally (and sustainably) produced. Under these arrangements,
approximately 90 per cent of timber produced in Australia is sourced from
certified forests. The remaining 10 per cent of timber product that is not certified
comes from wood supplied by small forest growers who are, regardless, required
to comply with the relevant state and territory regulations for growing and
Regulation Impact Statement
The RIS assesses the potential costs and benefits for domestic business,
individuals and the Australian economy of regulatory options designed to
restrict the importation of illegally logged timber into Australia. It outlines
three options and identifies a preferred option. Whilst five measures were identified
in the December 2010 policy announcement, the RIS focuses on measures 3 and 4
which are to:
identify illegal logged timber and restrict its import into
require disclosure at point of sale of species, country of origin
and any certification.
The initial assessment of the costs and benefits of the potential
regulatory approaches were taken by the CIE using:
CIE assumptions for estimating compliance costs for developed
countries, developing countries and Australia; and
four levels of legality verification – Self-declared legal (SDL),
Verified Legal Origin (VLO), Verified Legal Compliance (VLC) and full
In terms of modelling, the Global Trade Analysis Project (GTAP) model
was initially used by the CIE to analyse the costs and benefits to the global
and Australian economies of stopping illegal logging. This analysis was
supplemented with modelling undertaken by ABARE using the Global Trade and
Environment Model (GTEM). According to the explanatory memorandum, the
differences between the CIE and Australian Bureau of Agricultural and Resource
Economics (ABARE) analytical approaches and assumptions used for the assessment
of costs and benefits 'reveals major differences in the economic outcomes for
Australia from combating illegal logging'.
The timber products to be covered by the policy options fall into three
Category I solid timber and wood products and some paper products
(12 per cent of Australia's timber imports);
Category II partially processed/processed timber and wood
products plus category I products (39 per cent of Australia's timber imports);
Category III highly processed/composite timber and wood products
from multiple sources plus category II products (70 per cent of Australia's
Concerns regarding the draft Regulation Impact Statement
According to the explanatory memorandum, the response of stakeholders to
the draft RIS was one of 'significant support for moral reasons for change and
an acceptance of small costs for Australia from removing illegally sourced
products from Australia's market'.
There were, however, four key issues of concern raised in relation to
the draft RIS. The primary concern amongst stakeholders was that illegal timber
production should not be seen as an economic benefit. Greenpeace Australia
Pacific, for example argued:
The Draft RIS also fails to acknowledge that consumers of
illegally derived timber products are effectively the end recipients of stolen
goods and it is perverse to describe the reduced costs of illegal timber as a 'benefit'
to the economy and consumers without recognizing this aspect.
The explanatory memorandum responds to this concern by noting that in
the final RIS in the exposure draft, illegal timber production is not viewed as
providing an economic benefit. Indeed, the RIS recognises that illegal logging
can have a significant impact on industry structure, employment, investment and
Submitters to the draft RIS in 2009 were also concerned that the
'intangible' and social impacts and costs in the cost-benefit analysis should
be given greater emphasis. The Uniting Church in Australia–Synod of Victoria
and Tasmania, for example, argued that the analysis produced by the CIE and
reflected in the draft RIS was 'highly deficient in its social analysis' and adopted
what it termed an 'amoral approach of including criminal activity within the
logging industry as a net economic positive without any comment on the social
or human rights dimensions of such criminal activity'.
Similarly, Humane Society International (HSI) argued that the cost-benefit
analysis was of limited use to the government because of its dismissive
treatment of intangible benefits which included Australia providing a role
model to other trading partners and 'Australia sending a message to trading
partners that they should also invest in measures to curb illegal logging', and
that the initiative should serve as a 'step towards more effective national and
multilateral moves to improve the sustainability of all logging, legal or
The government responded to these concerns, noting that the Department
of Agriculture, Fisheries and Forestry (DAFF) has undertaken a more detailed
social assessment to support the completion of the RIS which highlighted the
social impacts associated with illegal logging. According to the explanatory memorandum,
as part of the assessment, significant tangible and intangible costs were noted
and in particular, the loss of human, resource and other forms of capital for
forest-dependent communities, loss of payments for timber and the lack of
social services supplied by industry and government where there are illegal
There was also support amongst a number of submitters for the inclusion
of moral and treaty obligations for Australia in the cost-benefit analysis. The
government noted, however, that given its strategic geographical location in
the Asia-Pacific, if Australia is able to influence governments to take action
to combat illegal logging through the domestic measures it employs to identify
and restrict illegally-logged timber imports, there may be some justification
for claiming a greater proportion of the benefits than 0.034 per cent. That is,
the benefits might be greater than US$21 million per annum.
A number of submitters to the draft RIS also held the view that a
comprehensive assessment of the policy options available to the government for
combating illegal logging requires an examination of both the tangible and intangible
costs and benefits. In relation to the option of a co-regulatory approach which
is realised in the bill, the government responded that an assessment of the
range of intangible benefits adds weight to the benefits component of the
benefit to cost ratio, although they remain similar in size.
Identified options and stakeholders response
The RIS considers three options to change the behaviour of timber
producers by directly limiting opportunities for the production and trade of
illegal timber. Such options, which are based on the outputs of CIE and ABARE
analysis, seek to complement the government's broader suite of non-regulatory
measures outlined in its election commitment and include:
Option 1: a quasi-regulation regime whereby codes of conduct would
be enforced by industry;
Option 2: a co-regulatory regime using a prohibited element and a
requirement for due diligence, and ;
Option 3: an explicit regulation requiring a minimum standard for
The CIE recommended that the government implement option 1 or a
quasi-regulatory approach. However, the government decided upon a co-regulatory
regime or due diligence approach. The co-regulation option would include
targeted investment in capacity building and maintaining Australia's bilateral
and multilateral engagement with other countries in the Asia-Pacific region.
The RIS provided an impact analysis of the costs, benefits and risks in
relation to each option, all of which include a capacity building investment
requirement as well as relevant estimates of the government enforcement costs.
The RIS emphasises that in the absence of any multilateral agreement,
'utilising the available processes for legality verification and forest
certification provides an enabling environment which will allow producers to
benefit from being part of the legal timber market'.
It concluded that because Australia has a limited share in the international
timber trade, the government should consider only non-regulatory policy options
to combat illegal logging.
The CIE recommended option 1 which it assumed would have no cost for the
Australian economy and minimal impact on industry as the small and large
companies currently using legality verification would see no incentive for
taking on the extra cost. It argued that as Australia's imports account for
such a small share of illegally logged timber and restricting imports has
limited effect in reducing illegal logging, Australia would incur all the costs
of restricting imports without achieving commensurate benefits of reducing the
damaging effects of illegal logging. The CIE conceded, however, that this
conclusion is heavily dependent upon no other country taking action.
Alternatively, the CIE recognised that under this option, it was
possible that a greater volume of illegally logged timber products could be
diverted to Australia as the regulatory requirements imposed by the EU and US
came into effect. Therefore, such a policy response by Australia might
'undermine the effectiveness of other global approaches to combating illegal
This argument was taken up by Humane Society International in its 2009
submission on the draft RIS:
As a first point, we note that the Government has rejected
similar arguments in relation to Australia's unilateral commitment to reduce
our greenhouse gas emissions. Secondly, it is obviously the case that a prohibition
on imports of illegal timber needs to be part of a broader policy package to be
pursued by the Government, including continued pursuit of bi and multi-lateral
The explanatory memorandum notes that option 1 maintains the status quo
and does not meet the government policy objective given its voluntary nature. It
highlights that the policy objective would only be met through this option if
other governments similarly contributed 'on a proportional basis to the
substantive capacity building requirements for verifying the legal origins of
Even so, there would remain 'long lead times before acceptable legality
verification schemes would be available in all producer countries'.
Whilst quasi regulation provides a low cost option to industry and government, the
explanatory memorandum concluded that substantial investment in overseas
capacity building would be required to provide credible systems of legality
verification in producer countries.
In terms of costs, this option would require government to maintain the
existing level of bilateral and multilateral engagement (approximately $1
million per annum) and investment in capacity building. There would be no
requirement for increased costs to any of the regulatory or enforcement agencies.
Responses to the draft RIS in 2009 indicate industry support for Option
1 on the grounds that it is a low-cost approach for industry compliance where
many involved sectors comprise a substantial number of small businesses.
The Australian Timber Importers Federation Inc (ATIF), for example, supported
this option on the basis that there would be 'no net benefit to Australian
consumers from introducing regulatory measures' given Australia's small share
of international trade in potentially illegal timber products and the capacity
of producers to divert such products to less discerning markets.
In 2009, ATIF argued in favour of continuing with the process of developing a
robust industry code of conduct, noting that its preferred policy option was that
of a mandatory code of conduct for timber product (veneer, plywood, panels,
engineered wood products, timber components and solid timber products)
importers into Australia. ATIF suggested that an industry body administer the
code with a third-party audit and verification process.
The Decorative Wood Veneers Association (DWVA) held that Australia is a
small importer in the overall world timber/veneers production industry and that
its impact on the world scene is greatly overrated.
It also argued that the most cost effective approach in reducing or eliminating
illegal logging without imposing unnecessary costs on the Australian economy
was that of self-regulation combined with a bilateral approach.
Others supported the view that the current regime was adequate. The Department
of Infrastructure, Energy and Resources of Tasmania, for example, argued that
Tasmania has a 'comprehensive regulatory system and enforcement provisions to
provide certainty of legality'.
Australian Forest Growers (AFG) also argued that the current compliance
requirements under existing legislative framework in various jurisdictions
within Australia are both 'substantial and well implemented'. It raised
concerns that private forest growers in Australia should not be the subject of
increased regulatory burdens in order to address illegal logging that takes
place elsewhere and noted that it does not support application of certification
standards as 'surrogates for existing domestic legislation and codes of
It concluded that:
AFG would seek that any measures imposed on Australian
growers as part of an Australian policy to address illegal logging are
simplistic and are not costly to comply with in time nor fiscally, e.g. a
statutory declaration stating that the timber is legally grown and sourced
would be a maximum measure support by AFG.
Option 2 proposes a co-regulatory regime comprising two elements – a
prohibition on illegal timber imports and a requirement for due diligence. The
second element comprises a requirement for companies or other organisations
placing timber on the market in Australia to be signatories to
Commonwealth-accredited codes of conduct for undertaking due diligence in
verifying the legal origins of timber products.
The government supports this option as the most effective of the three
options for reasons including the fact that it is consistent with actions of
the EU and US.
A co-regulatory approach is also expected to minimise disruption to trade by:
...allowing importers and domestic suppliers to determine
the most effective means for verifying the legality of products from
potentially multiple sources based risk assessment of the potential illegality of
timber using a framework for due diligence system developed by industry.
The RIS also highlights that the cost-benefit analysis indicates that
the costs and benefits of such an approach would be of similar size. However,
it also noted that:
When the intangible costs and benefits of stopping illegal
logging and Australia's capacity for encouraging action by foreign governments
are taken into account, this option should generate benefits to industry, the
economy and the community that outweigh the costs. Applying similar measures to
domestic suppliers and imports would ensure the approach is consistent with
Australia's trade law obligations whilst providing a comprehensive policy
response at both domestic and global levels.
According to the RIS, a co-regulation approach should:
[M]inimise disruptions to trade, allow a recovery of
depressed prices (which will help offset the additional compliance costs),
minimise industry compliance costs, limit potential impacts on small businesses
(and the industry structure), address the free-rider problem, remove unfair
competition and provide assurances to Australian consumers of the legal origins
of the timber products they are purchasing. The use of a licensed trademark by
industry would assist consumers to identify legally-sourced timber products.
The explanatory memorandum acknowledges that in terms of the financial
impact of this approach on consumers, businesses and the Australian economy,
costs are expected to increase as a consequence given that importers and
domestic producers will be required to verify the legal origins of timber
products at the first point of sale or entry onto the market in Australia.
However, the explanatory memorandum also notes that compliance costs may be at
least partially offset by the recovery in prices if products derived from
illegally-logged sources are prevented from entering the country.
It acknowledges the argument of stakeholders that prices are depressed because
of the availability of illegally-logged products. The explanatory memorandum
notes in this regard that if illegal logging was stopped, the prices for timber
products would be expected to rise by an estimated 3 per cent.
However, it was also argued that when the intangible costs and benefits of
stopping illegal logging as well as Australia's capacity to encourage action by
foreign governments are taken into account, 'this option should generate
benefits to industry, the economy and the community that outweigh the costs'.
In terms of costs to it, the department noted that any increased
financial burden would be relatively small because whilst it may invest in a
targeted capacity building and outreach program, the costs for government
enforcement, accreditation of codes and monitoring of compliance would be relatively
low (compared to option three) with industry responsible for administering the
codes of conduct which are accredited and monitored by the Commonwealth.
In terms of impact and costs to industry, larger businesses would be in a
better position than smaller ones to absorb the additional costs associated
with co-regulation, however:
[T]his is not expected to have a significant effect on
industry structure, particularly small businesses, as the rebound in market
prices for legal timber products that would occur if the sale of
illegal-sourced product was severely restricted in Australia, would be expected
to cover at least part of the due diligence costs.
The explanatory memorandum responds to the argument of the CIE and some industry
stakeholders that as Australia's imports account for a small share of illegally
logged timber, Australia would incur costs of restricting imports without
achieving commensurable benefits. Whilst conceding that Australia's share of
the global trade in illegally logged timber is small, the explanatory
memorandum emphasises that this conclusion is totally dependent on a lack of
action on the part of other countries. Moreover, Australia's 'strategic
location and regional engagement in combating illegal logging and associated trade
should add to the process of change'.
Option three comprises an explicit regulation requiring a minimum
standard for legality verification. As part of the explicit regulation, the
create an offence for importing or supplying illegal logged timber
products in Australia;
specify a minimum standard of legality verification with Commonwealth
accreditation of acceptable schemes; and
establish a separate system for disclosure of species, country of
harvest and any certification of imported and domestic timber products.
Whilst the explanatory memorandum recognises that the option of
explicit regulation would offer certainty in meeting its policy objective, a
minimum standard for legality implies high government administration and
industry compliance costs because of the high levels of intervention. The explanatory
memorandum also emphasises that the costs involved with this approach are
expected to significantly outweigh the potential benefits.
Moreover, such an approach would be 'inconsistent with the approaches of all
other producer and consumer countries'.
Measures equivalent to those introduced for imported timber would be
applied to domestic products in line with Australia's commitments under the
World Trade Organization (WTO) and obligations under its free trade agreements.
The costs associated with verifying the local origins of timber products
at the first point of sale or entry onto the Australian market were not
directly assessed by the CIE. However, the explanatory memorandum drew on
analysis by ABARE and others to estimate the associated costs as follows:
The costs for the Australian economy with category III
product coverage were estimated as US$8.9–17.9 million per annum once the new
equilibrium is reached. For category II product coverage costs were estimated
as being in the range of US$4.4–9.8 million per annum, and US$2.1-5.1 for
category I product coverage. It is important to note the size of these net
costs compared to the size of the Australian forest industry, independent of
whether it is domestic mill production ($2.5–$3 billion per annum) or industry
turnover ($23 billion per annum).
The explanatory memorandum details the costs and considerations in
relation to this option:
The costs to consumers would increase as a result of higher
timber prices associated with a reduction in the volume of illegally-logged
timber entering Australia.
Australian industry will gain from higher prices which may
off-set increased production costs either partially or fully. Production costs
are expected to increase in light of the new legality verification compliance
Most of the benefits from this action will accrue to overseas
countries as the legal timber producers in developing countries will benefit
and GDP in developing countries will fall (though offset by those countries
receiving a significant share of the social and environment benefits from
Australia's actions to stop illegal logging).
The range of potential benefits arising from this option is
US$0–21 million per annum.
Large business would be better able to absorb the additional
costs associated with a co-regulatory option based on the use of legality
verification due diligence systems.
Option 2 would have a lesser impact on industry structure than
In terms of costs to government of this option, the CIE concluded that
the potential costs and benefits are similar in size and that such costs would
'the accreditation of due diligence codes of conduct, the
assessment of code administration body compliance with the regulatory
requirements, and some post-border surveillance activities (less than US$1
million per annum)'; and
capacity building targeted at 'addressing critical gaps in
producer countries, assisting industry develop codes of conduct and an outreach
program to inform government and industry of Australia's approach (US$8-14
million over the first four years of the regulation coming into effect)'.
Implementing a co-regulatory approach
The co-regulatory approach outlined in option 2 is to be implemented
through new legislation administered by DAFF and supported by the Australian
Customs and Border Protection Service in association with DAFF.
For its part, industry would be required to develop and implement
legality verification codes of conduct through new code administration bodies
which describe the processes for assessing the risks of sourcing
illegally-logged timber. Individual companies who are signatories to the due
diligence codes of conduct would be responsible to undertake third-party
independent auditing of compliance with the codes' requirements. This would
involve identifying the risks of sourcing illegal products and implementing
approaches that are relevant to minimising those risks. The code administration
bodies would then report on the findings of the signatory audits, the signatory
response to adverse audit reports and complaints against their signatories as
the basis for retaining their Commonwealth accreditation.
Timber suppliers who are legally compliant and who use a range of
voluntary legality verification measures for imported and domestic timber would
simply formalise their current arrangements to meet the legality verification
requirements of the relevant codes of conduct.
It is the free-riders or enterprises that don't have such systems in place that
will need to implement due diligence procedures.
The prohibition elements of the due diligence approach would apply from
the date the legislation comes into effect and in order to minimise impacts on
stakeholders in relation to the code of conduct elements of due diligence,
transitional arrangements would be put in place for two years prior to such
requirements being fully enforced. After that time, timber products could only
be placed on the domestic market by code of conduct signatories.
Support for and concerns regarding a co-regulatory approach
Most stakeholders who responded to the draft RIS supported the
government's intention to combat illegal logging and the capacity development
initiatives undertaken by the government in countries including Indonesia and Papua
New Guinea. Timber Queensland recognised that Australia has a significant role
to play in developing capacity in high-risk supply countries to help reduce
illegal logging and to assist in developing legality and compliance systems
that can be used for verification purposes in Australia and elsewhere.
Similarly, the Australian Plantation Products and Paper Industry Council (A3P)
expressed its support for what it called 'continued complementary action' by
the government to support other countries individually or collectively to
improve forest law enforcement, governance and management.
Many such stakeholders were mindful of the need for Australia to act as
consumers 'simply expect that timber and timber products will be sourced from
legally logged origins' and as Timber Queensland noted, 'delivering on these
expectations will be essential to maintaining the reputation and standing of
timber as being the premier environmental choice'.
In terms of the co-regulatory approach, A3P voiced support for a policy
response that incorporates mandatory application of the principles of due
diligence within a risk assessment framework'.
Timber Queensland acknowledged that a staged introduction of more comprehensive
verification requirements and a phasing in over a wider range of products would
more likely be the most effective way of addressing the issues surrounding
capacity to verify legality.
It noted, moreover, that many timber importing businesses had already started
work on addressing the legality and sustainability of their imported timber and
timber products where they were being sourced from high risk countries and
[T]he majority of Category I and Category II products
produced in Queensland already have full certification or come from businesses
that are working towards certification.
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