Climate change policy distortions in the wood and food market

The widespread shift of Australia’s wood products industry away from native forests to an agricultural regime–wood plantations–has enhanced forestry industry competitiveness. Wood now competes against food for agricultural land, water and other resources (including government support). New plantings have increased substantially since the mid 1990s via plantation managed investment schemes (MIS), arousing protest in the traditional agricultural sector and claims of unfair government policy treatment. This claim is investigated in an analysis that integrates the taxation treatment of plantation MIS with economics and forestry industry knowledge. Three methods are developed, and applied, to estimate the plantation MIS tax-based subsidy. Preliminary estimates indicate a tax-based subsidy to forestry through plantation MIS of between $0.9-1.2 billion over the five years ending 2008. The estimated subsidy is then incorporated in the Productivity Commission’s calculations of the effective rate of assistance (ERA) to industry groups from tariff, budget outlay and tax-based government policy. The ERA to Forestry & logging in 2008 was estimated to be 41.8 per cent: government assistance is equivalent to 42 per cent of Forestry & logging’s unassisted value added. The estimated plantation MIS tax based subsidy accounted for 77 per cent of the assistance. Assistance to Forestry & logging exceeds substantially the assistance (including drought related payments) to food growers: 7.2 per cent to Grain, sheep & beef and 17.3 per cent to Dairy cattle farming (a significant proportion was assistance that ceased in April 2008). A detailed examination of Australia’s proposed climate change policy concerning the land use sector indicates that agricultural resource use distortions created through plantation MIS arrangements are lightly to intensify.