Potential Impacts of Climate and Energy Policy on Forest Sector Industries

Providing Incentives for Bio-Energy While Protecting Established Biomass-Based Industries

Current and proposed climate and energy policy, and specifically incentives for the development of bioenergy have the potential to negatively impact established biomass-based industries through increased costs, competition for supplies, and perhaps other unidentified cause and effect relationships. This report assesses short and long-term impacts (both positive and negative) of state and federal climate and bioenergy policies and incentives on the domestic forestry/wood products sector, and in particular the logging, lumber, composite panels, and paper industries, and considers how incentive programs might be modified so as to achieve optimum results for bioenergy producers and established wood-based industries alike. Potential long-term implications of rising energy prices – whether resulting from market forces or public policy – for the domestic wood products industry are also assessed.

Currently, a great number of options for converting biomass to energy products are recognized. Among them are electricity from biomass, combined heat and power (CHP), gasification, district heating, bio-oil, ethanol (via starch or developing cellulosic pathways), biodiesel, Fischer-Tropsch diesel, aviation fuel, biobutanol, gasoline, and fuel pellets. The production of fuel pellets has in itself quickly developed in to a sizeable industry, with production capacity exceeding four million tons annually in the United States.

As with energy, there are a great many options for conversion of biomass to various industrial chemicals – chemicals that are now largely produced from fossil fuels. Technologies are now in place or under development that will allow replacement of virtually all petrochemicals by biomass-derived chemicals.

Bioenergy initiatives were begun by the National Science Foundation and transferred to the Department of Energy in the late 1970s. Since that time, over $3.7 billion has been invested since the 1970s in research, development, deployment, and diffusion programs focused on biofuels, bio-power, biomass feedstocks, municipal wastes, and various bioproducts, with much of that over the past five years. In addition, most of the states have enacted laws in recent years to promote the development and use of biomass energy. In addition, a number of regional coalitions of states have also been formed with the express purpose of providing incentives for biomass energy development.

Within the forest products sector, energy intensive industries would be challenged under every scenario of continued high and increasing energy prices, irrespective of cause, to adapt to the new reality. The paper industry faces significant pressure to accelerate energy efficiency improvements, including capture of a greater portion of the energy value of biomass now used in supplying a portion of energy requirements. At the same time, composite products industries would experience substantial difficulty not only with respect to costs of biomass feedstocks, but with regard to energy-intensive petroleum-based resins, the prices of which would also be impacted by carbon management measures.

At petroleum prices existing at the time of this report (~$100/bbl) equivalent prices based on energy content, across the spectrum of energy products, support the production of many forms of bioenergy, without subsidy, creating potential problems for the forest products industry even in the absence of federal, states, or regional bioenergy initiatives. The pulp and paper, particleboard, and Chip-N-Saw southern softwood sawmill industries in particular will face price pressures. Should energy prices rise further, either as a result of market forces, climate or energy policy, or other factors, upward pressure on biomass materials will result, with efforts even felt in low grade hardwood sawbolt and sawlog markets.

Because even seemingly straightforward measures to encourage bioenergy development can have unintended and detrimental consequences for long-established, value-added domestic industries, including serious erosion of global competitiveness, it is important that policy-makers recognize the impact potential of their actions. This report concludes with a number of observations about how policies and incentive programs, and approaches to development of them, might be changed to provide better protections for established biomass-using, value-added industries.

The dual risks posed to many forest products industry sectors by climate and energy policy on the one hand, and rising market-driven energy prices on the other suggest a need for proactive action on an industry-by-industry basis to assess risks, and to identify and implement strategies to alleviate these risks. A concerted industry-wide focus on energy efficiency and cost-containment appears justified.

Amid the specter of considerable problems going forward it should be noted that rising energy prices and interest in bioenergy also provide dividends to the forest sector. The emergence of bioenergy and biochemicals markets, and potential for development of carbon markets, combined with increasing societal interest in products with low energy and carbon intensity spell opportunity for creative, innovative firms assuming a level playing field in the policy arena.