Forest Industry Requests EU Commission to Evaluate the Fairness of the Planned Energy Subsidy for Small-Diameter Trees

Finland, Apr 22, 2011 - The Finnish Forest Industries Federation has asked the EU Commission to evaluate whether Finland’s planned energy subsidy for small-diameter trees is fair for all buyers of wood.
An energy subsidy for small-diameter trees is necessary, but it must be scaled appropriately so that it increases the supply of wood both for energy production and pulp and paper processing.

The Ministry of Agriculture and Forestry and the Ministry of Employment and the Economy have sought Commission approval for an energy subsidy for small-diameter trees. Goal of the subsidy is to increase the amount first-thinning wood used in energy production.

The subsidy would come to €10 per cubic metre of wood, which is sold for energy production. It would be available for at most 45 cubic metres of wood per hectare, i.e. the maximum per hectare subsidy would be €450. The energy subsidy would not be granted to wood, which is sold for wood processing, even though about half of the first-thinning wood sold to a pulp mill is used at the mill to produce renewable energy.

Economic incentives for the management of young forests are necessary because they increase the supply of timber. Furthermore, when thinning is performed at appropriate intervals, it improves forest growth. However, subsidies should above all boost supply, making more wood available for both processing and energy generation. A poorly planned subsidy will just steer wood out of processing and into energy utilisation, bringing no extra wood onto the market.

The energy subsidy for small-diameter trees should be set at a level that treats all buyers of wood fairly

Energy subsidy for small-diameter trees should be set on a level, which treats all buyers of wood fairly. The proposed maximum subsidy amount, 45 cubic meters per hectare, is too high. That brings two thirds of the wood within the subsidies and redirects valuable fibre wood for mere burning.

The now-proposed subsidy is about 20% too high and gives buyers of energy wood an excessive competitive advantage in deals concerning first-thinning stands. Competition belongs in the timber market, but subsidies should not favour one buyer segment over all others.

The proposed subsidy will increase the costs and weakens wood processing. This also puts renewable energy production at risk, as 70% of Finland’s renewable energy is generated in conjunction with the forest industry’s manufacturing activities. The subsidy targets all first-thinning stands, which are the source of one-fifth of the wood needed to supply the pulp and paper industry. The state of the national economy also makes it imperative that tax-funded subsidies are utilised with maximum efficiency.

Progress of the EU procedure

The national proposal for an energy subsidy for small-diameter trees in any case requires EU approval. The EU Commission will assess the impact of the subsidy and determine its compatibility with the Internal Market.

The Ministry of Agriculture and Forestry and the Ministry of Employment and the Economy put the proposal for a small-tree energy subsidy forward for Commission approval in March. Typically, such EU deliberations take about six months to complete.

Further information:
Jouni Väkevä, Senior Adviser (Forestry), Finnish Forest Industries Federation, tel.             +358 9 132 6620      ,             +358 40 530 7164      
Stefan Sundman, Director (Energy and Infrastructure), Finnish Forest Industries Federation, tel.             +358 9 132 66 11      ,             +358 40 535 0501      

Background information:

Energy utilisation of wood already supported through five different mechanisms

Finland has already implemented feed-in tariffs for wood-fuel and forest chip power plants. A possible third feed-in tariff is being planned for coal power plants, which replace some of their coal fuel with wood. The EU’s emissions trading scheme also promotes the energy utilisation of wood, as does the tax on the energy utilisation of peat that took effect at the beginning of 2011. In its planned form, the energy subsidy for small-diameter trees would constitute no less than the sixth overlapping subsidy mechanism that is primarily funded from public coffers.

The combined impact of these subsidies may lead to distortions in the timber market. If there is a scarcity of competitively priced wood to supply processing operations, the production volumes of the wood processing will fall, and this will reduce national export revenues. Production of renewable energy will drop as a side effect, preventing Finland from reaching its EU-targets. The forest industry generates 70% of Finland’s renewable energy as a by-product of its manufacturing operations.
The forest industry has proposed that the Government establish a system for monitoring how energy wood subsidies and changes to energy taxation affect the timber market and the production of renewable energy in Finland.

PRESS RELEASE 25 FEB 2011: Impact of subsidies and taxes on the timber market must be monitored

When does wood enter the market?

Wood from first-thinning stands supplies almost one-fifth of the raw material needs of pulp mills. On average, some 39 million cubic metres of wood were needed to manufacture the pulp consumed annually by paper and paperboard mills in the 2000s. Metsäteho Oy has calculated that on average 7 million cubic metres of wood were harvested annually from first-thinning sites in the same period. This means that on average 18% of the wood needed to supply pulp making was sourced from first thinning sites.

A parcel of forest should be thinned for the first time once its trees have grown to a length of 12-15 metres. The poorest quality trees and ones that grow too densely are removed to create sufficient living space for the trees that are left to grow.

The average first-thinning site yields 50 cubic metres of pulpwood per hectare that can be used in the manufacture of paper and paperboard. In addition, thinning produces smaller trunks and treetop mass, which are well-suited for energy utilisation.

The growth rate is maintained with additional thinning operations. All this ends with regeneration felling, which is performed when the trees are 80-120 years old, after which fresh saplings are planted and the forest cycle begins again.

First-thinning does not produce any sawlogs, which only start to become available in subsequent thinning operations and regeneration felling in particular. Sawlogs are valuable because they can be used in the manufacture of sawn timber and plywood, and account for some 80-90% of the wood contained in a forest parcel due for regeneration. All felling operations yield pulpwood that is used to make paper and paperboard. Sawmills sell woodchips and sawdust, by-products of their manufacturing processes, for use in the panel industry as well as for raw material use in the production of paper and energy.

The majority of the forest chips, which are used to generate energy, are sourced from branches, tree stumps and treetops that are left over from regeneration felling. Finland can only attain EU-imposed renewable energy targets if it maintains its high production volumes in wood processing. Increased utilisation of domestic wood would also lead to growth in the production of forest chips and thus promote the achievement of energy targets.

Some 100 million cubic metres in fresh growth is added to Finland’s forest resources annually. The Finnish Forest Research Institute reckons that almost 70 million cubic metres of wood could be harvested sustainably each year. In the last few years, the forest industry has managed to procure on average 55 million cubic metres of domestic wood.