Incidence of domestic subsidies vs. export taxes: An equilibrium displacement model of log and lumber markets in Oregon

Abstract

Governments have used policies such as taxes on the exports of unprocessed wood products and subsidies to domestic manufacturers to improve the competitiveness of domestic industries with the goal of supporting economic activities especially in rural areas. Newer motivations for policy interventions come in the form of climate change mitigation targets whereby improved forest management and increased use of wood products provide a long-term solution to enhance carbon sequestration. We compare three different policies in terms of their welfare incidence, impacts on economic activity and carbon storage. To analyze the policy scenarios, we extend an equilibrium displacement model to include subsidies and calibrate it to represent Oregon's harvesting and lumber manufacturing sectors. The three hypothetical policies we study are an ad valorem log export tax, an ad valorem input subsidy received by Oregon mills, and an ad valorem subsidy received by Oregon lumber consumers. Our results show that the three alternative policies differ in terms of their impacts on economic returns, employment, and carbon storage, and none of the policy alternatives is superior along all these dimensions.