Reassessing forest products demand functions in Europe using a panel co-integration approach

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Fibre-based products

Wood-based panels are made of lower value raw material such as forest residues and can thus be produced at lower price than solid wood products (Rivela et al., 2006, 2007). Over the last fifty years, the aesthetic of wood based panels improved so that consumer shifted their preferences from solid wood to fibre-based materials. For example the vast majority of furniture and floor or wall panelling are now made of particle board or fibre board, instead of solid wood.
According to Figure 1.1 (Mantau et al., 2010), by 2010, wood fuel represented 200 million m3 or 40% of the total wood resources consumed in he EU. The figure is slightly lower but in line with the FAO data presented Figure 1.5. Another 100 million m3 wood residues should be added to this amount. About half of the European consumption is burned by household, often in low yield chimneys or ovens. A quarter is used – in the form of wood residues – by the forest products industry to generate electricity and heat for wood drying processes. Kiln drying is by far the highest energy input in sawnwood production (Ramage et al., 2017). The remaining quarter is burned in other biomass power plants, mainly district heating facilities and potentially electricity power plants. Biomass is a bulky, material with low value per unit of volume, therefore transport costs represent a large proportion of up to half the cost of wood fuel (Shabani et al., 2013). Besides, profits from the sale of wood biomass help finance thinning operations necessary to enhance the growth of high value trees. Further down the value chain, sawmill by-products are used for panel production or energy generation. In fact saw mills and pulp mills are large producers of renewable energy. For these reasons, the forest-based sub-sectors: sawmill, paper mill, panel production and wood energy sector are largely interdependent for their raw material supply. Because of these inter dependencies, illustrated at the European level Figure 1.1, analysing the competition between sub-sectors is complex. In a normal market state, when there is sufficient supply, lower value products go to the energy sector and there is no competition between material and energy uses of wood. But when demand and prices rise high enough, fuel wood supply start to compete for raw material with panel and pulp products.
Compared to other forest products, European fuel wood consumption (Figure 1.5) has a very different dynamic. Fuel wood consumption decreased through the 1970ies, before rising again after the 1990ies, and it wasn’t impacted by the 1973 and 2008 energy and financial crises. An important growth factor after 2000 has been the de-velopment of biomass-based district heating. Investments in biomass-based heating facilities were stimulated by public policies in the frame of the EU 2020 renewable energy Directive (European Parliament, 2009). I will come back to energy policies later in section

Substitute products

Besides forest based products, consumers can chose among substitute products made from a range of alternative materials. For example, steel and concrete roof construc-tions are an alternative to wooden roof construction. In the furniture sector, various metals and plastics materials are used as an alternative to build chairs and shelves. In packaging, corrugated cardboard can be replaced by plastic material. In the pub-lishing industry, electronic media such as tablets can replace paper-based books, I will expand this specific topic in chapter 4. For heating purposes, diesel fuel and natural gaz are alternatives to wood fuels.
It is clear that new material developments in the metal, concrete, plastic or com-posite sector can displace wood usage, but the opposite is also true as new wood usages can displace alternative materials. Substitution can also happen between different products within the forest sector. The literature on forest sector models rarely includes non-forest products in its modelling frameworks.

Drivers of long term change

This section describes policies and technological changes that influence forest prod-ucts supply and demand. The interaction between various policies mean that there is a need for reliable prospective tools, in order to plan forest management for the long term future. Given the wide range of issues at stake, the analysis will draw from a range of interdisciplinary methods.

The impact of public policies on forest products supply and demand

Forests provide a habitat for animal species and a place for human leisure activities. Environmental services such as animal habitat and landscape beauty do not have a market valuation. But their values are far from negligible, indeed several studies estimated that the value of forest recreation (Zandersen and Tol, 2009) for example can be as high as the value of timber production. Environmental policies take into account the increased economic value generated by recreation amenities. As they potentially reduce the amount of wood available for harvest (Verkerk et al., 2008), forest protection policies are meant to interact with the industry. Forest policy is a balancing act between economic, environmental and social constraints. This section highlights some of the public policies that affect the forest sector and the interactions between them.

Renewable energy and CO2 emissions policies

Even though the major part of the wood consumption volume globally is used for energy purposes, by far the major part of its value is generated from wood-based products. One of the purposes of this thesis is to analyse policies influencing ma-terial uses of wood. But because they are based on the same material, renewable energy policies have a strong influence on the forest sector. Biomass is the first source of renewable energy in Europe. Indeed biomass and renewable waste ac-count for two thirds of the primary renewable energy production in the EU-28 in 2013 (EUROSTAT, 2015), much higher than hydropower and wind combined. It should be noted that wood biomass represents only a part of total biomass con-sumption. Used mainly for heat production and to a lesser extend for electricity generation, biomass consumption has continued to increase in recent years, though at a slower pace than solar and wind. Increased consumption has been incentivised by EU renewable energy targets which encourage alternatives to fossil fuels (Euro-pean Parliament, 2009). Yet the increased use of biomass in the renewable energy mix has been criticized by the forest sector for over emphasising the use of fuel wood at the expense of material uses of wood (Mantau et al., 2010). On the other hand, biomass co-production is essential to the profitability of forest sector activities.
For the purpose of maximising emissions reduction, different levels of wood resource use should be distinguished. A meta analysis of twenty studies shows that on average 1 ton of carbon used in wood products creates an emissions reduction of 2 tons of carbon (Sathre and O’Connor, 2010). Wood products are a valuable means to reduce CO2 emissions when used in a building or furniture. In fact, when looking at avoided emissions, wood processing is more efficient than alternative materials such as plastic, aluminium, steel or concrete. Some have concluded that wood energy should be used as a last resort, at the end of life of its valuable material use.
Climate change mitigation option within the AFOLU IPCC 5th assessment 3rd report on mitigation mention changes in consumption behaviour as a mitigation option: “Demand-side options (e. g., by lifestyle changes, reducing losses and wastes of food, changes in human diet, changes in wood consumption), though known to be difficult to implement, may also play a role (Section 11.4).”

Biodiversity conservation and forest recreation policies

Biodiversity consideration might seem remote from the production imperatives of the forest sector, they are nonetheless central to the integrity of forest ecosystems. In this section I would like to briefly describe the trade-off between biodiversity conservation and intensification of forest management practices. Although the link with forest products consumption may seem tenuous, biodiversity protection issues could participate in the environmental consciousness of forest products consumers.
The trade off between production intensification and biodiversity protection is de-cided upon by public policies. Policy answers to this trade-off can lead to several outcomes on an axis with intensified harvesting on the one side and complete pro-tection on the other side. Plantation and short rotation coppices being the most intensive types of management. Plant and animal diversity are high on naturally re-generated forests with mixed species and they are low on mono-species plantations. In general, the low environmental impact of forest management practices mean that commercially managed forests harbour biodiversity. There are several degrees of biodiversity importance, and the methodologies for assessing economic impacts on biodiversity are still in development. It is clear that private and public forests are important elements in the connectivity of protected national parks. Together, all forests – with various degrees of harvesting activities within them – harbour the ma-jor part of continental biodiversity (Myers et al., 2000). Another important source of policy interest linked with animal presence in western European forests is the browsing by animals such as deer. Over browsing tends to reduce tree species di-versity, although the effect on tree species dispersion are not fully understood Gill and Beardall (2001).
Forest structure also contribute to the quality of the landscape for recreation pur-poses such has hiking and cycling. Consumer preferences for specific landscapes has indirect measurable market impacts on tourism and housing prices for exam-ple. Surveys evaluate how some consumers have a preference for mixed forest stand in comparison to mono-specific plantations (Abildtrup et al., 2013; Nielsen et al., 2007).
Countries vary greatly in the way they have built forest regulations to deal with biodiversity related trade-offs. Some have set aside part of the forest area for com-plete conservation and allowed intense management in the remaining areas. This is the approach taken in countries such as the USA and New Zealand. European countries on the other hand have taken an integrative approach, where forest man-agement integrates biodiversity conservation principles (Bollmann and Braunisch, 2013). Such management principles are called multifunctional: they should achieve the joint purposes of wood production, biodiversity conservation and recreation in the same forest. Additionally, increased forest protection in developed countries can lead to potential leakage and forest degradation in other countries.
Overall, forests role as biodiversity habitat contributes to the image of forest prod-ucts as environmentally friendly products. Consumers certainly do not have a direct influence on forest management, but they could have an indirect influence by shift-ing to certified products. Indeed the Forest Stewardship Council (FSC) certification for example requires harvesting operations to set aside some trees for biodiversity purposes.

Forest certification

In the mind of a consumer, forest products convey two contradictory images both affecting nature in radically opposite ways. Consumers are torn between the nega-tive image of deforestation and the positive image of a renewable natural product. In the absence of certificate of origin, a final consumer cannot possible know if the forest from which a wood product came from was managed responsibly. In a market where information on sustainable practices is lacking, industries which do not re-spect environmental and social standards have an unfair competitive advantage. To address the issue of unsustainable practices, civil society and the industry created a new market for certified products. Certification schemes can be assimilated to brands, used to convey a quality signal directly to final consumers. This demand driven approach is based on marketing theory and the hypothesis that consumer preferences are concentrated on brands (Fournier, 1998). In a mature market where diverse products are available, the quality of a product is difficult to evaluate and brands acts as a quality signal. Consumers don’t need to perform a quality assess-ment but make their decisions based on the label attached to a product (Cochoy, 2007). Other factors such as social prestige also play a role in the way customers establish a relationship with a brand (Vigneron and Johnson, 1999).
Wood products are one of the few natural resources that undergo certification and chain of custody on an international level. Certification has been encouraged by a different social acceptability of wood compared to other materials in buildings. In-deed what has become acceptable requests concerning wood material remains hard to imagine for other construction products. A certification of the sustainable origin of concrete or steel is not imaginable. In contrast, requirements for certified tim-ber have become common place, especially for high value products or in the case of public procurement. Such is the contrast of the public image of wood as both a highly desirable material and a despised material connected with deforestation issues. Certification schemes such as the Forest Stewardship Council (FSC) and the Programme for the Endorsement of Forest Certification (PEFC) clearly label prod-ucts that are the outcome of sustainable forest management. If enough consumers buy certified products, reduced demand for uncertified products will create an in-centive for more forest-based industries to get certified and to eliminate questionable wood sources in their supply chains. Forest certification has seen a widespread adop-tion for example in the packaging and printing paper sector and to a lesser extent in the furniture sector. As a result of their market power, industry owning large consumer brands can gain policy influence and become important decision makers in forest products markets. But such consumer driven policies have shown limits with some considering they largely failed to change consumption practices (Haener and Luckert, 1998). In addition, Rametsteiner and Simula (2003) point that certification has been mostly adopted in the temperate zone and that it’s stated aim to reduce deforestation cannot be achieved as long as certification has such a low penetration rate in tropical countries.

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The impact of structural changes

Technological progress has an effect both inside the forest sector and outside the forest sector. Technological progress within the forest sector leads to the creation of new products and new markets. In parallel, technological progress outside the forest sector leads to the substitution of forest-based products by alternative materials. In addition substitution also happens inside the forest sector itself. For example, parti-cle and fibre board have increasingly substituted solid wood in the furniture industry over the the past forty years. Their consumption volume has grown indeed over 2% annually. In parallel non-coniferous sawnwood consumption decreased dramatically over the same period.
The impact of technological progress on wood products consumption can be illus-trated with two examples. First, the development of panel making technologies in the 1980ies led the furniture sector to switch gradually from solid-wood to panel based production. Second, development in light frame wood construction and glue laminated beam technology lead roof making from traditional timber structures to light frame construction and then to engineered wood products. Finally, the impact of technological progress on paper products consumption will be further detailed in chapter 4.

Composite material and wood fibre

Wood is a natural material composed of various polymers: cellulose, hemicellu-lose and lignin. With the help of mechanical and chemical processes, individual constituents can be separated and re-assembled in new composite materials. For example cellulose can be chemically transformed in a viscose polymer to produce synthetic fabric used in clothes. The viscose process is not entirely new since it was developed in the nineteenth century already. But bio-refineries have recently seen industrial scale development in Nordic countries. With time, the transformation of wood fibres in new composite materials becomes more cost effective and possible on a large scale. Forest-based materials are chosen over substitutes for several reasons, e.g. economic, aesthetic or/and cultural. Wood may be the cheapest material for a given purpose or present intrinsic structural qualities which cannot be easily reproduced with sub-stitutes. For reasons of cost but also of structural strength, all major German car manufacturers use biomass-based composite panels in car production (Jawaid and Khalil, 2011). Wood furniture and interior design are deeply embedded in our cul-ture, because wood was an important construction material in the pre-industrial era. In the next section 1.2, we will show how the development of multi storey con-structions using forest based materials demonstrates the growing role this material can play in modern construction. Observing aggregate demand at the country level means observing the sum of two opposite development paths: forest-based products being displaced by their substi-tutes in some markets and forest-based products increasing market share in other markets.

Wood construction scenarios

Technological improvements in building material lead to new uses of wood in the construction sector. These developments can be illustrated by 3 major technological advances, in chronological order: glue laminated beams, pre-fabricated buildings, multi storey constructions.
Gluing techniques enables to overcome limits in length and thickness of the natural wood material. Sawn timber obviously cannot be longer than the log from which it was cut, roughly a maximum of 10m. Beam thickness is also limited for proper drying to occur, roughly a couple of centimetres. Gluing hundreds of small boards together makes it possible to build beams 1 meter thick, reaching several dozens of meters in length. Glue laminated beams can be used to replace wood beams in traditional housing construction or in large public buildings such as the roof structures of Olympic swimming pools, airport halls or even highway bridges Ramage et al. (2017).
Pre-fabricated buildings are made of wall and floor components prepared in a factory and assembled on the construction site. The goal is to achieve economies of scale by assembling complete wall panels with integrated windows, insulation material, interior and exterior plaster on an automated production line. Economies of scale help to reduce costs. The cost of wood material remains higher than that of concrete, but a prefabrication system provides shorter construction time and other benefits such as improved insulation. This technique has found a small but significant market share in private housing and is also used in larger office buildings.
Multi-storey buildings made out of wood build upon the 2 previous technological ad-vances. Indeed, glue laminated beams are used extensively in multi-storey buildings. And construction methods draw heavily from pre-fabricated building construction techniques. Hurmekoski et al. (2015b) consider that multi-storey wooden construc-tion could develop up to a 5% market share in densely forested countries such as in Scandinavia. However the adoption of these techniques will take a long time in the whole of Europe because building codes and regulations are slow to adapt to new construction techniques. In any case, the development of multi storey constructions will increase the consumption of sawnwood and wood panels. It was estimated that if wood-based multi story housing gains a 10% market share in Germany, it would increase sawnwood demand by 1.5 to 2 million m3 Pöyry (2016). Eriksson et al. (2012) integrated four different models to simulate potential development scenar-ios of multi-storey wooden construction. Their simulations show how a moderate increase in wood construction would contribute to reduce CO2 emissions without affecting the forest sector. Eriksson et al. (2012) also simulated more extreme sce-narios where sawnwood consumption would reach 1m3 per capita in Europe, but these scenarios led to drastic price increases, pushing models outside of their usual range of application.

Information Technology and Paper products scenarios

Since the mid 1990ies, a decline in newsprint consumption was observed in the United States and in other countries. Hetemäki (1999) emitted the hypothesis that this decline was due to the rise of information technology. But there was little data at the time to support this hypothesis. Similar to above developments, there is yet too little data to analyse composite wood products and multi storey construction impacts on a macroeconomic level. However additional data for the paper market which has accumulated since the work of Hetemäki (1999) 20 years ago shows a newsprint consumption decline in a large number of countries and a similar decline in the demand for printing and writing paper. Chapter 4 provides a detailed ac-count of studies that have attempted to add new explanatory variables – related to Information Technology – that could explain the structural change. I contribute a new approach by using information technology as a threshold variable to explain the non linearity in paper demand.

Table of contents :

1. Introduction 
1.1. Forest resources supply
1.1.1. Sustainable Forest Management
1.1.2. Industrial supply chain network
1.1.3. International Trade
1.1.4. Forest products consumption Sawnwood Fibre-based products Substitute products
1.2. Drivers of long term change
1.2.1. The impact of public policies on forest products supply and demand Renewable energy and CO2 emissions policies Biodiversity conservation and forest recreation policies Forest certification
1.2.2. The impact of structural changes Composite material and wood fibre Wood construction scenarios Information Technology and Paper products scenarios
1.3. Forecasting of wood-products markets
1.3.1. Approaches to forest sector modelling
1.3.2. Applications of forest sector models
1.3.3. Details of a partial equilibrium model Static market equilibrium Dynamic market shifts
1.3.4. Econometric modelling of forest products demand Theoretical derived demand model Relevance of considering a demand function isolated from the rest of the market Spurious regression issues
2. Potential impact of a transatlantic trade and investment partnership on the global forest sector 
2.1. Introduction
2.2. Methods
2.2.1. Theory
2.2.2. Global Forest Products Model
2.2.3. Effects of the TTIP
2.2.4. Macroeconomic scenarios
2.3. Results
2.3.1. Price effects
2.3.2. Effects on industrial roundwood
2.3.3. Effects on sawnwood
2.3.4. Effects on wood-based Panels
2.3.5. Effects on wood pulp
2.3.6. Effects on paper and paperboard
2.3.7. Effects on value added
2.3.8. Welfare effects
2.3.9. Sensitivity analysis
2.4. Summary and conclusion
2.5. Acknowledgments
3. Reassessing forest products demand functions in Europe using a panel co-integration approach 
3.1. IntroductionReassessing forest products demand functions in Europe using a panel co-integration approach
3.2. Literature
3.3. Model and data
3.4. Methodology
3.4.1. Panel non stationarity tests
3.4.2. Cointegration tests and estimation method
3.5. Results
3.5.1. Panel unit root tests
3.5.2. Cointegration tests
3.5.3. Estimated demand elasticities
3.6. Conclusion
3.7. Acknowledgements
4. Information technology, substitute or complement to paper products demand? 
4.1. Introduction
4.2. Literature
4.3. Theoretical model
4.4. Estimation method and data
4.5. Results
4.6. Conclusion
5. Conclusion 
A. Résumé détaillé en français 
A.1. Contexte et méthodes d’analyses de la consommation de produits bois
A.2. Impact Potentiel d’un Accord de Partenariat Transatlantique sur le Secteur Forestier Mondial
A.3. Réévaluer la demande de produits forestiers en Europe à l’aide d’une approche par cointégration en panel
A.4. Les technologies de l’information, complément ou substitut de la demande de papier?
B. Appendix to chapter 3 additional samples 
B.1. Unit root tests
B.1.1. PANIC (2004)
B.1.2. Carrion-i-Silvestre (2005)
B.1.3. Bai Carrion (2009)
B.2. Cointegration tests
B.2.1. Westerlund (2007)
B.2.2. Westerlund and Edgerton (2007)
B.2.3. Banerjee Carrion (2015)
B.3. Demand elasticities
B.3.1. Estimation by DOLS and PMG
B.3.2. Comparison plot
B.4. GFPM demand scenarios
B.4.1. Comparison of estimated elasticities with the literature
B.4.2. GFPM demand scenarios
C. Appendix to chapter 4 
C.1. Panel cointegration tests
C.2. Thresholds results for consumption per capita in difference
C.3. DOLS and PMG estimation before and after an average break
C.4. Descriptive statistics


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