This paper examines the role and impact of taxation on sustainable forest management. It is shown that fiscal instruments neither reinforce nor substitute for traditional regulatory approaches. Far from encouraging more sustainable forest management, fiscal instruments such as an inappropriate tax policy can actually undermine it. The paper uses the arguments at the root of the Faustmann solution to draw conclusions on the incentives for sustainable tropical forest exploitation. The paper also proposes a bond mechanism as an alternative market-based instrument to encourage sustainable forest logging while reducing monitoring costs.
Countries generally tax the forestry sector to achieve the twin objectives of revenue maximization and sustainability of logging levels. In an ideal world of perfect markets and information, auctions would be the best instrument to determine the price of extraction rights. However, a number of factors-including a lack of information on the forest resources under consideration, uncertainties as to the stability of property rights over time, and a lack of access to credit-have limited the use of auctions so far, particularly in low-income countries. To establish transparency of the forestry sector's financial flows, this paper discusses a radical simplification of Liberia's current timber tax structure, including a proposal to reduce the sector's current tax system to two instruments, an area tax and an export tax.