The Development of Forest-based Biorefineries: Implications for Market Behavior and Policy

In a forest-based biorefinery, the entire potential of forest raw materials and byproducts may be used to produce a diverse set of products, including transport fuels, chemicals, and pulp and paper products. This paper analyzes the general impact on forest raw material markets following an increased diffusion of biorefineries and highlights a number of related public policy issues. The analysis indicates that the character of forest raw material supply, in particular the distinction between main products and byproducts, will have a major influence on the functioning and the organization of future forest products markets. Moreover, the advent of new uses of forest-based biomass will foster an increased competition for (and thus higher price of) this resource. An important policy lesson, however, is not to directly regulate the allocation of forest resources between different sectors or promote a certain industrial structure. The rationale for policy intervention lies instead in identifying situations in which essential societal costs and benefits do not enter the private decision-making process. The presence of external environmental costs (e.g., damages to the climate) and the public spillover effects from R&D and innovation activities provide such rationales, but at the same time require careful analysis prior to the introduction of specific policy instruments. Overall there exists a need to create a better understanding of the linkage between energy and forest products markets, with new co- and byproducts included.