STATE OF THE WORLD’S FORESTS 2005 98 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 99

Economics of wood energy

n the past decade, policies to encourage Currently, wood energy accounts for about I the use of renewable energy have grown 5 percent of the world’s total primary energy in importance as part of the efforts to reduce supply (TPES)1, and woodfuel is by far the most dependence on non-renewable energy sources important source of wood energy (Figure 12). such as fossil fuels and as part of strategies to However, the importance of wood energy address global warming. Wood energy has been to total energy supply differs greatly among identified as a potentially significant source of countries and regions. For example, wood renewable energy, and for this reason a number energy (mostly fuelwood) accounts for more of developed countries have shown interest in than two-thirds of TPES in the Congo, Eritrea, increasing its use (Trossero, 2002). In addition, Ethiopia, Mozambique and the United Republic wood energy remains the most important source of Tanzania, and it accounts for over half of of energy for the more than two billion people TPES in Haiti, Nepal and Paraguay. In Europe, in developing countries who have access to few the overall contribution of wood energy to other sources of energy. TPES is very low (around 1 percent), but there Given the importance of wood energy are great differences among countries. For in developing countries and its potential example, because of the large pulp and paper importance in developed countries, it is useful to industry and the use of black liquor for energy understand the economic forces that encourage production, wood energy accounts for 14 and or constrain the use of wood energy. This chapter 10 percent of TPES in Finland and Sweden, provides an overview of wood energy and its respectively (Table 10). importance, explains some of the economic The importance of wood energy as a use forces affecting wood energy production and of forests and trees also varies widely among consumption and describes how countries might countries and regions. Overall, woodfuel develop the wood energy sector to meet some of (i.e. fuelwood and charcoal) accounts for about their broader policy goals and objectives. 53 percent of total roundwood produced in the world. However, woodfuel accounts for only OVERVIEW OF WOOD ENERGY 14 percent of total production in G8 countries, Wood energy comprises a number of different compared with 69 percent in the rest of the types of wood-based fuels. The most prominent world (Table 11). In terms of the distribution of these is fuelwood, cut directly from trees and of woodfuel production across regions, Asia forests. This may be further refined into other accounts for the largest share of global woodfuel types of energy such as charcoal or wood-derived production (around 44 percent), followed liquid fuels. In addition to these, wood energy includes a number of by-products from the forest

processing industry (notably black liquor – a 1 Total primary energy supply is the supply of unprocessed by-product of pulp and paper making – and fuels (e.g. oil, gas and coal) and excludes the production wood residues) and recycled wood and paper. It of refined or converted types of energy (e.g. petrol and electricity). The figures presented here have been calculated should also be noted that the wood energy sector by converting all of the different types of fuel into includes more than just fuelwood and charcoal. comparable measures of the energy that they can produce. STATE OF THE WORLD’S FORESTS 2005 98 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 99

FIGURE 12 Contribution of wood energy to total primary energy supply, 2001

������������������

��

��

��

��

�

� World G8 Rest of Africa Asia South and Developing North Europe countries the world Central countries America America

����������� ������������������������������ ������������

Source: International Energy Agency, 2003.

TABLE 10 Contribution of wood energy to total primary energy supply in selected developed countries, 2001

Country Contribution to TPES (%)

Black liquor All wood energy

Finland 11.5 14.4

Sweden 8.0 9.9

Canada 3.0 3.5

New Zealand 2.0 2.0

United States 1.3 2.0

Source: International Energy Agency, 2003. 100 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 101

TABLE 11 or negative and are also very difficult Percentage of total roundwood production to value. used for woodfuel, 1997 The contribution of any activity to the economy (e.g. to the GDP) is measured as the Region Proportion of total roundwood production value added produced by that sector. This in (%) turn is calculated by subtracting the costs of World 53 goods and services purchased from other sectors

G8 14 and used for production (e.g. fuel, tools and machinery) from the total value of output in Rest of the world 69 the sector (i.e. quantity produced multiplied by Developing countries 76 price). The production of woodfuel involves few Africa 89 purchases from other sectors. This is particularly Asia 79 true in developing countries, where the main input used to produce woodfuel is labour (which Europe 18 is not counted as a cost in the calculation of North America 15 value added). Thus, the total value of woodfuel South and Central America 59 production gives a reasonable approximation of the value added in the sector. Source: FAO, 2004. Currently, woodfuel prices range from around US$5 to $25 per cubic metre in developed by Africa (21 percent). Together, Asia, Africa countries and US$1 to $10 per cubic metre in and South and Central America account for developing countries (Broadhead, Bahdon 76 percent of global woodfuel production and Whiteman, 2001). However, in developing (Trossero, 2002). countries, a large proportion of woodfuel In the future, the global production of is produced by individuals for their own woodfuel is expected to increase moderately, consumption rather than for sale. In such cases, from 1 885 million cubic metres in 2000 to there are several ways of valuing production 1 921 million in 2010 and 1 954 million in 2020 that is not traded in the market. One is to (Broadhead, Bahdon and Whiteman, 2001). calculate the replacement cost of this production Fuelwood production is expected to increase in (i.e. the cost of replacing the production for Africa and South America but decrease in Asia, personal use by the purchase of woodfuel or while all three regions are expected to increase other types of energy), but this is likely to lead charcoal production. In addition, the use of black to an overestimate of the value of production. liquor for energy is likely to increase in countries Alternatively, the value of production can be where the pulp and paper industry is expanding. calculated as the cost of the time taken to collect woodfuel (as the value must be at least equal to ECONOMIC VALUE OF WOOD this cost or collection would not take place), but ENERGY PRODUCTION this would probably lead to an underestimate of Wood energy contributes directly to national the value of production. economies as a source of energy supply. Taking into account these uncertainties, the However, because a large proportion of wood market price of woodfuel can be used as a rough energy is not sold in the market, valuing this estimate of the value of woodfuel production. contribution is quite difficult. In addition, the Therefore, with total production of around social and environmental impacts of wood 1 885 million cubic metres (and assuming energy production and consumption are 75 percent in developing countries and 25 percent indirect effects – or externalities – of wood in developed countries), the total value of global energy use. These externalities can be positive woodfuel production could be in the range of 100 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 101

US$4 billion to $26 billion per year. These figures households. Woodfuel production requires the amount to about 0.01 to 0.06 percent of global highest amount of labour inputs per unit of GDP. Other types of wood energy (e.g. black energy produced: 100 to 170 person-days per liquor) are not included here, so these figures terrajoule for fuelwood and 200 to 350 person- are an underestimate. However, they indicate days per terrajoule for charcoal (Remedio, that the direct contribution of wood energy to 2001). However, the benefit of this employment national economies is probably quite small. generation depends on the value of the labour used for production (Luoga, Witkowski and Positive and negative externalities Balkwill, 2000). For example, employment can The main positive externalities of wood energy be considered as a positive externality if rural are the effect on carbon balances of substituting unemployment is high, but perhaps not if there wood energy for fossil fuels and the employment are alternative uses for this labour. In addition, generated by wood energy production. The main policy-makers should be aware that woodfuel negative externality is the environmental cost of projects and programmes may not always woodfuel harvesting in terms of forest loss and be the best way to increase rural income and degradation. employment. With the methodology currently used for As with the impact on carbon balances, the carbon accounting, losses of biomass carbon are environmental costs of wood energy use also counted as part of changes in the stock of forest depend on the source of woodfuel. Again, forests biomass. Thus, to avoid double counting, the use that are sustainably managed for woodfuel of wood energy is not counted as an activity that production are likely to lead to some positive

leads to CO2 emissions even though it is one. externalities in terms of their environmental The potential for wood energy to lead to real impact, while unsustainable harvesting for changes in carbon balances depends on the woodfuel production is likely to lead to source of woodfuel. If woodfuel is produced environmental costs. from sustainably managed forests where the To summarize, the indirect effects of wood wood harvested is replaced by the increment energy production and consumption are of the remaining growing stock, then the complex and not well known. However, it seems substitution of wood energy for fossil fuels likely that on balance there may be some positive will result in a real reduction in the net carbon externalities from the use of wood energy in balance. Similarly, if residues from harvesting developed countries and negative externalities and wood industry are used for energy in many developing countries. production rather than left for waste, this would also have a positive net effect. ECONOMICS OF WOOD ENERGY However, if woodfuel is produced on an PRODUCTION AND CONSUMPTION unsustainable basis by clearing forests, the IN DEVELOPING COUNTRIES substitution of wood energy for fossil fuels will In developing countries, the use of wood energy not have a positive effect on carbon balances is divided as follows: fuelwood, 90 percent; and could even be worse than the use of fossil black liquor, 6 percent; and charcoal, 4 percent. fuels. This is particularly true if wood energy is Households (particularly rural households) produced inefficiently. For example, inefficient are its main consumers, with industry and the

kilns emit a great deal of CO2 during the service sector consuming far less. production of charcoal, resulting in very high The use of wood energy is determined emissions per unit of energy produced. by a number of factors, including price, With respect to employment, woodfuel income, availability of other types of energy production is labour intensive and an important and resource availability. In general, most source of income and employment for rural consumers in developing countries use wood 102 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 103

Many rural households in developing countries only produce enough woodfuel to meet their own needs; some, however, are able to enter the market as sellers of woodfuel FAO/17437/A. ODOUL

energy because their choice of energy supply is expend to produce woodfuel. For example, if restricted by income and the availability of other prices rise, households in the third group are types of energy. likely to produce more of their own woodfuel. Households that use wood energy can be In most cases, households in the first group do divided into four types: not participate in the market for reasons such as • households that only produce woodfuel for location (i.e. remoteness) and the low value of their own needs; their own labour. However, if woodfuel prices • households that produce and sell woodfuel; change significantly, households in this group • households that produce and purchase could enter the market either as buyers or sellers woodfuel; of woodfuel. • households that only purchase woodfuel. With respect to income, some researchers have Most rural households fall into the first and found that the share of woodfuel in household second groups, while most urban households energy use declines as per capita income fall into the third and fourth groups. increases (Sathaye and Tyler, 1991; Leach, 1988; The price of woodfuel has a greater effect on Broadhead, Bahdon and Whiteman, 2001). On consumption for the last three groups in the the other hand, Leach et al. (1986) reported above list. For example, households that only that woodfuel consumption increased when purchase woodfuel are likely to respond to price incomes increased in very poor rural households changes by altering total energy consumption in Brazil, India, Pakistan and Sri Lanka. Some or switching to other types of energy. Price others have also reported a positive relationship changes are likely to influence total production between income and woodfuel consumption for the second group or total consumption for (Shaw, 1995; Zein-Elabdin, 1997). Thus, it is not the third group. The effect of price changes on always the case that low-income households first how much these groups produce for themselves use woodfuel and then ultimately progress to will depend on the value of the labour they other types of energy as incomes increase. High- 102 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 103

income households may consider woodfuel 0.9 percent of TPES in G8 countries, compared an inferior good, but low-income households with a total of 1.4 percent for all wood energy may not share this view. Consequently, in poor (Figure 12 and Table 10). In the countries of countries, the switch from woodfuel to other OECD, the contribution of all biomass energy types of energy is likely to occur slowly. to TPES is about 3.5 percent; biomass energy Generally, the decision to switch depends on from agriculture and forestry accounts for about the prices, availability, reliability of supply and 86 percent of this (Radetzki, 1997). energy content of the alternatives. Another factor Government efforts to boost the production is the cost of changing equipment (e.g. stoves). of renewable energy include attempts by the However, in many rural areas, there is no option EU to increase the share of renewable energy but to use woodfuel because of remoteness and to 12 percent of all energy consumption and the lack of infrastructure for delivering other 22 percent of electricity consumption by 2010. types of energy. In the EU plan, the expected growth in biomass Surprisingly, black liquor contributes a little energy production is second highest (after more than charcoal to the TPES of developing wind power), with an expected increase from countries, but this is the result of high use of 55 million to 135 million tonnes of oil equivalent black liquor in only a few countries where pulp (Harmelink et al., 2004). Most developed and paper production is significant (e.g. Brazil, countries treat biomass as an important source of Chile, China, Colombia, Indonesia and South renewable energy and have supporting policies Africa). The availability of by-products from the in place (Table 12). In addition to governments, forest processing industry and recycled wood many other organizations also promote and paper products is significant and could be renewable energy. However, despite such used to increase wood energy production, but initiatives, concerns remain about the production this will depend on the profitability of using these costs and financial viability of renewable energy materials for energy production compared with production. the profitability of alternative uses (e.g. as inputs The cost of wood energy production depends for wood panel and paper manufacturing). on the source of wood used. In general, recovered Other social and environmental factors that wood and paper products and wood residues affect household woodfuel consumption include from the forest processing industry are likely climate (e.g. altitude, length of winter and rainy to be the least costly sources of supply because seasons), access to markets and forest resources, they are concentrated in urban areas and can health and environmental effects of woodfuel use benefit from economies of scale in production. (e.g. smoke) and cultural variables. For example, Harvesting residues and the forest plantations the failure of fuelwood and charcoal substitution specifically managed for wood energy production programmes in many countries is attributed to are likely to be more expensive sources of the resistance of consumers to change cooking supply. Consequently, wood energy systems habits (e.g. to replace wood and charcoal stoves in developed countries have tended to focus with alternative technologies). These other factors on using wood residues. However, there is an can be important and should be considered in opportunity cost of using these materials for wood energy policies and programmes. wood energy, as they are also an important source of supply for the forest industry. Thus, there ECONOMICS OF WOOD ENERGY are concerns about the impact that subsidizing PRODUCTION AND CONSUMPTION wood energy will have on the forest industry. IN DEVELOPED COUNTRIES Promoting wood energy will be beneficial for the With few exceptions, black liquor is the main forestry sector as a whole, but the distribution of type of wood energy used in developed the costs and benefits of such policies across the countries. In 2001, black liquor accounted for sector needs to be evaluated carefully. 104 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 105

TABLE 12 Instruments used in OECD countries to promote renewable energy Austria Belgium Denmark Finland France Germany Greece Ireland Italy Japan Luxembourg Netherlands Norway Portugal Spain Sweden UK USA

Research and n n n n n n n n n n n development

Tax incentives n n n n n n n n n n n n n

Subsidized loans n n n n n n n n n n n

Capital subsidies n n n n n n n n n n n

Feed-in tariffs n n n n n n n n n n n n

Energy taxes n n

Market n n n n n liberalization

Information n n n n n n n n n campaigns

Training n n n n n

Standardization n n n n n n n

Certification n n n

Source: Short and Keegan, 2002.

Green pricing programmes for renewable energy

In 2002, 90 green pricing programmes were offered to about 26 million consumers in 32 states in the United States. Almost 274 000 consumers participated in these programmes. The premiums for renewable energy ranged from US$0.007 to US$0.176 per kilowatt-hour, and consumers paid an average of US$4.43 per month for green power. At the end of 2002, utility companies had installed nearly 290 megawatts of renewable energy capacity and had plans to install another 140 megawatts. Biomass energy production accounted for the second largest share of capacity, with 15 percent of installed capacity and 17 percent of planned capacity. About 25 percent of utility companies produced their own renewable energy, 46 percent purchased all of their supplies from other power generators or purchased renewable energy certifi- cates, and the remaining companies used a combination of these approaches.

Source: Bird, Swezey and Aabakken, 2004. 104 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 105

More fuel-efficient stoves improve the welfare and living conditions of people living in remote communities FAO/19754/G. BIZZARRI FAO/19754/G.

Other factors that will affect the economic FUTURE STRATEGIES AND POLICIES viability of wood energy are the demand for Over the next two decades, the importance renewable energy and the non-wood costs of wood energy in developed countries is of wood energy production. With respect to likely to increase as part of efforts to promote demand, energy pricing programmes in some the use of renewable energy. This may also developed countries have enabled consumers occur in developing countries, although to choose renewable energy and pay slightly the greatest changes can be expected from more for it (see Box on facing page). In addition households switching from woodfuel to other to households, corporate consumers in the types of energy. These transitions will require industrial and service sectors are starting to programmes and policies that take into account purchase renewable energy to improve their the complex economic forces that influence environmental image and as part of social wood energy production and consumption. corporate responsibility programmes. Thus, the The following issues are put forward for prices for renewable energy may increase in the consideration by policy-makers. future, particularly if the market can be divided • At the international and national level, in this way. forestry and energy policies need to be In terms of production costs, the current complementary in order to achieve the cost of electricity production from biomass is benefits that wood energy can offer. about US$0.07 to $0.09 per kilowatt-hour, which • Government subsidies for wood energy is slightly higher than the cost of producing should continue in order to enable it electricity from fossil fuels. However, in to compete with other types of energy. favourable situations, it can be reduced to as However, subsidies need to take into account little as US$0.02 to $0.04 per kilowatt-hour the impacts of greater wood energy use on (Ahmed, 1994). Furthermore, new and improved other parts of the forestry sector. technologies, such as integrated biomass • Policies and projects that encourage the use gasification plants, may soon produce electricity of wood energy should be based on holistic from biomass at about US$0.04 per kilowatt-hour analysis of all the economic, social and (Elliott, 1993). More generally, Short and Keegan environmental costs and benefits of wood (2002) predict that the cost of biomass energy energy. In situations where the use of wood production will fall by 15 to 20 percent over the energy results in significant benefits, this next 20 years, making it broadly comparable information should be disseminated with the cost of energy from fossil fuels. widely. 106 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 107

• Attention should be paid to possible negative REFERENCES externalities of woodfuel use (such as nitrogen oxides and particulate emissions), Ahmed, K. 1994. Renewable energy technologies: a which are largely unknown at the moment. review of the status and costs of selected technologies. • Efforts should continue to improve the Washington, DC, World Bank. efficiency of wood energy production in Bird, L., Swezey, B. & Aabakken, J. 2004. Utility green developing countries. These could include pricing programs: design, implementation and consumer not only the promotion of more efficient response. Golden, USA, National Renewable Energy wood stoves but also the development Laboratory. of more modern production systems Broadhead, J., Bahdon, J. & Whiteman, A. 2001. Past such as the use of wood for electricity trends and future prospects for the utilization of wood production. Successful experiences with for energy: Annexes 1 and 2. Global Forest Products modern wood energy systems in some Outlook Study Working Paper No. GFPOS/WP/05. developed countries should be shared with Rome, FAO. developing countries through investment Elliott, P. 1993. Biomass energy overview in and technology transfer. the context of the Brazilian biomass power • Integrated operations that combine the use demonstration. Bioresource Technology, 46: 13–22. of wood for energy and the production FAO. 2004. Wood energy data from the Energy Information of forest goods are likely to be more Systems. Rome (available at www.fao.org/forestry/ economically viable than systems that only site/14012/en). focus on the production of wood energy. ◆ Harmelink, M., Voogt, M., Joosen, S., Jager, D., Palmers, G., Shaw, S. & Cremer, C. 2004. Implementation of renewable energy in the European Union until 2010. Utrecht, Netherlands, Ecofys. International Energy Agency. 2003. Key world energy statistics 2003. Paris. Leach, G. 1988. Residential energy in the third world. Annual Review of Energy, 13: 47–65. Leach, G., Jarass, L., Obermair, G. & Hoffman, L. 1986. Energy and growth: comparison of 13 industrial and developing countries. Guildford, UK, Butterworth Scientific. Luoga, E.J., Witkowski, E.T.F. & Balkwill, K. 2000. Economics of charcoal production in miombo woodlands of eastern Tanzania: some hidden costs associated with commercialization of the resources. Ecological Economics, 35: 243–257. Radetzki, M. 1997. The economics of biomass in industrialized countries: an overview. Energy Policy, 25(6): 545–554. Remedio, E.M. 2001. Socio-economic aspects of bio-energy: a focus on employment. Rome, FAO. (Unpublished) Sathaye, J. & Tyler, S. 1991. Transition in household energy use in urban China, India, the Philippines, 106 STATE OF THE WORLD’S FORESTS 2005 PART II SELECTED CURRENT ISSUES IN THE FOREST SECTOR 107

Thailand, and Hong Kong. Annual Review of Trossero, M.A. 2002. Wood energy: the way ahead. Energy and Environment, 16: 295–335. Unasylva, 211: 3–12 (also available at www.fao.org/ Shaw, C.L. 1995. New light and heat on forests as forestry/unasylva). energy reserves. Energy Policy, 23(7): 607–617. Zein-Elabdin, E.O. 1997. Improved stoves in Short, W. & Keegan, P. 2002. The potential of sub-Saharan Africa: the case of Sudan. Energy renewable energy to reduce carbon emissions. Economics, 19: 465–475. ◆ In R.G. Watts, ed. Innovative energy strategies for

CO2 stabilization, pp. 123–177. Cambridge, UK, Cambridge University Press.