Can legality verification rescue global forest governance?

Forest Policy and Economics 18 (2012) 13–22

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Forest Policy and Economics journal homepage: www.elsevier.com/locate/forpol

Review

Can legality verification rescue global forest governance? Analyzing the potential of public and private policy intersection to ameliorate forest challenges in Southeast Asia Benjamin Cashore ⁎, Michael W. Stone Yale School of Forestry and Environmental Studies, United States

a r t i c l e

i n f o

Available online 15 February 2012 Keywords: Forest governance Market mechanisms Legality verification Forest certification Illegal logging Institutions

a b s t r a c t One of the most important and pressing questions of our times is to understand better what types of governance arrangements at the local, domestic and international levels, as well as innovative non-state market driven mechanisms that might best address fundamentally important but seemingly intractable environmental, economic and social challenges. This paper sheds light on these questions by assessing the emergence of legality verification as a means to address global forest degradation. Legality verification is puzzling because it presents a relatively modest solution compared to previous efforts to build a legally binding global forest convention, global certification systems or domestic focused “good forest governance” initiatives, and yet it is garnering the interest of wide ranging and diverse global coalitions within developed and developing countries. Does the relatively limited scope of legality verification represent a “race to the bottom” in global forest regulation that many scholars assert is inevitable with the rise of economic globalization? Or, does legality verification trigger the beginning of a process that may provide institutional solutions to global forest governance in ways that previous efforts have yet to accomplish? The purpose of this paper is to offer a theoretical framework with which to guide future research on these questions. To accomplish this task we distinguish conceptually legality verification from global certification and domestic good forest governance initiatives. We then review current support in developed and developing countries, focusing our lens on coalitions supporting legality verification in the United States, European Union, and Southeast Asia. Third, inductively from this review, and deductively, we develop propositions to guide further conceptual and empirical researches focusing on the institutionalization “logics” of legality verification to become an authoritative arena of global forest governance, as well as its potential to reinforce, rather than detract from, global certification and good forest governance initiatives. © 2011 Published by Elsevier B.V.

1. Introduction One of the most important and pressing questions of our times is to understand better what types of governance arrangements at the local, domestic and international levels, as well as innovative nonstate market drive mechanisms that might best address fundamentally important, but seemingly intractable, globally important environmental, economic and social challenges. This paper sheds light on these questions by assessing the emergence of legality verification as a means to address global forest degradation. The growing interest in legality verification appears quite puzzling. Most stakeholders agree that by itself, the relatively narrow focus on “legality” will be unable to ameliorate key global forest governance challenges, including deforestation from land use change, that have consumed efforts over the past 30 years to build authoritative and durable forest policy institutions. In fact, 20 years ago the idea of promoting ⁎ Corresponding author. E-mail addresses: [email protected] (B. Cashore), [email protected] (M.W. Stone). 1389-9341/$ – see front matter © 2011 Published by Elsevier B.V. doi:10.1016/j.forpol.2011.12.005

legality verification would have been unimaginable to many environmental groups, who reasoned that such an approach was insufficient to address enduring environmental, social, and economic challenges facing the world's forests. Does the relatively limited scope of legality verification represent a “race to the bottom” in global forest regulation that many scholars assert is inevitable with the rise of economic globalization (Gale, 1998)? Or, does legality verification represent the “trigger” of a process that may provide institutional solutions to global forest governance in ways that previous efforts have yet to accomplish (Cashore et al., 2007)? The purpose of this paper is to offer a theoretical framework to guide future research on these questions. To accomplish this, we distinguish conceptually legality verification from global certification and domestic good forest governance initiatives. We then review current support in developed and developing countries, focusing our lens on coalitions supporting legality verification in the United States and the European Union, and Southeast Asia. We pay particular attention to the emergence in each of these cases of “Bootleggers and Baptists” coalitions of environmental groups and business interests, who, for very different self-interested reasons,

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come to support the same policy intervention. Third, we develop propositions to guide further conceptual efforts and empirical research, focusing on the institutionalization “logics” of legality verification to become an authoritative arena of global forest governance, as well as its potential to reinforce, rather than detract from, global certification and good forest governance initiatives. Three arguments emerge from this effort. First, the lack of forward looking theory about institutionalization and intersection in global and domestic forest governance scholarships has biased the bulk of practitioner efforts toward making strategic decisions that, while well intended, may hamper efforts to build longer term solutions. Second, whether ‘ratcheting up’ or ‘ratcheting down’ will occur is not preordained, but instead will be dependent on whether strategic decisions are consistent with legality verification's institutionalization logic. Third, depending on such strategic decisions, legality verification has the potential to provide the “glue” to link, synergistically, market based governance on the one hand, and domestic good governance on the other hand. 2. Conceptualizing legality verification in contrast to non-state market driven forest certification and domestic forest governance Conceptualizing legality verification as an “ideal type” reveals similarities and differences with “non-state market driven” (NSMD) driven forest certification and domestic good forest governance initiatives. We review the essential tenants of each in order to position our empirical assessment and theory building over institutionalization and intersection. 2.1. Forest certification as “non-state market driven” (NSMD) global governance Forest certification emerged on the global scene following the creation of the Forest Stewardship Council (FSC) in 1993, which was promoted heavily by the world's leading environmental groups following failed efforts to develop a binding global forest convention at the 1992 Rio Earth Summit. The idea behind certification was relatively straightforward: develop a set of wide ranging rules governing sustainable forest management and mobilize customers of forest products to encourage adherence to the standards. Strategists reasoned that by drawing on carrots (price premiums) and sticks (shaming campaigns of companies not undertaking certification), economic incentives might provide more enduring support than short lived and ineffective boycotts of tropical wood products prominent in the 1980s; while providing more purposeful rules than international efforts that many NGOs felt amounted to “logging charters.” Five key features have been identified as key to understanding forest certification as “non-state market driven” (NSMD) global governance: domestic sovereign states do not require adherence to the rules; wide ranging policies governing social and environmental practices are developed; third party auditing is used to promote verification/compliance, and tracking of eco-certified products is undertaken along global supply chains (Bernstein and Cashore, 2007; Cashore, 2002; Cashore et al., 2004). Over the last 17 years, efforts to promote responsible stewardship through certification have been mixed. There is now considerable support for third party certification among most commercial forestry operations in North America. However, two challenges still characterize efforts to build global uptake. First, considerable debate continues over support for the NGO supported FSC, and the domestic, government/industry/landowner initiated, “FSC competing” programs. These competing programs (now housed under the international umbrella of the Program for the Endorsement of Forest Certification (PEFC)) emerged to provide global scope comparable to the FSC for domestic programs. They are asserted to be more flexible and “business friendly” because they gave more discretion to the forest sector and firms in implementing policy goals. Second, support, though growing, is weakest in tropical

developing countries where so much scrutiny was first placed (Graph 1). This relatively weaker uptake can be traced to the enduring challenges facing tropical forest degradation and the rather limited economic incentives from the EU and the US compared to the costs involved in implementing certification. Of course, there is some evidence that certification already has market based incentives for certification. Some studies have found price premiums for participation in certification in Malaysia (Kollert and Lagan, 2007) while others have demonstrated that benefits such as increased market access, access to new markets, increased firm's reputation are also generated (Bouslah et al., 2010). While these studies are useful in explaining certifications growth, the limited presence of certification in much of the developing world demonstrates that certification still has challenges to overcome regarding global adoption. 2.2. Domestic “good forest governance” In part owing to certification's limited uptake in the tropics, international agencies, led by the World Bank, began to focus increasingly on promoting capacity building and learning within tropical countries. The idea, buttressed by studies showing that many developing countries had on their books relatively strong, but unenforced, forest practice regulations (McDermott et al., 2009; McDermott et al., forthcoming), was to help countries develop and implement their own policy priorities and goals for sustainable forest management. As a result, UK, German and EU development agencies undertook, under the auspices of “Forest Law Enforcement and Governance (FLEG),” (FLEG News, 2007; Food and Agriculture Organization of the United Nations, and International Tropical Timber Organization, 2005; The World Bank, 2006) initiatives to improve capacity building, as well as foster policy learning networks in hopes of strengthening, rather than challenging sovereignty and domestic policy development (Thang, 2008). Key early FLEG outputs included an East Asian FLEG Ministerial Declaration in Bali in 2001, followed by Ministerial declarations in Africa in Yaoundé in 2003, in Europe, and in North Asia in St. Petersburg in 2005, as well as initial talks in Latin America. As a result of these

Graph 1. Number of hectares under different certification systems 2011. Note: Data from FSC, SFI, CSA and PEFC publicly available from their respective websites (accessed October 2011).

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declarations, a number of projects and initiatives have been created to promote FLEG at various scales and regions (Brown et al., 2008; Kaimowitz, 2003; Magrath et al., 2007; Perkins and Magrath, 2005; The World Bank, 2005; The World Bank, 2006; The World Bank, 2007). Within ASEAN, the Bali declaration served to coalesce region wide deliberations (Defensor and Fathoni, 2005) in which key member states are committed to fostering and building cross national ties to promote the FLEG initiative and to combat corruption and forest policy enforcement challenges. Regional FLEG processes opened the door for new initiatives and experiments within and across countries (BBC, 2007; Brack, 2005; Brown et al., 2008; Cashore et al., 2006; Ching, 2007), with varying involvement of civil society and forest sector stakeholders (Thang, 2008). Many of these FLEG processes focused much of this effort on building greater capacity for enforcement of existing laws (Tacconi, 2007), reducing contradictory legal regimes, and enlisting NGOs to monitor on-the-ground activities, including reducing high levels of illegal logging (Brown et al., 2008; FLEG News, 2007; Food and Agriculture Organization of the United Nations, and International Tropical Timber Organization, 2005). While the idea behind promoting good forest governance was widely shared, the challenges they purported to address, such as corruption and lack of resources, have been raised as key reasons as to why a focus on promoting FLEG in the absence of trade or market incentives would be unable to address forest degradation. Many development agencies and other stakeholders became concerned that because of the absence of formal requirements and incentives, efforts to promote FLEG might simply result in window dressing that ironically supported ongoing corruption by giving the appearance of change without meaningful changes in “on the ground” behaviors.

practices. Instead, it only needs to find a way to remove illegal supply (or a portion of it) from global forest products. This feature, as we discuss below, requires, as with forest certification, tracking products along supply chains, focusing greater attention on both the technical challenges and innovations for undertaking such an effort. Yet despite the widespread potential support for legality verification, it has a limited policy scope in that this approach is designed to affect a relatively narrower set of problems—illegal timber harvesting rather than proscribing a wider set of environmental and social standards through broader sustainable forest management solutions, offered by certification and good forest governance efforts. Those interested in promoting legality verification now comprise developed and developing country governments including their forest, foreign, international trade and development agencies, as well as environmental groups, forest research organizations, and forest industry associations. Within the US and EU, legality verification has been championed for two primary reasons. First, there is growing recognition that, even if successful, a legally binding international agreement will have little “on the ground” effects in those countries with poor capacity, training and enforcement. Second, efforts to certify the best forest practices led, some critics asserted, to simply separating markets rather than improving on the ground results. Hence, legality verification emerged by drawing on similar ideas as certification, but emphasizing adherence to national laws and regulations.

2.3. The emergence of legality verification

3.1. Weeding out illegal logging: the US approach

Partly as a result of concerns regarding the effectiveness of global certification systems and good forest governance initiatives, “legality verification” is now emerging as a leading policy instrument with which to combat the forest degradation and deforestation associated with illegal logging, which has been asserted to constitute some of the worst forest practices around the world (Food and Agriculture Organization, 2001; Kaimowitz, 2005), especially in tropical developing countries where biodiversity loss is seen as a global challenge (Tacconi, 2007). As Table 1 reviews, legality verification represents a hybrid of global certification and FLEG efforts: similar to FLEG efforts legality verification recognizes and promotes national sovereignty; however like certification it relies on third party verification. Unlike certification, it does not have to rely on altruistic customers' support of eco-friendly

The US approach to weeding out illegal logging has been under the auspices of an amendment to the US Lacey Act, which expanded the Act's jurisdiction from imports of illegally harvested fauna to include flora. The amendments to the Lacey Act render any firm in noncompliance, and wood forfeited, if they knowingly or unknowingly import illegally harvested wood products. Firms can limit punishment, but not forfeiture, if they can demonstrate that they showed “due care” to avoid importing illegal products. It is this provision that has placed so much interest on the part of importers in promoting credible supply chain tracking “legality verification” systems. At the same time, as these are early days, considerable uncertainty remains about what the precise definition of “due care” will come to mean following regulations, potential court rulings and development of international norms. Until further legal and regulatory clarifications evolve, much of the current strategies on the part of those advising importers are to take actions to reduce risk of non-compliance. As a result, various “corporate social responsibility” initiatives have been proposed. For instance, one strategy has been to take proactive internal firm efforts to identify “red flags” such as abnormally low prices or offers to sell product for cash without paperwork (Asner and Pickering, 2009). More proactive efforts include developing longterm relationships with suppliers including visits to their production facilities (Environmental Investigation Agency, and World Resources Institute, 2010; Negley, 2010). Importantly for our paper, as we review below, longer term solutions have included recommendations that firms

Table 1 Key features of forest legality, certification and domestic forest governance. Forest legality Forest certification verification (NSMD) Role of government Sovereign governments decide rules Policy scope Assurance

Role of markets

Economic incentives

Limited Third party verification required Tracking along supply chain Weeding out supply increases prices

Domestic “good forest governance” Sovereign government decide rules

Sovereign governments do not require adherence to rules Broad Third party verification required Tracking along supply chain

Broad Often weak

Demand from customers

Increased tax revenues

Demand for products

3. Emergence and support 1 While there is a general convergence in support among a range of actors, difference have emerged regarding policy scope, definitions and compliance.

1 Research conducted for the empirical assessment applies a “historical institutionalist” approach which emphasizes “process tracing” (Bennett and Elman, 2006) to uncover and identify complex causal processes larger N studies or quantitative regressions are unable to uncover. Accordingly, we draw on several complementary empirical efforts including analysis of secondary and primary documentations, as well as several interviews conducted in Southeast Asia in the summer of 2010 and in Washington DC in March 2011. For brevity, we only refer to specific interviews when identifying key factual points.

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support either third party certification of their forest products (all third party forest certification programs have as their first principles that managers meet government regulations); and/or support emerging legality verification programs that third party non-government organizations have been developing expressly to assist firms in meeting their EU and US legal import requirements (Environmental Investigation Agency, and World Resources Institute, 2010; Negley, 2010).2 3.2. US support The 2008 amendment of the Lacey Act was born from a coalition of environmentalists and timber industry officials jointly approaching two legislators in Oregon, Congressman Blumenauer and Senator Wyden. In the case of the Lacey Act, illegal logging was a prime target for both domestic industry officials from groups such as American Forest & Paper Association (AF&PA) and Hardwoods Federation; and environmentalists such as World Wildlife Fund (WWF), and Environmental Investigation Agency (EIA) ((World Wildlife Fund and TRAFFIC, 2007; Wrobleski, 2007); Environmental Investigation Agency and World Resources Institute December 4 2008; (Barringer, 2007)). Both sides saw the Lacey Act as a powerful regulatory tool already poised to apply to plants and had been established as applying to foreign trade and global supply chains (Ottitsch, 2010). Furthermore, both had recognized that amending the Lacey Act mutually served their interests. “AF&PA and its members are doing the right thing and believe that any reduction in illegal logging will assist our legal products in competing against products manufactured from lower-cost illegal material” (Wrobleski, 2007). These claims were buttressed by an AF&PA sponsored study that estimated that prices could go up by as much as 15% if illegal wood was removed from the global supply (Seneca Creek Associates and Wood Resources International, 2004). Recognition of this helps explains why much broader coalitions that have emerged to address forest legality, including some who are vehement opponents over whether to support the FSC and PEFC certification programs. As Cassie Phillips, vice president in charge of Sustainable Forests and Products at Weyerhaeuser stated, “The Lacey Act will protect the forest-products industry's global reputation by helping eliminate illegal logging, which in some places is carried out by organized crime, spreading violence and deforestation in some developing countries…It will cost the global industry economically, but we will all gain in the longer term as illegally sourced wood is removed from the marketplace (Environmental Investigation Agency, and World Resources Institute, 2008).” To be sure, not all parties welcomed the Lacey Act amendments with two key groups noting their opposition. First, Monsanto and BIO (Biotechnology Industry Organization) stated that special exceptions were needed so as to allow for the transportation of select plant samples into the US for potential biotechnology issues (Khatchadourian, 2008). This was resolved by the amendment including a special exception for “scientific” samples and crop cultivars. A second group to oppose the legislative changes was a small group of forestry industry companies with a host of concerns. A coalition formed under the leadership of the International Wood Products Association (IWPA) which claimed to represent 745,000 small businesses who were worried about the impact of the amended Lacey Act (Forester, 2007). This coalition claimed that the additional documentation requirements were burdensome and wished to be granted special “innocent owner” exceptions. They also suggested not only that the rules were unclear, but that timber as a product is too hard to track. While this coalition would concur that illegal logging is to be avoided, they worried that they would face higher

2 To be sure, it is important to note that certification may not be a 100% guarantee against prosecution. As the standard for liability is “fact based” not “document based,” certification can, arguably, go a long way to establish ‘due care’ (Environmental Investigation Agency, and World Resources Institute, 2010).

compliance costs than large timber companies (Forester, 2007). Despite these objections, the amended Lacey Act passed both houses of Congress, becoming the foremost regulatory tool in the US for addressing importation of illegal timber products. 3.3. The EU approach In a departure from general forest policy development that has remained under EU member state's jurisdiction, policy to combat illegal logging was developed at the EU level and framed as a trade issue through its Forest Law Enforcement, Governance and Trade (FLEGT) initiative. Established in 2005 following EU Council support, FLEGT would focus on developing bilateral negotiations, known as “Voluntary Partnership Agreements” (VPA) with individual countries—promising enhanced market access to EU markets in exchange for promoting “good forest governance” inside their own borders.3 The VPA focus is on bilaterally negotiated treaties regarding the technical details of legal verification such as a mutual definition of legality and the development of a secure licensing system (Brown, 2006). Such an approach was also designed to be consistent with WTO rules, which permit trade restrictions when both producer and exporting countries agree. The European Council, which gave the European Commission the mandate to negotiate on behalf of the entire European community, provided clear market incentives to countries to enter negotiated VPA agreements, through a 2005 regulation which states that “Imports into the Community of timber products exported from partner countries shall be prohibited unless the shipment is covered by a FLEGT license.” 4 The VPA negotiation process has five key components: agreeing on a legality standard, establishing a chain of custody, implementing a verification system, establishing the license issuing authority in the partner country, and independent monitoring (European Commission, 2003). To date ten countries have entered into VPA negotiations subject to government and non-governmental stakeholder support and participation. As of July 2010 Cameroon, Republic of the Congo, Gabon, and Malaysia were considering penultimate negotiated drafts while Ghana and Indonesia have agreed upon what constitute legality standards.5 Inspired by the US Lacey Act approach and its ability to cover all countries simultaneously, the EU parliament took the additional step in early July 2010 to require that importers not covered by VPAs also avoid importing illegal timber by demonstrating “due diligence.” They identify three elements needed for manage this risk: “access to information, risk assessment, and mitigation of the risk identified” (Obligations of operators who place timber and timber products on the market, 2010). The idea is that importers are accountable for the goods they bring into the EU and must manage this responsibility by ensuring proper documentation that wood products came from legal sources. Like the Lacey Act, the EU parliament avoided precise definitions of legality. The EU legislation states, “In the absence of an internationally agreed definition, the legislation of the country where the timber was harvested, including regulations as well as the implementation in that country of relevant international conventions to which that country is party, should be the basis for defining what constitutes illegal logging.” 6 The EU Parliament passed the 2010 regulation with widespread support, earning 644 votes in favor, 25 votes against, and 16 abstentions (Girling, 2010). The only gathered opposition which opposed the bill was the United Kingdom wing of Europe of Freedom and 3 (Council Regulation (EC) on the establishment of a FLEGT licensing scheme for imports of timber into the European Community (2005)). 4 (Council Regulation (EC) on the establishment of a FLEGT licensing scheme for imports of timber into the European Community (2005)). 5 Of all the countries in VPA negotiation, only Ghana has agreements covering all of the dimensions but it has not yet began actively delivering ‘legality verified’ timber. 6 (Obligations of operators who place timber and timber products on the market, 2010).

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Democracy (EFD), which broke ranks with the rest of the EFD to oppose the bill (Ottitsch, 2010; Votewatch.eu, 2010). On the other hand, small forest owners at this point oppose both VPAs and the EU legislation (and subsequent commission directive), as they are concerned that they, too, will be subject to further burdensome regulations as a result (Ottitsch, 2010). 3.4. Support in supplier countries: Indonesia and Malaysia Responses in supplier states have changed dramatically over time, as countries in Southeast Asia with significant export markets in the US and EU, either directly or indirectly through China, demonstrate relatively higher degrees of interest than countries that rely less on these markets (Ottitsch, 2010; Wenming, 2010). While it is beyond the scope of this paper to offer a systematic assessment, we identify key themes that have emerged and shaped support or opposition to forest legality verification in two key forest producing countries: Indonesia and Malaysia. The overall picture of trade in forest products from Indonesia and Malaysia to the EU and US has been relatively stable over the last decade. While Indonesia has historically been the larger source of direct trade, beginning in 2007 major growth occurred in Malaysian exports to the EU, while all other exports remained stable (See Graphs 2 and 3.) the relationship between these producers and consumers has been lucrative and is a large source of revenue for both Malaysia and Indonesia. Given the nascent nature of legality verification, these two countries seem logical candidates for initial exploration into support for and effects of EU and US approaches for promoting and assisting domestic efforts to produce good forest governance. The scale and values of this industry show that it is a substantial portion of the economy in both countries and that the development of legality verification will be of substantial impact. The central question in how legality verification will impact this industry revolves around whether the ‘weeding out’ of illegal wood will lead to rising prices as the supply of timber becomes restricted. Indeed, the answer to this question will not become clear until after a working legality verification system is in operation and begins preventing the sale of illegal timber. However, it is possible to estimate the relative change to price relative to consumption based on previous studies of price elasticity for the relevant products. For example, using US furniture data Appelbaum (2006) found inelastic material substitution, suggesting that wood materials in finished products are not easily substituted and thus restrictions in supply will lead to higher prices. While this is only a single study, it reflects a broader truth about

Graph 2. Forest product trade flow between Indonesia/Malaysia and US/EU. Note: Data from FAO Forestry Statistics, September 2010 (FAOSTAT, 2010).

Graph 3. Forest product trade by product between Indonesia/Malaysia and US/EU. Note: Data from FAO Forestry Statistics, September 2010 (FAOSTAT, 2010).

price behavior following restrictions in the supply of wood available due to the removal of low price illegal timber from the market. Thus it is reasonable to hypothesize that the price of timber will increase instead of substituting additional labor or another wood product. In Indonesia the government's response to both the US Lacey Act and the EU VPA negotiations appears to have been strongly influenced by pre-existing efforts of the Indonesian government to promote forest legality. Following domestic FLEG efforts noted above, the Indonesian government experimented by creating the Badan Revitalisasi Industri Kayu (BRIK, Indonesian Institute for the Revitalization of the Timber Industry) which was charged with monitoring and verifying the legality of timber. To accomplish these objectives, ETPIK issues a certificate of legality to forest companies which provide all required documents, including transportation permits. However, the ready availability of these certificates on the black market raises doubts about the effectiveness of this approach (Colchester, 2006). There appears to be widespread support for the US Lacey Act among forest stakeholders in Indonesia because the Act is seen as reinforcing baseline governance while treating all nations the same. It also provides a mechanism for gaining access to US markets in ways that Indonesia views as much easier to meet than demands for certified forest products or boycott campaigns: the former were seen as imposing far too many costs than benefits, while boycotts were seen as protectionist, blunt and discriminatory. The Lacey Act approach also appeared as much more lean and efficient than the EU VPA process that, like ITTO and certifications before it, once again required extensive negotiations with domestic and global stakeholders that might yield additional unanticipated demands or costs—as well as potentially challenging national sovereignty indirectly. Though there remains uncertainty about how US federal agencies implement the Act, it appears that the Lacey Act approach is gaining traction with many Indonesian forestry officials. In this case these efforts are considered by key stakeholders to be reinforcing sovereignty and providing market benefits, rather than losing market share. Certainly more research needs to be undertaken, however, to assess whether part of the support for the Lacey Act in Indonesia is related to differing domestic coalitions who are either attempting to maintain their access to informal payments or those who are trying to weed out what is asserted to be widespread corruption. At the same time, the Indonesian approach to negotiating EU VPA agreements (Colchester, 2006) has proven to be more cautious, even though Indonesia was the first in Southeast Asia to draft a complete agreement framed within timber legality assurance systems (TLAS). As Ahmad Maryudi explains, the Indonesian TLAS (SVLK, Standar Verifikasi Legalitas Kayu) was submitted to the Ministry of Forestry

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following five years of negotiations in the fall of 2008. The lengthy process was in part due to debates about whether the agreement would merely cover distribution and trade of timber products, or cover broader forest management questions include planning, execution and harvesting as well. In addition, EU negotiators asked that Indonesia agree to third party verifiers for monitoring legality as part of the VPA agreement, a key point of contention that may reflect competing domestic interests. This is a fascinating development in which state actors maintain full authority for creating and developing rules, but who voluntary give up enforcement to outside parties in an effort to bypass potential corruption or uncertainties about implementation (Cashore et al., 2010) This request was agreed in August 2009, paving the way for the formal agreement. Approving the SVLK and signing the VPA as Maryudi has argued, “appears to hold potential to working in tandem with local institutions, to develop a durable and effective institution for reducing illegal logging in the country”. In contrast to Indonesia, Malaysia has been slower, but open to promoting legality verification. Arguably one of the impediments to Malaysia's participation is that while it has received sustained international scrutiny, many domestic forest agencies feel that its longstanding land use (Abdullah and Hezri, 2008) policies, protected forests and gazetted forest lands make its domestic policies one of the most advanced and sustainable in Southeast Asia. Hence, Malaysia does not have the same domestic political crisis regarding forest legality as its counterparts in Indonesia. As an economically advanced Southeast Asian nation, it does not suffer from the same type of governance challenges as do other countries. It is arguably in part for these reasons that international scrutiny in Malaysia has focused on its widespread conversion of natural forests in Borneo and Peninsular Malaysia to palm oil plantations—an altogether different problem than forest legality verification. Other hurdles also confront efforts to develop forest legality. First, the industry remains skeptical that a price premium will ever materialize and with the EU unwilling to formally commit to higher prices for access to its markets, stakeholders fear that verification may cost countries more than the benefits that will accrue. In addition, and reflecting federal jurisdictional issues governing forest management, differences across sub-national jurisdictions are slowing negotiation. While the 11 peninsular states and the state of Sabah in Borneo Malaysia are now supporting efforts, the state of Sarawak is hesitating for two key reasons. First, stakeholder bodies have sought to expand definitions of legality to include indigenous land claims, which would significantly raise the costs of implementing forest legality. Second, Sarawak exports almost nothing to EU and US markets, thus rendering its calculations for compliance a negative one. Nonetheless, progress has been made in signing a VPA. EU commitments to provide resources for capacity building may in part explain ongoing advances. At the same time, hurdles in developing legal verification, skepticism about just what it can and cannot do, and concerns that the EU is imposing requirements beyond what Malaysia and Indonesia would have otherwise require, remain (Freezailah, 2010; Johnson, 2010). Preliminary indications are that government officials in both countries now see the EU and US processes as evolving to currently pose little or no infringement, on their own domestic commitments.7 Moreover there is widespread recognition, especially in Indonesia, that ongoing concerns over corruption and weak enforcement might be ameliorated by legality verification demands from the EU and Europe. Instead of focusing on helping countries enforce whatever rules they had “on the books” the EU bilateral approach was to focus on a consensus agreement over what constituted legal compliance. Developing a “common definition” for legality would be a way to put teeth to broad and ambiguous policy goals. To develop such an approach, the European Commission launched a public consultation in 2006 to evaluate the FLEGT. This effort determined that a common definition across all countries might legitimize inappropriate laws by

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Personal interviews, government officials, Malaysia and Indonesia, summer 2010.

encouraging a race to the bottom in standards of forest management (European Commission, 2008). Still, some worried that legality would fail to lead to any further changes and would just relieve pressure on the companies logging vulnerable tropical ecosystems. However, other officials took the opposite position and suggested that legality verification was a first, necessary step to working forest certification and sustainable forest management in the tropics. 3.5. The emergence of “certification light” A key and partly unanticipated consequence that has emerged from EU and US public policy legislation restricting imports, and the increasing support of these efforts within Indonesia and Malaysia, have been the reinvigoration of private, market based third party verification as the mechanism to provide assurances through the world's supply chains of legality verification. That is, not only does market pressure help explain support for legality verification, but also nurtures private certification of legality as a policy instrument with which to ensure compliance to EU, US and Southeast Asian nations' public policies. Yet, it is important to note that while the legality verification and certification do offer potential for mutual support, simply certifying does not ensure compliance. However, it is often argued that certification would go a long way to demonstrate ‘due care’. This is because it appears that third party, private certification of legality compliance is emerging as a key instrument with which to meet “due care” obligations.8 As a result many of the world's nongovernmental third party auditors for compliance to sustainable management certification are now busily creating offices/department to provide legality assurance. For example, the Rainforest Alliance's SmartWood program, which audits firms for compliance to FSC certification standards, has launched generic standards for Verification of Legal Origin (VLO) and Verification of Legal Compliance (VLC) (Rainforest Alliance, 2010b; Rainforest Alliance, 2010a). Thus, VLC incorporates a range of SmartWood standards of legality including social and environmental expectations, while the VLO standard would represent the more modest claims related to the payment of fees, legal right to harvest and chain of custody (Donovan, 2010). While there is no governing authority regarding third party certifiers, the ideal of this approach is for third party auditors to directly take part in the governance of forest resources. Rainforest Alliance suggests that they should hold such a role because mechanisms such as FLEGT are not free from conflicts of interest on the part of participating governments (Donovan 2010). 4. Toward a theoretical framework What do the above conceptual and empirical explorations tell us about the possibility of legality verification as a means to promote “good forest governance?” How might legality verification make a difference directly by weeding out from global markets illegally harvested material? How might it make a difference by interacting with, or providing prerequisites for, other stalled policy initiatives, such as forest certification? We address these questions in this section by developing propositions about the conditions through which legality verification might institutionalize to become durable and authoritative; as well as on the conditions through which it might help nurture other forms of governance. These are important questions for forest governance in general, as well as for broader public policy questions regarding “basket” approaches to environmental problem solving (Gunningham et al., 1998) (Boonekamp, 2006; del Río, 2010; Oikonomou et al., 2010) and efforts to gradually improve forest practices through “step wise” approaches (Tropical Forest Trust, 2008).

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Personal interviews.

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To begin to overcome these limitations we focus our framework on understanding how “bootleggers and Baptists” (Vogel, 1995; Vogel, 2001) might emerge in this context, and then theorize about the potential interacting effects with two other important initiatives: efforts to build global “sustainable management” forest certification through eco-labeling and efforts to promote FLEG efforts in developing countries. Doing so leads us to argue that coalition building in this case requires that efforts first focus on building supply chain tracking, which ironically, maybe be hampered if the standards are set too high. That is, legality verification may play a supporting role by creating “necessary” but “insufficient” baseline preconditions that enable other interventions, such as certification and domestic efforts to promote good forest governance, to have direct impact. If this relationship does exist, it carries with it fundamental and counterintuitive implications for strategic choices. This counter intuitive prediction, however, is still guided by the central tenet behind Vogel's path breaking work. Vogel found that in some cases economic integration led to increases in environmental regulations, because when self-interested firms are confronted with higher environmental, safety and social regulations than their competitors in other jurisdictions or countries, they will often align with environmental groups or other social actors to champion increased regulations on their competitors. Because California tends to lead the nation in environmental and social regulations, and hence sees many firms advocating for national policies to create a level playing field, Vogel terms this phenomenon the “California effect” (Vogel, 1995; Vogel, 2001), often triggered by very different groups with different motivations coalescing to support the same intervention. Important to this phenomenon, as Vogel demonstrates, is that such coalitions are durable precisely because they appeal simultaneously to very different interests. Hence Vogel's story is not just about the standards—even though these play a prominent role—but also about developing widespread support for such initiatives. 9 In considering these lessons for legality verification, it is important to develop hypotheses about what strategic choices are most likely to nurture global coalitions, and the implications of this for legality verification's direct and indirect potentials. What is notably different in the case of legality verification is that whereas bootleggers and Baptist coalitions typically are treated as protectionist and met with scorn by producers in exporting countries (Cashore, 1997); in this specific case these coalitions, because they focus on reinforcing governing capacity and hence sovereign authority in producing countries, can, if managed strategically, be viewed positively—a phenomenon largely unexplored in the broader literature. Accordingly, our hypotheses are geared toward teasing out the conditions for direct effects and institutionalization of such broad global coalitions; as well as the implications for the ability of legality verification, once institutionalized, to interact with certification and broader domestic good forest governance initiatives.

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The logic behind this hypothesis, and which is consistent with the Seneca Creek findings that arguably reinforced US timber industry support, is that most forest stakeholders domestically and globally have a strategic self-interest in supporting legality verification. Only four groups are excluded: those undertaking illegal logging practices; those government officials who receive informal payments for permitting such activity; manufacturers/retailers who benefit from cheaper input costs and consumers, who, all else being equal, benefit from lower prices. Importantly, those firms undertaking legal operations have an economic self interest for promoting legality verification because, as students of economics 101 all know, and as illustrated by Fig. 1, all else being equal the removal of supply from a market will result in a shift in the supply curve, resulting in an increase in price. Hence, legality verification turns to markets to provide economic incentives but its mechanisms for doing so has arguably a much easier task than was confronted by those promoting forest certification. H2. Wide spread global support for legality verification is more likely to occur when standards are limited in scope. The more legality is defined broadly to include environmental regulations or sustainable forest management, the more likely the bootleggers and Baptist coalition will be reduced. If one or two key countries decide to walk away from this coalition, there is a strong risk that it will serve to segment markets rather than help to transform practices. H3. Developing country governments are more likely to support legality verification when the standards are viewed as reinforcing, rather than detracting from, national sovereignty. If developing country governments are “forced” to undertake efforts they otherwise would not have and to which they might be opposed, they will be unenthusiastic and tentative members of the broad coalition. If legality is focused on helping such governments reinforce their own domestic concerns that they currently have difficulty achieving, then such global coalitions will be embraced for their help in reinforcing rather than detracting from national sovereignty. H4. Legality standards will foster a race “to the bottom” among developing countries when legality compliance is defined as meeting all relevant environmental and social legislations in a given country. The logic behind this hypothesis is that if legality requires that verifiers assess whether forest managers have adhered to a country's own environment and social regulations, then those countries with higher regulationssuch as those with mandatory no harvest buffer zones—will be put at a competitive disadvantage to competitor countries with no such rules in place. We would expect in such a situation

Timber Supply Shift From Removal of Illegal Timber Supply 5. Hypotheses

Price

H1. Legality verification creates potential for a widespread global coalition.

9 To be sure, it is equally important to understand when economic integration leads to the “Delaware effect”—where companies flee to those jurisdictions with the most lax taxes, regulations, and environmental/social standards. Our point here is that rather modest standards that Vogel associates with “downward” effects of economic globalization, may actually be necessary to trigger a “ratcheting up”.

S’ D

5.1. Potential for large coalition

S

P’ P

Q’ Q Fig. 1. Price impact from removal of illegal timber.

Quantity

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a downward pressure on governments with high environmental regulations to reduce their domestic standard to achieve market access— which could inadvertently create a Delaware effect. H5. Developing countries are more likely to support legality verification when standards focus on those activities that they have a preexisting self-interest to pursue. There are a range of forest management practices that are in the strategic self interest of most governments, including: requiring a level of cut that allows harvests “in perpetuity,” the development of associated management plans that encourage reforestation, and elimination of theft and promoting payment of taxes. Domestic laws related to these concerns would be enhanced by the adoption of legality verification because they would be beneficial laws for the governments and stakeholders.

5.2. Implications for supply chain tracking

H6. Legality verification's largest impact is in its potential to promote widespread tracking of forest products along global supply chains. Implementing tracking systems of global forest products serves to create necessary preconditions for both eco-certification and domestic good forest governance. These more ambitious efforts, which cover a wider ranging set of rules and standards, both could benefit from legality verification developing supply chain tracking. This is important since it seems counterintuitive that global certification which was seen as “imposing from outside” standards on countries and eroding sovereignty; when combined with internationalizing enforcement at the end-points of trade might strengthen country's internal forest governance through interaction with certification. Technological advances may also work to facilitate supply chain tracking (Auld et al., 2010).10 There are two major approaches in development: either the creation of a large database of genetic material from different forests; or the submission of wood chips from the producers combined with random sampling of warehoused timber holds the potential to determine exactly where the cut timber is from. While both are potentially feasible, the latter is less costly and acts as a “quality assurance” to paper based supply chain tracking as a means to assess reliability of certificates and identify forgeries.11 For the future, there is technology in development such as isotope analysis and fiber analysis among others, these other technologies may also provide useful components to tracking systems as well. H7. Following the development of supply chain tracking, the cost of any increases in standards will be borne by customers not firms. The logic behind this hypothesis is two-fold. First, strategists want to ensure that their decisions draw on a range of strategic self-interest to develop such a coalition. Second, they need to focus efforts on those technological solutions and global systems that appear most likely to advance global tracking in ways that do not just separate markets (Johnson, 2010; Moiseyev et al., 2010) but have some effect on reducing illegal logging. The more strategists focus on these issues, and the more supporters recognized that prices are then likely to rise because supply has been reduced, the more likely those gaining higher rents will want to contribute resources to ensure such tracking. Such an effort requires simultaneous attention to maintaining an interest on the part of legal harvesting companies to developing tracking that will deliver in reducing supply and hence increasing prices, while also paying attention to hastening technological innovations that often go uncovered. 10 11

And personal interviews. Personal interview, Double Helix tracking, July 2010, Singapore.

5.3. Intersecting effects 5.3.1. NSMD global certification Why would a focus on building tracking of supply chains be more important than direct impacts of legality verification itself? We answer these questions by reflecting on the implications of legality verification for two important efforts: certification and FLEG efforts, which, while gaining significant attention and interest, have been unable to achieve the results their supporters and creators had originally intended. Since key barriers to promoting forest certification are the difficulties in building both global tracking systems and price premiums; it seems plausible that efforts to build global forest certification capable of ameliorating tropical forest degradation would need to occur after the institutionalization of legality verification. This is because once global tracking is in place, it seems much more likely that standards could be expanded in ways that reward, rather than penalize, participating firms. That is, consumers would be paying the price for internalizing the externalities related to combating illegal harvesting. H8. Legality verification provides a prerequisite for global forest certification because it permits standards to be raised that reward, rather than penalize, participating firms. The logic behind this hypothesis is that currently, in the absence of strong price premiums and market signals, firms in the tropics believe that they cannot support certification because they will bear the costs of compliance rather than consumers. However, once global tracking is in place and institutionalized, then raising standards will be borne through customers as higher price premiums, rather than firms as fixed costs for access to markets. Such a change in logic toward broader global certification systems is only achievable once supply chain tracking is entrenched because then the fixed costs will be lower and the competition from cheap illegal wood will dissipate. 5.4. Domestic forest governance Likewise, we expect domestic forest governance efforts to be enhanced through legality verification because economic incentives, owing to supply and demand functions discussed above, are more likely to develop. Though such incentives will be weighed against other factors such as corruption and capacity challenges, all else being equal we would expect legality verification to provide longterm incentives for promoting “good forest governance.” Whereas legality efforts are relatively narrow, domestic forest governance initiatives are broad and address a range of issues relevant to forest management. H9. Legality verification provides long-term incentives for baseline governance that may “tip the scales” in support of domestic policies and coalitions seeking to promote “good forest governance”. We would expect legality verification to similarly reinforce domestic “good forest governance” for two reasons. First, economic incentives that might “tip the scales” between domestic efforts to promote good forest governance over those firms and officials who, owing to corruption or weak enforcement of social and environmental standards, benefit from the lack of effective governance, can be seen as positive, if insufficient. Second, to the extent that global efforts to promote legality verification come with technological and capacity enhancing efforts—something the EU has committed to doing—there could be a more significant and indirect long-term effects in reinforcing domestic good forest governance efforts. Empirically assessing hypotheses H6, H8 or H9 will be challenging since they focus on interactions that have, for the most part, yet to occur. What we can say is that many firms reason that the economic

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incentives for supporting global forest certification systems often fall short of the costs, leading to fragmentation of certified markets, significantly hampering the development of supply chain tracking. Hence, and somewhat ironically, a focus on weeding out illegal supply may provide broader incentives to build such tracking systems because weeding out illegal supply will be expected to increase prices, as reviewed in H1. 6. Conclusions The focus on illegal logging as a key global forestry problem definition, something many stakeholders would have rejected as being too weak just 20 years ago, and the solution to promote legality verification through global supply chains; confronts scholarly communities whose boundaries are ill-equipped to theorize about such impacts across multiple scales and raises questions about interaction or evolutionary potential. Do these efforts illustrate the inability of broader and more comprehensive efforts to address global forest degradation or are the beginnings of a “progressive incremental” ratcheting up of forest standards and authoritative governance? This paper has attempted to shed light on these questions by contrasting legality verification with other forms of forest governance, reviewing its empirical support in developed and developing countries, and from this effort, to offer a preliminary theoretical framework sensitive to evolutionary and intersecting logics that condition (often unpredictable) agent choices. What is clear is that current and potential interactions of EU and US import legislations; private third party, market based certification; and domestic forest policies in Indonesia and Malaysia, present students of public policy, regulations, international relations, and corporate social responsibility with one of the most innovative “policy baskets” available to practitioners of resource and environmental management. The potential of such intersection to create global coalitions of “bootleggers and Baptists,” who are united around global supply chains, but who play varying roles in standards development and enforcement, requires that scholars and practitioners make several fundamental reorientations. In particular, scholarly communities united around such sub disciplines as “international relations,” “comparative politics,” “public policy” or “area studies” must break from their own epistemological and methodological biases to better understand how intersection and evolution of real world activity that cut across their intellectual boundaries, might occur. Similarly, practitioners must play careful attention to the strategic choices that will either limit or facilitate such integration. What is important in this context and which has significance for studies of institutional fit and smart regulation, is that greater care must be placed on understanding whether intersection is about such structural issues as managing supply chains, how to nurture coalitions of support, and/or policy development. In this case it appears that promotion of widespread policy requirements may serve to undermine the long term potential of legality verification to intersect with private certification. This is because once global tracking is relatively robust and complete, we would then expect the cost of certification to fall as the practice becomes diffuse across industry supply lines—indeed this circumstance could be beneficial as standards' mass acceptance could cause a transition to consumers bearing the costs. That legality verification can been seen as having important, but insufficient “direct” effects, but having significant potential for reinforcing both global private certification and domestic good governance is reason enough for political scientists and forest policy scholars to give this intervention careful and sustained scrutiny. The lessons for precisely how intersection might occur will have importance beyond the forest sector, as well as informing strategic choices over developing and nurturing durable institutions with which to address longstanding environmental and social challenges governing global resources management.

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Acknowledgements We are grateful for finances support from the Yale Macmillan Center, the Sobotka family foundation and the Center for Business and Environment at Yale. We thank Erica Pohnan for excellent research assistance. For helpful comments on previous versions of this paper we are grateful to Burkard Eberlein and participants at workshops on transnational business regulation, European University Institute in Florence, Italy, May 23–24 2011; School of Public Policy and Administration, Carleton University, Ottawa, March 15 2011; Faculty of Life Sciences, University of Copenhagen, December 15 2010; Department of Forest Sciences, University of Helsinki, Helsinki, Finland, October 8, 2010; FAO Rome forest governance workshop "Emerging economic mechanisms: implications on forest-related policies and sectoral governance", Rome, October 5 2010; American Political Science Association annual meeting, Washington DC, September 2–5 2010. 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