Unit 1 Micro: Biomass Subsidies and Timber Prices

If you are a fan of laminate flooring, wood panelled walls or neat wood-based fencing for the garden, the chances are that you will be paying higher prices in the years ahead. Despite the Britain offering a temperate climate for a plentiful supply of wood and a well organised system of land registry and plantation management, the UK market price of different types of timber has shot up over the last two years.

Rising demand for timber

The underlying cause is pretty straight-forward - namely a surge in market demand for wood much of which is linked to the UK government’s legally-binding commitments to meeting tough targets for energy generated from renewable sources. Indeed at a time when the UK housing industry is in the doldrums, timber prices might be even higher if the construction industry was enjoying a stronger rebound from the recession.

Composite demand

Wood is a product in composite demand – meaning that there are many competing and highly valuable uses for wood. An increase in demand for using wood in one way reduces the stocks available for other users and drives prices higher. This is where the impact of green energy subsidies comes into force.

Government financial support for using biomass (derived from living, or recently living, biological organisms) are providing incentives for power stations to use wood as an alternative to coal. In doing so, the cost of wood for alternative uses such as furniture, packaging, fencing and in the building industry is rising too.

Drax Power Station in Yorkshire (Britain’s single source of carbon emissions) has recently been given the go-ahead by the government to invest in two huge wood burning power plants at Selby in Yorkshire and South Killinghome, in North Lincolnshire. When fully up and running, these two plants will burn nearly 6 million tonnes of wood a year – over half the UK’s annual wood harvest.

Distorting subsidies?

But will a shift towards bio-mass energy production bring unwanted side-effects to other important industries in the UK that use wood in manufacturing consumer and industrial products? Higher timber prices increase costs in the construction industry and many other businesses have to adjust to increased costs. Furniture manufacturer for example have to pay more for their chipboard made from waste wood. So too do farmers who pay for timber to make fence posts.

Some UK wood panel producers are saying that unless timber prices fall, they might have to close UK-located wood mills and import cheaper wood from overseas.

They have established a new campaign “Make Wood Work” outlining what they see as the dangers for wood panel manufacturers and for jobs in Britain unless the renewable subsidy regime is altered. They also argue that subsidies for using wood to generate energy is more harmful to the environment that manufacturing products using the same wood. “Burning virgin wood, or used wood that has recycling potential, is a waste of a valuable resource.”

One leading wood panel maker - Kronospan Ltd - has this year established their own bio-mass plant at their factory to generate energy using waste timber.

If timber prices stay high we can expect to see a supply-side response from the market as more agricultural land is given over to growing coppices and existing forestry is subject to better-organised management. But increasing the volume of new timber available in the UK will take many years to achieve since the elasticity of supply for new timber is low in the short run.

Related news articles:

BBC news: Energy subsidies push up the price of wood

BBC Wales News: Plans for a biomass plant at Kronospan, Chirk, revealed

Channel 4 News Video: Government subsidies to encourage power companies to burn wood are distorting the market for timber and forcing up prices in manufacturing and construction industries

Reuters: Power station looks to biomass for low carbon future