The Incentive to Abate : The Swedish Pulp and Paper Industry and the 1969 Environment Protection Act

Abstract: The Swedish Environment Protection Act (SEPA) was implemented in 1969 and constituted the first comprehensive Swedish regulation of industry-induced environmental externalities. In keeping with a longstanding corporatist tradition, Swedish policymakers aimed to establish a cooperative climate with industrial producers and instructed the regulatory authorities to strive to reach consensual agreements with affected firms. Despite such accommodations, the environmental adaptation of Swedish industrial production proceeded at a greater pace, during the 1970’s and 1980’s, than in most comparable countries, many of which had implemented seemingly more stringent environmental regulations than had Sweden.This thesis seeks to identify the firm level incentives behind this process, by examining the economic impact of the SEPA upon one of the more pollution-intensive branches of Swedish industrial production, the pulp and paper industry. Guided by previous research, an hypothesis is proposed in which the implementation of the SEPA came to aid the structural rationalization of this industry during the 1970’s and 1980’s, by inducing the exit of marginal, small-scale pulp and paper mills, thereby relaxing the prevailing competition over wood resources and available market space and creating more room for expansion within the surviving mills. As larger firms tend to operate larger mills, the hypothesized effects are suggested to have benefited large-scale producers within the industry, at the expense of their smaller rivals.  The findings of the thesis show that the economic effects of the SEPA were more severe for small as compared to large-scale mills and that regulatory requirements for pollution abatement did contribute to the shutdown of several small-scale mills during the 1970’s and 1980’s. No conclusive evidence could, however, be found for the validity of the thesis’ hypothesis as a whole, as these shutdowns were not predominantly administered by small-scale firms, as predicted by the hypothesis. Rather, the vast majority of these shutdowns were accounted for by some of the largest firms within the industry. Some tentative evidence was found, however, that the implementation of the SEPA may have benefitted certain large-scale producers within the industry, by facilitating acquisitions of smaller firms with valuable assets.