Examining the competition for forest resources in Sweden using factor substitution analysis and partial equilibrium modelling

Abstract: The overall objective of the thesis is to analyse the procurement competition for forestresources in Sweden. The thesis consists of an introductory part and two self-containedpapers.In paper I a translog cost function approach is used to analyse the factorsubstitution in the sawmill industry, the pulp and paper industry and the heating industryin Sweden over the period 1970 to 2008. The estimated parameters are used to calculatethe Allen and Morishima elasticities of substitution as well as the price elasticities ofinput demand. The utilisation of forest resources in the energy sector has been increasingand this increase is believed to continue. The increase is, to a large extent, caused byeconomic policies introduced to reduce the emission of greenhouse gases. Such policiescould lead to an increase in the procurement competition between the forest industriesand the energy sector. The calculated substitution elasticities indicate that it is easier forthe heating industry to substitutes between by-products and logging residues than it is forthe pulp and paper industry to substitute between by-products and roundwood. Thissuggests that the pulp and paper industry could suffer from an increase in theprocurement competition. However, overall the substitutions elasticities estimated in ourstudy are relatively low. This indicates that substitution possibilities could be ratherlimited due to rigidities in input prices. This result suggests that competition of forestresources also might be relatively limited.In paper II a partial equilibrium model is constructed in order to asses the effectsan increasing utilisation of forest resources in the energy sector. The increasing utilisationof forest fuel is, to a large extent, caused by economic policies introduced to reduce theemission of greenhouse gases. In countries where forests already are highly utilised suchpolicies will lead to an increase in the procurement competition between the forest sectorand the energy sector. It is therefore of interest of, for example, policy makers to be ableto analyse the effects of these policies. The purpose of this study is to construct a modelof the Swedish forest sector and energy sector in order to enable such analyses given theincreasing inter-linkages between energy production and biomass. The model is used tostudy how an increasing demand from the energy sector can affect the forest industriesfor example in terms of increasing procurement competition for forest resources. Apartial equilibrium model was thus constructed and applied to the Swedish forest sectorand energy sector. A baseline scenario is calibrated using the GAMS software. Fourscenarios of different development paths are then simulated and compared to the baselinescenario. The results indicate that the impacts on the procurement competition betweenthe forest sector and the energy sector are relatively moderate also in situations ofexpanding production in the forest industries. An increase in the competition betweenindustries in the energy sector can however be observed.