The use of biofuels has been increasing steadily in Sweden during the last three decades. In 1970 less than 10 percent of the energy supply was derived from biofuels and in 2003 the corresponding figure was almost 20 percent.
In 1999 a number of long term environmental objectives were adopted, where one of them is aimed at limiting Sweden’s emissions of greenhouse gases. In its present form the objective states that the Swedish emissions of greenhouse gases during the period 2008 to 2010 has to be reduced to a level at least 4 percent lower than the levels of 1990. However, indicators show that the level of emissions will only be slightly lower in 2010 than in 1990, so to meet this goal a continuous conversion of the energy system is assumed to be needed, and this is likely to imply a further increase in the use of renewable resources.
One of the main energy users is the district heating industry, and since the beginning of the 1980s there has been an extensive substitution of forest fuels for oil as input in this industry. An increasing demand for biofuels may have effects outside the energy industry, most notably in the forest sector. Today, a large part of the biofuels consists of residues from forestry and by-products from the sawmills and the pulp industry. However, a substantial rise in the use ofrenewable resources would imply that forest resources, which may have an alternative use (e.g., pulpwood), could have to be considered for energy purposes. This is likely to have an effect on other users of forest resources, such as the sawmills and the pulp industry, and therefore it is important to analyze how such an energy policy will affect the competition for the forest resource.
A system of supply and demand equations is estimated and price elasticities are calculated for the four main actors on the roundwood market; the forest owners, the sawmill industry, the pulp and paper industry, and the energy industry. The major difference between the two studies is that a static short run model is used for a first, preliminary analysis in the former paper, whereas a more comprehensive dynamic long run model is used to capture the intertemporal aspects in the latter paper. The static model is based on the assumption that capital is fixed, whereas all other inputs are flexible.
This implies that the estimated elasticities can be interpreted as short run elasticities, since they are conditioned on a fixed capital stock. The results from the study show that the forest owners short run own price supply elasticity for forest fuels is close to zero. In addition, the positive cross price elasticities between pulpwood and forest fuels suggest that they are complements to each other.
One explanation to this result is that there is a joint production of forest fuels and pulpwood. When the forest owners respond to higher pulpwood prices by increasing the supply of pulpwood, there will also be an increase in the supply of wood residues (forest fuels) as a side effect. Dynamic models impose some kind of adjustment process when changing an input factor. Models within the dynamic framework can be divided into three sub groups; first, second, and third generation of dynamic factor demand models. In the first two generations, the adjustment process is introduced in the econometric specification, whereas in the third generation framework, it is introduced in the theoretical model.
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