Factor Demand and Price Sensitivity of Forest-Based Biomass in the European Energy and Forest Sectors

Abstract

Abstract An increasing utilization of biomass is, in the short-term, one of the most realistic alternatives to meet the energy and the environmental goals established by the European Union. As a result, the demand for forest-based products from European forests will increase. However, glaringly little research effort has been made towards analyzing the price effect resulting from the increasing demand for forest-based biomass and how the relevant industry sectors adjust their input demands due to these price changes. The purpose of this paper is thus to provide a disaggregated and detailed empirical estimation and analysis of the various input demand elasticities, as well as of the relevant substitution elasticities. The model is estimated using a panel of 23 European countries for the period between 1999 and 2005, thus allowing for specific country effects. The results indicate that the energy sector is relatively more price sensitive in its input demand for fossil fuels compared to the fibrous fuel categories. Thus, higher fibrous input prices will have a relatively small effect on the quantity of fibrous inputs that the energy sector demands. The forest industry is comparatively more price sensitive in its procurement of fibrous inputs than the energy sector, and will therefore reduce its input demand relatively more as a consequence from a fibrous input price increase. Furthermore, the cross-price elasticities reveal some interesting findings. In general, the energy sector will increase its utilization of fossil fuels as a result of increasing fibrous input price. Conversely, the energy sector will increase the utilization of fibrous input relatively less as a consequence of increasing fossil fuel prices.