Factor substitution and procurement competition for forest resources in Sweden

Abstract

The utilisation of forest resources in the energy sector has been increasing, partly caused by economic policies introduced to reduce the emission of greenhouse gases. This in turn has led to an increase in the procurement competition between the forest industries and the energy sector. A translog cost function approach is used to analyse the factor substitution in the sawmill industry, the pulp and paper industry and the heating industry in Sweden over the period 1970–2008. The estimated parameters are used to calculate the Allen and Morishima elasticities of substitution as well as the price elasticities of input demand. The results indicate that it is easier for the heating industry to substitutes between by-products and logging residues than it is for the pulp and paper industry to substitute between by-products and roundwood. This suggests that the pulp and paper industry could suffer from an increase in the procurement competition. However, overall the substitutions elasticities estimated in our study are relatively low. This indicates that substitution possibilities could be rather limited due to rigidities in input prices. This result suggests that competition of forest resources also might be relatively limited.