Scandinavian Working Papers in Economics

Working Paper Series,
Swedish University of Agricultural Sciences, Department of Forest Economics

No 06/01: Swedish Industry and Kyoto An Assessment of the Effects of the European CO2 Emission Permit Trading System

Runar Brännlund () and Tommy Lundgren ()
Additional contact information
Runar Brännlund: Department of Forest Economics, Swedish University of Agricultural Sciences, Postal: Department of Forest Economics, Swedish University of Agricultural Sciences, SE 901 83 Umeå, Sweden
Tommy Lundgren: Department of Forest Economics, Swedish University of Agricultural Sciences, Postal: Department of Forest Economics, Swedish University of Agricultural Sciences, SE 901 83 Umeå, Sweden

Abstract: We assess the effects on Swedish industry input and output demands of different climate policy scenarios connected to energy policy induced by the Kyoto protocol. A unique data set containing firm level data on outputs and inputs during the years 1991 – 2001 is used to estimate a factor demand model, which is then simulated for different policy scenarios. Sector specific estimation suggests that the proposed quadratic profit function specification exhibit properties and robustness that are consistent with economic theory; that is, all own-price elasticities are negative and all output elasticities are positive. Furthermore, the elasticities show that the input demands are, in most cases, relatively inelastic. Simulation of the model for 6 different policy scenarios reveal that the effects on Swedish base industry of a EU level permit trade system is dependent on (i) removal or no removal of current CO2 tax, (ii) the established price of permits, and (iii) what will happen to the electricity price. Our analysis show that changes in electricity price may be more important than the price of permits for some sectors.

Keywords: CO2-emissions; factor demand; fossil fuels; tradable permit market

JEL-codes: Q58

32 pages, March 3, 2006

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