Following the Kyoto protocol and the European Union climate policies larger than 20 MW energy plants are part of the EU's emissions-trading scheme (ETS). This greenhouse gas emission mitigation strategy, tradable carbon quota system, started in 2005. The scheme is not mandatory for the firms with size less than 20MW. Also the firms using renewable fuels will not pay for allowances. Advanced energy production technologies enable power and heating plants to use both nonrenewable fossil fuels and renewable wood fuels in energy production. Wood fuel demand may constitute a substitute for fossil fuel demand if the price of tradable carbon allowances is relatively high. In this context plant level panel data from years 2003-2007 in Finland is analyzed with panel and mixed models. Econometric demand equations are specified for the ratio of wood and fossil fuel. The results show that high allowance prices in the years 2005 and 2006 compared to the years 2003 and 2004 decreased the use of fossil fuels and the demand for wood fuels increased. This increase was the larger the smaller proportional user of wood-fuel a plant was. However the downturn of allowance prices in year 2007 ended this process. The heterogeneity of energy plants in size, industry and location determines the intensity and extension of fuel use but their role is limited in the fuel substitution.
a b s t r a c tThe demand for wood fuels is increasing as several countries have targets for different types of wood-based energy, e.g. pellets. Sawmills are a source for wood fuels since they can refine their by-products into energy products. We present a model of a profitmaximizing sawmill, and analyze the production and investment decisions of thirty large-scale Finnish sawmills. The model allows the investigation of required policy incentives that enable sawmills to realize the production targets set for pellets. We analyze the policy costs of the investment, production and input subsidies. We found that the production subsidy is an efficient policy instrument.
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