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Investments into forest biorefineries under different price and policy structures


  • Kangas, Hanna-Liisa
  • Lintunen, Jussi
  • Pohjola, Johanna
  • Hetemäki, Lauri
  • Uusivuori, Jussi


Increasing scarcity of oil reserves and the high CO2 emissions from using oil have contributed to the development of renewable biofuels. Pulp and paper mill integrated forest biorefineries offer one important means to increase biofuel production. This study analyzes the effects of policies to support biofuel production in the pulp and paper sector. We study the relative effectiveness of three biofuel supporting policy instruments, namely production subsidy, input subsidy and investment subsidy. We present a partial equilibrium pulp and paper market model with a biorefinery investment option. A numerical model is used to evaluate the impacts of policy instruments on wood prices, as well as input choices and investment strategies of pulp and paper industries. The data represent the Finnish pulp and paper sector. We evaluate the values and direct costs of the policy instruments in a situation of exogenous biofuel production targets. The direct costs of input and investment subsidies are higher than those of a production subsidy. With all the policy instruments, Finnish pulp and paper mills would invest in wood-gasifying technology, instead of black liquor based one. The number of biorefinery units is dependent on the subsidy type — investment and input subsidies are likely to result in more numerous but smaller biofuel production units than a production subsidy. With all the policy instruments the demand for wood increases in Finland leading to higher wood prices. This, in turn, could reflect negatively on the profitability of the pulp and paper industries. To a significant degree, the model and the results can be generalized to other countries and markets where integrated pulp and paper mills are operating.

Suggested Citation

  • Kangas, Hanna-Liisa & Lintunen, Jussi & Pohjola, Johanna & Hetemäki, Lauri & Uusivuori, Jussi, 2011. "Investments into forest biorefineries under different price and policy structures," Energy Economics, Elsevier, vol. 33(6), pages 1165-1176.
  • Handle: RePEc:eee:eneeco:v:33:y:2011:i:6:p:1165-1176 DOI: 10.1016/j.eneco.2011.04.008

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    References listed on IDEAS

    1. Kangas, Hanna-Liisa & Lintunen, Jussi & Uusivuori, Jussi, 2009. "The cofiring problem of a power plant under policy regulations," Energy Policy, Elsevier, vol. 37(5), pages 1898-1904, May.
    2. Lintunen, Jussi & Kangas, Hanna-Liisa, 2010. "The case of co-firing: The market level effects of subsidizing biomass co-combustion," Energy Economics, Elsevier, vol. 32(3), pages 694-701, May.
    3. Mäkelä, Matti & Lintunen, Jussi & Kangas, Hanna-Liisa & Uusivuori, Jussi, 2011. "Pellet promotion in the Finnish sawmilling industry: The cost-effectiveness of different policy instruments," Journal of Forest Economics, Elsevier, vol. 17(2), pages 185-196, April.
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    Cited by:

    1. Bergek, Anna & Mignon, Ingrid & Sundberg, Gunnel, 2013. "Who invests in renewable electricity production? Empirical evidence and suggestions for further research," Energy Policy, Elsevier, vol. 56(C), pages 568-581.
    2. Qiu, Cheng & Colson, Gregory & Wetzstein, Michael, 2014. "An ethanol blend wall shift is prone to increase petroleum gasoline demand," Energy Economics, Elsevier, vol. 44(C), pages 160-165.
    3. Latta, Gregory S. & Sjølie, Hanne K. & Solberg, Birger, 2013. "A review of recent developments and applications of partial equilibrium models of the forest sector," Journal of Forest Economics, Elsevier, vol. 19(4), pages 350-360.
    4. Hurmekoski, Elias & Hetemäki, Lauri, 2013. "Studying the future of the forest sector: Review and implications for long-term outlook studies," Forest Policy and Economics, Elsevier, vol. 34(C), pages 17-29.
    5. Lochhead, Kyle & Ghafghazi, Saeed & Havlik, Petr & Forsell, Nicklas & Obersteiner, Michael & Bull, Gary & Mabee, Warren, 2016. "Price trends and volatility scenarios for designing forest sector transformation," Energy Economics, Elsevier, vol. 57(C), pages 184-191.

    More about this item


    Renewable energy; Energy policy; Biofuel; Biorefinery; Partial equilibrium model;

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy


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