Swedish Industry and Kyoto – An Assessment of the Effects of the European CO2 Emission Permit Trading System

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