The Role of Wastepaper in the Pulp and Paper Industry Investments, Technical Change and Factor Substitution
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2002:36 DOCTORAL THESIS The Role of Wastepaper in the Pulp and Paper Industry Investments, Technical Change and Factor Substitution ROBERT LUNDMARK Department of Business Administration and Social Sciences Division of Economics 2002:36 • ISSN: 1402 - 1544 • ISRN: LTU - DT - - 02/36 - - SE The Role of Wastepaper in the Pulp and Paper Industry: Investments, Technical Change and Factor Substitution Robert Lundmark Division of Economics Luleå University of Technology Department of Business Administration and Social Sciences SE-971 87 Luleå, Sweden Keywords: Pulp and Paper Industry; Wastepaper; Investment; Location; Translog; Cost Function; Substitution; Technical Change; Sweden; Europe; Elasticity. Abstract During the last decades environmental concerns have resulted in an increased focus on wastepaper recovery and use. Many analysts suggest that the growing importance of wastepaper in paper and paperboard production has: (a) been stimulated not only by ambitious recycling policies, but also by fundamental technical advances in the production process; and (b) in turn given rise to important structural changes in the industry’s investment behaviour. The overall purpose of this dissertation is to analyse the role of wastepaper as an input factor in the production of new paper and paperboard products. Specifically, three different aspects of wastepaper use are analysed: (a) investment behaviour and the role of wastepaper availability; (b) the impact of technological change on wastepaper use; and (c) the degree of input substitutability between wastepaper and other production factors. The dissertation comprises six self- contained papers out of which the three first analyse investment behaviour, while the remaining three focus on technical change and input factor demand. Papers I-III attempt at answering the question of whether wastepaper availability, measured either as price or quantity, has a profound impact on investment behaviour in the European pulp and paper industry. Two discrete and one continuous investment models are developed and empirically implemented. The results indicate that the impact of short-run wastepaper availability on investment decisions is ambiguous, and also differs across paper grades. In some model specifications, no evidence supports the notion that short-run wastepaper availability matters for investment location choice in the paper and pulp industry. The analysis of long-run wastepaper availability produces similar ambiguous results but this variable has, in general, a somewhat larger impact on the investment decision. The other driving factors behind investment decisions analysed in the papers include: (a) other raw material prices and/or quantities, both domestic and import; (b) wage; (c) energy price; (d) output market size; (d) agglomeration effects; and (e) taxes. Papers IV-VI analyse the production technology of the Swedish pulp and paper industry. Specifically, they focus on the impact of technical change on wastepaper use and on wastepaper demand elasticities. The analyses are conducted within variable Translog cost functions, and by employing mill-level data for four different paper grades over the time period 1974-1994. Even though the rate of technological progress has been considerable in the Swedish pulp and paper industry, the results suggest that its impact on the use of wastepaper has been relatively small. In addition, the results suggest that the own-price elasticities of wastepaper demand, as well as the substitution possibilities with other input factors, are relatively high even in the short-run. For some of the paper grades the own-price sensitivity of wastepaper demand has also increased over time due to technical advances. Overall, it can be concluded that the alleged role of wastepaper as the main driving force behind a structural and technical change in the pulp and paper industry appears somewhat overrated. Wastepaper has been economically used by the industry for a long time, and the relatively recent policy-induced increase in wastepaper use does not imply fundamental changes in the behaviour of the pulp and paper industry. i Acknowledgements Without the indefatigable and constructive supervision by Mats Nilsson and Patrik Söderholm I dare say that this dissertation work would have been considerably delayed if not completely abandoned. The problems I encountered, on several occasions, would have seemed insuperable without the constructive ideas and suggestions provided by Patrik and Mats. Furthermore, the person responsible for – or perhaps guilty of – accepting me into the doctoral student program in economics at Luleå University of Technology deserves my gratitude. Thank you Marian Radetzki. I would also like to thank the foundations, and the people behind them, that have supported my work financially. Financial contributions from the following sources are gratefully acknowledged: The Jan Wallanders and Tom Hedelius Foundation; The Kempe Foundation; and the Marcus and Amalia Wallenberg’s Foundation. The eminent international advisory board attached to the economics program at Luleå has, with their vast knowledge, experience and wisdom, contributed substantially to the progress of my dissertation. The composition of the advisory board has changed during the years so I would like to thank both its past and present members: Professor Ernst Berndt, Massachusetts Institute of Technology; Professor James Griffin, Texas A&M University; Professor Thorvaldur Gylfason, University of Iceland; Dr. David Humphreys, Rio Tinto Ltd., London; Dr. Keith Palmer, N M Rothschild & Sons Ltd., London; Professor David Pearce, University College London; and Professor John Tilton, Colorado School of Mines. My special gratitude goes to Jim Griffin for arranging for me to attend the Texas A&M University as a visiting scholar. All my other colleagues also deserve my gratitude, especially for the endurance they have shown over the years, but also for the support and help they have provided (and hopefully will continue to provide). Thank you Anna, Berith, Bo, Christer, Eva, Fredrik, Gerd, Gudrun, Jerry, Kristina, Linda, Olle, Staffan, Stefan and Thomas. My family and friends, who never stopped asking me what I was doing and especially what for, but who also never stopped supporting me. You have all been indispensable. I love you all. If I have left anyone out I am truly sorry and promise to include you in the second edition. Robert Lundmark Luleå November 2002 ii List of papers The dissertation contains this introduction and the following papers: Paper [I]: Lundmark, R. (2001). Choice of Location for Investments in the European Paper Industry: The Impact of Wastepaper. Resources, Conservation and Recycling, vol. 33, pp. 167-180. Reprinted with permission. Paper [II]: Lundmark, R., and M. Nilsson. (2001). Increasing Rates of Paper Recycling and the Locational Behaviour of Newsprint Producing Facilities in Europe. Journal of Forest Economics, vol. 7, pp. 245-262. Reprinted with permission. Paper [III]: Lundmark, R. (2002). Investment Behaviour in the European Pulp and Paper Industry: A Panel Data Analysis. Earlier version is forthcoming in Scandinavian Journal of Forest Research. Paper [IV]: Lundmark, R., and P. Söderholm. (2002). Estimating and Decomposing the Rate of Technical Change in the Swedish Pulp and Paper Industry: A General Index Approach. Submitted to International Journal of Production Economics. Paper [V]: Lundmark, R. (2002). A Comparison of Methodological Approaches Towards the Assessment of Technical Change: The Case of Swedish Newsprint Production. Submitted to Journal of Productivity Analysis. Paper [VI]: Lundmark, R., and P. Söderholm. (2002). Structural Changes in Swedish Wastepaper Demand: A Variable Cost Function Approach. Submitted to Journal of Forest Economics. iii Preface Introduction The overall purpose of this dissertation is to analyse the role of wastepaper as an input factor in the European and, in particular, the Swedish pulp and paper industry. Even though wastepaper has been used economically in the production of new paper and paperboard products long before the political agenda included any environmental concerns, it became one of the first targets of the producer responsibility legislations in various countries. Generally, the producer responsibility legislations stipulate an increasing recovery rate of wastepaper and an increased use of wastepaper in the production of new paper and paperboard products. In 1975, along with many other European nations, the Swedish government gave an advance warning of the producer responsibility ordinance in its preparatory work regarding solid waste management (Prop., 1975). Even though the intent to introduce such a legislation was announced in 1975 it was not enacted until 1994 (SFS, 1994:1205). This gave the pulp and paper industry time to consider their future utilisation of wastepaper and adapt their production structure accordingly. As a consequence, not only has the recovery of wastepaper increased but so has the significance of wastepaper in the production of new paper and paperboard products. By examining the utilisation of fibre inputs it can be seen that in Sweden between 1974 and 1994, the share of virgin woodpulp out of the total fibre input decreased on average from 61.6 per cent to 45.4 per cent, while wastepaper increased its share from 31.8 per cent to 39.1 per cent (PEDB, annual). The same pattern is also evident for Europe as a whole. Table 1 shows that the ratio of wastepaper consumption to virgin woodpulp