We develop a spatially elaborate partial equilibrium model for the forest chips market in Finland and demonstrate its use by examining the targets outlined by the government for the increase in the use of forest chips for energy.
Because the supply of stumps and logging residues is tied to roundwood harvests, reaching the target seems unrealistic without investments in the new production capacity of the forest industry. In particular, the industries using sawlogs would need to get back to the high levels of production seen a few years ago. For instance, policies leading to the increased use of wood in construction would support the renewable energy goals as well. Also subsidies for CHP-production at sawmills would facilitate that.
Tight carbon policy alone would lead to considerable increases in the use of forest chips, but because the prices of the CO2 emission permits are difficult to foresee, subsidies are needed to decrease the uncertainty faced by the market actors.
The government is planning to set subsidies for wood-based electricity, which would be tied to the carbon price. Based on our results, we recommend binding the potential subsidies for chipping energy wood to the carbon price as well.