The Norwegian aluminium industry, electricity prices and welfare

Abstract

This paper presents a partial equilibrium analysis of the changes in the the Norwegian aluminium industry which would follow if the industry was faced with higher electricity prices. The industry is modelled as an imperfectly competitive industry, where the producers recognize their market power, and where the firms produce products which are imperfect substitutes in demand. The paper provides an empirical implementation of the model, using panel data for the Norwegian producers. The final part of the paper presents results from policy simulations on the model. These simulations show that an increase in electricity prices to long term production costs would essentially eliminate the Norwegian activity in this industry. Nevertheless, the value of the reduced electricity consumption in the aluminium industry, if this policy is introduced, is more than sufficient to compensate for the reduction in operating surplus and pay the workers if they are unable to find alternative jobs. The paper also provides an analysis of the scope for strategic trade policy in this industry.