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Ethanol production under endogenous crop prices: Theoretical analysis and application to barley

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Title: Ethanol production under endogenous crop prices: Theoretical analysis and application to barley
Author: Rinne, Jaakko; Lankoski, Jussi; Ollikainen, Markku; Mikkola, Hannu
Belongs to series: Discussion Papers - 28
ISSN: 1459-9996
Abstract: We examine the social desirability of ethanol production from agricultural crops when its effects on the greenhouse gas balance, land competition and crop prices are taken into account. The model comprises two land use forms: bioenergy crop and conventional feed crop. Industry demands crops for both ethanol and feed production. We characterize theoretically the private and social optima and apply the framework to barley production in Finland. In particular, we focus on various parts of the production chain and examine how the life cycle CO2 –eq emissions associated in each part and the endogenous prices impact social benefits from ethanol production. We find ethanol production socially desirable under current ethanol price if, in addition to ethanol itself, it is possible to produce the side products: grain residue for animal feed, and the straw for energy. If either these side products cannot be produced, social returns to ethanol production either vanish or become very small. Moreover, we show that emissions from soil belong to critical key variables; if the existing uncertain proxies underestimate emissions from soil, social returns to ethanol production may vanish altogether. In all above cases, the outcomes result from changes in emissions offset, fertilizer intensity and land-use that are guided by endogenous crop prices.
URI: http://hdl.handle.net/1975/8496
Date: 2009

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