Building Bio-Based Supply Chains: Theoretical Perspectives on Innovative Contract Design
49 Pages Posted: 17 Nov 2012 Last revised: 5 Jan 2013
Date Written: 2012
By 2030, the United States will consume over 300 million tons of forest and agricultural feedstocks for energy production. The supply chain necessary to provide unprecedented quantities of new “bioenergy crops,” however, is fraught with uncertainty. The vertically integrated model the nascent sector currently uses may have limited opportunity for expansion to meet renewable energy mandates. A hybrid structure is likely to emerge as the industry evolves, in which end-users closely cooperate with a large number of heterogeneous producers through long-term contracting rather than as direct owners or operators of biomass farms. This “vertically coordinated” industry model is dependent on a series of biomass supply contracts between end-user and farmer. The “take it or leave it” production contracts offered by end-users represent the archetypal cost and risk minimization perspectives common in the fossil fuel-based energy context (e.g., petroleum, coal). These initial offerings lack many of the considerations provided in agricultural-based contracting and are unlikely to engender the level of dedicated energy biomass cultivation needed to meet renewable energy mandates. In response, we propose an alternative Biomass Contract Framework, which incorporates three separate theoretical approaches to contract design with the objective of removing barriers to entry into the market. Incorporating a socioeconomic perspective into the more familiar risk and cost minimizing approaches found in contract theory literature will enhance producer ability to maintain existing social networks, while minimizing farmer disincentives to enter into production contracts for novel biomass crops. Our Framework also recognizes end-users’ needs to meet emerging environmental sustainability requirements, even perhaps facilitating “shed-level” coordination.
Keywords: biofuels, contracts
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