The Role of Third-Party Institutions in Biomass Contracting: A Comparative Perspective
41 Pages Posted: 26 Apr 2016 Last revised: 29 Apr 2016
Date Written: April 25, 2016
Bioenergy is a prominent form of renewable energy that encompasses different types of energy produced from biomass feedstock (i.e., organic-based plant materials). Market innovations and feedstock improvements have allowed cost-effective bioenergy production and increased acceptance by end-users. Recent regulations, such as the Obama Administration’s Clean Power Plan, encourage the energy sector to reduce carbon emissions by shifting to renewable energy.
As technology improves, however, new challenges emerge as how to organize the biomass supply chain for efficient bioenergy production. In the case of biofuels, one of these challenges is how to address contracting issues that may cause conflicts among biomass feedstock producers and biofuel producers. Biofuel production requires large initial investments, and uncertainty exists in the supply of feedstock; thus, it is necessary to reduce transaction costs and organize the industry in the most efficient manner.
One market we may look to for ideas and answers is the biofuels market in Brazil. Brazil is the world’s largest producer of sugarcane and one of the most important players in the ethanol market. Sugarcane is processed into ethanol, which is a clean, affordable, and low-carbon biofuel that has emerged as a leading renewable fuel. The success of the sugarcane market in Brazil is strongly related to the continuous development and improvement of Brazil’s sugarcane supply chain. Further, the Brazilian government maintained tight control over the sugarcane industry until the deregulation of the sector in the 1990s. After deregulation, sugarcane growers and sugar and ethanol processing facilities joined together to create the São Paulo State Council of Sugarcane, Sugar and Ethanol Producers, “Consecana.” Consecana is an association comprised of representatives of both segments of the supply chain, independent farmers and the sugar and ethanol industry. The Consecana model is an example of a voluntary market-based arrangement entered into by the industry, which utilizes a transparent mechanism of payment for sugarcane. When viewed through the lens of transaction cost economics, Consecana reduces uncertainties in the transaction between buyers and sellers of sugarcane by defining its terms ex ante through a series of rules created and enforced by both sides of the industry.
In this article, we suggest that different sectors within the U.S. bioenergy industry adopt a model predicated on cooperation and self-regulation, as well as third-party intervention, accomplished in a formal manner. We argue that as different sectors in the bioenergy industry become more established and create demand for specific inputs, such as distinct energy crops and wood wastes, these sectors will benefit from industry self-regulation. Our focus is on voluntary self-regulation, which encompasses both the making and implementation of norms and rules by the private industry itself, independent of the government. We discuss some of the current biomass associations and biomass groups in the United States, how they are structured, and what kinds of contracting issues these associations address. We conclude by proposing that as the biomass market evolves, biomass associations in the United States should specialize according to the type of feedstock their members produce and utilize, encourage cooperation among their members, and increase cooperation among themselves by employing more self-regulatory mechanisms.
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