Juan P. Sesmero

UNCERTAINTY, IRREVERSIBILITY, AND INVESTMENT IN SECOND-GENERATION BIOFUELS

The present study quantifies the importance of price risk and irreversibility for investment in a corn stover-based cellulosic biofuel plant. Using a real-option model, we recover prices of gasoline that would trigger entry into the market and compare it to breakeven price. Our analysis shows that the price premium (above breakeven) required by investors to enter the market due to risk is substantial. Managerial flexibility (embedded in the option of mothballing and reactivating the plant) does not sensibly reduce the entry premium. Results also show that price volatility may greatly reduce plants’ responsiveness to gasoline prices and decrease supply elasticity. In combination, results suggest that (1) policies supporting second-generation biofuels may have fell short of their targets because of their failure to alleviate price uncertainty and (2) the use of price-based instruments such as reverse auctions, either in isolation or in combination with mandates, may be warranted.

Farmers’ Supply Response, Price of Corn Residue, and Its Economic Viability as an Energy Feedstock

Previous economic analyses of energy from corn stover assumed yield reductions from residue removal (without nutrient replacement) and limited or no supply response by farmers to changes in the price of stover. We exploit agronomic and cost information from a randomized block design experiment to model and quantify farmers’ supply response to changes in relative prices of corn stover, corn grain, and soybean. We then couple this supply response with a model of a cost-minimizing processing plant. Results suggest that stover-based energy may be closer to economic viability than previously found. In addition, in areas where reductions in corn yield due to corn monoculture are small, processing plants may find optimal to pay a higher price for stover to induce farmers to adopt continuous corn because it reduces transportation cost. This suggests that such areas may experience changes in their land cover configuration if stover-based energy does become commercially viable.

Economic Analysis of Supplementing Sugarcane with Corn for Ethanol Production in Brazil: A Case Study in Uberaba

This study evaluates the economic viability of using corn to supplement sugarcane for ethanol production in Brazil. Volatility of input and output prices and their correlation due to the transmission of shocks across markets is considered in calculations of Net Present Value. Investment in a flexible mill (i.e. a mill that can process corn during the sugarcane off-season) is dominated by investment in a standard mill based on a second order stochastic dominance criterion. The latter suggests that risk-neutral and risk-averse investors may refrain from investing in a flexible plant. Downside risk associated with a flexible plant may be worsen by the US ethanol blend wall as this weakens the correlation between the price of corn and the price of inputs and outputs of the sugar complex. Reductions in capital import tariffs can offset this effect.

Dynamic adjustment in agricultural practices to economic incentives aiming to decrease fertilizer application

Input- and output-based economic policies designed to reduce water pollution from fertilizer runoff by adjusting management practices are theoretically justified and well-understood. Yet, in practice, adjustment in fertilizer application or land allocation may be sluggish. We provide practical guidance for policymakers regarding the relative magnitude and speed of adjustment of input- and output-based policies. Through a dynamic dual model of corn production that takes fertilizer as one of several production inputs, we measure the short- and long-term effects of policies that affect the relative prices of inputs and outputs through the short- and long-term price elasticities of fertilizer application, and also the total time required for different policies to affect fertilizer application through the adjustment rates of capital and land. These estimates allow us to compare input- and output-based policies based on their relative cost-effectiveness. Using data from Indiana and Illinois, we find that input-based policies are more cost-effective than their output-based counterparts in achieving a target reduction in fertilizer application. We show that input- and output-based policies yield adjustment in fertilizer application at the same speed, and that most of the adjustment takes place in the short-term.

Corn Residue Supply in the Irrigated Corn Belt

The present study quantifies the profit-maximizing supply of corn stover per unit of land under alternative crop rotations in irrigated cropland with and without limits to irrigation. The model is parameterized based on growing conditions in Nebraska, USA. Our analysis quantifies a trilemma between stover supply, groundwater consumption, and food/feed supply per unit of land. In the absence of water conservation policies, higher stover prices are associated with higher supply and increased irrigation application. If an upper limit is imposed on irrigation at the baseline level (for groundwater conservation purposes), an increase in net revenue from stover sale from

The influence of feedstock supply risk on location of stover‐based bio‐gasoline plants

15 to

Potential of border tax adjustments to deter free riding in international climate agreements

25/metric ton is associated with an increase in stover supply of 5 metric tons/ha and a 2-metric ton reduction in corn yield under continuous corn. Under corn/soybean rotation, such an increase in net revenue is associated with an increase in stover supply of 10 metric tons/ha, and reductions of 0.5 metric tons in corn yield and 0.7 metric tons in soybean yield.

How Do African Farm Households Respond to Changes in Current and Past Weather Patterns? A Structural Panel Data Analysis from Malawi

This study models and quantifies spatially referenced probability distributions of corn residue cost and assesses their influence on comparative advantages of different areas of the Corn Belt to attract biofuel plants. Results suggest that irrigated areas of the Corn Belt, despite their relatively low planting density, may result more attractive than some of their rainfed counterparts in the eastern Corn Belt due to low risk in feedstock cost resulting from stability of yields. Therefore, agricultural districts in the Great Plains of the US may not need to pay high subsidies to compete with those in the eastern Corn Belt to attract biofuel firms. Policy restrictions on irrigation due to concerns over groundwater depletion may, however, diminish the relative comparative advantage of the irrigated Corn Belt for biofuel production.

Biomass supply schedules for Great Plains delivery points

The objective of this study is to conduct assessment of the hypothesis that trade sanctions in the form of border tax adjustments (BTAs) used by the United States against China, constitute a viable enforcement mechanism to sustain compliance with a range of emissions taxes in the context of agreements to curb global emissions of greenhouse gases (GHGs). The performance of BTAs is then compared with those of punitive tariffs on the basis of the range of emission taxes that can be successfully enforced by their implementation. Results show that BTAs are a viable enforcement mechanism for international GHG mitigation agreements. However the maximum level of carbon tax that can be enforced varies dramatically with (1) the marginal damage of pollution perceived by Chinese authorities, and (2) the legal limitations that GATT rules may impose on BTAs. Finally, while BTAs seem a promising enforcement mechanism in the context of climate agreements, punitive tariffs seem to be capable of supporting a much stricter environmental target.

Supply Response, Marginal Cost, and Soil Erosion Implications of Stover-based Biofuels

&NA; We use three waves of nationally representative household‐level panel data from Malawi to estimate a structural model characterizing the response of smallholder farm households to current and past weather patterns, and the subsequent impacts on household net income. We also quantify heterogeneity among households along the wealth spectrum regarding their ability to adapt to evolving weather patterns. This approach yields two key findings. First, adverse weather history prompts households to devote more time to maize cultivation on their own farms, to the detriment of other, possibly more remunerative income sources. Households also reduce application of productivity‐enhancing inputs, such as fertilizer and improved maize varieties, in response to adverse weather history. Our results are robust to different clustering structures and falsification tests aimed at ruling out alternative explanations to observed trends. Second, we find that, by maintaining a more diversified income structure, wealthier households are better able to adapt to adverse weather history. Consequently, adverse changes in past weather may be regressive in nature, creating a “climate‐induced” poverty trap that locks poor smallholder households into low‐value maize cultivation from season to season. This finding suggests that developing more weather‐resilient maize varieties and promoting smallholder livelihood diversification strategies may help mitigate the effects of adverse weather on the most vulnerable households.