Files
Abstract
The European Union’s Emission Trading
Scheme (EUETS)
and the current renewable resource
program provide strong incentives to use agricultural
crops either for combustion in power plants to produce
electricity and heat or as a feedstock for transportation
fuels. In this paper we examine the social desirability of
ethanol production from agricultural crops. To
endogenize the competition on land use, we employ a
Ricardian model of heterogeneous land quality, where
land is allocated to alternative crops on the basis of their
relative profitability. The model comprises three land
use types: bioenergy crop, conventional feed crop and
green setaside.
Industry demands crops for both ethanol
and feed production. Effects on the GHG balance are
explicitly taken into account in the analysis. Theoretical
model characterises both the private and social optima
and examines endogenous price effects. Theoretical
framework is applied to barley production in Finland.
We found that the socially optimal demand for barley is
13.3 % higher than demand obtained in the private
optimum. This implies shifts in land allocation, fertilizer
intensity and prices. Considering the climate impacts of
crop cultivation, the land area devoted to green setaside
greatly increases in the social optimum as compared
with the private optimum.