Belfer Center Researchers Suggest Five Organizing Principles for Maximizing Development Impact of Global Biofuel Market
In a discussion paper released by Harvard University’s Sustainability Science Program and the Belfer Center’s Environment and Natural Resources Program at the Harvard Kennedy School, Ricardo Hausmann and Rodrigo Wagner lay out five organizing principles for maximizing the development impact of a global biofuel market.
Hausmann and Wagner note that a disproportionately large amount of the world’s agronomic potential for the production of bioethanol is concentrated in a subset of developing countries. In addition to contributing to the global energy supply, the emergence of a biofuels industry may also promote the competitiveness of some of these most vulnerable communities. To develop that potential, they write, countries need both the existence of an appropriate local business ecosystem and reliable global demand.
This opportunity is being threatened, however, by the complexity of the coordination challenges, like standardization and the building of an integrated supply chain, as well as by the large number of policy priorities that are shaping the industry’s emerging structure. This paper will discusses all these tensions in the context of the international policy debate.
Creating a viable global biofuels market depends on a range of both local and global policy inputs. Translating the biological potential for biofuels into an economically exploitable opportunity requires a business ecosystem that provides the intermediate inputs and market structures that maintain the private cost of production below the sale price. Since this complex network of requisite conditions...can neither be developed quickly nor provided by a single firm, it is crucial to coordinate entrant entrepreneurs by providing certainties.
—Hausmann and Wagner
Their five organizing principles for maximizing the development impact of a global biofuels market are:
Provide certainty for production in places that do not have it, but do it in a way that promotes competitiveness. This organizing principle implies that regulatory regimes should not limit the capacity of the national state—i.e., implementing firm-level regulation rather than putting requirements on national governments.
Not all biofuels are created equal, so we have to tell them apart (up to a point). Certification is an economically sound tool to tell apart products with different attributes, they note, but these should be attributes that can be observed by a certifier at some point in the value chain.
Focusing on things that are not observable by a third party can not only increase the burden of requirements in these new areas, but also create mysterious and probably distortive ways to certify unobserved things, as it would be a requirement asking for biofuels produced in a give acre to not push the agricultural frontier as a secondary effect.
Have as many (targeted) instruments as policy goals. “It will be impossible,” they write, “to create a sensible green market if we pile the requirements of distinct and often contradictory policy goals onto the shoulders of bioenergy.”
As illustration, this principle says that if we care about forests, then we should design incentives to compensate the owners of that land to keep the forest. This is much more targeted and specific than trying to preserve a forest through bioenergy policy. Two different goals require two independent levers to achieve them.
Minimize transaction costs, in a broad sense. This implies certifying only the crucial steps in the value chain, to avoid making the burden of regulation higher than the benefits of an efficient production.
Create “scaffolding” to deal with uncertain regulation in complementary policy arenas. scaffolding regulations are a flexible set of norms that can accommodate to future changes in the rest of the regulatory environment. As an example, they suggest that if a global carbon tax becomes available, then local regulation should piggyback on it, rather than doubling the burden of taxation on energy transportation.
ResourcesHausmann, Ricardo and Rodrigo Wagner, “Certification Strategies, Industrial Development and a Global Market for Biofuels,” Discussion Paper 2009-15, Cambridge, Mass.: Belfer Center for Science and International Affairs, October 2009.