Bioethanol production under endogenous crop prices: Theoretical analysis with an empirical application to barley

The European Union’s Emission TradingScheme (EUETS)and the current renewable resourceprogram provide strong incentives to use agriculturalcrops either for combustion in power plants to produceelectricity and heat or as a feedstock for transportationfuels. In this paper we examine the social desirability ofethanol production from agricultural crops. Toendogenize the competition on land use, we employ aRicardian model of heterogeneous land quality, whereland is allocated to alternative crops on the basis of theirrelative profitability. The model comprises three landuse types: bioenergy crop, conventional feed crop andgreen setaside.Industry demands crops for both ethanoland feed production. Effects on the GHG balance areexplicitly taken into account in the analysis. Theoreticalmodel characterises both the private and social optimaand examines endogenous price effects. Theoreticalframework is applied to barley production in Finland.We found that the socially optimal demand for barley is13.3 % higher than demand obtained in the privateoptimum. This implies shifts in land allocation, fertilizerintensity and prices. Considering the climate impacts ofcrop cultivation, the land area devoted to green setasidegreatly increases in the social optimum as comparedwith the private optimum.