Concepts and Instruments for a Rational Bioenergy Policy

The chapter provides an introduction to the book, by outlining the opportunities and challenges of bioenergy use, and discussing the role of economic policy advice in generating recommendations for a complex allocative and regulative problem. While the expansion of modern energetic biomass use can play an important role in transitioning to a low carbon energy system, it also entails sustainability risks and increases competition between various alternative uses for land and biomass resources. Indeed, German and European bioenergy policies have attracted fierce criticism with regard to efficiency and sustainability concerns. Economic policy advice can make a valuable contribution towards assessing these criticisms, and developing recommendations for a more rational policy design. However, theory-based, economic contributions to the debate have been primarily based on neoclassical economics, employing several idealised assumptions which prove problematic when confronted with the numerous sources of market and government failures which are relevant in the bioenergy context. This motivates the book’s research objectives: to gain additional economic insights into the governance of complex environmental policy problems, and to use these insights to develop economic recommendations for the case of German bioenergy policy which are closer to political realities than those based on the neoclassical construction of the problem. The German case study offers important lessons, since Germany was among the early movers in supporting the expansion of biomass use in all three energy sectors, which amplifies resource competition and increases coordination requirements between sectoral policy measures. Following the introduction of research objectives and methodology, the chapter outlines the structure of the book.

The chapter “Allocative Challenges of Bioenergy Use” conducts an economic analysis of the problems that arise when allocation decisions are coordinated by market forces alone, and the challenges that apply to regulative interventions in the market mechanism. As central normative criteria, the requirements of efficiency and sustainability are discussed. It is shown that when allocative problems such as the steering of biomass flows and technology choices, the setting of innovation incentives, and the steering of location and sourcing decisions are solved by the market mechanism alone, the outcome will not be efficient. Several market failures are identified which distort allocation decisions, namely environmental externalities, security of supply externalities, knowledge and learning externalities, the occurrence of market power in the energy sector, and dynamic market failures that inhibit market adjustment processes. Moreover, interactions between market actors are subject to information problems and transaction costs, and even if the market outcome was efficient, it need not be sustainable. Regulative interventions, on the other hand, are complicated by conflicting aims, information problems and transaction costs, the multi-level governance nature of the regulative problem, and conflicts between political and economic rationality considerations. For assessing policy interventions, requirements for a rational bioenergy policy are defined, which take the constraints imposed by imperfect information and political feasibility into account. However, the analysis demonstrates that the multiplicity of relevant, interacting market failures and sources of potential government failures makes compliance not only with sustainability and efficiency criteria, but also with rational bioenergy policy requirements, a challenging task.

The chapter “Implications of Economic Theory for Bioenergy Policy Design” develops the analytical framework which is used in Chap. 5 to derive recommendations for German bioenergy policy. First, neoclassical theory implications for bioenergy policy, as well as their limits, are discussed. To move towards more realistic theory-based policy recommendations, the analysis draws on the theory of second-best, information economics, the theory of economic order, and new institutional economics, and gives an outlook on ecological economics implications. For each of these theories, relevant findings are applied to bioenergy policy, leading to the derivation of theoretical guidelines for bioenergy policy design. It is demonstrated that a combination of theoretical approaches is necessary to generate recommendations which adequately reflect the complexity of the bioenergy policy problem. However, among the theories considered, new institutional economics approaches are found to be particularly fruitful. Here, the matrix of institutions which jointly influence allocation decisions by bioenergy actors is at the centre of the policy analysis. Among new institutional economics approaches, transaction cost and contract economics, the principal-agent approach, the theory of institutional change, and the public choice approach provide valuable insights for generating policy design recommendations in the presence of uncertainty, transaction costs, path dependencies and political feasibility constraints. Because of the advantages that an institutional perspective offers for the analysis of bioenergy policy, new institutional economics is chosen as the overall framework into which insights from other theories are integrated.

This chapter provides an overview of relevant political framework conditions for German bioenergy policy. European and national policy levels are focused on, because it is here that major incentives for bioenergy use originate. It is shown that bioenergy policy affects a wide range of policy aims from diverse policy areas, and that the political prioritisation of aims has changed over time. Furthermore, there is a complex mix of policy instruments that influence bioenergy allocation decisions. Instruments identified as the most relevant for bioenergy allocation include command-and-control instruments and market-based incentive instruments, which can be further divided into indirect instruments which increase the costs of fossil fuel substitutes and direct instruments which set positive incentives for bioenergy use. Direct, sectoral instruments such as the Renewable Energy Sources Act in the electricity sector, the Renewable Energy Heat Act and the Market Incentive Programme in the heating sector, and the biofuels quota in the transport sector are the most relevant policy drivers for bioenergy expansion in Germany. Moreover, the chapter assesses the German bioenergy policy mix in relation to the market and government failures discussed in Chap. 2, and reviews major strands of critique in the public debate. The chapter concludes with a review of recommendations for reforming the German bioenergy policy mix, to allow for a comparison to the NIE-based policy advice developed in this book.

This chapter derives recommendations for bioenergy policy, applying the theory-based analytical framework developed in Chap. 3 to the German case study. The focus is on recommendations for a rational bioenergy policy concept, which encompasses the definition of a system of consistent policy aims; the choice of allocative principles which determine what allocation mechanism is used primarily to implement aims; and the identification of suitable instrument types. Given the conflicting nature of policy aims, the establishment of a complete and coherent system of policy aims is found to be of particular importance. Also, requirements concerning the operationalisation of aims are discussed. In contrast to neoclassical recommendations, a theoretical case is established for a bioenergy mix combining governance structures comparatively close to markets, which leave technology choices to market actors, with more hierarchical interventions. Based on the analysis of what allocative principles are recommendable for different allocative challenges, perspectives for the further development of the German policy mix are discussed. Moreover, to demonstrate the applicability of the study’s analytical framework to more specific questions of instrument choice and design, recommendations for the bioelectricity sector are developed in greater detail. Three design elements are identified as particularly important: the choice between price, quantity and hybrid instruments; the design of a mechanism for technology differentiation; and the design of an adjustment mechanism. Based on a comparative analysis of institutional alternatives, recommendations are derived.

The book’s conclusions summarise the major findings, discuss the transferability of the study’s analytical framework to other policy contexts, and provide an outlook. The study develops recommendations for a rational bioenergy policy, which strives for efficiency and sustainability under constraints imposed by interacting market failures and government failures, while acknowledging the likely non-optimality of outcomes. This approach highlights the necessity of identifying solutions for a rational handling of uncertainty in policy making; moreover, in order to ensure the practical relevance of recommendations, political feasibility considerations have to be taken into account. Parallels between the German bioenergy policy mix and bioenergy policies of other EU and non-EU countries ensure the relevance of case study results for other institutional contexts. Furthermore, with adjustments, the analytical framework can be transferred to other problems of environmental policy making where multiple market failures meet multiple risks of government failures, and uncertainties associated with the environmental costs and benefits of measures are high, such as the emerging field of bioeconomy policy.