2. Allocative Challenges of Bioenergy Use

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.