Rational Exuberance for Renewable Energy by Srinivasan Sunderasan

Author:Srinivasan Sunderasan
Language: eng
Format: epub
Publisher: Springer London, London

4.7 Refining Margins and Farmers’ Incentive Structures

Working backwards from the price of the finished product, and the costs involved in transesterification and related processes, refiners choose to procure feedstock from farmers’ (or cooperatives) at a price that yields a competitive return on their investment, which is comparable with the long-run average return on a broad-based stock market index. Additional revenue streams could accrue from the sale of byproducts viz., glycerine, oil cake, and from trading approved carbon emission reduction.4 Exogenously determined support prices for seed procurement in the case of biodiesel, and sugarcane in the case of ethanol, with a constant threat of upward revision, would make it unattractive for refiners to invest in the business. On the other hand, such inflated support prices encourage farmers to convert to biofuel plantation, at the cost of other food and non-food crops.

The “cut-in” prices that would induce cultivation of biofuel crops, would be determined by the indifference level of the farmers, measured by a benefit-cost metric between biofuel and the alternatives, other factors such as knowledge, credit, fertilizer and irrigation held constant. Assuming that an individual farmer’s decision to grow one or the other crop does not influence its market price, the support price announced for biofuel crops and the price for food crops viz., paddy, wheat etc., discovered on the futures markets would help the farmer compute and compare such benefit-cost measures.

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