Subsidize Farmers or the Bioenergy Producer? The Design of a Government Subsidy Program for a Bioenergy Supply Chain

Abstract

The success of the bioenergy industry will depend, in part, on enough feedstock being grown. To increase the reliability of the supply of bioenergy, a government can offer two types of subsidy program: a farmer subsidy program (FSP) and a bioenergy producer subsidy program (PSP). We develop models to analyze the optimal subsidy program by capturing the strategic interactions between the government, the bioenergy producer, and farmers. The models incorporate the government’s subsidy budget constraint, the environmental benefits from the use of bioenergy, the farmer’s risk aversion and land capacity constraint, as well as the random yield of the feedstock. The findings reveal that both FSP and PSP are effective as long as the farmers’ land capacity exceeds a threshold. If both the government’s subsidy budget and land capacity are sufficiently large, PSP outperforms FSP; if only the subsidy budget is limited, FSP is better; if only land capacity is limited, FSP and PSP are equivalent. Counterintuitively, we find that PSP always benefits farmers more, while FSP can benefit the bioenergy producer more in some scenarios. Also, we find that FSP can better mitigate risk than PSP when the yield uncertainty is high. Lastly, insights for policy makers to promote bioenergy development are highlighted.