Implications of Economic Theory for Bioenergy Policy Design

Abstract

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.