Using Game Theory to Resolve the “Chicken and Egg” Situation in Promoting Cellulosic Bioenergy Development

Abstract

The Renewable Fuel Standard (RFS) requires production of cellulosic biofuel, such as ethanol produced from switchgrass. However, the bioenergy industry faces a well-established “chicken and egg” conundrum where biorefineries cannot be built until adequate farmers' participation in cellulosic biomass production is ensured; on the other hand, farmers will not commit to growing cellulosic biomass until a market is established. We assume that individual farmers in a future biofuel market are boundedly rational, and will endure the risk of growing switchgrass if they are likely to receive a better payoff in the future. After the number of switchgrass farmers reaches a certain threshold, sufficient biomass can be procured to build an economically viable biorefinery. If a biorefinery is built in a region, the reductions of logistics costs and economies of scale lead to the realization of a public good, and all farmers can be benefited from it; otherwise, the efforts of early switchgrass adopters could be unsuccessful. In this paper, an appropriate biorefinery capacity and the corresponding incentives provided to the farmers are determined by balancing the impact and the risk of the public good. Our incentive model is more efficient than a program that incentivizes all switchgrass growers equally.