Publication Type

Journal Article

Version

submittedVersion

Publication Date

2-2020

Abstract

Motivated by the agricultural industries, this paper studies the economic and environmental implications of biomass commercialization; that is, converting organic waste into a saleable product, from the perspective of a processor that uses a commodity input to produce both a commodity output and biomass. We characterize the economic value of biomass commercializa- tion and examine how input and output spot price uncertainties affect this value. Using a model calibration, we find that lower input spot price variability or higher output spot price variabil- ity or correlation between the two spot prices increases this value for a typical palm oil mill. To measure the environmental impact we use total expected carbon emissions resulting from profit-maximizing decisions and characterize the change in total expected emissions after com- mercialization. Our analysis reveals that while higher biomass demand or biomass price always increases the value of biomass commercialization, these changes are not necessarily environmen- tally beneficial as they may increase the emissions associated with biomass commercialization. We also characterize conditions under which biomass commercialization is environmentally ben- eficial or harmful; that is, it leads to a reduction or an increase in the total expected emissions, respectively. In comparison with the existing understanding which does not take into account optimization of operational decisions, our analysis highlights two types of misconceptions (and characterizes the specific conditions under which they appear): (i) we would mistakenly think that biomass commercialization is environmentally beneficial when it is not, and (ii) we would mistakenly think that biomass commercialization is environmentally harmful when it is not.

Keywords

Biomass, Agriculture, Commodity, Sustainability, Emissions, Spot Price Uncertainty, Renewable Energy, Palm Oil

Discipline

Agribusiness | Agricultural and Resource Economics | Operations and Supply Chain Management

Research Areas

Operations Management

Publication

Management Science

First Page

1

Last Page

69

Publisher

Institute for Operations Research and Management Sciences

Embargo Period

2-16-2020

Copyright Owner and License

Authors

Comments

The article has been accepted at Management Science

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