Farmers can find bioenergy crops more attractive through carbon mitigation incentives

Bioenergy crops, such as miscanthus and switchgrass, offer numerous environmental benefits. However, low returns and profit risks have hindered farmer investment. A recent study conducted by the University of Illinois Urbana-Champaign suggests that carbon mitigation payments could alleviate these barriers by increasing net returns and reducing income risk. This, in turn, may incentivize more farmers to cultivate bioenergy crops.

The study has been published in the Journal of the Agricultural and Applied Economics Association.

“Our research aimed to compare the returns and risks associated with adopting bioenergy crops versus conventional corn and soybean crops. Additionally, we wanted to explore the impact of carbon mitigation payments on returns and risks,” stated Madhu Khanna, the Alvin H. Baum Family Chair and director of the Institute for Sustainability, Energy, and Environment (iSEE) at the University of Illinois. She also serves as the ACES Distinguished Professor of Environmental Economics in the Department of Agricultural and Consumer Economics (ACE) and co-director of the Center for the Economics of Sustainability (CEOS), part of the College of Agricultural, Consumer and Environmental Sciences (ACES) at the U. of I.

“Bioenergy crops offer two main carbon mitigation benefits. Firstly, their deep roots sequester more soil carbon compared to conventional crops. Secondly, the harvested biomass can be used to produce cellulosic biofuel, which can replace fossil fuels,” explained Fahd Majeed, a postdoctoral research associate at iSEE and the U.S. Department of Energy’s Center for Advanced Bioenergy and BioProducts Innovation (CABBI) at the U. of I. Majeed conducted the research as a doctoral student in CEOS.

The profitability and risk associated with biomass, along with the carbon mitigation potential of these crops, vary depending on weather-related yield risks and the relative returns from conventional crops. Therefore, policies designed to incentivize farmers to transition to bioenergy crops must address these factors, as well as the high upfront costs and long establishment periods.

“While some farmers may be risk-averse and prefer lower but more stable profits, others may be risk-neutral and prioritize higher profits regardless of risk. However, a policymaker may not have information about farmers’ risk preferences,” noted Majeed. “Our analysis allows us to compare and rank the risky returns from bioenergy crops and conventional crops when farmer risk preferences are unknown.”

The study utilized a biogeochemical model to simulate yields of bioenergy crops (miscanthus and switchgrass) and conventional crops (corn and soybean) under randomized weather conditions for 30 years. The researchers analyzed 2,122 counties in the rainfed region of the United States, specifically those on or east of the 100th meridian. For conventional crops, they considered both corn-corn and corn-soybean rotation, as well as till versus no-till practices.

By combining the yield analysis with an economic model estimating crop prices and carbon mitigation payments, the researchers were able to assess the appeal of these crops to different types of farmers in various locations.

The researchers examined the profitability of bioenergy crops at biomass prices of $40 and $60 per metric ton, and carbon payments of $0, $40, and $80 per metric ton of carbon dioxide (CO₂). The study found that bioenergy crops were not profitable without carbon payments at lower prices. However, with carbon mitigation payments, these crops would attract risk-averse farmers who are willing to accept slightly lower but less variable returns compared to conventional crops. At the higher biomass price of $60 per metric ton, carbon mitigation payments significantly increase returns and decrease risk, making the cultivation of bioenergy crops appealing to farmers regardless of risk preference.

Furthermore, when comparing the two bioenergy crops, the researchers discovered that miscanthus would be preferred over switchgrass by farmers in the Midwest, while switchgrass would be favored by farmers in the southern states. These preferences are influenced by differences in expected yield, carbon mitigation potential, and costs across various bioenergy crops.

In conclusion, carbon mitigation payments can enhance the appeal of bioenergy crops for farmers. However, it is crucial to adapt these payments to account for variations in potential yield, carbon mitigation, and risk across different regions.

“One policy implication of this study is that carbon credits can effectively reduce risk. However, these incentives should be spatially tailored. A uniform payment per acre of land throughout the entire region would not be as effective. Instead, carbon credits that vary based on the carbon mitigated across different regions would create differentiated incentives and be more cost-effective in achieving an aggregate target for carbon mitigation,” Khanna emphasized.

Currently, carbon mitigation payments are primarily facilitated through voluntary markets, where companies and organizations purchase credits to meet their carbon reduction goals. The researchers suggest that government programs can supplement these markets to further incentivize bioenergy crop production.

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