 "The current biomass market operates more along the lines of a
take-it-or-leave-it contract, but in order to encourage enhanced
participation and promote a more sustainable, stable biomass
supply, a new kind of contract needs to be created," said Jody
Endres, a U of I professor of energy and environmental law.
Endres said that a good contract gives everyone more
certainty.
"Incomplete contracts are the hazard," she said. "We need to
develop contracts that nail down all of the details and are
transparent about who's taking on the risk and who's paying for
it. If we get these considerations into the contracts, those who
finance this new biomass crop industry will have more certainty
to invest."
The study identifies considerations that should be included
in the framework for a biomass contract, including a control for
moral hazard, risk incentive trade-off, existing agricultural
practices, and risk and management tools to make the industry
more sustainable financially and environmentally.
Endres said that if biorefineries receive money in the form
of carbon credits for reducing pollution, incentives for farmers
should be included in contracts because they are the ones who
are bearing the risks associated with sustainability practices.
"Suppose a sustainability contract lists that the default
should be integrated pest management rather than application of
traditional pesticides," Endres said. "The farmer takes on some
risk to provide a sustainable product, but the biorefinery gets
carbon credit for those sustainable practices. This should be
worked into the contract -- that if the farmer assumes the risk
of IPM as opposed to traditional pesticide options, there has to
be some sort of upfront payment or incentive in the contract to
account for this risk. Due to the power relationships in this
industry, the onus is on the biorefinery to be the leader in
developing contracts in this new landscape."
The perennial nature of biomass crops also makes developing
contracts challenging.
"We're in a unique environment, and traditional agricultural
contracting structures just don't apply," Endres said. "Crop
insurance is not currently available for farmers who grow
biomass crops, so they take on additional risk. Likewise,
landowners see high prices for traditional commodity crops and
do not want to be locked into a multiyear contract with a lessee
to grow a perennial biomass crop. It's complicated," she said.
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Endres said that although sustainability requirements are important,
having an adequate supply of biomass is important as well.
"We're trying to envision a future in which we have a lot of
biomass, and one way to secure that is to recognize all of the risks
and costs, especially when it comes to sustainability practices.
It's unique, and we do not yet have contracts for this aspect of the
industry," she said.
A newly forming biomass standards group, in which Endres holds a
leadership role, is looking at how the value of sustainability
practices can be measured at the watershed, eco-shed or air-shed
level rather than on the scale of individual farms. Endres said the
working group will examine how to ensure that balance is achieved
between producers and consumers of biomass, including through
contracts.
"I'm optimistic that it can be done," she said. "Growers and
refiners right now are concerned with the industry being financially
sound.
"There's also a real need for education in both developed and
underdeveloped countries about biomass contracting," Endres said.
"We're trying to shift the paradigm from traditional agriculture to
something that's more sustainable -- and that takes knowledge. If we
don't have that knowledge here in the United States and we're trying
to draft contracts in our very developed system, how is this going
to be rolled out in say, Africa, or other areas where the use of
production contracts are much more rare, especially in the small
farm context?"
"Building Bio-based Supply Chains: Theoretical Perspectives on
Innovative Contract Design" was published in the UCLA Journal of
Environmental Law and Policy and is available online at
http://escholarship.ucop.edu/uc/item/6h74x82n. A. Bryan Endres
and Jeremy J. Stoller were co-authors.
[Text from file received from the
University of Illinois College of Agricultural, Consumer and
Environmental Sciences]
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