For the second energy seminar of the new term we hosted Jorge Andrés Moncada on analysing biofuel supply chains in an imperfect world. Jorge is visiting the Centre for Environmental Policy as part of his PhD studies at Delft University of Technology and Utrecht University in the Netherlands. He has kindly written us this companion blog post on the topic. You can also download his slides from the talk [PDF].

The depletion of fossil fuels, growing concerns about energy security and global climate change have led to growing worldwide interests in biofuels [1]. In fact, the substitution of fossil fuels with biofuels has been proposed by the European Union (EU) as part of a strategy to reduce greenhouse gas emissions from road transport, enhance energy supply and support development of rural communities [2].

One of the fundamental problems of the creation and further development of biofuel supply chains is related to economics. Biofuels are not cost competitive with their fossil fuel counter parts and thus they need governmental intervention. Formal institutions such as mandatory blending targets, tax exemptions, subsidies, and import tariffs are some of the government interventions widely used to stimulate production and increase consumption of biofuels around the world [1].

Current scientific literature has been focused on the long term optimal design of bioenergy systems. This literature has provided insights by identifying promising configurations for feedstock, technology, and energy vectors. However, these studies have left aside the institutional framework and have made normative assumptions on actors’ behaviour (homo economicus). Thus, it is not well understood what policy strategies might steer the bioenergy system in the direction pointed by the optimisation studies. In fact, empirical research has shown that policy interventions in bioenergy systems might have side effects that are hard to predict because of the high interdependencies of the biomass and bioenergy markets [3].

To understand the effect of policy interventions on the evolution of the bioenergy systems requires thinking differently about those systems. It requires to move away from “the perfect world” assumed in the optimisation studies and to embrace the complexity of the world we live in. It requires accounting for elements such as: feedback loops, time delays, bounded rationality, uncertainty, and evolution.

I try to bridge that knowledge gap in my PhD by combining elements of computer science and economics. My project focuses on understanding what conditions (technologies, policies, and organisational structures) might lead to the emergence of renewable jet fuel supply chains. The project is funded by Climate-KIC and it is being developed at Delft University of Technology and Utrecht University in The Netherlands.

To answer the research question I moved from a technocratic approach and constructed a conceptual framework on the basis of institutional analysis, complex adaptive system theory and (neo) institutional economics theory as presented in Figure 1. The framework recognises that a biofuel supply chain is more than a technological construction or organisational construction. In fact, it proposes that a biofuel supply chain is the result of the interaction between these two constructs.

Institutions are composed of four different layers as they interact with the network of actors and with the behaviour of the system at the micro and macro level. Similarly, the network of actors is divided in two scales to illustrate the interaction of institutions and actors at different levels (actor level, network level).

Layer 1, actors and games, refers to the rules, norms and shared strategies that influence the behaviour of individuals and shape the interaction between individuals within an organisation. The level of institutional arrangements describes the different mechanisms of interaction (e.g. spot market, bilateral contracts, and vertical integration) between and designed by actors to coordinate specific transactions. The formal institutional environment sets the rules of the game. Finally, the informal institutional environment refers to culture. Norms, customs, traditions, and religion play a large role in this level.

The interaction between the physical system and the network of actors is less abstract. Actors design, build, operate, and invest in different elements of the physical system. In turn, the physical sub-system enables actors to create wealth, to coordinate transactions, and to track compliance with certain laws and regulations.

The conceptual framework has been formalised into an agent-based model to account for the consequences of the interaction between technical and social elements (actors and institutions). The emergence of the biodiesel supply chain in Germany and the emergence of the renewable jet fuel supply chain in Brazil have been analysed using this approach. Overall, it has been found that biofuel supply chains’ behaviour is influenced by actors’ decision making and adaptation mechanisms.