Contracting for perennial energy crops and the cost-effectiveness of the Biomass Crop Assistance Program

Using a framework that meshes mechanism design theory and real options analysis, we recover the contract terms biomass processing plant would offer farmer to induce conversion of land perennial energy crops. We consider three terms: performance payment (price per dry ton biomass), establishment (one-time acre planted), acreage (annual planted). find that, in equilibrium, signed by farmers buyers Miscanthus (the crop choice our analysis) uses combination all payments. Conditional on equilibrium contract, show how changes structure Biomass Crop Assistance Program affect cost risk along vertical supply chain. Our analysis reveals subsidies both payments are equally cost-effective reducing production cellulosic biofuels. However, more effective at for buyer and, therefore, dominate from risk-adjusted cost-effectiveness criterion. This suggests larger share budget should be allocated detriment matching (subsidies payments) maintenance payments).