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50% greater than 2005 levels. These significant price changes have a significant
impact on the economics of corn-based ethanol production.
In the bioenergy world, by-products are often advanced as valuable items that
can help support bioenergy production. However, one must be careful to consider
the price changes brought about by increased supply.
Consider one such by-product: glycerol arises as a by-product when producing
biodiesel. The expansion in biodiesel production resulted in additional glycerol production so large (2.8 million tons) that it exceeded the market volume before the
expansion (2 million tons). As a result, the market saturated, and the price crashed.
Moreover, the crude glycerol by-product from biodiesel production contained toxic
elements and exhibited a substantial difference in color, decreasing its market value.
Consequently, the glycerol by-product became worth less than the cost of selling it
and now it is an item for disposal.
This example shows the need for considering by-product demand relations when
evaluating Nexus projects. Moreover, this is not always done, for example, Wooley
(1999) identified glycerol as a by-product contributing to profitability while
Ciriminna et al. (2014) identified glycerol as a disposal issue that costs money to
dispose of.
The anticipation of price changes requires broad industry level consideration. For any single firm, the input use or by-product quantity is typically not
large enough to stimulate price changes. However, when many firms pursue the
same actions, then the quantities are large enough, and price changes occur.
Such a process is called the fallacy of composition by economists. The lesson
here is that industry trends also need to be considered when evaluating Nexus
projects.
Demand relationships are also key when Nexus actions cause product prices to
increase. For example, in an energy-only context, in the early 1970s, the state of
Washington Public Power Supply System (WPPSS) responded to a 7% annual
growth rate in electricity demand by initiating construction on five nucleargenerating facilities. The cost of constructing nuclear power plants was deemed too
high to be covered by funds just raised by issuing bonds and WPPSS began to raise
electricity rates paid by customers. This led to a demand response in the form of
lowered electricity consumption. The needed revenue for the financing did not
materialize and contributed to the abandonment of four of the new plants and the
largest bond default in US history.
Collectively, one must incorporate product demand and input supply relations in
Nexus project evaluations. If this is not done, there is a high likelihood of a biased
evaluation and an unanticipated result.
5.2.2 The Rebound Effect
We noted in Sect. 4.3.4 that rebound effects are unintended responses to changes in
the social system, such as the introduction of new technology or policy, which
results in a reduction or reversal of the intended impact. For example, economists
5 Economics
50% greater than 2005 levels. These significant price changes have a significant
impact on the economics of corn-based ethanol production.
In the bioenergy world, by-products are often advanced as valuable items that
can help support bioenergy production. However, one must be careful to consider
the price changes brought about by increased supply.
Consider one such by-product: glycerol arises as a by-product when producing
biodiesel. The expansion in biodiesel production resulted in additional glycerol production so large (2.8 million tons) that it exceeded the market volume before the
expansion (2 million tons). As a result, the market saturated, and the price crashed.
Moreover, the crude glycerol by-product from biodiesel production contained toxic
elements and exhibited a substantial difference in color, decreasing its market value.
Consequently, the glycerol by-product became worth less than the cost of selling it
and now it is an item for disposal.
This example shows the need for considering by-product demand relations when
evaluating Nexus projects. Moreover, this is not always done, for example, Wooley
(1999) identified glycerol as a by-product contributing to profitability while
Ciriminna et al. (2014) identified glycerol as a disposal issue that costs money to
dispose of.
The anticipation of price changes requires broad industry level consideration. For any single firm, the input use or by-product quantity is typically not
large enough to stimulate price changes. However, when many firms pursue the
same actions, then the quantities are large enough, and price changes occur.
Such a process is called the fallacy of composition by economists. The lesson
here is that industry trends also need to be considered when evaluating Nexus
projects.
Demand relationships are also key when Nexus actions cause product prices to
increase. For example, in an energy-only context, in the early 1970s, the state of
Washington Public Power Supply System (WPPSS) responded to a 7% annual
growth rate in electricity demand by initiating construction on five nucleargenerating facilities. The cost of constructing nuclear power plants was deemed too
high to be covered by funds just raised by issuing bonds and WPPSS began to raise
electricity rates paid by customers. This led to a demand response in the form of
lowered electricity consumption. The needed revenue for the financing did not
materialize and contributed to the abandonment of four of the new plants and the
largest bond default in US history.
Collectively, one must incorporate product demand and input supply relations in
Nexus project evaluations. If this is not done, there is a high likelihood of a biased
evaluation and an unanticipated result.
5.2.2 The Rebound Effect
We noted in Sect. 4.3.4 that rebound effects are unintended responses to changes in
the social system, such as the introduction of new technology or policy, which
results in a reduction or reversal of the intended impact. For example, economists
5 Economics