Climate change and the economics of biomass energy feedstocks in semi-arid agricultural landscapes: a spatially explicit real options analysis

The economics of establishing perennial species as renewable energy feedstocks has been widely
investigated as a climate change adapted diversification option for landholders, primarily using net
present value (NPV) analysis. NPV does not account for key uncertainties likely to influence relevant
landholder decision making. While real options analysis (ROA) is an alternative method that accounts for
the uncertainty over future conditions and the large upfront irreversible investment involved in establishing
perennials, there have been limited applications of ROA to evaluating land use change decision
economics and even fewer applications considering climate change risks. Further, while the influence of
spatially varying climate risk on biomass conversion economic has been widely evaluated using NPV
methods, effects of spatial variability and climate on land use change have been scarcely assessed with
ROA. In this study we applied a simulation-based ROA model to evaluate a landholder's decision to
convert land from agriculture to biomass. This spatially explicit model considers price and yield risks
under baseline climate and two climate change scenarios over a geographically diverse farming region.
We found that underlying variability in primary productivity across the study area had a substantial
effect on conversion thresholds required to trigger land use change when compared to results from NPV
analysis. Areas traditionally thought of as being quite similar in average productive capacity can display
large differences in response to the inclusion of production and price risks. The effects of climate change,
broadly reduced returns required for land use change to biomass in low and medium rainfall zones and
increased them in higher rainfall areas. Additionally, the risks posed by climate change can further
exacerbate the tendency for NPV methods to underestimate true conversion thresholds. Our results show
that even under severe drying and warming where crop yield variability is more affected than perennial
biomass plantings, comparatively little of the study area is economically viable for conversion to biomass
under $200/DM t, and it is not until prices exceed $200/DM t that significant areas become profitable for
biomass plantings. We conclude that for biomass to become a valuable diversification option the synchronisation
of products and services derived from biomass and the development of markets is vital.