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Agriculture in the Bioeconomy: Economics and Policies

Working Paper

Justus Wesseler, Wageningen University, The Netherlands

New developments in microbiology open‐up new possibilities for the use of renewable resources. They include in addition to enriched food and feed, biofuels, fine chemicals for biodegradable plastics, food additives, and more. While at the research level substantial advancements have been made, at the development phase less success has been made. This to a certain extend can be explained by the regulatory framework applied to assess new bioeconomy products. In the presentation an overview about the developments of the EU bioeconomy will be given. The regulatory framework at European Union level will be discussed and the implications it had so far on the development of new products presented both from a theoretical as well as empirical point of view. The presentation will conclude with lessons learned and how future developments may look like.

1 Introduction

The bioeconomy is high on the policy agenda. The Dutch government has identified the

bioeconomy as one among the "Top Sektoren". Germany has introduced the Bioeconomy

Council in 2009. The United States (US) government has published a National Bioeconomy

Blueprint in 2012.

The European Union (EU) plans to spend more than 5 billion Euro for research on the

bioeconomy and expects that “each euro to be invested under the proposed Horizon 2020

programme for research and innovation could generate ten euros of added value in the

different bioeconomy sectors by 2025.” (European Commission 2012, p. 4).

But what actually is the bioeconomy ? What does it have to offer? Why do we discuss this

now and not twenty years ago? When we think about agriculture, did we not always have a

bioeconomy? And is it not just a buzzword that may soon be forgotten? Or should we focus

on the bioeconomy in our research on agricultural economics and policies? And what are the

questions that need to be addressed?

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When we look at definitions for the bioeconomy than we can observe similarities and

differences. Some explicitly consider public sector research and development activities, others

consider only the renewable energy sector.

The definition I prefer is the one used by the European Commission as it includes the primary

sectors as well as the up- and downstream sectors: “…the production of renewable biological

resources and their conversion into food, feed, bio-based products and bioenergy.” This

includes agriculture, forestry, fisheries, food, pulp and paper production, as well as parts of

chemical, biotechnological and energy industries. (European Commission 2012, p.9).

The European Commission mentions (2012, p. 17): “Based on available data from a wide

range of sources it is estimated that the European bioeconomy has an annual turnover of about

€ 2 trillion and employs more than 22 million people and approximately 9% of the total EU

workforce.”

In addition to the sectors mentioned, we also need to consider research and development

conducted in both the public and the private sector and will be discussed later to why this is

important.

2 Beyond the Agricultural Sector

In my opinion there are six major reasons why we should take the bioeconomy seriously.

These reasons are:

Advances in biological sciences

An increase in horizontal and vertical integration in agricultural supply chains

An increase in inter- and intra-industry trade

Advances in information and communication technologies

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An increase in globalization

An increase in the importance of climate change

2.1 Advances in biological sciences

The development of recombinant DNA technology in the early 1970s was the start of modern

biotechnology (Tramper and Zhu 2011). The Bayh-Dole act of 1980 in the United States

(US), which provided universities and other forms of organisations with the right to exploit

patents that had been obtained with public funding, has been seen as key for innovations in

modern biotechnology (Stevens 2004). Some of the first successful products using rDNA

technology were a vaccine for swine diarrhoea in 1982 by the Dutch company Intervet and the

production of human insulin for diabetics from genetically engineered bacteria by the US

company Eli Lilly. Since 1984, the Dutch Company Gist-Borcades (now DSM) started to

insert the bovine chymosin gene in yeast cells, which allows for cultivating the yeast in large

fermenters to be used for cheese production. In the late 1980s, the technology was adopted by

cheese producers in Switzerland, followed respectively by producers in The Netherlands,

Germany, and France, in 1992, 1997, and 1998. Parallel, applications for enzymes produced

from GE bacteria for bakery products have been introduced (Tramper and Zhu 2011).

Today a wide array of applications is available including applications in the food and feed

sector, biofuels, biomaterials, chemicals, biorefineries and more. These advances in the

natural sciences allow us to address a number of societal challenges.

2.2 Increase in horizontal and vertical integration

In addition to this drastic technological change, supply chains became increasingly vertically

and horizontally integrated (Wesseler 2014a). Looking at the agricultural sector only and not

considering the increase in up- and downstream linkages through different forms of

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contractual arrangements may create biases in policy analysis. Contractual arrangements

cause hysteresis resulting in delayed responses to changes in external factors such as in

market prices. If farmers have signed up for an environmental service scheme, they may not

easily change their mode of production. Horizontal integration through mergers and

acquisitions in up- and downstream sectors or voluntary collaboration at farm level can

change the market power of agents with economic and distributional effects along the value

chain.

2.3 Increase in inter- and intra-industry trade

A further important aspect is the increase in inter- and intra-industry trade.

The volume of world merchandise exports has more than tripled since 1990 (WTO 2014). The

share of intra-industry trade more than doubled since the early 1960s (OECD 2011). Since

1960 agricultural production has tripled while the agricultural trade volume has increased by a

factor of six worldwide (FAO 2014). This increase in trade with all the implications this may

have for countries, producers and consumers has increased inter- linkages between

international trade and agricultural production. A drought in Brazil, resulting in a decrease in

soybean yields, has an effect on European animal farming as happened in 2007/08 (Backus et

al 2009).

2.4 Advances in ICT

A further important development has been the increase in information and communication

technologies. Internet and phone connections are now available almost everywhere and news

about major events spread rapidly around the world. The speed at which information (news) is

communicated (formally and informally) and its reach is positively affected by advances in

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the information and communication technology (ICT) sector: especially through mobile

telephony and television networks, and the internet (including its social media platforms).

As ICTs improve, become more affordable, and their use spreads across the world - especially

in developing countries - their impact on the bioeconomy and therefore society will gain in

importance.

2.5 Increase in Globalization

A fifth important aspect which is closely related to the previous three is the increase in

globalization. According to the Levin Institute (2015) this is understood “as a process of

interaction and integration among the people, companies, and governments of different

nations, a process driven by international trade and investment and aided by information

technology. This process has effects on the environment, on culture, on political systems, on

economic development and prosperity, and on human physical well-being in societies around

the world.” Globalization goes beyond increase in international trade and vertical and

horizontal integration. We now find food chains such as McDonald’s or Burger King and food

processors such as Nestle or Unilever in almost every country and food retailers such as

Walmart or the Schwarz Group are following closely behind.

2.6. An Increase in the Importance of Climate Change

Knowledge about the causes and implications of climate change has substantially increased

over the past three decades. The bioeconomy offers opportunities to address adaptation to

climate change and mitigation of greenhouse gas emissions. The use of new breeding

technologies provides tools to develop crops that are suitable for wide range of micro agro-

climatic conditions much faster and thereby respond to climate change more effectively. The

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use of bioenergy generated from biological resources such as wood, manure, food waste,

algae, and other biological resources allows to recycle greenhouse gases for the generation of

energy in the form of fuel and electricity without increasing greenhouse gas emissions (de

Carvalho Macedo et al 2015). This can even have a positive effect on greenhouse gas

emissions, i.e. a reduction in the emissions, due to differences in timing between sequestration

and release of carbon dioxide (e.g. Tassone et al. 2004).

These six issues have important potential implications for players within the bioeconomy,

especially concerning activities impacting consumer affairs and the environment.

The rapid spread of imperfect information facilitated by ICTs and the immediate responses by

players within vertically integrated, cross-border value-chains may be disproportionate and

have undesirable outcomes for society. An example is the May 2011 outbreak of a foodborne

illness in Germany caused by a Shiga-toxin producing strain of Escherichia coli (STEC)

found in contaminated fenugreek seed, which was imported from Egypt in 2009 and 2010

(European Food Safety Authority 2011). Statements made by German officials falsely

implicating imported cucumbers from Spain as the bacteria’s source caused financial losses

mainly to Spanish farmers and participants within the vegetable value chain, causing Russia

to impose temporary import bans on all vegetables from the European Union ( Chelsom-Pill

2011), strained diplomatic relations, and tainted the image of the industry..

The EHEC example illustrates the increase in horizontal and vertical interlinkages between

the different sectors of the bioeconomy over space and time and how this requires us to look

beyond the agricultural sector if we want to assess economics and policies. The implications

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for the whole value chain need to be considered, as the results of our economic and policy

assessment might otherwise be biased.

But what kind of economic and policy assessments are of relevance? Every researcher may

have her or his own ideas, but there are also issues of general interest formulated by different

stakeholders representing civil society. The Dutch Government, The European Union, the

OECD, to name only a few, expect a substantial contribution of the bioeconomy to address

global as well as regional challenges.

To quote the European Commission: “With the world population set to approach an estimated

9 billion by 2050, against a background of finite natural resources, Europe needs renewable

biological resources -not just for securing healthy food and animal feedstuffs but also for

materials and other bio-based products such as bio-fuels. A strong bioeconomy will help

Europe to live within its limits. The sustainable production and exploitation of biological

resources will allow the production of more from less, including from waste, while limiting

negative impacts on the environment and reducing the heavy dependency on fossil resources,

mitigating climate change and moving Europe towards a post-petroleum society.” (European

Commission 2012, p. 4).

Accordingly, this includes contributions to food security, the sustainable management of

natural resources, reducing dependence on non-renewable resources, mitigating and adapting

to climate change, and creating jobs and maintaining competitiveness.

3. Economic Implications

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In summary, developing the bioeconomy promises great opportunities for improving our well-

being or equivalently sustainable development.

This requires some knowledge about sustainable development for examining whether or not

the bioeconomy lives-up to its promises and leads to the question how we should define and

measure sustainable development from an economic perspective.

Although there have been many attempts to measure sustainability, none has established itself

so far. Examples include the Ecological Footprint (EF) (Wackernagel and Rees 1996), the

UN’s Human Development Index (HDI) (Sagar and Najam 1998), and Bhutan’s Gross

National Happiness Index (Mukherji and Sengupta 2004). 1

Much discussed are the World Bank’s measure of genuine savings and the Arrow, Dasgupta,

and Mäler approach on inclusive wealth and genuine investment (Arrow et al. 2012). Both

concepts serve as measures of sustainable economic development over time. To compute the

genuine savings rate, resource depletion and environmental degradation are subtracted from

traditional net savings, while investment in human capital is added (Hamilton 2000).

The concept of inclusive wealth and genuine investment is similar: a society’s inclusive

wealth is determined by measuring the shadow value of the economy’s stock of capital assets

(including manufactured capital assets, natural capital assets and human capital). Genuine

investment is then defined as a measure of changes in the economy’s set of capital assets

weighted at shadow prices. Accordingly, positive genuine investment is used as an indicator

1 The Dutch Wetenschappelijke Raad voor het Regeringsbeleid (Netherlands Scientific Council for Government Policy) published a report on the sustainability of the Dutch economy in 1987 using a dynamic multi-sector model including emissions and possibilities for emission control.

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of sustainable development. In contrast to other approaches, this has a forward-looking

perspective.

Still, the approach does not explicitly consider the existence of opportunities, as the focus is

on specific investments. Further, future opportunities are inherently uncertain and this

uncertainty needs to be explicitly considered, in particular when opportunities involve sunk

costs or other kinds of irreversible costs and/or benefits. I will get back to the importance of

opportunities, uncertainties, and irreversibilities and their relevance for sustainable

development in more detail.

First I would like to address issues related to possible negative impacts of new technologies.

3.1 Negative Impacts of New Technologies

The possibility of producing and consuming new products may have negative impacts on

human health and/or the environment. Exclusion of these negative impacts from users’ net-

benefit assessment may warrant a restriction or ban to reduce or eliminate their negative

impacts. However, if the impacts are included in the assessment and there are positive net

gains, additional constraints may be unjustified from a cost-benefit perspective. Hence, it is

unclear ex ante if introducing a new technology warrants additional use restrictions or even a

ban, merely because of a negative health and/or environmental impact. Those have to be

compared with the benefits of the new technology. Further, the impact of a new technology on

human health and/or the environment may be smaller than the impacts of the technology it

replaces. 2

2 This is the link to measuring the changes in capital assets at shadow prices in the Arrow et al. (2012) approach.

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Following Wesseler and Smart (2014), Figure 2 presents the standard framework for assessing

health and environmental benefits and costs of a new technology. The x-axis depicts the

quantity, Q, produced for either a single crop or a portfolio of crops, and refers to a specific

plot, farm, or region. The y-axis represents the marginal benefit (MB) and marginal cost (MC)

of producing quantity Q. An increase in the production of Q decreases the marginal private

benefit (MPB) and increases the marginal private cost (MPC). For the private producer or

sector, the optimal quantity produced, Q, is at c, where MPB = MPC. If no additional benefits

or costs need to be considered, c reflects the optimal level of production for society.

Now, let us assume that the production of Q bears additional costs not considered under

private costs. If these costs are added to the marginal private cost, we get the marginal social

cost (MSC) and the societal optimal level of production decreases from QPO to QSO. One

way of reducing Q is by taxing production. The optimal tax rate, the Pigouvian Tax, should

increase private cost so that MPC intersects with MPB at d. The external effects of production

are then internalised and the producer pays for the extra environmental damages, equivalent to

a - b.

Figure 2’s important message is that although producing Q causes external environmental

damage, reducing its production to zero is suboptimal. Merely observing that producing an

agricultural crop causes negative environmental impacts when regulatory policies are in place

does not necessarily justify additional intervention from a cost-benefit perspective.

Regulation of environmental externalities following the Pigouvian argument has been

criticised, most prominently by Ronald Coase (1960). Coase argued that observing

externalities does not necessarily justify government intervention, for example via a

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Pigouvian tax as often argued. Stakeholders themselves should have an incentive to reduce

environmental pollution. An investigation is necessary to determine if government

intervention can improve the current situation of observed environmental pollution, and all

institutional arrangements available to address the problem should be considered. As a

reference, Coase suggests comparing the outcome of alternative institutional arrangements

with the existing situation (Coase 2006). An intervention by governments is warranted if a

different institutional arrangement improves the outcome and requires so. The results of this

reasoning are presented in Figure 3, where the MPC has been adjusted by internalising the

external effects of production so that the MPC is equivalent to the MSC, indicated by

MPC’=MSC.

Coase’s view was challenged by libertarians; for them, the question of government

intervention depends on property rights. They argued that the courts should settle the problem

of externalities. To quote Rothbard: “We have concluded that everyone should be able to do

what he likes, except if he commits an overt act of aggression against the person and property

of another. Only this act should be illegal, and it should be prosecutable only in the courts

under tort law, with the victim or his heirs and assigns pressing the case against the legal

aggressor.” (Rothbard 1997, p. 169). While ex-post liability can address a number of

environmental externalities, this does not per se exclude the use of ex-ante regulations even

under the libertarian view, e.g. if ‘everyone’ freely decides to work together in a group to

implement regulations imposed on members of the group. Farmers may voluntarily form a

group and decide their own production standards. Further, implementing ex-post liability has

its own problems due to liability avoidance, differences in wealth, and more (Shleifer 2010).

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However, the libertarian view does not necessarily contradict the situation shown in Figure 2.

The expected ex-post liability cost increases MPC. Further, ex-post liability costs provide

incentives for implementing ex-ante measures to reduce ex-post liability, hence increasing the

MPC compared to a situation where this possibility is absent, as discussed, for example, by

Beckmann et al. (2010) for the case of coexistence.

In conclusion, externalities create additional costs under the Pigouvian, Coasian, and

libertarian views; views on measuring costs and appropriate responses differ. However, these

views reach the same conclusion: the existence of externalities per se does not immediately

justify government intervention and additional investigation on a case-by-case basis is

needed.

3.2 The precautionary approach

The previous discussion fails to differentiate between different types of external costs. One of

the concerns about environmental and health impacts is that they may be irreversible and/or

catastrophic; this is one reason why the precautionary approach has been mentioned in many

regulations of GMOs (see e.g. European Council for the Environment 1999) and other

technologies, most prominently in the Rio Declaration on Environment and Development

under Principle 15: “In order to protect the environment, the precautionary approach shall be

widely applied by States according to their capabilities. Where there are threats of serious or

irreversible damage, lack of full scientific certainty shall not be used as a reason for

postponing cost-effective measures to prevent environmental degradation.” (United Nations

1992, Principle 15).

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There are diverse interpretations of the precautionary approach. The one most widely held is

that for a new technology, the prospect of harmful effects take precedence over the prospect

of beneficial effects. As harmful effects are potentially catastrophic, and this potential cannot

be excluded, and “the infinite costs of a possible catastrophic outcome necessarily outweigh

even the slightest probability of its occurrence” (van den Belt 2003, p. 1123), the result would

be a ban of new technologies.

This line of reasoning is logically inconsistent, as pointed out by the philosopher Henk van

den Belt (2003). According to Pascal’s Wager: “Given a known but nonzero probability of

God’s existence and the infinity of the reward of an eternal life, the rational option would be

to conduct one’s earthly life as if God exists.’ (van den Belt 2003, p. 1124). The contradiction

is the ‘many gods’ example: ‘Consider the possible existence of another deity than God, say,

Odin. If Odin is jealous, he will resent our worship of God, and we will have to pay an infinite

price for our mistake. Never mind that Odin’s existence may not seem likely or plausible to

us. It is sufficient that we cannot exclude the possibility that he exists with absolute certainty.

Therefore, the very same logic of Pascal’s Wager would lead us to adopt the opposite

conclusion not to worship God. Pascal’s argument, then, cannot be valid.” (van den Belt 2003,

p. 1124).

In the context of new technologies, catastrophic negative effects cannot be excluded; this

interpretation of the precautionary approach is unhelpful. Van den Belt recommends using as

a guideline for approval: a comparison of the benefits and costs of possible errors. This

corresponds with recommendations by economists who state: “… regulate until the

incremental benefits from regulation are just offset by the incremental costs. In practice,

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however, the problem is much more difficult, in large part because of inherent problems in

measuring marginal benefits and costs.” (Arrow et al. 1996, p. 221).

A method of addressing potential environmental impacts in line with the precautionary

approach, and in particular considering uncertainties and irreversible damages, is by

performing an extended cost-benefit analysis. The economic literature suggests that if a new

technology includes irreversible costs, the net benefits arising from the technology have to be

larger than they otherwise would be (e.g. Pindyck 2000). The additional net benefits needed to

compensate for irreversible costs are commonly calculated by using real-option models.

Wesseler et al. (2009) suggest using this modelling approach for assessing new

biotechnologies. Because irreversible costs of GMOs are difficult to quantify, irreversible

costs that are acceptable considering the net benefits of GM crop cultivation should be

calculateda threshold value they call the maximal incremental socially tolerable irreversible

costs (MISTICs). This threshold level is below the threshold level ignoring uncertainties and

irreversible costs. In cases where irreversible benefits are larger than irreversible costs,

policies supporting the specific policy can be justified (Wesseler 2009).

3.3 Valuing opportunities

Dixit and Pindyck (1994) suggest the application of real option theory not only to investment

problems in new technologies but also to all kinds of decision making under temporal

uncertainty and irreversibility. The methodology has been applied to assess a wide range of

issues including the evaluation of firm investment in different sectors and in patents; the

effect of subsidies and taxes on optimal investment decisions and on foreign direct

investments; and more. Model applications not only include irreversible costs but also

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irreversible benefits, optimal abandonment, entry and exit, and uncertainty over several

variables such as reversible and irreversible costs and benefits, discount rates, and others.

Recent reviews by Mezey and Conrad (2010) and Perrings and Brock (2009) discuss these

applications in more detail. Also, Smit and Trigeorgis (2004), Merton (1998), Trigeorgis

(1996), and Dixit and Pindyck (1994) among others offer overviews on applications and

methodologies.

The advantage of real option theory is that it allows us to measure the value of future

opportunities. In the most basic setting, future opportunities can be interpreted as options,

where the owner of the option has the right but not the obligation to exercise the option,

similar to a call option in financial markets. An option may not be exercised unless the value

of the option is greater than or equal to zero. The optimal timing of exercise is important to

maximise option benefit. Maximum option benefit is important to value the option. The value

of the option depends on a number of important parameters including its expected return, the

related uncertainty, opportunity costs, and the costs of exercise (Dixit and Pindyck 1994).

As an illustrative example: assume a company holds the patent on a new technology, say a

new seed. The patent provides opportunities for additional income if the company invests in

the patented technology. These investment costs can be considered sunk costs. The value of

the patent will depend on the future net benefits the technology will provide to the company.

Those future net benefits are uncertain, as it is impossible to precisely predict how markets

will develop. The required investments may include physical investments (green field

investments) to produce the new product, or financial investments to merge and/or acquire a

company that has the facilities and location to produce the new product. In addition, there

may be extra costs to comply with environmental, food, and health safety standards. Real

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option theory tells us that although the investment opportunity yields a positive net present

value (NPV), delaying the investment might be the optimal choice because losses can be

avoided. Arrow and Fisher (1974) and Henry (1974) pointed this out in seminal papers in the

early 1970s (Wesseler 2014b).

Leitzel and Weisman (1999) provide an interesting contribution. They argue that new

government policies require sunk investments in the form of training government officials,

hiring additional workers, and purchasing equipment. This argument has been picked up by

Hennessy and Moschini (2006), although they do not explicitly refer to the contribution by

Leitzel and Weisman. Their paper shows that the irreversibility effect delays changes in

government regulations. Swinnen and Vandemoortele (2010) observe a similar effect for the

case of biotechnology regulations in the EU, although they do not explicitly mention the

application of a real option approach in their paper.

These studies show that, with respect to government policies, an irreversibility effect exists,

regulations can induce hysteresis, and this may cause additional costs. What is important to

note is that without capturing the temporal dynamics - that is agents have the possibility to

move from one state of nature to another state of nature and back - policy changes and their

impact on the allocation of resources and resulting economic effects over time are difficult to

demonstrate. These dynamic affects are difficult to capture with comparative static models.

There is one additional issue that deserves attention and that is related to the economic value

of opportunities not exercised. The conceptual framework for assessing those opportunities is

introduced in Figure 4. The straight lines in Figure 3, the so-called ‘Marshallian lines’, show

the NPV of an investment opportunity. Where the straight line intersects with the horizontal

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axis, the NPV is zero and onwards to the right it is positive. Applying the NPV criterion as a

decision rule, it would be optimal to invest – invest is used as an equivalence to saying

exercising an opportunity - if the returns V of the project are equal to or greater than the

irreversible investment costs I.

The value of the option to invest F(V) is illustrated by the combination of the nonlinear and

linear functions where the nonlinear functions smoothly match the Marshallian lines at V1, V2,

V3, and V4, the real option theory’s points of optimal exercise. These points are to the right of

the Marshallian trigger value, implying that a greater V is needed, compared to that needed to

satisfy the NPV criterion, to compensate for the irreversible investment costs. The difference

is due to the so called irreversibility effect (Henry 1974).

As a larger V is needed to induce investment, one implication is that most options will be

exercised at a later point in time. The optimal threshold value for V depends on F(V).

Changes in V caused by changes in uncertainty, trends, opportunity costs, or a combination

thereof can change F(V). Further, changes in irreversible costs have an effect on F(V). While

Figure 4 is a representation of a simple model with irreversible investment costs and uncertain

returns that follow a geometric Brownian motion, more advanced models that consider entry

and exit options, several stages, uncertainty about the irreversible investment costs,

irreversible benefits, and more increase the complexity of possible effects. What is important

to notice in the context of new developments in the bioeconomy is, that even if a project will

not be exercised, the opportunity does not have a zero value. As we will observe only projects

that have been exercised - values to the right of V1, V2, V3, and V4 - we will miss the not

directly observable real option value (ROV). Assuming a number of companies with same

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investment costs but different V’s, the area between the F(V) function and the horizontal axis

to the left of the dashed lines can be used as an approximation for the ROV. 3

If we compare the real option function for V1, F(V1) with the real option function (in red) for

V4, F(V4), the shift is caused by an increase in the irreversible investment costs. Now, assume

that the current value for V would be to the right of V4. In this case we would not observe any

effect of the policy, while the policy has substantially reduced the real option value as

expressed in the changes in the area between F(V1) and the horizontal axis and to the left of

V1, and the area between F(V4), and the horizontal axis and to the left of V4. Further, the

investment trigger has moved from V1 to V4 resulting in a delay of exercise due to changes in

investment costs. As Dixit and Pindyck (1994) and others have pointed out, the irreversibility

effect can be substantial and hence so can its effect on national welfare. The effects of

changes in the real option value on national welfare can be expected to be substantial as well.

According to several authors, regulations of biotechnologies and GMOs in particular has

unnecessarily caused a substantial increase in irreversible investment costs resulting in fewer

products being developed, a concentration of the industry, reallocation of research priorities

and reallocation of research and development to countries with less stringent regulations and

even damaging sustainable development considering the environmental and health benefits of

cultivating GE crops.

While several authors argue that regulations have negative effects on investments and reduce

economic growth, others point out the positive effects of avoiding future damages. Porter has

argued that environmental regulations may even have positive effects on firm-level growth

(Ambec et al. 2014). While the effect of regulation and in particular of environmental 3 This is a simplified illustration, the aggregation is much more complicated (see e.g. Mbah et al., 2010).

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regulation on firm investment has been investigated (Ambec et al. 2014), less is known about

the effect of regulation on research and development in the public and private sector, or about

the indirect effect on sustainable development via its effect on research.

3.4 The case of ‘Golden Rice’

The study by Wesseler and Zilberman (2014) on the case of Vitamin A enriched rice indicates

that those effects can be substantial and hence deserve attention. I would like to discuss this

example in more detail as it illustrates the complexity of economic, social, and political issues

related to new technologies and their controversies. 4

Vitamin A enriched rice, ‘Golden Rice’, has been developed to address vitamin A deficiency

among children by using modern biotechnologies. Research has shown that one cup of

‘Golden Rice’ per day adds enough supply of Vitamin A to prevent Vitamin A deficiency

among children in South and Southeast Asia, has no negative health or environmental effects,

and is substantially cheaper than alternative strategies. Despite the evidence, many groups are

opposed to the technology with the result that until now it is not available. Greenpeace (2012)

states “ ...if introduced on a large scale, golden rice can exacerbate malnutrition and

ultimately undermine food security.” Scientists working on the topic have been accused of

being “nazi collaborators” (Adams 2014); some have lost their jobs (Enserink 2013).

Together with David Zilberman of UC Berkeley I developed a real option model to assess the

health costs for India caused by not having access to the technology over one decade.

According to our calculations, the delay over the last 10 years has caused losses of at least

1,424,680 life years for India, not considering indirect health benefits. Our calculation also

4 Adrian Dubock (2014) provides an excellent overview about the history of ‘Golden Rice’.

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shows that the additional perceived costs by the Government of India are at least US$1.7

billion (about US$200 million annually) that would justify a delay of introduction from an

economic perspective. This is a substantial amount and reflects the economic power of the

opposition against the introduction of ‘Golden Rice’. Our model explains why it is more

difficult to convince regulators when a strong vocal opposition exists that mainly stirs

uncertainty about a new technology.

The ‘Golden Rice’ issue is an extreme case, but it shows how lobby groups can affect public

opinion and off-set scientific evidence. The paper also shows how we can use economic

models to assess the implications of specific policies and perhaps even generate impact. The

paper has been downloaded several thousand times within a year and been widely mentioned

in public media.

4. Regulation in the EU

The EU’s approval process is legally guided by the precautionary principle, and commences

when a developer applies to its Member State’s competent authority for approving a GE crop.

Approval is for a specific use, e.g. ‘cultivation’, and or ‘food and or feed’, and or ‘import and

processing’, or any combination of these. The Member State passes this application on to the

European Food Safety Authority (EFSA) for assessment in terms of the Council Directive

2001/18/EC (see Figure 5).

The EFSA is an independent body operating since 2002 for providing the European

Community with scientific and technical support for food and feed safety issues, and is

mandated to conduct risk assessments—“… a scientifically based process consisting of four

steps: hazard identification, hazard characterisation, exposure assessment and risk

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characterisation …” (Council Regulation (EC) No 178/2002). This ‘risk assessment’ step

(similar to the petitioning ‘bureaucratic’ step in the US) ends when the EFSA issues its

opinion. If this opinion is favorable, itThis opinion is passed on to the European Commission

(EC) for the final “risk management” (‘political’ step) phase of regulatory oversight (Council

Regulation (EC) No 178/2002; EFSA, 2015).

The EC prepares a draft decision based on the EFSA’s opinion, and submits it to a committee

comprising representatives of each Member State—the Standing Committee on the Food

Chain (SCFCAH)—for a decision that is reached by qualified majority voting under

Regulation 1829/2003 (if submitted under Directive 2001/18, then by the Regulatory

Committee) (EC, 2016). If the SCFCAH rejects the draft decision or expresses a ‘no opinion’,

the EC either amends its draft decision and resubmits it to the SCFCAH or submits the

original draft decision to the Appeal Committee—a more senior level of Member State

representation—for a decision (European Council, 2015), also by qualified majority voting.

Similarly, approval is declined if the draft decision is rejected, but if a ‘no opinion’ is

expressed, the EC may adopt the decision, i.e. approval will be granted (Figure S3 from Smart

et al., 2015, on-line). The ‘political’ step, and therefore the approval process, stops when the

Commission reaches its decision (Davison, 2010).

Most (97%) of the applications in the EU have been for ‘food and or feed’ and or ‘industrial

purposes’. For these applications, results of field trials done outside of the EU are cited

(Council Directive 2001/18/EC). Field trials done in the EU are required for applications for

‘cultivation’ use only.

22

4.1 Approval Time Length

In Smart et al. (2016) we collected data for 65 observations (applications) of which 62 were

approved. The oldest and most recent applications for starting the Member State-application

step were submitted in 1996 and 2012, respectively; 32% and 68% of the applications were by

local and foreign (mostly the US) developers, respectively. 51% of the applications were for

single and 49% for multiple-trait GE crops. In 72% and 51% of the cases, GE modifications

were for herbicide tolerance and insect resistance, respectively, while 16% were for ‘other’

traits. Most of the applications were for ‘food and feed’ (88%), while 12% were for industrial

and other purposes (only two applications were for cultivation). Maize has the most

applications (51%); followed by soy beans (21%); cotton (12%); potato (3%); with the

remaining 13% comprising: sugar beet, flowers, and rice.

We find a negatively-sloping linear relationship for the ‘political’ step. We capture this trend

with a metric variable measuring the change in approval time by year. With every additional

year, the approval time decreases by 7-8% (35-48 days). There is evidence that applications

for multiple traits take somewhat longer compared with the single trait category. Coefficients

for cotton and potato are statistically significantly different to maize, meaning that completing

this step took approximately 49% (163 days) and 118% (977 days) longer for these

applications, respectively, compared with maize.

Results confirm a concave trend in overall approval time; coefficients in all models are

statistically significant and all have the expected signs. The results suggest that the Member

State-application step drives the reduction in approval time; the ‘risk assessment’ and

‘political’ steps contribute to the overall time, but only marginally (if anything) to the

observed changes in duration.

23

Single trait applications required 15-22% less time (206-375 days); applications for potatoes

and cotton took about 54% (1,273 days) and 49% (1,021 days) longer, respectively. For the

overall time, they find no robust evidence for statistically significant differences between

domestic and foreign developers, herbicide tolerant and insecticide resistant crops, or ‘food

and feed’ and non-food/feed crops.

4.2 Voting on Approval of GM Crops

The number of MSs comprising the EU has increased since its inception (originally known as

the European Economic Community: ECC) from six core states to 15—when GE crops first

appeared in the mid-1990s—to the current 28. Each MS’s vote is weighted according to its

population (with the less-populous states having a proportionally larger weighting). A QM is

achieved when the number of votes cast (‘for’ or ‘against’) equal or exceed a threshold value

calculated as a percentage of the maximum possible number of votes (European Commission,

2013).

We give our mathematical description of the QM voting as follows:

At any given time, the EU MSs comprise a set N denoted i.

We denote the votes of MS i as .

10

′ ′

0 if a MS i votes ‘against’ including any form of ‘against’ (i.e. an abstention, or absent

from the ballot).

24

Each MS i, has a vote weight, wi. For each ballot, the total number of ‘for’ votes, Q is

calculated as follows

,

A positive decision (i.e. approval) is reached if , where is the QM threshold value of

‘for’ votes for a given decision (ballot). For the period 1 December 2007 to 30 June 2013, for

example, a decision required at least 255 votes (73.91 per cent) out of the 345 total, for

adoption. The weighting arrangements are the result of a compromise reached between MSs

in a degressively proportional system where smaller and larger MSs are over- and under-

represented, respectively—a compromise reached between federalist and intergovernmental

elements within the EU of the ‘one man, one vote’ and ‘one country, one vote’ principles,

respectively (Moberg, 1998). The current weighting of votes, enshrined in The Treaty of Nice,

came into force on 1 November 2004. Subsequently, The Treaty of Lisbon (Article 16 of the

Treaty on European Union) introduced a new definition for the rule of QM with a three-stage

implementation.

We sourced our data from two publications: AgraFacts and AgraFocus (see

http://www.agrafacts.com/Home.html), which published most of the voting results for the

SCFCAH (Environmental Minister level) and the Commission (the AC) for the period

December 2003 to January 2015. We captured the ballot results in the following categories for

the aforementioned voting bodies: ‘for’; ‘against’; ‘abstain’; and pooled the results for

‘absent’, ‘no representative’, and ‘no position taken due to “parliamentary reserve”’, and ‘no

result published’ as ‘no vote cast’ because of their infrequent occurrence and their failure to

contribute to a QM.

25

The number of voting opportunities per MS has changed as new members have joined the EU

over time. The Netherlands, Sweden, Finland, the UK, the Czech Republic, Estonia, Romania,

and Spain; and Austria, Luxembourg, Greece, Hungary, Cyprus, and Lithuania voted ‘for’ and

‘against’, respectively, with a frequency of at least 80 per cent; Italy, France, Bulgaria, and

Ireland abstained at least 40 per cent of the time at the SCFCAH. Finland and The

Netherlands, and Austria always voted ‘for’ and ‘against’ at both the SCFCAH and the

Commission, respectively. Croatia, Luxembourg, and Latvia never voted ‘for’ at the

Commission (Figures 6 and 7).

The data summarised in Figures 6 and 7 in essence represent the binary outcome of each

ballot. However, the weighted outcome is the important result of each voting event as this

determines whether or not a QM vote is achieved. We applied the voting weights to each

successive ballot at the SCFCAH and the Commission, and calculated the minimum number

of additional ‘for’ votes needed for a QM. It is interesting to note that there is a hard-core

level of resistance against a QM from being achieved at both levels of voting, which

established itself earlier at the Commission than at the SCFCAH (Figures 8 and 9).

Our statistical analysis shows that a MS’s identity (i.e. endogenous factors) is statistically the

most significant factor driving voting sentiment, and that other factors like a GE crop’s

characteristics play an unimportant role in explaining MS voting behaviour in the context of

our study and assumptions. Results indicate the poor likelihood that a QM vote can be

reached due to the strong blocking effect of a few ‘heavy weight’ voters like France,

Germany, Italy (Leech, 2002), and more recently, Poland. The latest changes to the voting

rules mean that Germany has the strongest blocking power in the EU conferring it with

significant leverage for concessions with other voters Moberg (2007).

26

5. Summary and Outlook

The rise of the bioeconomy affects may sectors of the economy. Many governments support

the bioeconomy through direct and indirect investments, most notably the European Union

and Germany in particular. At this stage the contribution to economic development are still

uncertain as most of the developments are still at its infancy. Nevertheless, the recent

developments in the biological sciences offer a huge potential not only for the more efficient

use of biological resources for food, feed, fibre and fuel (energy) and industrial products

mainly via enzymes but also for the development of the health sector. The more efficient use

of biological resources also provides new opportunities to respond to the challenges posed by

climate change. The generation of bioenergy can reduce the emission of greenhouse gases and

the efficiency gains in plant breeding allow to better adopt at local level to climate change.

Measuring these effects at national level require a detailed monitoring of the product flows as

part of an input-output analysis. This will provide information about the size of the sector, its

contribution to economic growth and related labour market effects. First efforts have been

initiated in member states of the European Union, while other countries might follow. The

importance with respect to monitoring the product flow is expected to increase in the near

future. Certification schemes for bio-based products are increasing. Companies use them for

marketing their final products to create, improve or maintain a “green” image. This can have

implications for international trade, if standards between countries differ. A fruitful area for

future research would be to investigate the development of those standards and potential

international trade effects.

27

Due to Engel’s law, the share of the agricultural and food sector declines with economic

growth and may also result in declining terms-of-trade of the agricultural sector. Using

biological resources for not only for food and feed production but also for other uses has the

potential to reduce or to even turn around this effect.

This is in particular important for developing countries where the majority of the population

lives in rural areas and share of the agricultural sector is still relatively high. The bioeconomy

may provide opportunities to maintain employment opportunities in rural areas and strengthen

the agricultural sector. More research investigating opportunities for developing countries,

which so far has mainly concentrated on the bioenergy sector, for getting a better

understanding about opportunities.

One issue of concern is related to the regulation affecting the bioeconomy. Studies

investigating innovations in the bioeconomy by using patent data provide some interesting

results. The member states of the European Union show a decline in patent applications for

the different sectors of the bioeconomy in comparison with other regions of the world. The

OECD has suggested this being an effect of regulations facing the industry. If this indeed

would be correct and some studies provide support for this view, what on the one hand is

created with public sector investment in research and development is destroyed with the other

hand by public sector market intervention. This is an area where additional theoretical as well

as empirical research will be needed to get a better understanding about the interdependencies

between innovation and regulation policies.

Our results show that regulations have an effect on the approval of new technologies. They

result in delays of approval. Those delays are often not based on scientific evidence but on

28

political economy effects. In the EU some countries show a continuous opposition to GM

technology in agriculture measured by their voting behaviour. While in the end the European

Commission decided about the approval, the delays can be costly as they cause interruption in

international trade and in the end can be expected to have a negative impact on agriculture

and hence farm-household income. The negative effect on farm-household income in Europe

can be expected to be further strengthened through the reduced access to innovations in

modern plant breeding.

29

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Figure 6. The relative frequency of votes cast by MSs at the SCFCAH from December 2003 to December 2014 (MS abbreviations are listed in Table 1). On the vertical axis, the numbers in parentheses are the number of voting opportunities that each MS had. Note: “Absent” included no position taken due to parliamentary reserve.

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AT (61)

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For

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43

Figure 7. The relative frequency of votes cast by MSs at the Commission from May 2004 to February 2015 (MS abbreviations are listed in see Table 1). On the vertical axis, the numbers in parentheses are the number of voting opportunities that each MS had. Note: “Absent” included no position taken due to parliamentary reserve.

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44

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45

Figure 9. The total number of ‘for’ and ‘against’ votes cast at the Commission expressed as a percentage of the maximum possible number of votes, according to each EU MS’s weight for ballots authorizing GE crops from May 2004 to February 2015 versus the QM threshold.

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