Subsidize farmers or bioenergy producer? The design of a government subsidy program for a bioenergy supply chain

Abstract The success of the bioenergy industry will depend, in part, on enough biomass feedstocks being grown. To increase the reliability of feedstocks supply, a government can offer two types of subsidy program: a farmer subsidy program (FSP) and a bioenergy producer subsidy program (PSP). We develop models to analyze the optimal subsidy program by capturing the interactions between the government, the bioenergy producer, and the farmers. The models incorporate the subsidy budget constraint, the environmental benefits from the use of bioenergy, the farmer's risk aversion and land capacity constraint, as well as the yield uncertainty of feedstocks. The findings reveal that both FSP and PSP are effective as long as the farmers' land capacity exceeds a threshold. If both the subsidy budget and the land capacity are sufficiently large, PSP outperforms FSP; if only the subsidy budget is limited, FSP is better; if only the land capacity is limited, FSP and PSP are equivalent. Counter‐intuitively, we find that PSP always favors farmers more, while FSP favors the bioenergy producer more under certain conditions. Also, we find that FSP can better mitigate risk than PSP when yield uncertainty is high. Lastly, insights for policy makers to promote bioenergy development are highlighted.