Maximum Incremental Social Tolerable Irreversible Costs (MISTICs): Assessing Economic and

Transcription

1 Maximum Incremental Social Tolerable Irreverible Cot (MISTIC): Aeing Economic and Ecological Impact of Innovation under Irreveribility and Uncertainty Sara SCATASTA, Department of Environmental and Reource Economic, Environmental Management, Center for European Economic Reearch (ZEW), Mannheim, Germany Jutu WESSELER, Eleonora NILLESEN Environmental and Natural Reource Economic Group, Department of Social Science, Wageningen Univerity, The Netherland ABSTRACT In thi tudy we introduce the concept of maximum tolerable irreverible ocial cot (MISTIC) a an indicator of potential welfare impact of introducing an agricultural innovative technology. The MISTIC identify an upper bound for irreverible ocial cot beyond which, it would not be ocially optimal to potpone the introduction of a new technology. The MISTIC including private a well a ocial cot and benefit, upport deciion making procee that need to conider economic a well a ocial and environmental factor, offering a broader perpective on potential impact of introducing technological innovation with unknown irreverible ocial cot. The MISTIC were computed for the cae of introducing genetically modified (GM) corn in France. Keyword: irreveribility, new technology, real option approach, ocial benefit-cot-analyi JEL: D6, D8, Q1 1

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3 1. INTRODUCTION Modeling the deciion of releaing genetically modified crop in the European Union i a demanding tak. The introduction of uch a new technology i characterized by a certain level of uncertainty about it environmental and economic impact. Some impact might be irreverible in nature implying that, once the deciion i taken, it i not poible to go back to the equilibrium the economy wa before uch deciion. Cot and benefit ariing from thoe impact may be private, i.e., born by an identifiable group of market agent (e.g. farmer) or ocial if born by ociety a a whole. Deciion making procee addreing the introduction of new technologie from an environmental a well a ocio-economic perpective will have to take into account the uncertainty and irreveribility aociated not only to private cot and benefit but alo to it ocial cot and benefit of the technology. In the context of genetically modified organim (GMO) an example of reverible private benefit i given by farmer income. xample of private irreverible cot are incremental crop protection cot born by farmer due to the development of reitance in targeted pet. Example of ocial irreverible cot are loe in biodiverity. Example of ocial irreverible benefit are gain in biodiverity from reduced peticide ue. The object of thi tudy i to apply a real option approach to deciion making procee involving environmental a well a ocio-economic apect. In particular, we how how to ue a real option approach to quantify the maximum incremental ocial tolerable irreverible cot (MISTIC) of introducing Bt corn in France immediately. We alo how how the MISTIC can be ued to ae the immediate releae of GM corn in France in the abence of information about the true incremental ocial irreverible cot of thi technology. Preliminary quantitative reult baed on field trial are offered to help explain our methodological approach. In ection 2 we preent ome background information on corn in France and decription of field trial carried out in Narbon, France. Thi data i largely ued in the quantitative analyi. In ection 3 we decribe the MISTIC approach. In ection 4 we preent preliminary reult on quantifying the MISTIC. In ection 5 we ummarize and dicu our finding. 3

4 2. BACKGROUND Corn i grown in France mainly for animal feed (80%), but alo for human conumption (20%). Corn for human conumption i ued to produce corn oil, tarch and weetener which are common ingredient in many proceed food uch a breakfat cereal and dairy good, and only a mall amount i ued for direct conumption (ee Eential Bioafety, 2004, EUROSTAT, 2005). France produce about 1.2% of world corn, and 40% of the total EU-15 corn production. France i a net exporter of corn for human conumption, exporting 45% of it production mainly to other EU-15 member tate (FAOSTAT, 2005). One of the genetically modified corn conidered to be allowed for planting in France i Bt corn. Bt corn ha been genetically engineered to contain a gene of the oil bacterium Bacillu thuringieni (Bt). Thi bacterium produce a crytal-like (Cry) protein that i toxic to the European Corn Borer (ECB- Otrinia nubilali). (Bt) corn ha been currently approved in the EU only for animal feed. In the EU Bt corn i grown in Spain with an adoption rate of about 17.5% (0.1 million hectare), and in Germany (le than 0.05 million hectare) (Jame, 2004). Unfortunately no official information i available on Bt corn planting in France. In France, epecially in the outhern area, the ECB i conidered to be one of the mot evere corn pet. Figure 1 how the ECB preure in France in

5 Figure 1: 2004 European Corn Borer Preure: Number of Larvae per foot. Source: InfLarvaire

6 The ECB can caue evere damage to corn plant by penetrating the talk and excavating large tunnel into the plant.conventional ECB pet control trategie are difficult to manage becaue a correct timing of inecticide application i crucial to their effectivene. Inecticide are effective only when the ECB i in it larval tatu but it ha not yet penetrated the talk, or i migrating to neighbouring plant. Bt corn i expected to benefit farmer through reduced harvet loe due to ECB infetation. Bt corn i alo expected to benefit the environment through reduced inecticide ue. At the ame time, due to higher cot for Bt-eed, it i not undiputed that the aociated yield improvement will alo tranlate in increaed farmer income. (ee Demont and Tollen, 2004). In 2004, for the EU funded project ECOGEN (Soil Ecological and Economic Evaluation of Genetically Modified Crop) field trail were carried out in Narbon, France, to tet for cot and benefit of Bt corn on European oil. ECOGEN field trial were organized in 16 plot (20 meter by 12 meter), with four different crop management ytem: Bt (MON 810) with Bt crop management; a Bt Ioline with Bt crop management; a Bt Ioline with conventional crop management; and a popular check variety with conventional crop management. Unfortunately one of the four plot with Bt corn wa detroyed by protetor. Bt and conventional crop management differ in the application of inecticide to control for ECB: none for Bt corn, Lambda-cyhalothrine (100g/l, 0.15 liter per hectare) and Deltaméthrine (15 g/l, 1.33 liter per hectare). Concern about the introduction of Bt-corn include impact on non-target inect, imilar to the concern in the US about impact on the Monarch butterfly, the development of ECB reitance againt Bt due to the commercialization of Bt corn, which might become a problem for organic farmer who currently ue thi bacterium, incorporated into pray, a a natural crop protection tool and general concern about unkown rik of the technology (Ervin and Welh, 2005). Thoe concern, if correct, can be een a poible irreverible cot of introducing the BT-corn technology. An important quetion i under what circumtance uch kind of irreverible cot would jutify a delayed introduction of the technology., where the delay could be ued to obtain additional information about benefit and cot of the technology. 6

7 3. IDENTIFYING THE MAXIMUM INCREMENTAL SOCIAL TOLERABLE IRREVERSIBLE COSTS (MISTIC) FOR Bt CORN IN FRANCE The real option approach offer a way to quantify the value of the option to delay adoption of Bt corn in France. The value of thi option i given by the difference between total irreverible ocial cot (I) and the um of irreverible benefit (R), uch a benefit from reduced peticide ue, and reverible ocial net-benefit (W), uch a benefit accruing to farmer, weighted by the ize of the uncertainty aociated to the introduction of a new technology (or hurdle rate: 1 ). When ocial irreverible cot cannot be quantified, the real option approach allow reearcher to identify at leat the maximum amount of tolerable irreverible ocial cot (I*) that would jutify immediate adoption of Bt corn in France. Thi amount i to be no greater than the um of irreverible ocial benefit and reverible ocial net-benefit from GM crop, uch that: W I* R (1) 1 Since 1 1, the real option deciion criteria i more retrictive than the traditional deciion criteria: I* W R (2) The ue in practice of the real option deciion criteria pecified in (1) require quantification of the following factor: 1. Reverible ocial net-benefit from GM crop, W; 2. Hurdle rate, 1 ; 7

8 3. Irreverible ocial benefit, R; Total change in reverible and reverible cot and benefit will alo depend on the rate of adoption of Bt corn. Due to data availability, reverible ocial net-benefit in thi tudy include only private reverible net-benefit for two market agent: buyer and eller. We limit the analyi to two type of technologie, trangenic and conventional, without taking organic production into conideration. Thi i common ue in the analyi of welfare impact of trangenic crop (ee Klotz-Ingram et al., 1999, Qaim, 1999, Traxler and Falck-Zepeda, 1999, Falck-Zepeda et al. 2000a,b, Pray et al., 2001, Frivold et al., 2003, Qaim, 2003, Qaim and de Janvry, 2003, Demont and Tollen, 2004; Demont et al., 2004). Following Mochini et al. (2000), reverible private net-benefit are meaured in term of producer and conumer urplu derived from contant elaticity log-linear demand and upply function. Supply elaticitie were taken from the European Simulation Model (ESIM) where they are derived from behavioural equation. Suggeted elaticitie of land allocation to corn are 0.77, o we approximated upply elaticitie to thi value in our bae cae (ee Bane et al., 2004). A we conider France of a mall open economy for corn, we took into conideration a perfectly elatic demand function. Detail of the choen partial equilibrium model can be found in the Appendix. We aume that the adoption of a technological innovation, uch a trangenic corn, caue a pivotal hift in the invere upply function. Thi hift i calculated on data from Narbon field trial and it i given by: 8

9 K 1/ 1/ 1 1 MC 1 MC 1 A A y y c g 1/ 1/ c g c yc g yg 1/ Pf 1 MCc 1 1/ A y c c yc 0.24 (3) where MCc are variable operational cot (Euro per hectare) aociated to the conventional technology; MCg are variable operational cot (Euro per hectare) aociated to the trangenic technology; yc i production (in metric ton) under conventional technology and yg i production (in metric ton) under the Bt technology. The trangenic corn adoption curve i aumed to follow a logitic pattern over time. The ize and peed of adoption can be etimated with ordinary leat quare (OLS) uing data from the adoption rate in the United State (ISAAA, 2004). Following Demont et al. (2004) the peed of adoption will then be aumed half of that of the U.S. Thi allow u to obtain conervative etimate of the ocial reverible benefit. Auming an adoption ceiling of 30% for Bt corn we obtain: ( t) ln t 0.3 ( t) Bt (4) where ( t) repreent the adoption rate of Bt corn. In our analyi we aume that the introduction of trangenic corn doe not caue hift in the demand function, and it hould be taken into conideration that problem of conumer acceptance of GM food could change the reult of our analyi. Baed on a mall open economy partial equilibrium model for the market for corn for grain recognizing the European Common Agricultural Policy price upport ytem modelled a a producer price wedge and on

10 data Eurotat New Crono databae and the FAOSTAT-Agriculture databae (Eurotat, 2005; Faotat, 2005). From Eurotat (2005) we found a gain in private net reverible benefit from adoption of Bt corn in France equal to 47 million Euro per year or 167 Euro per hectare. Hurdle rate, 1, are aumed to follow a geometric Brownian motion uch that 1 r r 1 2r (5) where r i the rikle rate of return equal to 0.045; i the difference between mean annual rate of return,, and the rik adjuted rate of return 10.5 and the poitive root of the olution for a Fokker-Planck equation. In particular: i, t i, t 1 mean ln (6) t i, t 1 i, t where i, t repreent real farmer gro margin at time t, and 2 = i, t i, t 1 i, t 1 i, t 2 tddev ln (7) t Time erie data on farmer gro-margin from 1973 to 2004, from the Eurotat dataet Agri were ued to calculate and 2. We find for France, a a reult, a hurdle rate equal to 1.35, meaning that reverible net- 10

11 benefit need to be 1.35 time higher than irreverible net-cot to jutify immediate adoption of trangenic corn. Irreverible ocial benefit were calculated on the bae of change in peticide ue in Narbon field trial, i.e., a reduction of kilogram Active Ingredient (kgai) per hectare; a well a change in fuel ue from a comparative technology (ugar beet), a reduction of 0.01 tonne of CO 2 emiion per hectare. (Demont et al., 2004). Following Pretty et al. (2000) we conidered 0.84 Euro of ocial irreverible benefit per kgai reduction and Euro of ocial irreverible benefit per tonne of CO 2 emiion and found, baed on projected adoption curve, about 300,000 Euro per year ocial irreverible benefit or 1.09 Euro per hectare per year. The maximum tolerable amount of ocial irreverible cot (MISTIC) that would jutify immediate adoption of Bt corn in France would be equal to about 35 million Euro per year. Thi figure correpond to 125 Euro per hectare or 1.43 Euro per houehold, or 291 Euro per farmer. A noted by Alton et al. (1998) exiting literature report upply elaticitie between 0.1 and 1. We found that for a value of 0.1 of the upply elaticity, the maximum tolerable amount of ocial irreverible cot decreae for about 80%. For a value of 1 of the upply elaticity the MISTIC increae for about 20%. Doubling the hurdle rate reduce the MISTIC by 50%. Reducing the hurdle rate by a half double the MISTIC. One percent increae (decreae) in the vertical hift of the upply curve caue about 10% percent increae (decreae) in the MISTIC. Finally, doubling the peed of adoption increae the maximum tolerable MISTIC by about 35% for Bt corn. The analyi carried out in thi ection can be extended to other European Union (EU) countrie, preliminary reult in thi direction are offered in table 1. 11

12 The MISTIC were computed in the cae of Bt corn in France uing data from field trial carried out in 2004 in Narbone, France. Private reverible net-benefit due to adoption of Bt corn were found to be poitive and equal to about 47 million per year (167 Euro per hectare). Social irreverible benefit from reduced inecticide and fuel ue alo have been taken into account and were found to be about 0.30 million Euro (1.09 Euro per hectare). The total amount of tolerable irreverible ocial cot i, therefore, 35 million Euro (125 Euro per hectare). Thi amount correpond to 1.43 Euro per houehold and 291 Euro per farmer. The low amount of MISTIC per houehold ugget that the value of the option to delay adoption of Bt corn in France might indeed be poitive. Thi mean that from a purely economic perpective there might be a ocial gain in waiting to adopt Bt corn until more information i gathered to reduce the uncertainty aociated to private reverible netbenefit or to identify the exact actual amount of ocial irreverible cot. The difference between MISTIC per houehold and MISTIC per farmer how how different group of market agent may have different willingne to bear irreverible ocial cot, indicating that thee group might expre different opinion regarding the immediate introduction of trangenic crop in the EU. 4. THE REAL OPTION APPROACH AND THE MISTIC The example for the releae of Bt-corn in France illutrated, how the real option approach can be ued to ae new technologie from a ocial point of view. The real option approach ugget to differentiate between reverible and irreverible benefit and cot. The ocial benefit cot analyi further ugget to differentiate between private and public (external) benefit and cot. Figure 1 illutrate thoe two dimenion that are important within an ex-ante ocial benefit cot analyi. 12

13 Generally, citizen expre concern about new technologie. Many of the concern are a reult of ignorance and non-familiarity with the new technology. The calculation of the MISTIC provide an attempt to conider uch concern within a ocial benefit-cot analyi. They can be calculated for different takeholder group. Difference between takeholder offer an explanation, why ome takeholder upport the technology, while other are more reluctant to accept the technology. A comparion of benefit and cot between different takeholder can, of coure, be achieved within a tandard ocial benefit-cot analyi, but the MISTIC approach allow to conider the effect of irreverible cot explicitly, cot many people are mot concerned about. The MISTIC on a per peron level provide a boundary value for the maximum willingne-to-pay for not having the new technology being introduced. The MISTIC can be compared with reult from willingneto-pay tudie. Thi can provide additional information for deciion maker facing the problem of whether or not to allow the introduction of a new technology. 13

14 5. CONCLUSION In thi tudy we introduce the concept of maximum tolerable irreverible ocial cot (MISTIC) a an indicator of potential welfare impact of introducing an agricultural innovative technology. The MISTIC identify an upper bound for irreverible ocial cot beyond which, it would not be ocially optimal to potpone the introduction of a new technology. The MISTIC including private a well a ocial cot and benefit, upport deciion making procee that need to conider economic a well a ocial and environmental factor, offering a broader perpective on potential impact of introducing technological innovation with unknown irreverible ocial cot. The MISTIC were computed for the cae of introducing genetically modified (GM) corn in France. It hould be noticed that thi analyi doe not take into account potential hift in the demand function due to problem of conumer acceptance of GM fed cow milk for example. Such hift could ignificantly change our welfare aement. 14

15 REFERENCES Alton, J. M., Norton, G. and Pardey, P. G. (ed.) (1998). Science under carcity: Principle and Practice for agricultural reearch evaluation and priority etting. CAB International, U.K :Wallingford. Bane, M., H. Grethe, and S. Nolte (2004). European Simulation Model (ESIM) in GAMS: Uer Handbook. Goettingen and Berlin. Boccaletti, S., and Moro, D. (2000). Conumer willingne-to-pay for GM food product in Italy. AgBioForum, 3(4): Bohanec, M., D eroki S., nidar i M., Scatata S. and J. Weeler, 2004 Multi-attribute modelling of economic and ecological impact of cropping ytem. Informatica 28: Brooke, G. (2003a) The Farm Level Impact of Uing Bt Corn in Spain. Crop Biotech Brief Canterbury, U.K: Demont, M. and Tollen, E. (2004). Firt Impact of Biotechnology in the EU:Bt Corn Adoption in Spain. Annal of Applied Biology 145(3): Demont, M., Weeler, J. and Tollen, E. (2004). Biodiverity veru trangenic ugar beet: the one euro quetion. European Review of Agricultural Economic 31(1):1-18. Eential Bioafety (2004). Crop Databae: DBT418. Available at page maintained by AGBIOS, lat conulted February, 21,

16 Eurotat (2005). Eurotat New Crono databae (theme 5): Lat updated October Falck-Zepeda, J. B., G. Traxler, Et Al. (1999) Rent Creation and Ditribution from the Firt three Year of Planting Bt Cotton. ISAAA Brief 14. Falck-Zepeda, J. B., G. Traxler, Et Al. (2000b) Surplu Ditribution from the Introduction of a Biotechnology Innovation. American Journal of Agricultural Economic 82(2): Falck-Zepeda, J. B., G. Traxler, Et Al. (2000c) Rent Creation and Ditribution from Biotechnology Innovation: the Cae of Bt Cotton and Herbicide-Tolerant Soybean in Agribuine 16(1): Faotat (2005). Faotat-Agriculture. Lat updated February Frivold, G. B., J. Sullivan, Et Al. (2003) Genetic Improvement in Major US Crop: the Size and Ditribution of Benefit. Agricultural Economic 28(2): Jame, C. (2004). Global Statu of Commercialized Biotech/GM Crop International Service for the Acquiition of Agri-Biotech Application. ISAAA Brief No Klotz-Ingram, C., S. Jan, Et Al. (1999) Farm-level Production Effect Related to the adoption of Genetically Modified Cotton for Pet Management. AgBioForum 2(2):

17 Lekaki, J.N., and C. Pantzio. Agricultural Liberalization and the Environment in Southern Europe: the Role of the Supply Side. Applied Economic Letter 6(1999): Mochini, G. and Lapan, H. (1997), "Intellectual Property Right and the Welfare Effect on Agricultural RandD." American Journal of Agricultural Economic, 79, Mochini, G., Lapan, H. and Sobolevky, A. (2000). Roundup ready Soybean and Welfare Effect in the Soybean Complex. Agribuine 16(1): Pray, C. E., R. H. Huang, Et Al. (2002) Five Year of Bt-Cotton in China - The Benefit Continue. The Plant Journal 31(4): Pray, C. E., D. Ma, Et Al. (2001) Impact of Bt Cotton in China. World Development 29(5): Qaim, M. (1999) Potential Benefit of Agricultural Biotechnology: an Example from the Mexican Potato Sector. Review of Agricultural Economic 21(2): Qaim, M. (2003) Bt Cotton in India: Field Trial Reult and Economic Projection. World Development 31(12): Qaim, M. and A. De Janvry (2003) Genetically Modified Crop, Corporate Pricing Strategie, and Farmer' adoption: the Cae of Bt Cotton in Argentina. American Journal of Agricultural Economic 85(4): Traxler, G. and J. Falck-Zepeda (1999) The Ditribution of Benefit from the Introduction of Trangenic Cotton Varietie. AgBioForum 2(2):

18 Table 1. The Maximum Social Tolerable Irreverible Cot (MISTIC) for Bt corn in France. Member State Private reverible netbenefit ( /ha) Social irreveribl e benefit ( /ha) Hurdle Rate MISTIC ( /ha) MISTIC (Million ) MISTIC ( /houehold) MISTIC ( /farmer) France N/A = Not Available *** = countrie that do not have problem with the European Corn Borer Scope Reveribility Quadrant 1 Private Quadrant 2 External (Public) Reverible Irreverible Private Reverible Benefit (PRB) Private Reverible Cot (PRC) Quadrant 2 Private Irreverible Benefit (PIB) Private Irreverible Cot (PIC) External Reverible Benefit (ERB) External Reverible Cot (ERC) Quadrant 4 External Irreverible Benefit (EIB) External Irreverible Cot (EIC) Source: Demont, Weeler, and Tollen (2004) Figure 1: The two dimenion of an ex ante analyi of ocial benefit and cot of a new technology 18

19 Appendix A Specification of the partial equilibrium model for corn in a mall open economy We aume that there are only two technologie repreented by the ubcript i = g (Bt corn), c (conventional corn). Country j upply of corn with technology i, Q i, i given by: Qi Ai Pi (A1) where the ubcript j i dropped for eae of notation; P i the producer (or output) price received by corn eller; Ai i a technology pecific contant term for the aociated product and function. The aggregate demand for grain corn, the demand elaticity tend to infinity and i d Q i, i modeled a linear and parallel to the horizontal axe uch that P d P w (A2) where d P i the buyer (or input) price paid for corn; and w P i the world price for corn do not depend on what technology i ued in country j corn production, that i country j i aumed to be a mall open economy. The market clear with the following requirement: Q d i Q i (A3) d w P 1 P 1 P (A4) where d d P P P repreent the proportional CAP price upport coefficient identifying the relative difference between the output and the input price of corn due to the CAP corn price upport regime. Note that 19

20 in thi preliminary verion of thi tudy we model CAP ubidie a price upport meaure, further reearch i needed to include in the model CAP area payment a well. Baed on EUROSTAT data on the value of production calculated at the eller price and the value of production calculated at the buyer price, we oberve that the variation in upport received by corn eller per unit of the product doe not vary with the quantity produced. The price upport ytem, therefore, reduce marginal production cot for corn eller cauing a parallel downward hift in the upply function. At any time period the equilibrium price, * * P and quantitie, Q, are given by: P P P * d* P d* W* 1 (A5) Q A P * * Producer urplu, PS f, t, at the equilibrium condition in (A5) i given by: 1 * Qi d* * Qi 1 * * d* * i 1 i i i i i i A 0 i PS P Q dq P Q P Q 1 1 (A6) With a perfectly elatic demand curve the conumer urplu i zero. Following Mochini, Lapan, and Sobolevky we aume that the adoption of a technological innovation, uch a trangenic corn, caue a pivotal hift in the invere upply function by changing the value of the technology pecific contant term, A. The proportional vertical hift in the invere upply function will be given by: 20

21 1/ Pf 1/ Pf 1/ Pf A A A A / Pf 1/ Pf A1 1 1 A A 0 0 1/ Pf t K (A8) A A 1 0 Pf 1 1 t K 1 ( t) i the trangenic corn adoption rate over time, t; A0 i the direct upply function contant coefficient with conventional technology; A1 i the direct upply function contant coefficient with trangenic technology and K MC y c c 1 MC 1 y g 1/ 1/ y c g yg MC y c c 1 y 1/ c (A9) where MCc are variable operating cot (Euro per hectare) aociated with the conventional technology; MCg are variable operational cot (Euro per hectare) aociated with the trangenic technology; yc i production (in metric ton) under conventional technology and yg i production (in metric ton) under the Bt technology. Given Equation (A5) to (A7) we can compute change in the equilibrium price and quantitie due to adoption of trangenic corn a a function of the vertical hift in the invere upply function and the CAP price upport coefficient: 21

22 P P * d* 0 0 A A Q* Q Q A A P Q 1 ( t) K 1 Q * * w* 1 0 * * A0 (A10) In Equation (A10) the ubcript f and t are dropped again to implify notation. The change in producer urplu, in particular, will be given by: W * W * W * W * PS PS1 PS0 P (1 ) Q1 P Q1 P (1 ) Q0 P Q0 1 1 P (1 ) P Q Q 1 1 ( t) K 1 P Q 1 1 W W * * W * (A11) The trangenic corn adoption curve i aumed to follow a logitic pattern over time uch that: ( t) exp MAX ( t ) a bt (A13) Equation (A13) can be tranformed into: ln MAX ( t) ( t) ( t) a bt (A14) The coefficient in Equation (A14) can be etimated with ordinary leat quare (OLS) uing data from the adoption rate in the United State. Following Demont, Weeler, and Tollen (2004) the peed of adoption b 22

23 will be aumed to be half of the peed of adoption of the U.S. to obtain conervative etimate of the ocial reverible benefit. 23