Hierarchical decision-modeling framework to meet environmental objectives in biofuel development

Biofuel development to comply with the Renewable Fuel Standard (RFS) would alter conventional crop patterns in agricultural watersheds. As a result, the hydrologic response of the watersheds will exhibit different and often opposing effects on agrohydrological system variables such as riverine nitrate-N load and streamflow. Conventional modeling approaches treat those externalities as regulatory constraints, often fail to consider the hierarchical nature of the decision-making process, and end with unrealistic solutions. This study therefore proposes an alternative decision-modeling framework for biofuel development to optimize a water-quality objective under different levels of streamflow requirement in the watershed. A bilevel programming model is established to mimic the hierarchical decision-making process in environmental regulation. The model is applied to the Sangamon River basin, a typical agricultural watershed in central Illinois, to determine the optimal locations and type of ethanol biorefineries as policy instruments. The results show that the proposed instruments can effectively guide the decisions in biofuel development to meet the environmental objectives in the watershed, although adopting the proposed framework yields a lower profit than the conventional models, which is the price of a more realistic solution to the hierarchical decision problem. The results also highlight the importance of spatial heterogeneity and identifying an appropriate spatial scale to design effective environmental policies in biofuel development.