Pareto-efficient legal regulation of the (bio)fuel market using a bi-objective optimization model

• Multi-period MILP model for analysis of legal regulation in the (bio)fuel sector.
• Two objectives: max. NPV and min. emissions including emissions of land use change.
• Use of the augmented ε-constrained method to calculate the efficient frontier.
• Evaluation of existing political regulations for the biofuel sector.
• Derivation of implications and recommendations for political decision makers.

Blending biofuels into fossil fuels allows for emission reductions in the transportation sector. However, biofuels are not yet competitive due to high production costs and investments and thus, legal requirements like blending quotas or emission thresholds must be issued if biofuels are to contribute to European CO2-reduction goals. Thereby, the aim is to establish Pareto-efficient long-term legal requirements. Against this background, we develop an optimization model for simultaneously minimizing life cycle greenhouse gas emissions and maximizing discounted net present value in order to analyze the overall system of biomass cultivation, (bio)fuel production and blending. The applied ε-constraint approach allows to calculate Pareto-efficient solutions. The model is applied to the German (bio)diesel market. We show that current and past European Union directives are not Pareto-efficient and cause unintended side effects. As results, information about trade-offs between the two objectives (minimizing life cycle greenhouse gas emissions and maximizing discounted net present value) as well as recommendations on the design of the regulation is derived.