Policy uncertainty and the optimal investment decisions of second-generation biofuel producers

Evan Markel, Charles Sims and Burton English

Energy Economics, 2018, vol. 76, issue C, 89-100

Abstract: Uncertainty has been cited as one possible explanation for the lackluster performance of the Renewable Fuel Standard, which was enacted to encourage investment in the production of advanced biofuel. The unpredictability of conventional fuel markets makes the revenues and costs associated with biofuel production uncertain. In addition, policy uncertainty, in the form of annual revisions and adjustments to the program, make the cost of complying with the Renewable Fuel Standard uncertain. This paper is the first to decompose the aggregate uncertainty facing biofuel producers and isolate the effect of fuel market uncertainty and policy uncertainty on the decision to enter and exit the biofuel market. Results indicate that the uncertainty in the conventional fuel markets and the uncertainty in status of the Renewable Fuel Standard program influence incentives to enter and exit the biofuel market in different ways. Annual adjustments to the standard coupled with the unpredictable expiration and reinstatement of blender tax credits can work to discourage investment in biofuels and undermine effectiveness of the program.

Keywords: Option value; Renewable identification numbers; Renewable fuel standard; Tax incentives (search for similar items in EconPapers)
JEL-codes: D81 Q16 Q48 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S014098831830389X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:76:y:2018:i:c:p:89-100

DOI: 10.1016/j.eneco.2018.09.017

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().