Biodiesel investment in a disruptive tax-credit policy environment

Shen Liu, Gregory Colson and Michael Wetzstein

Energy Policy, 2018, vol. 123, issue C, 19-30

Abstract: An investigation of Poisson type policy jumps on biodiesel investment considers the theory of investment under uncertainty. The analysis studies the probability of implementing a policy if it is not in effect and the probability of withdrawal if it is in effect. An application models the policy-switching regime of the discontinuous U.S. federal tax credit of $1.00 per gallon on biodiesel. Results support that time inconsistent government policies do lead to market uncertainty. The analysis reveals a pronounced negative impact on decisions to invest in a biodiesel refinery. Results do indicate a consistent policy-switching regime may not be that disruptive to the emerging biodiesel industry. It is policy uncertainty that drives the option-pricing thresholds and a consistent policy switching does not increase the uncertainty.

Keywords: Biodiesel investment; Disruptive biodiesel policy; Poisson policy jumps; Real options (search for similar items in EconPapers)
JEL-codes: Q42 Q48 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Disruptive Policy Impacts on Biodiesel Investment: The Third Leg in 3-T Policy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:123:y:2018:i:c:p:19-30

DOI: 10.1016/j.enpol.2018.08.026

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