Ex-Ante Study of Biofuel Policies–Analyzing Policy-Induced Flexibility

Inka Ruponen, Mariia Kozlova and Mikael Collan
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Inka Ruponen: School of Business and Management, LUT University, Yliopistonkatu 34, 53850 Lappeenranta, Finland
Mariia Kozlova: School of Business and Management, LUT University, Yliopistonkatu 34, 53850 Lappeenranta, Finland

Sustainability, 2021, vol. 14, issue 1, 1-15

Abstract: A variety of policy types are available to foster the transition to a low-carbon economy. In every sector, including transportation, heat and power production, policymakers face the choice of what type of policy to adopt. For this choice, it is crucial to understand how different mechanisms incentivize investments in terms of improving their profitability, shaping the flexibility available for investors, and how they are affected by the surrounding uncertainty. This paper focuses on transportation-biofuel policies, particularly on the financial incentives put on the bio-component of fuel and the combination of using penalties and tax-relief. Delivery of vital policymaking insights by using two modern simple-to-use profitability analysis methods, the pay-off method and the simulation decomposition method, is illustrated. Both methods enable the incorporation of uncertainty into the profitability analyses, and thus generate insight about the flexibilities involved, and the factors affecting the results. The results show that the combination of penalties and tax-relief is a way to steer fuel-production towards sustainability. The two methods used for analysis complement each other and provide important insights for analysis and decision-making beyond what the commonly used profitability analysis methods typically provide.

Keywords: biofuel policy; investment profitability analysis; the pay-off method; simulation decomposition (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
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