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Biodiesel investment in a disruptive tax-credit policy environment

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  • Liu, Shen
  • Colson, Gregory
  • Wetzstein, Michael

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.

Suggested Citation

  • Liu, Shen & Colson, Gregory & Wetzstein, Michael, 2018. "Biodiesel investment in a disruptive tax-credit policy environment," Energy Policy, Elsevier, vol. 123(C), pages 19-30.
    • Handle: RePEc:eee:enepol:v:123:y:2018:i:c:p:19-30
    DOI: 10.1016/j.enpol.2018.08.026
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    More about this item

    Keywords

    Biodiesel investment; Disruptive biodiesel policy; Poisson policy jumps; Real options;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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