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Disruptive Policy Impacts on Biodiesel Investment: The Third Leg in 3-T Policy

Author

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  • Liu, Shen
  • Colson, Gregory J.
  • Wetzstein, Michael E.

Abstract

The effect of Poisson type policy jumps on biodiesel investment is investigated through the theory of investment under uncertainty. The analysis considers the probability of a policy being implemented if it is not in effect and the probability of it being withdrawn if it is in effect. As an application, the policy switching regime of the discontinuous federal tax credit of $1.00 per gallon on biodiesel is modeled as a Poisson jump process. Results support that time inconsistent government policies do lead to market uncertainty. The analysis reveals a pronounced negative impact on the decisions to invest in a biodiesel refinery. However, results indicate a consistent policy switching regime may not be that disruptive. 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 J. & Wetzstein, Michael E., 2015. "Disruptive Policy Impacts on Biodiesel Investment: The Third Leg in 3-T Policy," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205582, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea15:205582
    DOI: 10.22004/ag.econ.205582
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    2. Savvas L. Douvartzides & Nikolaos D. Charisiou & Kyriakos N. Papageridis & Maria A. Goula, 2019. "Green Diesel: Biomass Feedstocks, Production Technologies, Catalytic Research, Fuel Properties and Performance in Compression Ignition Internal Combustion Engines," Energies, MDPI, vol. 12(5), pages 1-41, February.
    3. Garret Kent Fellows & Jennifer Winter & Alaz Munzur, 2023. "An Analysis of Industrial Policy Mechanisms to Support Commercial Deployment of Bitumen Partial Upgrading in Alberta," Energies, MDPI, vol. 16(6), pages 1-49, March.
    4. Tautorat, Paul & Iversen, Jasper & Schmidt, Tobias S. & Steffen, Bjarne, 2025. "Real options analysis of decarbonization investments in the chemical industry," Applied Energy, Elsevier, vol. 397(C).
    5. Zetterholm, Jonas & Mossberg, Johanna & Jafri, Yawer & Wetterlund, Elisabeth, 2022. "We need stable, long-term policy support! — Evaluating the economic rationale behind the prevalent investor lament for forest-based biofuel production," Applied Energy, Elsevier, vol. 318(C).

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    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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