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Examining the effects of uncertainty on second-generation biofuel investment by using a two stochastic process approach


  • Markel, Evan
  • Sims, Charles
  • English, Burton C.


Investment in the production of advanced biofuel has been encouraged by the federal regulation which enacted the Renewable Fuel Standard (RFS). However, investments and production of advanced biofuel has been lower than expected in recent years, leading regulators to substantially reduce required volumes of advanced biofuel. Real option analysis is used to help explain why uncertainty has reduced investment in advanced biofuel and eroded the requirements put forth by USEPA. This study examines the effect of uncertainty and irreversibility on a second-generation biofuel investment while considering the volatility of Renewable Identification Number (RIN) price, conventional fuel price and their correlations by applying a two stochastic variable approach.

Suggested Citation

  • Markel, Evan & Sims, Charles & English, Burton C., 2016. "Examining the effects of uncertainty on second-generation biofuel investment by using a two stochastic process approach," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235827, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea16:235827
    DOI: 10.22004/ag.econ.235827

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    References listed on IDEAS

    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    3. Merton, Robert C, 1998. "Applications of Option-Pricing Theory: Twenty-Five Years Later," American Economic Review, American Economic Association, vol. 88(3), pages 323-349, June.
    4. Schmit, T.M. & J., Luo & Conrad, J.M., 2011. "Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables," Energy Economics, Elsevier, vol. 33(6), pages 1194-1205.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Irwin, Scott, 2014. "Understanding the Behavior of Biodiesel RINs Prices," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 4, pages 1-7, October.
    7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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    Cited by:

    1. Ghoddusi, Hamed, 2017. "Blending under uncertainty: Real options analysis of ethanol plants and biofuels mandates," Energy Economics, Elsevier, vol. 61(C), pages 110-120.

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    Resource /Energy Economics and Policy; Risk and Uncertainty;

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