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Costs for conventional and renewable fuels and electricity in the worldwide transport sector: a mean-variance portfolio approach

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In this paper we analyze the role of changes in the fuel mix on emissions reduction and the diversification of risks associated to rising prices of energy. To this purpose we evaluate the average cost and the cost volatility of alternative fuel combinations in the road transport sector by means of the Mean-Variance Portfolio Theory. The results suggest big gains in diversification of risks and emissions reduction associated with shifts away the current fuel mix, which is more than 90% concentrated worldwide in fossil fuels. Those shifts are discussed vis à vis the policy recommendations of the International Energy Agency on fuel use in the transport sector, and both the business as usual and the low carbon scenarios of the European Commission. In particular, shifting toward an efficient system would involve optimizing the use of biofuels (mostly from endogenous feedstock), with second generation biofuels taking the lead in the long-run, and this combined with electricity from clean sources. This scenario would mean reducing cost volatility by more than 50% as well as CO2 emissions by more than 30% in the long-run.

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  • Ricardo Guerrero-Lemus & Gustavo A. Marrero & Luis A. Puch, 2012. "Costs for conventional and renewable fuels and electricity in the worldwide transport sector: a mean-variance portfolio approach," Documentos de Trabajo del ICAE 2012-18, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  • Handle: RePEc:ucm:doicae:1218
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    1. de-Llano Paz, Fernando & Antelo, Susana Iglesias & Calvo Silvosa, Anxo & Soares, Isabel, 2014. "The technological and environmental efficiency of the EU-27 power mix: An evaluation based on MPT," Energy, Elsevier, vol. 69(C), pages 67-81.
    2. Guerrero-Lemus, Ricardo & González-Díaz, Benjamín & Ríos, Gerardo & Dib, Ramzi N., 2015. "Study of the new Spanish legislation applied to an insular system that has achieved grid parity on PV and wind energy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 49(C), pages 426-436.
    3. deLlano-Paz, Fernando & Martínez Fernandez, Paulino & Soares, Isabel, 2016. "Addressing 2030 EU policy framework for energy and climate: Cost, risk and energy security issues," Energy, Elsevier, vol. 115(P2), pages 1347-1360.
    4. deLlano-Paz, Fernando & Calvo-Silvosa, Anxo & Iglesias Antelo, Susana & Soares, Isabel, 2015. "The European low-carbon mix for 2030: The role of renewable energy sources in an environmentally and socially efficient approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 48(C), pages 49-61.
    5. Solaymani, Saeed & Kari, Fatimah, 2013. "Environmental and economic effects of high petroleum prices on transport sector," Energy, Elsevier, vol. 60(C), pages 435-441.
    6. Marrero, Gustavo A. & Puch, Luis A. & Ramos-Real, Francisco J., 2015. "Mean-variance portfolio methods for energy policy risk management," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 246-264.
    7. repec:eee:rensus:v:77:y:2017:i:c:p:636-651 is not listed on IDEAS
    8. Raslavičius, Laurencas & Semenov, Vladimir G. & Chernova, Nadezhda I. & Keršys, Artūras & Kopeyka, Aleksandr K., 2014. "Producing transportation fuels from algae: In search of synergy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 133-142.
    9. Kitzing, Lena, 2014. "Risk implications of renewable support instruments: Comparative analysis of feed-in tariffs and premiums using a mean–variance approach," Energy, Elsevier, vol. 64(C), pages 495-505.
    10. Dedinec, Aleksandar & Markovska, Natasa & Taseska, Verica & Duic, Neven & Kanevce, Gligor, 2013. "Assessment of climate change mitigation potential of the Macedonian transport sector," Energy, Elsevier, vol. 57(C), pages 177-187.
    11. Liu, Ming-Lei & Ji, Qiang & Fan, Ying, 2013. "How does oil market uncertainty interact with other markets? An empirical analysis of implied volatility index," Energy, Elsevier, vol. 55(C), pages 860-868.

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    Keywords

    Fuel costs; road sector; efficiency frontiers; mean-variance analysis.;

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