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

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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analysis considers the probability of a policy being implemented if it is not in effect and the probability of it being withdrawn if it is in effect.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.

Keywords: Biodiesel investment ; Disruptive biodiesel policy ; Poisson policy jumps ; Real options

Subject(s): Resource /Energy Economics and Policy

Risk and Uncertainty

Issue Date: 2015

Publication Type: Conference Paper/ Presentation

PURL Identifier: http://purl.umn.edu/205582

JEL Codes: Q42; Q48

Series Statement: Poster


Record appears in: Agricultural and Applied Economics Association (AAEA) > 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California

Author: Liu, Shen ; Colson, Gregory J. ; Wetzstein, Michael E.

Source: http://ageconsearch.umn.edu/record/205582?ln=en

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