IDEAS home Printed from https://ideas.repec.org/a/eee/appene/v318y2022ics0306261922004457.html
   My bibliography  Save this article

We need stable, long-term policy support! — Evaluating the economic rationale behind the prevalent investor lament for forest-based biofuel production

Author

Listed:
  • Zetterholm, Jonas
  • Mossberg, Johanna
  • Jafri, Yawer
  • Wetterlund, Elisabeth

Abstract

Uncertain and unstable policy support has often been claimed to be a major cause of the slower than expected deployment of technologies for production of advanced biofuels. We investigate the economic rationale of this claim by applying a real options framework incorporating uncertainties regarding energy prices, investment costs, and prevalence of policy support, in terms of an economic support per produced unit of biofuel depending on the greenhouse gas (GHG) mitigation potential. Six industrially relevant forest-based technologies for production of drop-in biofuels were evaluated. The technologies were integrated with a pulp mill and an oil refinery and are at different stages of their technical development. The results show that there is a limited economic rationale behind the claim that policy uncertainties are a major source for the stalled deployment of forest-based biorefinery technologies. Only technologies that require very high policy support to become economically viable, with associated low likeliness of investment, showed any significant sensitivity to the policy uncertainty. The results show that the stalled deployment is mainly related to the uncertainties regarding investment costs and future energy prices — and not related to the specific policy uncertainty. The results show that the stalled deployment is mainly related to the uncertainties regarding investment costs and future energy prices. This results in technologies with lower sensitivity with respect to these uncertainties have a larger chance of becoming commercially relevant investment options. The findings show that reduced policy uncertainty will neither lead to earlier investments nor improve the commercial viability of emerging biorefinery technologies. Literature citing policy uncertainty as the main hindrance for commercial deployment cannot do so from an economic perspective without simultaneously investigating the impacts from investment cost and market price uncertainties. Additionally we find that if policy support is intended to promote investment in technologies with high GHG performance, it must be directed specifically to these technologies, otherwise, it is more beneficial to invest in technologies with more favourable conditions for investment and operational costs, but lower GHG performance.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:appene:v:318:y:2022:i:c:s0306261922004457
    DOI: 10.1016/j.apenergy.2022.119044
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0306261922004457
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.apenergy.2022.119044?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    2. Jafri, Yawer & Wetterlund, Elisabeth & Anheden, Marie & Kulander, Ida & Håkansson, Åsa & Furusjö, Erik, 2019. "Multi-aspect evaluation of integrated forest-based biofuel production pathways: Part 1. Product yields & energetic performance," Energy, Elsevier, vol. 166(C), pages 401-413.
    3. Näyhä, Annukka & Pesonen, Hanna-Leena, 2012. "Diffusion of forest biorefineries in Scandinavia and North America," Technological Forecasting and Social Change, Elsevier, vol. 79(6), pages 1111-1120.
    4. Hassett, Kevin A & Metcalf, Gilbert E, 1999. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," Economic Journal, Royal Economic Society, vol. 109(457), pages 372-393, July.
    5. Jafri, Yawer & Wetterlund, Elisabeth & Mesfun, Sennai & Rådberg, Henrik & Mossberg, Johanna & Hulteberg, Christian & Furusjö, Erik, 2020. "Combining expansion in pulp capacity with production of sustainable biofuels – Techno-economic and greenhouse gas emissions assessment of drop-in fuels from black liquor part-streams," Applied Energy, Elsevier, vol. 279(C).
    6. Mai-Moulin, T. & Hoefnagels, R. & Grundmann, P. & Junginger, M., 2021. "Effective sustainability criteria for bioenergy: Towards the implementation of the european renewable directive II," Renewable and Sustainable Energy Reviews, Elsevier, vol. 138(C).
    7. Schachter, J.A. & Mancarella, P., 2016. "A critical review of Real Options thinking for valuing investment flexibility in Smart Grids and low carbon energy systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 261-271.
    8. Sarah L. Stattman & Aarti Gupta & Lena Partzsch & Peter Oosterveer, 2018. "Toward Sustainable Biofuels in the European Union? Lessons from a Decade of Hybrid Biofuel Governance," Sustainability, MDPI, vol. 10(11), pages 1-17, November.
    9. World Bank, "undated". "State and Trends of Carbon Pricing 2020 [Situación y tendencias de la fijación del precio al carbono 2020]," World Bank Publications - Reports 33809, The World Bank Group.
    10. Connolly, D. & Mathiesen, B.V. & Ridjan, I., 2014. "A comparison between renewable transport fuels that can supplement or replace biofuels in a 100% renewable energy system," Energy, Elsevier, vol. 73(C), pages 110-125.
    11. Magdalena Fallde & Johan Torén & Elisabeth Wetterlund, 2017. "Energy System Models as a Means of Visualising Barriers and Drivers of Forest-Based Biofuels: An Interview Study of Developers and Potential Users," Sustainability, MDPI, vol. 9(10), pages 1-19, October.
    12. Hamelin, Lorie & Borzęcka, Magdalena & Kozak, Małgorzata & Pudełko, Rafał, 2019. "A spatial approach to bioeconomy: Quantifying the residual biomass potential in the EU-27," Renewable and Sustainable Energy Reviews, Elsevier, vol. 100(C), pages 127-142.
    13. Markel, Evan & Sims, Charles & English, Burton C., 2018. "Policy uncertainty and the optimal investment decisions of second-generation biofuel producers," Energy Economics, Elsevier, vol. 76(C), pages 89-100.
    14. Gazheli, Ardjan & van den Bergh, Jeroen, 2018. "Real options analysis of investment in solar vs. wind energy: Diversification strategies under uncertain prices and costs," Renewable and Sustainable Energy Reviews, Elsevier, vol. 82(P3), pages 2693-2704.
    15. 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.
    16. Jafri, Yawer & Wetterlund, Elisabeth & Anheden, Marie & Kulander, Ida & Håkansson, Åsa & Furusjö, Erik, 2019. "Multi-aspect evaluation of integrated forest-based biofuel production pathways: Part 2. economics, GHG emissions, technology maturity and production potentials," Energy, Elsevier, vol. 172(C), pages 1312-1328.
    17. Charles R. Harris & K. Jarrod Millman & Stéfan J. Walt & Ralf Gommers & Pauli Virtanen & David Cournapeau & Eric Wieser & Julian Taylor & Sebastian Berg & Nathaniel J. Smith & Robert Kern & Matti Picu, 2020. "Array programming with NumPy," Nature, Nature, vol. 585(7825), pages 357-362, September.
    18. Ghoddusi, Hamed, 2017. "Blending under uncertainty: Real options analysis of ethanol plants and biofuels mandates," Energy Economics, Elsevier, vol. 61(C), pages 110-120.
    19. Zetterholm, Jonas & Wetterlund, Elisabeth & Pettersson, Karin & Lundgren, Joakim, 2018. "Evaluation of value chain configurations for fast pyrolysis of lignocellulosic biomass - Integration, feedstock, and product choice," Energy, Elsevier, vol. 144(C), pages 564-575.
    20. Akbari, Maryam & Oyedun, Adetoyese Olajire & Kumar, Amit, 2018. "Ammonia production from black liquor gasification and co-gasification with pulp and waste sludges: A techno-economic assessment," Energy, Elsevier, vol. 151(C), pages 133-143.
    21. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    22. Karasu, Seçkin & Altan, Aytaç & Bekiros, Stelios & Ahmad, Wasim, 2020. "A new forecasting model with wrapper-based feature selection approach using multi-objective optimization technique for chaotic crude oil time series," Energy, Elsevier, vol. 212(C).
    23. Ji Wu & Jing Zhang & Shiyu Zhang & Liping Zou, 2020. "The economic policy uncertainty and firm investment in Australia," Applied Economics, Taylor & Francis Journals, vol. 52(31), pages 3354-3378, June.
    24. Kevin A. Hassett, 1999. "Tax Policy and Investment," Books, American Enterprise Institute, number 53049, September.
    25. Li, Yihua & Tseng, Chung-Li & Hu, Guiping, 2015. "Is now a good time for Iowa to invest in cellulosic biofuels? A real options approach considering construction lead times," International Journal of Production Economics, Elsevier, vol. 167(C), pages 97-107.
    26. Liu, Guanchun & Zhang, Chengsi, 2020. "Economic policy uncertainty and firms' investment and financing decisions in China," China Economic Review, Elsevier, vol. 63(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sun, Bo & Fan, Boyang & Zhang, Yifan & Xie, Jingdong, 2023. "Investment decisions and strategies of China's energy storage technology under policy uncertainty: A real options approach," Energy, Elsevier, vol. 278(PA).
    2. Sun, Bo & Fan, Boyang & Wu, Chun & Xie, Jingdong, 2024. "Exploring incentive mechanisms for the CCUS project in China's coal-fired power plants: An option-game approach," Energy, Elsevier, vol. 288(C).
    3. Lin, Boqiang & Zhao, Hengsong, 2023. "Tracking policy uncertainty under climate change," Resources Policy, Elsevier, vol. 83(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fedorova, Elena & Ledyaeva, Svetlana & Drogovoz, Pavel & Nevredinov, Alexandr, 2022. "Economic policy uncertainty and bankruptcy filings," International Review of Financial Analysis, Elsevier, vol. 82(C).
    2. Linnerud, Kristin & Andersson, Ane Marte & Fleten, Stein-Erik, 2014. "Investment timing under uncertain renewable energy policy: An empirical study of small hydropower projects," Energy, Elsevier, vol. 78(C), pages 154-164.
    3. Davison, Matt & Merener, Nicolas, 2023. "Equilibrium and real options in the ethanol industry: Modeling and empirical evidence," Journal of Commodity Markets, Elsevier, vol. 31(C).
    4. Klaus Wälde, 2003. "Endogenous Business Cycles and Growth," CESifo Working Paper Series 920, CESifo.
    5. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2014. "Economic policy uncertainty and firm-level investment," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 42-53.
    6. Castellini, Marta & Menoncin, Francesco & Moretto, Michele & Vergalli, Sergio, 2021. "Photovoltaic Smart Grids in the prosumers investment decisions: a real option model," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).
    7. Dibiasi, Andreas & Abberger, Klaus & Siegenthaler, Michael & Sturm, Jan-Egbert, 2018. "The effects of policy uncertainty on investment: Evidence from the unexpected acceptance of a far-reaching referendum in Switzerland," European Economic Review, Elsevier, vol. 104(C), pages 38-67.
    8. Pennings, Enrico, 2005. "How to maximize domestic benefits from foreign investments: the effect of irreversibility and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 29(5), pages 873-889, May.
    9. Alam, Ahmed W. & Farjana, Ashupta & Houston, Reza, 2023. "Firm investment steering through state-level policy uncertainty," Finance Research Letters, Elsevier, vol. 58(PC).
    10. Niemann, Rainer, 2006. "The impact of tax uncertainty on irreversible investment," arqus Discussion Papers in Quantitative Tax Research 21, arqus - Arbeitskreis Quantitative Steuerlehre.
    11. Panteghini Paolo, 2001. "On Corporate Tax Asymmetries and Neutrality," German Economic Review, De Gruyter, vol. 2(3), pages 269-286, August.
    12. Ramjerdi, Farideh & Fearnley, Nils, 2014. "Risk and irreversibility of transport interventions," Transportation Research Part A: Policy and Practice, Elsevier, vol. 60(C), pages 31-39.
    13. La-Bhus Fah Jirasavetakul & Mr. Antonio Spilimbergo, 2018. "Economic Policy Uncertainty in Turkey," IMF Working Papers 2018/272, International Monetary Fund.
    14. Pawlina, Grzegorz & Kort, Peter M., 2005. "Investment under uncertainty and policy change," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1193-1209, July.
    15. Wen, Xingang & Hagspiel, V. & Kort, Peter M., 2017. "Subsidized Capacity Investment under Uncertainty," Other publications TiSEM 4c7a7c87-a34c-4934-a910-5, Tilburg University, School of Economics and Management.
    16. 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.
    17. Chen, Yu-Fu & Funke, Michael, 2003. "Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision," HWWA Discussion Papers 234, Hamburg Institute of International Economics (HWWA).
    18. Klaus Abberger & Andreas Dibiasi & Michael Siegenthaler & Jan-Egbert Sturm, 2016. "The Effect of Policy Uncertainty on Investment Plans," KOF Working papers 16-406, KOF Swiss Economic Institute, ETH Zurich.
    19. Nagy, Roel L.G. & Hagspiel, Verena & Kort, Peter M., 2021. "Green capacity investment under subsidy withdrawal risk," Energy Economics, Elsevier, vol. 98(C).
    20. Bart M. Lambrecht & Grzegorz Pawlina, 2010. "Corporate Finance and the (In)efficient Exercise of Real Options," Multinational Finance Journal, Multinational Finance Journal, vol. 14(3-4), pages 189-217, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:appene:v:318:y:2022:i:c:s0306261922004457. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.