Cost Effectiveness of Alternative Policies to Induce Investment in Cellulosic Biofuels

Over the past few years cellulosic biofuel production has continually fell short of the mandates set by the Renewable fuel standard. This has continued to happen despite positive predictions in the net present value of a cellulosic biofuel plants and government subsidy/assistance programs. The present study evaluates the impact of alternative policy instruments on the price that firms require to enter the market. Some policies aim at increasing the mean returns on investment without affecting uncertainty (annual subsidy and establishment cost subsidy), others are designed to reduce uncertainty without affecting the mean (long-term production contracts), and finally some instruments affect both (blending mandates and price supports). Results from a parameterized real options model analyzing and comparing the cost effectiveness of different policies show, on a per dollar basis, that not all policies are created equal when it comes to lowering the price premium required for entry into the industry. Our analysis finds that a biofuel price support constitute the most cost-effective policy option.