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

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  • Liu, Shen
  • Colson, Gregory J.
  • Wetzstein, Michael E.

Abstract

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considers the probability of a policy being implemented if it is not in effect and the probability of it being withdrawn if it is in effect.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

Suggested Citation

  • Liu, Shen & Colson, Gregory J. & Wetzstein, Michael E., 2015. "Disruptive Policy Impacts on Biodiesel Investment: The Third Leg in 3-T Policy," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205582, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea15:205582
    DOI: 10.22004/ag.econ.205582
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    Keywords

    Resource /Energy Economics and Policy; Risk and Uncertainty;

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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