Investment in Cellulosic Biofuel Refineries: Does the Waivable Mandate Matter?

Ruiqing Miao, Bruce Babcock and David Hennessy

No 61165, 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado from Agricultural and Applied Economics Association

Abstract: Renewable Fuel Standard (RFS) aims to support investment in cellulosic biofuel refineries by mandating a floor on the amount of biofuels being consumed in every calendar year. Tradable Renewable Identification Numbers (RINs) is the market mechanism by which the mandates are to be met. But the RFS allows for a waiver of the mandates. In this paper we construct a conceptual model to study the impact of RINs on stimulating investment in cellulosic biofuel refineries under a waivable mandate. In a two-period framework, we compare the first-period investment level in three scenarios: (1) laissez-faire, (2) non-waivable mandate implemented through RINs, and (3) waivable mandate implemented through RINs. We find that RINs associated with a waivable mandate may or may not increase the first-period investment level depending on the price distribution of cellulosic biofuel in the future and the cost of biofuel production. Under certain conditions about the second-period price distribution of cellulosic biofuels, RINs, no matter under a non-waivable mandate or under a waivable mandate, do not affect the investment level in the first period. If these distribution conditions do not hold and investors' marginal costs are constant, then a non-waivable mandate can increase the period one investment level but a waivable mandate will not. A waivable mandate, even when it has no impact on the period-one investment level, always increase the expected profit of investors who invest in the first period. However, if investors' marginal costs are strictly increasing, then even a waivable mandate can stimulate the period-one investment level.

Keywords: Industrial Organization; Resource/Energy Economics and Policy; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 1
Date: 2010-04-30
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea10:61165

DOI: 10.22004/ag.econ.61165

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