Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables

T. M. Schmit, J. Luo, J. M. Conrad

Research output: Journal article publicationJournal articleAcademic researchpeer-review

24 Citations (Scopus)

Abstract

U.S. ethanol policies have contributed to changes in the levels and the volatilities of revenues and costs facing ethanol firms. The implications of these policies for optimal investment behavior are investigated through an extension of the real options framework that allows for the consideration of volatility in both revenue and cost components, as well as the correlation between them. The effects of policy affecting plant revenues dominate the effects of those policies affecting production costs. In the absence of these policies, much of the recent expansionary periods would have not existed and market conditions in the late-1990s would have led to some plant closures. We also show that, regardless of plant size, U.S. ethanol policy has narrowed the distance between the optimal entry and exit curves, implying a more narrow range of inactivity and indicative of a more volatile evolution for the industry than would have existed otherwise.

Original languageEnglish
Pages (from-to)1194-1205
Number of pages12
JournalEnergy Economics
Volume33
Issue number6
DOIs
Publication statusPublished - 1 Nov 2011
Externally publishedYes

Keywords

  • Ethanol
  • Investment
  • Policy
  • Real options
  • Volatility

ASJC Scopus subject areas

  • Economics and Econometrics
  • Energy(all)

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