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Market Uncertainty and Policy Effects on Bioenergy Investments : A Real Options Approach

Research domain:
Policies and institutions

Project duration:
31.08.2009 - 30.12.2014

The dissertation is concerned with possible future scenarios of bioenergy production from agricultural crops. Its main objective is to analyze the effects of multiple uncertainties, stemming from the interrelated output and factor markets, on irreversible time-lagged bioenergy investments under different policy regimes. These effects are studied in a real options-based stochastic partial equilibrium model that represents the interplay of the global energy market and the local bioenergy and food markets. The numerically obtained results reveal that for irreversible investment project characterized by a longer time-to-build, a high share of variable production costs, and the possibility to suspend production, increasing uncertainty may lead to higher investment incentives. The dissertation further examines the implications of crop-based bioenergy production for food prices and macroeconomic welfare.