Examining the effects of uncertainty on second-generation biofuel investment by using a two stochastic process approach

Investment in the production of advanced biofuel has been encouraged by the federal regulation which enacted the Renewable Fuel Standard (RFS). However, investments and production of advanced biofuel has been lower than expected in recent years, leading regulators to substantially reduce required volumes of advanced biofuel. Real option analysis is used to help explain why uncertainty has reduced investment in advanced biofuel and eroded the requirements put forth by USEPA. This study examines the effect of uncertainty and irreversibility on a second-generation biofuel investment while considering the volatility of Renewable Identification Number (RIN) price, conventional fuel price and their correlations by applying a two stochastic variable approach