Ex-Ante Study of Biofuel Policies–Analyzing Policy-Induced Flexibility

Abstract

A variety of policy types are available to foster the transition to a low-carbon economy. In every sector, including transportation, heat and power production, policymakers face the choice of what type of policy to adopt. For this choice, it is crucial to understand how different mechanisms incentivize investments in terms of improving their profitability, shaping the flexibility available for investors, and how they are affected by the surrounding uncertainty. This paper focuses on transportation-biofuel policies, particularly on the financial incentives put on the bio-component of fuel and the combination of using penalties and tax-relief. Delivery of vital policymaking insights by using two modern simple-to-use profitability analysis methods, the pay-off method and the simulation decomposition method, is illustrated. Both methods enable the incorporation of uncertainty into the profitability analyses, and thus generate insight about the flexibilities involved, and the factors affecting the results. The results show that the combination of penalties and tax-relief is a way to steer fuel-production towards sustainability. The two methods used for analysis complement each other and provide important insights for analysis and decision-making beyond what the commonly used profitability analysis methods typically provide.

The Importance of Intelligent Colouring for Simulation Decomposition in Environmental Analysis

“…The visual analytics of Sim-Dec have been employed in a variety of environmentally-related system dynamics settings. One of the first applications of SimDec involved a renewable energy policy analysis, in which the policy design features were analyzed in terms of the incentives they created for renewable energy investors (Kozlova et al, 2017;Ruponen et al, 2021). In these applications, SimDec was able to produce important insights into how different features of the policy interact with each other and how the investment project must be designed in order to achieve the maximum benefit from the financial support under uncertain market conditions.…”