Three essays on U.S. renewable energy policies

Abstract

This study investigates three issues on U.S. renewable energy markets. The primary objective is to describe how U.S. renewable energy policies affect solar photovoltaic (PV) and biodiesel industries.

The first essay develops and estimates an analytical framework for assessing the optimal solar energy subsidy, which takes into account the environment, health, employment, and electricity accessibility benefits. Results indicate that an optimal subsidy is positively affected by the marginal external benefit. Calibrating the model, using published elasticities, yields estimates of the optimal solar energy subsidy equaling to approximately $0.02 per kilowatt hour when employment effects are omitted. The estimated optimal subsidy is in line with many current state feed-in-tariff rates, giving support to these initiatives aimed at fostering solar energy production.

The second essay examines price volatility spillovers among U.S. crude oil, diesel, biodiesel, and soybeans based on weekly prices from 2007 to 2014. A univariate EGARCH model along with a DCC-MGARCH model are employed. The univariate EGARCH model provides evidence of double-directional price-volatility spillovers between biodiesel and soybean markets and between crude oil and biodiesel markets. Further there exists unidirectional price-volatility spillovers from the crude oil market to the soybean market and from the diesel market to the biodiesel market. The DCC-MGARCH model indicates time-varying conditional correlations among markets and the pairwise conditional correlations fluctuated from 2008 to 2009.

The third essay investigates the effect of Poisson type policy jumps on biodiesel investment through the theory of investment under uncertainty. The analysis considers the probability of a policy being implemented if it is not in effect and the probability of it being withdrawn if it is in effect. As an application, the policy switching regime of the discontinuous federal tax credit of $1.00 per gallon on biodiesel is modeled as a Poisson jump process. Results support that time inconsistent government policies do lead to market uncertainty. The analysis reveals a pronounced negative impact on the decisions to invest in a biodiesel refinery.