Abstract
AbstractA promising feedstock for large‐scale production of sustainable jet biofuel is the inedible oilseed Brassica carinata (referred to simply as “carinata”), but transitioning to large‐scale fuel production entails significant economic uncertainty and requires substantial up‐front capital requirements for biorefinery construction. Furthermore, for carinata and other feedstocks attempting to compete within the established fossil jet fuel market, historically volatile aviation fuel prices affect the economic feasibility and return of biorefinery investments. In this study, we assess the impact of jet fuel price volatility on the return on investment in a carinata biorefinery employing a real options analysis (ROA). The key advantage of ROA over traditional net present value (NPV) analysis is that it simultaneously assesses the optimal timing for investments and the impact of jet fuel price dynamics on the likelihood of positive economic returns from investments in processing plants. Given the nonstationary nature of jet fuel prices and the presence of structural breaks, the price series are modeled as a geometric Brownian motion. Taking into account the volatility of jet fuel price, the ROA price threshold for a profitable investment is 45% greater than the NPV threshold. The ROA model identifies the necessary market conditions for a profitable investment and highlights the importance of considering market price dynamics before making substantial capital investments in a carinata biorefinery.
Highlights
Economic Impact: The aviation industry is a significant component of the global economic system with a total annual impact of $2.7 trillion (3.6% of global GDP)
CO2 emissions per seat kilometer have dropped by 50% since 1990
CO2 Emissions: In 2017, the fossil fuel dependent aviation industry contributed about 2% (859 million tons) of total human-produced CO2 emissions globally
Summary
Selected Paper prepared for presentation at the 2020 Agricultural & Applied Economics Association Annual Meeting. Drop-in Jet Biofuel from Carinata: A Real Options Analysis of Processing Plant Investments. Economic Impact: The aviation industry is a significant component of the global economic system with a total annual impact of $2.7 trillion (3.6% of global GDP). Industrial Scale Fuel Production: As with other agricultural biofuels, developing the supply chain and processing infrastructure requires significant financial investments and faces structural challenges from incumbent fuel supply sources and uncertain market price conditions. Oil Processing Plant Feasibility: Previous studies (e.g., Chu et al, 2017; McGarvey and Tyner, 2018) estimate, depending on multiple factors such as production capacity and production methods, significant investment costs ($33.5-$104 million) and annual operating costs ($12.8-$109 million) for an industrial scale carinata oil processing facility
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