Measuring and addressing investment risk in the second-generation biofuels industry
Despite the Renewable Fuel Standard and other policy measures, U.S. production of second-generation (cellulosic and algal) biofuels has lagged expectations and falls far short of goals set at the direction of the Energy Independence and Security Act (EISA). Several cellulosic biofuel technologies have been demonstrated, but one of the primary challenges to commercial-scale development is inadequate access to investment capital for commercialization.
ICCT has collaborated with researchers at Johns Hopkins University to analyze the share prices of seven of nine publicly listed cellulosic and algal biofuel producers using the capital assets pricing model (CAPM), a common investment assessment tool. The analysis shows that these stocks have been significantly more volatile than the U.S. market as a whole since 2010. Under the CAPM, other things being equal, prospective investors in this sector would require a 15% expected annual rate of return, compared to a recent average rate of return of the S&P 500 of 8%. Such a high required return is a barrier to investment at a critical juncture in development of the cellulosic biofuels industry in the U.S.
This paper proposes minor changes to an existing federal tax incentive for second-generation biofuels in order to mitigate the elevated risk of investing in this industry. The proposed changes are:
- Extend the existing second generation biofuel producer tax credit until 1 billion cellulosic RINs have been generated.
- Allow companies eligible for the second-generation biofuel producer tax credit to opt instead for the business energy investment tax credit, worth 30% of expenditures on new property used in the production of second-generation biofuel or in new or retrofitted facilities.
- Allow producers to opt for a grant in lieu of the investment tax credit, or make the investment tax credit refundable and/or transferable.
A precedent for these changes exists in tax policy for other renewables.