Benefits of blending mandate in sustainable economies

Abstract

In Europe biofuels are subject to two major regulations that fix targets for a blending share within 2020 and 2030. Blending mandates are a crucial tool for decreasing greenhouse gas emissions and for stimulating investments in ethanol plants. The investment value in ethanol plant can be viewed as a real option, more precisely as a straddle option. Real options are investment analysis tools that capture the value of managerial flexibility of strategic decisions in dynamic environments. A real option model for evaluating an investment in ethanol plant is discussed here. According to the model, higher ethanol blending shares correspond to higher investment values of the production plant. This confirms the assumption that policy measures like blending mandates help cities to be more sustainable from a pollution reduction perspective, and they stimulate investments in biofuels due to higher profits.