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Federal Financial Incentives to Induce Early Experience Producing Unconventional Liquid Fuels

Federal Financial Incentives to Induce Early Experience Producing Unconventional Liquid Fuels

Frank Camm
James T. Bartis
Charles J. Bushman
Copyright Date: 2008
Edition: 1
Published by: RAND Corporation
Pages: 96
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  • Book Info
    Federal Financial Incentives to Induce Early Experience Producing Unconventional Liquid Fuels
    Book Description:

    The government, as a principal, may seek to induce a private investor, as anagent, to build and operate an unconventional-oil production plant topromote early production experience with such plants. Facing significantuncertainty about the future, it also wants to limit the cost to the publicof doing this. This report offers an analytic way to design and assesspackages of policy instruments that the government can use to achieve itsgoal.

    eISBN: 978-0-8330-4865-3
    Subjects: Political Science, Technology

Table of Contents

  1. Front Matter
    (pp. i-ii)
  2. Preface
    (pp. iii-iv)
  3. Table of Contents
    (pp. v-vi)
  4. Figures
    (pp. vii-viii)
  5. Tables
    (pp. ix-x)
  6. Summary
    (pp. xi-xiv)
  7. Acknowledgments
    (pp. xv-xvi)
  8. Abbreviations
    (pp. xvii-xviii)
  9. CHAPTER ONE Introduction
    (pp. 1-2)

    Rising petroleum prices have prompted interest in using coal to manufacture liquid fuels that can displace petroleum-derived gasoline and diesel fuels. Coal is abundant in the United States and elsewhere, and coal-to-liquids (CTL) technology is commercially viable. But great uncertainties persist about the cost and performance of new CTL production facilities, the price of petroleum over the life of such facilities, the value or cost of carbon dioxide (CO2) coproduced with liquid fuels in a CTL facility, and other factors relevant to the economic viability of new CTL production facilities.¹ In the face of such uncertainty, this technical report describes...

  10. CHAPTER TWO Designing an Effective Long-Term Public-Private Relationship
    (pp. 3-12)

    When the federal government seeks to encourage a private firm to build and operate a plant, it faces a “principal-agent” problem; the government wants to induce a private investor to do something in the government’s interest. As a principal, the government seeks to design a cost-effective package of financial policies that will induce a private firm—an agent—to build and operate the plant.¹ We take the goal of inducing early CTL production experience as given. The government wants to induce such early experience to kick-start the development of a new industry by accelerating the construction and operation of first-of-a-kind...

  11. CHAPTER THREE Assessing Financial Effects Under Uncertainty
    (pp. 13-18)

    The qualitative factors described in Chapter Two can help us choose what type of financial instruments to consider in any incentive package. Detailed cash-flow analysis allows us to assess the effects of choosing specific values for the attributes of these instruments—e.g., the level of a price support, the number of barrels in a purchase guarantee, the size of a tax credit, the specific terms of a net income–sharing agreement. As we go forward, please keep in mind that the cash-flow analyses presented here do not attempt to capture the negative effects of moral hazard and adverse selection discussed...

  12. CHAPTER FOUR Policy Effects with 100-Percent Equity Financing
    (pp. 19-32)

    This chapter uses the model described in Chapter Three to assess the effects of various packages of public policies when the investor uses 100-percent equity financing. Figure 4.1 presents baseline findings on which we will build through the remainder of this chapter. We will use the format in this figure repeatedly as we consider variations on this baseline. The figure shows real private after-tax IRR on the horizontal axis and real government NPV on the vertical axis. Dashed axes at a private after-tax IRR of 10 percent and a government NPV of zero offer benchmarks the reader can use to...

  13. CHAPTER FIVE Policy Effects with Debt Financing
    (pp. 33-42)

    The potential for using debt financing affects our analysis in two ways. First, for any particular set of policy instruments, it immediately leads to the potential for higher levels of real private IRR at any level of real government NPV—for policies with lower CRIOP levels. Second, it opens the door for government-provided loan guarantees for any loans an investor uses. We consider each effect in turn and then examine their combined effect on the outcomes associated with other policy instruments available to the government.

    This chapter starts by showing how IRR rises when debt share increases. It then presents...

  14. CHAPTER SIX Implications for Robust Financial-Incentive Packages
    (pp. 43-50)

    Using the spreadsheet underlying the cash-flow results described in Chapter Five, we can scan the outcomes associated with that range of average oil prices and ask how various financial-incentive packages affect private IRR and government NPV in two cases. In case A, project costs match the reference case, and CO2management imposes no costs other than those already assumed—namely, the costs for compression and dehydration of captured CO2. In case B, project costs match the high-price case, and CO2costs $10 per ton to transport and sequester. Scanning these packages reveals a small number of packages that place private...

  15. CHAPTER SEVEN Can Formal Source Selection Help the Government Create an Integrated Policy?
    (pp. 51-52)

    The discussion in Chapter Two (quite deliberately) examines the policy instruments that the government might use to induce private participation in a project in terms of language normally used to discuss the design of voluntary agreements. The principles in Chapter Two spring from historical experience with voluntary agreements that have successfully survived the test of time in competitive environments. These principles promote the use of various policy instruments in designing voluntary agreements. Each agreement uses a different set of instruments to reflect the specific characteristics and mutual interests of the parties to the agreement. Agreements between the government and potential...

  16. CHAPTER EIGHT Conclusions
    (pp. 53-54)

    This technical report is based on the assumption that the government, as a principal, seeks to induce a private investor, as an agent, to build and operate an unconventional-oil production plant to promote early production experience with such plants. Given this goal, facing significant uncertainty about the future, the government wants to limit the cost to the public treasury of doing this. This report offers an analytic way to design a package of policy instruments that the government can use to achieve its goal.

    It starts with general principles of the economic theories of contracting and agency. These remind us...

  17. APPENDIX A Structure of the Spreadsheet Analysis That Implements the Cash-Flow Model
    (pp. 55-64)
  18. APPENDIX B How Debt and Loan Guarantees Affect Investors and the Government
    (pp. 65-74)
  19. References
    (pp. 75-78)