Full Title: Federal Financial Incentives to Induce Early Experience Producing Unconventional Liquid Fuels
Author(s): Frank Camm, James T. Bartis, Charles J. Bushman
Publisher(s): The RAND Corporation
Publication Date: November 1, 2008
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The government, as a principal, may seek 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 and assess packages 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. Looking across many alternative futures helps the authors design incentive packages that are robust from a private perspective and limit costs to the government. As these principles would predict, cash-flow analysis demonstrates the cost-effectiveness of using investment incentives rather operating incentives and the powerful effect that a higher debt share has on the private rate of return. Cash-flow analysis also reveals specific opportunities that the government has to change course among policy alternatives as it seeks the lowest-cost way to increase the private rate of return associated with a project.