Flexi-fueled Vehicles: overcoming carbon lock-in and microeconomic impacts

Carla M. de Souza e Silva PhD Student Department of Economics Federal University of Rio de Janeiro carla@ie.ufrj.br carla.souzaesilva@uol.com.br
Abstract
Flexi-fueled vehicle (FFV) is an alternative fueled vehicle that can run using two types of fuels in any proportion. The most widely developed FFV is the one that can burn gasoline or ethanol or with any mix of both fuels. The objective of this paper is to analyze this technology as a schumpeterian innovation from two perspectives. From a broad perspective, it will be shown that FFV can be an important step to overcome the barriers imposed by carbon lock-in concept developed by Unruh (2000). This analysis will be based in the study of the three leading experiences on the introduction of FFV into market: USA, Sweden and Brazil. From a microeconomic perspective it will be discussed how FFV can change fuel market organization by permitting the immediate arbitrage between gasoline and ethanol from demand side.

1. Introduction Schumpeter (1934) defines innovation as follows: i) the introduction of a new good or a new quality of a good; ii) the introduction of a new production method; iii) the opening of a new market; iv) the access of a new source of raw material; v) the creation or destruction of a monopoly position in a market. Flexi-fueled vehicle (FFV) is an alternative fueled vehicle that can run using two types of fuels in any proportion. The most widely developed FFV is the one that can burn gasoline or ethanol or with any mix of both fuels. Although not being a radical technological innovation it can be seen as a schumpeterian innovation from two points of view. From a broad perspective, it will be shown that FFV can be an important step to overcome the barriers imposed by carbon lock-in. This concept has been developed by Unruh (2000), according to which there are systemic forces that impede the adoption of environmentally friendly end-use technologies in transportation sector. This analysis will be based in the study of the three leading experiences on the introduction of FFV into market: USA, Sweden and Brazil. From a microeconomic perspective it will be discussed how FFV can change fuel market organization by permitting the immediate arbitrage between gasoline and ethanol from demand side. In particular, it will be discussed that FFV reduces market power of ethanol producers. 2. Brief technology description FFVs are a simple technological innovation. Compared to a conventional gasoline car, there is only one major additional part: the fuel sensor that detects the ethanol/gasoline ratio. This sensor identifies the fuel mix and informs this proportion to the electronic central unit (ECU). In fact, the technological step that permitted the creation of an automatic flexi-fueled car was the introduction of electronics in gasoline engine functioning in the 80s. The ECU have been re-programmed to adjust the engine functioning to optimize fuel burn and car efficiency due to the differences in octane1 and stochiometric ratio of the two fuels. Because ethanol is corrosive, a number of other parts on the FFVs fuel delivery system are modified so that they are ethanol compatible. Any part that comes in contact with ethanol, has been slightly modified. Normally, these parts include a stainless steel fuel tank and Teflon lined fuel hoses. (Ballerini et all, 2006). Another challenge concerning the use of ethanol as a substitute to gasoline is the difference in vapor pressure. In Brazil, the alternative to overcome this issue was the use of an additional gasoline tank to initiate the engine when the temperature is low. The sensor identifies the fuel mix and depending on the
Gasoline presents MON of 85 and ethanol presents MON of 92. This difference in octane would require a engine with flexible compression rate. This is not yet viable in commercial terms.
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temperature it actions automatically the use of the gasoline contained on the additional tank before switching to the ethanol fuel. This alternative has been inherited from the ethanol-dedicated cars used in Brazil in the 80s. Another way to overcome this issue is the adoption of a mixture of 15% gasoline on ethanol, the use of the so-called E85. There are others solutions already studied that are being used in new FFVs particularly in Sweden (due to severe climate conditions in winter) and in Brazil (to substitute the additional tank) that concerns the warming of injection system. (Ballerini et al, 2006) In terms of consumption, the difference in heating power between ethanol and gasoline leads to a greater consumption when running on pure ethanol2. On the other hand the greater octane permits a better efficiency on the engine, which could mitigate this effect. However, a comparison made by Fuel Economy (2007) comparing different FFV models produced in 2000 in US shows that on average a FFV runs only 73% of the miles run by the same vehicle when burning gasoline3. 3. Historical background: The ethanol lock-out The history of ethanol as a motor fuel and Flexi Fuel Vehicles is in the heart of Otto cycle engines history. Nicholas Otto had already created an engine that used ethanol as fuel prior to its internal combustion engine based on gasoline spark ignition. Henry Ford built its first vehicle to run on pure ethanol in 1896, and in 1906 he makes the first Flexi Fueled Vehicle, a vehicle that could run on ethanol, gasoline or a combination of both. The owner of the vehicle determined the mix mechanically (Lorenzetti, 1996). Both actors were attracted by the superior quality of ethanol compared to gasoline as a spark ignition fuel. Ethanol presents two majors technical advantages over gasoline as a fuel to spark ignition engines: a) a greater octane index, which allows a greater efficiency in converting chemical energy in mechanical energy, b) oxygen content, which allows for a cleaner burn resulting in lower pollutant emissions. Although technically superior, ethanol lost competition to gasoline as the dominant fuel and become locked-out by historical events and increasing returns. First of all, its production process based on corn made ethanol more expensive than its competitor derived from oil. As a hazardous by-product of kerosene production, gasoline was much cheaper than ethanol (Unruh, 2000). Ethanol has been a traditional lighting fuel in USA, but during the civil war it has been taxed in order to raise funds to war. Its production and use as lighting fuel has decreased until tax elimination in 1906. However, in 1919 US government prohibits pure ethanol sales, and mandates its mixture with gasoline in order to prevent its use as beverage. This prohibition will only be suspended in 1933. (Lorenzetti, 1996) This initial competition period was crucial to the emergence of gasoline as the dominant design on automobile industry, because it had timing to explore increasing returns. According to Arthur (1994), increasing returns can derive from four major effects: i) scale economics, that is, the reduction in unit production costs provided by the presence of increasing returns to scale; ii) learning economics - cost reductions and productivity improvement due to the accumulation of knowledge, specialized skills and experience -; iii) adaptive expectations increasing adoption reduces uncertainty to producers and consumers -; iv) network economies, which arises from network externalities (the value to users grow as network grows in size) and relates systemic relations among technologies, infrastructures, interdependent industries and users.

Measured in Kilojoules/liters, based on Prost et al (2006) these are the respective lower heating values: Standard Gasoline (32389); Ethanol (21283); E85 (22950); E23 (29834). 3 In fact, the ratio of lower heating values between E85 and standard gasoline is 72%. It takes also in consideration the gasoline used as a denaturant. In Brazil, the magazine guia 4 rodas (4 wheel guide) made a comparison of different FFV running on urban traffic and shows the same difference on average distance percorrida using the same volume of different fuels.

In terms of scale economics and learning economics, this is the period of the development of refinery techniques and international expansion of oil industry. The abundant oil supply turned the competition between ethanol and gasoline really unfair to the former. In this context, engine engineers concentrated their focus on gasoline engines, which by its turn explored as well scale and learning economics in the context of fordist production organization. However, concerning fuel competition the construction, expansion and density of gasoline distribution network in global scale organized by oil companies at this time was fundamental to the locking out of ethanol as a spark ignition fuel. The interest on fuel ethanol will be re-born by a historical-economic event: the oil crisis in the 70s. 4. Development and launching of FFV: overcoming the lock-in The concept of technological lock-in regards the dominance of one technology over others competing technologies (Arthur, 1989). Unruh (2000) highlights a particular characteristic of this technological lockin in transportation sector: the existence of systemic forces that impedes the adoption of environmentally friendly end-use technologies. He names this effect as a carbon lock-in. industrial economies have become locked into fossil fuel-based technological systems through a pathdependent process driven by technological and institutional increasing returns. Pp. 1 In this context, it will be argued that FFV can be an important step toward the overcoming the lock-in in transportation sector. In addition, as it permits the use of a renewable fuel, it can also be considered as a way to overcome this carbon lock-in. But, first it is important to understand which elements contributed to the development of this technology and the successful commercial launching in three different countries: USA, Sweden and Brazil.
4.1 Country experiences

The first country to introduce FFV into market was USA. Flexible Fueled technology came to automobile research agenda by the end 80s with the promulgation of Alternative Motor Fuels Act (AMFA) of 19884 in USA. This act provided incentives to the production of alternative fueled vehicles by relaxing the restrictions imposed by the Corporate Average Fuel Economy (CAFE) on energy efficiency of new cars produced by automobile manufacturers5. AMFA assumed that any alternative fueled vehicle was more efficient in energy consumption and so, any alternative fueled vehicle launched by an automobile manufacturer converted in credits of energy efficiency (Department of Transportation, 2004). In fact, in the context of falling oil prices, the launching of an alternative fueled vehicle permitted automobiles companies the production of more potent, bigger and more consuming gasoline cars6 (EIA, 2005). In addition, the Energy Policy Act (1992) had an important role on the FFV development. It defined E85 (the mix 85% of ethanol and 15% gasoline) as an alternative fuel. It also established a minimum participation of FFV in public fleet, which was a great demand impulse. As pointed out by Mathieu (1998), another important interest group on this context was corn producers in US. US is one of the

5 As a means to reduce oil consumption after the oil shocks, the US government passed a regulation that intended to increase energy efficiency of vehicles by establishing average performance target to be achieved by new cars sales in terms of miles per gallon. This regulation is called the Corporate Fuel Economy CAFE 6 In 1973, the average performance of a medium passenger car in US was 14 miles pe gallon (mpg). The targets of CAFE was to achieve 18 for a 1978 model and 27,5 for a 1985 model. The incentive contained at AMFA could represent 1,2 mpg for the restant fleet produced by a company that introduced an alternative fueled vehicle on the market. For a discussion on the effects of AMFA on energy efficiency of american cars EIA:Energy Eficiency_Transportation Sector available in http://www.eia.doe.gov/emeu/efficiency/ee_ch5.htm

greatest corn producers in the world and an alternative use to corn is a means of stabilizing producers revenues. As a result of institutional regulation combined with the pressure of important interest groups (automobile industry and corn producers) FFV was commercial launched in 1992 by General Motors, being followed by Chrysler, Mercedes Benz, Ford, Dodge, Chevrolet e a Nissan. Based on data provided by EIA (2006) and Prost et al (2006) we can estimate that the actual FFV fleet in United States is around 6,5 millions vehicles7. E85 FFV responded for 4% of new cars sales in the first half on 2006.
Figure 1 - Overview of E85 FFV in US(1000 cars)
1000 900 800 700 600 500 400 300 200 100 0 600,8 FFV sales 835,0 859,3 674,7 581,8 FFV in use 743,9

100,3 8,8 2000 2001

121,0

133,8

146,2 0,0

2002

2003

2004

2005*

* there is no data available for FFV in use for 2005

The flexibility is a fundamental characteristic due to the lower spread of supply infrastructure in the country. It is estimated that there is around 700 E85 filling stations out of 170 thousands in the country. The flexibility in end-use technology as provided by FFV is crucial to overcome one of the main elements of technological lock-in: network economies. Dedicated end-use technology in automobile industry depends on the construction of supply network, which involves elevated sunk costs. This imposes risks to suppliers since there are not enough vehicles running on alternative fuel. With a flexible technology the demand side of this equation is solved, and it reduces the uncertainties to suppliers on investing supply network. Particularly in the case of ethanol as an alternative fuel, its chemical characteristics (liquid) reduce the investment costs as it can use the same kind of distribution logistics as gasoline. Back to northamerican case, today it is known that most FFV owners in US are unaware of this capability of burning E85. As can be seen in Figure 1, the number of FFV in use (those believed to be intended for use as AFV) is much smaller than vehicles made available by manufacturers. This is a result of the AMFA: in order to get energy efficiency credits automobile manufacturers sell FFV all over the country, even in areas with no availability of E85. FFVs are sold by the same price as a gasoline engine model, and some models only present the FFV version. Corn producers and automobile manufacturers argue that it was important to have a great number of FFV on the road to guarantee the necessary condition to expand supply infrastructure. Nowadays there is an intense campaign to divulgate FFV models and to stimulate FFV owners to put pressure to increase ethanol supply infrastructure in the country. In Sweden the research on alternative fuels started after the oil crisis as a means to guarantee energy supply. By the end of 80s environmental was the main concern that drove policy action toward alternative fuels (Atraxi Energi, 2005). At that time, there was a competition to which kind of alternative fuel should
For 2002, the EIA estimated that the number of E-85 vehicles that are capable of operating on E85, gasoline, or both, is about 4.1 million. If we sum-up the FFV made available since then, we can get to a number around 6,3 millions FFVwithout considering 2006 data.
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be supported by policy action: methanol or ethanol. Both alcohols present roughly the same characteristics, and the research in the 70s was more concentrated on methanol. According to Atraxi Energy (2005), Swedish government followed the successful experience in introducing ethanol in US and in Brazil and decided to concentrate efforts on this fuel. Institutional organizations have been formed and had important role in this ethanol option. The first and most active one is the BioAlcohol Fuel Foundation, founded in 1983, intended to develop the production and use of biomass based ethanol in transport sector. From the beginning, this organization had the focus on stimulating the production of ethanol out of lignocellulosic raw material, since its supply is abundant in the country and there was already a good knowledge on how to handle forest residue. Supported by this initiative, SEKAB was founded in 1985, a production ethanol plant in rnskldsvik with cellulose from sulphite pulp as raw material. It also produces from wine surplus in Europe and imports ethanol from Brazil. However, according to Grahn (2004), the main political inflexion towards the support of an ethanol program was the three party energy policy agreements in 1991. Since 1980, the discussions about the phasing out of nuclear program in the country divided the three political parties: the social democrats, the liberals and the centre party. The later was known for its position against nuclear power but also by being advocate of Swedish farmers. In this sense, the author points out that the centre party traded the postponement of a decision to close down nuclear power against favourable conditions for large-scale introduction of grain-ethanol. This agreement opens space to the implementation of a set of political measures (tax exemptions, financial funding to projects aiming at producing/ using ethanol, R&D funding) that lead to an increase in ethanol use in the country. Regarding FFVs, in the beginning of 90s a Ford manufacturer started to import FFV from United States. It was already in place a government support to the use of ethanol in urban buses, a cooperation program between municipalities (Stockholm and 10 other Swedish cities) and Scania, with the aim at reducing tail pipe emissions in big cities. This program had the initial role of developing expertise on the use of ethanol as a fuel. There were however legal impediments for private persons to buy one of the imported FFV (Atraxi Energy, 2005). In addition, there was only one model available Ford Taurus - that was seen as inadequate to be used by service companies and municipalities.
Figure2:Sweden: FFV x Filling Stations

800 700 600 500 400 300 200 100 0

60000 50000 40000 30000 20000 10000 0 2001200220032004200520062007 E85 Filling stations FFV FFVs

In order to overcome these obstacles, in 1998 there was created a technical procurement initiative: an organization of interested buyers and associations the Swedish Flexi-Fuel Buyers' Consortium. The negotiations between the consortium and Ford led to the development of the first FFV in Europe: the Ford Foccus 1.6. The initial agreement involved the delivery of 3000 cars between 2001 and 2003. The final

Filling stations

Source: BAFF, 2007

price would be 500 euros lower than an equivalent gasoline Ford Focus due also to the reduction in VAT to the production of FFV. This project counted on government financial support. In 2005, Saab and Volvo launch FFV models in Swedish market. Today, total FFV fleet in Sweden is 52,3 thousands vehicles (BAFF, 2007). FFVs sales in the first half of 2006 represented 18% of total new cars sales (Prost et al, 2006). Concerning the distribution network, SEKAB associated with an oil company OK that committed itself to the erection of filling stations in each city with a minimum required number of FFV. Government funding also supports investments on flexible pumps and storage tanks resistant to ethanol. Today there are 696 E85 filling stations in Sweden (BAFF, 2007). It is worth noting that it is almost the same number of E85 filling stations in the whole United States. In Brazil, the technological development of FFV was in the mid 90s. Thanks to the ethanol Program (proalcool)8, Brazil counted on a wide ethanol supply infrastructure that covers almost 100% of total filling stations on the country (around 30 thousand). However, consumers have developed an aversion to dedicated-ethanol fueled cars the symbol of ethanol program during the 80s - since the ethanol shortage crisis by the end of 80s. At that time, due to prices spikes on sugar international market, ethanol producers devoted most part of sugarcane production to sugar9. Unlike the American case, in which flexibility was a crucial element due to the insufficient supply network, in Brazil, flexibility was the element that permitted to overcome this consumer aversion and to benefit from existing infrastructure to stimulate ethanol consumption. However, the economic context regarding oil consumption in the nineties is completely different from that of the seventies: today, Brazil is a net exporter of gasoline. In this sense, the main argument to stimulate ethanol consumption is its environmental externalities. And of course, the traditional role of ethanol and sugar production in Brazilian economy and political scenario gives producers strength as an interest group to pressure in their favor. From the point of view of automobile industry, producing FFV vehicles is also interesting because it saves costs and efforts of producing the same vehicle model in two versions (gasoline and ethanol). From the political side, in 2002 government determines that FFVs could receive the same fiscal exemption as the one applied to ethanol-dedicated cars. This incentive permitted FFV to have a final price close to gasoline cars. As a result, in May 2003 Volkswagen launches the first FFV on Brazilian market. In the same year the main automobile manufacturers in the country follow the same strategy. FFV is considered a great commercial success. FFV fleet in Brazil is already 2,5 millions and they represented 70% of total new light cars sales in 2006 and already 82,7 % of new cars sold in January 2007. (Anfavea, 2007) From these three leading experiences, we can conclude that in absolute number FFV are more developed in United States. It was a result mainly of a lobby of automobile industry to relax energy consumption restriction. In this sense, in terms of actual use as an alternative vehicle it had low impact. In the Brazilian case, the most difficult step, the construction of supply network, had already been made prior to FFV introduction. In this sense, FFV found favourable conditions and commercial introduction was a success. However, in Sweden the combination of institutional support, policy action and co-ordinated effort shows that lock-in in transportation sector can be overcome. From a broad perspective, since oil crisis, government measures taken in order to reduce oil consumption had impact on diversifying energy sources particularly in industry sector and electricity generation.
The Government support to the use of ethanol fuel started in the 70s as a response to oil crisis. The heart of the program is the mix of ethanol and gasoline in proportions that varies from 20 to 25% of ethanol anhydrous on the mix. Today this proportion is 23%. After the second oil crisis government started stimulating the production of ethanol dedicated cars. In 1988 almost all new passenger cars sales was ethanol dedicated ones. 9 In Brazil, 75% of ethanol production is produced by complex sugar mills/ distilleries that are capable of swinging from ethanol and sugar production.
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However, in transportation sector oil diversification had little impact. It is not a matter of lack of technological alternatives, but mostly a result of the technological lock in. This implies that there are systematic forces that make it difficult to change the development path of existing techno-institutional systems. In this sense, FFV is an important innovation because it gives rise to diversification of energy sources in transportation sector and the use of carbon saving and renewable fuel, the ethanol10 . It responds for the first issue: the availability end-use technology. The diversification is possible using the same kind of technical system already available concerning end-use technology (spark engines) and of supply network already established by the dominant design (because it is a liquid fuel). In this sense, based particularly on the Swedish experience, we can see that political measures, and the co-ordinated actions among private institutions and interest groups, as well as historical events, were responsible for the development of this alternative in the interior of the dominant design complex. Supported by these initiatives, the technology can benefit from increasing returns (particularly those related to adaptive and network economies) and establishes itself as a viable alternative. There is a room to overcome the socalled carbon lock-in in transportation sector. 5. Microeconomics of FFV FFV allows for immediate arbitrage between the two fuels, gasoline and ethanol, which leads to a convergence between gasoline and ethanol markets. Lets see this how this affects consumers choice, market prices and competition. This flexibility permits that consumers perceive both fuels as perfect substitutes. Consumers will have their utility based on the service provided by the fuels, that is mechanical energy (or distance transported). In terms of indifference curves, this implies that they will be shaped as straight lines, presenting a constant Marginal Rate of Substitution (MRS)11. Considering the difference in energy content, the Marginal rate of substitution between both fuels will be equal to the lower heating value ratio. As seen in section 2, it can be considered roughly as 0,7. A possible representation of this consumers preference would be: U(gasoline, ethanol) = gasoline + 0,7 ethanol. To proceed to the Consumer Maximization, it is worth noting that Perfect Substitutes indifference curves do not fulfil one necessary condition to the uniqueness of consumers choice equilibrium, that is, a consumer bundle strictly convex. The Consumer Problem in this context is to maximize its utility subject to its budget restriction (the total revenue he considers to spend on fuel consumption). This will result in multiple solutions. This effect can be graphically analysed in figure 3. The first impact of this configuration is that the consumer will only chose any mix of ethanol and gasoline when relative prices are equal to MRS. Otherwise, the only rational behaviour would be to choose between total ethanol consumption or total gasoline consumption. This effect can be important on demand projections. The second impact is on price evolution. Because of immediate arbitrage, ethanol prices cannot move away from gasoline prices. In this sense, it can be interpreted as an application of the socalled law of one price to the fuel market. In its simple version it says that the price of a good in two different geographical markets cannot be different from its import parity, otherwise it gives rise to arbitrage between markets which re-establishes equilibrium. In this particular case, the arbitrage plays a role of providing long run equilibrium between the prices of the two different fuels in the same market. In Hicks (1936) definition, ethanol and gasoline will form a composite commodity: a set of good whose
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On a Well-to-wheel analisys, de Oliveira et al (2005), shows that ethanol from sugar cane emmit only 31% of the emmisions released by gasoline. Ethanol from corn has also a positive environmental impact as its emission represent 80 % of gasoline emissions. 11 This analysis is based on the following assumptions : a) gasoline and ethanol are homogeneous goods from consumers perspective, that is consumers base their choice only on the price of the goods ; b)consumers are unbounded rationals, c) perfect information on the market, d) the only element that affects consumer utility is transported distance, that is, they do not take into consideration environmental externalities, e) and finally, possible difference in vehicle performance using the different fuels are negligible from consumers point of view.

prices move together respecting a constant relative price. Considering that the two fuels provide the same utility to consumers but in different proportions, the long run price equilibrium will converge to the relation represented by the Marginal rate of substitution.
Figure 3 Consumers Choice Perfect Substitutes
eth B

Budget constraints Indiference curve + Budget Constraint Indiference Curve

Consumers Choice results: If relative prices (Pethanol /Pgasoline) > MRS: the optimal consumption point will be point A. In this point consumer will spend his entire fuel budget on gasoline If relative prices < MRS: the optimal consumption point will be point B in which consumer will spend his entire budget on ethanol. If relative prices are equal to MRS: Budget constraint will be over his indifference curve - there will be multiple solutions (green line).

gas

In terms of competition impacts, it can be seen that the flexibility on the demand side can reduce price impacts due to supply issues. The arbitrage made by consumers implies on a specific demand curve to be faced by ethanol producers. Ethanol producers will face a demand curve similar to that one faced by an independent firm on a pure competition market (Figure 4) Ethanol prices above the long run equilibrium will induce consumers to run solely on gasoline, and ethanol sales will be zero. On the other hand, if prices are below the long run equilibrium, ethanol producers will face total market demand. When prices equal its long run equilibrium, ethanol producers will be able to sell any quantity, depending on its capacity to produce. This will have important implications. First, ethanol producers will have limited ability to influence market prices. In other words, as FFV increase its participation on passengers fleet, ethanol producers will become price takers. Ethanol is produced from agricultural commodities, such as sugarcane, sugar beets or corn. These agricultural commodities have alternative uses mainly in food or animal industry feeding. In general terms, ethanol supply is a positive function of its own price and negative function of the price of substitute goods on the supply side. Intuitively: if prices of substitute goes up, there will be an increased demand on raw material market which will lead to an increase in raw material price. In this sense, an increase in substitutes prices will ceteris paribus reduce ethanol supply by increasing its marginal production costs. In Brazil, this alternative analysis is even more critical because the majority of ethanol is produced in flexible sugar mills/ethanol distilleries complex. Most ethanol producers are able to swing production from ethanol to sugar. Although this flexibility is not complete as in the demand side - producers maximize the product mix and ethanol can also be produced from a by-product of sugar production it had important implications on ethanol program in Brazil. In a context of dedicated technology, prices spikes on international sugar market would have major impacts on ethanol prices in domestic market. In the new context, prices increases in sugar market will tend to reduce ethanol market share on fuel market. Two important results emerge from this basic microeconomic analysis. First, demand side flexibility can be a solution to the problem of ethanol increasing prices due to price variations in international sugar market. As FFV increases its participation on passengers cars fleet, ethanol producers will progressively

lose their capacity to transfer opportunity costs spikes to consumers. Second, it is expected that ethanol prices will be increasingly driven by oil/gasoline prices as long as they remains the dominant design.
Figure 4 Demand and Supply curves based on dedicated technology x based on flexible technology Dedicated Technology Flexible Fuelled Technology

S2
P2 et

S1 P*eth D Q2 Q1

S2 S1

P1 et

Qethano

Q2

Q1

Qethano

These are basic conclusions that depend on the assumptions made. However, this basic analysis opens space to a more detailed analysis of competition on fuel industry given the flexibility on demand side. 6. Conclusions Although not being a radical technological innovation, FFV it has been shown that it can lead to important transformation in fuel market structure. From a broad perspective, being a flexible end-use technology it can be an important step to the diversification of energy sources in transportation sector. In addition, as it permits the use of a renewable fuel, it can overcome the so called carbon lock-in in transportation. Based on Swedish example, it was seen that institutional support, policy action and co-ordinated effort can overcome this lock-in and reduces barriers to the effective adoption of this technology. From a microeconomic perspective it has been discussed how FFV can change fuel market organization by permitting the immediate arbitrage between gasoline and ethanol. This brief and basic microeconomic analysis gave important insights on how this technology change fuel market structure and it gives rise to more detailed and empirical analysis. 7. References ATRAX ENERGI (2005). Assessment of bio-ethanol and biogas initiatives for transport in Sweden: Background information for the EU-project PREMIA, may 2005. Available in http://www.senternovem.nl/mmfiles/26452_tcm24-124155.pdf. Acceded in 03/15/2007 ARTHUR, B (1994). Increasing Returns and Path Dependence in the Economy. University of Michigan Press. Ann Arbor. ARTHUR, B (1989).Competing Technologies, Increasing returns and Lock-in by historical events. The Economic Journal 99 March 1989 pp116-131. ANFAVEA (2006), Anurio da Industria Automobilstica Brasileira. Associao Nacional dos Fabricantes de Veiculos Automotores. Disponivel em: http://www.anfavea.com.br/anuario2006/indice.pdf

BALLERINI, D; Les biocarburants: tat des lieux, perspectives et enjeux du developement. IFP Publications, Editions Technip. Paris, 2006 De OLIVEIRA, Marcelo; VAUGHAN, Burton. RIKIEL JR, Edgard. Ethanol as a fuel: Energy, Carbon Dioxide Balances and Ecological Footprint. BioScience, July 2005 Vol 55 n. 7 pp593-602 DEPARTMENT OF TRANSPORTATION (2005). Automotive Fuel Economy Manufacturing Incentives for Alternative Fueled Vehicles. Available in http://www.nhtsa.dot.gov/cars/rules/CAFE/Rulemaking/AMFAFinalRule2004.htm Acceded in 03/15/2007 EIA, FUEL Alternatives to traditional Transportation Flexi-fuel Fuels 2000 2005. Available in: in

http://www.eia.doe.gov/cneaf/alternate/page/datatables/atf14-20_05.html. Acceded in : 03/15/2007

ECONOMY, technology. Available

http://www.fueleconomy.gov/feg/flextech.shtml. Acceded in 03/15/2007

GRAHN, M (2004). Why is ethanol given emphasis over methanol in Sweden? Energy, Environment and Sustainability. Department of Physical Resource Theory. Chalmers University Technology HICKS, J (1936). Value and Capital. Oxford: Oxford University press. LORENZETTI, M (1996). Alternative Motor Fuels: a non technical guide. Pennwell Publishing Company Tulsa, Oklahama, UNRUH, G (2000). Understanding carbon Lock-in Energy Policy. Volume 28 pp 817 830 (2000) MATHIEU, Alain (1998). Linterface entre le secteur agricole et secteur petrolier: quelques questions au sujet des biocarburants. Cahier n 98.02.12 Centre de Recherche en Economie et Droit de l'Energie, UNIVERSIT DE MONTPELLIER I. PROST, A(2007). Rapport du groupe de travail sur le soutien au developpement de la filire E85. Ministre de leconomie, des finances et de lindustrie et le Ministre de lagriculture et de la pche. Septembre 2006. Available in: http://www.finances.gouv.fr/directions_services/sircom/carburants/e85.pdf. Acceded in 03/15/2007

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