Impacts of flexible-fuel vehicles on Brazil's fuel markets

Ethanol is a green and environmental-friend fuel, which has been one of the most important fuels for Brazil’s drivers for decades. Brazil has a strong and booming ethanol industry. Brazil’s consumers are able to switch between ethanol and gasoline since the introduction of flex-fuel vehicles in March 2003, which alters both ethanol and gasoline markets. This paper’s objectives are specified as follows: a. Estimate the demand elasticity of ethanol, cross demand elasticity of ethanol to gasoline/sugar, the income elasticity of ethanol, the demand elasticity of ethanol to fleet; b. Estimate the elasticities before and after the introduction of flex-fuel vehicles, and test if there is a significant difference between two periods; c. Analyze the reasons for such differences as well as provide policy implications. 3-stage Least Squares Simultaneous Equations System is utilized for statistical analysis. Results of this study Show that: (1) demand for hydrous ethanol is more elastic after March 2003; (2) cross demand of ethanol to gasoline price is more elastic after March 2003; (3) income elasticity of ethanol is not statistically significant; (4) the relationship between sugar price and supply of ethanol is unimportant; (5) the growth in fleet leads to increase in the demand for hydrous ethanol, and this effect grew stronger after the introduction of flex-fuel vehicles. My findings suggest that the invention and commercialization of flex-fuel vehicles alters Brazil’s fuel market by enabling consumers to switch between two fuels. From a policy maker’s view, demand for ethanol and gasoline are more sensitive to their prices, and their relationship is complicated with two reverse effects, which requires a more comprehensive model to evaluate any policy effect. From industrial standpoint, the results suggest that pricing strategy for ethanol and gasoline should be revised due to increasing elasticities. Future research about flex-fuel vehicles and fuel markets should incorporate tax rates, government policy, propaganda, education, and environmental impact.M.S.Includes bibliographical referencesIncludes vitaby Yifan H