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Flex Fuel Vehicles and Infrastructure:

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Audley Yung

on 21 April 2014

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Transcript of Flex Fuel Vehicles and Infrastructure:

Flex-Fuel Vehicles and Alternative-Fuel Infrastructure: A Chicken-or-Egg Question
by Kenneth S. Corts
What are Flex Fuel Vehicles?
-Designed to run on standard E10 Gasoline as well as E85 Ethanol Gasoline.

-E85 means there is 85% Ethanol in the gasoline and only 15% fossil fuel

-Sensor within gas tank and engine detects amount of Ethanol in fuel and adjusts engine accordingly and on the fly to run properly.

-Ethanol is highly combustible and very corrosive so engines need to be built with slightly stronger cylinder walls, valve seals, pistons etc to withstand the heat.

What is Flex Fuel?
-Ethanol is a fuel made from corn (environmentally friendly)

-Renewable Energy. You simply grow more corn if you want to make more ethanol.

-Can be produced locally in United States.

How can we encourage use of this new technology?
Gov't has the answer
-To break stale mate between choosing whether production of Flex Fuel Cars or proliferation of E85 fuel pumps should come first, Federal and State agencies have mandated all gov't fleets begin using Flex Fuel cars in 1992.

-this is a viable option because for every 100-170 gov't FFVs in a single county, the average # of E85 enabled gas stations goes up by 1.

-Government is hoping to make E85 more visible by taking it upon themselves to solve the "chicken or egg" problem instead of letting the market figure it out.
What are the costs?
-automakers spend an extra $200 to make a car flex-fuel capable
-NREL says costs of converting existing pumps to E85 capable pumps is negligible as long as E85 profit margins are similar to that of gasoline and sells as much as a station's premium gasoline.
Network Externality Effect
-When present, the value of a product or service is dependent on the # of others using it.

-The wider the availability of E85, the more demand for its' necessary complement, Flex Fuel Vehicles.

-use of FFV vehicles in government fleets will spur the growth of E85 fueling stations.

-This, in turn, will spur private demand for Flex Fuel cars.
What else is the Gov't doing?
Subsidy at the pump
Presented by: Audley Yung & Michael Luckey
-45 cent/gallon subsidy to producers from 1980s to 2011

-Lowered price at the pump

-Now that subsidy expired in 2012, E85 is more expensive (still a bit less than gasoline)
FFVs and E85: Complementary Goods
- Complements are 2 goods, for which an increase in the price of one leads to a decrease in the demand for the other.

-In the case of Ethanol subsidies, the decrease in the price of one, leads to an increase in the demand for E85 fuel.

-FFV and E85 fuel is a pair of goods that are used together.

-Gov't mandated FFV fleets are a strategic use of complementary goods to spawn use of E85
Inefficiencies of E85 Fuel
-E85 offers only 70% of fuel economy as normal gasoline. Lack of subsidy now will decrease incentive of buying E85 even though it's still a bit cheaper than normal gasoline.

-Critics contend that it takes more resources to produce Ethanol than refining fossil fuel/petrol.

-The IMF estimated recently that shift of crops out of the food supply to produce Ethanol accounted for almost half the recent increases in global food prices.

Why are we really using E85 Fuel?
- to wean ourselves off foreign oil and from places that we may have volatile relationships with.

-E85 can be completely produced within the United States.

-It's "renewable".

-running E85 is a personal gesture of support for American agriculture, alternative fuels, and energy independence.
Prescriptive Based Command and Control
-Mandating gov't fleets is prescriptive based approach.

-C&C focuses on regulating behavior of individual firms.

-Technology standard requires firms to use a particular pollution abatement technology (FFV's in our case)

-Not the most efficient method.

Why the Command and Control policy works
-It gets things done faster

-Catalytic Convertors, do we remember a time when we didn't have them?

-May not be the most efficient, but is faster then letting market forces adjust and figure out what method is best.
Using market based policies instead
- Market based instruments are divided into 2 categories.

-influencing price or limiting quantity

-Subsidy represented a price based approach.

-Quantity based limitations are not applicable in this situation.
-The government has let its market based approach expire (subsidy).

-It's now using a C&C approach (technology standard).

-It's not fostering competition and technology innovation.

-Big reason is to greatly lessen our dependance on foreign oil despite the ineffiencies of E85

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