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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 80’s. 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 FFV’s 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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Another way to overcome this issue is the adoption of a mixture of 15% gasoline on ethanol. E23 (29834). ethanol lost competition to gasoline as the dominant fuel and become locked-out by historical events and increasing returns. and mandates its mixture with gasoline in order to prevent its use as beverage. based on Prost et al (2006) these are the respective lower heating values: Standard Gasoline (32389). gasoline was much cheaper than ethanol (Unruh. Ethanol has been a traditional lighting fuel in USA. Both actors were attracted by the superior quality of ethanol compared to gasoline as a spark ignition fuel. Henry Ford built its first vehicle to run on pure ethanol in 1896. Its production and use as lighting fuel has decreased until tax elimination in 1906. 3. that is. This alternative has been inherited from the ethanol-dedicated cars used in Brazil in the 80’s. the ratio of lower heating values between E85 and standard gasoline is 72%. 2 2 . E85 (22950). Ethanol (21283). iv) network economies. 1996). but during the civil war it has been taxed in order to raise funds to war. Nicholas Otto had already created an engine that used ethanol as fuel prior to its internal combustion engine based on gasoline spark ignition. 3 In fact. First of all. which allows a greater efficiency in converting chemical energy in mechanical energy. specialized skills and experience -. which arises from network externalities (the value to users grow as network grows in size) and relates systemic relations among technologies. 2000). (Ballerini et al. 2006) In terms of consumption. Measured in Kilojoules/liters. interdependent industries and users. and in 1906 he makes the first Flexi Fueled Vehicle. 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. It takes also in consideration the gasoline used as a denaturant. 1996) This initial competition period was crucial to the emergence of gasoline as the dominant design on automobile industry. 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. The owner of the vehicle determined the mix mechanically (Lorenzetti. gasoline or a combination of both. As a “hazardous” by-product of kerosene production. ii) learning economics . However. its production process based on corn made ethanol more expensive than its competitor derived from oil. the reduction in unit production costs provided by the presence of increasing returns to scale. b) oxygen content.temperature it actions automatically the use of the gasoline contained on the additional tank before switching to the ethanol fuel. In Brazil. the difference in heating power between ethanol and gasoline leads to a greater consumption when running on pure ethanol2. Although technically superior. However. increasing returns can derive from four major effects: i) scale economics. According to Arthur (1994). which could mitigate this effect.cost reductions and productivity improvement due to the accumulation of knowledge. which allows for a cleaner burn resulting in lower pollutant emissions. iii) adaptive expectations – increasing adoption reduces uncertainty to producers and consumers -. because it had timing to explore increasing returns. the use of the so-called E85. a vehicle that could run on ethanol. Ethanol presents two majors “technical” advantages over gasoline as a fuel to spark ignition engines: a) a greater octane index. 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. This prohibition will only be suspended in 1933. 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. On the other hand the greater octane permits a better efficiency on the engine. (Lorenzetti. infrastructures. in 1919 US government prohibits pure ethanol sales.

The abundant oil supply turned the competition between ethanol and gasoline really unfair to the former. 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. In addition. “industrial economies have become locked into fossil fuel-based technological systems through a pathdependent process driven by technological and institutional increasing returns”.In terms of scale economics and learning economics. Sweden and Brazil. AMFA assumed that any alternative fueled vehicle was more efficient in energy consumption and so. this is the period of the development of refinery techniques and international expansion of oil industry. The incentive contained at AMFA could represent 1.eia. bigger and more consuming gasoline cars6 (EIA. The interest on fuel ethanol will be re-born by a historical-economic event: the oil crisis in the 70’s. it will be argued that FFV can be an important step toward the overcoming the lock-in in transportation sector. It defined E85 (the mix 85% of ethanol and 15% gasoline) as an alternative fuel.htm 3 . 2004). which by its turn explored as well scale and learning economics in the context of fordist production organization. which was a great demand impulse. engine engineers concentrated their focus on gasoline engines. concerning fuel competition the construction. 2005). any alternative fueled vehicle launched by an automobile manufacturer converted in “credits” of energy efficiency (Department of Transportation. It also established a minimum participation of FFV in public fleet. In addition. the average performance of a medium passenger car in US was 14 miles pe gallon (mpg).gov/emeu/efficiency/ee_ch5. in the context of falling oil prices. another important interest group on this context was corn producers in US. He names this effect as a “carbon lock-in”. Pp. 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. Flexible Fueled technology came to automobile research agenda by the end 80’s with the promulgation of Alternative Motor Fuels Act (AMFA) of 19884 in USA. The targets of CAFE was to achieve 18 for a 1978 model and 27. 1989). it can also be considered as a way to overcome this carbon lock-in. In fact. For a discussion on the effects of AMFA on energy efficiency of american cars EIA:Energy Eficiency_Transportation Sector available in http://www. 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. the Energy Policy Act (1992) had an important role on the FFV development. as it permits the use of a renewable fuel. In this context. 4. US is one of the 5 As a means to reduce oil consumption after the oil shocks.doe.5 for a 1985 model. 1 In this context. 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.1 – Country experiences The first country to introduce FFV into market was USA. 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. 4.2 mpg for the restant fleet produced by a company that introduced an alternative fueled vehicle on the market. As pointed out by Mathieu (1998). But. 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. the launching of an alternative fueled vehicle permitted automobiles companies the production of more potent. This regulation is called the Corporate Fuel Economy – CAFE 6 In 1973. However.

Overview of E85 FFV in US(1000 cars) 1000 900 800 700 600 500 400 300 200 100 0 600. Particularly in the case of ethanol as an alternative fuel. the number of FFV in use (those believed to be intended for use as AFV) is much smaller than vehicles made available by manufacturers. If we sum-up the FFV made available since then.0 133. Dedicated end-use technology in automobile industry depends on the construction of supply network. 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.7 581. FFVs are sold by the same price as a gasoline engine model. Ford. today it is known that most FFV owners in US are unaware of this capability of burning E85.8 146. is about 4. 2005).0 859. It is estimated that there is around 700 E85 filling stations out of 170 thousands in the country. By the end of 80’s environmental was the main concern that drove policy action toward alternative fuels (Atraxi Energi. This imposes risks to suppliers since there are not enough vehicles running on alternative fuel. 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. As can be seen in Figure 1. and some models only present the FFV version. which involves elevated sunk costs.2 0. being followed by Chrysler. With a flexible technology the demand side of this equation is solved. 7 4 . Dodge.greatest corn producers in the world and an alternative use to corn is a means of stabilizing producers revenues. and it reduces the uncertainties to suppliers on investing supply network. we can get to a number around 6.8 2000 2001 121. gasoline. the EIA estimated that the number of E-85 vehicles that are capable of operating on E85.3 674. 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. or both. even in areas with no availability of E85. its chemical characteristics (liquid) reduce the investment costs as it can use the same kind of distribution logistics as gasoline.1 million.3 8. This is a result of the AMFA: in order to get “energy efficiency credits” automobile manufacturers sell FFV all over the country.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. Chevrolet e a Nissan. there was a competition to which kind of alternative fuel should For 2002. 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. Mercedes Benz. Figure 1 . Back to north–american case.8 FFV sales 835.3 millions FFVwithout considering 2006 data.9 100.8 FFV in use 743. In Sweden the research on alternative fuels started after the oil crisis as a means to guarantee energy supply. 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. At that time.

SEKAB was founded in 1985. there was only one model available – Ford Taurus . Supported by this initiative. 2005). The final Filling stations Source: BAFF. However. According to Atraxi Energy (2005). Regarding FFVs. in 1998 there was created a technical procurement initiative: an organization of interested buyers and associations – the Swedish Flexi-Fuel Buyers' Consortium. 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. In addition. with the aim at reducing tail pipe emissions in big cities. In this sense. There were however legal impediments for private persons to buy one of the imported FFV (Atraxi Energy. since its supply is abundant in the country and there was already a good knowledge on how to handle forest residue. The later was known for its position against nuclear power but also by being advocate of Swedish farmers. in the beginning of 90’s a Ford manufacturer started to import FFV from United States.6. This agreement opens space to the implementation of a set of political measures (tax exemptions. R&D funding) that lead to an increase in ethanol use in the country. according to Grahn (2004). financial funding to projects aiming at producing/ using ethanol. It also produces from wine surplus in Europe and imports ethanol from Brazil. The first and most active one is the BioAlcohol Fuel Foundation. The initial agreement involved the delivery of 3000 cars between 2001 and 2003. 2007 5 . the main political inflexion towards the support of an ethanol program was the three party energy policy agreements in 1991. The negotiations between the consortium and Ford led to the development of the first FFV in Europe: the Ford Foccus 1. a cooperation program between municipalities (Stockholm and 10 other Swedish cities) and Scania. From the beginning. It was already in place a government support to the use of ethanol in urban buses.that was seen as inadequate to be used by service companies and municipalities. and the research in the 70’s was more concentrated on methanol. a production ethanol plant in Örnsköldsvik with cellulose from sulphite pulp as raw material. the liberals and the centre party. Since 1980. This program had the initial role of developing expertise on the use of ethanol as a fuel. 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. Institutional organizations have been formed and had important role in this ethanol option. the discussions about the phasing out of nuclear program in the country divided the three political parties: the social democrats. Swedish government followed the successful experience in introducing ethanol in US and in Brazil and decided to concentrate efforts on this fuel. intended to develop the production and use of biomass based ethanol in transport sector. Both alcohols present roughly the same characteristics. this organization had the focus on stimulating the production of ethanol out of lignocellulosic raw material. founded in 1983.be supported by policy action: methanol or ethanol.

The Government support to the use of ethanol fuel started in the 70’s as a response to oil crisis.since the ethanol shortage crisis by the end of 80’s. Brazil counted on a wide ethanol supply infrastructure that covers almost 100% of total filling stations on the country (around 30 thousand). since oil crisis. 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. In 1988 almost all new passenger cars sales was ethanol dedicated ones. the technological development of FFV was in the mid 90’s. FFV’s sales in the first half of 2006 represented 18% of total new cars sales (Prost et al. In Brazil. 2006). Unlike the American case. From the point of view of automobile industry. ethanol producers devoted most part of sugarcane production to sugar9. the economic context regarding oil consumption in the nineties is completely different from that of the seventies: today. It is worth noting that it is almost the same number of E85 filling stations in the whole United States. From the political side. the most difficult step. we can conclude that in absolute number FFV are more developed in United States. 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. Brazil is a net exporter of gasoline. This incentive permitted FFV to have a final price close to gasoline cars. In this sense. In this sense. It was a result mainly of a lobby of automobile industry to relax energy consumption restriction. At that time. However. 2007) From these three leading experiences. However.5 millions and they represented 70% of total new light cars sales in 2006 and already 82. policy action and co-ordinated effort shows that lock-in in transportation sector can be overcome. Government funding also supports investments on flexible pumps and storage tanks resistant to ethanol. In this sense. 2007). government measures taken in order to reduce oil consumption had impact on diversifying energy sources particularly in industry sector and electricity generation. Today this proportion is 23%. FFV is considered a great commercial success. In the Brazilian case. the construction of supply network. had already been made prior to FFV introduction. Concerning the distribution network. 8 6 . in terms of actual use as an alternative vehicle it had low impact. 9 In Brazil. After the second oil crisis government started stimulating the production of ethanol dedicated cars. In 2005. And of course. consumers have developed an aversion to dedicated-ethanol fueled cars – the symbol of ethanol program during the 80’s . (Anfavea. From a broad perspective. Saab and Volvo launch FFV models in Swedish market. total FFV fleet in Sweden is 52. Thanks to the ethanol Program (proalcool)8. in Sweden the combination of institutional support. FFV fleet in Brazil is already 2.price would be 500 euros lower than an equivalent gasoline Ford Focus due also to the reduction in VAT to the production of FFV. flexibility was the element that permitted to overcome this consumer aversion and to benefit from existing infrastructure to stimulate ethanol consumption.3 thousands vehicles (BAFF. in May 2003 Volkswagen launches the first FFV on Brazilian market. FFV found favourable conditions and commercial introduction was a success. In the same year the main automobile manufacturers in the country follow the same strategy. in 2002 government determines that FFVs could receive the same fiscal exemption as the one applied to ethanol-dedicated cars. As a result. producing FFV vehicles is also interesting because it saves costs and efforts of producing the same vehicle model in two versions (gasoline and ethanol). Today. in which flexibility was a crucial element due to the insufficient supply network.7 % of new cars sold in January 2007. 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. 2007). 75% of ethanol production is produced by complex sugar mills/ distilleries that are capable of swinging from ethanol and sugar production. the main argument to stimulate ethanol consumption is its environmental externalities. due to prices spikes on sugar international market. in Brazil. This project counted on government financial support. Today there are 696 E85 filling stations in Sweden (BAFF. However.

11 This analysis is based on the following assumptions : a) gasoline and ethanol are homogeneous goods from consumers perspective.7 ethanol. Consumers will have their utility based on the service provided by the fuels. In this sense. in transportation sector oil diversification had little impact. This will result in multiple solutions. ethanol prices cannot move away from gasoline prices. In this particular case. and the co-ordinated actions among private institutions and interest groups. possible difference in vehicle performance using the different fuels are negligible from consumers point of view. ethanol and gasoline will form a composite commodity: a set of good whose 10 On a Well-to-wheel analisys.7. which leads to a convergence between gasoline and ethanol markets. A possible representation of this consumers preference would be: U(gasoline. as well as historical events. Otherwise. the arbitrage plays a role of providing long run equilibrium between the prices of the two different fuels in the same market. 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. This implies that “there are systematic forces that make it difficult to change the development path of existing techno-institutional systems”. 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). Microeconomics of FFV FFV allows for immediate arbitrage between the two fuels. 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). It responds for the first issue: the availability end-use technology. In Hicks (1936) definition. they do not take into consideration environmental externalities. d) the only element that affects consumer utility is transported distance. This effect can be graphically analysed in figure 3. but mostly a result of the technological lock in. based particularly on the Swedish experience. 7 . gasoline and ethanol. e) and finally. we can see that political measures. This effect can be important on demand projections. that is mechanical energy (or distance transported). As seen in section 2. Supported by these initiatives. Ethanol from corn has also a positive environmental impact as its emission represent 80 % of gasoline emissions. the only rational behaviour would be to choose between total ethanol consumption or total gasoline consumption. In terms of indifference curves. ethanol) = gasoline + 0. b)consumers are unbounded rationals. The second impact is on price evolution. c) perfect information on the market. that is consumers base their choice only on the price of the goods . It is not a matter of lack of technological alternatives. Considering the difference in energy content. that is. de Oliveira et al (2005). it is worth noting that Perfect Substitutes indifference curves do not fulfil one necessary condition to the uniqueness of consumer’s choice equilibrium. this implies that they will be shaped as straight lines. market prices and competition.However. shows that ethanol from sugar cane emmit only 31% of the emmisions released by gasoline. the technology can benefit from increasing returns (particularly those related to adaptive and network economies) and establishes itself as a viable alternative. 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. In this sense. it can be considered roughly as 0. 5. were responsible for the development of this alternative in the interior of the dominant design complex. a consumer bundle strictly convex. In its simple version it says that the price of a good in two different geographical markets cannot be different from its import parity. the ethanol10 . In this sense. Let’s see this how this affects consumer’s choice. Because of immediate arbitrage. it can be interpreted as an application of the socalled “law of one price” to the fuel market. presenting a constant Marginal Rate of Substitution (MRS)11. To proceed to the Consumer Maximization. There is a room to overcome the socalled carbon lock-in in transportation sector. that is. the Marginal rate of substitution between both fuels will be equal to the lower heating value ratio. This flexibility permits that consumers perceive both fuels as perfect substitutes. otherwise it gives rise to arbitrage between markets which re-establishes equilibrium.

prices move together respecting a constant relative price. Ethanol is produced from agricultural commodities. as FFV increase its participation on passengers fleet. In the new context. depending on its capacity to produce. this alternative analysis is even more critical because the majority of ethanol is produced in flexible sugar mills/ethanol distilleries complex. Although this flexibility is not complete as in the demand side . prices increases in sugar market will tend to reduce ethanol market share on fuel market. In a context of dedicated technology. if prices are below the long run equilibrium. ethanol producers will progressively 8 . the long run price equilibrium will converge to the relation represented by the Marginal rate of substitution. First. On the other hand. sugar beets or corn. demand side flexibility can be a solution to the problem of ethanol increasing prices due to price variations in international sugar market. ethanol producers will be able to sell any quantity. When prices equal its long run equilibrium. such as sugarcane. there will be an increased demand on raw material market which will lead to an increase in raw material price. The arbitrage made by consumers implies on a specific demand curve to be faced by ethanol producers. In other words. it can be seen that the flexibility on the demand side can reduce price impacts due to supply issues. Figure 3 – Consumers Choice – Perfect Substitutes eth B Budget constraints Indiference curve + Budget Constraint Indiference Curve Consumer’s Choice results: If relative prices (Pethanol /Pgasoline) > MRS: the optimal consumption point will be point A. If relative prices are equal to MRS: Budget constraint will be over his indifference curve . Intuitively: if prices of substitute goes up. ethanol supply is a positive function of its own price and negative function of the price of substitute goods on the supply side.there will be multiple solutions (green line). ethanol producers will become price takers. and ethanol sales will be zero. Two important results emerge from this basic microeconomic analysis.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 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. ethanol producers will face total market demand. In Brazil. First. A gas In terms of competition impacts. prices spikes on international sugar market would have major impacts on ethanol prices in domestic market. In general terms. 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. This will have important implications. These agricultural commodities have alternative uses mainly in food or animal industry feeding. In this sense. an increase in substitute’s prices will “ceteris paribus” reduce ethanol supply by increasing its marginal production costs. ethanol producers will have limited ability to influence market prices. Considering that the two fuels provide the same utility to consumers but in different proportions. As FFV increases its participation on passenger’s cars fleet. Most ethanol producers are able to swing production from ethanol to sugar.

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 D Qethano Q2 Q1 Qethano These are basic conclusions that depend on the assumptions made. it is expected that ethanol prices will be increasingly driven by oil/gasoline prices as long as they remains the dominant design. B (1989). policy action and co-ordinated effort can overcome this lock-in and reduces barriers to the effective adoption of this technology. FFV it has been shown that it can lead to important transformation in fuel market structure. Associação Nacional dos Fabricantes de Veiculos Automotores. Anuário da Industria Automobilística Brasileira. Ann Arbor. The Economic Journal 99 March 1989 pp116-131. Assessment of bio-ethanol and biogas initiatives for transport in Sweden: Background information for the EU-project PREMIA. References ATRAX ENERGI (2005). ANFAVEA (2006). it was seen that institutional support.com. Conclusions Although not being a radical technological innovation.Competing Technologies. 7. being a flexible end-use technology it can be an important step to the diversification of energy sources in transportation sector. Acceded in 03/15/2007 ARTHUR.br/anuario2006/indice. it can overcome the so called carbon lock-in in transportation.pdf 9 . 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. From a microeconomic perspective it has been discussed how FFV can change fuel market organization by permitting the immediate arbitrage between gasoline and ethanol. B (1994).pdf. as it permits the use of a renewable fuel. Second.senternovem.lose their capacity to transfer “opportunity costs” spikes to consumers. University of Michigan Press. From a broad perspective. Increasing returns and Lock-in by historical events. Based on Swedish example. Available in http://www. may 2005.nl/mmfiles/26452_tcm24-124155. this basic analysis opens space to a more detailed analysis of competition on fuel industry given the flexibility on demand side. In addition. Increasing Returns and Path Dependence in the Economy. However.anfavea. 6. ARTHUR. Disponivel em: http://www.

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