Price It and They Will Buy: How E85 Can Break the Blend Wall

Biofuel mandates in 2014 and 2015 are scheduled to push ethanol consumption beyond the E10 blend wall-the amount of ethanol that can be easily consumed in the United States in a 10 percent ethanol and 90 percent gasoline blend. Numerous interest groups and academics are calling on the Environmental Protection Agency to cut back on scheduled mandate increases because of the uncertainty of the cost and exactly how ethanol consumption can be increased beyond E10. The uncertainty centers around the position of the "beyond-E10" demand curve for ethanol, which simply measures the response of ethanol consumption to lower ethanol prices at ethanol quantities above 13 billion gallons. Some oil companies argue that there is no demand for ethanol above 13 billion gallons so that it is physically impossible for them to mandate using ethanol. Others argue that there may be a demand curve, but that possible consumption quantities are quite limited. The reason why there is uncertainty about the position of ethanol demand above 13 billion gallons is because we have no US data to observe consumption above the E10 blend wall. However, insight into the question of what the demand curve might look like can be obtained by estimating the demand for E85 by owners of flex vehicles using data from Brazilian drivers who choose between ethanol and gasoline largely based on relative costs per mile. A key difference between Brazil and the United States is that in Brazil every station sells both ethanol and gasoline, whereas US drivers must search for a station that sells E85. We account for this difference by calculating the additional distance that must be traveled by owners of US flex vehicles to a station that sells E85. The further the distance the greater the fuel savings must be from E85. The resulting demand curve for ethanol above the E10 blend wall suggests E85 consumption of about one billion gallons if E85 were priced to generate a six percent reduction in fuel costs. If the price were lowered further to generate a 15 percent reduction then about two billion gallons could be consumed, and a 30 percent reduction would be needed to induce three billion gallons of consumption. These estimates do not account for the increase in the size of the flex vehicle fleet in 2013 and 2014 or the likely increase in the number of stations that will find E85 an attractive fuel to sell. These results suggest that rather than being a physical barrier to increased ethanol consumption, the E10 blend wall is an economic barrier that can be overcome by increasing the incentive for drivers to use E85 to fuel their vehicles. Current RIN (Renewable Identification Numbers) prices are high enough to achieve modest increases in ethanol consumption above 13 billion gallons and to create incentives to increase the ability to consume lower-carbon ethanol in 2016 and beyond.