Build it, But Will They Come? Evidence from Consumer Choice between Gasoline and Sugarcane Ethanol

Abstract

How motorists might switch from gasoline and diesel to alternative energy sources is not known, since the availability of alternatives is currently very limited. To bridge this gap, we exploit recent exogenous variation in ethanol prices at Brazil's pumps and uncover substantial consumer heterogeneity in the choice among century-old gasoline and a less-established -- but still widely available and usable -- alternative, sugarcane ethanol. We observe roughly 20% of flexible-fuel motorists choosing gasoline when gasoline is priced 20% above ethanol in energy-adjusted terms ($/mile) and, similarly, 20% of motorists choosing ethanol when ethanol is priced 20% above gasoline. We use transaction-level data to explore "non-price" characteristics which differentiate the two goods in the minds of different groups of consumers. Our findings suggest -- and a counterfactual illustrates -- that switching away from gasoline en masse, should this be desired, would require considerable price discounts to boost voluntary adoption, in the US and elsewhere.

Keywords: Fossil Fuels, Renewable Fuels, Alternative Fuels, Gasoline, Ethanol, Biofuels, Flexible-Fuel Vehicles, Consumer Choice, Consumer Preferences, Perfect Substitutes, Differentiated Products

JEL Classification: D12, Q42, R41