Regulated and Unregulated Substitutes: Aversion Effects of an Ethanol Mandate

Transcription

1 Regulated and Unregulated Substitutes: Aversion Effects of an Ethanol Mandate Michael D. Noel Dept. of Economics Texas Tech University Travis Roach Dept. of Economics U. of Central Oklahoma

2 Purpose We examine the ethanol mandate in New South Wales (NSW), Australia from Mandate to replace regular grade gasoline with E10 Unpopular, and as much as a quarter of the fleet was potentially incompatible with it Dual blend mandate multiple ethanol blends available Two main purposes of the article 1. To show the impact of aggressive dual blend mandates on consumer costs 2. To show a clean and dramatic example of the Lucas Critique in action Michael D. Noel and Travis Roach 1

3 Ethanol Mandates Ethanol mandates are popular with policymakers 62 countries have a form of one Mandates require a minimum amount of renewables (ethanol) in gas Proponents: Environmental: to reduce GHG emissions Political: reduce dependence on foreign oil Economic: Create more domestic jobs Critics: Lack of environmental value or need to replace fossil fuel Externalities on food prices Michael D. Noel and Travis Roach 2

4 The New South Wales Ethanol Mandate We focus on one type of cost and the goal is to measure it well -- consumer costs in terms of higher expenditures for the same amount of energy contained in fuel Usual assumption is based on the energy-adjusted price difference between unblended and ethanol blended Not valid with a dual blend mandate: Ethanol only blended into regular gasoline Premium gasoline remained ethanol free An ethanol-free substitute for those that couldn t use E10 8% higher cost prevents unnecessary E10 avoidance Does not require retailers to install new storage tanks Michael D. Noel and Travis Roach 3

5 The New South Wales Ethanol Mandate Four stages: 2% ethanol in gasoline by volume (from Oct 2007) 4% ethanol in gasoline by volume (from Jan 2010) 6% ethanol in gasoline by volume (from Oct 2011) Convert all regular to E10 (from July 2012) Preview of mandate success: 2% level reached only in late 2009, 4% level has never been reached 6% stage postponed from Jan 2011 to Oct 2011 to no avail and final stage abandoned altogether So what happened? Michael D. Noel and Travis Roach 4

6 Model Reduced form difference-in-differences set-up Control states: QLD, VIC, SA, WA Dependent variables: volumes, prices Alternate VAR-ECM price model Michael D. Noel and Travis Roach 7

7 Mandate Effect on Grade Volumes Reg, E10 2% Mandate Reg: ML E10: ML 4% Mandate Reg: ML E10: ML 6% Mandate Reg: ML E10: ML Michael D. Noel and Travis Roach 9

8 Mandate Effect on Grade Volumes - Premium 2% Mandate ~0 ML 4% Mandate ML % 6% Mandate ML % Michael D. Noel and Travis Roach 9

9 Mandate Effect on Premium Market Shares 2% 4% 6% 2005m7 2007m1 2008m7 2010m1 2011m7 2013m1 Date Actual Predicted 95% Confidence Michael D. Noel and Travis Roach 10

10 Mandate Effect on Regular Market Shares 2005m7 2007m1 2008m7 2010m1 2011m7 2013m1 Date Actual Predicted 95% Confidence Michael D. Noel and Travis Roach 12

11 0 Mandate Effect on Regular Market Shares % 4% 6% 2005m7 2007m1 2008m7 2010m1 2011m7 2013m1 Date Actual Predicted 95% Confidence Michael D. Noel and Travis Roach 13

12 Million L / mo. Volume Replacement by Mandate Period Predicted Volume Changes Regular E10 Premium % Mandate 4% Mandate 6% Mandate Michael D. Noel and Travis Roach 14

13 Diversion Ratio Diversion Ratios by Mandate Period Diversion Ratios Regular to E10 Regular to Premium % Mandate 4% Mandate 6% Mandate Michael D. Noel and Travis Roach 15

14 Diminishing Marginal Returns Diminishing marginal returns to the mandate 2008 consumers who switched all switched to E out of every 3 consumers who had to switch switched to premium instead out of every 5 consumers who had to switch switched to premium instead of E10 The cost of adding one more liter of E10 into the fuel supply was forty-five times more expensive in 2013 than it was in 2009 Also: we also examine the effect of the mandate on prices we find no effect on prices Michael D. Noel and Travis Roach 16

15 Burden and Incidence of the Mandate Burden calculations: CV-type and EV-type CV-type: Increased cost of buying the same amount of energy as consumers would have bought absent the mandate EV-type: Increased cost of buying the same amount of energy as consumers actually bought with the mandate Driven by the composition change in grades No significant price effects Incidence Calculations Consumers who switched from regular to E10 (usual assumption) Consumers who switched from regular to premium (important) Michael D. Noel and Travis Roach 18

16 Burden and Incidence of the Mandate Michael D. Noel and Travis Roach 19

17 Incompatibility vs. Aversion Switching Table 7. Incompatibility Switching and Aversion Switching IPART Wilson et al. Listed Compatible Vehicles 78.1% 83.2% Potentially Incompatible Vehicles 21.9% 16.8% Potentially Incompatible Vehicles that Do Not Require Premium Already 17.6% 13.5% Potentially Incompatible Vehicles that Do Not Require Premium Already and Do Not Have Ready Access to Regular 9.9% 7.6% Total Estimated Premium Switching from Inception of Mandate to mid % 20.2% Estimated Incompatibility Switching 9.9% 7.6% Estimated Aversion Switching 10.3% 12.6% Michael D. Noel and Travis Roach 21

18 Lessons Aggressive mandates necessitate dual blends which can create additional unconsidered for costs That can dwarf costs under the usual calculations (96% of total) U.S. EPA has started rolling out E15 to replace E10 Industry cannot meet escalating ethanol requirements under aggressive ethanol mandate (18.2 billion gallons) EPA approved E15 for cars manufactured after 2001, but manufacturers have stated that 90% of vehicles (all but a few post-2012 models) are not certified for E15 and using it will void warranties E85 take-up in the US abysmal Michael D. Noel and Travis Roach 24

19 Department of Economics