Driving Biofuel Adoption
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Social Impact Policy May 1, 2011

Dri­ving Bio­fu­el Adoption

Brazil’s con­sumers offer a peek at atti­tudes towards alt-fuels

Based on the research of

Alberto Salvo

Cristian Huse

Whether we like it or not, the vast major­i­ty of car and truck own­ers in the Unit­ed States are cap­tive con­sumers of the car­bon-based liq­uid fuel we call gaso­line. But we import from for­eign coun­tries a large per­cent­age of the oil need­ed to pro­duce it, and many of these nations have unsta­ble gov­ern­ments that result in ener­gy price shocks. For exam­ple, the recent social unrest sweep­ing Arab states in the oil-rich Mid­dle East threat­ens to spike gas prices to $5 per gal­lon by this sum­mer, and it is one more reminder that the Unit­ed States needs to diver­si­fy its ener­gy port­fo­lio to buffer against wide swings in oil prices.

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Con­sumers are aware of this and many demand an alter­na­tive fuel that comes from a renew­able resource — prefer­ably one sourced and pro­duced in the Unit­ed States. But what exact­ly would con­sumers do if they had a choice of ener­gy source, and if their cars were able to run the same off both?

Brazil­ians have had this choice for decades. In fact, they have been using ethanol, pro­duced with their own sug­ar­cane, since the 1970s. And most vehi­cles sold there today can be pow­ered by both gaso­line and ethanol, allow­ing dri­vers to flit between these fuels at a whim (Fig­ure 1).

Salvo2010_Fig1.gifFig­ure 1. Evo­lu­tion of gaso­line and ethanol con­sump­tion in Brazil’s road trans­porta­tion, in tons of oil equiv­a­lent from 1981 to 2008. Ethanol con­sump­tion is bro­ken down into unblend­ed ethanol (which has fueled ethanol-ded­i­cat­ed cars and, more recent­ly, flex­i­ble- fuel vehi­cles) and as an addi­tive to gasoline. 

So what dri­ves their choic­es at the pump? Price may be a good first guess, but new con­sumer-lev­el research by Alber­to Sal­vo, an assis­tant pro­fes­sor of man­age­ment and strat­e­gy at the Kel­logg School of Man­age­ment, and Cris­t­ian Huse, an assis­tant pro­fes­sor at the Stock­holm School of Eco­nom­ics, shows that life is not that sim­ple. In fact, Salvo’s paper shows that 40 per­cent of flex­i­ble-fuel vehi­cle own­ers in Brazil essen­tial­ly ignored price when choos­ing what to pump into their tanks. These con­sumers dug their heels in and stuck with their pre­ferred fuel even when the alter­na­tive was priced up to 20 per­cent less.

Sal­vo and Huse exam­ined con­sumer choice pat­terns at Brazil­ian refu­el­ing sta­tions and found that even when prices swung wide­ly, most con­sumers who owned flex­i­ble-fuel cars stuck with either gas or ethanol, whichev­er they pre­ferred. Their choice may have stemmed from con­cerns about the envi­ron­ment, the range of miles they could get on a tank of fuel, con­cerns about their engines, or sim­ple inat­ten­tion to chang­ing (or even unchanged) prices.

Fuel(s) of Choice

The researchers gath­ered their data by observ­ing what cus­tomers pur­chased at the pump, then asked the cus­tomers to par­tic­i­pate in a sur­vey that probed their edu­ca­tion lev­el, age, rea­son for fuel choice, car use, and past fuel choic­es. By observ­ing the flex­i­ble-fuel motorists choose between gaso­line and ethanol, the researchers were able to see peo­ple putting their mon­ey where their mouth is,” Sal­vo says. It’s easy to state that you like some­thing, but it is very dif­fer­ent to observe motorists go about their dai­ly busi­ness and see what they actu­al­ly do. Brazil mat­ters in this respect because it is just about the only place around today where a large share of motorists actu­al­ly do have an alter­na­tive to gaso­line or diesel.”

Brazil has mar­ket­ed ethanol as an envi­ron­men­tal­ly-friend­ly alter­na­tive to gaso­line for many years. (Recent research has shown it may have local­ly-pol­lut­ing effects, but that when made from sug­ar­cane it is bet­ter for the envi­ron­ment on a glob­al scale than gaso­line.) Rely­ing on ethanol also pads Brazil against fos­sil-fuel ener­gy shocks imposed by oth­er coun­tries and boosts an estab­lished home-grown indus­try: sug­ar­cane. Ethanol pro­duc­tion in Brazil occurs very near to where the sug­ar­cane crop is grown.

Ethanol is a big part of the local land­scape there,” says Sal­vo, who spent most of his child­hood in Brazil. At just about every refu­el­ing sta­tion in the nation, you will have ethanol offered along­side gaso­line — some­times in the same pump. It’s as sim­ple as that.”

Today, near­ly one third of Brazil’s pri­vate pas­sen­ger vehi­cle fleet — 9 mil­lion cars and light-duty trucks — have flex­i­ble-fuel capa­bil­i­ties. But decades after ethanol was intro­duced as an alter­na­tive fuel, Sal­vo won­dered what drove the flex­i­ble-fuel vehi­cle own­ers’ fuel choice. Did they go for the low­est price, or did they bring some oth­er deci­sion-mak­ing process­es with them to the refu­el­ing stations?

In Jan­u­ary 2010, he saw a prime chance to study his ques­tion about pat­terns of fuel sub­sti­tu­tion when the price of sug­ar spiked glob­al­ly due to a failed har­vest in India. This allowed Brazil’s sug­ar­cane indus­try to charge more for its prod­uct, regard­less of whether it was being export­ed, most­ly in the form of sug­ar, or used domes­ti­cal­ly for ethanol. As a result, ethanol prices rose sharply for a few months, but gaso­line prices, which are con­trolled by the gov­ern­ment, stayed level.

The Ethanol Caveat

There is one wrin­kle to under­stand about the pric­ing of these fuels. In Brazil, ethanol usu­al­ly retails for less per liter than gaso­line because a dri­ver gets less dis­tance out of it. For exam­ple, for a giv­en amount of gaso­line in a Brazil­ian cab driver’s tank he can dri­ve 100 miles. But for that same vol­ume of ethanol, he’d dri­ve 70 miles. So when the per-liter price of ethanol is 70 per­cent the price of gaso­line, par­i­ty” is reached; this is the point at which gaso­line and ethanol prices are equal in terms of cash spent per mile trav­eled on either fuel.

Brazil­ian radio sta­tions report reg­u­lar­ly on the fuel prices rel­a­tive to each oth­er, and work­ers at refu­el­ing sta­tions can also help motorists by updat­ing them on price fluc­tu­a­tions. (It is more cus­tom­ary for a work­er to refu­el a motorist’s car than for the dri­ver to do so.) Or, dri­vers can just keep a cal­cu­la­tor handy to divide the price of ethanol by the price of gaso­line and com­pare it to the 70 per­cent par­i­ty ratio. Despite the var­i­ous ways that dri­vers can keep up with the par­i­ty ratio, some may be unwill­ing to make the effort, unin­formed, inat­ten­tive, or unable to ask about the cost conversion. 

A Sug­ary Shock

Giv­en the ubiq­ui­ty of ethanol, and its con­stan­cy in Brazil­ians’ lives, Sal­vo saw the glob­al sug­ar-price surge as the per­fect moment to pounce on ripe, liv­ing data.

He select­ed six major cities as loca­tions for his study. Three of the cities were in sug­ar-pro­duc­ing states (São Paulo, in the state of São Paulo; Curiti­ba, Paraná; and Recife, Per­nam­bu­co) and three cities were in non-sug­ar pro­duc­ing states (Rio de Janeiro, in the state of Rio de Janeiro; Belo Hor­i­zonte, in Minas Gerais; and Por­to Ale­gre, in Rio Grande do Sul). At least twen­ty refu­el­ing sta­tions with­in each city were used for obser­va­tions. Field rep­re­sen­ta­tives made 12 obser­va­tions per vis­it to each sta­tion, and some cities were sur­veyed over mul­ti­ple weeks that were spaced apart. In all, 2,160 obser­va­tions of indi­vid­ual con­sumers were made at the 180 dif­fer­ent sta­tions in the study. (Sal­vo says the fuel prices var­ied more wide­ly between cities than with­in them.)

Dur­ing the sug­ar-price surge, the price of a liter of ethanol peaked at 75 per­cent of gaso­line in São Paulo, and 90 per­cent in Por­to Ale­gre, which imports ethanol from out of state and tax­es the alter­na­tive fuel more heav­i­ly rel­a­tive to São Paulo. Only two months lat­er, by late March, the price of ethanol in São Paulo had sunk to below 60 per­cent that of gasoline.

Dur­ing this rise and fall from par­i­ty, Sal­vo found that 20 per­cent of flex­i­ble-fuel vehi­cle own­ers stuck with ethanol even when it was 20 per­cent more cost­ly per mile trav­eled than gaso­line — and anoth­er 20 per­cent stuck with gaso­line when it was gasoline’s turn to be priced 20 per­cent high­er. In oth­er words, price was sim­ply not an impor­tant fac­tor for 40 per­cent of the motorists.

We may need to make the alter­na­tive much, much cheap­er than the tra­di­tion­al tech­nol­o­gy or fuel to dri­ve vol­un­tary adop­tion, at least ini­tial­ly.” — Salvo

Sur­veyed motorists were asked, What was the main rea­son for your choice of fuel today?” Those who said they were con­cerned for their engines more fre­quent­ly select­ed gaso­line and were around 25 per­cent less like­ly to buy ethanol, while motorists who expressed con­cern for the envi­ron­ment were around 40 per­cent more like­ly to buy ethanol. Motorists wor­ried about the range a tank of fuel would give them were 25 per­cent less like­ly to select ethanol. Sal­vo and Huse found that while motorists were gen­er­al­ly aware of the sug­ar industry’s three-decade-long adver­tis­ing cam­paign about ethanol’s green­ness”, renewa­bil­i­ty, and pro­vi­sion of local jobs, they seemed to be less accept­ing of car­mak­ers’ insis­tence that flex­i­ble-fuel vehi­cles are equipped to oper­ate sim­i­lar­ly on either fuel.

The researchers also found that motorists who pre­ferred ethanol tend­ed to be younger, col­lege-edu­cat­ed, and live in sug­ar-pro­duc­ing states, while those who pre­ferred gaso­line tend­ed to be old­er and to be heavy commuters.

In a way it’s not sur­pris­ing that the old­er dri­vers tend­ed to be slow­er to adopt a new tech­nol­o­gy,” Sal­vo says. But we also inter­pret this find­ing to mean that old­er peo­ple will require deep­er price dis­counts to vol­un­tar­i­ly switch to a new fuel tech­nol­o­gy. Gaso­line is their com­fort zone.”

Over­all, the con­sumer switch­ing that hap­pened between ethanol and gaso­line dur­ing the study peri­od occurred over a much wider range of prices ver­sus the com­par­a­tive­ly nar­row range around par­i­ty that Sal­vo antic­i­pat­ed. What also sur­prised me was the will­ing­ness to pay by cer­tain con­sumers for what they per­ceive to be a green­er fuel,” Sal­vo says. On aver­age, such motorists were will­ing to shell out the equiv­a­lent to an addi­tion­al 10 cents (U.S.) per mile for ethanol over gaso­line, the study found.

Con­sumer Behav­ior and Alt-Fuel Adop­tion

At the heart of it, though, Sal­vo says his find­ings have impli­ca­tions for oth­er coun­tries, like the Unit­ed States, that are search­ing for poli­cies to help dri­ve adop­tion of ener­gy sources or tech­nolo­gies that are alter­na­tives to gasoline.

We may need to make the alter­na­tive much, much cheap­er than the tra­di­tion­al tech­nol­o­gy or fuel to dri­ve vol­un­tary adop­tion, at least ini­tial­ly,” Sal­vo says. We also need to equip con­sumers with the tools to eas­i­ly com­pare across the ener­gy sources in terms of prices and non-price char­ac­ter­is­tics. What this study shows is that con­sumer choice and behav­ior is just as impor­tant as supply.”

In oth­er words, hav­ing an alter­na­tive that can be deliv­ered to our exist­ing cars using an exist­ing fuel-deliv­ery infra­struc­ture will not be enough for con­sumers to vol­un­tar­i­ly switch en masse; prices may have to be sub­si­dized steeply in order to sway con­sumers who are more like­ly to pre­fer stick­ing with a con­ven­tion­al fuel or technology.

I would dare to say the issues we find with ethanol in Brazil are like­ly to become com­pound­ed in the U.S. when it tries to dri­ve adop­tion away from gaso­line, say toward elec­tric­i­ty-pow­ered cars,” Sal­vo says. Peo­ple choose between these types of fuels even when you think they would not.”

Relat­ed read­ing on Kel­logg Insight

Con­sumers, Cars, and Com­mon Sense: The role of gas prices in Amer­i­can auto­mo­bile purchases

$1,000 Cash Back Impli­ca­tions for cus­tomer and deal­er negotiations

Featured Faculty

Alberto Salvo

Member of the Department of Strategy faculty from 2005 to 2013

About the Writer

T. DeLene Beeland is a science writer based in Asheville, NC.

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