This is shown by a study carried out within the scope of the RCGI analyzing the elasticity of ethanol and gasoline prices in relation to the market share of these vehicles

Flex fuel cars – running on technology that holds the lion’s share of the market, at over 90% – could become a market barrier for the expansion of vehicles with new non-polluting technologies, such as electricity or hydrogen. The reason is that they represent a product considered by economists to have nearly zero price elasticity. That is, a market protected against fluctuations in fuel prices, where the demand for vehicles using this technology tend remain unchanged. This is one of the conclusions reached by a study published, in January, in the periodical Transportation Research, in the section dedicated to studies regarding transportation and the environment.

Authored by researcher Thiago Luís Felipe Brito, PhD in Energy from the Institute of Energy and Environment of the University of São Paulo (IEE/USP), the study was performed within the scope of research being performed by the FAPESP Shell Research Centre for Gas Innovation (RCGI). Brito analyzed the direct and cross elasticity of fuel prices in relation to the market share of the passenger cars running on gasoline and ethanol, from 1980 to 2002, and then of the flex models, from 2003 to 2017. The data used in the study are from the Brazilian Automobile Industry Association (ANFAVEA), of the Office of Energy Research (EPE), and of the Environmental Company of the State of Paulo (CETESB).

While tracing the history of the price elasticity of these fuels in relation to car sales, Brito found that the technologies that reach a large share of the domestic market showed small signs of elasticity, being less subject to variations in demand. And that the State’s incentive programs carried immense weight within this scenario.

From 1980 to 1990, for example, the sale of cars powered by ethanol was greater than those running on gasoline. This is directly related to the price of ethanol, which became dropped, influenced by the incentives of ProÁlcool (The Brazilian Alcohol Program), with subsidies for ethanol producers and vehicle manufacturers, and tax exemptions on sales to consumers.

Despite the initial sales successes, ethanol suffered pricing shocks during the 1990s, with the move to producing sugar. Furthermore, the Brazilian government began to give incentives to small-engine cars, the so-called popular cars running on gasoline. The results were reduced sales of ethanol-powered cars, followed by increased sales of those running on gasoline. The price variation was so great that consumers lost interest in cars fueled by ethanol, even when the price dropped. “The share of gasoline-powered cars then lost its elasticity; despite the greater price variation compared to gasoline, consumers continued preferring cars having gasoline technology,” Brito states.

Radical change – In 2003, with the advent of flex-fuel technology, this situation experienced radical change, especially as of 2005. That was when the improvements made in flex technology resulted in a 40% increase in energy efficiency. Sales soared and flex technology began to dominate the passenger car market. Flex cars were doubly benefited by ethanol’s lower price and by the fact that consumers lost interest in gasoline-powered vehicles.”

“Besides efficient fuel consumption, one can explain the success of flex technology due to the competition between gasoline and ethanol prices,” Brito explains, while adding that, at the same time, ethanol began to play a crucial role in reducing greenhouse gas emissions, which boosted the ProÁlcool program.

Based on this background and due to the findings of the study’s elasticity calculations, Brito believes that the expansion, or even the advent, of new fuel technologies in Brazil will face an uphill battle for acceptance, because of the highly competitive flex context; not only because it dominates the market, but also due to favorable public policies. In his opinion, a hybrid technology (flex and electric), which would increase energy efficiency, would have a better chance of successfully competing in the Brazilian marketplace. “I believe that some technologies – electricity and hydrogen, for example – will likely become a market niche, as did natural gas for passenger cars,” he says.

“Of course, fuel prices are not the only variable that affects car sales, but clearly there is a need to ensure the competitiveness of technologies that use alternative fuels, if there is a desire to open the market to them. The purpose of this study was to provide a few reliable elasticity parameters for those who establish public policies, at least with respect to relationship between car sales and fuel prices,” he concludes.

The study had contributions from professors Towhidul Islam (University of Guelph – Canada) and Marc Stettler (Imperial College London – United Kingdom), who guided Thiago Brito in his Doctoral sandwich and assisted with the method proposal and a review of the calculations. Professors Edmilson Moutinho dos Santos and Dominique Mouette, both of the IEE/USP, accompanied the researcher’s work and brought a national viewpoint to the study.