Advancing Economics, Transforming Lives

January 2009

Designing Producer Adoption Incentives for Next Generation Energy Policies

By Jennifer Allwardt

One of the newest faculty members in the department has an interest in studying markets for ethanol and other renewable fuels.  Soren Anderson, who holds appointments in the Departments of Economics, and Agricultural, Food, and Resource Economics, has jumped into working with other MSU faculty.  “I’m really excited about learning from my new colleagues. MSU has a real concentration of bioenergy experts.” Anderson recently earned his Ph.D. in economics at University of Michigan in 2008, where he focused on emerging markets for biofuels.  He also has experience as an economist for the Council of Economic Advisers in Washington, D.C.

 A major research thrust consumer willingness to buy ethanol, depending on its price relative to gasoline.  Estimating the price at which consumers will switch from petroleum-based fuels to ethanol is important information for economists who are interested in better understanding this new market.  His estimates of consumer behavior are based on Minnesota’s nascent market for E85—a specialty fuel blend that contains 85% ethanol. “Consumers have widely divergent preferences,” he says, “Some consumers demand steep discounts before they’ll switch to ethanol, while others will pay a premium for the fuel.”  He is using these estimates to predict the likely impacts of the federal renewable fuel standard. “Accounting for consumers that prefer ethanol reduces the cost of the standard,” he explains, “because you can get them to switch to ethanol with little or no subsidy. That said, costs still exceed benefits in terms of improved energy security or climate change. Raising the gas tax would be much better.”

Anderson is also studying the market for flexible fuel vehicles, which can burn either ethanol or gasoline.  This market is interesting in its own right, but it also offers important clues about the auto industry’s cost of complying with fuel-economy standards.  The standards, which mandate a minimum average mileage for new cars, contain a provision that gives extra credit to automakers that produce flexible-fuel vehicles.  While the cost of adding flexible-fuel capacity is known, it is difficult to discern the costs of other compliance strategies, such as selling smaller vehicles or making vehicles more efficient. “Assuming that automakers try to minimize costs,” Anderson notes, “Then automakers that use flexible-fuel vehicles to comply indirectly reveal information about the costs of those other strategies.”

Anderson is exploring more energy-related research topics. One possible project would estimate the cost of improving energy efficiency in the manufacturing sector using a Department of Energy database of energy-efficiency audits and project recommendations.  Anderson wants to investigate the mechanics of how ethanol and petroleum markets interact.  “I’d love to look back at the spectacular growth of ethanol over last decade and figure out what fraction of that growth was due to government policy, and what fraction was due to higher petroleum prices. And then figure out whether ethanol has any chance of reducing gasoline prices in the future.”