Effects on Gasoline Demand in
Canada and the United States of
Increased Ethanol Use
By
Christopher J. Nicol
Kurt K. Klein
with contributions by
Maria Olar
Presentation Outline:
-
Why use ethanol?
-
Modelling gasoline demand
-
Some estimated elasticities
-
Gasoline pricing breakdown
-
Pricing effects of using E10
-
Effect on gasoline demand of increasing ethanol content
-
Implementation considerations
Why Use Ethanol?
 Greenhouse gas (GHG) emission reduction:



Pure, grain-based fuel implies 30-40% reduction; E10 fuel implies 3-4%
reduction (Natural Resources Canada, 2003).
Cellulose-based fuel implies 60-80% reduction.
Reduction level depends on proportion of ethanol in the fuel.
 Criteria air contaminant (CAC) effects:


Reduction in CO, volatile organic compounds (VOC), particulate matter
(PM) and sulphur oxides (SOx).
Increases in nitrogen oxides (NOx) and some VOC’s.
 Increased vehicle efficiency:



Higher octane fuel.
Engine-cleaning properties.
Higher efficiency in burning.
Modelling Gasoline Demand
 A model of gasoline demand can be embedded in a complete
demand system.
 We make use of estimated elasticities from a complete demand
model developed for Canada and the United States
 The model (from Nicol, 2001) is a six-good demand system,
controlling for a variety of important demand factors.
 The model has been used to compute gasoline elasticities of
demand for Canada and the United States (Nicol, 2003).
Some Estimated Elasticities
Canadian Estimates:
United States Estimates:
Atlantic
-0.262
North East
-0.275
Québec
-0.131
Mid West
-0.409
Ontario
-0.158
South
-0.361
Prairies
-0.167
West
-0.293
B.C.
-0.224
All
-0.185
All
-0.339
Gasoline Pricing Breakdown, Canada
2000:
City
Crude Content
Halifax
Montreal
Toronto
Edmonton
Vancouver
Source: CPPI Fuel Facts, August 8, 2000
26.7c
27.5c
28.0c
26.9c
27.9c
Retail
72.2c
77.5c
69.3c
64.1c
73.0c
Gasoline Pricing Breakdown, Canada
2004:
City
Crude Content
Halifax
Montreal
Toronto
Edmonton
Vancouver
Source: CPPI Fuel Facts, June 8, 2004
33.8c
34.5c
35.9c
33.5c
34.8c
Retail
97.0c
95.9c
83.6c
85.6c
97.4c
Gasoline Pricing Breakdown, United
States
2000:
City
Bangor,ME
Buffalo,NY
Minneapolis,MN
Seattle,WA
Source: CPPI Fuel Facts, August 8, 2000
Crude Content
26.7c
28.0c
26.9c
27.9c
Retail
61.8c
63.8c
55.8c
65.1c
Gasoline Pricing Breakdown, United
States
2004:
City
Bangor,ME
Buffalo,NY
Minneapolis,MN
Seattle,WA
Source: CPPI Fuel Facts, June 8, 2004
Crude Content
33.8c
35.9c
33.5c
34.8c
Retail
74.5c
76.3c
72.4c
87.2c
Pricing Effects With E10
 Production cost of corn-based ethanol, 35c/l (Baker, 1990).
 Break-even price of ethanol versus gasoline estimated at 28c/l
(Government of Alberta, 2000).
 Minimum additional “raw material” cost of E10-based fuel at least 1c/l.
 At 2000 level gasoline prices, moving to E10 increases fuel prices
across Canada and the U.S. by 1.3-1.6% and 1.0-1.2% respectively,
depending on region.
 At 2004 level gasoline prices, moving to E10 increases fuel prices
across Canada and the U.S. by 1.0-1.2% and 0.8-0.9% respectively,
depending on region.
Effects on Gasoline Demand of
Increased E10 Use
 Gasoline consumption, Canada, 2001, 36,902 million
litres.
 Gasoline consumption, United States, 2001, 464,277
million litres.
 Based on estimated elasticities earlier, could see a
reduction in gasoline demand in Canada of 75.3
million litres.
 Based on estimated elasticities earlier, could see a
reduction in gasoline demand in the U.S. of 1416.1
million litres.
Implementation Considerations

Ethanol production capacities in Canada and the U.S. are below that feasible to
meet complete E10 needs for each country.

Tax treatment of the ethanol component of fuel differs in provinces across
Canada and states across the U.S.

Opposition of various sorts is likely in the event of a policy to promote increased
E10 use.

Although the increase in fuel price is modest, this in itself is likely to generate
considerable opposition to policy-promoted use of E10.

A comprehensive approach, looking at all aspects of a change, is likely to meet
with more success.

This work is preliminary, but the analysis suggests greater benefits might be
available with a widespread movement to the use of E10.