The market and consumer welfare effects of mid-level ethanol blends in the US fuel market

This study examines the prospect that a consumer-driven market could eventually replace the myriad regulations and demand quotas in the US ethanol and gasoline fuel market. Given efficient households that minimize the cost of operating automobiles, recent vehicle technology that improves blended fuel substitution, and typical market conditions of the last five years, blended fuels with 20% ethanol concentration could occupy a volume of 82.2 billion gallons in a 138.3 billion gallon gasoline market. The consumer welfare gain associated with blended fuel is $15.9 billion annually for US consumers, or about $1000 over the life of a vehicle. The ethanol demand associated with a voluntary blended fuel market is 16.4 BGY, slightly more than the conventional component of the Renewable Fuels Standard. It is time to replace the corn RFS with a free market. But an active competition policy in the fuel marketing system may also be required. Intervention for the impending Biomass Ethanol Industry, such as a subsidy or an exemption a carbon tax, may also be in order. (C) 2016 Elsevier Ltd. All rights reserved.