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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.

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Presentation on theme: "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 transcript:

1 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

2 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

3 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.

4 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).

5 Some Estimated Elasticities Canadian Estimates:United States Estimates: Atlantic-0.262North East Québec-0.131Mid West Ontario-0.158South Prairies-0.167West B.C All-0.185All-0.339

6 Gasoline Pricing Breakdown, Canada 2000: CityCrude ContentRetail Halifax26.7c72.2c Montreal27.5c77.5c Toronto28.0c69.3c Edmonton26.9c64.1c Vancouver27.9c73.0c Source: CPPI Fuel Facts, August 8, 2000

7 Gasoline Pricing Breakdown, Canada 2004: CityCrude ContentRetail Halifax33.8c97.0c Montreal34.5c95.9c Toronto35.9c83.6c Edmonton33.5c85.6c Vancouver34.8c97.4c Source: CPPI Fuel Facts, June 8, 2004

8 Gasoline Pricing Breakdown, United States 2000: CityCrude ContentRetail Bangor,ME26.7c61.8c Buffalo,NY28.0c63.8c Minneapolis,MN26.9c55.8c Seattle,WA27.9c65.1c Source: CPPI Fuel Facts, August 8, 2000

9 Gasoline Pricing Breakdown, United States 2004: CityCrude ContentRetail Bangor,ME33.8c74.5c Buffalo,NY35.9c76.3c Minneapolis,MN33.5c72.4c Seattle,WA34.8c87.2c Source: CPPI Fuel Facts, June 8, 2004

10 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 % and % respectively, depending on region. At 2004 level gasoline prices, moving to E10 increases fuel prices across Canada and the U.S. by % and % respectively, depending on region.

11 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 million litres.

12 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.


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