Fuel Choice and Fuel Demand Elasticities in Markets With Flexfuel Vehicles

The purchase of multifuel vehicles (MFVs) has been incentivized by policies across the globe. Such vehicles are able to operate on more than one source of energy, so they introduce fuel (or energy) choice as one additional dimension consumers decide about. As fuels differ in terms of carbon emissions, this choice has environmental effects. Using 12 years of monthly Swedish data, here I show that the majority of MFV drivers purchase petrol when it is priced at parity with ethanol. Through policy simulations, I document that fossil fuel taxes have limited success in making drivers switch to alternative fuels and can generate economic distortions. The findings question the cost-effectiveness of programmes to incentivize the purchase of MFVs that ignore the fuel choice dimension and highlight the importance of accounting for fuel choice in the analysis of public policy and emerging technologies