Study: Minnesotans willing to pay premium for E85

(Photo via USDA)

Minnesota drivers like their E85, and they’re willing to pay a premium for it.

A new study by a Michigan State University economist shows that even when the higher ethanol blend is a more expensive option than regular gasoline, some flex-fuel vehicle owners in Minnesota continue buying the higher-blend ethanol.

E85, which contains a mix of 85 percent ethanol and 15 percent gasoline, is almost always less expensive per gallon than regular gasoline, which in Minnesota typically contains 10 percent ethanol. But because of E85’s lower energy content, the relative cost per mile of using it can vary.

Soren Anderson, an assistant professor of economics, examined sales and price data from 200 Minnesota fueling stations between 1997 and 2006.

“When the price of E85 rose relative to gasoline, the market didn’t disappear,” Anderson said. “There were still people buying E85 even when its price was quite a bit higher [relative to] gasoline.”

Anderson argues that researchers should take this consumer preference into consideration when calculating the cost of policies such as the federal renewable fuels standard.

Several studies have examined how drivers respond to changes in gasoline prices, but little was known about how ethanol blend prices affect consumer decisions. Anderson concluded that a 10-cent-per-gallon increase in E85 prices caused demand to fall off between 12 percent and 16 percent. That’s significant, but smaller he would have guessed knowing that drivers could have easily switched to conventional gasoline.

“They value something about that fuel when they’re willing to buy it even when the per-fuel-mile price is high,” Anderson said.

The study didn’t survey drivers about their motivations, but it says possible explanations include perceived social and environmental advantages, or misunderstanding about how the fuels compare.

Sales of E85 ethanol have continued to grow in Minnesota, according to statistics publicized this week by the American Lung Association in Minnesota.

Minnesotans bought an estimated 19.8 million gallons of E85 in 2011, making it the third best year for E85 and best since the pre-recession record of 22.5 million gallons in 2008. Gasoline sales, meanwhile, fell to 2.4 billion gallons in 2011 from 2.5 billion gallons in 2010.

“I think it’s a sign that E85 has really become well established in Minnesota,” said Bob Moffitt, spokesman for the American Lung Association of the Upper Midwest. “It’s got a really solid base of customers. The number of stations is not growing quite so fast as it was in the earlier years, but we’re steadily adding numbers.”

Moffitt takes issue with the second part of Anderson’s study, which concludes that even accounting for the “sizable” premium some drivers are willing to pay for ethanol, the federal renewable fuel standard is an expensive way to reduce greenhouse emissions — about $70 per metric ton of carbon dioxide emissions avoided, Anderson calculated.

Anderson acknowledges in his report that the carbon cost is based on current assumptions about the price of ethanol and gasoline, either of which could change due to political, economic or technology factors, such as a game-changing breakthrough in cellulosic ethanol production. If greenhouse emission reductions is the goal, Anderson said in an interview that a more direct policy such as a carbon tax would be less costly to consumers.

The federal renewable fuel standard will require 36 billion gallons of annual production by 2022, with no more than 15 billion gallons coming from corn-based ethanol. Many of the assumptions Anderson makes about its cost come directly from the U.S. Environmental Protection Agency’s regulatory impact statement for the policy.

Moffitt said one of Anderson’s assumptions — that E85 ethanol nets 36 percent fewer miles per gallon than conventional gasoline — is not what they’ve observed and heard from drivers. In real life it’s closer to a 15 percent or 20 percent decrease, Moffitt said.

Ethanol offers benefits beyond reducing greenhouse gases, too, Moffitt said. Anderson’s study focuses solely on greenhouse gases and consumer impacts. The EPA’s policy impact report counts $2.6 billion worth of energy security benefits, up to $2.2 billion in health benefits, and $13 billion in new farm income. (Also: millions of pounds of new nitrogen and phosphorus pollution in the Mississippi River.)

“Gasoline powered vehicles produce a lot more than just greenhouse gas. They’re the single largest source of air pollution in Minnesota,” Moffitt said. “Any steps we can take toward cleaner, more renewable fuels is a step in the right direction.”

On that point, it would seem many Minnesota drivers agree.

One thought on “Study: Minnesotans willing to pay premium for E85

  1. My experience with two Flex Fuel pickups that the drop in mileage is less than 20%, closer to 15%. So that changes the math considerable in this study. Also corn growers in Minnesota like buying corn based ethanol instead of supporting the Mid East economys.