Fueling Ethanol: Government policies, networks, and the diffusion of E85 stations in the United States

United States energy policy in the transportation sector has increasingly focused on the development of alternatives to traditional gasoline. Proposals include natural gas vehicles, hydrogen powered vehicles, electrical vehicles, and biofuel. My research studies the most developed of these alternatives: biofuel blends of E85 (85% ethanol and 15% gasoline). Like many alternatives to traditional gasoline, the development and deployment of E85 depends crucially on the diffusion of both compatible vehicles as well as fueling stations. I focus on the later, estimating the effect of various state and federal policies on fueling stations’ investment decision in E85 fueling infrastructure. I develop of theoretical model of diffusion, motivating my empirical estimation strategy, and estimate the effect of grant programs, state tax credit programs, and the federal tax credit on gasoline station owners’ investment decisions from 1992-2009. I find that grant programs and the federal tax credit have a strong, positive effect while state tax credits have no significant effect. In addition, I estimate the network benefit of additional E85 stations, and find evidence of strong network effects, suggesting the importance of taking into consideration networks when promoting renewable fuel alternatives.