Blend-wall economics: Relaxing US ethanol regulations can lead to increased use of fossil fuels

The US Environmental Protection Agency is currently considering a waiver allowing an increase in the fuel-ethanol blend limit (the blend wall) from 10% (E10) up to 15% (E15). Justifications for this waiver are reduced vehicle fuel prices and less consumption of petroleum gasoline leading to energy security. A theoretical examination of this waiver reveals an anomaly where a relaxation of this blend wall elicits a demand response. Under a wide range of elasticities, this demand response can actually increase the consumption of petroleum gasoline and thus lead to greater energy insecurity. The economics supporting this result and associated policy implications are developed and discussed. (C) 2010 Elsevier Ltd. All rights reserved.