Biodiesel Use

Network Externalities

As in the case of ethanol, biodiesel has already been fairly widely commercialized in certain parts of the world. However, it is much more widely used in the European Union, where biodiesel makes up 80% of the biofuels market (IEA Energy Policies Review-EU 2008), than in the United States, where ethanol dominates. The EU is also the largest producer of biodiesel in the world. Promoting biodiesel use has been viewed as a way to secure the EU’s energy independence when faced with rapidly increasing demand for diesel, which the bloc has met largely through increasing imports of petrodiesel from Russia.

Figure IV. Evolution of the diesel and gasoline demand in the EU
Source: Eurostat (historical data)

(European Biodiesel Board 2008)

Why has diesel (and therefore, biodiesel) been so much more popular in Europe than in the United States?

European demand for diesel displayed a steady increase from 1990 through 2005, as shown in the graph above. The explanation for this phenomenon can be understood largely through considering the combined effects of preferential tax policy for diesel use and production and network externalities. As diesel became the more affordable fuel option in Europe, for both tax incentive and natural fuel efficiency reasons, consumers increasingly purchased diesel-compatible vehicles. (To learn more about diesel’s efficiency advantages, see this site created by our classmates on clean car technology.) In response, diesel became increasingly ubiquitous in EU gas stations, making it an increasingly reasonable choice for subsequent car purchasers. With increasing diesel vehicle demand, car producers invest more money in developing new diesel models, thereby giving consumers comparably fewer options if they want to stick with the declining gasoline technology.

Diesel prices at a fuel station in Mannheim, Germany in 2007

If petroleum prices continue to rise, we could reasonably even imagine that diesel (especially diesel/biodiesel blends) might “lock in,” (for theoretical treatment of technological lock-in, see Arthur 1989) if it has not already done so, and become the prevailing fuel technology in Europe, at least until a new technology (e.g. hydrogen fuel cells or battery electric vehicles) emerges as a viable large-scale option.

In contrast, in the U.S., tax incentives (especially on the state level) have traditionally had an opposite effect, supporting gasoline over diesel. This fact, along with diesel vehicles’ poor reputation in the U.S. as being loud, dirty, slow, and not well-made (which was not entirely inaccurate, due to few options and a lack of investment in diesel car production in the U.S.), caused diesel cars to trail far behind gasoline cars in popularity. Currently, diesel cars make up only about one percent of new sales in the U.S. (compared to 70 percent in Europe). There continue to exist strong network effects favoring the purchase and production of vehicles that run on gasoline in the U.S. However, increasing fuel costs and awareness of the efficiency benefits of diesel have spurred signs that the market may be shifting. Diesel auto sales increased by 35 percent in the first quarter of 2012.

Social Externalities

Compared to petrodiesel, biodiesel produces less emissions of toxic and greenhouse gases, such as sulfur and nitrogen oxides, and can be produced domestically in both the U.S. and Europe, creating strong incentives for public subsidization for environmental and national security reasons. Since most of the social benefits from biodiesel use as compared to petrodiesel consist of positive externalities through decreases in harmful emissions and political benefits of energy independence, these subsidies could be justified as correcting for market failures resulting from a lack of internalization of these social benefits.

Whether biodiesel represents the best direction for public subsidies as compared to other alternative fuels or fuel efficiency projects remains an open question to be discussed further here.

Arthur, W. Brian. (1989). “Competing Technologies, Increasing Returns, and Lock-In by Historical Events.” The Economic Journal 99,394: 116-131.

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