Natural Gas Vehicles: Consequences for Fuel Markets and the Environment

Policies to adopt cleaner fuels have become increasingly important, but their impacts on incumbent fuel prices and resulting greenhouse gas emissions remain unclear. We use a panel dataset on weekly prices at the gas station level in a large Brazilian state to study how the growth of natural gas, a cheaper and less carbon-intensive alternative to traditional fuels, impacted retail prices, and profit margins of gasoline and ethanol. Applying an IV strategy, we estimate that prices and margins have fallen. The intensified competition in the fuel market boosted fuel demand, leading to higher emissions of GHGs and other pollutants. JEL Classification: L11 Production, Pricing, and Market Structure; size distribution of firms; L13 Oligopoly and Other Imperfect Markets; Q31 Nonrenewable Resources and Conservation: Demand and Supply; prices; Q41 Energy: Demand and Supply; prices; Q53 Air Pollution; water pollution; noise; hazardous waste; solid waste; recycling