The Higher Price of Cleaner Fuels: Market Power in the Rail Transport of Fuel Ethanol

This paper provides evidence of market power in the transportation of ethanol used in reformulated gasoline and alternative transportation fuels. I estimate a reduced form model for railroad route-level prices. My identification strategy instruments for railroad entry, controls for selection and explicitly models capacity constraints. A detailed understanding of this industry is important because U.S. environmental policies seek to substantially expand ethanol use. Evidence of market power may alter the types of policies pursued by lawmakers. I find that ethanol shipment prices are lower for more competitive routes. I also find evidence that railroads price discriminate based on environmental regulation at route destinations. Monopolist prices for shipments to carbon monoxide non-attainment areas are 3% higher than shipments to other destinations. This price premium falls sharply with increased competition. This suggests a perverse result where environmental regulation increases the price of a clean input. ∗I thank Meghan Busse, Stephen Holland, Christopher Knittel, Douglas Miller, David Rapson, Victor Stango, four anonymous referees, and seminar participants at the College of William and Mary, the Colorado School of Mines, Iowa State University, North Carolina State University, Pennsylvania State University, the University of California Energy Institute, the University of California Santa Barbara, the University of Colorado at Boulder, the University of Michigan, UNC Chapel Hill, UNC Greensboro, and the University of Tennessee for helpful discussions. All remaining errors are my own. I thank Michael Nicholas for assistance with GIS programming. I am grateful for financial support from the Sustainable Transportation Energy Pathways (STEPS) program and the UC Davis Institute of Transportation Studies. University of Colorado at Boulder, Department of Economics, 256 UCB, Boulder, CO 80309; email: [email protected]