Purpose

This paper examines the value of fuel choice flexibility derived from a flex-fuel engine.

Method

Based on the stochastic properties of fuel prices, we use Monte-Carlo simulation in order to value the option to switch fuel.

Results

Our findings indicate a considerable value of fuel choice flexibility, ranging between 7,500 and 37,800 SEK, depending on the underlying stochastic process we assume that fuel prices follow. This can be compared to the state subsidy of 10,000 SEK provided until recently for buying a flex-fuel car.

Conclusion

Compared to an environmentally friendly pure ethanol strategy, the switching strategy is considerably less costly, about 2,000–19,000 SEK depending on the assumed underlying stochastic process, a fact that is important to take into consideration with environmental policy.