Option Value Embedded on the Brazilian Flex and Sustainable Vehicles

Abstract

The Brazilian auto industry has changed significantly since 2003 by the introduction of the flexible fuel vehicles that can run with any mix of gasoline or sugarcane ethanol. Sugarcane ethanol is a well-known renewable fuel and an efficient alternative to fossil fuel due to its high energy yield and its great sustainable potential for fixing carbon dioxide. Consumers see great opportunity in acquiring a flex fuel vehicle, because car owners can select the fuel by considering its relative price and sustainable profile. This study applies the real options methodology to capture the worth of owning and operating a Brazilian flex fuel vehicle, regarding the relative prices of the two fuels. The more uncertain the relative prices of fuels the more valuable the option value embedded in Brazilian flex fuel vehicles becomes. The authors develop sensitivity analyses regarding different scenarios on Brazilian fuel markets and discuss their impacts.