Modelling the Coevolution of the Fuel Ethanol Industry, Technology System, and Market System in China: A History-Friendly Model

Abstract

The interaction among the fuel ethanol industry, the technology system, and the market system has a substantial effect on the growth of the fuel ethanol industry which plays a key role in the formation of a sustainable energy system in China. However, we know little about the relationships among them and it is difficult to explore the nexus using econometric method due to the lack of statistics on China’s fuel ethanol industry. This paper develops a history-friendly coevolutionary model to describe the relationships among the fuel ethanol industry, the technology system, and the market system in China. Based on the coevolutionary model, we further assess the impacts of entry regulations, production subsidies, R&D subsidies, and ethanol mandates on the growth of the fuel ethanol industry in China using a simulation method. The results of historical replication runs show that the model can appropriately reflect the multidirectional causalities between the fuel ethanol industry, the technology system, and the market system. We also found that entry regulation is conducive to weakening the negative economic impacts induced by the growth of the grain-based fuel ethanol industry without affecting the long-term total output of the industry; production subsidies to traditional technology firms are helpful for the expansion of the fuel ethanol industry, but they also impede technology transfer in the industry; only when firms inside the industry are not in the red can R&D subsidies promote technological progress and then further accelerate the growth of the fuel ethanol industry; the ethanol mandate has a significant impact on industrial expansion only when a production subsidy policy is implemented simultaneously. Our findings suggest that more attention could be paid to consider the cumulative effects caused by coevolutionary mechanisms when policymakers assess the effects of exogenous policies on the growth of the fuel ethanol industry. More attention also could be paid to the conditions under which these policies can work effectively.