Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 362: Interest groups and thefailure of transformativeinnovation policy - Insights from the ethanolcar bubble in Sweden 2003-2013

Rickard Björnemalm () and Christian Sandström ()
Additional contact information
Rickard Björnemalm: Stockholm School of Economics, Postal: Box 6501 | SE-113 83 Stockholm
Christian Sandström: The Ratio Institute, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: Literature on innovation policy has so far paid little attention to policy failure and the mechanisms leading to failure. We describe the Swedish bubble in ethanol cars 2003-2013 and explain why well intended policies may end up with unsatisfactory results. Directives from the European Union forced policymakers in Sweden to act swiftly and the Swedish government put in place The Pump law which forced gas stations to supply ethanol as a fuel from 2006 and onwards. In combination with targeted tax deductions for ethanol cars, a sharp increase in demand took place in 2006-2008. As these started to experience engine problems by 2009-2010, demand declined. Tax deductions were subsequently altered in order to also include cars with very low CO2 emissions, a shift that contributed further to the downfall of ethanol cars. Our data suggests that domestic car manufacturers Volvo and Saab, along with Ford benefited from the ethanol policies as their combined market share for green cars surged from 12 to 75 percent 2005-2008. Ethanol was competitive in the political domain as the fuel was backed by the Centre Party and the associated farmers’ lobby group, but lacked economic, technological and environmental competitiveness. Our findings suggest that innovation policies aimed at supporting new technologies against vested interests may instead end up extending established interests as policies are put in place under the influence of various stakeholders.

Keywords: Ethanol car; policy failure; innovation; technology; environment.

JEL-codes: O25; O31; O38; O44; Q42

Language: English

36 pages, First version: May 18, 2023. Revised: September 5, 2022.

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