**2. Literature Review**

### *2.1. The E*ff*ects of Technology Change on the Evolution of the Fuel Ethanol Industry*

One of the most important factors limiting the scale of the fuel ethanol industry in the United States is technological progress. Fuel ethanol could account for about 10% of total energy consumption if there is no major technological advance, but if technological progress is significant, then this proportion could rise to 20%. This proportion could further rise to 25% if the major usage of the land could be partly converted to planting energy crops [7]. The success of the fuel ethanol industry was not only due to resource advantages but also due to the advantage of technological progress [8]. In addition, the e ffect of technological progress on the production of fuel ethanol is adjusted by mandatory consumption policies [9].

There is no doubt that technological change has vital impacts on industry evolution. However, the origin of the fuel ethanol industry's technological progress remains controversial. One of the hypotheses is that technological advantage is derived from the accumulation of knowledge, which is one of the "learning by doing" types [29]. Another opinion is that technological progress is driven by the new energy automobile industry, especially the development of flexible fuel vehicles that began in 2003 [30,31]. In addition, agricultural output is believed to be the main source of the fuel ethanol industry, so the progress of agricultural technology has had an important impact on the development of the fuel ethanol industry [32]. Di fferent actors (e.g., ethanol producers, public and private research institutions, and governmen<sup>t</sup> institutions) in the industrial chain could also a ffect technological progress [7]. Some scholars found that more attention should be paid to scientific progress, especially the impact of scientific progress on fuel ethanol technology in recent years [33].

The relationship between the progress of fuel ethanol technology and public policy is very close. However, the focus of the scientific community is di fferent than the focus of the government. The scientific community is concerned about environmental protection and technology, while the governmen<sup>t</sup> is concerned more about geopolitics. This di fference reveals that either the scientific community needs to pay more attention to the knowledge demands of policymakers or that policymakers need to focus more on scientific and technological knowledge [10].

### *2.2. The E*ff*ects of Renewable Energy Policy on the Evolution of the Fuel Ethanol Industry*

The development of new technologies in the fuel ethanol industry still faces various barriers [34]. In many countries such as the United States [35], governments have adopted a wide range of policies to support the development of their fuel ethanol industries, especially, to spur the new technologies. These policies (e.g., subsidies, tax cuts, mandatory consumption, and tari ff protections) have had important impacts on the development of the fuel ethanol industry. If the government's subsidy policy is properly designed, it can e ffectively compensate for the risk di fference caused by land quality di fference, and further, promote the greater use of marginal land with poor quality to produce energy crops [36]. R&D support policies play an important role in the technological progress of the fuel ethanol industry, and the quantity of public R&D funds directly a ffects the progress of fuel ethanol technology [7].

Some scholars have investigated the impact of various renewable energy policies on industry evolution. A vertically integrated market model, including fuel ethanol, by-products, and corn, was used to analyze the social impact of the fuel ethanol industry's subsidy policies, and the results showed that subsidy policies may not lead to positive social benefits [18]. It is also found that the tari ff protection and tax-cut policies of biofuels in the United States may lead to the loss of total social welfare [37].

Other scholars analyzed the distortion e ffect of fuel ethanol policy from the perspective of international trade. If the U.S. governmen<sup>t</sup> were to cancel tari ff protection and reduce the scope of tax cuts, ethanol imports would increase 130%, while domestic ethanol production would fall 9% [11]. The current biofuel trade protection policy in the United States not only reduces the industrial competitive

advantage of corn-based ethanol but also increases dynamic learning costs, which will also reduce the international competitiveness of the future cellulosic ethanol industry [38]. No matter how high the carbon tax rate is, a single carbon tax policy without additional subsidies will not promote the evolution of the fuel ethanol industry [19].

Although many studies have noted the distortion effects of fuel ethanol policies, other scholars maintain that subsidies can help to overcome market failure [20]. Gehlhar et al. (2010) evaluated the long-term economic impact of fuel ethanol subsidies in the United States and concluded that the development of the fuel ethanol industry is conducive to lowering the dependence on oil imports, thereby contributing to the development of the overall economy. Further, the overall benefits induced by the subsidy were greater than the welfare losses [21].

However, due to the characteristics of the emerging industry, the future direction of the fuel ethanol industry policy is highly uncertain, which increases the uncertainty of the development of the fuel ethanol industry [39]. The development of the fuel ethanol industry involves issues of food security, energy security, and environmental protection. Therefore, in the process of formulating supporting policies for the fuel ethanol industry, attention should be paid to the integration of these policies [32,40].

### *2.3. The E*ff*ects of Market Factors on the Evolution of the Fuel Ethanol Industry*

Since oil and biofuels are substitutes, and crops like corn and sugar cane are the main feedstocks of biofuels, the price of oil, corn, and sugar cane will have an important impact on the evolution of the biofuel industry. An empirical study showed that an increase in oil prices will lead to an increase of biofuel production, while the increase of corn and sugarcane price will lead to a decrease of fuel ethanol production [11]. Government subsidies for the fuel ethanol industry and biodiesel industry should be increased because uncertainty in oil prices and crop yields would affect the evolution of the fuel ethanol industry [12]. It is also found that a 30% drop in oil price would lead to a significant drop in fuel ethanol demand, and, at the same time, fuel ethanol prices would also drop significantly [13].

The cost of feedstocks was found to be the main influencing factor affecting the short-term evolution of the fuel ethanol industry. Therefore, the future R&D of the fuel ethanol industry should focus on the low cost of decomposition from lignocellulose sugar and the comprehensive utilization of lignocellulose [14]. It is also found that an insufficient understanding of feedstock cost is the main reason for the slow progress in the commercial utilization of fuel ethanol in Africa [5].

The above literature sheds important light on the relationships between the fuel ethanol industry and its driving factors. However, the ignorance of the industry's multidirectional relationships may lead to an inaccurate assessment of the relationship between the fuel ethanol industry and its drivers. Therefore, in order to understand the growth mechanism of the fuel ethanol industry in China, this paper will analyze the relationships among the fuel ethanol industry, the technology system, and the market system using a history-friendly coevolutionary model. This paper will further assess the impacts of several policies (i.e., entry regulation, production subsidy, R&D subsidy, and ethanol mandates) on the growth of the fuel ethanol industry.
