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Roll Back the Biofuel Mandate

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Roll Back the Biofuel Mandate

March 2, 2016

Biofuels have long been used as blending components in U.S. transportation fuels to meet a wide variety of fuel specification and environmental requirements. Prior to the recent resurgence in domestic oil and natural gas production, laws passed in 2005 and 2007 established a broad program to blend renewable fuels into the domestic transportation fuel (gasoline and diesel) pools. These minimum volumes of ethanol and biomass-based diesel (biodiesel) were mandated to rise each year through 2022. 

At the time that the legislation was enacted, the blending requirements were viewed as being well below the bounds where they would create adverse operational effects. The law now requires an increasingly aggressive program each year for blending biofuels with petroleum based transportation fuels. Specifically, ethanol is blended into gasoline, and biodiesel is blended into diesel. These volumetric targets began in 2006 at a total of 260,000 barrels/day and are mandated to rise to 2.35 million barrels/day in 2022 (see figure). 

Under the statute, the U.S. Energy Information Administration is required to estimate future gasoline and diesel consumption, and then set percentage targets for renewable fuels for refiners to blend into transportation fuels. However, EPA has not issued the volumetric requirements on a timely basis in recent years as the introduction of higher volumes of biofuels into transportation fuels has come against technical and cost constraints.

The cost risks to the program escalate substantially as blending volumes exceed the 10% of the gasoline pool and are exacerbated by low gasoline prices. EPA has previously recognized these risks, and it has used its authority to set mandated blending volumes below targets established by the original statutes. Although this recognition by EPA that the blendwall, as well as other parts of the program, present technical constraints, the agency has nevertheless stated that it intends to continue to raise annual volumetric targets and undertake an ambitious effort to do so.

The U.S. biofuel program is now really two programs, blendstock produced from corn ethanol, which is a well-integrated (nearly all U.S. gasoline is E10) blending component for the production of gasoline (at levels of 10% and below), and everything else. Today, E10 is sold in every state and more than 95% of U.S. gasoline contains up to 10% ethanol to boost octane and meet air quality requirements. 

Corn ethanol is a mature and competitive industry. In 2015 the U.S. ethanol industry was sufficiently competitive to export over 800 million gallons to international markets, and even in a regulatory environment free of mandates would still provide roughly the same volume of blendstock consumed by the petroleum industry as has prevailed in recent years. Ethanol producers would be unlikely see any substantial reduction in sales volume below 10% of U.S. gasoline demand even in a full repeal scenario. Ethanol is an important and critical blendstock for the production of gasoline. The problem with the program is not ethanol, but the mandate which prohibits normal market adjustments to price fluctuations and poses ongoing price risks to consumers. 

Many of the remaining technologies in the biofuel industry are uneconomic either because they are too costly to produce or are technically constrained by blending volumes above 10 percent. Given the maturity of the domestic ethanol industry it can clearly prosper without a mandate. The question is finding an appropriate implementation strategy for the more expensive cellulosic and other advanced biofuels. 

Traditionally, government programs have not sought to mandate costly or unproven technologies into the marketplace over concerns that consumers would face rising prices. We should now recognize that we are in an era of energy abundance and that other strategies, e.g., research support or tax credits, are a more cost effective policy to protect consumers instead of mandates. 

As we look back on U.S. energy legislation policies since the 1970s, we cannot help but be stunned by the systematic failure to predict the future and the unintended consequences of U.S. energy policy. Often these policies, in an attempt to either promote the development of alternatives to petroleum or to insulate consumers from price volatility, prevented more productive responses from both consumers and producers. 

Price controls implemented in response to a six-month Arab oil embargo in 1973 resulted in over ten years of sustained misallocation of resources, limited the cost-effective development of U.S. petroleum resources, and brought about the proliferation of dozens of small inefficient refiners. 

In the late 1970s, in response to concerns we were running out of natural gas, we banned its use in electric power generation throughout the national economy. These policies were implemented through the Powerplant and Industrial Fuel Use Act of 1978, which encouraged the use of coal, nuclear energy, and other alternative fuels under the assumption that natural gas production was in permanent decline. We no longer have a government run Synfuels Corporation (initiated in the late 1970s) because it became too costly in the 1980s. I am sure it is lost on none of us how peculiar and counter-productive these programs seem today and these experiences of the past should provide guidance in reforming mandates for biofuel blending into transportation fuels. 

Finally, there is a much larger concern for the Congress to address, and that is the risk to economic recovery. Lower gasoline prices are yielding annual savings for the U.S. economy of $129 billion, or an estimated $1,000 per year per household. These savings to consumers are essential for expanding economic growth, particularly in light of the enormous losses we are seeing from rapid cuts in capital investment in domestic oil and gas development. 

The oil- producing regions of the U.S. are experiencing enormous pain from the decline in oil and gas development. Historically, this pain has been compensated by savings to consumers and subsequent economic expansion. Great care should be taken to ensure that these savings are not lost through a regulatory program that increases gasoline prices (which was never an expected outcome of the program when Congress established the RFS). At a minimum we should only proceed if we have a clear understanding of both the incremental benefits of the program and economic risks associated with higher gasoline prices.

 

Lucian Pugliaresi is president of the Energy Policy Research Foundation, Inc. This op ed is based on testimony given on February 24 before the Senate Committee on Environment and Public Works. The full testimony can be found here.

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