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Time for Action on Flawed Ethanol Mandate

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Time for Action on Flawed Ethanol Mandate

October 31, 2017

America has a long decades-long history of propping up corn ethanol, dating back to a 40 cent-per-gallon subsidy in 1978. In 2005, the Renewable Fuel Standard (RFS) program came into effect, requiring refineries to blend biofuels into their gasoline. The statute calls for the annual volume to increase to 36 billion gallons by 2022, with the Environmental Protection Agency (EPA) determining volume requirements for the years after that. The EPA recently released a notice reviewing options for the program, including a reduction in the total renewable fuel volume requirement or changing the way it treats ethanol exports in relation to the mandate.

Secretary Pruitt has now walked back consideration of those changes, assuring senators in a letter that final volume requirements for 2018 and 2019 would be “equal or greater” to the original proposed amounts.

Refineries and producers have to meet annual biofuel quotas, or purchase compliance credits in a secondary market. Many refineries struggle to meet the quota because rising annual quotas are coming up against the upper limit of the amount of ethanol that can be blended into gasoline, and higher limits could have adverse effects for vehicles. Even as the annual volume requirements have increased, the total amount of finished motor gasoline supplied has flattened, in part due to improved fuel efficiency in the vehicle fleet.

The agency had reportedly considered a change that would allow exported ethanol to generate these compliance credits, which would effectively reduce the quota, but has since reversed course. Prices for the credits jumped to the highest level in eleven months following the news that the agency would not be pursuing changes to the RFS program.

The RFS program benefits ethanol producers at the expense of motorists, and has not proven an effective way to reduce emissions or increase American energy independence. The opposition to previously-considered changes underscores the extent to which the program has now become vital to producers’ welfare, trumping ordinary Americans’ welfare.

In a 2015 report from the Manhattan Institute, Robert Bryce found that the RFS program imposed $10 billion each year in additional fuel costs for motorists, equivalent to $47 a year per driver. The reason for the higher cost is straightforward, as from 1982 to 2014, “ethanol was 2.4 times more expensive than an energy equivalent amount of gasoline.”

Beyond the costs to consumers, the RFS program has failed to deliver on its stated objectives. The original purposes of the RFS program were related to developing another transportation fuel supply to reduce dependence on foreign energy and to reduce emissions out of environmental concerns. Along both fronts, the program has either failed to deliver or other outside developments have obviated the need for the mandate.

Domestic energy production has surged since the program was created in 2005, in large part thanks to development of natural gas. Domestic oil production has soared from 5.18 million barrels per day in 2005 to 8.86 million barrels per day last year. Since the inception of the RFS program, America has practically achieved energy independence—but due to outside factors rather than program’s success in developing the market for biofuels.

In addition, multiple studies, including a report from the Government Accountability Office, find that the program is “unlikely to meet its targets for reducing greenhouse gas emissions and expanding the U.S. renewable fuels sector.” Advanced biofuels are not a viable investment and development has stagnated because fossil fuel prices are low and advanced biofuel prices are high.  Conventional biofuels such as corn-starch ethanol pollute more than cars, according to a report published in the Proceedings of the National Academy of Sciences.

How does a costly program with questionable results continue untouched? As in many cases, the benefits are concentrated benefits and the costs are diffused. The nonpartisan Congressional Research Service noted that the RFS is in place to help rural America and find a market for biomass.  The $47 per motorist does not represent one of the biggest financial burdens for households. At the same time, the benefits for corn-producers are significant, and they are more focused on ensuring the program continues unabated.  Senator Joni Ernst from Iowa, which produces corn, stated that her support for a nominee to a position in the EPA would be withheld until the agency backed off any considered changes. In other areas, such as regulatory reform, trade, and taxes, Senator Ernst has supported free market policies, which makes her actions regarding the RFS program more striking.

The quick reversal gives some indication of how difficult it can be to make even small changes to entrenched programs, but that does not mean there should be no further attempts. More robust domestic production of natural gas and oil, and changes in the price of those fossil fuels, has changed the surrounding policy landscape considerably since the RFS program was enacted in 2005. Policymakers in both chambers have recently signaled a willingness to consider changes to the RFS program in the past, and they should renew their efforts.

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes

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