New Study on the Impact of RFS Implies There Is No Need for the RFS

Earlier this week, the Renewable Fuels Association released a report arguing that the Renewable Fuel Standard (RFS) is only slightly raising gasoline prices. The implication of the report is clear—there is no need for RFS. If the RFS has positive benefits, as the report claims, or only slight costs, then there is no need for Congress to mandate the use of billions of gallons of ethanol a year.

With gasoline prices spiking recently, the ethanol fuel industry, through its promotion of the RFS, has been criticized as one of the drivers of the increase. To comply with the RFS, refiners are forced to blend 13.8 billion gallons of ethanol in gasoline this year or they have to buy ethanol RIN (Renewable Identification Numbers) credits. The price of a RIN shot up from about seven cents at the start of the year to over a $1 by early March. Economic theory suggests that in the long run these additional costs will lead to higher gasoline prices. The Wall Street Journal, for example, stated that “the price of gas would quickly fall by about five to 10 cents a gallon” without the RFS.

To combat these arguments, the Renewable Fuels Association, the lobbying group for the ethanol producers, commissioned a study by Informa Economics to look at the price impacts of the RFS. The Informa study found that, “The direct effect on retail gasoline prices associated with elevated RIN costs is only $0.004 per gallon” and “the net benefit to consumers from the usage of ethanol is $0.04 per gallon of gasoline in the reference case and $0.02 per gallon in the high case.”

For sake of argument, let’s assume that they are right and the RFS actually produces net benefits. If blending billions of gallons of ethanol in gasoline leads to net benefits, then there is no reason to keep the RFS. If Informa’s numbers are correct, then refiners would gladly blend billions of gallons of ethanol in gasoline every year because it would save them money.

The fact that the RFS exists suggests the renewable fuels lobby doesn’t actually believe that it can compete in a free market, which implies that the benefits in this recent study are illusory.

Another issue with the study is that it fails to account for the fact that a gallon of gasoline has 47 percent more energy content than a gallon of ethanol (a gallon of ethanol has 76,100 BTUs, while a gallon of reformulated gasoline has 111,836 BTUs). This makes gallon to gallon comparisons between ethanol and gasoline misleading without correcting for the difference in energy content.

Nevertheless, the Renewable Fuels Association makes the comparison without correcting for energy content. For example, the study states, “Thus far in 2013, ethanol prices have on average been $0.44 per gallon below wholesale gasoline prices, which translates to a gross benefit of $0.04 per gallon of finished motor gasoline supplied to consumers.”

One reason that a gallon of ethanol costs less than a gallon of gasoline is because it contains significantly less energy. Energy content per gallon is a very important characteristic of fuel. After all, the entire point of using gasoline is that it provides energy for our cars.

Another issue the study avoids is the additional costs of transporting and blending billions of gallons of ethanol in gasoline. The study seems to assume that it’s either costless to blend ethanol with gasoline or that the costs of handling ethanol are the same as gasoline. Both are incorrect.

Ethanol is alcohol—a solvent. It can corrode pipes as well as become contaminated by water. To transport ethanol by pipeline, special additives have to be used and the ethanol can become contaminated with water, damaging the fuel. This is why most ethanol is not transported by pipeline. The first ethanol pipeline entered service in 2008, while the first petroleum pipeline was built in the 1860s. Because ethanol is more difficult to transport than petroleum products, the use of ethanol is more expensive than petroleum products.

While we can debate the methodology used to assess the impact of the ethanol mandate, the study implies something far more important—there is no need for the Renewable Fuel Standard. If the Renewable Fuel industry wants to argue that its product results in lower gasoline price, then there is no need for the RFS to mandate the use of billions of gallons of year. If using this much ethanol is beneficial to refiners and gasoline buyers, people will use it regardless of government mandates.