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What About the Social Cost of Corn?

December 18, 2013 by Leave a Comment

Imagine an alternate universe in which a new diet craze began in 2005, where fitness gurus urged Americans to massively increase their corn intake. The spiking prices led farmers to substitute corn for other crops, and to bring new land under cultivation to meet the exploding demand from consumers. Then an Associated Press investigation reveals the dark side to the new fad: Five million acres of land taken out of conservation and turned into farmland, wetlands filled, and water sources polluted with excess fertilizer.[1] Facing such ravages, the government establishes a committee of experts to estimate the “social cost of corn.” This calculation is used to enact a corn tax (levied in dollars per bushel), which will squelch demand and generate revenues to subsidize the development of non-corn food sources.

Something like the above scenario actually did unfold, except for one little detail: The reason for the spike in demand for corn came not from market forces, but from the government. Specifically, the Renewable Fuel Standard (originally passed in 2005 but considerably expanded in 2007) mandated an aggressive expansion of ethanol in the nation’s fuel mix, rising from 9 billion in 2008 to 13 billion gallons by 2012.[2] Combined with a blender’s tax credit and tariff on foreign ethanol (which expired at the end of 2011), federal policies have induced a massive increase in corn production from what the market would naturally have chosen.

Source: U.S. Department of Agriculture

As the graph above illustrates, the U.S. acreage devoted to corn had been fairly flat since the mid 1990s, yet began rising rapidly after 2007, pulling back only slightly because of the onset of the Great Recession in 2008.

It’s not hard to see why U.S. farmers behaved this way. The following chart shows the price of corn:

 Source: USDA 

We see a similar pattern as with our previous chart: a massive spike in corn prices going into 2007, a retreat with the onset of the Great Recession, but elevated prices thereafter. It’s not only corn prices, but all crops, that follow this general pattern. Of course there are complex factors involved in determining market prices, but the government’s ethanol mandate surely played an important role. As farmers substituted out of other crops and into corn, it reduced the relative supply of those other crops, raising their price to make it worthwhile to continue growing them. Thus, the government’s mandate not only pushed up the price of corn, but ag prices in general, including beef and poultry (because they may be raised on feed). This is another reason that even progressives have begun turning their backs on ethanol and other biofuel programs: they contribute to rising global food prices. There’s even a website with the snappy slogan: “Corn For Food Not Fuel.”[3]

However, notice that the chart above also indicates a steady collapse in corn prices throughout 2013. This is partially due to expectations of a revision in the EPA’s mandate for ethanol. These expectations were justified on November 15, when the EPA proposed new levels for its 2014 biofuel mandate.[4] Specifically, EPA reduced the ethanol requirement to 15.21 billion gallons, falling below the critical 10 percent threshold of motor fuel consumption, and 16 percent lower than the original 2014 level as established back in 2007.

The reason for the policy shift is that total motor fuel consumption is lower now—because of the recession and increases in vehicle fuel economy—than analysts had expected back in 2007 when the Renewable Fuel Standard was updated. Since the mandate was expressed in absolute gallons, rather than a percentage of the fuel mix, the original targets would have pushed the ethanol component above the “blend wall.” In other words, the original EPA target for 2014 would have required refiners to mix more ethanol in the fuel mix than could safely be handled by the current fleet.

The official rationale for the ethanol mandate was to promote “renewable” fuels, both for reasons of economic and military security, but also to mitigate the effects of climate change. Yet ironically, as the AP investigation reveals, the crash course in ethanol has not only distorted the economy—it’s also led to massive environmental disruption. At this point, it’s not merely fiscal conservatives who oppose federal support for ethanol; environmental activists are switching camps, too.

The problem isn’t merely that the massive push for ethanol has led to the farming of land formerly managed as conservation land. Ironically, some scientists have challenged the entire premise that ethanol mandates are an effective way to reduce carbon dioxide emissions. For example, if farmers are encouraged by federal policy to plant corn on land that was previously “set aside” for conservation, then the net result is to release more carbon dioxide into the atmosphere than would otherwise have occurred.[5] Considerations such as these led Craig Cox of the Environmental Working Group to declare, “This is an ecological disaster.”

Yet despite the EPA’s merciful nod to reality by easing up on the 2014 mandate, the Obama Administration is by no means throwing in the towel. When speaking to ethanol lobbyists on Capitol Hill, Agriculture Secretary Tom Vilsack reportedly said, “We are committed to this industry because we understand its benefits.” In what was perhaps too candid a statement, he elaborated: “We understand it’s about farm income. It’s about stabilizing and maintaining farm income which is at record levels.”[6]

Vilsack’s admission is the key to unlocking this puzzle. Even though the government would no doubt have vilified the “social cost of corn” (analogous to the “social cost of carbon”) as an extreme environmental threat had these economic and environmental disruptions originated from the market, the Obama Administration instead seems determined to press ahead. In light of the mounting evidence of which the scathing AP investigation is just the latest example, it becomes clear what is actually going on: As Secretary Vilsack explained, it’s about maintaining farm income.

IER Senior Economist Robert P. Murphy authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , ,

Bipartisan Group of Senators Calls for an End to the Wind PTC

December 17, 2013 by Leave a Comment

WASHINGTON – A bipartisan group of lawmakers, led by Sens. Lamar Alexander (R-TN) and Joe Manchin (D-WV), have joined today in opposition to another extension of the wind Production Tax Credit (PTC). In a letter sent to Senate Finance Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT), the Senators call for the permanent expiration of the wind PTC. AEA President Thomas Pyle released the following statement:

“The American Energy Alliance welcomes the efforts of this bipartisan group of Senators to put an end to the wind PTC. For decades, American taxpayers have bankrolled the wind industry, and the time has long past to allow the PTC to run its course. This tax credit was always intended to be temporary, but Big Wind has grown addicted to taxpayer subsidies, spending millions year after year to extend and even expand this unnecessary and expensive taxpayer giveaway and fleecing the American people out of billions of dollars along the way.

“Last year’s extension and expansion of the wind PTC alone cost the American people $12.1 billion dollars and another one year extension would cost another $6.5 billion. As Big Wind cries for another extension— even calling for its retroactivity in the event a measure isn’t passed before it expires as planned at the end of the year—this letter sends a strong message to the rest of Congress that it is time to put an end to wind welfare and ensure that the wind PTC blows away once and for all.”

To read the full letter, click here.

To read a comment from Thomas Pyle published today on the National Journal Energy Insiders Blog, click here.

To read IER’s study, “Estimating the State-Level Impact of Federal Wind Subsidies”, click here.

Filed Under: Press Releases Tagged With: ,

New Analysis Underscores Danger of RFS

December 16, 2013 by Leave a Comment

In a previous post we discussed the EPA’s proposed reduction to the 2014 biofuel mandate: Because motor vehicle consumption of gasoline has risen more slowly than legislators assumed back in 2007 when the Renewable Fuel Standard (RFS) statute was updated, the originally mandated targets would have required refiners to surpass the “blend wall.” In other words, the original mandates would have forced refiners to put more ethanol into the nation’s fuel mix than would be safe for many types of engines. That’s why in November the EPA proposed a reduction in the original targets, in recognition of this obvious problem with the original schedule.

A recent analysis by two scholars (Irwin and Good) from the University of Illinois Urbana-Champaign indicates that the EPA may face serious hurdles in this sensible move. The analysis also underscores what’s at stake, hence illustrating the danger of RFS regulations in the first place.

First, Irwin and Good explain that the EPA’s proposed rulemaking is quite controversial, because it changes EPA’s approach to enforcing the actual statutory language of the RFS. In their words:

This new implementation framework basically takes the E10 blend wall as a starting point and builds the mandated volumes up from this starting point.  EPA rulemaking in previous years worked in essentially the opposite fashion by taking the total RFS volume in the statute as the starting point and then reducing the cellulosic sub-mandate as needed.  Based on the new framework, the EPA preliminary rule making for 2014 proposed a write down of the cellulosic mandate, the advanced mandate, and the total mandate.

Even if EPA goes ahead with its proposed rule after receiving comments, Irwin and Good expect they will face legal challenges. (They link to a colleague’s earlier analysis of the legal issues involved.)

But what’s the big deal? What hangs in the balance on whether EPA can scale back the original ethanol mandate for 2014 (and 2015)? Irwin and Good assess the situation in this way:

If the proposed EPA rules are finalized and survive a court challenge, then blend wall problems generally will be resolved, the RINs market will likely return to pre-2012 price levels, and pressures in grain and oilseed markets will be largely abated.  If on the other hand the EPA rules are eventually overturned, then blend wall problems will return in short order, RINs stocks will likely be exhausted by the end of 2014, RINs prices will soar once again, and pressure on the grain and oilseed markets will in all likelihood resume.  Much hangs in the balance on the outcome.

Irwin and Good don’t draw the obvious implication from their analysis, but I will: It is very poor public policy when markets can be thrown into a tailspin on the basis of an arbitrary number created by political authorities. The RFS never made any economic sense to begin with, but the fact that the rules themselves are uncertain just adds insult to injury.

Even beyond the benefits of avoiding specific inefficient policies, a general framework of free markets is beneficial because it provides institutional stability. When producers and consumers know what the rules of the game will be for years to come, they can more confidently make investment and consumption decisions in the present. In our present environment, where people don’t even know what to expect three months from now, it is very difficult to rationally run a business or plan household finances.

IER Senior Economist Robert P. Murphy authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , ,

Senate Hearing Exposes Flawed Ethanol Mandate

December 11, 2013 by Leave a Comment

The Senate Environment and Public Works (EPW) Committee held a hearing this week on the Renewable Fuel Standard (RFS). The hearing comes on the heels of the Environmental Protection Agency’s (EPA) proposal to reduce the total volume obligation for 2014.

Testifying at the hearing, American Fuel & Petrochemical Manufacturers (AFPM) President Charles Drevna explained some of the flaws with the RFS:

In addition to the technological innovations in oil and gas production leading to an energy renaissance in the U.S., we now know that the RFS is raising food and fuel costs, increasing GHG emissions, reversing advancements in air and water quality, and increasing the likelihood of engine damage. While the law is flawed at its core, its implementation has demonstrated the extent of the mandate’s unworkability.

Drevna is spot on. The RFS was premised on the assumption that America’s energy resources were scarce and dwindling. When Congress expanded the RFS in 2007, U.S. oil production was declining, while domestic gasoline consumption was rising, prompting Congress to mandate the use of ethanol. Six years later, America’s domestic energy renaissance—driven by increased production of shale energy resources on state and private lands—has resulted in the highest levels of domestic oil production in 25 years. Meanwhile, gasoline consumption has leveled off, not risen, due to more fuel efficient vehicles and Americans simply driving less. America’s new energy landscape is no longer one of scarcity, but rather of abundance.

In addition to flawed assumptions, the RFS causes unintended consequences that harm almost anyone who eats food or drives cars. The vast majority of ethanol in the U.S. is derived from corn. Mandating ever-rising volumes of ethanol as fuel increases demand for corn, thereby increasing its cost. Indeed, corn prices have risen about 70 percent since the RFS was passed—driving up the price of feed for cows, chicken, and hogs.

As the National Council of Chain Restaurants (NCCR) explains in a new advocacy campaign, the RFS imposes enormous costs on fast food chains. Wendy’s franchisee Mark Behm tells NCCR that the ethanol mandate has prevented him from expanding operations and forced him to cut benefits for his employees. White Castle President Lisa Ingram says flatly, “We’re not out there creating new jobs because of RFS.”

The RFS not only makes food more expensive, but it also raises gasoline prices. A gallon of ethanol is less energy dense than a gallon of gasoline. This means that as the ethanol content of gasoline increases, fuel economy decreases. Indeed, the energy-adjusted price of E85—ethanol that contains up to 85 percent ethanol—is currently almost 80 cents higher than conventional gasoline that contains about 10 percent ethanol.

In his testimony, Drevna praised the EPA’s proposal to cut the 2014 RFS as a short-term fix, but stressed that congressional action is necessary to provide long-term relief to Americans.

AFPM believes a two-step process is needed to alleviate the problems. Although it should go further, EPA is undertaking the first step to reduce the 2014 mandates using its discretionary waiver authority. This authority is merely a band-aid, however, as EPA’s authority extends only a year at a time. Ultimately, Congress needs to take action to begin rolling back this unworkable and anti-consumer mandate – and soon.

The RFS is a fatally flawed policy that makes food and fuel more expensive, harms vehicle engines, and distorts the market. By forcing motorists to consume fuels that bureaucrats deem worthy, as opposed to what makes the most economic sense, the RFS takes important choices about how to balance food and fuel conflicts out of the hands of American families. The EPA’s proposal may provide temporary relief, but the only workable long-term solution is to end the RFS.

IER Policy Associate Alex Fitzsimmons authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , , ,

How Mandating Ethanol Use Makes Your Big Mac More Expensive

December 10, 2013 by Leave a Comment

Have you noticed the price of beef, chicken, and eggs going up in recent years? This is what happens when federal laws require turning food into fuel. The Renewable Fuel Standard (RFS) requires refiners to blend ethanol into the nation’s fuel supply. Because the only domestic source of cost-effective ethanol is corn-based ethanol, this means that federal law mandates turning food into fuel.

As a new ad campaign explains, the Renewable Fuel Standard makes it more difficult for American families to put food on the table. In a new video, Feed Food Fairness speaks with chain restaurant owners who are struggling with higher food costs due to the federal ethanol mandate.

Wendy’s franchisee Mark Behm explains how the RFS hinders growth and hurts his employees. “We’ve had to cut back on the amount of capital improvements that we make in our restaurants,” he says. “Some of our employee benefits have been diminished.”

White Castle President Lisa Ingram points out that beef prices have risen 46 percent since the RFS became law. She notes that White Castle is a family-owned business with 406 locations that operate in 12 states and support more than 10,000 jobs. Ingram estimates the RFS costs each White Castle location about $15,000.

Ingram adds that the RFS is preventing her business from growing. “We’re not out there building new restaurants,” she says. “We’re not out there creating new jobs because of RFS.”

As we have explained on these pages before, the harmful effects of the RFS ripple throughout the economy. Chain restaurants, many of which are small and family-owned businesses, support millions of jobs across the country. Most chain restaurants operate on small margins, according to the National Council of Chain Restaurants. This makes it difficult for them to absorb higher food costs without passing those costs on to consumers, cutting jobs and benefits, or shuttering operations altogether. This is just one of many reasons the RFS is a flawed policy.

IER Policy Associate Alex Fitzsimmons authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , ,

AEA Targets Nick Rahall Carbon Tax Vote

December 4, 2013 by Leave a Comment
WASHINGTON — The American Energy Alliance (AEA) began today airing two weeks of cable and network television commercial advertisements targeting Rep. Nick Rahall (D-W.Va) for his controversial support for carbon tax measures that would harm his own constituents and his state’s economy if enacted. Beginning Dec. 4 and continuing throughDec. 18, AEA will run the “These Days” advertisement in West Virginia’s four largest television markets.

Rahall, the 19-term Democrat representing West Virginia’s 3rd Congressional District, has often walked the fine line between advancing policies supportive of the Mountain State’s vital coal industry and the anti-coal policies of his party’s senior leadership. Currently, West Virginia is among the nation’s top three coal producing states, and supplies more than one-third of all the coal produced east of the Mississippi River. Moreover, West Virginia’s electricity needs are met almost entirely by coal-fired power plants, which are under regulatory assault due to the anti-coal bias of current administration polices. Despite the harmful impacts of carbon tax measures, Rahall has supported legislation that would cost West Virginia as much as 40,000 jobs.

AEA president Thomas Pyle released the following statement:

“To the detriment of West Virginia families, Congressman Rahall has perfected the art of saying one thing at home and voting the other way in Washington. His vote for the progressive budget, which includes an economically devastating carbon tax, is another example of this. With his support for the carbon tax, Congressman Rahall has enlisted in President Obama’s war on coal, a war whose first victims include the coal mining families of West Virginia’s third Congressional District.”

The ad buy represents AEA’s latest effort to spotlight the voting records of Members of Congress that warrant further public scrutiny. Earlier this year, AEA released a series of advertisements highlighting the pro-carbon tax votes of Senators Begich (D-Alaska) and Hagan (D-N.C.), as well as numerous House members.

To read the fact sheet supporting AEA’s “These Days” ad, click here.

To view AEA’s “These Days” ad, click here.

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Filed Under: Press Releases Tagged With: , , ,

AEA Launches Initiative Targeting Wind Subsidies

December 3, 2013 by Leave a Comment

WASHINGTON — The American Energy Alliance launched today a week-long initiative targeting federal subsidies for the wind industry. The initiative includes a $40,000 digital and print ad buy promoting a new report from AEA’s parent organization, the Institute for Energy Research. The report, titled “Estimating the State-Level Impact of Federal Wind Energy Subsidies”, provides a state by state and region by region assessment of the distributional impacts of federal wind subsidies. The ad buy includes placements in theDecember 2nd issue of the Washington Examiner magazine, the December 3rd-5th editions of the National Journal daily, and a series of digital ads on www.WashingtonExaminer.comand www.WeeklyStandard.com.

In addition to the ad buy, AEA is flying in a group of advocates from states that are negatively impacted by federal wind subsidies to brief Congressional staff. The Institute for Energy Research will also host a policy summit consisting of a panel of experts on Tuesday, December 3rd at noon.

Upon announcement of the initiative, AEA and IER President Thomas Pyle released the following statement:

“The Institute for Energy Research has taken a comprehensive look at the state by state impacts of federal wind subsidies, confirming what many have suspected all along. The majority of states are shouldering an unfair tax burden, shifting millions of dollars from their states’ economies to line the pockets of wind producers in states with mandates for renewable energy.

“Studies like this are essential for the American public to understand what happens when government takes their money to fund expensive programs that benefit boutique industries.

“The present administration has picked wind as its favorite energy source and as a result, every American taxpayer loses.

“The American Energy Alliance intends to broadly disseminate this data to underscore the need for sound energy policies and put an end to wasteful wind subsidies. We will be making an aggressive push to help policymakers understand the real world impacts of wind subsidies on their constituents.”

For an interactive map on the distributional impact of federal wind subsidies, click here.

To read IER’s study, “Estimating the State-Level Impact of Federal Wind Energy Subsidies”, click here.

To register for IER’s policy summit, click here.

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Filed Under: Press Releases Tagged With: , ,

Baucus’ Energy Plan is a Train Wreck

November 22, 2013 by Leave a Comment

WASHINGTON — Senate Finance Committee Chairman Max Baucus (D-Mont.) released yesterday a federal tax reform discussion draft that includes a number of energy provisions. American Energy Alliance Senior Vice President Dan Kish released the following statement in response to the Senator’s plan:

“Senator Baucus’ energy tax plan should serve as a reminder that he was Obamacare’s chief author and then later distanced himself from his work by calling it a “train wreck”. Americans should be getting wise to career politicians who feign surprise when their “solutions to problems” end up blowing up in Americans’ faces.  The Baucus energy plan is just another train wreck waiting to happen, and in this case, it’s just another hidden tax on Americans who are struggling to work and pay their bills.  Montanans and Americans don’t need fewer jobs and higher energy prices – the logical result of Baucus’ latest train wreck proposal. It’s just proof his decision to retire is long overdue.”

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Filed Under: Press Releases Tagged With: ,

Big Ethanol Running Empty On Rhetoric

November 22, 2013 by Leave a Comment

Last week was unkind to the ethanol lobby. The EPA proposed a reduction in the biofuel mandate, and a scathing AP investigation undermined the environmental case for ethanol support. To gauge just how serious the situation is, we need only look at the weak arguments put forth by the ethanol lobby in rebuttal.

First let’s review what happened: The EPA proposed rolling back the 2014 amount of ethanol to be included in the nation’s fuel mix. According to the schedule passed by Congress in 2007, the 2014 mandate would have been 18.15 billion gallons. Yet now EPA is proposing a 16 percent reduction (citing a new range of 15 billion to 15.52 billion gallons), which would pull the 2014 level even below the existing 2013 mandate. Thus, for the first time since the Renewable Fuel Standard was put in place, the mandated level of ethanol would fall.

The primary reason for the rollback was simple common sense: Gasoline consumption had not grown as quickly as forecasted (because of the recession and advances in fuel economy), and so the original mandate for 2014 would have pushed the ethanol content above the E10 “blend wall.” This would have risked actual damage to engines.

The other backbreaking development last week was the release of an AP investigation showing that even environmental activists are now recognizing that federal support for corn-based ethanol is having environmental impacts, leading to soil erosion, higher food prices, and even increased CO2 emissions. Thus the policy is a failure on any dimension.

The pro-ethanol lobby was not happy with EPA’s announcement:

“EPA is proposing to place the nation’s renewable energy policy in the hands of the oil companies,” said Bob Dinneen, CEO of the Renewable Fuels Association, a major ethanol industry group. “That would be the death of innovation and evolution in our motor fuel markets, thus increasing consumer costs at the pump and the environmental cost of energy production. This proposal cannot stand.”

Dinneen’s complaints are misplaced. It’s not placing policy “in the hands of the oil companies” for the government to simply move in the direction of consumer and business choice. In reality, policy is still in the hands of the ethanol companies, because the government is literally forcing refiners to use more ethanol in the fuel mix than they would voluntarily choose to do.

This also shows the flaw in Dinneen’s claim that cutting back on the mandate will increase “consumer costs at the pump.” If it really were the case that ethanol made it cheaper to drive—after accounting for the lower mileage because ethanol has a lower energy content per volume than gasoline, and also accounting for the various hidden costs borne by refiners because of the mandate—then why would the government have to force refiners to use it? (Also note that the “econometric” tests of ethanol’s impact on prices contain design problems that bias the results.)

Finally, it doesn’t make sense to encourage “innovation” in economically inefficient areas. If the government mandated that fast food restaurants serve rising amounts of Brussels sprouts with every meal, that would “spur innovation” in the industry as well, but it would hardly be what consumers wanted.

It was years in the making, but at long last there has been just a smidgen of common sense in federal ethanol policy. The response from the pro-ethanol forces shows just how weak their position is.

IER Senior Economist Robert P. Murphy authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , ,

EPA's 2014 Ethanol Mandate Ignores Reality

November 18, 2013 by Leave a Comment

The proposed 2014 mandate for the Renewable Fuel Standard Program demonstrates that the RFS is irreparably broken and should be scrapped. Until Congress repeals the entire RFS, EPA should lower the total ethanol mandate and set the advanced ethanol and cellulosic ethanol mandate to zero. Despite years of trying, EPA has proven incapable of setting ethanol volumes that correspond in any way to reality, especially cellulosic ethanol. Furthermore, in the name of reducing greenhouse gas emissions, keeping the advanced biofuel standard leads to the environmentally and economically absurd practice of importing Brazilian sugarcane ethanol and then exporting U.S. corn ethanol back to Brazil to replace the sugarcane ethanol.  This is what happens when government tries central planning, and that is what the RFS is.

The RFS is fundamentally flawed because it is based on the belief that the White House or Congress or EPA can accurately project overall gasoline and diesel demand years in advance, as well as ethanol production and demand. After their projections have proven woefully wrong year after year, it is time to end the RFS and empower everyday Americans to make food and fuel choices, instead of bureaucrats and politicians.

The 2014 ethanol mandates are flawed

While it is good to see EPA acknowledge a little bit of reality and reduce the overall ethanol mandate with their proposed 2014 rule, EPA continues to ignore reality by failing to further reduce the “advanced biofuel mandate” and the “cellulosic mandate.”

The proposed rule sets the total ethanol mandate at 15.21 billion gallons. This is down from the total Congress specified in the Energy Independence and Security Act of 2007 of 18.15 billion gallons. EPA’s reduction is an acknowledgement of the simple reality that there was not enough gasoline being used in America to blend 18.15 billion gallons of ethanol. Through September the U.S. motorists are on pace to use 134 billion gallons of gasoline in 2013. If the mandate remained at 18.15 billion gallons, then gasoline would average 14 percent ethanol—more than almost all cars can currently safely use.

EPA Continues to Promote Cellulosic Ethanol

While EPA recognizes there was nowhere for 18.15 billion gallons of ethanol to go, they continue to promote “advanced” and cellulosic ethanol to the detriment of Americans. Congress and the Bush Administration were so convinced that more ethanol was the way forward in 2007, they mandated 36 billion gallons must be sold by 2022, comprised of 15 billion gallons of corn ethanol with the remainder being cellulosic or advanced ethanol.  Biofuels lobbyists convinced them that it would be commercially available, but they were wrong.  As a safety valve, EPA was given the authority to adjust the numbers should the numerical mandates be unachievable.  EPA, however, has a track record of grossly overestimating cellulosic ethanol volumes, and has done so repeatedly. Despite the D.C. Circuit chastising EPA for “let[ting] its aspirations for a self-fulfilling prophecy divert it from a neutral methodology”, EPA continues to promote cellulosic production instead of using a neutral methodology and projecting realistic cellulosic volumes.

EPACellulosicGraph

For 2013, EPA mandated 6 million gallons of cellulosic ethanol, so far this year 217,569 “gallons”[1] of cellulosic ethanol have been produced. This is ten times as much cellulosic ethanol as was produced in 2012, but there is no reason to believe that cellulosic production will suddenly increase by nearly 80 times to the 17 million gallons that EPA is mandating in the proposed rule. This is especially true because KiOR, one of the only cellulosic producers, missed its 2nd quarter forecast by 75 percent and is now involved in a lawsuit because of alleged misleading statements.

Advanced Ethanol is not “advanced”—it’s just another name for sugar cane ethanol from Brazil

Another problem with the 2014 RFS volumes is the mandate for advanced biofuel. EPA’s 2014 proposed ethanol mandate sets the advanced ethanol mandate 2.2 billion gallons. While it is good that EPA gives a nod to reality by reducing the amount of advanced ethanol required by EISA, it is important to understand what “advanced” biofuels are and why this requirement leads to environmentally and economically absurd results.

Advanced biofuels are biofuel other than ethanol derived from corn starch (ie. corn kernels) which EPA deems to have 50 percent lower lifecycle greenhouse gas emissions relative to gasoline. Sugarcane ethanol is the only mass-produced product[2] which EPA has certified to meet the definition of “advanced” biofuel. As a result, we have the absurd situation were the U.S. imports sugarcane ethanol from Brazil and exports corn ethanol to Brazil as this chart from EIA shows:

Untitled2

As EIA explains, “U.S. obligated parties [ie. U.S. refiners] prefer sugarcane ethanol over corn ethanol” because “sugarcane ethanol counts toward the RFS advanced requirement.” Brazilian ethanol users are indifferent between corn ethanol and sugarcane ethanol.

This situation is completely absurd. First, sugarcane ethanol is not “advanced.” Sugarcane has been used to make ethanol in Brazil since the late 1920s.[3] The only reason sugarcane is deemed to be “advanced” is because EPA believes it has 50 percent lower lifecycle greenhouse gas emissions than gasoline. The Renewable Fuels Association does not agree with EPA’s assessment of 50 percent lower lifecycle greenhouse gas emissions from sugarcane ethanol.

Second, while sugarcane ethanol may have lower lifecycle greenhouse gas emissions, any reductions are wiped out by what happens with sugarcane ethanol in the real world. The preference that EISA sets up for sugarcane ethanol means that not only is sugarcane ethanol imported to the U.S., increasing its lifecycle greenhouse gas emissions, but corn ethanol is then exported to Brazil further increasing the true lifecycle greenhouse gas emissions of sugarcane ethanol. When EPA deems sugarcane ethanol an advanced biofuel, they have to consider its true lifecycle greenhouse gas emissions not only the greenhouse gas emissions required to get the sugarcane ethanol to the U.S., but also what replaces that ethanol in Brazil. Swapping Brazilian sugarcane ethanol with U.S. corn ethanol actually results in overall higher greenhouse gas emissions—not lower emissions, which was supposed to be the point of the advanced ethanol provision in EISA.

Worse, swapping Brazilian sugarcane ethanol with U.S.-produced corn ethanol is completely economically wasteful. This swap does nothing, except increase costs and energy use required to swap Brazilian for U.S. ethanol.

EIA believes that this absurd trade in ethanol will continue for the next 30 years, with imported ethanol expected to play a much more important role than cellulosic ethanol.

Untitled3

The free market would use billions of gallons of ethanol a year—just let the market work

Ending the RFS does not mean that ethanol would not be used. What it does mean is that the absurd and inefficient Brazilian-U.S. ethanol swaps would end, that research dollars would be spent on projects that make economic sense, and that the American people would balance the competing uses of corn instead of the federal government dictating a certain amount of ethanol.

If the RFS were repealed, the reality is that billions of gallons of corn ethanol would still be used in transportation fuel. One of the most important, and free market, uses of ethanol in the United States today is ethanol’s use as cost-effective way for refiners to increase octane in gasoline.

While repealing the RFS would still mean that billions of gallons of ethanol are used, it would end the absurd and economically inefficient swapping of corn for sugarcane ethanol. Without the RFS, the only reason sugarcane ethanol would be imported to the U.S. is because it makes economic sense and the only exports of ethanol to Brazil would occur because it makes economic sense.

One of the arguments for the advanced and cellulosic provisions in EISA was to create increased demand for alternative fuels. This argument however, overlooks a simple fact of the size of the liquid fuel market. The global market for gasoline and diesel is literally worth trillions of dollars. Products that economically replace conventional oil production in that market do not need subsidies and mandates from the federal government.

The obvious example is shale oil production. Shale oil did not need billions of dollars of subsidies or a mandate that compels refiners to blend shale oil with conventionally-produced oil and consumers to buy it. Shale oil producers saw a huge market opportunity and developed the technology to compete. Because of shale oil, the U.S. energy picture has completely changed since 2007, when the law was passed to reflect that year’s energy picture. The U.S.’s oil production is rapidly increasing because of shale oil production—something a law like EISA did not foresee or take into account.

Cost effective ethanol products will find a place in the market, but only if, like shale oil, they are cost competitive. The government can mandate the use of billions of gallons of cellulosic ethanol, for example, but that has not made it economic.

Lastly, corn ethanol has been implicated with increasing the price of food by reducing the amount of corn available for uses other than ethanol. The problem with the RFS is the law essentially requires turning billions of bushels of corn into ethanol. In a free society, the federal bureaucrats should not be deciding how much corn to use for fuel; the American public should be making those decisions based on their free choices. Repealing the RFS would empower everyday Americans to make these important financial choices, just as they choose what kind of cell phone or computer to buy. When each of us makes decisions, we live with the consequences, whereas when the government makes decisions for us, no one has the freedom to escape a bad decision.

Conclusion

EPA continues to promote environmental and economically absurd practices by mandating artificially higher levels of ethanol production, especially advanced and cellulosic production. There is however, a simple fix—repeal the RFS and thereby empower everyday Americans to make the important choices about what fuel to use and how to balance food and fuel conflicts.

[1] Technically, 145,042 gallons of cellulosic ethanol have been produced, but that translates to 217,569 RINs.

[2] See U.S. Biofuel Policy, http://sugarcane.org/global-policies/policies-in-the-united-states/us-biofuel-policy.

[3] USGA: Em 1927, O Primeiro Grande Empreendimento Brasileiro em Alcool Combustivel,http://web.archive.org/web/20080319112800/http://www.aondevamos.eng.br/boletins/edicao07.htm.

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