The Environmental Protection Agency’s (EPA) recent alteration to the Renewable Fuel Standard (RFS) offers Americans a bit of temporary relief for an economic ailment that needs a cure. And Congress has the cure at its disposal.
Instead of attempting to reform the RFS or continually calling on the EPA to waive the mandates, Congress should repeal the RFS to protect American families from artificially higher food and energy prices and eliminate the small set of special interests that stand to benefit from the mandate.
The EPA’s Revision: Admission of an Unworkable Policy
By law, there must be 15 billion gallons (and no more) of corn-based ethanol and another 21 billion gallons of non-corn biofuels in the nation’s fuel supply by 2022. Even though Congress set target levels, the EPA officially creates the annual targets based on domestic gasoline and diesel production.
The problems created by the RFS demonstrate just how badly the federal government plans production. In some cases, the renewable fuel production dramatically underperforms, while in other instances, too much renewable fuel may be required. The production of cellulosic ethanol, made from nonfood sources, is nowhere close to meeting its targets, while refiners may be required to blend excess corn-based ethanol as a result of increases in the mandate and decline in fuel consumption.
In fact, the original quota created in 2007 for cellulosic ethanol for 2013 was 1 billion gallons. The EPA substantially lowered the target to 6 million gallons, or 0.6 percent of the initial production goal. Cellulosic ethanol has only just recently obtained commercial viability, and so far, only 48,846 gallons have been produced in 2013—0.8 percent of the 6-million-gallon target.
Another problem is what is known as the “blend wall.” The engines in most vehicles can use only gasoline blended with 10 percent ethanol (E10). Another gas blend, known as E85, allows a mixture of 85 percent ethanol, but only flex-fuel vehicles can run on this fuel, and the demand for these vehicles is very low. Further, drivers who own flex-fuel vehicles often fill their tanks with E10 as opposed to E85 because the energy content in E85 is lower, meaning more fuel is necessary to drive the same distance. The combination of the increasing mandate and declining fuel consumption—from a slow economy and increased fuel-efficiency standards—means that refiners may have to blend more ethanol than drivers can safely use in their vehicles.
As a result, the EPA announced it will likely lower the requirements for 2014 as well, saying that it “does not currently foresee a scenario in which the market could consume enough ethanol sold in blends greater than E10, and/or produce sufficient volumes of non-ethanol biofuels to meet the volumes of total renewable fuel and advanced biofuel as required by statute for 2014.”
RFS Benefits Few at the Expense of Many
Because the RFS requires that fuel blenders use biofuels regardless of the cost, most Americans are made worse off through higher food and fuel expenses. The higher costs paid by American families benefit a select group of special interests that produce renewable fuels.
Much of the mandate is met with corn ethanol. Since corn is a staple ingredient for many foods and an important feedstock for animals, many in the food industry—including cattle and chicken farmers and restaurant associations—have expressed concern regarding the mandate’s effect on food prices. Although the magnitude of the ethanol mandate’s effect on corn prices is difficult to determine (because knowing how much ethanol would be used for fuel absent a mandate is not possible), it is clear that the mandate is increasing prices.
The Heritage Foundation calculated that the mandate could be increasing corn prices by as much as 68 percent. In fact, Bob Dinneen, CEO of the Renewable Fuels Association, recently said at a House Energy and Commerce Committee hearing, “One of the purposes of the RFS was to increase farm income. Increase the price of corn. It has done that.” Farmers divert land toward corn to take advantage of the policy, raising prices for other crops that may have been planted in a world without the RFS.
The RFS also costs Americans as taxpayers and drivers. Ethanol has lower energy content than gasoline, and although fuel that is 85 percent ethanol has a lower price at the pump, when adjusting for its lower British Thermal Units, it is actually more expensive. Taxpayers have also shelled out $45 billion over a 30-year time frame for ethanol, and while the targeted tax credit for ethanol expired, subsidies remain in place for other biofuels.
The problem is not with renewable fuels but with a policy that creates artificial markets by guaranteeing the industry a share of the transportation fuels market. This removes the incentive to lower costs to create economically viable products, and the labor and capital used in meeting the RFS could have gone to more productive use. Fuel diversity and increased alternative fuel production benefit consumers but only if that shift in fuel consumption is driven by the market.
The EPA’s constant revisions of the RFS indicate just how poorly the government is at planning production. The EPA and Congress can temporarily alleviate some of the pain caused by the RFS by reducing the mandated volumes and reforming the policy. But as the production quotas increase in coming years, the economic problems will escalate and the special interest handout will remain intact. For a permanent solution, Congress should:
- Repeal RFS in its entirety. Congress took important steps in allowing the ethanol tax credit and protection tariff to expire, but the RFS is a costly carve-out that rewards special interest and drives up prices for families and businesses.
- Repeal all transportation fuel and technology subsidies. Congress should remove preferential treatment for all transportation fuels and technologies, including oil, natural gas, electric vehicles, biofuels, and battery technologies. Removing those policies would allow the truly competitive technologies to thrive, and it would properly reward innovation.
Repeal Is the Only Reform
The United States is almost halfway through the mandate to produce 36 billion gallons of ethanol by 2022, and the policy has been disastrous. Tinkering around the edges will not rescue this unworkable policy. Moreover, the federal government should not be mandating what type of fuel drivers use in the first place. Congress should repeal the RFS. That is the only true reform.
—Nicolas D. Loris is Herbert and Joyce Morgan Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.