The EPA made the right call on renewable fuels

By Jason Bordoff
November 19, 2013

Just last week, the Obama Administration lowered the volume of ethanol that the fuel industry must blend into the U.S. gasoline supply, marking a notable shift in the Administration’s biofuel policy. Predictably, the renewable fuels lobby criticized the rule for hurting farmers, consumers, and increasing our dependence on costly imported oil. The Administration made the right call, however, acknowledging the reality of how rapidly the U.S. energy outlook has changed since the renewable fuels mandate was put in place.

In 2007, in a laudable effort to reduce oil imports, Congress revised the Renewable Fuel Standard, or RFS, which mandated that refiners blend increasing volumes of ethanol into gasoline each year. At the time, gasoline consumption was projected to rise nearly 20 percent by 2020. But U.S. gasoline consumption actually peaked in 2007, and is now projected to be 16 percent lower by 2025 than 2007. For the most part, refiners cannot blend more than 10 percent ethanol into gasoline. Combine a rising and rigid volumetric ethanol mandate with declining gasoline use, and the result is that this year refiners hit that 10 percent “blend wall.”

Moreover, the increasing targets in the RFS were intended to be met mostly with cellulosic ethanol—made from switchgrass and other plants—that has a much lower impact on carbon emissions and food prices than corn, which is where most ethanol comes from today. Unfortunately, the development of cellulosic ethanol has not materialized. This year, the statutory cellulosic target is 1 billion gallons, but EPA lowered that requirement to just 6 million gallons.

Against this background of a changed fuel market outlook, the Environmental Protection Agency, in developing renewable fuel targets for 2014, had to decide whether to throttle back the mandate or continue pushing more ethanol into the fuel supply. Given the 10 percent limitation on blending ethanol into gasoline, continuing to increase the ethanol mandate would require investments in costly new tanks and pumps to sell gasoline that is 85 percent ethanol (E85), as some stations in the Midwest do. Currently, around 11 million “flex fuel” vehicles can take E85. Selling gasoline that is 15 percent ethanol (E15), EPA says, is also an option for newer cars, although automakers say this fuel may void warranties and few consumers are likely to buy it.

We have already seen how the energy market would react to higher ethanol mandates. Earlier this year, the price of the certificates that refiners and importers are required to turn into the government to show compliance with the RFS shot up from a few cents to nearly $1.50, as we approached the blend wall and as concerns about looming credit scarcity became more widespread. The price of certificates for biomass-based diesel has also been very high. Over time, if the ethanol targets were to continue to rise above 10 percent of total gasoline consumption, high credit prices would effectively mean that consumers of gasoline would pay a small penalty, and consumers of diesel fuel a larger one, in order to subsidize the sale of E85 fuel.

The EPA’s proposal last week to lower the ethanol mandate to around 10 percent of the fuel supply is consistent with a policy judgment that the costs of building out a fuel infrastructure capable of handling more than 10 percent ethanol are not worth the benefits if the ethanol in question will largely come from corn, or be imported from Brazil as most advanced biofuel mandated by the RFS has been in recent years. At the same time, EPA’s proposed rule included an aggressive target for cellulosic ethanol, reflecting a judgment that a breakthrough there would be a game changer when it comes to both our economy and the environment that could justify expanding our ethanol fueling infrastructure. Moreover, had EPA not acted to ease the mandate, it is very possible Congress would have scrapped the whole thing, reducing the possibility that such a breakthrough might one day be achieved.

There are strong economic, security, and environmental reasons to continue reducing oil consumption, and biofuels play an important role in achieving that objective. But as the outlook for fuel usage and cellulosic production changed sharply in the past several years, the RFS needed to change too. The Administration’s decision this week to limit the mandate to 10 percent of fuel use, while continuing to promote potentially game-changing cellulosic biofuels, makes good sense against this reality.

PHOTO: A vial of cellulosic material is shown at a research facility for cellulosic ethanol at the University of Guelph in Guelph, in this May 7, 2008 file photo.  REUTERS/Mark Blinch/Files

5 comments

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Lowering the percentage will help save everyone huge repair costs caused by too much ethanol in gasoline which plays havoc with gaskets and other internal parts, especially in older engines!

Posted by CaptD | Report as abusive

NAFA Fleet Management Association, representing fleet managers throughout the United States and Canada, supports the recent EPA E-15 proposal –> http://www.nafa.org/press/nafa-press-roo m/?id=2870

Posted by NAFA | Report as abusive

But isn’t the use of ethanol a big part of the reason for the decrease in the use of gasoline? Maybe this is really just a sop to the oil companies, who are upset they aren’t selling as much oil as they used to.

Posted by Calfri | Report as abusive

@ CaptD — My 1978 Ford runs just fine on gas with ethanol. Maybe your vehicle is not old enough?

Posted by Oma | Report as abusive

It’s mighty odd that Brazilians have had complete choice as to what amount of ethanol to put in their cars for several decades while we keep getting less choice and more lies from Big Oil. Brazil has been energy independent for decades while we are sadly, not. If cars run on ethanol in Brazil, they will run in the USA. In Brazil, prices for gas and ethanol are both given and the consumer figures out the best blend to use to save $$ on any given day. Why don’t we have that choice? We have so much excess corn this harvest that we are selling crops below production cost. Ethanol production produces distillers grains used to feed cattle which is better than corn, anyway. Less ethanol will mean less corn grown and if food insecurity is what the EPA wants, then that is what they will get. I remember before ethanol how dirty the air was and how much cleaner it is now. The lies and articles like these smack of Big Oil and Big Auto trying to cut costs at consumer ad farmer expense.

Posted by iowafarm | Report as abusive