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.