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Let’s Get Rid of the Ethanol Mandate, Not Reform It

June 28, 2018

In recent months, a number of proposals have been put forward to reduce the cost and complexity of complying with the RFS that requires American oil refiners and importers to blend biofuels, mainly corn ethanol, into gasoline and diesel fuel.

In recent months, a number of proposals have been put forward to reduce the cost and complexity of complying with the Renewable Fuels Standard (RFS) that requires American oil refiners and importers to blend biofuels, mainly corn ethanol, into gasoline and diesel fuel.

Established more than a decade ago as part of two pieces of energy legislation, the RFS mandates that the Environmental Protection Agency (EPA) set a blending target for ethanol each year. Since 2010, the blending requirement has jumped from 12.9 billion gallons annually to 19.3 billion gallons.

As with many public policies, the “law of unintended consequences” has come into play. While large, integrated energy companies have become ethanol distillers and blenders as well as oil refiners, independent refineries that can’t produce the required blends must purchase credits, called RINS, sold on the open market by large oil companies. Initially, these credits were less than ten cents per gallon but have ranged as high as $1.40. Today, the cost of a RIN is about 75 cents.

In some cases, the cost of purchasing RINS to comply with the ethanol mandate has made refinery operations unprofitable. Indeed, Philadelphia Energy Solutions, the largest refiner in the eastern US, filed for bankruptcy last year because of the renewable fuels mandate. A few small refiners have been granted exemptions in recent months, but the mandate remains in place for most companies.

Another consequence of the RFS is the ability of large gasoline retailers to “game the system” by selling excess credits at a profit, thereby generating revenues that allow them to undercut competitors. This bias against small retailers has serious implications for their long-term survival as large retailers use their RINS profits to increase market share by purchasing convenience store chains. As a result, the demise of small “mom-and-pop” fueling stations has accelerated, with more than 12,000 closing since 2007.

Proponents of ethanol, including Marc Rauch who extolled the fuel’s virtues in a recent commentary published by The Daily Caller, claim that, unlike the production and burning of gasoline, ethanol is environmentally benign. Recent evidence suggests otherwise. (RELATED: Here Is The SHOCKING BUT TRUE Story Of Big Oil’s Hypocrisy About Ethanol)

Recently, the environmental community has started to question the alleged benefits of ethanol, citing higher-than-expected carbon emissions, fertilizer runoff, and reduced wildlife habitat. For example, the National Resources Defense Council (NRDC), who lobbied strongly for the RFS, now believes that “the bulk of today’s conventional corn ethanol carries grave risks to the climate, wildlife, waterways, and food security.”

In terms of greenhouse gas reduction, even the EPA admits there is little benefit from the mandate since making ethanol requires clearing forests and grasslands that could otherwise sequester carbon emissions.

Growing enough corn to yield one gasoline-equivalent gallon of ethanol requires 2,700 gallons of water while the refining process requires another three to six gallons. Because half the nation’s corn production is now refined into ethanol, consumers are paying higher prices for beef, milk, poultry and pork.

Many environmental groups, along with oil refiners and importers, are now calling for a complete revamp of the RFS. Not surprisingly, corn growers and ethanol manufacturers want to see the mandate increased and resist efforts to modify the program.

It’s time to rethink the biofuels mandate because it’s bad public policy. We forget that the RFS was implemented during an era when we thought we were running out of oil and importing more than 60 percent of domestic consumption. Today, we’re exporting more than two million barrels per day while net imports have fallen to about 20 percent of consumption. What’s more, the blending of ethanol with gasoline has never been subject to a market test and only occurs because of the mandate.

Rather than modify the RFS, as some politicians have proposed, the public would be better served by killing the mandate because its economic and environmental costs far exceed its benefits.

[Originally Published at The Daily Caller]

Article Tags
Energy
Author
Bernard L. Weinstein is Associate Director of the Maguire Energy Institute and an Adjunct Professor of Business Economics in the Cox School of Business at Southern Methodist University in Dallas.
bweinstein@cox.smu.edu