Renewable Fuel Standard: Enough With Supporting Big Ethanol Already!

It's amazing how everything can be politicized, including food that can be turned into fuel. Last week, midwest biofuels associations were requesting that the Environmental Protection Agency (EPA) stop handing out exemptions for the Renewable Fuel Standard, such as the waiver for major oil refinery Andeavor last month. This request took place shortly before the President reportedly is to meet with Senators on biofuel policy sometime this week. The purpose of this meeting, according to Reuters, is to help "refiners cope with the Renewable Fuel Standard."

Let's get into the basics of the Renewable Fuel Standard (RFS) before we analyze it further. As part of the Energy Policy Act of 2005, the RFS was created to mandate that transportation fuel sold in the United States contained a minimum volume of renewable fuels. The EPA is the entity responsible for administering the RFS program to ensure that volume requirements are met through a system of tradable credits known as renewable identification numbers (RINs). The RFS was meant to be a major boost for ethanol producers. When formally enacted in 2007, the RFS required ethanol producers to blend 13.8 billion gallons of ethanol into gasoline by 2013, and up to 32 billion gallons by 2022. When President Bush passed the law, he stated that the idea behind this mandated renewable fuel subsidy was to limit our dependence on foreign oil while reducing carbon emissions. How well has the RFS fared so far?

Higher Costs for Drivers: The RFS was intended for ethanol gasoline to be a substitute for standard petroleum-based gasoline. According to the American Action Forum (Rosetti, 2018), Americans spent $76 billion more on transportation fuel in the past decade as a result of this mandate. In 2016, the Heritage Foundation found that repeal would save the American people $54 million over a decade's time.

The U.S. Department of Energy found that ethanol has two-thirds the energy of regular gasoline, which would further explain the higher prices. The lack of ethanol's energy content relative to petroleum-based gasoline helps explain why ethanol is costing the American people at the gas pump. Even when using E85, ethanol fuel usage is more expensive that standard fuel usage (Loris, 2016).

Higher Food Costs: In addition to higher fuel costs, there is the matter of higher food prices. The Resources for the Future estimated in 2016 that by 2022, global food prices will have increased an extra 17 percent more than they would have without the mandates (Chakravorty, 2016, p. 13). These findings should be no surprise considering how much crops are diverted from the food market (40 percent of corn production), thereby constricting supply and subsequently increasing prices. The amount of corn used to produce ethanol fuel exceeds corn production in Africa and any single country, with the exception of China (Carter et al., 2014). Think of all of the people that could have been fed if it had not been diverted by RFS! The concerns of increased food prices as a result of biofuel mandates have been expressed by the United Nations' Food and Agricultural Organization, the World Resources Institute, and the OECD.

Environmental Impact: In its 2016 report on RFS, the Government Accountability Office (GAO) concluded that it would be unlikely that the EPA could meet the RFS' greenhouse gas reductions by 2022. When it released the report, the GAO found that less 5 percent of the emissions reductions were met. The GAO found a few reasons for this lack of success. One is that most of the biofuel blended as a result of RFS has been corn-starch ethanol, which has smaller greenhouse gas emission reductions than other biofuels. The second issue is that many vehicles are not compatible with biofuels with higher concentration than E10 (i.e., gas with 10 percent ethanol). The third reason is that in spite of the mandate, demand has not been sufficiently high enough. This lack of demand undoubtedly has to do with hydraulic fracturing and more fuel-efficient cars that reduce overall demand for transportation fuel. Finally, production costs remain high, even in spite of the subsidies and the research and development work (GAO, p. 10).

More ironic is a study from the University of Minnesota that found that because of the "fuel market rebound effect," the RFS has actually increased greenhouse gas emissions (Hill et al., 2016; DeCicco, 2016). How so? The RFS mandate increases supply of fuel, which lowers prices and subsequently increases quantity produced. And this doesn't account for costs of land-use (Holland et al., 2013).

Oil Consumption and Lack of Energy Independence: Forget for a moment that energy independence is a myth. Ethanol oil has played a minuscule role in energy use for transportation, not to mention that the United States is a net importer of biofuels. Even with the de facto ethanol mandate in place, biofuels only accounted for 4 percent of transportation fuel in 2016.

• Despite the ethanol mandate and the increasing oil prices since last decade, petroleum accounts for 88 percent of the transportation fuel market. 
• Ethanol's minuscule role in the market implies that it is not responsible for reducing dependence on oil, either domestic or foreign. 
• Now that the United States is a net exporter of petroleum, it is more likely that ethanol would displace domestic production than foreign production. 
• 40 percent of our corn production is used to produce ethanol fuel and it only accounts for 4 percent of transportation fuel. Can we realistically expect that ethanol fuel be a viable replacement for petroleum if it cannot meet consumption demand?

Impeding Technological Progress: As the American Enterprise Institute illustrates in its report on RFS, there have been multiple developments in recent years that have shaped the transportation market, whether it is electric cars or hydraulic fracturing. Alternatively, there might not be enough progress to get petroleum-powered vehicles out the market. The problem is that over a decade ago, the government made a choice as to which type of fuel the American people should be nudged towards: ethanol fuel. Going back to the GAO report, the GAO admits that it would take a lot of technological investment, an amount that is not feasible, to get ethanol fuel anywhere that is cost-effective enough to meet RFS standards.

Postscript: I expressed my discontent with RFS about five years ago about how RFS should have never become law in the first place, and can you blame me? The program has neither allowed for energy independence nor has it lowered emissions. The fact that the EPA had to reduce the RFS' cellulosic fuel target from 1 billion gallons to 6 million gallons back in 2013 shows just how little the government understands the market enough to plan production. I have made the same point when analyzing wind power: the government has no business selecting winners and losers. Such market-distorting decisions harm both the consumer and the environment while benefitting a few well-connected ethanol producers. It has failed to deliver on the promises it made. Especially when ethanol has been heavily subsidized over the years and still cannot be cost-effective or environmentally friendly signals that the best reform for biofuels policy is to repeal the RFS.