The Other Shoe

When the Supreme Court recently ruled that the Environmental Protection Agency had the authority and obligation to regulate greenhouse gas emissions under the Clean Air Act, it put the climate change issue squarely back in the Administration's lap. Yesterday the President issued his response. He is proposing legislation to implement the 35 billion gallon renewable/alternative fuel standard (RFS) introduced in the State of the Union address, along with tightening gas mileage standards for cars by 4% per year. He has also charged the EPA and the Departments of Transportation, Agriculture and Energy with cooperating on new rules to reduce greenhouse gas emissions and oil consumption, with a 2008 deadline.

Presumably this higher RFS target will be administered under the same mechanism recently established to implement the 7.5 billion gallon per year (BGY) target that became law as part in the Energy Policy Act of 2005. My initial reaction to that program was fairly negative, particularly since we are already on track to exceed that goal within a year or so, without a new bureaucracy for tradable Renewable Identification Numbers on biofuels blended into gasoline or diesel. Now I suspect that the architects of this system had the higher target in mind all along.

If you've been reading my blog for a while, you know that I have a strong bias toward energy policies that set goals without prescribing the specific means of attaining them. Reducing gasoline consumption by 20% by 2017 is a reasonable stretch objective--though still a couple of steps removed from an emissions target--but linking it to a mandate for alternative fuels could produce gains that are largely illusory, at least in terms of greenhouse gas emissions and our overall energy consumption. It implicitly places an enormous bet on cellulosic ethanol becoming practical and economical on a large scale, since domestic corn ethanol production seems likely to top out somewhere between 12-20 BGY, based on land constraints and agricultural market ripple effects.

If highly efficient ethanol from biomass, rather than food crops, doesn't materialize shortly, the energy and environmental benefits of a large biofuels mandate would be limited. Even if corn ethanol could supply all the incremental volume required, this would only reduce greenhouse gas emissions on our total 2017 gasoline consumption by about 3%, because it takes 1.3 gallons of ethanol to replace the energy in a gallon of gasoline, with greenhouse gas emissions that may be only 12-18% lower than those from gasoline. At the same time, producing an additional 30 BGY of corn ethanol would cause the US to import roughly an extra 5 billion cubic feet per day of natural gas, or 8% of our current consumption, to generate the fertilizer and fuel used to make corn ethanol. And if synfuels from coal-to-liquids are included under the alternative fuel target, emissions would actually go up, unless the synfuel plants are required to sequester their CO2 output.

Whether any of this is the best way to go about reducing emissions and oil imports, or whether the 35 billion gallon biofuel goal is even attainable, is about to become irrelevant. Once this mechanism goes into effect, refiners must sell the requisite quantities of alternative fuel or buy credits from another firm that exceeded its quota. Consumers will be paying more for fuel that may reduce our oil imports, but might not reduce total energy consumption or greenhouse gas emissions by very much. The fuels market in this country is about to change in profound ways, as will everything connected to it, and the knock-on effects are likely to surprise us in ways that go beyond the price of tortillas in Mexico.