Monday, June 01, 2015

EPA's Blown Call on Ethanol

  • EPA's proposed revision to renewable fuel quotas achieves the appearance of compromise by cutting non-existent volumes, while still attempting to force more ethanol into the market than consumers seem to want.
Last Friday the US Environmental Protection Agency released its long-awaited proposal for untangling a broken federal Renewable Fuels Standard (RFS). Although it provides all parties with greater certainty, it fails to resolve the regulation's fundamental flaws. This is all the more disappointing for the duration of the wait involved, finalizing 2014's quotas 18 months late and leaving refiners and fuel blenders to operate for the first five months of this year on hints and guesswork about how much ethanol and biodiesel they would be required to sell in 2015.

The proposal meets at least one definition of a compromise, with most affected constituencies apparently disappointed or irate about the result. To someone unfamiliar with the situation, it might even seem that, as ethanol groups claim, the agency has leaned far in the direction of assuaging the concerns of the petroleum refining industry by cutting a total of 11 billion gallons from the 2014-16 quotas for ethanol and other biofuels. However, as EPA's accompanying analysis makes clear, the omitted volumes were unlikely ever to be purchased by end-users, given the decline in US motor fuels consumption since the statutes imposing the RFS were passed in 2005 and 2007. Nor do the facilities yet exist to produce the quantities of cellulosic biofuels that account for the lion's share of the proposed cuts.

EPA's documentation repeatedly cites the "intent of Congress." This seems to refer to the Congressional sessions that bequeathed us this policy, rather than to the current Congress, which is waking up to the fact that the program has largely been superseded by reality. The RFS was designed to address two problems: US fuel scarcity and transportation-sector emissions of greenhouse gases. The former has been overcome mainly thanks to the shale revolution, transforming the US from a net importer of refined petroleum products to the world's largest exporter.

As for automobile-related emissions, they are being managed more effectively by fuel economy improvements and new vehicle technology. The RFS may even be counterproductive in its overall emissions impacts, as noted in a press release from the Environmental Working Group. Nor are emissions the only issue for which crop-based ethanol may be doing more harm than good. Evidence points to periodic impacts on global food prices. It's hard to conclude we could divert 38% of the US corn crop without causing unintended consequences somewhere.

EPA's analysis of the snarl at the core of the existing RFS is perplexing. First it describes how ethanol has effectively reached its maximum possible penetration of the US market for ordinary gasoline containing up to 10% ethanol (E10)--the so-called "blend wall." It goes on to acknowledge that sales of gasoline blends containing up to 15% or 85% ethanol, respectively, remain minuscule relative to total gasoline sales. However, it then ignores these facts and persists in the hope that by continuing to increase its ethanol quota, albeit more slowly, it can convince consumers to embrace fuels for which they had little appetite even when gasoline cost $1 more per gallon than it does today.

As the Washington Post noted, most car manufacturers still warn automobile owners that using gasoline containing more than 10% ethanol could result in engine damage not covered by their warranties. Although I was pleased to see that the car I recently purchased is warranted up to 15% ethanol, I cannot envision buying a single gallon of E15 unless it was priced at a discount to E10 gasoline, reflecting its inherently lower fuel economy and range. As for E85, in only a handful of states does the market discount meet or exceed the fuel's 27% calculated deficit in delivered energy, compared to E10. Is it any wonder that for a decade E85 has failed to take off as envisioned by the EPA and previous Congresses?

The EPA does not have a free hand to rewrite this regulation in any manner it would like, to fit the greatly altered circumstances in which the US now finds itself. The agency may well believe it has gone as far in that direction as it could, although I suspect it could have justified freezing ethanol from all sources at current levels, and allowing cellulosic ethanol gradually to displace corn-based fuel as new facilities come online. However, no adjustments that EPA seems prepared to make can repair a biofuels policy that was fundamentally broken at its inception, due to its inherent contradictions with other policies and consumer preferences.

We have reached the point at which conflicting federal biofuel quotas, emissions regulations, and  chronically weak GDP growth have rendered the original goals of the RFS not just ambitious but unattainable. The EPA has taken its best shot at addressing this and come up short. It is now up to the US Congress and the Administration to work together to fix this mess, before the consequences of inaction put a damper on one of the few bright spots of the current economy.

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