Friday, May 18, 2012

E15's Problems Are Symptomatic of A Failing Biofuels Policy

A new report on automobile engine durability casts further doubt on the compatibility of mid-level ethanol blends such as E15 (15% ethanol, 85% gasoline) with the existing US light-duty vehicle fleet. The report was issued this week by the Coordinating Research Council (CRC) under the auspices of API, Global Automakers, and the Alliance of Automobile Manufacturers.  It found that at least some of the vehicles included in EPA's certification of E15 for use in cars manufactured since 2001 experienced excessive valve wear and other mechanical problems over the course of a simulated engine lifetime.  Together with previous research highlighting the risks of E15 for gas station pumps, the report's findings raise serious questions about the federal government's current ethanol policy and who will ultimately bear its hidden costs.

I've written extensively about the EPA's approval of E15 for use in vehicles and the underlying rationale for increasing the ethanol content of most gasoline beyond the 10% limit (E10) for which most cars on the road today were designed.  At current volumes, domestically produced corn-based ethanol accounts for roughly 10% of all US gasoline and displaces the energy equivalent of 600,000 barrels per day of imported petroleum products.  However, without increasing the amount of ethanol blended into each gallon of gasoline, and in the absence of a miraculous transformation in the public's minuscule appetite for E85 (the 85% ethanol blend sold for flexible fuel vehicles) the US ethanol strategy has hit its natural limit.  Since US gasoline consumption, which prior to the recession routinely grew at 1-2% per year, has stalled at a level comparable to what we used ten years ago, the enthusiasm of the US ethanol industry for E15 to expand its market is entirely understandable.

The CRC's results have been criticized by both the ethanol industry and the Department of Energy.  Although I don't have the background to judge CRC's report assumption by assumption and result by result, it does appear that many of the criticisms raised by the DOE were addressed in the body of the report, including the choice of ethanol-free gasoline as the reference fuel.  As for complaints that the auto and oil producers have a vested interest in making E15 look bad, ethanol producers are at least as conflicted for their part.  Moreover, without impugning the integrity of the fine folks at the DOE, the federal government also has a significant conflict of interest in this matter: The administration and its cabinet agencies are stewards of a 2007 national biofuels policy that now depends on the adoption of mid-level ethanol blends like E15 if it is to have any chance of reaching its goal of 36 billion ethanol-equivalent gallons per year by 2022, from around 15 billion gallons per year today.  The apparent damage to some engines running on E15 under test conditions similar to those used by the car manufacturers for their own product testing highlights risks that must be addressed before consumers should be asked to put this fuel into their cars.

In addition to concerns about the safety of this fuel for the mechanical integrity of the tens of millions of vehicles for which the EPA has approved it, including both of my family's vehicles, E15 still faces substantial practical obstacles to its widespread distribution--obstacles that will likely require significant new federal funding to overcome. My industry contacts tell me that gasoline retailers considering selling E15 must install brand new gas pumps, because the nationally recognized testing laboratories like UL won't certify existing product dispensers for use with E15.  Anyone who ignores this requirement faces serious liabilities and could end up in violation of local fire codes.  So not only would retailers selling E15 instead of E10 be excluding a large portion of their existing market--at a minimum all pre-2001 cars--but they would have to make significant investments to do so.  Such investments are unlikely to be repaid by higher prices for E15 than for E10, because if anything, E15 should sell for a discount to E10.  Its nearly 2% lower energy content than E10 would translate into a requirement for roughly one extra fill-up a year for the average driver, or a penalty of about $37 per year at current prices.

There's an obvious solution for the risks that the administration is asking motorists to take on with E15 fuel.  Since neither vehicle manufacturers nor fuel retailers are prepared to accept the liability for excessive engine wear or fuel system damage from using E15 instead of E10 or purer gasoline--a position the Congress is considering granting statutory protection--the federal government should step up to this role.  The DOE and EPA claim E15 is safe for cars.  In the private sector, such claims would have to be backed up by warranties, explicit or implied.  Why should this situation be any different?  The President should therefore instruct DOE and EPA to carve out a portion of their annual budgets--after cuts--to fund a new federal warranty program for vehicles damaged by E15.  If these agencies are unwilling to stand behind their assessment of E15, then perhaps this fuel is not as ready for prime time as they suggest.  In any case, foisting this liability on consumers would represent a hidden and likely regressive new tax.