Time to rethink the Renewable Fuel Standard

Time to rethink the Renewable Fuel Standard
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Environmental Protection Agency Administrator Scott PruittEdward (Scott) Scott PruittOvernight Energy: EPA declines to write new rule for toxic spills | Senate blocks move to stop Obama water rule | EPA bought 'tactical' pants and polos Grassley wants to subpoena Comey, Lynch after critical IG report Senate blocks bid to stop Obama water rule MORE thinks U.S. refiners are being forced to blend too much ethanol into their gasoline. His recent comments to that effect sent biofuel advocates into a frenzy. But it’s the public who should be angry.

If ever a federal program had outlived its usefulness, it’s the government’s support for ethanol.

The modern ethanol industry got its start in the mid-1970s, when U.S. crude oil production began to decline and Middle Eastern countries began using oil exports as a tool to punish the U.S. for its pro-Israel policies.

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Congress subsidized ethanol production for decades, in the hope of reducing U.S. dependency on imported oil and creating a more environmentally friendly alternative to gasoline. But in 2005, Congress took a different approach when it passed the Energy Policy Act, creating the Renewable Fuel Standard. The RFS requires nearly all gasoline to be mixed with ethanol, which is mostly corn-based though increasingly includes other biofuels.  

 

The new law mandated that 4 billion gallons of ethanol be mixed into gasoline beginning in 2006. Congress expanded that mandate when it passed the Energy Independence and Security Act of 2007, requiring a minimum of 36 billion gallons of ethanol to be mixed into gasoline by the year 2022. 

But problems emerged. 

To begin with, Congress required a significant increase in cellulosic biofuels — made from switchgrass and other organic substances — and other biofuels so we weren’t putting so much corn in our gas tanks. However, the industry initially had trouble keeping up with those targeted productions.

Second, the economic recession, along with more fuel-efficient cars, meant that gasoline usage remained relatively flat for several years, rather than growing as Congress had anticipated. 

Normally, lower-than-expected gasoline usage would have been considered good news. However, to meet the congressionally imposed mandate requiring more ethanol, refiners would have to increase the percentage of ethanol per gallon of gasoline, which was usually capped around 10 percent and referred to as the “blend wall.”

And that predicament led to the third problem. Higher blend levels could harm older car engines, as car manufacturers repeatedly warned. 

Then there’s a fourth problem, which Pruitt highlighted in his recent comments: The mandate’s impact on refiners. 

Philadelphia Energy Solutions, the largest refiner on the East Coast, recently filed for bankruptcy citing the RFS. 

Here’s why. Refiners that don’t meet their goal of mixing ethanol have to buy a type of credit, known as RINs, which can be very costly.

For example, the management consulting company McKinsey & Co. recently reported, “For refiners this [the credits] translated into an additional cost of operations of [$3 to $4 per] barrel of crude processed. … For example, Valero energy has projected annual spend on RINs in 2016 could total $850 million.” 

In other words, refiners may be out hundreds of millions of dollars just complying with federal regulations. Pruitt thinks the RFS program needs to be reformed and he is absolutely right. 

It won’t be easy. The corn-based ethanol industry is powerful. And Iowa, the first state up in the presidential election primary process, is one of our biggest corn producers. And so the ethanol industry works to ensure that every potential presidential candidate is a strong supporter of ethanol and the RFS.

But times change. The reasons for creating the RFS — declining U.S. crude oil production and the belief that ethanol was more environmentally friendly — no longer apply.

Innovative drilling techniques, which really began to take off about the time Congress created the RFS, have made the U.S. the largest producer of crude oil and natural gas in the world. Production is rising, not falling as it was in the 1970s.

In addition, many environmentalists now question whether ethanol is that much cleaner than gasoline, given all of the fuel and water it takes to grow, harvest, transport and process corn into ethanol — not to mention its impact on the price of corn.

In short, even if the reasons for subsidizing and mandating the use of ethanol were once true, not anymore. Pruitt is right that its time to reconsider the Renewable Fuel Standard, regardless of who that angers.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.