Renewable fuel standard: Are we nearing a compromise on ethanol?
Disagreement, But The Outline of A Compromise
Yesterday I watched the livestream of a National Journal鈥檚 event, 鈥溾�� from Washington, DC. I encourage you to skim through the replay. The session highlighted聽a wide range of聽views concerning the US Renewable Fuels Standard (RFS), including those of the corn ethanol and advanced biofuels industries, poultry growers, chain restaurants, environmentalists, and small engine manufacturers. Although these broke down pretty sharply along pro- and anti-RFS lines, I thought I detected聽hints of the kind of compromise that might resolve this issue. I鈥檇 like to focus on the elements of such a deal, rather than rehashing the positions of all of the participants, with one necessary exception.
The Requirement for Reform
The most disappointing contributions to the discussion occurred during the interview with Representative Steve King (R, IA) by National Journal鈥檚聽Amy Harder. If we accept Mr. King鈥檚 perspective, we should embrace the RFS as being as relevant today as when it was conceived, with no changes required. That flies in the face of the serious market distortions now manifesting in the 鈥溾�� at 10% ethanol content in gasoline. Among other things, Mr. King claimed that a 2008 reduction of $0.06 per gallon in the now-expired ethanol blenders credit brought the expansion of the corn ethanol industry to a standstill. The industry鈥檚 own聽聽tell a very different story, with US ethanol production capacity having grown by a further 86%聽since聽that point.
Rep. King also characterized 鈥渇ood vs. fuel鈥� concerns as a bumper sticker issue, with no basis in fact. That issue might be controversial, but it is far too聽聽to dismiss so cavalierly. The latest evidence of that is a聽聽to聽cap the contribution of conventional biofuel 鈥� ethanol and biodiesel derived from聽food crops 鈥� at 6% of transportation energy out of a 2020 target of 10%,聽based on concerns about sustainability and competition with food. It seemed fairly clear that the Congressman views the RFS more as a farm support measure than an energy program.聽
Finding Common Ground
The only one of聽Mr. King鈥檚 comments that seemed to find traction with the other pro-RFS聽panelists was his odd suggestion that without a mandate for biofuels, the only federal mandate in place would be one for petroleum-based fuels. Certainly,聽gasoline and diesel have聽advantages in terms of infrastructure, energy density and the legacy fleet, but he appeared to have something else in mind. From the way others picked up on this, perhaps it was his earlier reference to聽the tax benefits that conventional fuel producers have long enjoyed. This is the first and easiest element on which to compromise.
If ethanol producers and advanced biofuels developers are convinced that fossil fuels get a better deal from the government than the one they have under the RFS and the $1.01 per gallon producer tax credit for second-generation biofuels, it would be a simple matter to replace these programs with the incentives received by oil and gas producers and petroleum refiners. After all, the biofuel industry already benefits from the Section 199 tax deduction that accounts for a third聽of budgeted聽聽for the oil industry, and it shouldn鈥檛 be hard to devise an accelerated depreciation benefit analogous to 鈥減ercentage depletion鈥� and the expensing of intangible drilling expenses. Combined, the value of these tax benefits is about 1.3垄 per equivalent gallon of oil or natural gas produced this year.
Other concerns came across clearly.聽Despite the endorsement of 15% ethanol blends by the Environmental Protection Agency, blending聽more than 10% ethanol in gasoline creates聽serious risks for the US鈥檚 500 million existing gasoline engines, large and small.聽The scale of corn diversion necessary to go beyond 10% is also distorting the US agricultural聽economy and聽food聽value chain, all the way to the restaurants in our communities. However, those engaged in developing聽new biofuels that don鈥檛 rely on edible crops,聽or that are fully compatible with existing infrastructure and engines, are legitimately worried that the repeal of the entire mandate would strand the significant investments in new technology that have already been made, and possibly smother their industry just as it nears its first commercial-scale deployments. All these points of view struck me as eminently reconcilable within a reformed RFS that recognizes that most of the assumptions of the 2007 mandate are no longer valid.
The starting point should be a 10% cap on ethanol from all sources in mass-market gasoline 鈥� excluding E85 鈥� combined with measures to give ethanol from non-food sources priority within that cap over ethanol produced from corn or other food crops. The advanced biofuel targets of the RFS should also be scaled back significantly to reflect the reality that the 2007 targets were wildly optimistic. Ideally, they should be adjusted each year based on the previous year鈥檚 actual output. In return, the current producer tax credit for cellulosic and other second-generation biofuels could be extended beyond its expiration at the end of this year, and then phased out over a reasonable, predictable period, perhaps tied to cumulative output. Finally, since few on the panel seemed impressed by the EPA鈥檚 exercise of its statutory power to adjust the RFS to fit changing circumstances, that authority should be transferred to another agency, along with clearer guidelines on when adjustments would become mandatory.
Conclusion 鈥� Compromise Isn鈥檛 Repeal
I鈥檇 be the first to admit that the reforms I鈥檝e outlined above聽fall well short of the outright repeal of the RFS that many, including myself, would prefer. That鈥檚 the essence of compromise.聽In light of a government shutdown and impending debt ceiling crisis brought on by the clash of two intransigent positions, this might be preferable to聽an impasse that leaves an unsustainable status quo untouched. And if the assessment of Representative Welch (D-VT) concerning the appetite of the Congress to take up this matter is accurate, something along these lines might just be achievable.
Reform of the RFS would leave in place the outlines of a mechanism that one of yesterday鈥檚 panelists accurately described as a Rube Goldberg construction, at least for a while longer. Short of a guarantee to bail out聽everyone who invested in biofuels production or research on the basis of the RFS that Congress put in place in 2007, should they fail in a post-repeal market, I鈥檓 not sure there鈥檚 another course that would be sufficiently equitable to all parties involved.
