海角大神

The Unicorn Analogy

There is a reason I don鈥檛 ride a unicorn to work.

It isn鈥檛 because it鈥檚 too far to work. Nor is it because it rains here in Hawaii nearly every day and I might get wet. It isn鈥檛 because the powerful automobile lobby has convinced me that driving a car to work is a better option for me. No, it鈥檚 a bit more fundamental than that.

I don鈥檛 ride a unicorn to work because unicorns don鈥檛 exist.

But imagine the following scenario. A number of companies claim that they are developing unicorns, and in 3 years they will be commercially available. The Environmental Protection Agency (EPA) thinks 鈥淗ey, this is a great idea. It would be a more environmentally friendly method of transport. Let鈥檚 force automakers to start selling these unicorns in 3 years. We will base our projections on how many unicorns these unicorn companies say they will produce. After that we will increase the number the automakers must sell in each subsequent year, and then force the automakers to pay up if they don鈥檛 meet these quotas.鈥澛�

The automakers naturally cry foul and point out that the unicorn industry is hypothetical, and that there is no evidence that they can deliver on their claims. In response, the unicorn companies say 鈥淥f course the automakers would say that. They are afraid that we are going to put them out of business.鈥� The government agrees and starts giving taxpayer money to the unicorn companies in order to turn the hypothetical into reality. The unicorn companies start hiring people and issuing press releases indicating just how awesome they are going to be.

Now imagine that the unicorn companies fail to produce the unicorns, and instead of waiving the unicorn mandate the EPA merely reduces the number of unicorns that the automakers must sell. The unicorn companies that over-promised get a free pass on their inflated claims, while the automakers are still penalized for not selling enough non-existent unicorns.

Cellulosic Ethanol Mandate

Consumers are at least scientifically literate enough to recognize the absurdity of this scenario. Even if they hate the auto industry, they understand that since unicorns don鈥檛 exist it would be unfair to punish the auto industry for not selling them. But replace the auto industry in this scenario with the oil industry, and unicorns with cellulosic ethanol 鈥� and this is an accurate description of what the EPA did.

I explained this situation in a 2011 column 鈥斅燙ellulosic Ethanol Targets: Mandating the Nonexistent. In 2007 the EPA expanded the Renewable Fuel Standard (RFS) to include cellulosic ethanol. They mandated that starting in 2010 gasoline blenders must put increasing volumes of cellulosic ethanol into the fuel supply. The EPA based the mandated volumes on what potential cellulosic ethanol producers claimed they would be able to produce. Producers had incentives to overstate their claims in order to drive more financial support toward their industry.

But if producers failed to deliver on their overstated claims, it wasn鈥檛 the producers who would be punished for their failure to deliver. As in the unicorn/auto industry example, the gasoline blenders were fined for failing to sell fuel which wasn鈥檛 commercially available because producers didn鈥檛 deliver on their claims.

Burden of Responsibility

For example, in 2010 the EPA was counting on 100 million gallons of cellulosic fuels based on claims primarily from two companies: Range Fuels and Cello Energy. They then assumed that this industry 鈥� which didn鈥檛 exist when the mandate was put in place 鈥� would rapidly grow. The EPA tallied up the various claims from people like Vinod Khosla 鈥� the outspoken backer of Range Fuels and聽an investor in Cello Energy聽鈥� and they put some aggressive mandates in place. The first three years of the mandates, starting in 2010, required oil companies to blend 100 million, 250 million, and then 500 million gallons of cellulosic ethanol into the fuel supply.

In 2010, both Range Fuels and Cello failed to delivery any cellulosic ethanol, nor did they ever produce any qualifying cellulosic ethanol. Qualifying production for 2010 and 2011 was zero gallons across the cellulosic ethanol 鈥渋ndustry鈥� (Source). In 2012 the first qualifying batch of cellulosic ethanol was produced 鈥斅�20,069 gallons by Blue Sugars Corporation. The ethanol was produced in April 2012, and no more was produced for the rest of the year.

Thus, in the first three years of the cellulosic ethanol mandate, the percentage of qualifying fuel that was produced was 0%, 0%, and finally 0.004% in 2012 of the originally mandated volumes.

The EPA did roll back the mandated volumes as the cellulosic industry failed to materialize. They subsequentlyreduced the 2010 mandate to 6.5 million gallons聽鈥� but still required gasoline blenders to go buy this fuel that didn鈥檛 commercially exist.

The American Petroleum Institute (API) thought it somewhat unfair that gasoline blenders would be fined for the failure on the part of producers, so they sued. Last week, the United States Court of Appeals for the District of Columbia agreed, stating that the EPA鈥檚 quotas were聽based on wishful thinking.

API聽responded to the decision:

API favors an approach in which mandated volumes for future years are tied to production volumes in the current year.

As I noted in my 2011 article, those who advocated for these inflated volumes are the ones who should be held accountable for failure to deliver. If there are credits to be bought, then the various ethanol lobbies 鈥� who thought this was a swell idea 鈥� can put up the money when companies fail to deliver.

In any case, the courts have now agreed with me that requiring gasoline blenders to blend cellulosic ethanol makes about as much sense as requiring automakers to sell unicorns.

Link to Original Article:聽Why I Don鈥檛 Ride a Unicorn to Work