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By Geoffrey Styles on Oct 10, 2013 with 7 responses

Is An Ethanol Compromise on the Horizon?

Tags: ethanol, RFS

Disagreement, But The Outline of A Compromise

Yesterday I watched the livestream of a National Journal’s event, “Biofuels Mandate: Defend, Reform, or Repeal” from Washington, DC. I encourage you to skim through the replay. The session highlighted a wide range of 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 hints of the kind of compromise that might resolve this issue. I’d 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’s Amy Harder. If we accept Mr. King’s 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 “blend wall” 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’s own statistics tell a very different story, with US ethanol production capacity having grown by a further 86% since that point.

Rep. King also characterized “food vs. fuel” concerns as a bumper sticker issue, with no basis in fact. That issue might be controversial, but it is far too substantive to dismiss so cavalierly. The latest evidence of that is a vote by the European Parliament to cap the contribution of conventional biofuel — ethanol and biodiesel derived from food crops — at 6% of transportation energy out of a 2020 target of 10%, 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.

Finding Common Ground

The only one of Mr. King’s comments that seemed to find traction with the other pro-RFS 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, gasoline and diesel have 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 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 of budgeted federal tax benefits for the oil industry, and it shouldn’t be hard to devise an accelerated depreciation benefit analogous to “percentage depletion” and the expensing of intangible drilling expenses. Combined, the value of these tax benefits is about 1.3¢ per equivalent gallon of oil or natural gas produced this year.

Other concerns came across clearly. Despite the endorsement of 15% ethanol blends by the Environmental Protection Agency, blending more than 10% ethanol in gasoline creates serious risks for the US’s 500 million existing gasoline engines, large and small. The scale of corn diversion necessary to go beyond 10% is also distorting the US agricultural economy and food value chain, all the way to the restaurants in our communities. However, those engaged in developing new biofuels that don’t rely on edible crops, 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 — excluding E85 — 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’s 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’s 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 – Compromise Isn’t Repeal

I’d be the first to admit that the reforms I’ve outlined above fall well short of the outright repeal of the RFS that many, including myself, would prefer. That’s the essence of compromise. 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 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’s panelists accurately described as a Rube Goldberg construction, at least for a while longer. Short of a guarantee to bail out 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’m not sure there’s another course that would be sufficiently equitable to all parties involved.

  1. By Dave Swenson on October 10, 2013 at 4:42 pm

    The no more than 10 percent recommendation makes great sense. It allows existing efficient corn-based producers to continue operation, and it also allows the advanced fuels a guaranteed market share.

    If you remember back, the corn to ethanol was always claimed to be a transitional technology in lieu of expected gains in the development of advanced fuels. That said, it is time for the industry to transition down. There’s a nice symmetry to advanced fuels displacing corn-based fuels.

    • By HopelessAboutChange on October 18, 2013 at 9:16 am

      Corn ethanol has an EROEI of 1.5 at best and below 1 at worst, meaning some percentage of it uses more oil to produce than it replaces. It seemed like a good idea in 1973, went we had millions of pound of corn sitting in storage, but that time has passed.

      • By Geoffrey Styles on October 22, 2013 at 3:25 pm

        Corn ethanol’s energy return on energy invested (EROEI) isn’t great. It’s clearly too low for it to be more than “hamburger helper” for oil, rather than a replacement. However, I think you’ve misinterpreted what it’s telling us about ethanol’s oil and fossil energy content. The easiest way to appreciate this is to think of ethanol as a solar-leveraged gas-to-liquids technology.
        The “energy invested” side is a combination of different energy sources, mainly natural gas used to produce the nitrogen fertilizer for growing the corn, as well as the process heat for fuel distillation and drying of the distiller’s grain byproduct, and to generate much of the electricity used in the facility. (In some plants that process heat and/or electricity is generated from coal.) Then there’s the oil content, mainly in the form of diesel fuel for cultivation, harvesting, and transportation of both the grain feed and the ethanol product. Most of the energy return above 1.0:1 comes from sunlight.
        Bottom line: corn ethanol consumes some oil but a lot more natural gas, and isn’t necessarily the worst way to turn some natural gas into a form cars can use.

  2. By Russ Finley on October 12, 2013 at 12:37 pm

    This is a way to subsidize farmers without using tax dollars. The funding comes straight from fellow citizens forced to buy their product.

    Seems to me, that if government mandated consumption is a good thing in a free market, then the government should be mandating the consumption of more products of special interest groups. In the futuristic movie “Idiocracy” a special interest group had convinced the government to mandate irrigation of corn with a sports drink. Watch for it …

    • By Tom G. on October 13, 2013 at 12:32 am

      Russ said: “Seems to me, that if government mandated consumption is a good thing in a free market…”.

      Tom said: You are talking about Obamacare right? LOL.

      • By Russ Finley on October 13, 2013 at 11:08 pm

        Not a lot different from mandatory car insurance except you can choose not to drive. Today, you can also choose not to receive any medical care if you have a heart attack without insurance …which never happens of course.

        …and thanks to the AMA restriction of the supply of physicians, our health care system looks more like a medieval guild than a free market

        ; )

        • By HopelessAboutChange on October 18, 2013 at 9:08 am

          Nice job blaming the union, but you should also look at the profit motive at each point in the medical industry. Each piece from the insurer, to the hospital/clinic, imaging provider, equipment/drug vendor even to the laundry, janitorial and food companies have to show year on year growth in profits. As long as medical is a growth based “industry” and baby boomers are demanding every test in the world, just because they have a bump on their butt, cost will continue to spiral.

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