Renewable Fuels Are Toxic DC Swamp Water
While President Trump promised to “drain the swamp,” he also voiced his commitment to the biofuels industry and the Renewable Fuel Standard (RFS). These promises are in direct conflict. No federal program epitomizes the metaphorical swamp water of Washington better than the RFS.
This week, public comments are due on Environmental Protection Agency’s (EPA) proposed RFS targets for 2018. The proposal is a mixed bag. As it stands, the administration needs to do more on RFS to maintain its credibility as a Washington change agent. There’s no having your cake and eating it too when it comes to fighting the DC establishment and appeasing the biofuels lobby.
RFS is a case-study in bad public policy. It hits most all of the broad systemic problems of big government routinely raised by free-market advocates.
Congress created RFS in 2005 and expanded it in 2007. Seeking to curb America’s reliance on foreign oil, Congress mandated increasing volumes of biofuels, primarily corn-based ethanol, be blended into the nation’s fuel supply. Congress set into statute raw gallon figures for these fuels and delegated authority to EPA to establish annual compliance rules. Essentially, RFS is nothing more the Soviet-style central planning of the fuel market—which is why it was destined to wreak havoc.
The first problem with RFS relates to the knowledge problem of central planning. Warnings of central planning’s follies date back to Adam Smith’s Theory of Moral Sentiments, published in 1759, and were put on full display during the collapse of communism in Eastern Europe. But that didn’t stop Congress from blundering into RFS a decade ago.
As explained by F.A. Hayek in his essay The Use of Knowledge in Society, “The economic problem of society… is a problem of the utilization of knowledge which is not given to anyone in its totality.” Central planning through programs like RFS doesn’t work because no single person or cadre could possibly possess all the information required to create an outcome more efficient than one reached by countless voluntary exchanges in the market.
RFS, in its current 2007 form, was instituted without knowledge of the Great Recession or the domestic oil and gas boom of the last decade. Thus, RFS mandates are based on rising fuel consumption and dependence on oil imports. Neither are today’s case. Fuel consumption has been flat since 2007 while crude oil production has spiked to record levels, making the US the world’s dominant energy producer.
This doesn’t just mean RFS is useless; it’s also creating economic distortions. Since RFS creates a guaranteed market for corn through ethanol mandates, corn prices have increased. This increases the cost of food across the market. More expensive corn raises the price of corn-based products, including livestock feed, and incentivizes farmers to divert more acres to corn production, reducing supply of other crops and therefore increasing those prices too.
Further, today’s economic conditions make the mandated volumes of ethanol harmful to the overall fuel supply. Most cars and fuel infrastructure can be damaged by ethanol blends beyond 10 percent. With overall fuel demand not increasing at the rate anticipated, the mandated amount of ethanol has crossed this threshold. This forced EPA to repeatedly lower annual ethanol standards below those required under law, doing so from 2014 through 2016.
RFS creates another conundrum by establishing a concentrated benefit and dispersed costs scenario. This is where RFS gets particularly swampy. Despite the glaring problems, RFS is vehemently defended by a collection of biofuels and agricultural lobbyists and Midwestern politicians. Who wouldn’t want a government mandate forcing consumers to buy your stuff? While the program is estimated to impose billions in economic distortions, that cost is spread out—nickel-and-dimed away from Americans with each trip to the pump and grocery store.
The special interests making those billions can afford more real estate on K Street than the average family paying more for gas and food. That’s how the DC swamp keeps boondoggles like the RFS in place, much to the amazement of disgruntled Americans—particularly those who voted for Trump.
While the EPA’s proposed 2018 RFS targets reduce the overall level of biofuels required, the ethanol mandate remains flat from 2017 and in-line with the misguided targets set in 2007. Industry experts insist this will exceed the recommended amount of ethanol in the fuel supply.
This is disappointing news out of the Trump administration. The president may have promised to support the ethanol industry, but his entire campaign rested on a bigger promise to end this kind of insanity in Washington. The White House would be wise to lean on EPA to utilize more of its RFS waiver authority and demand Congress kill this program for good.
Trump is going to break a campaign promise this fall. He just has to decide whether it’ll be his promise to biofuel lobbyists or the other 99 percent of Americans who supported his campaign.