Let Ethanol Fend for Itself
The East Coast’s largest and oldest oil refinery is declaring bankruptcy. In its January 22 filing, Philadelphia Energy Solutions (PES) — whose facilities can process 335,000 barrels of oil per day — cited the economic burden of complying with the Renewable Fuel Standard (RFS) as a primary contributor to its fiscal woes. Regardless of the merits of PES’s claims, the RFS is an economic and environmental burden on the United States and ought to be repealed.
The RFS, first passed in 2005 and expanded in 2007, mandates that fuel blenders mix ethanol into fuel supplies at increasing levels until 2022. Interest in ethanol peaked during the George W. Bush administration for an amalgam of reasons stretching from rising oil prices, to a belief that plant-derived fuels would be environmentally superior to fossil fuels. With ethanol production then sitting at just a few billion gallons, the law sought a 10-fold increase in ethanol production over less than two decades. In the early years of the policy, complying with the standard was fairly inexpensive. Renewable Identification Numbers (RINs), the tradable compliance credits generated when ethanol is produced, sold for 10 cents or less.
Sometime within the past few years, the fuels industry began to heave under the pressure of steadily mounting RFS requirements. With the exception of rare 85 percent ethanol pumps only usable by specially-designed engines, U.S. pumps can generally only sell blends up to 10 percent. This puts a hard cap, referred to as the “blend wall,” on how much ethanol can realistically be blended.
The RFS mandate blew past the blend wall back in 2016, and compliance costs are commensurately higher. The EPA has repeatedly responded to the industry’s pleas by waiving portions of the mandate, but blenders still struggle to meet reduced requirements. Whatever the cause of Philadelphia Energy Solution’s troubles, the $832 million it spent on RINs cannot have helped. RFS mandates, in fact, are the single biggest operating cost to PES after crude oil itself, surpassing even payroll costs.
Many people understandably won’t sympathize with a dying fossil fuels company. But the RFS is not the path to a green future. In terms of lifecycle greenhouse gas emissions, ethanol is almost identical to conventional gasoline. In addition, the RFS is linked to a myriad of environmental problems, including erosion, elimination of conservation lands, pollution of waterways, and heavy water use in drought-prone areas.
Most of these problems come from the rapid expansion of U.S. corn production following the RFS demand spike. Corn grown on traditional cropland with adequate crop rotations can produce ethanol at little environmental cost, especially if rainfall is ample. The RFS, however, necessitates far more corn production than can be produced on such ideal cropland. As a result, corn farms pushed deep into marginal and previously unfarmed areas, often requiring new water-hungry irrigation systems. Many farmers abandoned crop rotations in favor of heavy fertilization. Ironically, mandating the “green” fuel alternative led the alternative to cease being green.
What about the impact on American farmers? It is true that ethanol consumption would fall if the RFS were eliminated, but corn farmers (and ethanol refineries) need not worry about it slipping all the way to pre-2005 levels. Ethanol rose to industry prominence as the industry’s primary fuel oxygenate after the previous favorite, methyl tertiary butyl ether, was widely banned. That ban coincided with the onset of the RFS, which obscured much of the market impact of ethanol’s newfound value. We don’t need to keep the RFS until ethanol develops a market of its own — it already has one.
When discussing Philadelphia Energy Solutions’ bankruptcy, EPA Director Scott Pruitt expressed interest in reforming the RFS. What that means is unclear, but one can hope that repeal is on the table. The RFS burdens domestic energy suppliers and continues to degrade the environment for little benefit. As a mature industry with clear market value as an octane enhancer, ethanol is more than ready to fend for itself.
Arthur R. Wardle is an advocate for Young Voices, a graduate student in economics at Utah State University, and a research fellow at the Center for Growth and Opportunity at Utah State University. He researches energy and environmental policy.