The Dethroning of King Corn in the US Ethanol Industry
Many have been criticizing ethanol ever since the corn-alcohol distillate was proposed as an anti-knock additive to replace lead in gasoline. In the mid-2000s, faced with the prospect of diminishing oil production and higher energy prices, the U.S. Congress turned to ethanol as an alternative fuel that could supplement and (supporters claimed) eventually even supplant gasoline in the our fuel supply, along with biodiesel from corn and soybean oil.
The oil and gas fracking revolution over the last decade, however, has shown the pessimists were wrong. Yet, a federal mandate that requires refiners to blend increasing amounts of ethanol into gasoline each year lives on. Now E10 — an approximately 10 percent ethanol-blended gasoline — is pervasive in the U.S. fuel supply, and the ethanol industry is well developed.
A victim of its own success, ethanol is under mounting pressure.
Economists point out the inefficiency of using fossil fuel-derived fertilizers to grow an “alternative fuel” with only two-thirds the energy content of gasoline. Environmentalists decry the conversion of marginal lands to grow crows for fuel stocks. Clean air advocates warn about the adverse health effects of ethanol’s significantly higher emissions of ozone-forming nitrogen oxides. Indeed, recent developments suggest the overthrow of King Corn may be coming. Consider:
- In January 2018, Philadelphia Energy Solutions, the largest refiner in the eastern U.S., filed for bankruptcy because of the $200 million — twice as much as its payroll — it was forced to pay for credits since it could not properly blend-in ethanol;
- On June 29, 2018, EPA released a long-delayed report that finds the federal ethanol program harms the soil, water, and air; and
- On July 26, 2018, 21 U.S. senators wrote EPA Acting Administrator Andrew Wheeler, warning him not to “deviate from sound policy and the law” by “retroactively reallocating obligations” to blend ethanol the EPA regularly waives for small refiners to larger refiners.
The senators’ letter comes as the ethanol industry faces the collision of flat demand for gasoline and a production-glut of corn and soybeans, with the “blend wall.” The Energy Policy Act of 2005 created — and the Energy Independence and Security Act of 2007 expanded — the federal mandate on refiners to blend increasing amounts of ethanol and other biofuels with gasoline and diesel through 2022.
The law set annual targets but allowed EPA to set lower amounts if supplies were insufficient to reach the goals. EPA set the total volume of renewable fuels for 2017 and 2018 at about the same level, 19 billion gallons, which is well below the 26 billion gallons originally required by the 2007 law.
Big oil refining companies such as BP and Shell have gotten into the ethanol distilling and blending business, and have reaped huge profits from the sale of credits for blending more fuel than they are required to, thanks mostly to their greater capacity.
Independent oil refineries that are not equipped to process ethanol have an alternative. They can purchase credits called Renewable Identification Numbers (RINs) generated by other refiners that produce or blend more biofuels than they need. RINs are bought and sold separately from the blended fuel in a RINs market. The purchase price of those credits, however, rose from a few cents a gallon to (at one point) nearly $1.50 due to speculation. (Hence, the bankruptcy of Philadelphia Energy Solutions.)
More recently, the Renewable Fuels Association, a trade association of ethanol refiners, complained that RINs prices have collapsed. They blame the falling RIN market on hardship exemptions from the requirement to blend or purchase RINs that EPA gave to 48 small refiners (as allowed under law).
In a July 25th letter to the chair and ranking member of the House Subcommittee on the Environment/Committee on Energy and Commerce, RFA President Bob Dinneen said that “RINs prices have plummeted from 95 cents in late November 2017 to just 25 cents today.” The RFA letter calls this “demand destruction.”
But whatever the state of the government-created demand for RINs in an artificial market, it has little to do with the actual amount of ethanol that is blended. That is determined by the amount required by EPA, acting under the mandate of mid-2000s laws. RINs prices do not determine the price of corn and other ethanol fuel stocks.
The purpose of RINs, according to RFA, is to “serve as a critical economic incentive to expand the production and use of renewable fuels.” Indeed, the ethanol industry wants to increase demand by requiring refiners to blend higher amounts of ethanol in gasoline, such as E15 or E20.
But members of Congress, environmental groups, and drivers themselves are all asking why we should encourage an increase in the production of a product for which there is no market. Last year, Sen. Bill Cassidy and Rep. Bob Goodlatte proposed legislation to repeal the RFS mandate altogether, cheered on by “free marketers,” environmentalists, and consumer advocates.
Within the Trump administration, the chief ally of ethanol opponents was former EPA Administrator Scott Pruitt. The RFS mandate was one of many items on his aggressive deregulatory agenda. In the midst of these developments, the controversial Pruitt resigned, and on July 9th, Andrew R. Wheeler became acting EPA chief. (Wheeler had been confirmed by the Senate as the EPA’s deputy administrator in April.)
By all reports, Wheeler’s ascension was welcomed with bipartisan relief on Capitol Hill. It helps that Wheeler worked for four years at EPA in the early-1990s and for another 14 years for the Environment and Public Works Committee under Sen. James Inhofe, before joining a lobbying firm. Thanks to his experience, Wheeler may have a clearer sense of what regulators can do versus what Congress should do. Thus, Wheeler says he will not take actions that federal laws do not authorize and are unlikely to be upheld when challenged in the courts.
With respect to ethanol, that presumably means he will not “retroactively reallocate” ethanol obligations, because the law does not authorize him to do so. On the other hand, he could allow summer sales of E-15, which requires a waiver because of the potential for higher emissions that contribute to ozone formation. And he could help refiners to meet their RINs obligations by allowing ethanol exports to qualify.
More fundamental reforms, or repeal of the renewable fuel mandate altogether, will require congressional action.
Joe Barnett (email@example.com) is a freelance author and former senior director of policy research at the National Center for Policy Analysis.