Odd Bedfellow Coalition Blasts “Havoc” Caused by Corn Ethanol Mandate

An odd-bedfellow coalition of agriculture, engine manufacturer, food retail, environment, hunger, taxpayer, and free-market public interest groups are asking the House Energy & Commerce Committee to ensure that any legislation proposed to reform the Renewable Fuel Standard (RFS) address the “havoc that the corn ethanol mandate” has imposed on a “multitude of stakeholder interests.”

In their joint letter to the E&C Committee, the 44 signatories state in part:

While our reasons vary, all of us have long maintained that the RFS is a uniquely flawed policy. The mandate on corn-based ethanol in particular has had a devastating effect on the entire food economy from livestock and poultry producers facing record feed costs, to food retailers facing record food costs, to consumers here and abroad struggling to balance food budgets in tough economic times. Some signers of this letter also question the propriety of Congress establishing production quota and guaranteed market shares for any type of commercial business. Ethanol from corn also is concerning to many due to its global warming impact and the use of natural resources such as water and native grassland for producing fuel. The corn-based ethanol mandate is also having a devastating impact in communities throughout the world, where people living in poverty are facing increased food prices that threaten their food and land security.

The coalition advises that “any RFS proposal advanced by the Committee should include significant, meaningful and permanent decreases in the conventional biofuels (corn ethanol) mandate.”

Click here to read the joint letter in full.

Update (added 5:30 pm)

A Reuters article by Cezary Podkul underscores the timeliness of the odd bedfellows coalition letter. Podkul reports that House E&C “is weighing a proposal to cap the ethanol requirement at below 10 percent for two or three years, according to a person close to the committee. The proposal, which is not yet finalized, would give the industry time to study the use of higher ethanol blends . . . and then raise the target above 10 percent, according to this source.”

Although this sort of stop-gap measure would postpone the impending blend wall crisis, it falls short of the “significant, meaningful and permanent decreases” in the corn-ethanol mandate that the odd bedfellows coalition is advocating.

Visitors to the site are probably familiar with the “blend wall” problem created by the RFS’s mandate to cram ever-larger quantities of ethanol into the nation’s motor fuel supply during a period of declining motor fuel demand, but here’s a quick recap.

At 13.8 billion gallons, the RFS blending target for corn ethanol in 2013 already exceeds the amount of ethanol that can sold as E10 (motor fuel containing 10% ethanol) in a 133 billion gallon motor fuel market.

Three market realities effectively establish E10 as the maximum blend for general commercial distribution: (1) higher blends void warranties; (2) service stations lack infrastructure to store and pump higher blends; and, (3) consumers shun higher blends because they reduce fuel economy.

To meet their RFS obligations without breaching the blend wall, refiners, blenders, and fuel importers increasingly use surplus blending credits acquired in previous years. But this strategy is unsustainable. RIN (renewable identification number) credits that sold for pennies per gallon in 2012 have sold for more than $1.00 per gallon in 2013. Much of the higher RIN credit cost is passed on to consumers at the gas pump. This situation will only get worse as the RFS ramps up to 36 billion gallons in 2022, fuel economy mandates limit or even shrink the overall motor fuel market, and obligated parties run out of RIN credits.

The biofuel lobby derides the blend wall as a myth, claiming Big Oil could sell more ethanol if it just spent the money to install dedicated blender pumps and storage tanks for E15 and higher blends. That’s bunk. The vast majority of service stations, including branded stations, are independently owned small businesses. They can’t afford to spend up to $200,000 each on E15-compatible infrastructure just to please Big Corn.

Podkul reports that in a leaked document, the EPA admits that “the blend wall – the 10 percent threshold of ethanol-mixed gasoline that is at the crux of the lobbying war – is an ‘important reality’.” The agency apparently plans to cut the 2014 RFS biofuel blending target to 15.21 billion gallons from the 18.15 billion target established by the 2007 Energy Independence and Security Act (EISA).

Bob Dinneen of the Renewable Fuels Association (RFA) argues that any such cutback in the RFS blending target is “patently unlawful.” But, as Podkul points out, the EPA’s proposal puts the RFA in a “tough spot”:

The Renewable Fuels Association has previously argued that Congress need not amend the 2007 law because the EPA has enough flexibility under the law to make changes to reflect market realities. The agency is now exercising some of that discretion – but certainly not as proponents would like.

Here’s the big picture from this free marketer’s perspective.

Both the leaked EPA proposal and the legislation that House E&C is reportedly considering would fail to achieve “significant, meaningful and permanent decreases” in the corn-ethanol mandate.

The RFS is a foul combination of Soviet-style central planning and corporate welfare. It mandates production quota for one set of businesses and guaranteed market shares for another. It literally compels one industry to purchase, process, and sell other industries’ products. It makes one industry responsible for the success of another industry’s business plans. As such, the RFS conflicts with the bedrock American principles of freedom of contract and equality under law.

A simple thought experiment makes this clear.

Imagine the howls from RFS supporters if Congress were to compel corn farmers to sell annually-increasing volumes of wheat, soybeans, or rice. Or imagine the outcry if Congress imposed on corn farmers a 15-year plan establishing volumetric targets for the purchase of certain types of seeds, fertilizers, pesticides, or harvesting machinery.

Corn growers would no doubt protest that no business should be compelled to buy the products of another, assume the investment risks of another, or produce what politicians want rather than what their customers want. They would be right.

The policy implication is obvious. The RFS flouts our national aspiration to be a “land of the free.” Congress should abolish it.