This morning I attended a briefing on “The Renewable Fuel Standard: Pitfalls, Challenges, and the Need for Congressional Action in 2013.” Steve Ellis of Taxpayers for Common Sense moderated a panel of six experts. Although each expert spotlighted a different set of harms arising from the RFS, reflecting the core concern of his or her organization, this was a team effort, with panelists frequently affirming each other’s key points. Collectively, they made a strong case that the RFS is a “costly failure.” The briefing’s purpose was to demonstrate the need for reform rather than outline a specific reform agenda. Panelists nonetheless agreed that, at a minimum, Congress should scale back the RFS blending targets for corn ethanol.

Kristin Sundell of ActionAid explained how the RFS exacerbates world hunger, undermining U.S. foreign aid and international security objectives. The RFS diverts 15% of the world corn supply from food to fuel, putting upward pressure on food prices. A recent Tufts University study estimates that U.S. ethanol expansion during the past 6 years cost developing countries more than $5.5 billion in higher prices for corn imports. In Guatemala, the additional expense ($28 million) in 2011 effectively cancelled out all U.S. food aid and agricultural assistance for that year. Food price spikes, partly due to the RFS, were a factor in the recent turmoil in the Middle East. ”Congress can’t control the weather, but they can control misguided energy policies that could cause a global food crisis,” Sundell said.

Kristin Wilcox of the American Frozen Food Institute discussed the RFS’s impact on food consumers. Corn is both the chief animal feed and an ingredient in about 75% of all frozen foods. Consequently, RFS-induced increases in corn prices drive up “the cost of producing a wide range of foods and leads to higher food bills for consumers.” In addition, when corn prices go up, so do the prices of other commodities that compete with corn such as wheat and soybeans. ”Our position is very simple,” Wilcox said: “food should be used to fuel bodies, not vehicle engines.” She concluded: “Trying to change the price at the pump should not burden consumers with increased prices in the grocery check out aisle.”

Actually, as Geoff Moody of the American Fuel & Petrochemical Manufacturers pointed out, the RFS aggravates rather than alleviates pain at the pump. Graphs from the Energy Information Administration show that biofuels are more expensive than gasoline on an energy-content (per-mile) basis. The higher the ethanol blend, the more expensive it is to drive, which is why fewer than 4% of flex-fuel vehicle owners fill up with E85 (motor fuel blended with 85% ethanol).

Moody’s major point was that the RFS is becoming increasingly unworkable. Already the 135 billion gallon U.S. motor fuel market is nearly saturated with E10. By 2022, U.S. motor fuel consumption is projected to be about 25% lower than Congress assumed when it expanded the RFS in 2007. If Congress does not revise the RFS, refiners will have to sell E20 or higher, but the existing retail infrastructure is not equipped to handle blends higher than E10. A typical service station may clear a profit of only $45,000 on motor fuel sales, but replacing pumps and storage tanks to handle higher blends can cost $50,000 to $200,000.

Scott Faber of the Environmental Working Group discussed the RFS program’s environmental impacts, especially changes in land use. From 2008 to 2011, high crop prices and crop subsidies contributed to the conversion of 23 million acres of wetlands and grasslands, an area the size of Indiana. About 8.4 million acres were converted to corn production. “We have lost more wetlands and grasslands in the last four years than we have in the last 40 years,” Faber said. If lawmakers knew in 2007 what we now know about the RFS’s many serious unintended consequences, they would not have enacted the program, Faber opined.

Tom Elam of Farm Econ LLC discussed the RFS program’s impacts on livestock producers and meat and poultry consumers. Since Congress created the RFS in 2005, annual feed costs have increased by $8.8 billion for chicken producers and $1.9 billion for turkey producers. Consequences of those higher costs include an 8 billion pound decline in poultry production, eight major bankruptcies, a half billion dollar loss in farm income, and higher prices for consumers.

Retail broiler prices, for example, increased from $1.74/lb in 2005 to $1.97/lb in December 2012. Turkey prices similarly rose from $1.07/lb in 2005 to $1.80/lb in early 2012. Beef and pork prices too rose along with feed costs, with the result that U.S. per capita meat and poultry consumption declined by about 10% since 2008.

The RFS may be good for corn farmers, but it fosters economic inefficiency. For every $1 of added ethanol production, food production costs increased $2.89. In other words, food producers bear a cost “more than twice the value of the ethanol created.”

Jim Currie of the National Marine Manufacturers Association explained the perils of E15 to the $72 billion per year U.S. recreational boating industry. Boats and other small gasoline-powered engines are designed to run on motor fuels blended with 10% ethanol or less. Consequently, “anything above E10 poses serious problems, including performance issues like stalling, corrosion leading to oil or fuel leaks, increased emissions and damaged valves, rubber fuel lines and gaskets.”

Higher blends are trouble for two reasons. First, ethanol is a solvent and at increased concentrations eats away at engine components. Second, ethanol is an oxygenate, and the higher the oxygen content of a fuel, the hotter the burn. Tests supervised by the Department of Energy’s National Renewable Energy Lab prove “time and time again that marine engines and, by extrapolation, other types of engines, simply cannot tolerate the high levels of additional oxygen that this fuel blend forces into the engine.” Currie presented lab test photos of such engine damage (pp. 3-7 of this Power Point).

Valve rupture from E15

Touching on the potential risks E15 poses to automobiles, he quoted the AAA’s statement of last December: “Only about 12 million out of the more than 240 million light-duty vehicles on the roads today are approved by manufacturers to use E15 gasoline.”

Currie’s conclusion drew applause from the Hill crowd:

As I am the last presenter today, let me offer a hypothetical scenario, based on what you have heard. Suppose an organization approached the Hill today and said, “We have a great idea for a new policy. It will largely benefit a small number of people in one part of the country, and members of Congress from there will support it wholeheartedly. The downside is that it will hurt the environment; and conservation practices; and will drive up food costs; and hurt people in developing countries; and will potentially damage every small engine in the country, including those in motorcycles and snowmobiles and ATVs and lawnmowers and generators; and it will damage boat engines; and it will potentially damage most automobile engines and will void your engine warranty if you use it. But we want you to enact a law requiring the American consumer to use it anyway.” That’s where we are today, and we think this law needs to be changed.

On Tuesday, the D.C. Circuit Court of Appeals denied by 7-1 a petition for a full-court re-hearing of its 2-1 decision last summer to dismiss litigation challenging EPA’s approval of the sale of E15 at retail motor fuel pumps. E15 is a blend of 85% gasoline and 15% ethanol.

In both decisions, Judge Brett Kavanaugh was the sole dissenter, and both times he trounces the majority on the facts and statutory logic.

In a previous post, I reviewed Kavanaugh’s dissent in the August 2012 decision. Herewith a brief recap:

• The 2-1 majority held that petitioners – refiners and livestock producers — would not be injured by the EPA’s grant of a waiver authorizing the sale of E15 and thus lack standing to challenge the agency. The majority somehow missed the obvious.
• There being no commercial substitute for ethanol to meet the ever-increasing production quota established by the Renewable Fuel Standard (RFS), EPA approval of E15 is a de facto mandate on refiners to increase the blend from E10 to E15 — a roughly 50% increase from about 14 billion gallons to 21 billion gallons annually. That will necessarily impose a cost on refiners. 
• In addition, because virtually all U.S. ethanol is made from corn, approving E15 will increase the demand for and price of corn, imposing a cost on livestock producers, who purchase billions of bushels annually to feed their hogs, cattle, and poultry.
• Clearly, EPA approval of E15 injures both petitioner groups, so the Court should have reviewed the petitions on the merits.
• Section 211(f) of the Clean Air Act (CAA) prohibits the EPA from approving the sale of any fuel additive that causes or contributes to the failure of emission control systems in any vehicle manufactured after 1974. 
• By the EPA’s own admission, E15 can contribute to emission control failures in vehicles manufactured during model years 1975 through 2000.
• Therefore, the EPA lacks authority to approve the sale of E15.

Kavanaugh’s dissent in Tuesday’s decision reiterates those points but also adds some illuminating refinements.

Although the EPA “did not raise a challenge to the standing of the food producers or the petroleum producers,” the 2-1 majority in August dismissed the case on standing grounds. “The panel determined that the food producers have Article III standing but lack prudential standing because, according to the panel, the food producers are not within the zone of interests under the relevant ethanol-related statute. The panel separately held that the petroleum producers lack Article III standing.” In Kavanaugh’s view, ”both groups plainly have standing.”

At this point you may be wondering, what is “prudential standing” and how does it differ from “Article III standing”? Article III of the U.S. Constitution extends (or limits) the judicial power to “cases” and “controversies.” As interpreted by the Supreme Court, this means plaintiffs have standing only if they can demonstrate an injury that is fairly traceable to the defendant’s challenged action. The doctrine of prudential standing is murkier, but basically means courts for prudential reasons may also refuse to adjudicate some claims. In the present case, the majority held that the food producers’ claimed injury does not fall within the “zone of interests” protected by the Clean Air Act provisions establishing the RFS program.

Kavanaugh finds the majority’s opinion incorrect for either of two alternative reasons. First, the “EPA chose not to challenge the food producers’ prudential standing – in other words, because EPA accepted that the food producers were within the zone of interests and therefore an aggrieved party – that issue has been forfeited and is no longer part of the case.”

Second, the “food producers’ case for being within the zone of interests is especially strong here because Congress expressly took account of the interests of food producers, among others, in this ethanol-related statute” [see Clean Air Act § 211(o)(7), which allows the EPA to waive the RFS blending requirements when those would severely harm the economy of a state, region, or the United States].

The 2-1 majority ruled that the petroleum refiners are not injured and hence lack Article III standing to challenge the EPA’s approval of E15. That is ridiculous. In Kavanaugh’s more polite words:

But the petroleum producers are directly regulated parties; and as the Supreme Court has said, when a party “is himself an object of the action” at issue, “there is ordinarily little question that the action” has “caused him injury, and that a judgment preventing” the action “will redress it.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 561-62 (1992). Indeed, EPA did not even challenge the petroleum producers’ Article III standing, recognizing at oral argument that the petroleum producers’ standing was “self-evident.” Tr. of Oral Arg. at 30. . . .EPA did not raise Article III standing no doubt because it fully understands how this program actually works, and EPA appreciates that the combination of the statutory renewable fuel mandate and EPA’s E15 waiver will obviously force petroleum producers to refine and sell E15. . . . In fact, the ethanol producers who sought the E15 waiver specifically argued to EPA that the E15 waiver was “necessary” for petroleum producers to meet the renewable fuel mandate. What better evidence do we need?

In short, plaintiffs have standing, the Court should review the case on the merits, the “evidence is undisputed” that approving E15 sales will “cause failure of emissions standards in cars manufactured through 2000,” and, thus, the “EPA’s action simply cannot be squared with the statutory text.”

Today, the D.C. Circuit Court of Appeals found in a 2-1 decision that automakers, petroleum refiners, and food producers lack standing to challenge the Environmental Protection Agency’s (EPA’s) approval of E15 — a blend of gasoline and 15% ethanol — for motor vehicles manufactured after 2000.

Petitioners argued that the EPA acted illegally. Section 211(f) of the Clean Air Act (CAA) prohibits the introduction of new fuels and additives into the U.S. motor fuel supply unless the manufacturer demonstrates that such fuels or additives “will not cause or contribute to a failure of any emission control device or system” of any motor vehicle, motor vehicle engine, nonroad vehicle, or nonroad engine manufactured after model year 1974. By the EPA’s own admission, E15 can contribute to emission failures in vehicles manufactured between 1975 and 2000. Petitioners argued that CAA 211(f) gives the EPA no authority to grant a “partial waiver” for the sale of new fuels or additives to a subset of vehicles (e.g., model years 2001 and later).

Chief Justice David Sentelle and Judge David Tatel held that petitioners lack standing to sue. According to Sentelle and Tatel, petitioners could not show that the EPA’s approval of E15 would likely cause a ‘concrete’ and ‘imminent’ injury to any automaker, refiner, or food producer.

I’ll grant that the automakers’ asserted injury may be ‘speculative’ or ‘conjectural.’ However, it is hard to fathom how the EPA’s approval of E15 would not impose substantial costs on both petroleum refiners and food producers. The switch from E10 to E15 means a 50% increase in the quantity of ethanol blended into the nation’s motor fuel supply, potentially increasing ethanol sales from 14 billion gallons a year to 21 billion gallons. Since nearly all U.S. ethanol today comes from corn, the switch to E15 could substantially increase demand for corn, corn prices, and the quantity of corn diverted from feed and food production to motor fuel production.

Sentelle and Tatal argued that refiners and food producers are not injured because the EPA is merely giving refiners the ‘option’ to blend and sell E15, not forcing them to do so. But this is a distinction without a difference. As the justices acknowledge, the Renewable Fuel Standard (RFS) will soon require refiners to sell more ethanol than can be blended as E10. Thus, if the EPA waiver is upheld, refiners will have no real choice but to blend and sell E15, and this will impose substantial, predictable costs on both refiners and food producers. Their injury is concrete and imminent. The Court, therefore, should have reviewed the case on the merits and struck down the waiver as exceeding the EPA’s authority under CAA Section 211.

Judge Brett Kavanaugh’s dissent is so powerful and convincing that I will be surprised if the case is not appealed and overturned. Excerpts from Kavanaugh’s dissent follow.  

KAVANAUGH, Circuit Judge, dissenting:

In order to issue the waiver under the statute, EPA had to find that E15 would not cause any car models made after 1974 to fail to meet emissions standards. EPA found that E15 could cause emissions failures in some cars made after 1974 (namely, in cars made between 1975 and 2000). Nonetheless, EPA still granted the waiver. For the first time ever, EPA granted what it termed a “partial waiver,” meaning that the waiver allowed E15 use only in cars made after 2000.

In this suit, members of the food industry and the petroleum industry contend that EPA’s E15 waiver is illegal. The food group is suing because, as a result of EPA’s E15 waiver, ethanol production will increase and demand for corn (a necessary raw material for ethanol) will rise significantly. In turn, corn prices will rise. Therefore, food producers, which compete directly with ethanol producers in the upstream market for purchasing corn, will have to pay more for corn. The petroleum group is suing because, as a result of EPA’s E15 waiver and the statutory renewable fuel mandate, those in the petroleum industry now must refine, sell, transport, and store E15, incurring significant costs to do so. 

Despite the fact that two enormous American industries will be palpably and negatively affected by EPA’s allegedly illegal E15 waiver, the majority opinion tosses the case for lack of standing.

The food group includes producers of processed food made with corn and those who raise livestock fed with corn. It is hard to overestimate the significance of corn to the American food industry. And petitioners’ submissions to EPA and this Court reveal the following about the effects of EPA’s E15 waiver on the food industry: In E10, up to 10% of gasoline is made up of ethanol. In E15, up to 15% of gasoline is made up of ethanol. That’s a 50% increase in the amount of ethanol used. In hard numbers, with only E10 on the trade market, 14 billion gallons of ethanol could be produced each year for the Nation’s gasoline supply. With E15 on the market, 21 billion gallons of ethanol can be produced each year. That’s an additional 7 billion gallons of ethanol annually produced for use in the U.S. gasoline supply. As a result of the E15 waiver, there is likely – indeed, nearly certain in the current market – to be a significant increase in demand for corn to produce ethanol. The extra demand means that corn producers can charge a higher price. Therefore, the E15 waiver will likely cause higher corn prices, and members of the food group that depend on corn will be injured.

This is Economics 101 and requires no elaborate chain of reasoning. It is no surprise that EPA – which is typically quite aggressive in asserting standing objections in lawsuits against it – has not contested the food group’s standing in this case.

When an agency illegally regulates an entity’s competitor in a way that harms the entity – for example, by loosening regulation of the competitor – we have said that the entity has Article III standing to challenge the allegedly illegal regulation. . . .Here, EPA’s E15 waiver loosens a prohibition on gasoline and ethanol producers and thereby harms entities such as the food group that directly compete with gasoline and ethanol producers in the upstream market for purchase of corn.

To show causation, the petroleum group must demonstrate a “substantial probability” that the E15 will cause at least one of its members to incur higher costs. Sierra Club v. EPA, 292 F.3d 895, 899 (D.C. Cir. 2002). To be sure, the E15 waiver alone does not require the petroleum group to use E15, make changes, and incur costs. But we cannot consider the E15 waiver in some kind of isolation chamber. The Energy Independence and Security Act imposes a renewable fuel mandate that requires a certain amount of renewable fuel to be introduced into the market every year. Pursuant to that law, an increasing amount of renewable fuel such as ethanol – rising to 36 billion gallons in 2022 – must be introduced into the market. 42 U.S.C. § 7545(o)(2)(B)(i)(I). EPA regulations identify petroleum refiners and importers who produce gasoline as “obligated” parties – they are responsible for introducing a percentage of the required amount into the market each year. 40 C.F.R. § 80.1406; see also 40 C.F.R. §§ 80.1407, 80.1427.

Before the E15 waiver, however, petroleum producers likely could not meet the requirement set by the statutory renewable fuel mandate. Now that EPA has allowed E15 onto the market, producers likely can meet the renewable fuel mandate – but they must produce E15 in order to do so. So the combination of the renewable fuel mandate and the E15 waiver will force gasoline producers to produce E15. In tort law, when two acts combine to create an injury, both acts are considered causes of the injury. So it is here. In the current market, there is at least a “substantial probability” that, in the wake of the E15 waiver, gasoline producers will have to use E15 in order to meet the renewable fuel mandate. And that’s all that the petroleum group needs to show to carry its burden on the causation issue. . . .On those facts, the petroleum group’s injury is not self-imposed, but is directly caused by the agency action under review in this case. For those reasons, the petroleum group has Article III standing to challenge the E15 waiver provision.

The majority opinion concludes otherwise. But the fundamental flaw in the majority opinion’s reasoning is its belief that petroleum producers could meet the renewable fuel mandate without using E15. In the current market, the majority opinion’s assumption is simply incorrect as a matter of fact. One way to answer the causation question in this case is to ask the following: In the real world, does the petroleum industry have a realistic choice not to use E15 and still meet the statutory renewable fuel mandate? The answer is no, and  intervenor Growth Energy’s claim to the contrary seems rooted in fantasy.

Having found that there is standing, I turn to the merits of this case. The merits are not close. In granting the E15 partial waiver, EPA ran roughshod over the relevant statutory limits.

Section 211(f)(1) of the Clean Air Act prohibits manufacturers of fuel or fuel additives from introducing new fuels or fuel additives into commerce for use in car models made after 1974, unless the new fuel or fuel additive is “substantially similar” to certain fuels or fuel additives already in use. 42 U.S.C. § 7545(f)(1)(B). All agree that E15 is not substantially similar to fuels already in use. But Section 211(f)(4) allows EPA to waive that prohibition if EPA “determines that the applicant has established that such fuel or fuel additive or a specified concentration thereof, and the emission products of such fuel or fuel additive or specified concentration thereof, will not cause or contribute to a failure of any emission control device or system (over the useful life of the motor vehicle, motor vehicle engine, nonroad engine or nonroad vehicle in which such device or system is used) to achieve compliance by the vehicle or engine with the emission standards with respect to which it has been certified.” 42 U.S.C. § 7545(f)(4) (emphasis added). Put in plain English, in order to approve a waiver, EPA must find that the proposed new fuel will not cause any car model made after 1974 to fail emissions standards.

Here, EPA issued a waiver for E15 even though it acknowledged that E15 likely would contribute to the failure of some cars made after 1974 (namely, those made between 1975 and 2000) to achieve compliance with emissions standards. EPA maintains that E15 will not contribute to the failure of emissions control systems in cars built in 2001 and later. But EPA concedes that E15 likely will contribute to the failure of emissions control systems in some cars built before 2001. EPA’s E15 waiver thus plainly runs afoul of the statutory text. EPA’s disregard of the statutory text is open and notorious – and not much more needs to be said.

EPA does throw out a few arguments to try to get around the text of the statute. None is persuasive.

First, EPA tries to weave ambiguity out of clarity in the statutory text. EPA contends that the statute does not expressly address partial waivers. But as petitioners aptly  respond in their brief, to suggest “‘that Chevron step two is implicated any time a statute does not expressly negate the existence of a claimed administrative power (i.e., when the statute is not written in ‘thou shalt not’ terms), is both flatly unfaithful to the principles of administrative law, and refuted by precedent.’” Petitioners’ Reply Br. 8-9 (quoting API v. EPA, 52 F.3d 1113, 1120 (D.C. Cir. 1995)). There is no plausible way to read this statute as allowing partial waivers of the kind granted by EPA here.

EPA also suggests that a plain text reading of the statute would be absurd – “[c]learly Congress did not mean to require testing of every vehicle or engine.” EPA Br. 23. But that argument confuses methods with standards. As to methods, the statute may allow EPA to test a reasonable sample of vehicles and extrapolate from those results to conclude that a new fuel will not cause any vehicles to fail their emissions tests. But the standard remains that a new fuel cannot cause any vehicles to fail their emissions tests. Just because EPA can restrict its testing to a reasonable sample does not mean that EPA can restrict its waivers to a subset.

If Congress wanted to authorize this kind of partial waiver, it could easily have said so (and going forward, could still easily do so). After all, the statute elsewhere allows EPA to partially waive other statutory requirements.

The food group petitioners and the petroleum group petitioners each independently have standing to challenge EPA’s E15 waiver. On the merits, EPA’s E15 waiver is flatly contrary to the plain text of the statute. I would grant the petition for review and vacate EPA’s E15 waiver decision. I respectfully dissent.

When the government introduced the mandates for ethanol and related biofuels, they needed a way in which companies could verify that they were complying with the Energy Independence & Security Act of 2007. For whatever reason, the decided mechanism would require that companies purchase credits to demonstrate that they had complied with the mandate: a renewable identification number (RIN). Each RIN is theoretically tied to a gallon of ethanol, biodiesel, or similar renewable fuel. However, because the RINs can be sold and traded similar to stock, in practice the pairing of a RIN with a particular gallon of fuel is somewhat superficial.

Unfortunately, this government created market in RINs has created an opportunity for criminally-minded entrepreneurs to scam the companies who are attempting to comply with the law by creating fake RINs and selling them in the marketplace. Note that these oil companies are required by law to purchase these credits, and its often difficult to verify that they are genuine, leading oil companies to often completely bypass small producers and only purchase biofuels and credits from larger, recognizable producers, a somewhat unique barrier to entry for small firms (suspicion of fraud). The latest case in fraudulent RINs surfaced late last month involved the sale of 60 million credits worth roughly $84 million, the third big bust in recent years ($ub required):

According to the violation notice, EPA determined that the fake credits were generated between July 16, 2010, and July 15, 2011. The Clean Air Act allows the agency to assess a civil penalty of up to $37,500 a day for each violation.

“When fuel credits are generated or used that do not represent qualifying renewable fuel, it undermines Congress’ goals in creating the program, creates market uncertainty and is a violation of the standard,” EPA said in a statement emailed to Greenwire. “EPA enforcement of the standard deters fraud and abuse in the system, helps to restore certainty in the market and ensures that the goals of Congress are met.”

This is the third notice EPA has issued since November to companies allegedly producing fake credits, and it is likely not the last.

Last November, EPA accused a Maryland man of generating $9 million worth of fraudulent renewable identification numbers (RINs) on his computer. The 38-digit numbers represented 22 million gallons of biodiesel that was never produced at the man’s company, Clean Green Fuel LLC.

EPA issued another violation notice in February to Texas-based Absolute Fuels LLC for allegedly creating 48 million fake credits worth approximately $62 million. The agency said CEO Jeffrey Gunselman used the money to purchase an aircraft and a number of vehicles, including a 2010 Mercedes Benz and a 2011 Bentley.

Yes, creating markets that are easy to fraudulently manipulate would indeed seem to undercut the goal of the ethanol mandate. Thankfully, unlike in previous cases, the EPA is working constructively with the companies who have been subjected to these scams rather than fining them for getting caught up in a problem the government has created.

This is yet another reason why moving forward with increasing blends of ethanol is not a good idea. Freeze the mandate at 2012 levels if it can’t be scrapped completely. Yes, the short term capital losses from ethanol investments  will be realized, and this will hurt a lot, but the alternative is to continue investments into a fuel that is still more expensive than gasoline once you adjust for its lower energy content. Or we can continue pretending that whatever minute environmental benefits accrue from corn ethanol are worth the absurd push to encourage ethanol use beyond E10. We can also continue to pretend that cellulosic ethanol is around the corner, and won’t suffer from the same problems that have haunted corn ethanol: high prices and heavy land use.

The Washington Times today has an editorial chiding the U.S. Environmental Protection Agency for its decision to proceed with approval and support for higher blends of ethanol (E15) to be sold nationally. There are still a number of complications that seem likely to get in the way of (i.e., the lack of price competitiveness) of widespread use of E15, but recent decisions by the EPA are unfortunately steering the country down that path. However, the editorial makes one comment that doesn’t seem quite right:

This issue highlights the danger of allowing liberal zealots to set public policy. They are so obsessed with micromanaging the lives of others and fulfilling their environmental fantasies that they give no thought whatsoever to the real-world consequences of their schemes.

As a fuel, ethanol is highly corrosive. The E15 gasoline blend reduces gas mileage by 6 percent compared to real gasoline. That adds up to about $150 a year for the average vehicle owner. This expense and the mechanical danger serve absolutely no purpose beyond filling the pockets of wealthy farming giants. Congress needs to repeal the ethanol mandate to protect American pocketbooks – and the car warranties of millions of motorists.

Assuming they are using ‘liberal’ in the liberal versus conservative sense,  ethanol has (both historically and to this day) been supported by both liberals and conservatives alike. Indeed, true market-oriented politicians oppose interventions in our energy markets. However, those politicians are few and far between as politicians from both sides rarely have issue with sacrificing their alleged principles in order to support local constituencies or interest groups.

If you look at current support for ethanol policies, you see a mish-mash of politicians from the Midwest, the Obama Administration, and the generally liberal environmentalists. However, to their credit the environmentalists have mostly abandoned support for corn ethanol while still unfortunately holding out hopes for cellulosic ethanol. Their are numerous conservative politicians who still actively support ethanol: Senator Grassley (R-IA), Mitch Daniels, Republican Presidential comic relief Newt Gingrich, former Republican Presidential candidate and Minnesota Governor Tim Pawlenty, and many more conservative and liberal politicians. President George Bush was a big ethanol supporter.

Ethanol is a costly boondoggle, but it is a bipartisan boondoggle, and turning this issue into yet another who to blame liberal versus conservative fight harms the bipartisan progress that has been made in limiting the use of government to expand ethanol. My colleague Marlo Lewis wrote about conservative support for ethanol earlier this year.

If you want to learn more about the historical bipartisan support for corn ethanol, I would recommend Ken Glozer’s book titled ‘Corn Ethanol: Who Pays? Who Benefits?’

The ethanol compromise did not make it into any debt ceiling negotiations and its future is now looking bleaker than ever before. The Congressional ‘super-committee’ established by the debt ceiling negotiations will have to decide by November 23rd some manner to reduce the deficit by $1.5 trillion or face potentially unpopular automatic spending cuts to defense and discretionary spending (though USA Today writes that these “threats” have failed in the past). None of the rumored super-committee members seem to be from regions that would require their support of the ethanol industry

The ‘ethanol compromise’ had legs because it funneled money into the domestic ethanol industry while still maintaining a facade of deficit reduction. It would have collected $2 billion in revenue from the ending of the domestic tax credit as of July 21 and used a small amount less than that to spend on items near and dear to the ethanol industry (mainly ongoing support for cellulosic ethanol and money for the installation of blender pumps at fueling stations), hence their support.

The deficit reduction from the ethanol tax credit is no longer possible because the ethanol tax credit is again set to expire at the end of the year (as it was extended for one year at the end of 2010). This means that any potential deficit reduction is slowly being eroded as the tax credit continues on towards the end of the year, and renewal of support for the industry will add to the deficit rather than reduce it, making it much more difficult for conservative politicians to support it (though, obviously, they have been willing to forget their supposed free-market ideology when it suits them).

So it seems likely that the tax credit and tariff will expire at the end of 2011. It is possible (though it is harder to get subsidies back once they’ve been gone) that future support for the industry will get stuck into a larger energy bill, especially support for ‘next generation’ biofuels which remains popular among those who have given up on corn based ethanol. The Renewable Fuels Association has high hopes:

Bob Dinneen, president and CEO of the Renewable Fuels Association said that because the debt deal includes a call for a future budget framework, the opportunity to discuss comprehensive energy tax policy still exists. This could include infrastructure support, tax incentives for second-generation ethanol technologies and feedstocks and the repeal of petroleum subsidies. “With the debt ceiling crisis looking as though it has been averted for now, we hope Congress and the administration are now prepared to address the nation’s worsening energy crisis, as oil and gasoline prices continue to rise and the nation’s investment in homegrown renewable fuels languishes,” he stated.

The much bigger problem with ethanol is still the renewable fuel standard. This fight will manifest itself in future years as virtually every related industry outside of those who produce ethanol revolt against higher blends of ethanol entering the fuel supply (this assumes that ethanol does not become cost competitive with petroleum, if it does, the government would do best to get out of the way).

Bob Dineen, writing in Ethanol Producer Magazine:

This may seem a daunting task but the industry has no other choice than to do the hard work necessary to drive ethanol market expansion and accelerate this industry’s evolution.  As we have clearly seen, no one is going to do it for us.  The success of E15 and the future of this industry are firmly in our capable hands.

That about sums up their attitude. Wouldn’t it be easier if the government would do it for us? Because years of tax credits, foreign tariffs, loan guarantees, national mandates that require other companies to purchase your products, and state support have not been enough. No, they face the daunting task of actually having to convince consumers to buy more of their product than they’re already required to. Poor guys. After the EPA approved E15 for use in MY2001-present vehicles, the ethanol industry is charged with the difficult task of convincing gas stations to sell E15 (and for consumers to buy it) despite it providing lower fuel efficiency per dollar spent.

The EPA has finalized label requirements for E15, backing down a bit from initial proposal which included the word ‘caution.’ The new label, as you can see, is a slightly less alarmist ‘attention.’ I will note that the new label does not point out in any form that ethanol will provide fewer miles per gallon for your vehicle. Adjusted for energy content, ethanol is more expensive than gasoline. However, if you do not adjust for energy content, ethanol costs less than gasoline. Being that the label doesn’t point this out, it seems that consumers might fill up with E15 as it will be slightly cheaper than E10, as few are aware that they will be reducing their fuel economy when moving from E10 to E15. I suspect that the government would be taking action if a private company were to do this.

The Corn Grower’s Association has weighed in, and they are unsurprisingly less than thrilled despite the fact that the EPA kowtowed to their demands:

“NCGA supports the use of a label but we are still concerned with the fact that it implies damage to other vehicles,” NCGA President Bart Schott said. “We also are bothered by the color choice for the label which could be mistaken for a warning label, setting the wrong tone for consumers.”

In other ethanol news, The Hill’s Energy blog has a post up noting that a deal has been struck with respect to mid-term support for ethanol. It’s not looking good:

Klobuchar said she is meeting with Thune and Feinstein later Tuesday to review a proposed agreement.  Klobuchar confirmed there would be “longer-term cellulosic tax credits” but said she didn’t have an exact date.

She said the money saved by killing the blender’s credit mid-year – it’s currently slated to expire at year’s end – would help pay for both deficit-reduction, and funding for cellulosic ethanol credits and ethanol infrastructure at service stations.

“This is a way to use the existing $2.4 billion that is still out there for the rest of the year, to use a big chunk of it for the debt and then the remaining money for the cellulosic tax credit and the blender pumps,” she told reporters.

Nothing ever changes. While lacking specifics, it seems clear from tone that the ethanol tax credit will disappear and then reappear into various forms of continued subsidies for the industry, via installing blender pumps for a fuel no one wants to use, or through expensive pipelines to pipe ethanol around the country.

UPDATE: Via Politico’s Morning Energy, it seems as if the report above is inaccurate, as Feinstein is reported saying that no deal has been struck yet.

Reuters is reporting that the White House has given its seal of approval to the EPA’s proposed label for E15 (85% gasoline, 15% ethanol). The picture above is of an earlier draft label, no actual images are public yet (to my knowledge) of what the final image ended up being. I suspect the label will be quite similar though it will change 2007MY to 2001MY.

Despite cheers from the ethanol industry, its not clear where the path goes from here. The EPA has suggested that E15 could be sold across the country by September, but a number of gasoline stations are in opposition. Here is a letter (.pdf) sent to Lisa Jackson from the National Association of Convenience Stores (NACS) and the Society of Independent Gasoline Marketers of America (SIGMA), whom together represent roughly 80% of retail fuel sales in the United States. In it they write:

Fourth, and perhaps most significantly, once E15 becomes legal for use in MY 2001 and newer vehicles, it is far from certain that owners of such vehicles will choose to refuel with E15  rather than less than or equal to E10. Unlike prior fuel transitions (i.e., leaded to unleaded gasoline and low sulfur to ultra-low sulfur diesel fuel), no vehicle is required to run on fuel containing more than 10 percent ethanol.  Consequently, demand for this product is purely subject to the voluntary decision making process of individual consumers. Indeed, as noted above, the fact that higher ethanol blends get fewer miles to the gallon makes it reasonable to assume many consumers will refrain from utilizing their prerogative to purchase E15. In addition, because automobile owner’s manuals (with the exception of those issued for flexible fuel vehicles) do not endorse the use of fuel containing greater than 10 percent ethanol, consumer acceptance of the new fuel may be even further limited. Consequently, retailers will obviously want to accommodate the segment of the market that does not wish to purchase fuel with greater than 10 percent ethanol.

Their reasoning basically consists of the fact that its not clear that there is any demand for E15, relying on evidence from very low E85 sales. On a per gallon basis, ethanol is currently cheaper than gasoline, but more expensive once you consider the lower miles per gallon. There’s no real incentive for consumers to buy this stuff (its more expensive on a per mile basis), or for gasoline retailers — a business with very low profit margins — to spend upwards of $200,000 on new pumps and storage tanks for E15.

There is a mandate to sell ethanol, though the “mandate” is enforced at the EPA’s discretion and consists of fines on petroleum refiners for not producing enough of it. To EPA’s credit, they have effectively removed the cellulosic ethanol mandates year after year as no one has been able and willing to produce any. So if retail fuel stations aren’t installing E15 pumps, I suspect that oil refiners will not be punished for failing to produce any E15 if they cannot sell it.

Almost every industry out there is wary of this proposal except for the ethanol industry. Auto manufacturer’s are wary of the effect E15 has on engines, retail fuel stations are wary of storing E15 and liability from misfuels, the marine industry doesn’t think ethanol works well in boats, etc. Unfortunately, despite their pledge to only listen to the science, the Obama administration is continuing to push to give the ethanol industry everything under the sun.