The Governors of Georgia, Texas, Arkansas, Delaware, Maryland, New Mexico, and North Carolina have petitioned EPA Administrator Lisa Jackson to waive the mandatory ethanol blending requirements established by the Renewable Fuel Standard (RFS). The petitioners hope thereby to lower and stabilize corn prices, which recently hit record highs as the worst drought in 50 years destroyed one-sixth of the U.S. corn crop. Corn is the principal feedstock used in ethanol production.

Arkansas Gov. Mike Bebe’s letter to Administrator Jackson concisely makes the case for regulatory relief:

Virtually all of Arkansas is suffering from severe, extreme, or exceptional drought conditions. The declining outlook for this year’s corn crop and accelerating prices for corn and other grains are having a severe economic impact on the State, particularly on our poultry and cattle sectors. While the drought may have triggered the price spike in corn, an underlying cause is the federal policy mandating ever-increasing amounts corn for fuel. Because of this policy, ethanol production now consumes approximately 40 percent of the U.S. corn crop, and the cost of corn for use in food production has increased by 193 percent since 2005 [the year before the RFS took effect]. Put simply, ethanol policies have created significantly higher corn prices, tighter supplies, and increased volatility.

Agriculture is the backbone of Arkansas’s economy, accounting for nearly one-quarter of our economic activity. Broilers, turkeys, and cattle — sectors particularly vulnerable to this corn crisis — represent nearly half of Arkansas’s farm marketing receipts. Arkansas poultry operators are trying to cope with grain cost increases and cattle familes are struggling to feed their herds.

Section 211(o)(7) of the Clean Air Act (CAA) authorizes the EPA to waive all or part of the RFS blending targets for one year if the Administrator determines, after public notice and an opportunity for public comment, that implementation of those requirements would “severely harm” the economy of a State, a region, or the United States. Only once before has a governor requested an RFS waiver. When corn prices soared in 2008, Gov. Rick Perry of Texas requested that the EPA waive 50% of the mandate for the production of corn ethanol. Perry, writing in April 2008, noted that corn prices were up 138% globally since 2005. He estimated that rising corn prices had imposed a net loss on the State’s economy of $1.17 billion in 2007 and potentially could impose a net loss of $3.59 billion in 2008. At particular risk were the family ranches that made up two-thirds of State’s 149,000 cattle producers. Bush EPA Administrator Stephen Johnson rejected Perry’s petition in August 2008.

In the EPA’s Request for Comment on the 2012 waiver petitions, the agency indicates it will use the same “analytical approach” and “legal interpretation” on the basis of which Johnson denied Perry’s request in 2008. This means the regulatory decks are stacked against the petitioners. As the EPA reads the statute, CAA Section 211(o)(7) establishes a burden of proof that is nearly impossible for petitioners to meet. No matter how high corn prices get, or how serious the associated economic harm, the EPA will have ready-made excuses not to waive the corn-ethanol blending requirements.

According to the EPA, Petitioners must show that the “RFS itself” would cause severe economic harm, not merely “contribute” to it. Petitioners therefore must also show that the relief sought would achieve a substantial reduction in the prices of corn, feed, and food.

This reading of the statute effectively prejudges the issue. ”Severe” economic harm typically results from a combination of factors, not one single cause. An ethanol mandate that causes little economic harm when unemployment rates are low, corn production is high, and China’s demand for U.S. corn imports is low could inflict severe harm when the opposite conditions obtain — as they do today.

If Congress wanted the EPA to grant a waiver only when the RFS alone causes severe economic harm, it could have easily said so. The statute specifies no such limitation. CAA Section 211(o)(7) does not tell the EPA to ignore non-RFS factors that might also adversely affect food and feed prices, agricultural employment, and the competitiveness of U.S. livestock producers.

The EPA’s demand that the waiver be a ”remedy for the harm” is the flip side of this same trick coin. By law, the EPA may grant a waiver for only one year at a time. Although a series of waivers might provide a complete remedy, a one-year waiver may have little impact on markets shaped by the RFS’s 17-year (2006-2022) production quota schedule. So the EPA could reject the waiver petitions on the grounds that a piecemeal solution is no solution at all.

Note: The EPA argues the exact opposite when the issue is whether or not to pull a regulatory trigger. In such cases, even small contributions to an alleged harm are considered sufficient grounds for regulation, and even minute regulatory contributions to the hoped-for solution are deemed fully justified and legally required.

Take, for example, the EPA’s heavy-duty truck greenhouse gas (GHG) emission standards. The EPA estimates that the standards for model year (MY) 2014-2018 heavy-duty vehicles will reduce atmospheric carbon dioxide (CO2) concentrations by 0.732 parts per million, which in turn will avert an estimated 0.002-0.004°C of global warming and 0.012-0.048 centimeters of sea-level rise by the year 2100 (Proposed Heavy Truck Rule, p. 74289). Such changes would be too small for scientists to distinguish from the “noise” of inter-annual climate variability. The EPA acknowledges no obligation to demonstrate either that heavy-truck GHG emissions alone harm public health and welfare or that regulating MY 2014-2018 heavy-truck GHG emissions would have a major impact on global warming.

Consider also the EPA’s Utility MACT Rule for coal-fired power plants. The agency acknowledges that U.S. mercury (Hg) emissions constitute only 5% of global anthropogenic Hg emissions and only 2% of the total global Hg pool, and that U.S. power plant emissions account for only 0.6% of the global pool. More importantly, the EPA estimates  — based on dubious epidemiological evidence and questionable demographic modeling – that the MACT Rule’s Hg emission reductions will avert the loss of 0.00209 IQ points per child in a guesstimated population of 240,000 subsistence fishing households. IQ points cannot be measured out to five decimal places. The MACT Rule’s microscopic mercury-related health benefits are literally undetectable and unverifiable. The EPA is completely undaunted by such facts. In the agency’s words (Proposed Utility MACT Rule, p. 24978):

However, as the U.S. Supreme Court has noted in decisions as recently as Massachusetts v. EPA, regarding the problem of climate change, it is not necessary to show that a problem will be entirely solved by the action being taken, nor that it is necessary to cure all ills before addressing those judged to be significant. 549 U.S. 497, 525 (2007).

In stark contrast, when the issue before the EPA is whether to grant regulatory relief, then the regulation itself must be shown to cause severe harm, and even temporary relief must be shown to cure all ills (or most of them). This is not surprising. Being a regulatory agency, the EPA does not accord the harms of over-regulation the same weight as the harms of under-regulation.

So in all likelihood, the EPA will deny the Governors’ waiver requests, even though a waiver would undoubtedly lower and stabilize corn prices to some extent.

This cloud may have a silver lining. If the EPA once again refuses to balance the interests of corn farmers against those of other industries and consumers, it will furnish new evidence that the RFS is a policy disaster. Especially if the drought persists into 2013, an EPA that won’t heed the reasonable requests of domestic livestock producers, seven governors, 156 House members, 26 Senators, the head of the UN Food and Agriculture Organization, and other food security advocates will build support for RFS reform — or repeal.

The worst drought in 50 years has destroyed one-sixth of the U.S. corn crop. The USDA’s World Agricultural Supply and Demand Estimates (WSDE) report, released Friday, projects the smallest corn crop in six years and the lowest corn yields per acre since 1995.

As acreage, production, and yields declined, corn prices spiked. Last week, corn futures hit a record high of $8.29-3/4 per bushel.

If corn prices remain  high through 2013, livestock producers who use corn as a feedstock will incur billions of dollars in added costs. “These additional costs will either be passed on to consumers through increased food prices, or poultry farmers will be forced out of business,” warn the National Chicken Council and National Turkey Federation.

Even before the drought hit, corn prices were high. Prices increased from $2.00 a bushel in 2005/2006 to $6.00 a bushel in 2011/2012, notes FarmEcon LLC. A key inflationary factor is the Renewable Fuel Standard (RFS), commonly known as the ethanol mandate. Since 2005, the RFS has required more and more billions of bushels to be used to fuel cars rather than feed livestock and people.

Suspension of the mandate would allow meat, poultry, and dairy producers to compete on a level playing field with ethanol producers for what remains of the drought-ravaged crop. That would reduce corn prices, benefiting livestock producers and consumers alike.

EPA Administrator Lisa Jackson has authority under the 2007 Energy Independence and Security Act (EISA) to waive the RFS blending targets, in whole or in part, if she determines that those requirements “would severely harm the economy or environment of a State, a region, or the United States.” The pressure on her to do so is mounting.

On July 30, a coalition of meat, dairy, and poultry producers petitioned Jackson to waive the 2012 and 2013 RFS blending requirements. From the petition:

As detailed below, the extraordinary and disastrous circumstances created for livestock and poultry producers by the ongoing drought in the heart of our grain growing regions requires that all relevant measures of relief be explored and taken where possible. One of these measures must be the amount of grain utilized for the production of renewable fuel. The ongoing drought is taking an enormous toll on the nation’s corn crop. As we detail below, the 15.2 billon gallon  renewable fuel standard (“RFS”) in 2012 coupled with the prospect of a 16.55 billion gallon standard in 2013 will require the renewable fuels industry to utilize a major portion of the drought-limited available corn supply. The drought-induced reductions in the corn supply means that the mandated utilization of corn for renewable fuels will so reduce the supply of corn and increase its price that livestock and poultry producers will be forced to reduce the size of their herds and flocks, causing some to go out of business and jobs to be lost. In addition to this direct harm, these herd and flock reductions will ripple through the meat, milk and poultry sectors, causing severe harm in the form of more job and economic losses. This drought-induced harm exists now, will continue to exist into the latter part of 2012 and 2013, and could continue to be felt in 2014 depending on the policy choices made now.

On August 1, bi-partisan groups of 156 House Members  and 26 Senators sent letters to Jackson asking her to “adjust” the RFS targets in light of the drought and rising corn prices. The House letter argues, in part:

As you are aware, U.S. corn prices have consistently risen, and the corn market has been increasingly volatile, since expansion of the RFS in 2007. This reflects the reality that approximately 40 percent of the corn crop now goes into ethanol production, a dramatic rise since the first ethanol mandates were put in place in 2005. Ethanol now consumes more corn than animal agriculture, a fact directly attributable to the federal mandate. While the government cannot control the weather, it fortunately has one tool still available that can directly impact corn demand. By adjusting the normally rigid Renewable Fuel Standard to align with current market conditions, the federal government can help avoid a dangerous economic situation because of the prolonged record high cost of corn.

 On August 9, Secretary General of the U.N. Food and Agricultural Organization (FAO) Jose Graziano da Silva called for an “immediate, temporary suspension” of the mandate  to help avert a repeat of the 2008 food crisis.

Also on August 9, the Govs. of Delaware (Jack Markell) and Maryland (Martin O’Malley), both Democrats, sent Jackson a letter in support of the industry coalition’s petition. From the Governors’ letter to Jackson:

In 2012, more than 40% of the U.S. annual corn supply was to be used to meet the RFS corn based ethanol requirements established annually by the EPA. If you were to exercise your statutory authority to waive the RFS standards for the next year, it would make more than 5 billion bushels of corn available to the marketplace for animal feed and foodstuffs, driving down costs and significantly lessening the financial impact to Delmarva’s [Delaware-Maryland-Virginia] poultry farms and consumers. While there may be some who question the true price impact of waiving the RFS standards for a limited period, those debates are quantitative, not qualitative, as it is not in dispute that a waiver would put downward pressure on corn pricing. Given the likely impacts to the poultry industry, not to mention the increased cost of food for consumers, of this dramatic increase in price due to the undersupply of corn, it is hard to imagine any scenario when exercising your authority would be more appropriate.

There is, alas, little chance Jackson will waive any part of the RFS. That would be asking an executive agency to put economic rationality ahead of political calculation in a presidential election year. President Obama today makes his fifth visit to Iowa this year. Iowa, with six electoral votes, is the heart of corn country. Supporting a waiver to lower corn prices would spoil the President’s photo ops.

Today’s Greenwire (subscription required) reports that the USDA has announced it will purchase up to $170 million worth of meat, poultry, and catfish to help producers who have been adversely affected by high corn prices. The fix on offer is not to scale back regulatory excess but to expand corporate welfare.  

Iowa State University’s Center for Agricultural and Rural Development (CARD) has just updated its 2009 and 2011 studies of ethanol’s impact on gasoline prices. CARD claims that from January 2000 to December 2011, “the growth in ethanol production reduced wholesale gasoline prices by $0.29 per gallon on average across all regions,” and that in 2011 ethanol lowered gasoline prices by a whopping $1.09 per gallon.

I’m no econometrician, but this study does not pass the laugh test. We’re supposed to believe that ethanol has conferred a giant boon on consumers even though gasoline prices have increased as ethanol production has increased, and even though gas prices hit their all-time high when ethanol production hit its all-time high. If that is success, what would failure look like?

CARD’s argument boils down to this. The gasoline sold at the pump today is E-10 — motor fuel blended with 10% ethanol. Ethanol thus makes up 10% of the motor fuel supply for passenger cars. If there were no ethanol, the motor fuel supply would be 10% smaller, and gas prices would be $1.09 per gallon higher (p. 6).

Well, sure, if we assume a drop in supply and no change in demand, prices will rise. But this scenario tells us nothing about what really matters — whether ethanol’s policy privileges, especially the Renewable Fuel Standard (RFS), a.k.a., the ethanol mandate, benefit or harm consumers.*

Note first that even in the absence of government support, billions of gallons of ethanol would be sold each year anyway as an octane booster. So a scenario in which 10% of the motor fuel supply simply disappears does not correspond to any policy choice Congress is actually debating or considering.

More importantly, CARD assumes that if the motor fuel supply were 10% smaller, refiners would not increase output to sell more of their product at higher prices. In other words, refiners would not engage in the economically-rational, profit-maximizing behavior that would bring supply back into balance with demand, thereby moderating the initial price increase.

Why wouldn’t they? There are only two possible explanations. One is that refiners don’t want to get rich, which is absurd. The other is that refiners operate like a cartel, colluding to restrict output in order to charge monopoly rents. CARD gives no sign of endorsing this view, and repeated investigations of the U.S. refining industry by the Federal Trade Commission repeatedly fail to find evidence of such anti-competitive scheming.

CARD’s analysis also ignores the opportunity costs of ethanol’s policy props. Capital is a finite resource. Every dollar refiners are forced or bribed to spend on ethanol is a dollar they cannot spend to produce gasoline. Government cannot rig the market in favor of ethanol without discouraging gasoline production. It is ridiculous to assume that all of the resources (e.g., refining capacity) commandeered by federal policy over the past decade to boost ethanol’s market share would have been left idle and not used to make gasoline in a free market.

In short, CARD’s analysis abstracts from the most basic economic realities we were all supposed to learn in Econ 101: resources are finite, choices have opportunity costs, and incentives (prices) matter.

I leave it to econometricians to quantify the repercussions, but this much is clear. In a free market, refiners would have blended less ethanol and produced more gasoline than they did in the market rigged by the RFS and other pro-ethanol policies. CARD — or, more precisely, CARD’s sponsors, the Renewable Fuel Association (RFA) — would have us believe that refiners would produce no more gasoline in a free market than they would in a market politicized by mandates and subsidies. That assumption is so unrealistic that any analysis based upon it is inappropriate and even fraudulent if used as a justification for maintaining or expanding government support for ethanol.

* Ethanol has about one-third less energy than an equal volume of gasoline. Consequently, even today, when the per-gallon price of ethanol is lower than gasoline, it still costs more to drive one mile on ethanol than it does on gasoline. But don’t take my word for it. According to the AAA’s Daily Fuel Gauge for May 16, 2012, the mile-adjusted price of E-85 (motor fuel blended with 85% ethanol) is $4.261 per gallon — pricier than regular gas ($3.728/g), premium ($4.026/g), and diesel ($4.032/g).

Or check out EPA and the Department of Energy’s joint Web site, www.fueleconomy.gov. The relevant information is not easy to find. Once you get to the landing page, click on Advanced Vehicles and Fuels, then on Flex-Fuel Vehicles, then on Fuel Economy Information for Flexible-Fueled Vehicles, and then again on Flex-Fuel Vehicles. For each of 25 models, EPA and DOE estimate how much the typical owner of a flex-fuel vehicle spends per year to fill up with either regular gasoline or E-85. The estimates fluctuate as gasoline and ethanol prices fluctuate. As of today (May 16, 2012), the average flex-fuel vehicle owner spends about $350 more per year to run the vehicle on E-85.

January marked the first month that the ethanol industry had to stand on its own feet was only supported by a massive taxpayer mandate for their product, rather than tax preferences, tariff protections, and a mandate.

Do not fret, as sales for E10 (10% ethanol 90% gasoline, commonly purchased at the pump) will hold remarkably steady, because this is the primary venue the rent-seekers use to dilute our nations gasoline supply with ethanol. I only slightly kid, as it makes sense to blend small percentages of ethanol into our fuel supply, though not in amounts exceeding 10 percent.

However, in the United States there are also niche markets for E-85, which is made up of 85% ethanol and 15% gasoline. E85 sales more accurately reflect what an actual competitor to gasoline would look like, as E10 blends only supplement regular fuel production. While there are a number of flex-fuel vehicles on the road (FFVs) capable of running on any blend of ethanol and gasoline, E85 sales have never taken off in the United States. This is because, after adjusting for the lower energy content in ethanol, it costs more money per mile traveled to fuel your vehicle with E85 than E10. It has always been this way and its unclear if it will ever change.

The lapse of the volumetric ethanol tax credit (VEETC) in January made this much worse, as E85 was receiving a tax credit worth just short of 40 cents per gallon, allowing the fuel to be sold more cheaply than it would absent the tax credit. Sales of E85 in Minnesota are about to discover this new reality:

The post-subsidy era also brings tough choices for owners of flexible-fuel vehicles, including the state of Minnesota, which has more than 3,000 vehicles capable of burning E85, and in 2010 used 963,000 gallons of it.

They must decide whether to support a fuel that is 85 percent home-grown ethanol even it it’s no longer competitively priced. Minnesota is the nation’s fourth-largest ethanol producer, and leads the nation with 364 retailers selling E85.

“We have our eyes open, and we are watching this,” said Tim Morse, director of Minnesota’s fleet. “We think it is too early to make any kind of decision right now.”

Morse said he wants to see if the full 38 cents of lost E85 subsidy gets added to the state’s fuel price. That could boost the state’s annual E85 bill by $366,000.

Last week in the Twin Cities, E85 was 16 cents to 40 cents lower than regular gasoline, which also rose in price. That’s as little as a 5 percent price difference. E85′s price advantage has sometimes been more than four times better and averaged 17 percent last year, according to the state Commerce Department.

The state of Minnesota has been purchasing E85 for state-owned flex fuel vehicles in the past. It isn’t clear if this saved them money, which is incredibly unlikely, or if they were doing it out of “statriotism.” Regardless, even now they feel the need to balance budget savings versus the very minute and possibly non-existent environmental benefits of corn ethanol.

More broadly, this demonstrates why the ethanol mandate is non-sensical and needs to be abandoned. Cellulosic ethanol has hit its 4th or 5th straight year of still being “right around the corner” and even environmentalists are becoming skeptical of its touted environmental benefits, after seeing the realities of corn ethanol. Allowing increasing blends of ethanol beyond E10 into our fuel supply is a pointless handout to an industry friendly with the Obama Administration. It’s hurting our refining industries which already operate on very low margins, and consumers have demonstrated that they prefer the price savings to vague and questionable environmental benefits.

Something will have to give soon. Our fuels market is not ready to go beyond E10 (and absolutely not beyond E15 in its present form), and consumers are not going to purchase E85 or flex fueled vehicles unless it saves them money. If not abandoning the ethanol mandate completely, the EPA could start by capping it (or suggesting that Congress cap it) at its current level.

Yesterday the EPA finalized the 2012 mandate for blending biofuels into our nation’s transportation fuel supply:

The U.S. Environmental Protection Agency (EPA) today finalized the 2012 percentage standards for four fuel categories that are part of the agency’s Renewable Fuel Standard program (RFS2). EPA continues to support greater use of renewable fuels within the transportation sector every year through the RFS2 program, which encourages innovation, strengthens American energy security, and decreases greenhouse gas pollution.

The Energy Independence and Security Act of 2007 (EISA) established the RFS2 program and the annual renewable fuel volume targets, which steadily increase to an overall level of 36 billion gallons in 2022. To achieve these volumes, EPA calculates a percentage-based standard for the following year. Based on the standard, each refiner and importer determines the minimum volume of renewable fuel that it must ensure is used in its transportation fuel.

The final 2012 overall volumes and standards are:

Biomass-based diesel (1.0 billion gallons; 0.91 percent)
Advanced biofuels (2.0 billion gallons; 1.21 percent)
Cellulosic biofuels (8.65 million gallons; 0.006 percent)
Total renewable fuels (15.2 billion gallons; 9.23 percent)

In a nod to how hard it is to predict the future, the EPA has lowered the cellulosic biofuel mandate from 500 billion gallons to a less ambitious 8.65 million gallons, which is 1.7% of the original planned requirement. Of course, they have done the same in previous years and as of October no qualifying cellulosic ethanol had been sold to refiners. Naturally, refiners are not pleased that in 2012 they will possibly be spending up to $8 million in credits depending upon actual production levels of cellulosic ethanol:

Although the EPA set the requirement well below Congress’s goal, its decision still irked refiners. Companies will have to buy credits from the EPA if they can’t find enough cellulosic ethanol to purchase—even though the fuel may not be available. “The [EPA's] cellulosic number is still conjecture-based fantasy,” said Stephen Brown, vice president for government affairs for refiner Tesoro Corp.

The credits cost about $1.20 per gallon, according to Charles Drevna, president of the National Petrochemicals and Refiners Association. “Once again, refiners are being ordered to use a substance that is not being produced in commercial quantities—cellulosic ethanol—and are being required to pay millions of dollars for failing to use this nonexistent substance. This makes no sense,” he said.

Brooke Coleman, executive director of the Advanced Ethanol Council, which represents advanced-biofuel companies, said Congress built flexibility into the mandate because “there was always a chance” the industry wouldn’t meet the schedule.

“It shouldn’t surprise anyone with the state of the economy, the state of the financial world, the state of the banks…that there are delays in implementation of new technologies,” Mr. Coleman said. He argued that financing for more cellulosic-biofuel capacity would come as long as the renewable-fuels standard remains in place.

There was always a “chance” they’d miss the mark by 99%! And despite the flexibility to lower the “mandate” the EPA does not seem to have the same flexibility (or perhaps, desire) in waiving the requirement that refiners spend millions of dollars to purchase fake cellulosic ethanol credits.

An interesting aspect of 2012 will be the extent to which the lifting of the tariff on ethanol imports will effect the “advanced biofuels” market. 2012 marks the end of the decades long tariff on ethanol imports, opening up the United States to increased imports from Brazil. Brazil is currently importing corn-ethanol from the United States, as well as exporting small amounts of ethanol to the United States.

Though imports to the United States might not increase dramatically in 2012 as Brazil does not appear capable of increasing production in the short term, given current policies Brazilian exports to the United States are likely to increase substantially in the years to come.

For more of CEI’s writing on ethanol, go here.

It’s now all but certain that the ethanol tax credit will expire at the end of the year, and the ethanol producers continue to claim credit for “giving it up” despite that it was obviously lost due to larger political considerations, and the fact that they lobbied initially for its extension and then eventually for a substitute which would have still funneled money into their industry. The tariff on ethanol imports also expires at the end of the year, and is likely to expire, though a bill was just introduced to extend it. It has no chance of passing through normal legislative means but its not impossible for it to be attached to larger omnibus bills in order to appease ethanol interests.

There are a few problems here. First, restrictions on trade are not normally good, but the fact that much of ethanol consumption is due to the renewable fuel standard mandate (and not market forces) complicates things. If imports of sugarcane ethanol are merely going to cut down on corn ethanol consumption/production, then it seems that the removal of the trade barrier would be a neutral/good thing. However, if imports of sugarcane ethanol require that Americans purchase additional ethanol relative to a baseline with the tariff, then an argument could be made for keeping the tariff. There are also other longer term political considerations: if sugarcane ethanol is kept out, the corn ethanol folks might lobby to lift the cap on corn ethanol and allow it to qualify as an advanced biofuel. Or, Congress might scrap the advanced biofuel RFS altogether as cellulosic ethanol is yet to exist.

However, the conversation has largely moved beyond the tax credit/tariff question. Now, environmental and free-market groups have yet again joined to request a hearing on the renewable fuel standard:

Yesterday a diverse coalition of hunger and development organizations, agriculture groups, budget hawks, free marketers and environmental groups called on the Senate Committee on the Environment and Public Works to hold hearings on the impacts of the Renewable Fuel Standard. A number of studies have recently been released criticizing the Renewable Fuel Standard for damaging the environment and increasing food price volatility, while a scandal involving fake credits has brought the Renewable Fuel Standard’s compliance system into question by the EPA and industry alike.

CEI has signed onto this letter along with groups like Friends of the Earth, Greenpeace, Americans for Tax Reform, ActionAid USA, Oxfam America, and a number of industry groups. Naturally, the ethanol industry countered with their own letter.

We hope that the Senate Committee on the Environment and Public Works will consider a hearing on whether it might be a good idea to stop the RFS in its place or perhaps remove it entirely and allow more efficient market based policies to govern our liquid transportation fuel sector.

Do biofuel mandates and subsidies inflate food prices? Do they increase world hunger ? There was a rip-roaring debate on the food security impacts of biofuel policies in 2007-2008, when sharp spikes in wheat, corn, and rice prices imperiled an estimated 100 million people in developing countries. Food price riots broke out in Bangladesh, Burkina Faso, Cameroon, Ivory Coast, Egypt, Indonesia, Mexico, Mozambique, Senegal, Somalia, and Yemen.

Experts attributed the rapid rise in food prices to several factors including high petroleum prices, drought in Australia, a weak U.S. dollar, commodity speculation, and rising demand for grain-fed meat by China’s rapidly expanding middle class. But some also laid part of the blame on biofuel policies, which artificially increase global demand for corn and soy while diverting those crops and farmland from food to fuel production. A July 2008 World Bank report argued that biofuel policies accounted for as much as two-thirds of the 2007-2008 price spike. A July 2010 World Bank report, on the other hand, concluded that rising petroleum prices were the dominant factor. “Biofuels played some role too, but much less than previously thought,” the report stated.

Where does the debate stand today? Recent reports by the National Research Council (NRC), the New England Complex Systems Institute (CSI), the UN Committee on World Food Security (CWFS), and Iowa State University (ISU) all acknowledge that biofuel policies put upward pressure on food and feed prices. The NRC and ISU studies argue that U.S. biofuel policies have only modest impacts on grain prices whereas the CSI and CWFS studies indicate that biofuel policies contributed significantly to the 2008 global food crisis and/or pose significant risks to global food security today.

Links to these reports and key excerpts follow.

National Research Council, Renewable Fuel Standard: Potential Economic and Environmental Effects of U.S. Biofuel Policy (2011):

Food-based biofuel is one of many factors that contributed to upward price pressure on agricultural commodities, food, and livestock feed since 2007; other factors affecting those prices included growing population overseas, crop failures in other countries, high oil prices, decline in the value of the U.S. dollar, and speculative activity in the marketplace.

To date, the agricultural commodities most affected by U.S. biofuels production are corn and soybean. The increased competition for these commodities created by an expanding biofuels market has contributed to upward pressure on their prices, but the increase has had a small effect on consumers’ food retail prices, except livestock products, because corn and soybean typically undergo some processing before reaching consumers’ food basket. The difference between the price of an unprocessed commodity and the retail price of processed food is typically large. The committee estimated that an increase of 20-40 percent in agricultural commodity prices would result in an increase in the retail price of most processed grocery food products (for example, breakfast cereal and bread) containing those commodities of only 1 to 2 percent.

New England Complex Systems Institute, Food Crises: A quantitative model of food prices including speculators and ethanol conversion (September 2011):

We further systematically consider other proposed factors affecting food prices. We provide quantitative evidence excluding all of them from playing a major role in recent price changes except corn to ethanol conversion. We show that, aside from the high price peaks, the underlying trends of increasing food prices match the increases in the rate of ethanol conversion.

Only a small fraction of the production of corn before 2000, corn ethanol consumed a remarkable 40% of US corn crops in 2011, promoted by US government subsidies based upon the objective of energy independence, and advocacy by industry groups. Corn serves a wide variety of purposes in the food supply system and therefore has impact across the food market. Corn prices also a ect the price of other crops due to substitutability at the consumer end and competition for land at the production end.

Regulation of markets and government subsidies to promote corn to ethanol conversion have distorted the existing economic allocation by diverting food to energy use. This raised equilibrium prices, increased energy supply by a small fraction (US corn ethanol accounted for less than 1% of US energy consumption in 2009 and reduced grain for food by a much larger one (US corn used for ethanol production is 4.3% of the total world grain production, even after allowing for the feed byproduct.

A parsimonious explanation that accounts for food price change dynamics over the past seven years can be based upon only two factors: speculation and corn to ethanol conversion. We can attribute the sharp peaks in 2007/2008 and 2010/2011 to speculation, and the underlying upward trend to biofuels. The impact of changes in all other factors is small enough to be neglected in comparison to these effects.

UN Committee on World Food Security Security, A Report by the High Level Panel of Experts on Food Security and Nutrition, Price volatility and food security (July 2011):

Biofuel support policies in the United States and the European Union have created a demand shock that is widely considered to be one of the major causes of the international food price rise of 2007/08.

By generating a new demand for food commodities that can outbid poor countries and food-insecure populations, industrial biofuels highlight the tension between a potentially unlimited demand (in this case for energy) and the constraints of a world with finite resources. Several proposals linked to changes in existing mandates could reduce the likelihood of biofuel production contributing to price spikes.

Given the major roles played by biofuels in diverting food to energy use, the CFS should demand of governments the abolition of targets on biofuels and the removal of subsidies and tariffs on biofuel production and processing.

Bruce A. Babcock, Center for Agricultural and Rural Development, Iowa State University, The Impact of U.S. Biofuel Policies on Agricultural Price Levels and Volatility (June 2011):

It is indisputable that biofuels contribute to higher agricultural commodity prices because the biofuel industry represents a large and growing share of demand for maize, vegetable oil and sugarcane. But biofuel production levels are not driven solely by government subsidies. Biofuels are the only large-scale substitute for liquid transportation fuels, so when crude oil prices rise, so too does the demand for biofuels. Furthermore, high agricultural commodity prices are not caused solely by expanded biofuel demand.

. . . a large expansion in US ethanol production would have occurred even if the subsidies and mandates had not been in place. The reason is that the return on investment in ethanol would have been so high that investors still would have brought their capital to the industry. As shown, the model indicates that in 2009, ethanol production would have been about 1.2 billion gallons lower without subsidies. The largest difference in production would have been in the 2008 marketing year when subsidies increased ethanol production by more than 2.3 billion gallons.

Market-based expansion of ethanol contributed about 50 percent to the difference in maize prices between 2004 and 2009. The direct conclusion of these results is that ethanol subsidies have had little impact on crop prices and that market-based expansion of ethanol had a large impact on maize prices, a modest impact on wheat prices and practically no impact on soybean and rice prices over this time period.

Overall, these results indicate that the effects of both ethanol subsidies and market-driven expansion of ethanol on US food prices have been small.

I may comment further on these reports in a future post. In the meantime, I will simply observe that if Babcock is correct, and U.S. biofuel policies have only a small influence on food prices because “a large expansion in US ethanol production would have occurred even if the subsidies and mandates had not been in place,” then U.S. taxpayers get little or no energy-security bang for billions of biofuel bucks.

As former OMB analyst Ken Glozer, author of Corn Ethanol: Who Pays, Who Benefits? explains in an op-ed based on his book:

The costs of ethanol policies are enormous, estimated at more than $500 billion to American consumers and taxpayers from 2008 to 2017. The taxpayer costs include subsidies to corn growers and for ethanol production.

The EIA forecast shows that current federal ethanol policy produces a minuscule additional amount of ethanol over what would be produced using a competitive market policy in the foreseeable future. In 2010, a mere 600 million gallons of additional ethanol were produced, roughly 5 percent of the 13 billion total gallons produced. In 2015, federal policies will increase production by just 1.4 billion gallons. The latter is less than 1 percent of U.S. gasoline consumption, and the cost per barrel of petroleum import reduction is an astounding $2,171.

From Glozer’s book: