Last week the EPA dismissed a petition by the American Petroleum Institute seeking relief from the cellulosic ethanol mandate, which requires that oil refiners blend 8.65 million gallons of ethanol into the fuel supply by the end of 2012:

“In all cases, the objections raised in the petition either were or could have been raised during the comment period on the proposed rule, or are not of central relevance to the outcome of the rule because they do not provide substantial support for the argument that the Renewable Fuel Standard program should be revised as suggested by petitioners,” EPA told API, American Fuel & Petrochemical Manufacturers, Western States Petroleum Association, and Coffeyville (Kan.) Resources Refining & Marketing on May 22.

“EPA’s mandate is out of touch with reality and forces refiners to pay a penalty for not using imaginary biofuels,” Bob Greco, API’s downstream and industry operations director, said on May 25. “EPA’s unrealistic mandate is effectively an added tax on making gasoline.”

Greco said the Clean Air Act requires EPA to determine the mandated volume of cellulosic biofuels each year at “the projected volume available.” However, in 2011 EPA required refineries to use 6.6 million gal of cellulosic biofuels even though, according to EPA’s own records, none were commercially available, Greco said.

EPA has denied API’s 2011 petition to reconsider the mandate and continues to require these nonexistent biofuels this year, he indicated. Greco called the action “regulatory absurdity and bad public policy.”

As regular readers of this blog will know, the whole problem with the EPA’s non-flexible mandate is that there is no commercially available cellulosic ethanol, thus making it impossible to meet the mandate. The EPA’s justification for this policy is that they need to maintain an incentive for companies to begin producing cellulosic ethanol, despite many past failures. The oil refiners are also required to purchase these cellulosic ethanol waivers, effectively giving the government money instead of purchasing the non-existent fuel.

How much progress have we made on cellulosic ethanol? Robert Rapier points out that the companies promising the “first commercial cellulosic plant” are about a century too late:

But believe it or not, commercialization also took place in the U.S. in 1910. The Standard Alcohol Company built a cellulosic ethanol plant in Georgetown, South Carolina to process waste wood from a lumber mill (PDA 1910). Standard Alcohol later built a second plant in Fullteron, Louisiana. Each plant produced 5,000 to 7,000 gallons of ethanol per day from wood waste, and both were in production for several years (Sherrard 1945).

To put that in perspective, Iogen claimed in 2004 that they were producing the world’s first cellulose ethanol fuel from their 1,500 gallon per day plant. (While 1,500 gal/day is their announced capacity, if you look at their production statistics they have never sustained more than 500 gallons per day over the course of a year; 2008 production averaged 150 gal/day).

Many companies are in a mad rush to be the “first” to commercialize cellulosic ethanol. The next time you hear someone say that they will be the first, ask them if they plan to invent the telephone next.

When reading about the potentials of cellulosic ethanol, I find very few optimists who are not financially tied to the industry and the government support that the industry relies on. The timing of government’s attempt to create both supply and demand for a new product was unfortunate, as the mandate began to ramp up significantly during the recession. However, we only have about 10 years until the Renewable Fuel Standard ceases increasing, and we have yet to produce any cellulosic ethanol at all. If you allow for some successes in the next 2-3 years, these will still be a drop in the bucket compared to the amount the government had “mandated” be produced. At the same time, the mandate continues to direct capital towards projects that aren’t competing on the merits of the technology, but are competing for guaranteed returns promised by our government.

It seems that there is little chance that cellulosic ethanol will have a significant effect on our nation’s fuel supply absent unforeseen breakthroughs in their effectiveness. It will still take massive amounts of land to produce the inputs necessary to create cellulosic ethanol, and these inputs must be cheap enough such that they make it into the market place. Check out the rest of Robert Rapier’s post for a back of the envelope calculation on land use with cellulosic ethanol production:

But then Jerry Taylor, who is the co-founder of MFA Oil Biomass provided a follow-up answer: “It takes 1,000 acres even at 12 tons an acre that we produce to produce 1 million gallons of cellulosic ethanol based on the known conversion rates today.”

Taking his biomass yield assumptions of 12 tons an acre at face value (I doubt you can consistently get 12 dry tons per acre at large scale; commercial hay production is only around half that), we can do an interesting calculation. One million gallons of cellulosic ethanol has the same energy content as half a million gallons of crude oil. (Ethanol contains 2/3rds the energy of gasoline, but a barrel of crude also produces diesel, jet fuel, and fuel oil). U.S. oil production is presently 6.1 million barrels per day. That is 256 million gallons per day, 10.7 million gallons per hour, or 1 million gallons every 5.6 minutes.

Therefore, taking his yield assumptions at face value, 1,000 acres of land planted in Miscanthus giganteus over the course of a year could produce the energy equivalent of under 3 minutes of U.S. oil production. Of course U.S. oil production does not come close to meeting our needs, so to put it in terms of total U.S. oil demand of 18.7 million bpd, 1,000 acres of Miscanthus would cover 55 seconds of U.S. oil consumption. Since that doesn’t take into account the petroleum that will be required to produce the cellulosic ethanol (e.g., running trucks and tractors), the net number would be even lower.

In the wake of high gasoline prices, the ethanol industry is making the rounds in Washington, and they want you to believe that the Renewable Fuel Standard has lowered gasoline prices by up to $.89 per gallon. This would be remarkable, if it were true. The ethanol industry relies on a study produced by the Center for Agricultural and Rural Development at the University of Iowa. Here is the abstract:

This report updates the findings in Du and Hayes 2009 by extending the data to December 2010 and concludes that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. The Midwest region experienced the biggest impact, with a $0.39/gallon reduction, while the East Coast had the smallest impact at $0.16/gallon. Based on the data of 2010 only, the marginal impacts on gasoline prices are found to be substantially higher given the much higher ethanol production and crude oil prices. The average effect increases to $0.89/gallon and the regional impact ranges from $0.58/gallon in the East Coast to $1.37/gallon in the Midwest. In addition, we report on a related analysis that asks what would happen to US gasoline prices if ethanol production came to an immediate halt. Under a very wide range of parameters, the estimated gasoline price increase would be of historic proportions, ranging from 41% to 92%.

If we go to E85prices.com, we see that as of March 29, 2012 the average nationwide price-spread between E85 and E10 is 14.7%, with E85 costing an average of $3.31/gallon and E10 costing an average of $3.89/gallon. Ethanol has less energy content than gasoline, so a direct price comparison is not appropriate. The generally accepted metric is that E85 must be priced about 28% lower than E10 in order to break even, meaning that the cost per mile driven is equal between E85 and E10.

Ethanol is blended into gasoline at refineries throughout the United States, and most gasoline that is sold in the United States is composed of 10% ethanol, 90% gasoline. If ethanol was really responsible for massively lowering the real cost (adjusted for energy content) of gasoline, we would expect E85 (a rough estimate of the actual cost of delivering ethanol to market) to cost much less than gasoline, below the break even point at least. As you can see, it doesn’t, and after adjusting for energy content ethanol is still more expensive than gasoline.

What the study does is it looks at refinery capacity throughout the United States. Refineries in the United States often run at close to max capacity, meaning if there were suddenly a very large increase in the demand for gasoline (suppose that every car driving American decides they want to take a road trip across the country, beginning tomorrow), refineries would be unable to immediately ramp up production, and gasoline prices would skyrocket. The same would happen, as the author notes in the abstract above, if ethanol production were to suddenly disappear overnight, as their refining capacity would drop precipitously.

The study holds refinery capacity constant over the past years, and models the effect that an absence of ethanol would have on gasoline prices. This is not a realistic assumption as there is no reason to believe that in the absence of ethanol, more refining capacity would have been built in the United States over the past decade.

I wrote about this same study in June of last year, and will quote the conclusion of analysis written by the Institute for Energy Research then:

The recent Iowa State study claiming that ethanol production has suppressed the growth in gasoline prices is very misleading. It takes for granted the current refinery capacity and other infrastructure that industry uses to deliver gasoline to motorists, without realizing that federal policies over the years have distorted the development of these markets. Ethanol only survives in the market place at its current levels because it is propped up by artificial mandates and preferential tax treatment.

The regression analysis of the Iowa study doesn’t accurately capture the timeline that would have occurred had the free market been allowed to operate. Of course a sudden disappearance of all ethanol would cause a bigger price spike in the Midwest than in the East Coast. That’s because the artificial federal support has displaced the development of oil-based gasoline delivery in the Midwest more than in other regions. The fact still remains that ethanol (at its current market share) is very inefficient. Taxpayers and consumers would be richer if the government dropped its support programs for it.

The final sentence is key. Despite generous subsidies for decades and a federal mandate, the real cost of ethanol is still higher than gasoline. Even the environmentalists are on our side on this issue, having realized that the environmental benefits of ethanol production are non-existent and the net effect (once you consider how much land globally has been converted to grow corn) is possibly worse than regular petroleum production.

Professional environmentalists are cheering President Obama’s rejection of construction permits for the KeystoneXL Pipeline. They are the only ones cheering, aside from a few NIMBY groups and The New York Times Obama’s always-loyal damage control cohorts. Even The Washington Post voted against Obama in this struggle. The pipeline was a small, but important part of our energy infrastructure and none of the arguments put forth against construction of the KeystoneXL Pipeline are convincing.

1. An initial argument claims that the KeystoneXL Pipeline will somehow not provide energy security for the United States.

Because consumers from around the country (and the world) use oil, pipelines are necessary to transfer mind-bogglingly large amounts of it around the country each day. Imagine a scenario where we randomly begin shutting down oil and natural gas pipelines around the United States. The obvious result of decreasing our capacity would be decreased security, as we are less capable of moving oil around our country to deal with shocks, disasters, etc. Now think about what adding a pipeline does: it increases our capacity to transport oil around the country. Ultimately, this must increase to some extent our energy security.

One reason that environmentalists claim no ‘energy security’ benefits is because they believe (or claim to believe) that all of the oil is destined for export.  This is unlikely. As you may well know, the U.S. imports a good chunk of its oil from Canada/Mexico already, but also imports roughly 40% of our petroleum from countries outside the Western Hemisphere, including Saudi Arabia, Nigeria, Venezuela, Russia, etc. These non Canadian/Mexican imports must be transported across the Atlantic Ocean, and as Michael Levi notes, its unlikely that it will not ultimately be cheaper to decrease some of our imports from across the Atlantic Ocean, and increase our Canadian oil imports.

Finally, the pipeline would be a good idea even if all the oil is exported, as refiners in the Gulf will profit from the value they add as the oil is refined into gasoline, diesel, etc.

2. Environmentalists claim that gasoline prices will increase for Americans if the pipeline is approved.

This claim is ironic, as the ultimate goal of some of the more seasoned environmental veterans is to make energy (including gasoline) more expensive. Apparently this isn’t selling point for environmentalism has yet to resonate with Americans. So it’s clear that this is a bait-and-switch in terms of appealing to the average American who, at this point, does not want gasoline prices to go up.

Regardless, the effect that the pipeline has on the price of gasoline in the United States shouldn’t change the merits of the project. Some have argued that gasoline is a bit under-priced in the Midwest at the moment because there is a glut of supply and not a ton of outlets for the oil. If supplies tighten in the Midwest, they will loosen elsewhere, including hopefully refineries on the Gulf Coast. And if they happen to result in higher prices in the Midwest and lower prices globally, this is also not something we should attempt to stop. Americans generally understand that trade restrictions make us all worse off, and that free trade is beneficial. Blocking the pipeline is a form of economic protectionism, its just slightly more hidden in the form of a regulation rather than a tariff.

3. The environmentalists claim that job projections are vastly inflated.

Industries lobbying for certain policies or projects exaggerate their beneficial effects, news at 11. It’s obvious that increased economic activity will add jobs, quibbling over the numbers is pointless. I will also point out that the same groups don’t have issues with accepting obviously inflated jobs numbers when the jobs involve installing windmills, solar panels, or cleaning up power plants.

4. The pipeline is “game over” for the climate. This line came from our country’s esteemed scientist James Hansen, and was delivered by assuming (1) that the oil would sit in the ground without the pipeline, and (2) that the entirety of the oil sands will be developed. Neither premise is likely. The oil can quite likely find an additional route to Asia (there’s too much money for the Canadian government in this to leave it all in the ground). Ironically, the 2nd-best route chosen by TransCanada will almost certainly be less efficient than the original planned route, and could ultimately increase carbon emissions especially if they begin shipping it directly to China. Moreover, to get the carbon dioxide emissions Hansen described (2ooppm) would take until the year 3316. Even if that number is off by a significant amount, we don’t plan even 100 years into the future (for good reason, we have no idea the effects of new technologies, etc.).

Finally, even if you agree that it is in the world’s best interest to begin drastically scaling back carbon dioxide emissions (and that the international will-power exists to do this or that its a good idea to proceed without international agreement), the oil sands are still going to be developed. The oil sands are only 5-10% more carbon intensive than a standard baseline for oil production, and would proceed even with a moderate price on carbon. Cheap carbon reductions are more likely to come, initially, from electricity production rather than oil production. Carbon free alternatives to carbon-intensive electricity production are much closer to working on a scale that would be necessary when compared with substitutes for oil, which are mostly non-existent except for the ever-fledgling biofuels industry.

**

Ultimately, the President kowtowed to a small special interest group that will play a pivotal role in his re-election, despite the conflict with other labor groups who supported construction of the pipeline. Somehow, environmentalists are happy, despite the high probability that this pipeline will still soon be built, perhaps even with President Obama’s blessings in 2013.

The Republicans may have screwed up by forcing Obama to decide on the pipeline (and giving him an excuse that he could sell to the public), though this issue will remain a large symbol in the 2012 campaign(s). Indeed, many centrist Democrats have already distanced themselves from the President’s decision.

The Administration’s reasoning for rejecting the permit is mostly bogus. They might have a legal excuse, but there are hundred’s of thousands of miles of pipelines around the U.S., and they cause no serious problems. If Obama is upset that Republicans have pushed him towards an “arbitrary” deadline, he must acknowledge that Republicans are upset that the President began this debacle by playing politics with our nation’s energy needs.

The pipeline is being routed away from what was claimed to be an environmentally sensitive area (which, many experts including the State Department, don’t really believe) to a safer area, yet we have to spend months and months studying the new route? It is overwhelmingly likely that there will be absolutely nothing wrong with the new route, and this is just a standard tactic to delay a politically tough decision.

We will see what happens in the months to come.

The Wall Street Journal ran an editorial commenting on the cellulosic ethanol mandate, which CEI has written extensively about in the past. They write:

Most important, the Nancy Pelosi Congress passed and Mr. Bush signed a law imposing mandates on oil companies to blend cellulosic fuel into conventional gasoline. This guaranteed producers a market. In 2010 the mandate was 100 million barrels, rising to 250 million in 2011 and 500 million in 2012. By the end of this decade the requirements leap to 10.5 billion gallons a year.

When these mandates were established, no companies produced commercially viable cellulosic fuel. But the dream was: If you mandate and subsidize it, someone will build it.

Guess what? Nobody has. Despite the taxpayer enticements, this year cellulosic fuel production won’t be 250 million or even 25 million gallons. Last year the Environmental Protection Agency, which has the authority to revise the mandates, quietly reduced the 2011 requirement by 243.4 million gallons to a mere 6.6 million. Some critics suggest that even much of that 6.6 million isn’t true cellulosic fuel.

The WSJ notes that 6.6 million gallons have been produced this year, though I do not think that this is correct. As far as I can tell, from EPA’s own data, no qualifying cellulosic ethanol has been produced through the end of October, 2011. They do note that some do not believe that the 6.6 million gallons is true cellulosic fuel.

They also cover the bizarre tax that the EPA has forced refiners to pay: $1 per gallon of cellulosic ethanol requirement in the form of a waiver or renewable fuel credit:

It gets worse. Because there was no cellulosic fuel available, oil companies have had to purchase “waiver credits”—for failing to comply with a mandate to buy a product that doesn’t exist. In 2010 and this year, the EPA has forced oil companies to pay about $10 million for these credits. Since these costs are eventually passed on to consumers, the biofuels mandate is an invisible tax paid at the gas pump.

Read the whole editorial here.

In related ethanol news, a recent cellulosic ethanol project, Range Fuels, declared bankruptcy after failing to produce cellulosic ethanol:

The plant was closed after a technical defect limited it to run at half rates and it produced cellulosic methanol, a fuel the Environmental Protection Agency doesn’t consider eligible for use to meet federal biofuel targets.

Range Fuels had also received millions of dollars in government loans (or loan guarantees) from the Department of Energy and the Department of Agriculture. The Range Fuels bankruptcy did not receive nearly as much traction as Solyndra, perhaps because Republicans are often as bad on ethanol as Democrats have been in the past. Hopefully, events like this will shift attitudes away from supporting projects like this.

Finally, in yet another fiasco caused by the ethanol mandates, over $9 million was spent by industrial refiners on the purchases of fake renewable identification numbers (RINs). Essentially, someone set up a fraudulent company and sold these RINs (which refiners are required to purchase in order to show EPA that they are meeting the mandate), which are supposed to be tied to individual gallons of ethanol. However, this individual didn’t actually produce any of the ethanol, and refiners are now being held liable for huge fines. As I understand it, the RIN market is often separate from the actual market for the fuel, which allowed for scams like this to take place.

Keep your eye out on a subsequent letter to the editor from some ethanol proponent who promises that a decade from now it will save the U.S. from its addiction to oil.

Dave Juday, a commodity analyst writing in The Weekly Standard, has a long essay covering the largely negative consequences of our nation’s ethanol policy. He covers many of the familiar arguments, such as rising food costs and the ongoing nonexistence of cellulosic ethanol, but also many topics less often covered by the media, such as the clever ability of corporations to take advantage of these subsidies in ways that were not intended:

For a time, the $1 tax credit provided a huge incentive to import soy oil from South America, blend it with a small amount of petroleum diesel to claim the U.S. tax credit​—​the blending often occurred while the tanker ship was still in port​—​and then re-export the blended fuel to Europe to further capture EU subsidies. That little scheme was known as “splash and dash,” and it was a $300 million subsidy to promote domestic biofuel use that did not in fact subsidize biodiesel use in the United States.

Consider the absurdity of splash and dash at its height: According to the Department of Energy, in 2008 the United States produced 678 million gallons of biodiesel and exported 677 million gallons. We imported 315 million gallons, and domestic U.S. consumption was 316 million gallons. That particular stratagem ended in 2009, but exports haven’t. Despite not meeting the mandated minimum for domestic biodiesel use last year, more than a third of the biodiesel produced in this country was exported in 2010.

This shouldn’t surprise anyone, but it is frustrating nonetheless. These companies would appear to have collected over $300 million in U.S. tax credits (and these tax credits are often defined a “refundable tax credits” which mean the IRS can actually write you a check if the tax credits exceed corporate tax liability, which they often do) at the expense of the U.S. taxpayer while not making any actual progress on the (still misguided) attempt at shutting the U.S. economy off from foreign sources of energy.

The author also covers the complex world of RINs — renewable identification numbers — that are bought and traded with each gallon of renewable fuel:

On top of all the complexity of the tax credits, tariffs, and the import quotas, the federal mandate by feedstock category creates an intricate compliance system. Energy companies who comply with blending regulations to meet the mandate are issued a “renewable identification number,” known as a RIN. These are 38-character numeric codes to trace the transfer of biofuels. Even the National Biodiesel Board itself confesses that “a RIN may look, at first glance, like a wicked advanced algebra problem,” but “in reality, it is the basic currency for .  .  . credits, trading, and use by obligated parties and renewable fuel exporters to demonstrate compliance, as well as track the volumes of renewable fuels.”

There is a sophisticated secondary market for RINs among “obligated parties”​—​i.e., energy companies who must blend biofuels into petroleum-based fuels to meet the standards. Companies who earn RINs may sell them to companies who don’t. It is a miniature cap and trade regime.

Energy companies who cannot procure advanced biofuels on the market because supplies are not available are forced to buy RINs. Given the production situation​—​overproduction of corn ethanol combined with severe underproduction of advanced bio-fuels—it came as no surprise to industry observers when a Maryland biodiesel producer was indicted for fraudulently selling counterfeit RINs.

Yet, to effectively maintain the overall biofuels mandate imposed in 2007, the Obama EPA recently proposed to increase the 2013 biodiesel mandate above the statutory level of 1 billion gallons to 1.28 billion gallons. There can only be one outcome: U.S. diesel users will pay more for fuel in order to offset the cost of imported sugar ethanol from Brazil and the lack of viable commercial cellulosic production technology.

With every government regulation comes an army of lawyers and a large complex program that those affected have to comply with. The author didn’t include another recent RIN scam put on by our own government, which is the EPA requiring that fuel producers continue to purchase cellulosic ethanol RINs despite the lack of cellulosic ethanol on the market, to the tune of roughly $6 million in 2011.

Read the entire essay here. The ethanol tax credit and corresponding tariff on ethanol imports is scheduled to expire at the end of the year and it seems very unlikely that either will be renewed. However, as one subsidy dies a new one might take its place. The ethanol industry is now promoting an ‘open fuel standard’ (among other ideas) which would give consumers the choice require that gasoline stations sell larger blends of ethanol (e15 and higher) while also mandating that automobile manufacturer’s begin building out their vehicle fleet to be flex fuel compatible, or able to run on higher blends of ethanol. I criticized that idea here.

The largest subsidy for the ethanol industry is still the renewable fuel standard. It seems very unlikely that ending this fuel standard would be politically feasible, though it might be possible to change the legislation such that current blend levels are frozen in place while not requiring that they continue to increase until 2022.

In a post titled “An ‘open’ and shut case for an enduring American energy policy: The infallibility of free markets underscores the philosophy for FuelChoiceNow” two authors argue that markets are generally the best method to reward new products and technologies while dismissing those that don’t quite pan out.

So, its odd to see that the the rest of the post goes on to demand that the government intervene in the market to require that automobile producers adjust their industrial processes and begin to build each car as flex-fuel compatible, meaning that it can run on higher blends of ethanol. Let’s address their arguments:

First, we must be honest about the problem itself. The current fuels marketplace is not open. It lacks fundamental market forces. It is highly consolidated, vertically integrated, and by virtue of OPEC, price manipulated. A non-competitive marketplace alters the implicit contract with innovators and drives new technologies and entrepreneurs elsewhere. The government objective is not to prop up new fuels, but rather to fix a broken marketplace that discourages innovation and leaves our country vulnerable to economic downturn.

Second, we have to move federal energy tax policy from the 20th to the 21st century. The U.S. taxpayer has de-risked oil investments, protected oil assets, and built oil infrastructure at tremendous cost for nearly a century, because promoting oil put us in the best position to succeed in the global economy. This is no longer true. We need to align federal tax policy with the national imperative to reduce oil dependence, create new economic opportunity, and give consumers a choice at the pump. The costs of the status quo dwarf those of promoting change.

This is partially true and partially false. The fuels market is not completely “open” but few markets are due to thousands of interventions in the economy, and it does not in anyway “lack fundamental market forces.” If someone produced an incredibly cheap fuel overnight that worked better than petroleum, individuals would stop purchasing petroleum (and then the media would scream about our new “addiction”). It just turns out that this is a very difficult thing to do.

You can currently purchase E85 at thousands of stations across the country. Most people choose not to, because it is not cost competitive with regular gasoline blends. Most automobile companies choose not to build more flex fuel vehicles because consumers have not seemed interested in purchasing it, and it makes automobiles cost more.  Unsurprisingly, many of the flex fuel vehicles exist today not due to market demand, but because they can count as offsets for automobile manufacturers in meeting fleet-wide mile per gallon standards (meaning they do not have to build as many vehicles with high fuel economy).

Does the current market place discourage innovation? No. If there were economically competitive alternatives to petroleum consumers would purchase them in order to save money. This is why many people in cities buy bicycles.

Third, there are a number of alternatives to foreign oil that are already price-competitive, but face unnecessary infrastructural and refueling challenges that impede market access. These unnecessary market barriers, which can be mitigated at little cost, should be targeted and eliminated to promote consumer choice in the immediate term.

This is classic op-ed speak for “I’m lying” but I’m going to dress my argument up in a bunch of vague buzz words so no one really has any idea what I’m saying. Exactly which alternatives to foreign oil are price competitive but are subject to “unnecessary infrastructural and refueling challenges”? And how are “infrastructural and refuelling challenges” unnecessary? Is it unnecessary to build infrastructure to deliver fuels to the marketplace? Could we just wave a magic wand instead?

Is it unnecessary for gasoline stations to spend tons of money building additional underground storage for ethanol or additional blender pumps? Is it unnecessary to include the cost to automobile manufacturers to build different engines or add modifications such that alternative fuels can be used with traditional petroleum?  Should we just pretend that these things don’t cost money and not include them in the final market price of the fuel? Of course all of these represent real costs, but that is what the authors seem to suggest.

There might be good arguments for some of these policies, but they cannot be based on support of “free markets.”

Finally, I am actually sympathetic to the idea that it would be a good idea for automobile manufacturers to build most of their fleet as flex fuel vehicles (not that it would be a good idea for the government to require them to do so), as expressed here (the author provides a similar take down of an argument put forth in the New York Times supporting a FFV requirement):

When viewed from a technical perspective, I don’t find the Council’s arguments for mandating FFVs especially persuasive. However, I think there’s a more compelling argument to be made, relying on option value. If it costs $100 to modify a car to run on other fuels besides gasoline, then that investment would still have value even if in practice the car’s owner never actually bought those fuels, as has been the case with the vast majority of the cars already capable of using E85. The option still has value because it provides an insurance policy against some future circumstance in which the only fuels available (or affordable) are non-petroleum ones, for whatever reason: an oil embargo, peak oil, pipeline failure, or some weather-related catastrophe, take your pick. That kind of competition for oil doesn’t even require large sales of non-petroleum fuels before having an impact in the market. The key question is whether it’s worth enough to us as a society to require the collective expenditure of roughly $1.2 billion a year (adapting all new cars) or up to $24 billion (retrofitting the entire light-duty vehicle fleet) to force it to happen, as opposed to leaving this as the consumer and manufacturer choice that it is today.

It would seem, from 3000 feet, that if it truly only costs $100 to make the vehicle flex fuel compatible that this might be a good idea as vehicles made these days are likely to be on the road for a very long time. It’s quite possible that the future value of having this alternative (in case biofuels happen to take off) would outweigh the immediate cost of an additional $100 to consumers. However, the automobile manufacturer’s are assuredly aware of this argument and are not convinced by it. And because they have spent a lot more time, effort, and money into investigating this issue than I have, I am likely incorrect.

(It’s also quite possible that the widely cited figure of $100 in additional cost to make a vehicle flex fuel compatible is incorrect.)

Rick Perry seems to be taking a tough position against government support for renewable fuels:

Not satisfied with that answer, Iowa Corn Growers Association president Dean Taylor tried again, stepping to the microphone to ask if Perry as president would support the renewable fuel standard that’s currently the law.

Perry answered: “Here’s my position on this issue again. I go back to ridding you of the regulations.

“The oil and gas industry will be asked the same thing. Would you rather have the subsidies, incentives, whatever you want to call them or would you rather have a government that actually removed the regulations?

“Think about what the EPA costs you every day in this country. What it costs John Deere. What it costs every manufacturing plant.

“Would you rather have those removed or would you rather have the government say, ‘We’re going to give this industry this tax credit and this industry that tax credit.’ That’s the federal government picking winners and losers.

He goes onto encourage them to compete in a free market and believes that they can do so absent what he labels ‘regulations.’ It isn’t clear exactly which specific regulations Perry is referring to in this instance, as its a sure bet that the ethanol industry is a net beneficiary from governmental regulations. Nonetheless, it is rare for a Presidential candidate to take what many would consider a principled stance on an issue that is important to Iowan voters. And as far as energy policy, removing governmental support for renewable fuels is a no-brainer for free marketers.

As governor, Rick Perry had previously attempted to remove Texas from the Renewable Fuel Standard.

Last month the EPA released its proposed 2012 cellulosic ethanol “mandate.” It suggests that there will be somewhere between 3.45-12.9 million gallons of qualifying cellulosic ethanol produced in 2012, though the number will be finalized in November. Note, as discussed previously, the industry has still not produced any qualifying cellulosic ethanol, and the EPA has consistently lowered the ‘mandate’ by over 90% in previous years. (A recently announced cellulosic plant claims it will produce cellulosic ethanol from, wait for it,  corn waste. So much for being a bridge fuel to the future).

In comments on the proposed 2012 production volumes, the ethanol industry begged the EPA to use the higher end of the standard:

In contrast, Brooke Coleman, executive director of the Advanced Ethanol Council, urged the EPA to continue its aggressive goals regarding cellulosic biofuels, stating that the agency’s mandated volume directly affects the industry’s ability to produce fuel. “There is this funny thing going here where you guys have to go out and measure capacity, but the numbers you come out with and the amount of capacity that you put into the Federal Register will have a giant effect on how much capacity we actually create,” he said.

The EPA has been quite vocal about its interest in enforcing the mandate, despite an unfortunate bump with reality. The rest of Congress might be less enthused. I suspect uncertainty is over the future of the Renewable Fuel Standard and the expiration of the cellulosic ethanol tax credit. And contra the AEC claim, there is a downside to optimistic requirements, as when they cannot be met, they are a tax as the refining industry is required to buy fake credits to ‘meet’ the apparent goal of sending $6 million dollars to the EPA. Of course, it would be sensible for the EPA to waive this requirement, but no government agency has ever turned down money.

It seems clear now that the tax credit and tariff will terminate at the end of the year. It also seems quite obvious that no-time soon will cellulosic ethanol be commercially viable with petroleum, and there isn’t much more room for increasingly large blends of ethanol in the fuel supply that can’t compete on cost. It’s time to discuss ending the renewable fuel standard. I suspect their will be much less support from establishment politicians for such a move (admitting they made a giant mistake).

We must avoid, what Robert Rapier points out, allowing corn ethanol to fill the entire renewable fuel standard. The corn ethanol industry is now lobbying to gain access to the rest of the mandate, as corn ethanol has hit its quota and will continue to easily exceed it:

Corn ethanol producers — in another move that I have long predicted –  have a different solution. They want an end to “corn-discrimination.” They would like to step into that void and supply the missing ethanol, thus raising the 15 billion gallon corn ethanol mandate that they currently enjoy to potentially 36 billion gallons by 2022.

More than doubling the amount of ethanol production will have a significant effect on food prices, among other questionable effects of massive ethanol production on the environment. This recent study suggests that increases in ethanol emissions might negatively effect human health (though note that this should be compared with potentially similar effects from petroleum).

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).

Today the EPA announced its proposed 2012 Renewable Fuel Standard requirements:

The Energy Independence and Security Act of 2007 (EISA) established 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, importer, and non-oxygenate blender of gasoline or diesel determines the minimum volume of renewable fuel that it must ensure is used in its transportation fuel.

The proposed 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 (3.45 – 12.9 million gallons; 0.002 – 0.010 percent)
Total renewable fuels (15.2 billion gallons; 9.21 percent)

Based on analysis of market availability, EPA is proposing a 2012 cellulosic volume that is lower than the EISA target for 2012 of 500 million gallons. EPA will continue to evaluate the market as it works to finalize the cellulosic standard in the coming months. The agency remains optimistic that the commercial availability of cellulosic biofuel will continue to grow in the years ahead.

Whoops! Mandating technological feats is harder than those Congresscritters thought. One of these days they will get it right. Unless some of the delayed-plants begin to seriously ramp up their production, I’d bet that the 2012 “mandate” will be lowered again from 3.45 million gallons. Note that no “qualifying” cellulosic ethanol (meaning zero gallons, of the original 250 million required in 2011) has been produced and blended into our petroleum as of now.