The People of America's Oil and Natural Gas Indusry

Corn State Concern over Ethanol Mandate

Bob Greco

Bob Greco
Posted April 11, 2013

Two members of the University of Illinois’ agricultural and consumer economics department have an article out this month that raises some important concerns about the Renewable Fuel Standard (RFS).  As agricultural economics experts at the flagship university of a farm-heavy state, which also is the third-largest ethanol-producing state in the country, their work merits a special mention.

First, Scott Irwin, chairman of the Agriculture Marketing Department, and Professor Darrel Good make some general observations about the RFS (sometimes also referred to as RFS2, for its 2007 revision), uncertainty surrounding potential higher compliance costs and where prices for Renewable Identification Numbers (RINs) may be headed under the RFS’ current framework:

Looking forward, conclusions about the cost of RFS2 compliance and gasoline price impacts may change substantially. Even though ethanol blending margins are expected to remain generally positive in the future, the collision between the E10 blendwall and the RFS2 mandate in 2013 and prospects for an increasingly larger wedge between the RFS2 mandate and the E10 blendwall in 2014 and beyond raise the specter of sharply higher compliance costs. Soaring RINs prices beginning in January 2013 are an early warning sign about the potential for higher compliance costs, particularly in 2014 as the existing stock of RINs could be depleted entirely.

They go on to mention that while increased production of ethanol may have reduced gas prices by “as much as 2 cents per gallon” – far less than the $1.09 claimed by renewable fuels advocates – the exact benefits are uncertain:

Our rough estimate is that the availability of large quantities of ethanol under RFS2 may have reduced retail gasoline prices by as much as 2 cents per gallon as a result. There is considerable uncertainty about this estimate of the impact on retail gasoline prices because the degree that positive blending margins were "shared" among market participants is not known. That is, the distribution of the positive blending margins and the substantial tax credits among corn producers, ethanol producers, participants in the motor fuel supply chain, and consumers is exceedingly difficult to disentangle.

This 2-cent estimate also does not consider the lower fuel economy resulting from ethanol’s lower energy content – as we’ve explained before – which would wipe out any savings ethanol appears to offer.

Finally, the authors point out that until the VEETC (ethanol blending tax credit) ended, taxpayers were shouldering an additional cost to support ethanol production and its mandated use under the RFS:

In addition, taxpayers incurred costs in the form of lost tax revenues due to VEETC claims.

Realizing that VEETC was bad public policy, the ethanol industry supported allowing it to sunset, claiming they were able to compete on the open market.  I believe that to be true, so let’s repeal the RFS – another bad policy – and let ethanol stand on its merits, like every other fuel. To that end, new House legislation that would end the RFS’ unworkable ethanol mandate is a step in the right direction. API President and CEO Jack Gerard:

“The nation’s ever increasing ethanol mandate is a crisis in waiting, and a chorus of concerned groups has joined API in calling on congress to repeal it. Unless we stop this madness now, the mandate could put consumers in harm’s way, hurt the economy, and disrupt the nation’s fuel supply.”