New Analysis Underscores Danger of RFS

In a previous post we discussed the EPA’s proposed reduction to the 2014 biofuel mandate: Because motor vehicle consumption of gasoline has risen more slowly than legislators assumed back in 2007 when the Renewable Fuel Standard (RFS) statute was updated, the originally mandated targets would have required refiners to surpass the “blend wall.” In other words, the original mandates would have forced refiners to put more ethanol into the nation’s fuel mix than would be safe for many types of engines. That’s why in November the EPA proposed a reduction in the original targets, in recognition of this obvious problem with the original schedule.

A recent analysis by two scholars (Irwin and Good) from the University of Illinois Urbana-Champaign indicates that the EPA may face serious hurdles in this sensible move. The analysis also underscores what’s at stake, hence illustrating the danger of RFS regulations in the first place.

First, Irwin and Good explain that the EPA’s proposed rulemaking is quite controversial, because it changes EPA’s approach to enforcing the actual statutory language of the RFS. In their words:

This new implementation framework basically takes the E10 blend wall as a starting point and builds the mandated volumes up from this starting point.  EPA rulemaking in previous years worked in essentially the opposite fashion by taking the total RFS volume in the statute as the starting point and then reducing the cellulosic sub-mandate as needed.  Based on the new framework, the EPA preliminary rule making for 2014 proposed a write down of the cellulosic mandate, the advanced mandate, and the total mandate.

Even if EPA goes ahead with its proposed rule after receiving comments, Irwin and Good expect they will face legal challenges. (They link to a colleague’s earlier analysis of the legal issues involved.)

But what’s the big deal? What hangs in the balance on whether EPA can scale back the original ethanol mandate for 2014 (and 2015)? Irwin and Good assess the situation in this way:

If the proposed EPA rules are finalized and survive a court challenge, then blend wall problems generally will be resolved, the RINs market will likely return to pre-2012 price levels, and pressures in grain and oilseed markets will be largely abated.  If on the other hand the EPA rules are eventually overturned, then blend wall problems will return in short order, RINs stocks will likely be exhausted by the end of 2014, RINs prices will soar once again, and pressure on the grain and oilseed markets will in all likelihood resume.  Much hangs in the balance on the outcome.

Irwin and Good don’t draw the obvious implication from their analysis, but I will: It is very poor public policy when markets can be thrown into a tailspin on the basis of an arbitrary number created by political authorities. The RFS never made any economic sense to begin with, but the fact that the rules themselves are uncertain just adds insult to injury.

Even beyond the benefits of avoiding specific inefficient policies, a general framework of free markets is beneficial because it provides institutional stability. When producers and consumers know what the rules of the game will be for years to come, they can more confidently make investment and consumption decisions in the present. In our present environment, where people don’t even know what to expect three months from now, it is very difficult to rationally run a business or plan household finances.

IER Senior Economist Robert P. Murphy authored this post.