Big Ethanol Running Empty On Rhetoric

Last week was unkind to the ethanol lobby. The EPA proposed a reduction in the biofuel mandate, and a scathing AP investigation undermined the environmental case for ethanol support. To gauge just how serious the situation is, we need only look at the weak arguments put forth by the ethanol lobby in rebuttal.

First let’s review what happened: The EPA proposed rolling back the 2014 amount of ethanol to be included in the nation’s fuel mix. According to the schedule passed by Congress in 2007, the 2014 mandate would have been 18.15 billion gallons. Yet now EPA is proposing a 16 percent reduction (citing a new range of 15 billion to 15.52 billion gallons), which would pull the 2014 level even below the existing 2013 mandate. Thus, for the first time since the Renewable Fuel Standard was put in place, the mandated level of ethanol would fall.

The primary reason for the rollback was simple common sense: Gasoline consumption had not grown as quickly as forecasted (because of the recession and advances in fuel economy), and so the original mandate for 2014 would have pushed the ethanol content above the E10 “blend wall.” This would have risked actual damage to engines.

The other backbreaking development last week was the release of an AP investigation showing that even environmental activists are now recognizing that federal support for corn-based ethanol is having environmental impacts, leading to soil erosion, higher food prices, and even increased CO₂ emissions. Thus the policy is a failure on any dimension.

The pro-ethanol lobby was not happy with EPA’s announcement:

“EPA is proposing to place the nation’s renewable energy policy in the hands of the oil companies,” said Bob Dinneen, CEO of the Renewable Fuels Association, a major ethanol industry group. “That would be the death of innovation and evolution in our motor fuel markets, thus increasing consumer costs at the pump and the environmental cost of energy production. This proposal cannot stand.”

Dinneen’s complaints are misplaced. It’s not placing policy “in the hands of the oil companies” for the government to simply move in the direction of consumer and business choice. In reality, policy is still in the hands of the ethanol companies, because the government is literally forcing refiners to use more ethanol in the fuel mix than they would voluntarily choose to do.

This also shows the flaw in Dinneen’s claim that cutting back on the mandate will increase “consumer costs at the pump.” If it really were the case that ethanol made it cheaper to drive—after accounting for the lower mileage because ethanol has a lower energy content per volume than gasoline, and also accounting for the various hidden costs borne by refiners because of the mandate—then why would the government have to force refiners to use it? (Also note that the “econometric” tests of ethanol’s impact on prices contain design problems that bias the results.)

Finally, it doesn’t make sense to encourage “innovation” in economically inefficient areas. If the government mandated that fast food restaurants serve rising amounts of Brussels sprouts with every meal, that would “spur innovation” in the industry as well, but it would hardly be what consumers wanted.

It was years in the making, but at long last there has been just a smidgen of common sense in federal ethanol policy. The response from the pro-ethanol forces shows just how weak their position is.

IER Senior Economist Robert P. Murphy authored this post.