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June 29, 2018

The Biofuels Industry Retains Pull in Washington

June 29, 2018
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On Tuesday, the EPA released a proposal to raise the biofuel mandate 3.1 percent to 19.88 billion gallons in 2019.  Under the Renewable Fuel Standard (RFS), fuel suppliers are required to mix billions of gallons of ethanol into gasoline and diesel fuel each year.

Despite objections from across the political spectrum, supporters of the mandate continue to argue that the RFS reduces gas prices, promotes economic growth, and contributes to a cleaner environment. In recent years however, reality has set in as each of these claims has been proven false and the RFS has been exposed for what it really is: a transfer of consumer wealth to the ethanol industry.

A Brief History of Biofuel Mandates

Like a lot of bad government policies, biofuel mandates began in the wake of a crisis caused by a separate government intervention. Congress passed the first biofuel tax credit in 1978 as part of the response to the oil crisis. Subsidies were later expanded starting with the Biomass Research and Development Act in 2000, the Healthy Forests Restoration Act of 2003, and the American Jobs Creation Act of 2004. In addition to that legislation, the various farm bills expanded biofuel programs creating what is now a complicated system of tax breaks, loan guarantees, and outright subsidies for biofuels.

The most notable of these programs remains the RFS, which originated in the Clean Air Act Amendments of 1990. This legislation mandated the sale of oxygenated fuels in certain parts of the country. The Energy Policy Act of 2005 mandated increases in the volume of renewable fuels that must be mixed into the supply of fuel over time. Then, in 2007, the Energy Independence and Security Act significantly raised the mandated quantities.

The Actual Effects of Biofuels Mandates

In February of 2017, the Heritage Foundation’s Nicolas Loris contributed an overview of the effects of biofuel programs to the Cato Institute’s Downsizing the Federal Government project. Here is his list of problems that biofuel mandates have created in the United States:

Cost for Drivers

“Ethanol is not a good substitute for regular gasoline because it contains less energy. Ethanol has only two-thirds the energy content of regular gasoline. Drivers get fewer miles per gallon the higher the share of ethanol and other biofuels mixed into their tanks.”

Food Prices

“Ethanol production uses a large share of America’s corn crop and diverts valuable crop land away from food production. The resulting increases in food prices have hurt both urban and rural families. Families with moderate incomes are particularly burdened by the higher food prices created by federal biofuel policies. Higher corn prices also hurt farmers and ranchers who use corn for animal feed. Higher food prices caused by biofuel policies also hurt low-income families in other countries that rely on U.S. food imports. U.S. corn accounts for more than half of the world’s corn exports.”

Environmental Harm

“Ethanol does have benefits as a fuel additive to help gasoline burn more cleanly and efficiently. However, in a report to Congress on the issue, the EPA projected that nitrous oxides, hydrocarbons, sulfur dioxide, particulate matter, ground-level ozone, and ethanol-vapor emissions, among other pollutants, would increase at different points in the production and use of ethanol… The problem with biofuel policies is that they are both harmful to the economy and they have negative environmental effects. Biofuel policies were sold as being “green,” but today’s high levels of subsidized biofuel use does not benefit the environment.”

The economic impacts of the RFS extend well beyond the fuel industry. The chemical makeup of ethanol can corrode the metal, rubber, and plastic components inside of an engine. It is impossible to say exactly how much of an effect this has on the economy, but we can be reasonably sure that this has diverted some degree of investment toward replacing capital damaged by the addition of ethanol to various types of fuel.

The RFS is also responsible for growing the size of the administrative state. The Energy Independence and Security Act created separate requirements for different types of biofuels and introduced a complex accounting system for greenhouse gases. Additionally, RFS compliance is tracked through the use of Renewable Identification Numbers (RINs). In order to meet the mandated levels established by the RFS, refiners must purchase a sufficient amount of RIN credits. My colleague Kenny Stein explained the problems with the credit system in a blog post earlier this year:

“The opaqueness of the system has left an opening for extensive fraud as well as speculation from entities outside the fuel industry looking to make a quick buck. A cynic might say that this is an unsurprising outcome in an artificial market that only exists because of government engineering.”

It’s clear that there is a gap between the stated goals of the RFS and the actual consequences of the policy. Like other attempts to centrally plan the energy industry, the RFS has raised costs for consumers, hampered economic growth, harmed the environment, and contributed to a culture of cronyism within the energy industry.

Conclusion

For many, it will be easy to ignore the EPA’s proposal because it is a comparatively modest increase to the RFS and well below what the biofuel industry is seeking. But sincere opponents of the RFS should reject even the smallest increase in the biofuel mandates because any increase in the total amount of subsidies provided to a special interest group makes the process of unwinding the program more difficult in the long run as the value of the new subsidies will quickly be capitalized into the value of the businesses the subsidies stand to benefit. This problem is known as the transitional gains trap. It is the primary reason why it is very difficult to get rid of unsuccessful government programs like the RFS.

As others at IER have stressed, policymakers should drop their plans to try to fix the problems with the RFS and pursue a route that targets completely eliminating this destructive policy. The EPA can take the first step in that direction by forgoing this proposed increase to the biofuel mandates for 2019.

 

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