Ethanol manufacturers have long maintained that government subsidies to their industry pay off for consumers in the form of lower gas prices. Not so fast. The Congressional Budget Office recently determined that the feds' ethanol targets will push gas prices higher.
The Environmental Protection Agency, under a rule known as the Renewable Fuel Standard, requires oil refiners to blend a huge amount of ethanol into the nation's gasoline supply. The EPA target for ethanol is scheduled to rise sharply in coming years. The CBO projects that will send the price of gasoline up 26 cents a gallon by 2017.
The EPA has proposed a reduction in the target, but hasn't actually done so yet. More on that in a minute.
A sluggish economy and welcome fuel-economy advances have combined to reduce gasoline demand. But the EPA still sets a target for how much renewable fuel is used. The current target calls for more ethanol, and that's likely to push the standard fuel blend above 10 percent ethanol. Dumping in a significantly higher proportion of ethanol risks damage to older automotive engines and could require infrastructure modifications at gas stations.
Fuel refiners and blenders could be stuck meeting their EPA obligations by selling fuel made up of 85 percent ethanol (known as E-85) at a loss, or by purchasing ethanol credits, which are traded like commodities, from other petroleum dealers. Those extra costs would be passed on to motorists in higher fuel prices, the CBO found.
The Renewable Fuel Standard also requires more use of so-called advanced biofuels. Nearly all the ethanol produced in the U.S. today comes from corn. Roughly 40 percent of the nation's largest cash crop gets burned up in gas tanks. Congress approved the RFS mostly to encourage commercial production of ethanol from inedible ingredients such as grass or wood chips.
That idea has flopped. Very little of this next-generation ethanol is available commercially. The outlook is bleak for ramping up production. Yet under the law, refiners and blenders are required to boost their use of this scarce fuel, which adds more unnecessary costs.
Last year, the EPA appeared to recognize the problem it was creating and it proposed to lower the Renewable Fuel Standard. The target is scheduled to rise from 16.55 billion gallons in 2013 to 18.15 billion gallons in 2014. The revised target would be 15.21 billion gallons in 2014.
That's a sound, if modest, adjustment. But it set off alarms among the business interests that benefit from government support of ethanol. The crop farming and renewable fuel lobbyists have ramped up pressure on the EPA to reverse itself and force consumers to buy more ethanol, no matter what the cost or consequences.
In the midst of all the political pressure, the EPA has stalled. The agency long ago missed a Nov. 30 deadline to set the final standard. It still hasn't issued a final decision, though we are halfway through 2014.
The resulting uncertainty has left the motor fuel industry in the lurch. By making it impossible for fuel blenders to plan in a timely manner, the EPA's inaction has raised costs for them and consumers. Depending on what the agency eventually decides to do, it could temporarily disrupt fuel supplies.
The EPA needs to resolve this now. But the ultimate answer lies with Congress. It's time to end the Renewable Fuel Standard.