American taxpayers can celebrate the expiration at the end of 2011 of more than $6 billion in subsidies for ethanol and other biofuels, but other absurdities and distortions remain. For example, as Matthew Wald recently reported in the New York Times, fuel producers will pay penalties to the U.S. Treasury of $7 million and up in 2011 and 2012 for not using mandated levels of advanced biofuels that do not exist. That’s just crazy. But the point is that, despite many years of effort and hundreds of millions of dollars in subsidies beyond the tax credit for blending ethanol in gasoline, advanced biofuels that are not food-based are still not available.
For developing countries, that means that corn-based ethanol will remain the major biofuel in the United States, diverting a third or more of the corn crop and keeping upward pressure on food prices. The elimination of the blenders’ credit will do little to change that because, while the subsidy bolstered producer profitability when corn prices spiked in 2008 and again last year, it was not a major factor driving demand for ethanol. The congressional mandate requiring that biofuels be blended into gasoline put a floor under the market, which encouraged investment. Thus, actual production has exceeded the mandated level in every year because oil prices have been high enough to make ethanol competitive.
Government subsidies and mandates created the ethanol market and government regulations could now help contain it, but neither the Bush nor Obama administrations has shown much inclination to do so. As I wrote here and here during the 2008 food price spikes, the Environmental Protection Agency (EPA) has the power to waive the biofuel mandate if there is a significant market disruption. But it declined to do so in response to a petition that summer from Texas Governor Rick Perry who was concerned about livestock feed prices (maybe that really was the third agency he wanted to eliminate?).
Given the questionable climate change benefits of corn-based ethanol, one might expect the EPA to be more helpful; but instead it loosened an important constraint on expanding the ethanol market. Until the agency issued waivers in late 2010 and early 2011 (in response to a petition from ethanol producers) concerns about the effects on motor vehicle engines limited the ethanol content of gasoline to 10 percent. That effectively capped ethanol demand at around 14 billion gallons (depending on gasoline demand), but the waivers raised the allowable level to 15 percent for light-duty vehicles built after model year 2000.
To give the agency some credit, restricting E15 to newer vehicles may leave a market that is too small to spur investment in the infrastructure needed to deliver the product to consumers (new tanks, pumps, etc.). The EPA website notes that, as of November 7, 2011, no E15 product had been registered with the agency and therefore it cannot be legally sold.
The ethanol industry had wanted to reprogram the expiring blenders’ credit to subsidize the building of infrastructure needed to expand ethanol markets. Now they will be in the position of lobbying for a new subsidy, which is generally harder than lobbying to extend or change an existing one. So, in this case, there is reason to celebrate Congress doing nothing at all.