November 16, 2012
“Corn ethanol is a done deal…. There’s no stopping it.” Princeton University scholar, Tim Searchinger, on The Grist blog in 2009In response to this year’s severe drought and surging corn prices, the governors of North Carolina and Arkansas asked the Environmental Protection Agency to waive the mandate for blending ethanol into gasoline. Governor Perry of Texas filed a similar request during the price spikes of 2008 that the EPA rejected. After that, global debate over the implications of crop-based renewable fuels for food prices and climate change escalated. Some policymakers responded, but only by tinkering around the margins: the US Congress allowed $6 billion in subsidies to expire last year in the face of intense budget pressures, and the European Commission recently proposed halving its mandate for food-based biofuels.So what will the EPA do now in response to North Carolina and Arkansas’s request (and when, since the deadline was days ago)? More importantly, does it matter?Recent moves to modestly reduce support for biofuels could constrain future growth, but they do little to reverse the damage already done. An EPA decision to waive the mandate probably wouldn’t make much difference either. A study from Iowa State University found that a waiver would lower the corn price by just over 7 percent, compared to a scenario with the mandate in place and flexibility regarding the year in which blend targets are met. A second study, from the University of Missouri, found that a waiver would have almost no impact on corn prices next year and might lower them around 3 percent in the 2013-14 crop year. To be clear, these analyses do not mean that ethanol support policies have had no impact on corn prices. The Iowa State study estimates that a ban on ethanol consumption, which won’t happen, would lower the average corn price by 50 percent or more.The small estimated impact on corn prices under current conditions reflects the fact that the mandate is no longer a principal driver of demand for ethanol. As shown in the figure, ethanol production has exceeded mandated levels in recent years, despite a sharp increase in those levels in the Energy Independence and Security Act of 2007.
Source: Renewable Fuels Association.Thanks to the mandate and subsidies, as I discussed here, the ethanol industry was able to build the infrastructure and reach the scale it needed to become competitive with gasoline, at least at recent prices. Demand for ethanol now is driven primarily by two factors that have little to do with the mandate: the relationship between ethanol and gasoline prices, and the “blend wall,” the level beyond which too much ethanol in gasoline can damage vehicle engines. When filling up at the gas station, you may have noticed a sign saying that the gasoline you are putting in your car may contain up to 10 percent ethanol, the legal limit until recently. Given current gasoline consumption, that cap sets the blend wall at around 13-14 gallons of ethanol, about where we are now.Unfortunately, the EPA loosened that constraint last year when it issued a rule allowing blends of up to 15 percent ethanol for vehicles produced after 2000. This is an odd decision for an agency charged with protecting the environment since the research by Searchinger and others suggests that biofuels will lead to overall higher greenhouse gas emissions because more land will have to be cultivated for food. So far, the 10 percent blend wall seems to be holding, for market-based reasons that I wrote about here, and the mandate itself puts a ceiling on corn-based ethanol of 15 billion gallons. But, thanks to the EPA, the door to further expansion is now open if the markets later want to go through it.So the key moving forward is to contain the sector. The European Union already moved in this direction by lowering the mandated level of renewable fuels using food crops to 5 percent, which is about the current level of consumption. The European Commission unfortunately softened the final version by removing restrictions related to land use change, but the proposal at least signals that the Commission realizes it made a mistake and is trying to minimize the damage. Similarly, an EPA waiver of the US mandate might have minimal practical impact in the short run, and it wouldn’t make up for approving E15, but it might at least signal that a rethink is possible.*Update: Shortly after this blog posted, the EPA denied the request from North Carolina and Arkansas to waive the mandate. See more on the decision here.
Source: Renewable Fuels Association.Thanks to the mandate and subsidies, as I discussed here, the ethanol industry was able to build the infrastructure and reach the scale it needed to become competitive with gasoline, at least at recent prices. Demand for ethanol now is driven primarily by two factors that have little to do with the mandate: the relationship between ethanol and gasoline prices, and the “blend wall,” the level beyond which too much ethanol in gasoline can damage vehicle engines. When filling up at the gas station, you may have noticed a sign saying that the gasoline you are putting in your car may contain up to 10 percent ethanol, the legal limit until recently. Given current gasoline consumption, that cap sets the blend wall at around 13-14 gallons of ethanol, about where we are now.Unfortunately, the EPA loosened that constraint last year when it issued a rule allowing blends of up to 15 percent ethanol for vehicles produced after 2000. This is an odd decision for an agency charged with protecting the environment since the research by Searchinger and others suggests that biofuels will lead to overall higher greenhouse gas emissions because more land will have to be cultivated for food. So far, the 10 percent blend wall seems to be holding, for market-based reasons that I wrote about here, and the mandate itself puts a ceiling on corn-based ethanol of 15 billion gallons. But, thanks to the EPA, the door to further expansion is now open if the markets later want to go through it.So the key moving forward is to contain the sector. The European Union already moved in this direction by lowering the mandated level of renewable fuels using food crops to 5 percent, which is about the current level of consumption. The European Commission unfortunately softened the final version by removing restrictions related to land use change, but the proposal at least signals that the Commission realizes it made a mistake and is trying to minimize the damage. Similarly, an EPA waiver of the US mandate might have minimal practical impact in the short run, and it wouldn’t make up for approving E15, but it might at least signal that a rethink is possible.*Update: Shortly after this blog posted, the EPA denied the request from North Carolina and Arkansas to waive the mandate. See more on the decision here.Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.