Why I Don’t Ride a Unicorn to Work

The Unicorn Analogy

unicornThere is a reason I don’t ride a unicorn to work.

It isn’t because it’s too far to work. Nor is it because it rains here in Hawaii nearly every day and I might get wet. It isn’t because the powerful automobile lobby has convinced me that driving a car to work is a better option for me. No, it’s a bit more fundamental than that.

I don’t ride a unicorn to work because unicorns don’t exist.

But imagine the following scenario. A number of companies claim that they are developing unicorns, and in 3 years they will be commercially available. The government thinks “Hey, this is a great idea. It would be a more environmentally friendly method of transport. Let’s force automakers to start selling these unicorns in 3 years. We will base our projections on how many unicorns these unicorn companies say they will produce. After that we will increase the number the automakers must sell in each subsequent year, and then force the automakers to pay up if they don’t meet these quotas.”

The automakers naturally cry foul and point out that the unicorn industry is hypothetical, and that there is no evidence that they can deliver on their claims. In response, the unicorn companies say “Of course the automakers would say that. They are afraid that we are going to put them out of business.” The government agrees and starts giving taxpayer money to the unicorn companies in order to turn the hypothetical into reality. The unicorn companies start hiring people and issuing press releases indicating just how awesome they are going to be.

Now imagine that the unicorn companies fail to produce the unicorns, and instead of waiving the unicorn mandate the Environmental Protection Agency (EPA), which was charged with implementing the mandates, merely reduces the number of unicorns that the automakers must sell. The unicorn companies that over-promised get a free pass on their inflated claims, while the automakers are still penalized for not selling enough non-existent unicorns.

Cellulosic Ethanol Mandate

Consumers are at least scientifically literate enough to recognize the absurdity of this scenario. Even if they hate the auto industry, they understand that since unicorns don’t exist it would be unfair to punish the auto industry for not selling them. But replace the auto industry in this scenario with the oil industry, and unicorns with cellulosic ethanol — and this is an accurate description of what the EPA did.

I explained this situation in a 2011 column — Cellulosic Ethanol Targets: Mandating the Nonexistent. In 2007 Congress expanded the Renewable Fuel Standard (RFS) to include cellulosic ethanol. They mandated that starting in 2010 gasoline blenders must put increasing volumes of cellulosic ethanol into the fuel supply. The EPA was charged with implementing the RFS, and they based the mandated volumes on what potential cellulosic ethanol producers claimed they would be able to produce. Producers had incentives to overstate their claims in order to drive more financial support toward their industry.

But if producers failed to deliver on their overstated claims, it wasn’t the producers who would be punished for their failure to deliver. As in the unicorn/auto industry example, the gasoline blenders were fined for failing to sell fuel which wasn’t commercially available because producers didn’t deliver on their claims.

Burden of Responsibility

For example, in 2010 the EPA was counting on 100 million gallons of cellulosic fuels based on claims primarily from two companies: Range Fuels and Cello Energy. They then assumed that this industry — which didn’t exist when the mandate was put in place — would rapidly grow. The EPA tallied up the various claims from people like Vinod Khosla — the outspoken backer of Range Fuels and an investor in Cello Energy — and they put some aggressive mandates in place. The first three years of the mandates, starting in 2010, required oil companies to blend 100 million, 250 million, and then 500 million gallons of cellulosic ethanol into the fuel supply.

In 2010, both Range Fuels and Cello failed to delivery any cellulosic ethanol, nor did they ever produce any qualifying cellulosic ethanol. Qualifying production for 2010 and 2011 was zero gallons across the cellulosic ethanol “industry” (Source). In 2012 the first qualifying batch of cellulosic ethanol was produced — 20,069 gallons by Blue Sugars Corporation. The ethanol was produced in April 2012, and no more was produced for the rest of the year.

Thus, in the first three years of the cellulosic ethanol mandate, the percentage of qualifying fuel that was produced was 0%, 0%, and finally 0.004% in 2012 of the originally mandated volumes.

The EPA did roll back the mandated volumes as the cellulosic industry failed to materialize. They subsequently reduced the 2010 mandate to 6.5 million gallons — but still required gasoline blenders to go buy this fuel that didn’t commercially exist.

The American Petroleum Institute (API) thought it somewhat unfair that gasoline blenders would be fined for the failure on the part of producers, so they sued. Last week, the United States Court of Appeals for the District of Columbia agreed, stating that the EPA’s quotas were based on wishful thinking.

API responded to the decision:

“We are glad the court has put a stop to EPA’s pattern of setting impossible mandates for a biofuel that does not even exist,” said API Group Downstream Director Bob Greco. “This absurd mandate acts as a stealth tax on gasoline with no environmental benefit that could have ultimately burdened consumers.”

The Clean Air Act requires EPA to determine the mandated volume of cellulosic biofuels each year at “the projected volume available.” There was no commercial supply of the fuel in 2012, according to EPA’s own records. EPA’s mandate would have required refiners and importers of gasoline and diesel to pay over $8 million for credits to cover the 2012 mandate of 8.65 million gallons of the nonexistent biofuels. The court said that EPA is not allowed “to let its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.” The court also pointed out the fundamental flaw with the overall biofuel mandates when it summarized this part of the program as, “[d]o a good job, cellulosic fuel producers. If you fail, we’ll fine your customers.”

API favors an approach in which mandated volumes for future years are tied to production volumes in the current year.

As I noted in my 2011 article, those who advocated for these inflated volumes are the ones who should be held accountable for failure to deliver. If there are credits to be bought, then the various ethanol lobbies — who thought this was a swell idea — can put up the money when companies fail to deliver.

In any case, the courts have now agreed with me that requiring gasoline blenders to blend cellulosic ethanol makes about as much sense as requiring automakers to sell unicorns.