History of U.S. Ethanol Policy
In 1978 the United States Environmental Protection Agency (EPA) issued a gasohol waiver that set the maximum legal limit of ethanol in motor gasoline at 10 percent denatured anhydrous ethanol.
27 years later, the Energy Policy Act of 2005 created a Renewable Fuel Standard (RFS) requiring 7.5 billion gallons of renewable fuel — primarily corn ethanol — to be blended into the fuel supply by 2012.
In 2007, an updated Renewable Fuel Standard — the RFS2 — accelerated the renewable fuel adoption schedule. Instead of 7.5 billion gallons by 2012, the new law required 9 billion gallons by 2008, soaring to 36 billion gallons by 2022.
Hitting the Limits
Americans presently consume about 133 billion gallons of gasoline each year, so somewhere in the range of 13 billion gallons of ethanol (approximately the amount of corn ethanol that is currently being produced in the US) the rising ethanol mandate was set to collide with the EPA’s 10% ethanol limit.
The ethanol lobby recognized this potential limitation to their market, so they petitioned the EPA to raise the allowable limit on ethanol content in conventional gasoline to 15 percent. But if this higher ethanol concentration were mandated instead of “allowed”, it would immediately increase ethanol’s market potential in the US by 50 percent.
The E15 push was opposed by automakers, oil companies, food producers, and environmental groups. Each lobby opposed the higher limits on different grounds, with automakers concerned about vehicle damage from using E15 in automobiles that weren’t designed for that concentration of ethanol. (Ethanol is more corrosive than gasoline, and while these corrosion issues can be addressed, some cars that weren’t designed for higher levels of ethanol could be damaged).
Despite the opposition, the EPA ultimately approved E15 for use, initially for model year 2007 and newer cars and light trucks, and later expanding that for use in 2001 and later models.
However, since it was allowed and not mandated — and damage could still result from using E15 in boats, motorcycles, small engines, and older cars — I predicted that adoption of E15 would be close to zero. That has in fact proved to be the case.
Forcing Consumers to Purchase More Ethanol
But I also predicted that once the waiver was granted, the next step would be for the ethanol lobby to ask for an E15 mandate. Some people argued that this would never happen. After all, how could the EPA force consumers to purchase fuel that many automakers have said would void their warranties? In response, I remind people that the EPA recently required gasoline blenders to blend nonexistent volumes of cellulosic ethanol. So it could definitely happen.
The ethanol lobby is now becoming more vocal in their calls for an E15 mandate. In a recent NPR story — EPA’s Push For More Ethanol Could Be Too Little, Too Late — chief ethanol lobbyist Bob Dinneen, who is President and CEO of the Renewable Fuels Association, continued to complain about the oil industry’s failure to embrace the ethanol industry:
Dinneen says this is the way Congress envisioned the mandate working: more and more ethanol over time in a gallon of fuel, and less and less petroleum.
“This is about market share,” Dinneen says. “This is about their profitability; it’s not any more complicated than that.”
Apparently, irony is lost on Dinneen — or he really is that big of a hypocrite — because it’s also about the ethanol industry’s market share. It’s about their profitability. Or does Dinneen want us to believe that his motives are as pure as the driven snow? That he isn’t being driven by his own fat salary — reportedly $469,332 in 2011 (available at http://www.guidestar.org/)? Incidentally, another irony is that because ethanol is mandated, we are all chipping in for Dinneen’s salary.
Demanding Perpetual Handouts to Stay Afloat
Here is my problem with the ethanol industry. My problem is not that there is an ethanol industry. Some people assume that if you have a problem with our ethanol policy, then you have a problem with ethanol, period. So I always have to add my standard disclaimer that my objections are about policy.
My problem is that the way we have gone about this has resulted in an industry that is dependent on perpetual welfare. The industry simply can’t exist without the direct involvement of the US government. Therefore, what’s been created is an industry that constantly has its hand extended for more government intervention lest it go under. Hence, the industry needs highly paid lobbyists who demand that the government force consumers to buy more and more of their product. That, to be blunt, is an exceedingly stupid way to create an industry.
As I have argued many times, I don’t have an issue with ethanol as a fuel. In fact, I think state governments — particularly in the Midwest — could do a lot to push E85 as the preferred fuel in the region (See E85 Case Study: Iowa). But the ethanol industry has never been about creating their own markets. They have always depended upon the government to force others to buy their product. This has established their industry as one of the largest recipients of welfare in the country, and it has made it virtually impossible for the industry to wean off of this welfare without collapsing.
A much better way to build a thriving ethanol industry would be to provide specific tax incentives for the adoption of ethanol. I am not talking about the federal tax credit that has since expired. I am talking about state governments shifting taxes from state income taxes, property taxes, and/or sales taxes into higher gasoline taxes — while exempting ethanol. This could be done in a revenue neutral manner, but one that makes locally produced ethanol more cost competitive with gasoline. If E85 established itself as a consistently more economical option than gasoline, then the Midwest alone could absorb three times the current US ethanol production.
But that would take too much effort I suppose. Far better to wine and dine lawmakers until they force consumers to buy your product. Instead of investing in ethanol distribution, continue to argue as Dinneen does that it is the oil industry’s fault that E15 isn’t being sold (despite the fact that automakers are warning of voided warranties). Over the long term, that not only keeps the industry dependent on the government, it creates an ever larger class of resentful consumers.
Note: I will be “off the grid” until April 12th, and unable to respond to comments.