Following the 2016 presidential election, I explained Why The Ethanol Industry Should Fear President Trump. Since that time, the ethanol industry has indeed been on the defensive. In fact, I recently characterized the industry as being under siege.
At issue is a requirement that ethanol is blended into the gasoline supply. The requirement has been in place since the Energy Policy Act of 2005 created the Renewable Fuel Standard (RFS).
Ethanol producers and corn farmers love the RFS because it gives them a mandated market for their product. Refiners hate the RFS because they are being forced to sell a competing product and because compliance with the policy costs them billions of dollars each year. (For more details of how the RFS is managed, and why refiners hate it so much in U.S. Ethanol Policy Set For Big Change).
EPA Administrator Scott Pruitt had opposed the program as Oklahoma’s Attorney General, so it was no surprise when he began to take steps to weaken the program. On the other side of the issue is Iowa Senator Chuck Grassley, who is perhaps the staunchest ethanol defender in Congress.
Last week Senator Grassley penned an editorial arguing the merits of the program. It’s similar to the competing press releases I get each week arguing the pros and cons of the RFS. They often contain misleading arguments, as Senator Grassley’s editorial does. I want to break down some of those arguments from his column.
An Honest Discussion?
Senator Grassley, who has consistently refused to entertain any changes to the RFS writes:
An honest discussion about this program is long overdue. In order to do that, it’s necessary to understand where the RFS began, how it evolved and the role it plays in ensuring American prosperity and security.
He then reviewed some of the history of the program, noting refiners use certain octane enhancers to meet octane requirements. Methyl tert-butyl ether (MTBE) was once commonly used to raise octane levels, especially after Congress passed the Clean Air Act Amendments of 1990. This act required the use of oxygenated gasoline in areas with high levels of air pollution, and MTBE helped meet the oxygenate requirement.
Then, Senator Grassley told a half-truth:
However, when MTBE was exposed as a public health risk, its use sharply declined, leaving refiners searching for an alternative. That alternative was ethanol. In 2005, Congress passed the Energy Policy Act, which removed the oxygenate requirement for reformulated gasoline. It also instituted the RFS. Refiners eliminated MTBE from blending operations and switched entirely to ethanol.
The reason that’s a half-truth is that refiners can meet all gasoline requirements without ethanol. I know this because in the past I blended gasoline in a refinery that produced high octane gasoline without using MTBE or ethanol. There are ways to achieve this, although in some cases ethanol could be the preferred option for boosting octane.
Ethanol Is Certainly Still Subsidized
That’s not a huge misstatement, but it begins a series of misleading comments:
Some continue to believe there is a federal subsidy for ethanol, but that hasn’t been the case. The tax credit expired in 2011. Notably, the oil industry has yet to give up any of its specific tax incentives.
This is misleading for what it omits. While the federal ethanol subsidy was allowed to expire (after a huge fight to preserve it from the ethanol industry), there is still a subsidy in place via the renewable identification numbers (“RINs”) that are assigned to biofuels as they pass through the supply chain.
Compliance with the RFS by “obligated parties” like refiners must be met by purchasing the fuel with the associated RIN or by purchasing the RINs (which can be separated from the associated biofuel). This means that the RFS artificially created a value for RINs that offsets some of the production cost for the biofuel producer.
Redirected Farm Income
Refiners spend billions of dollars to comply with the RFS. These compliance costs help subsidize the ethanol industry at the expense of refiners, and they help to artificially increase the price of fuel at the pump. Make no mistake — this is a direct transfer of wealth from refiners and gasoline consumers to the ethanol industry.
Ironically, last week I received a press release that cited a senior official with a biofuel industry group: “Farm-state lawmakers are furious that Administrator Pruitt has unilaterally undercut demand for biofuels with his secretive waivers, redirecting farm income to a few oil companies during the worst agricultural crisis since the 1980s.”
The irony is that these lawmakers are upset that farm-state income that was redirected to farm states in the first place is at risk of being redirected back to where it originated.