September 21, 2016

September 21, 2016 | Commentary on Energy Policy, Renewable Energy

Misguided Energy Mandates Fueling Higher Prices

Have you noticed how food prices have climbed over the last few years? A good portion of the blame for that goes to the Renewable Fuel Standard. The RFS, which recently turned 11, perfectly illustrates why government shouldn’t centrally plan energy decisions.

President George W. Bush signed the Energy Policy Act of 2005 into law and expanded it in 2007. The RFS, which originated with that act, mandates that refiners mix biofuels into America’s gasoline supply, primarily by using corn-based ethanol. To justify biofuels programs, politicians promised a new source of clean, climate-friendly fuel to lower gas prices.

Instead, the mandate is driving up costs for American families and businesses. We pay more than necessary at the pump because ethanol’s energy content is only two-thirds that of petroleum-based gasoline.

And food prices are higher — both here and abroad. About 40 percent of America’s corn crop now goes toward meeting RFS requirements. In 2012, the amount of corn used to produce ethanol in the U.S. exceeded the entire corn consumption of the continent of Africa and in any single country with the exception of China. And because farmers use corn feed for chickens, turkeys and cattle, Americans are paying more at the grocery store and when they go out to eat.

The Congressional Budget Office projects that the mandate will add $3.5 billion to Americans’ grocery bills in 2017. While that’s peanuts compared to how much Americans spend in total on groceries, and studies differ on how much the mandate impacts food prices, the end result is always the same: We pay more.

And the price impact cannot be so easily brushed aside in developing countries, where corn is a staple food. Land previously rented to subsistence farmers is now used for sugar cane to meet biofuel requirements in Europe. One subsistence farmer in Guatemala has been reduced to harvesting his corn crop in the median of a highway because there’s nowhere else to go.

Billed as a cleaner, climate-friendly source of fuel, biofuels have been anything but. Biofuels crops are replacing prairie land across the breadbasket.

According to a 2015 University of Wisconsin at Madison study, corn and soybean crops stretched into seven million acres of new land over four years to meet the mandate’s targets. The mandate increased the use of agricultural production, thereby increasing the use of fertilizers, insecticides and pesticides, which results in increased soil erosion and nitrogen and phosphorous runoff into lakes and streams.

And, of course, no government program is complete without some fraud. To understand the corruption involved, it is first important to understand the trading system associated with the mandate. The RFS stipulates that each domestic refiner has to meet a requirement that a certain percentage of domestic sales contain blended ethanol.

Refiners have an option to meet part of their requirement by buying credits. In order to track the renewable-fuel quotas, the Environmental Protection Agency requires a renewable identification number, or RIN, to track the amount of biofuel reaching the market and to hold refiners accountable in meeting their targets.

This RIN trading system has resulted in fraud where individuals sold fake credits to refineries with made-up RINs for millions of dollars. One man in Maryland sold $9 million worth of credits from his garage, without actually making a drop of biofuel.

Another man claimed his biofuels plant sold 50 million gallons of biofuels over three years for more than $29 million. When an EPA official went to inspect the plant, only one person was there. Pipes weren’t connected, and the alleged biofuel containers were rusting. Meanwhile, the man took his family, Lamborghini and private jet to Spain and laundered money by acquiring $15 million in art.

What the RFS really boils down to is the federal government’s inability to predict and plan energy markets. What we’ve seen, time and time again, is politicians trying to outsmart the market. They think they know what the next best innovation will be. Instead of investing their own money, however, they use government policy or invest the taxpayers’ money.

Honestly, for how often politicians tell us these taxpayer-funded endeavors are the wave of the future, one would think they’d want jobs on Wall Street. Given their track record of failures and economic boondoggles, however, it’s easy to see why they’re in Washington.

The simple reality is that if a fuel can thrive economically, it shouldn’t need a government policy mandating its use. The RFS was a bipartisan mistake. The best solution is to scrap it altogether.

About the Author

Nicolas Loris Herbert and Joyce Morgan Fellow in Energy and Environmental Policy
Thomas A. Roe Institute for Economic Policy Studies

Distributed by McClatchy.