The Trump Administration Should End, Not Expand, the Ethanol Mandate

COMMENTARY Energy Economics

The Trump Administration Should End, Not Expand, the Ethanol Mandate

Oct 8th, 2019 3 min read
COMMENTARY BY
Nicolas Loris

Deputy Director, Thomas A. Roe Institute

Nick is an economist who focuses on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.
Big Corn is reaching out for even more. SimonSkafar/Getty Images

Key Takeaways

Higher prices for food and feedstock are bad news for consumers and farmers raising chickens, cattle, turkeys, and other livestock.

Complying with the mandate is hugely expensive for American refiners as well.

Reallocating volume obligations to non-qualifying refineries would not only complicate the process but introduce more arbitrariness and subjectivity.

The ethanol lobby is like that greedy child on Halloween who is supposed to take one piece of candy at the door, but grabs a handful and runs away.

Already guaranteed a share of the energy market through the Renewable Fuel Standard, a regulation which mandates that fuel used for transportation contains a certain amount of renewable sources like ethanol, Big Corn is reaching out for even more.

This is a problem, as the ethanol mandate has never come cheap. Indeed, it’s hugely expensive, both economically and environmentally. University of California-Davis researchers determined that the mandate has raised corn and soybean prices 30% and 20%, respectively. Higher prices for food and feedstock are bad news for consumers and farmers raising chickens, cattle, turkeys, and other livestock.

The mandate has also produced undesirable environmental side-effects. The National Wildlife Foundation found that it resulted in the “conversion of 1.6 million acres of grassland, shrubland, wetland, and forestland into cropland between 2008 and 2016.”

Complying with the mandate is hugely expensive for American refiners as well. Naturally, those costs are passed on to consumers — sometimes costing them more than $1 billion a year. The Energy Policy Research Foundation and others estimate it has driven up gasoline prices 6 to 9 cents per gallon.

For small and mid-sized refineries, mandate compliance costs can be crippling. Small refiners can petition the Environmental Protection Agency for exemptions from producing ethanol if they can prove it would cause “disproportionate economic hardship.” Last year, the EPA granted 31 such waivers — and the ethanol lobby went ballistic. The exemptions, they claimed, would destroy ethanol markets.

That hasn’t happened.

Agricultural economist Scott Irwin finds “little if any evidence that the physical use of ethanol has declined during the last year.” He attributes the dip in ethanol prices to excess supply, rather than falling demand. But that hasn’t stopped Big Corn from demanding that the administration forces refiners to produce even more ethanol. And now the Trump administration seems to be on the verge of capitulating.

President Trump recently tweeted that his administration would have a new “giant package” for ethanol that will be “Great for all!” But if the package is anything close to what it’s rumored to be, the only people it will be great for is the corn lobby.

Insiders say that a key element of the package is to have the EPA estimate the amount of small-refinery exemptions it may grant in a forthcoming year and then to require larger refiners to bump up their ethanol production to offset the “lost” production of the little guys.

This is problematic for several reasons. Gouging the big guy to save the little guy still disadvantages consumers, and raising production quotas even higher will only further distort the already-gutted market.

There’s a legal problem, too. The statute does not grant the EPA authority to reallocate the volumetric exemptions to non-qualifying refiners. If the agency goes forward with this, non-exempt refiners will incur an additional financial penalty without any due process of law — a terrible precedent for regulators who already have too much unchecked authority.

Moreover, the approach under consideration would require the EPA to speculate about: how much gasoline and diesel each refinery might produce; which small refineries will petition for exemptions; how much blending they might need an exemption for, and which will ultimately be able to demonstrate “disproportionate economic hardship.”

One report says part of the package would have the EPA adjust the targets for large refiners upwards to reflect a three-year rolling average of exemptions, however, that’s a lot of speculating. Granting or denying an exemption petition is a complicated process. Reallocating volume obligations to non-qualifying refineries would not only complicate the process but introduce more arbitrariness and subjectivity into the EPA’s role mandating biofuel use.

If the president really wants to implement an ethanol policy that will be “great for all,” the best and easiest course of action would be to end the trade war. The president’s protectionism is hurting farmers, refiners, and ethanol producers — as well as the average consumer.

All three industries have voiced their frustration with the administration’s trade policy. Tariffs have increased their business costs, choked off domestic and foreign investment, and limited their ability to sell abroad. This, not the ethanol mandate, is the real solution.

Halloween is still weeks away, but for the ethanol lobby it’s always trick-or-treat season. The trick is selling the Renewable Fuel Standard as good economic and environmental policy. In reality, it’s neither. It’s toxic and enables a dependency on government. For all of the Americans families being punished by the mandate through higher food and fuel prices, it’s time to end this truly frightening policy.

This piece originally appeared in the Washington Examiner