America / Energy

Ethanol Misstep

Ethanol has been a point of excitement for the EPA for some time now; unfortunately the private sector has not been able to meet their lofty standards. The federal court of appeals struck down an EPA ruling that required petroleum refineries to increase the number of gallons of cellulosic ethanol blended into gasoline. This court decision will undoubtedly save companies from heavy fines. The mandate was a part of the Renewable Fuel Standard, which requires that all transportation fuel used in the US be mixed with a set minimum of renewable fuel.

This is part of an effort to reduce emissions, limit the impact of cars on the environment, and reduce dependence on oil imports. In 2007 the EPA set the goal of 36 billion gallons of renewable fuel to be mixed into gasoline by 2022. They have been heightening the goals cellulosic ethanol RFS as years go by and finally the private sector has reached a point where it cannot keep up.

The EPA is far too overzealous with this policy. Cellulosic ethanol—ethanol made from agriculture waste and other types of biomass—is not commercially available and becoming a large burden on refineries. Ethanol producers projected that approximately 20 million gallons of ethanol would be available between 2011 and 2012 so the EPA required those 20 million gallons be blended into gasoline. However, initial projections were inaccurate and a much lower amount of ethanol was produced. In response the EPA then gave refineries the option of buying tax credits to offset the requirements, but that was not enough to compensate for higher costs. The American Petroleum Institute eventually stood up and stated that this ended up being an unfair tax on the petroleum industry.

The EPA plays a critical role in environmental policy and protection, but their regulations should not deflate the private sector. The ethanol industry has struggled recently and increasing regulation is not going to save it. For example, the Midwest drought hit ethanol production hard and halted nearly 10% of production. As commodity prices soared ethanol became incredibly expensive and unmarketable. Ethanol still has yet to permanently work its way into a solid place in the market.

There is discussion in congress about whether changes should be made to the Renewable Fuel Standard. It was originally signed in 2005 under the Bush administration as a part of a large-scale energy bill. The bill dictated an increased use of biofuels annually, but the ethanol market was not advancing as initially predicted. This bill along with the EPA’s urgency to make it a reality has done little to make ethanol any more viable. This is a glaring downside to big public policy solutions.

Biofuels particularly cellulosic ethanol may very well become a profitable fuel, but that is not in the foreseeable future. In the end, RFS needs to be revised. It is smart to set long term renewable goals but there needs to be a good deal of flexibility, because the market is unpredictable. One broad sweeping environmental policy is not agile enough to compensate for natural disaster, production issues, or market volatility. It needs to be sensitive to the ethanol industry and allow it to progress as best it can.