Nov 27, 2017

Understanding America's ethanol policy

The Trump administration is gearing up to release by Thursday what is likely to be the biggest environmental regulation issued all year, driven by a 12-year-old law with a mixed record of success.

Driving the news: The Environmental Protection Agency faces a Nov. 30 deadline to issue quotas for how much biofuels refineries must blend into the gasoline supply under a federal mandate called the renewable fuel standard. Refineries are meeting the mandate now mostly by blending corn-based ethanol, though Congress had far greater ambitions for non-corn biofuels when it first passed the law, as the chart shows.

Data: Energy Independence and Security Act of 2007, Environmental Protection Agency; Note: Advanced biofuel includes biodiesel and cellulosic biofuel. Chart: Lazaro Gamio / Axios

What to watch: EPA Administrator Scott Pruitt will formalize an informal commitment he made to a group of corn-state lawmakers to drop a series of changes he was considering that would have made it easier for refineries to comply. The regulation is likely to keep proposed deep cuts to the quota for cellulosic biofuels not made from corn, so expect criticism from the biofuel industry on that point.

Gritty details: Because of its political relevance, corn ethanol gets all the attention, but there's a lot more to the mandate. The policy is kind of like a Russian doll: smaller categories of different types of biofuels inside an overall mandate for biofuels.

The largest type by far is corn ethanol — often called "conventional" biofuels — followed by advanced biofuels, which means biofuels made from material other than corn. This includes biodiesel and cellulosic biofuels.

The back story: The biofuels mandate, first passed by Congress in 2005 and expanded two years later in another law, is considered by some experts to be the single biggest piece of energy policy to come out of Washington since the Clinton administration.

Congress passed it under a now outdated mindset before America's oil boom of the last decade: The U.S., heavily dependent upon Middle Eastern oil, must wean itself from oil. The laws also promised economic growth to the nation's corn belt, and cleaner fuel for our cars in the name of climate change.

It had something for everyone, and the laws passed Congress with overwhelming bipartisan support. The mandate also has attributes that in hindsight have proven problematic, such as setting biofuels quotas by volume, not as percentage of total gasoline supply.

"Outside the ethanol industry, the mandate is viewed as an authentic policy error," said Bob McNally, president of the Rapidan Energy Group and former adviser to then-President George W. Bush. He left the administration before Bush signed into law the two bills that created the mandate.

Corn ethanol has boomed under the mandate, and was also helped by subsidies that expired in 2011. That has helped solidify an already-powerful group of farm-state lawmakers and lobbying interests. Gasoline blended with ethanol now makes up about 10% of the nation's gasoline supply.

Other types of biofuels, especially cellulosic, have not developed nearly to the extent Congress had intended when it set quota levels in the statute. This has happened due to a number of factors, including the unanticipated oil boom that has lowered gasoline prices and created an opening for oil companies to push for total repeal of the mandate.

The 2008 economic crisis also hampered advanced biofuel companies' ability to raise money. Both of these factors have made federal policy for advanced biofuels much more uncertain, compelling some advanced biofuel companies to adapt their business models to make things totally unrelated to fuel — like cooking oil and makeup, which can fetch higher prices.

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