EPA Unwavering in Support for Ethanol, Despite Drought

Last Friday the US Environmental Protection Agency (EPA) rejected the petitions of a bi-partisan group of state governors for a waiver of the federal ethanol mandate, resolving one of several energy-related issues that had been deferred beyond the presidential election.  The waiver requests filed in August cited the harm that the Renewable Fuel Standard (RFS) is causing to the poultry, dairy and livestock sectors and related businesses--and by extension to consumers--by increasing competition for corn during a severe drought that has sharply constrained supply.  The EPA's detailed response made frequent references to the "high statutory threshold of severe harm to the economy" required for a waiver of the RFS, and to the output of a model simulating the market for corn and ethanol. It also included the extraordinary assertion that, "the RFS volume requirements will have no impact on ethanol production volumes in the relevant time frame, and therefore will have no impact on corn, food, or fuel prices."  If that were true, then it's not obvious why the mandate should exist at all.

In rejecting pleas for relaxation of the ethanol standard, the EPA appears to be relying on two key facts.  First, wholesale ethanol prices remain lower than wholesale gasoline prices, despite corn prices that are high enough to force many ethanol producers to cut back output.  I'd attribute that mainly to weak US gasoline demand and the much-discussed impact of the "blend wall" in limiting ethanol to 10% of the gasoline pool, rather than as a sign of an unaffected market.  The agency is also relying on the availability of "paper ethanol" in the form of Renewable Identification Number (RIN) credits from past over-blending of ethanol by refiners and other gasoline blenders.  The EPA's estimate puts the number of available RINs at the equivalent of 2-3 billion gallons, or around 20% of this year's 13.2 billion gallon conventional ethanol requirement. As a result of these factors, EPA can claim with some justification that ethanol prices are not harming motorists at the gas pump at this time.  That's small consolation to the petitioners.

EPA's assurances to those in the poultry, dairy and livestock value chains are based on much thinner evidence--in fact, on none at all, unless you count as evidence a model that predicts corn prices would only fall by $0.58 per bushel if the ethanol mandate were eliminated entirely.  Simulations are useful but still aren't reality. The output of a model is only as good as its assumptions and algorithms, and when that output defies logic, it calls for the application of good judgment, particularly when the result happens to align so neatly with the internal concerns about the long-term implications of a waiver that are evident in the agency's response.  I can't help concluding that an agency whose management possessed greater depth and breadth of experience outside of government--especially in the business sector--would have given more weight to the struggles of the dairies, ranchers, meat-packers and others who are being squeezed by a mandate that is projected to consume 42% of this year's corn crop and is very likely inflating the cost of the Thanksgiving meal that many of my US readers will eat on Thursday.   This administration's lack of outside experience has been a glaring shortcoming that the President could easily remedy as turnover creates openings at the start of his second term. 

I can't say that I'm surprised by the EPA's ruling on the waiver requests.  I also can't help wondering whether it provides any indication of how the administration is likely to deal with the other issues that were deferred until after the election.  Yet even if we can't read anything else into this decision, it's clear that the Renewable Fuel Standard enacted in 2007--before the financial crisis and recession--is in serious need of reform.  If its language doesn't require the EPA to adjust the ethanol mandate in light of a drought that will result in the smallest corn crop since 2006, when US ethanol production was 65% lower than last year, then the law simply didn't incorporate sufficient foresight about possible future events.  Together with its unrealistically ambitious cellulosic biofuel standard, the provisions of the RFS increasingly seem to relate to some other, parallel universe, rather than the one in which we live.