Yesterday I watched the livestream of a National Journal’s event, “Biofuels Mandate: Defend, Reform, or Repeal”
from Washington, DC. I encourage you to skim through the replay. The
session highlighted a wide range of views concerning the US Renewable
Fuels Standard (RFS), including those of the corn ethanol and advanced
biofuels industries, poultry growers, chain restaurants,
environmentalists, and small engine manufacturers.
Although these broke
down pretty sharply along pro- and anti-RFS lines, I thought I
detected hints of the kind of compromise that might resolve this issue.
I’d like to focus on the elements of such a deal, rather than rehashing
the positions of all of the participants, with one necessary exception.The Requirement for Reform
The most disappointing contributions to the discussion occurred
during the interview with Representative Steve King (R, IA) by National
Journal’s Amy Harder. If we accept Mr. King’s perspective, we should
embrace the RFS as being as relevant today as when it was conceived,
with no changes required. That flies in the face of the serious market
distortions now manifesting in the “blend wall”
at 10% ethanol content in gasoline. Among other things, Mr. King
claimed that a 2008 reduction of $0.06 per gallon in the now-expired
ethanol blenders credit brought the expansion of the corn ethanol
industry to a standstill. The industry’s own statistics tell a very different story, with US ethanol production capacity having grown by a further 86% since that point.
Rep. King also characterized “food vs.
fuel” concerns as a bumper sticker issue, with no basis in fact. That
issue might be controversial, but it is far too substantive to dismiss so cavalierly. The latest evidence of that is a vote by the European Parliament
to cap the contribution of conventional biofuel — ethanol and biodiesel
derived from food crops — at 6% of transportation energy out of a 2020
target of 10%, based on concerns about sustainability and competition
with food. It seemed fairly clear that the Congressman views the RFS
more as a farm support measure than an energy program.
Finding Common Ground
The only one of Mr. King’s comments that seemed to find traction with
the other pro-RFS panelists was his odd suggestion that without a
mandate for biofuels, the only federal mandate in place would be one for
petroleum-based fuels. Certainly, gasoline and diesel have advantages
in terms of infrastructure, energy density and the legacy fleet, but he
appeared to have something else in mind. From the way others picked up
on this, perhaps it was his earlier reference to the tax benefits that
conventional fuel producers have long enjoyed. This is the first and
easiest element on which to compromise.
If ethanol producers and advanced biofuels developers are convinced
that fossil fuels get a better deal from the government than the one
they have under the RFS and the $1.01 per gallon producer tax credit for
second-generation biofuels, it would be a simple matter to replace
these programs with the incentives received by oil and gas producers and
petroleum refiners. After all, the biofuel industry already benefits
from the Section 199 tax deduction that accounts for a third of
budgeted federal tax benefits
for the oil industry, and it shouldn’t be hard to devise an accelerated
depreciation benefit analogous to “percentage depletion” and the
expensing of intangible drilling expenses. Combined, the value of these
tax benefits is about 1.3¢ per equivalent gallon of oil or natural gas
produced this year.
Other concerns came across clearly. Despite the endorsement of 15%
ethanol blends by the Environmental Protection Agency, blending more
than 10% ethanol in gasoline creates serious risks for the US’s 500
million existing gasoline engines, large and small. The scale of corn
diversion necessary to go beyond 10% is also distorting the US
agricultural economy and food value chain, all the way to the
restaurants in our communities. However, those engaged in developing new
biofuels that don’t rely on edible crops, or that are fully compatible
with existing infrastructure and engines, are legitimately worried that
the repeal of the entire mandate would strand the significant
investments in new technology that have already been made, and possibly
smother their industry just as it nears its first commercial-scale
deployments. All these points of view struck me as eminently
reconcilable within a reformed RFS that recognizes that most of the
assumptions of the 2007 mandate are no longer valid.
The starting point should be a 10% cap on ethanol from all sources in
mass-market gasoline — excluding E85 — combined with measures to give
ethanol from non-food sources priority within that cap over ethanol
produced from corn or other food crops. The advanced biofuel targets of
the RFS should also be scaled back significantly to reflect the reality
that the 2007 targets were wildly optimistic. Ideally, they should be
adjusted each year based on the previous year’s actual output. In
return, the current producer tax credit for cellulosic and other
second-generation biofuels could be extended beyond its expiration at
the end of this year, and then phased out over a reasonable, predictable
period, perhaps tied to cumulative output. Finally, since few on the
panel seemed impressed by the EPA’s exercise of its statutory power to
adjust the RFS to fit changing circumstances, that authority should be
transferred to another agency, along with clearer guidelines on when
adjustments would become mandatory.
Conclusion – Compromise Isn’t Repeal
I’d be the first to admit that the reforms I’ve outlined above fall
well short of the outright repeal of the RFS that many, including
myself, would prefer. That’s the essence of compromise. In light of a
government shutdown and impending debt ceiling crisis brought on by the
clash of two intransigent positions, this might be preferable to an
impasse that leaves an unsustainable status quo untouched. And if the
assessment of Representative Welch (D-VT) concerning the appetite of the
Congress to take up this matter is accurate, something along these
lines might just be achievable.
Reform of the RFS would leave in place the outlines of a mechanism
that one of yesterday’s panelists accurately described as a Rube
Goldberg construction, at least for a while longer. Short of a guarantee
to bail out everyone who invested in biofuels production or research on
the basis of the RFS that Congress put in place in 2007, should they
fail in a post-repeal market, I’m not sure there’s another course that
would be sufficiently equitable to all parties involved.
http://www.energytrendsinsider.com/2013/10/10/is-an-ethanol-compromise-on-the-horizon/
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