The Scientific American reports that roughly 40 percent of today’s corn crop is used for ethanol made from corn, which is added to gasoline. That is more than the second largest use of corn, as feed for cattle, pigs and chickens, which consumes 36 percent of the annual corn crop. Is it wise to burn food for fuel, more than for feeding a hungry world?
Using so much of the corn crop for fuel for cars and trucks rather than for food has already caused world prices for corn to rise sharply. That is not noticed in rich countries. But it has caused food riots in poor, third world countries, where poor families suffer hunger as a result.
This is particularly outdated in a world flooded by oil and natural gas, due to the effects of modern fracking. That flood has already caused world prices of oil and gas to sink, actually to the point of reducing such traditional energy production.
Contributing to these perverse effects is the U.S. Renewable Fuel Standard (RFS). That policy requires all transportation fuels sold in the U.S. to contain a minimum level of renewable fuels, such as ethanol.
Ethanol lobbyists say the RFS promotes economic growth. But the RFS is more like a tax increase, rather than economic growth. The free market will always choose the least cost fuel alternative, without the need for any mandate. The mandate in the RFS for ethanol just raises costs above whatever the least cost alternative is for any particular energy transaction.
That mandate tax creates winners and losers in the economy, just as any other tax increase. For those receiving jobs and other benefits financed by the mandate tax, the effect will feel like growth. But for those having to pay the extra costs of the mandate, the effect will feel just like any other tax increase, and just another drag on the economy.
The RFS mandate is legally considered satisfied when the fuel holds 10% ethanol. When that point of obligation is reached, a Renewable Identification Number (RIN) is assigned to the final blended fuel, which identifies the fuel as satisfying the RFS mandate.
The wasteful tax effect arises because a certain number of workers are used to produce the ethanol, rather than goods and services consumers in the market prefer. That waste involves a reduction in GDP, rather than an increase arising from whatever alternative products and services the workers might produce to satisfy market demand.
But the RFS regulation is more confused than even that. EPA is not even granting the RINs to smaller, independent refiners, even those that make ethanol to satisfy the RFS. When these refiners make ethanol, it goes into the pipeline, outside of their control. But RINs do go to the big retail suppliers who pump the ethanol blended fuel into retail gas pumps to be sold to consumers.
The big retail suppliers are then free to sell their RINs into an open market, which creates major windfalls for these suppliers. Smaller, independent refiners actually making the ethanol from corn have to go out into the market and buy RINs to satisfy their legal obligations.
That requires refiners to bear still further costs besides what they have to pay to produce the ethanol blended gas. Refiners consequently do not have the incentive to produce the annually increasing, full amount of ethanol required to be blended into gas under the law each year. As a result, they consistently fail to do so.
Instead, the market price of the insufficient RINs has soared, which only increases the windfall to the big retail suppliers. The market for those RINs exploded from $1 billion in 2010 to $15 billion by 2016, with the price for those RINs increasing by 5000% since the ethanol program started in in 2005. The current price is now roughly 20 times the cost of a gallon of ethanol.
Moreover, ethanol production exhibits considerable economies of scale, enabling larger gas suppliers to produce ethanol at a cost advantage of 10 to 50 cents over the smaller retailers, threatening the economic viability of small gas stations and convenience stores.
Finally, ethanol production and the RFS don’t even reduce greenhouse gas emissions. A study in Environmental Research Letters found that converting grasslands for ethanol production generated as much carbon emissions as 28 million cars. Even the International Institute for Sustainable Development has acknowledged that ethanol production does not reduce atmospheric CO2.
New EPA Chief Scott Pruitt and the rest of the Trump economic team need to recognize that the RSF point of obligation and the ethanol mandate tax actually represent a net loss to the economy, subtracting from growth. Abolishing the RFS and its tax would consequently amount to a pro-growth boost to the economy.
At a minimum, Pruitt should consider applications from independent refiners and small retailers to rationalize the RFS by changing the “point of obligation” to comply with the RFS from about 200 refiners and importers to an equally small number of “rack sellers” who supply blended ethanol fuel to the market.
Peter Ferrara is Senior Fellow for the Heartland Institute and Senior Policy Advisor for the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States Under President George H.W. Bush.