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The Department of Energy projects that U.S. gasoline use will decline by 20% in the next ten years. This decline stems from improvements in fleet fuel economy as old inefficient vehicles are replaced by new ones, and by the increasing market share of electric vehicles. Such a decline should be a boon for the environment, but fights over ethanol threaten to undermine potential environmental benefits.
Numerous studies show that pollution from cars negatively affects infant mortality, respiratory health, human cognition, and labor productivity. Lower consumption would reduce these pollution impacts, and it would also reduce the carbon footprint of transportation because gasoline contributes significantly to carbon emissions.
Currently, almost every gallon of gasoline contains 10% ethanol made from corn and 90% petroleum gasoline refined from crude oil as a result of the federal Renewable Fuel Standard. (RFS). However, declining gasoline use is intensifying the existing fight between big oil companies and the corn ethanol industry (or Big Corn) over how much of the shrinking transportation fuel pie each gets.
The most immediate impact of the RFS wars is to focus attention on corn ethanol and petroleum gasoline at the detriment of second-generation biofuels. These fuels — produced from the inedible parts of plants with much lower greenhouse gas emissions than corn ethanol — can also be blended with gasoline. Adding them to the fuel mix would lessen transportation-caused emissions considerably because they emit vastly less carbon than corn ethanol or petroleum gasoline.
While commercialization of second-generation biofuel has been very slow up to now, with only negligible volumes produced in 2017, recent innovations by American companies provide some hope. Today, several firms are producing cellulosic ethanol from corn kernel fiber, which would otherwise not be used productively.
In late 2017, POET, the country’s largest ethanol producer, reported an important breakthrough in “pretreatment,” the main barrier to commercial-scale cellulosic ethanol production. But more extensive growth requires support by the Environmental Protection Agency (EPA) through the RFS: either by upping the required yearly volume of second-generation biofuels, or by providing stable subsidies to the producers.
The core issue in the RFS wars is the total number of gallons of biofuel (a number determined by the RFS) that has to be used yearly. The economics of gasoline supply depend on the rate at which ethanol is blended into gasoline. Getting a certain number of gallons of ethanol into a shrinking gasoline pool requires that ethanol be a higher percentage of the fuel blend. Increasing the blend rate above the current 10% requires costly investments that the fuel industry has so far refused to make.
At the moment, EPA, which administers the RFS, is mediating the RFS wars using giveaways to Big Oil and Big Corn.
To Big Oil, EPA has secretly given compliance exemptions from using ethanol to several large and profitable firms that own small refineries. While EPA has the authority to exempt small refineries that suffer “disproportionate economic hardship” from complying with the statute, it has not demonstrated such hardship in these cases. Continuing these covert exemptions would be a back-door way to reduce the RFS mandate, and a reading of the law suggests it would be illegal.
To placate the corn ethanol industry, the White House has proposed to allow year-round sales of gasoline containing 15% ethanol, up from the current 10%. However, because ethanol increases ozone levels, this violates current air quality standards specified in the Clean Air Act. Furthermore, EPA had previously determined that it could not legally make the change.
Big Corn objects to the Trump administration’s gift to Big Oil, and Big Oil objects to the gift to Big Corn. These giveaways will be challenged in court, distracting EPA officials from their needed support for second-generation biofuels.
Congress could end the RFS wars by reforming the RFS and setting the gasoline blend rate. This would provide stability to the fuel industry, as firms would be able to determine the needed investments to meet the standard. In so doing, Congress could also provide production incentives for second-generation biofuels.
Whether gasoline use declines by more or less than what the Department of Energy projects, there will be still large demand for gasoline for the foreseeable future. All of us will suffer if we miss the chance to develop a viable second-generation biofuel supply because of political giveaways.
Aaron Smith, Ph.D., is a professor of agricultural and resource economics at the University of California, Davis. Vincent Smith, Ph.D., directs the agricultural studies program at the American Enterprise Institute. He is also Professor of Economics at Montana State University.
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