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The Biofuels Fiasco

Even Rube Goldberg would recoil in horror from this regulatory contraption.

Oct 31, 2011, Vol. 17, No. 07 • By DAVE JUDAY
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Yet, to effectively maintain the overall biofuels mandate imposed in 2007, the Obama EPA recently proposed to increase the 2013 biodiesel mandate above the statutory level of 1 billion gallons to 1.28 billion gallons. There can only be one outcome: U.S. diesel users will pay more for fuel in order to offset the cost of imported sugar ethanol from Brazil and the lack of viable commercial cellulosic production technology. This was foreseeable when President Bush proposed, and Congress adopted, the mandate for cellulosic ethanol back in 2007. For all intents and purposes cellulosic fuel did not exist at the time. Nonetheless, its use was mandated.

If cellulosic ethanol were to reach the market, on top of the excess corn ethanol supply, there would have to be higher concentrations of ethanol in retail fuel blends​—​which is the ethanol industry’s primary policy goal now as they keep fingers crossed for a cellulosic breakthrough. But there are a few problems with increasing the blends. First, cars get lower mileage when fueled by the blends. This puts the ethanol mandate in tension with the federal mandate for the auto fleet to achieve higher fuel efficiency.

Second, there is the issue of damage to engines from burning ethanol blends. The ethanol content in fuel is currently limited to 10 percent. The Environmental Protection Agency is finalizing a regulation to allow 15 percent blends (so-called e-15), but even the EPA has admitted this can harm engines, issuing a statement warning that “all motorcycles, all vehicles with heavy-duty engines, such as school buses, transit buses, and delivery trucks, all off-road vehicles, such as boats and snowmobiles, all engines in off-road equipment, such as lawnmowers and chain saws, and all model year 2000 and older cars, light-duty trucks, and medium-duty passenger vehicles (SUVs)” are prohibited from using e-15. Needless to say, this will cause chaos at the gasoline pumps.

Finally, as if that weren’t enough, in the offing lurks another compliance challenge. The 2007 energy statute limits the production of crops for biofuels mainly to land that was “existing agricultural land” at the enactment of the bill. Specifically, that means land that was cleared or cultivated prior to December 19, 2007, and since that time has been in continuous agricultural use. While the fuel market is a little more than halfway to its ultimate 36 billion gallon goal for biofuel use by 2022, land use is already at 98 percent of that cap. Once the cap is met, each gallon of biofuel will have to be classified by its feedstock and also certified to have originated on preexisting farmland. More regulation, more record keeping, more costs.

Ethanol started out as the quintessential subsidy program back in the 1970s. It cost a large number of taxpayers a relatively small amount of money apiece to provide a large benefit to a relatively small number of beneficiaries. It didn’t hurt that most of the beneficiaries were​—​and still are​—​in Iowa, where 25 percent of all ethanol is produced. Average farmland prices in the Hawkeye State have grown from about $2,600 per acre to $6,400 per acre since 2004, the year before the latest mandate was put in place. In 2004, owning 385 acres of typical Iowa farmland made you a millionaire. Today 160 acres will do the trick.

If politicians had set out to cater to and enrich some of the most influential voters in our presidential primaries every four years, they could scarcely have come up with a more ingeniously targeted policy. But the program is now starting to collapse under the weight of its own complexity and market distortion. Indeed, biofuels policy is now recognized by many of those same politicians as a program of dubious if not harmful environmental impact that imposes major costs on taxpayers and food consumers​—​with additional costs to motorists soon to come.

There are proposals in Congress to establish a trigger based on corn stocks to waive the corn ethanol mandate temporarily, to let states opt out of the federal mandate, and to deny the tax credits afforded biofuels. Those proposals are intended to address the budgetary costs and the now-widely recognized food versus fuel impact of biofuel -policy. But, even if they are adopted, a mind-numbingly convoluted regulatory regime will be left in place. As long as Iowa looms large in our -quadrennial selection of presidential candidates, don’t look for leadership on the issue to arise in this White House, or its successors.

Dave Juday is an agricultural commodity market analyst.

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