Renewable Fuel Standards Are a Pain In the Gas
Washington has a long-standing fascination with the nation's energy markets that generates an endless stream of legislation and regulation in pursuit of a wide range of policy objectives, from energy independence to climate change. For almost a decade, the government has been struggling to implement renewable fuel standards with the aim of increasing the role of ethanol and other biofuels. New mandates have been established, but it is becoming increasingly obvious that the law has created more questions than solutions. Problems first began to emerge when the economy collapsed, and with it, demand for fuel. What seemed like easily attainable targets in a rosy economy were now out of reach. Recently, the Congressional Budget Office released a study highlighting the ongoing problems with the renewable fuel standard program, raising serious concerns about the viability of the program.
The Energy Policy Act of 2005 created the first renewable fuel standard, a mandate that required 7.5 billion gallons of renewable fuel be blended into gasoline by 2012. Practically, this meant increasing the quantity of ethanol used in gasoline. The Energy Independence and Security Act of 2007 revised the standard with a 15-year plan, requiring an increase in ethanol use to 9 billion gallons in 2008, with the ultimate goal of 36 billion gallons of ethanol in the gasoline supply by 2022. Not content with simply expanding the use of biofuel, the new law also created mandates for specific types of biofuels: conventional, advanced, cellulosic and biodiesel.
Washington's ambitious plans to wean the nation off fossil fuels quickly failed the market test. The 2008 economic downturn eviscerated the targets and timetables for introducing renewable fuels. Gasoline consumption declined, which meant that there was less gasoline that needed ethanol. At the same time, cars were becoming more fuel-efficient, which also put downward pressure on gasoline consumption. With less gasoline being used, the amount of ethanol needed fell well below the mandated level.
The problem is exacerbated by the technical limitations defined by the blend wall. Ethanol is corrosive, and too much ethanol, particularly in older cars, can lead to engine troubles. Consequently, E10, or 10-percent ethanol, is the limit for safely blending ethanol. The exception is more recent flex-fuel cars, which are rated for an E85 blend, or 15-percent ethanol.
At the same time, the new mandates for subcategories of renewable fuels have also been problematic. As the CBO report notes, "the supply of cellulosic biofuels is limited because such fuels are complex and expensive to produce." In fact, there is a huge discrepancy between Washington and reality with respect to this particular mandate. As of 2013 there were no commercial plants producing cellulosic biofuels, and the Energy Information Administration estimates capacity in 2022 to be only 327 million gallons - far below the EPA's 16-billion gallon mandate.
With the mandate for renewable fuels relegated to a failing academic exercise, the market for fuel is being increasingly displaced by centrally planned prices contrived in Washington, D.C. Tacitly acknowledging the infeasibility of its regulations, the EPA has been exercising its waiver authority to delay implementation of the mandates. Just recently, the EPA delayed compliance with the 2013 standards until September 2014 while it attempts to establish the 2014 standards.
With such ad hoc and arbitrary changes, it is discretionary decisions in Washington rather than market forces that are shaping America's energy future.
In recent years federal regulations have supplanted market forces in vast swathes of the economy, including health care, financial services and the energy sectors. All too often, federal courts defer to agency expertise when these regulations are challenged. Yet the renewable fuel standard raises serious questions about such expertise. As Friedrich Hayek argued more than 50 years ago, regulators are incapable of incorporating the "particular knowledge of time and place" that markets so effectively exploit. As a result, regulations fall short, disrupting markets and misallocating economic resources.
In the case of renewable fuel standards, the government's forecasts woefully missed their mark with respect to both the demand and supply in energy markets. The government also assumed the existence of technologies that have yet to be proved commercially viable. And finally, technical limitations of ethanol given the composition of the current vehicle fleet were ignored. With the EPA scrambling to keep the program afloat and the CBO acknowledging the "significant challenges" of compliance, Congress should revisit the Energy Independence and Security Act and repeal the renewable fuel standard.