Dineen

During the early part of 2010, when the volumetric ethanol excise tax exemption (VEETC) looked like it was heading towards elimination, ethanol industry contortionist Bob Dinneen of the Renewable Fuels Association worked hard to paint the subsidy as vital to all things American.  In yet another RFA-sponsored study by the industry's favored economist John Urbanchuk, RFA set out to quantify the bad things that would happen if VEETC expired.  They came up with quite a list, summarized by Ethanol Producer Magazine:

If VEETC is allowed to lapse, the study said, the price to producers would be reduced by 27.4 percent, resulting in a nearly 38 percent cut in supply by producers...

If the VEETC is eliminated, the immediate impact on the industry is expected to be severe," the study said. "A significant amount of capacity would likely go offline quickly. Some of that capacity may come back online as prices rebounded to an equilibrium point, but most of the lost production would not come back.

In Dinneen's own words:

Failure to provide the kind of assurance investors require to continue building out this industry by extending the tax incentives would be shortsighted, relegating future generations to a reliance on both foreign oil and foreign renewable fuels.

With such dire outcomes, how could Congress even consider stripping away the multi-billion dollar tax break? 

The manner in which the RFS and blending subsidies interact, however, paints a very different picture of the likely impacts from elimination.  The RFS sets a mandated consumption floor for favored fuels, in good times or bad, high corn prices or low.  This is great protection if you are an ethanol producer, though quite bad if you happen to be a member of the urban poor in the developing world trying to buy corn for food.  Because the RFS creates a price-insensitive mandate, the rising feedstock prices would not divert supply from fuel to food markets as quickly as without the mandate.  This increases the likelihood of rich world fuel markets outbidding developing world urban poor looking to buy corn to eat.  Not a great dynamic. 

But back to US fuel markets though.  The RFS generates a market-clearing price for providing a pre-set number of RFS-compliant gallons.  With a few exceptions (such as biofuels so environmentally-challenged they can't even meet the weak RFS2 ghg reduction standards), these are the very same gallons eligible to meet the RFS2 mandates. 

So how would the policies overlap?  For a given production cost structure, gallons earning a 45 cpg tax credit are able to remain in production at a lower RFS credit value than would be possible for them to do without the tax credit.  (The RFS credit value in the US is referred to as the RIN value, which is short for "Renewable Identification Number," the accounting units the program uses for RFS-compliant gallons).  Pull the tax credit and the equilibrium RIN prices will rise more or less the same amount.  Increase the credit and the equilibrium RIN prices are likely to fall in response.

And, despite the claims of Urbanchuk and Dinneen, this is exactly what seems to be happening.  Here's an article on what's happening in the biodiesel sector, from Biodiesel Magazine in November 2010:

Although the U.S. biodiesel industry has struggled since the lapse of the $1 per gallon tax credit, renewable identification number (RIN) prices are currently trading high enough to fill that void. One factor that seems to be contributing to the relatively high price of RINs is the volume requirements mandated by the U.S. EPA under the renewable fuel standard (RFS2)...

According to Sam Gray, a renewable fuels trader with VICNRG LLC, 2010 biodiesel RINs hit an all-time high on Dec. 8, trading at 96 cents per RIN. Since each gallon of biodiesel that is produced generates 1.5 RINs, that equates to $1.44 per gallon, which more than offsets the lost value of the expired $1 per gallon biodiesel tax credit. [Emphasis added]...

Current market conditions seem to be indicating tight biodiesel supply in 2011, leading to relatively high RIN prices, but McMartin and Gray agree that this will change if the biodiesel tax credit is reinstated. "If that $1 comes back, there is no way RINs can remain high, the market just wouldn't allow it," Gray said. "The market will correct that, so if the dollar comes back, you are going to see a large percentage of that dollar proportionally wipe away the 2010 and 2011 RIN value."

The policy take-away here?  The very least Congress can do here is kill the blenders' credits permanently.  No transformation of the credits into new or bigger subsidies, such as to ethanol refueling infrastructure and pipelines as industry group Growth Energy has advocated; just kill the blenders credits because doing so will save taxpayers lots of cash, and will have virtually no effect on market structure anyway.

The march to E15-ity and beyond continues, with DOE submitting vehicle tests for how older cars performed with the higher blends of ethanol.  EPA allowed blends up to 15% for model 2007 and later vehicles in October 2010, and is expected to rule on earlier models (2001 and later) this month.

A few elements of this whole issue continue to puzzle me.  First, with DOE a strong proponent for ethanol blends for so long, was there no more neutral party to test the impact of the blends on vehicles?  Second, Reuters notes that EPA delayed its decision on later model cars "after the Energy Department said it needed to redo several tests because some of the cars were not properly prepared." While Reuters says that "the additional testing was not directly related to the E15 fuel," I could not locate information from DOE on what exactly the proper preparation was related to.  I wonder if this argument would work when my kids take their SATs?

In related news:

• Domestic production of ethanol, the vast majority of it from corn, reached an all time high of 27.4m barrels in October 2010.  This underscores the industry pressure to boost mandated consumption of ethanol fuels as much as possible.  There was no imported ethanol that month, though exports of the subsidized fuel were way up year-on year.  It's simple subsidy arbitrage. 
• Fuel ethanol now using nearly 40 percent of the US corn crop.  The larger the share of corn absorbed to make fuel ethanol, the more important the many subsidies to corn production become to the economics of fuel ethanol.  These include large subsidies to irrigation, corn production, and poor control of nutrient runoff of corn fields that are heavily polluting the Gulf of Mexico.
• The US auto industry has joined a growing array of affected parties suing the government on the E15 rule.  Since the auto makers get not a penny from the fuel you put in your car, one would think that perhaps there are real engineering and performance issues they are concerned about.  As far as I know, neither Bob Dineen or Matt Hartwig at RFA have taken up my 2009 suggestion to put their personal assets as collateral should the higher blends they are pushing so hard for do end up damaging the vehicles -- among the most expensive assets most Americans own.  It's simply aligning interests; and if the risks of damage are as low as they say, it should be an easy bet for them to make.   
• The final rule for the Biomass Crop Assistance Program (BCAP) was released a few months back.  BCAP provides subsidies to farmers for producing feedstocks they convert into "environmentally-preferable" second-generation cellulosic ethanol.  To be effective, BCAP subsidies need to outbid the subsidies to farmers already get for current production patterns, such as land used to produce corn and corn ethanol.  It's an ironic policy twist that has the government bidding against itself.  However, the final rule does not ensure that subsidized production is actually done in a sustainable manner.  In fact, only intense lobbying protected the bark and mulch industry from losing feedstock to subsidized fuel production. The subsidization of energy conversion undermining other uses of raw materials is not a new issue.  The soap and detergent industry was harmed by subsidies to biodiesel undermining their purchase of fats and oils.  Similarly, widespread subsidies to energy generation in basic industries such as paper and steel, and to landfill gas and waste-to-energy facilities all undermine the markets for recycling secondary materials since the recovery of the embedded energy these materials contain becomes less valuable.
• Fox News rags on Al Gore for reversing his position on ethanol, now recognizing they are very much a mixed bag environmentally. Would I have preferred Gore do this some years ago?  Sure.  But I'm glad he is doing it now.  And I would welcome a similar reversal by Fox News on nuclear power, recognizing that it, too, should not be a kept industry of the federal government existing merely due to its access to the flow of federal support.