RFA

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.

I should have linked to this last month, but better late than never.  Robert Rapier has done a nice review of the Renewable Fuel Association's rather exuberant claims on the impacts of killing VEETC. Given that the mandate still requires the use of almost all of the ethanol produced domestically, the mechanism of support may shift (from tax credits to transfers from consumers, as illustrated by rising prices on compliance credits under the renewable fuel standard) but the demand will remain.

Part I covers the problems with their jobs impact numbers and the work of John Urbanchuk, RFA's frequent researcher on these questions.  Rapier points out that in stark contrast to the more than 100,000 jobs Urbanchuk says will disappear with the demise of VEETC, another analysis, done for food manufacturers, estimated keeping VEETC in 2011 would save a whopping 296 jobs and at a cost of roughly $20 million each.   Part II covers the inaccurate comparisons RFA has made on subsidy support to oil versus ethanol.  Having done detailed work on subsidies to both of these fuels, I concur with Rapier that RFA simplifies and skews the comparison. 

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.

It has been a banner couple of weeks for the ethanol industry.  To my inbox come their daily proclamations and jubilations over a reprieve they have been given in a recent US EPA analysis of GHG impacts of the fuel. Corn-based fuels from new plants had to reach a minimum of 20% GHG reductions relative to gasoline in order to qualify as renewable under the renewable fuel standard mandates.  This reduction, by statute, had to include indirect land use, an effort to recognize that a large surge of land under fuel production would result in loss of carbon sequestering vegetation elsewhere.

While the 20% threshold is the lowest GHG hurdle for a biofuel offered within the mandates, corn ethanol rose to the challenge.  While it may seem unbelievable, the analysts at EPA found that not only did corn ethanol reduce GHG emissions by the required 20 percent under certain conditions, but that new plants would provide not a 20.25% reduction; not even a 20.5% reduction; but a whopping 21% reduction.  Amazing, just amazing, how the framers of the original requirements were able to predict the outcome of this complicated analysis so accurately.

Indirect land use as bunk

Today, lobbyist C. Boyden Gray argues in the Washington Times that the entire idea of indirect land use, "including as far away as Southeast Asia or Brazil," being considered when assessing the impact of biofuels production is just "flat wrong."  His article is titled "Getting a true measure on biofuels," though I assume he is using the word "true" in a lobbyist sort of way rather than its traditional meaning.

He argues in the article that including any evaluation of indirect land use impacts from US fuel production is simply "too difficult" to include.  And, I suppose, if something is difficult to assess easily, the only "true" measure is simply to exclude it entirely-- though only for accuracy of course. 

Technical difficulties in the write-up (more on this below) aside, the Renewable Fuels Association media machine jubilantly delivered me a link to the Gray piece, so here are my thoughts.

Some initial reactions to the politics of all this.  First, I think that any newspaper that publishes an opinion piece from a lobbyist ought to note at the bottom of the article whether the author is actually working for the industry he or she is opining about.  I suspect this is likely for C. Boyden Gray and Associates (despite this article from 1990 where Gray seems to be irked by pressure from the ethanol lobby), but it ought to be stated in black and white.

Second, it's a bit laughable to see Gray refering to Tim Searchinger et al.'s article on indirect land use change as causing a "policy imbalance" -- noting that that "Fortunately, there has been positive action on the congressional front to redress the policy imbalance Mr. Searchinger's article has caused."  So, let's get this claim straight:  Searchinger and his team of academics created a "policy imbalance" by publishing a peer-reviewed article in one of the most respected academic journals in the world, against which one of the most powerful lobby forces in the world -- apparently represented by Boyden himself -- is only now making right?  Uh huh.

Life cycle mapping: complicated, inefficient, and probably biased

Enough with Gray's posturing.  What about his arguments?  I actually agree with some of the concerns he raises on life cycle mapping -- albeit expecting bias in the opposite direction.  It is absolutely true that mapping the life cycle impacts of fuel chains is complicated, sensitive to the assumptions one makes, and subject to a wide range of technical problems as one tries to compress what is really a wide range of values for the same crop (depending, for example, on the specific location, fuels used in processing, the amount of irrigation and fertilizers needed, etc.) into a point estimate.  EPA's own magical 21% reduction value relies on a variety of these assumptions, including crop yields and co-product credits, well described in this Forbes article by Jonathan Fahey.

The estimation challenges are serious.  But they can as easily underestimate climate impacts as overestimate them as Gray implies.  In fact, it is reasonable to expect that when complicated, non-transparent modeling efforts are conducted outside of the public purview, they are much more likely to be influenced to support the politically well-connected than the politically weak.  The weak, after all, have much smaller budgets.  Stated in a more ethanol-specific way:  given the same set of scientific facts and uncertainty, and a 20% GHG reduction threshold for corn ethanol to partake in a large subsidy program, it is much more likely that the outcome will hit reductions of 21% than of 19%.

In addition, the analytic intensity (and cost) of the calculations these models require mean the information set driving regulations is subject to wide ranging accuracy problems simply from the long time delays between when information is collected and updated; by modeling staff turnover and its associated loss of specific knowledge; and by a general inability to capture complex systems with available modeling tools. 

The result?  A detailed round of policy analysis will be repeated only infrequently.  Rules may not be properly updated to integrate adverse effects on the ground that were missed the first time around.  Errors in who makes the initial cut will be canonized through the grandfathering provisions of the RFA.  These lock in facility eligibility under the RFS for life once a plant has passed the GHG test once.  Since the purpose of grandfathering is to avoid the premature obsolescence of capital, a far more logical grandfathering period would be limited to the depreciation period of the investment.  Efforts to provide this reasonable fix to the existing rules failed.

Carbon taxes, which achieve the same endpoints but in a much simpler, more neutral manner, should be preferred over the options now being pursued most heavily:  low carbon fuel standards or emissions trading schemes with difficult-to-validate or distortionary offset rules.  Yet, because the taxes offer far fewer opportunities for political barter and favoritism, policy momentum will not favor the simpler solution.

Land use might not matter if biofuels didn't need land

Gray's basic claim -- that land use displacement doesn't matter -- is just plain silly.  If land is a finite factor of production (which it clearly is), and there is a sharp increase in demand pressure on that resource, there are only a handful of things that can happen.  You can increase the productivity of that land (likely to happen, but not as much as boosters claim, and also with some environmental impacts from soil loss, and increased fertilization and irrigation); your can drive prices up so high that other products not requiring so much land per Btu of energy become more competitive (like oil, perhaps); or you can pull land from other uses into biofuels.

Searchinger talks about international impacts of land use change, and these do partly consist of a loss of forest cover.  Gray's counter-argument focuses only on the US, only on forest cover trends, and only for a period (ending in 2005) that preceded the spike in oil and corn prices, and much of the rapid growth in mandated biofuel consumption.   In fact, short-term impacts are far more likely to be seen in Conservation Reserve Program enrollment (declined during the high price surges), crop rotations (corn/soy rotations ramped down on the soy), and crop substitution (overall corn acreage was up).  Longer-term impacts -- which I suspect we have yet to see in the US, though already evident in Indonesia -- may well cut into forest cover.  In fact, given the rising subsidies to cellulosic production from forest wastes; and for direct burning of biomass for electricity, declining forest cover in the US seems all but inevitable. 

What about the Iowa State CARD study by Jerome Dumortier et al. that Gray cites to discredit the Searchinger team?  This study, "Sensitivity of Carbon Emission Estimates from Indirect Land Use Change," from July 2009, doesn't actually support Gray's claims so far as I can see.  Far from concluding that the Searchinger team is "flat wrong," the authors substantiate the general principle of land use impacts and a "carbon debt" where the land conversion impacts create a carbon hole that can take many years of fuel usage relative to a gasoline baseline to "pay off."  Specifically, they note that:

"We find that the payback period of corn ethanol’s carbon debt is sensitive to assumptions concerning land conversion and yield growth and can range from 31 to 180 years."

While Gray says the CARD used a "better model," Dumortier et al. note that they calculated a similar carbon debt as the Searchinger team when they used similar assumptions -- that is, the two models produced comparable results.  Thus, even if the CARD model is better, the approach used by the Searchinger team is not without merit.  One benefit of raising issues like Searchinger did is to encourage investment into improved models. 

Only when the Dumortier team changed their assumptions about the impact of biofuels growth on US forest cover and yield growth did the payback period decline to below what the Searchinger team predicted.  As Searchinger notes in this reply, uncertainty in how big the carbon debt is does not justify the path C. Boyden Gray recommends of ignoring the issue altogether.  In addition, even the lower bound of the carbon debt in the Dumortier study means that corn ethanol will actually worsen the GHG problem during the critical initial response window for GHG stabilization.  This is hardly something to celebrate.

Good feed, good food?

Gray also points to the value of the corn ethanol byproducts such as dried distiller's grains in boosting the GHG reduction value of ethanol fuel production, noting that they are a better feed than the corn itself.  Again, the issue is not nearly so much in the industry's favor as Gray spins it.  Here is Iowa State again, talking about nutritional value:

"However, feeding distillers grains creates some nutrition management challenges, in part because most of the nutrients in corn become three times more concentrated in distillers grains. Nutrients such as sulfur are often added during ethanol production and can occur at even higher concentrations. Formulating rations to accommodate the nutrient composition of distillers grains is further complicated by the significant variation in nutrient content that has been shown to occur between ethanol facilities and even between batches from the same facility. These nutrient issues can limit or even prohibit distillers grains use in some feeding situations."

And this one, from the FDA, on antiobiotic residues in the feed. 

Finally, there is increased pressure to take these feed byproducts and use them to boost fuel yield.  If more of the DDGs are diverted from feed to fuel, ostensibly EPA should scale down its GHG byproduct credit for corn ethanol.  If that change would pull corn ethanol below the 20% magic number though, EPA's revision will likely be a long time coming.