The Problem With Biofuel Mandates

Last Friday the EPA finally got around to setting the ethanol quotas refiners are responsible for blending into their fuel for 2014, 2015, and 2016. Beyond the obvious problems associated with setting annual targets after the year has already passed, the new numbers drew criticisms from ethanol boosters themselves for being too low. Reuters reports:

Demand [for oil] is expected to climb 1.5 percent this year to nearly 139 billion gallons (526 billion liters) according to the government’s most recent forecasts, enough to easily accommodate small increases in ethanol quotas without breaching the so-called “blend wall” that refiners say puts a cap on blending at around 10 percent of total gasoline and diesel supply.

It may be even higher, based on data from the first quarter, when gasoline use surged by more than 3 percent, the fastest in over a decade.

Those calculations help explain why biofuel backers are up in arms over the Environmental Protection Agency’s proposed renewable fuel goals unveiled on Friday, which reaffirmed the agency’s stance that ethanol use in fuel has hit a saturation point until more infrastructure and equipment is installed.

The “blend wall” mentioned above is the necessary limit on how much ethanol the American consumer can consume, based on the fact that gasoline composed of more than 10 percent ethanol by volume risks damaging older engines. In past years refiners found themselves squeezed between government quotas and this so-called “blend wall.” More fuel-efficient vehicles and slack gas demand (a result of higher gas prices and the 2008 financial crisis) made it impossible to comply with the Renewable Fuel Standard (RFS) and forced refiners to snatch up credits called RINs to fill that gap. Now we’re seeing observers complaining that targets are too low, that they don’t adequately reflect burgeoning gasoline demand (coming in no small part thanks to cheaper oil prices). In both cases we can see a fundamental failing of the RFS: its inability to react to changing market conditions.

The failings of our country’s biofuel boondoggle are varied (you can find a quick primer of them all here), but the lack of a corrective mechanism may be its most fundamental. Greens are calling for higher quotas to reflect burgeoning gasoline demand, but what happens if, say, OPEC decides to cut oil production later this week and gasoline prices spike upwards? The allure of a “green” (in quotation marks because this biofuel policy is not actually eco-friendly), domestically-sourced fuel source seduced two presidents and one of the front-runners for 2016’s election, but in practice this policy has been a ham-handed attempt to force through something no stakeholder seems content with.┬áSimply put, this is bureaucracy at its worst. Take it in in all its ignominy.

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