Changes may be coming to ethanol policy

The Renewable Fuel Standard requires oil companies to blend ethanol in its products. The Obama Administration may make changes to the RFS soon. (Grant Gerlock/Harvest Public Media)
The Renewable Fuel Standard requires oil companies to blend ethanol in its products. The Obama Administration may make changes to the RFS soon. (Grant Gerlock/Harvest Public Media)

The federal government may be charting a different course for ethanol as early ambitions for renewable fuels have run into a different reality at the pump.

Each year, the EPA issues a rule determining how much ethanol oil companies must combine with the gasoline supply. For the first time, the EPA is expected to propose a reduction in the mandate for corn-based ethanol.

The original plan in the Renewable Fuel Standard (RFS) would mandate 14.4 billion gallons of corn ethanol next year. However, in a leaked version of the 2014 numbers, the EPA pares that amount down to 13.3 billion.

The agency often lowers the quota for biofuels like cellulosic ethanol - which can be made from switchgrass or corn stalks - when there’s not enough in production to meet the government’s goals. But corn ethanol has the opposite problem. It’s called the “blend wall.” Although there’s plenty of capacity to make more corn ethanol, at the typical blend of 10 percent ethanol and 90 percent gasoline drivers don’t burn enough fuel to consume more than around 13.3 billion gallons.

When Congress passed the RFS in 2007, lawmakers assumed gasoline consumption would rise and the blend wall would be farther off. Instead, demand for gas has fallen thanks to a combination of the recession, changing driving habits and increased fuel efficiency.

Oil companies say that the original RFS standards would force them to buy more ethanol than can be used. Ethanol companies argue that aggressive mandates encourage fuel retailers to sell more ethanol by putting higher blends at the pump, like E15 or E85.

University of Illinois ag economist Scott Irwin says if the EPA follows through with cuts to the mandate in order to dismantle the blend wall it will be a dramatic policy shift.

“(Obama administration officials) appear to be doing a major policy U-turn where they’re effectively saying we’re not going to go any higher in terms of ethanol than the amount of that blend wall,” Irwin said.

A reduction in the mandate would be a turnaround in ethanol policy, but Irwin said it would not change much for people putting ethanol in their tank. And it may not mean much for corn farmers.

“Basically we’re stuck at a (demand) level of 4.9 billion bushels of corn for ethanol use,” Irwin said. “It’s probably not going to up or go down.”

If demand is stagnant, it lowers the potential ceiling for high corn prices. But Irwin said demand shouldn’t drop off by much because of changes to the mandate, so prices shouldn’t go down much either.

Irwin said it could actually be soybean prices that see a larger impact. Soybeans are the greatest source of biodiesel in the U.S., and biodiesel saw a jump in demand as oil companies bought more of it to meet RFS requirements. Changes in the RFS could mean that demand may dry up.

The EPA could announce its actual plans as soon as this week. When it does, ethanol producers are expected to appeal in court, and those appeals could take months or years.

Update: The EPA's official proposal was released Friday and is very similar to the copy that was leaked in October. It would cut the overall mandate for all biofuels from the inital level of 18.15 billion gallons to a range of 15-15.52 billion gallons. That includes a 1-2 billion gallon reduction for corn ethanol in the mandate. Farm groups and elected officials across the Corn Belt reacted with disappointment. Corn prices have fallen since the announcement. Opponents of the policy, including oil and livestock groups, applauded the reduction but continue to call for Congress to repeal the Renwable Fuel Standard outright. 

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