Time for Real Ethanol Policy Reform

Nicolas Loris /

The Environmental Protection Agency’s (EPA) approval to increase the amount ethanol blended into gasoline from 10 percent 15 percent has been controversial. A previous decision by the EPA in October 2010 made the 15 percent blend allowable (but not required) in passenger cars, light-duty trucks, and SUVs that had a model year of 2007 or newer. The EPA recently extended the allowance to include vehicle model years 2001 to 2006. Extending the vehicle list to model years of 2001 and newer just three months after the initial waiver has raised a number of concerns with regards to its impact on vehicle operations and consumer safety, which is why Representative John Sullivan (R–OK) introduced an amendment that would block funding for the EPA to implement the program. Sullivan remarked:

My amendment is about consumer safety, plain and simple. The EPA has completely ignored calls from lawmakers, industry, environmental and consumer groups to address important safety issues raised by the 50 percent increase in the ethanol mandate waivers issued over the last two years.

In a free market, fuel producers and users should be allowed to make their own fuel decisions without federal bureaucrats and powerful special interests deciding that for them. Unfortunately, when it comes to ethanol policy, the U.S. is anything but a free market. And that is the context in which Sullivan’s amendment must be understood. The reality is that his amendment is really a reaction to the bad policy currently governing the U.S. ethanol industry.

The federal government mandated that the U.S. produce 36 billion gallons of ethanol by 2022. Slower demand however has made that hard to meet. So now producers are over-supplying a government-created market. Instead of recognizing the folly of this approach, ethanol interests want the government to create a larger market, and the first step in doing so is for the EPA to allow it. What government planners don’t recognize is how their interventions distort the normal market process that would yield balances in supply and demand and result in a self-sustaining ethanol industry—if such a thing is possible.

Under current policy, the ethanol industry will perpetually need taxpayer resources and artificially created markets to stay afloat because they are too expensive to compete otherwise. In a market system, the simple solution to production exceeding demand is to slow down production, but because our government mandated such excessive levels of production, that’s not the case. To help meet such targets, expanding the allowable blend percentage and increasing the amount of vehicles that could take in that blend is critical, writes Geoffrey Styles, Managing Director of GSW Strategy Group, LLC:

First, there’s the tax associated with paying for fuel that has less value, due to ethanol’s lower energy content, yet carries the same pump price. At current gasoline prices a gallon of E15 is worth about 5.5¢ less than the E10 blend most of us are buying today.

Then there’s the indirect tax associated with the higher maintenance and repair expenses that some motorists are likely to experience. Despite the EPA’s reassurances about having tested E15, the focus of their testing was explicitly on emissions, not on performance and longevity. And finally there’s the tax or debt we’ll incur for the ethanol blenders credit that will be paid out on the incremental ethanol volumes facilitated by the waiver. That could eventually amount to an extra $3.2 billion per year, unless the current Congress finally ends this redundant subsidy that has been in place for more than thirty years.

In 2008, even as gasoline was reaching record prices, the ethanol mandate made them even more expensive. In addition, the diversion of corn from food to fuel use raised the price not only of corn itself but related food items such as corn-fed meat and dairy. Increased ethanol is also backfiring environmentally—even many environmental groups have turned against it.

Sullivan’s amendment and others—such as Representative Jeff Flake’s (R–AZ) to prohibit funding for the installation of blender pumps—would help reduce the harmful impact of Washington’s ethanol policies. But what is really needed is broad reform that would abolish the mandated ethanol production requirement, allow the ethanol tax credits to sunset, and eliminate the 54-cent tariff on imported ethanol.