A Big GOP Win In 2016 Is Unlikely To End The Ethanol Mandate – Here’s Why

Source: By Tristan Brown, Seeking Alpha   • Posted: Thursday, January 15, 2015

Some politicians are proposing to repeal corn ethanol’s share of the U.S. biofuel mandate.

A repeal would negatively impact the corn ethanol industry’s future earnings.

A repeal is unlikely to find the requisite political support even if the GOP takes Congress and the White House in 2016.

My recent article on independent corn ethanol producer Green Plains, Inc. as an attractive long investment received a number of comments and questions regarding the company’s outlook under a scenario in which the GOP takes both Congress and the White House in Election 2016. For example, SA contributor Dirk Leach asked:

Have you considered that a Republican Congress and potentially a Republican administration in 2017 might undo the ethanol subsidies and fuel mandate. The idea to use corn for fuel was born a long time ago when we thought oil was getting scarce and oil was expensive. Today, we have much higher known reserves, better extraction technology and oil is not so expensive. The need for corn ethanol as a transportation fuel only has the “lower emissions” driver working for it now. I’m not sure. Might want to reconsider the politics around ethanol before making a big bet on a comeback.

While I left a short answer in the comments to that article, the mandate’s importance to the future prospects of the entire corn ethanol industry merits a more detailed consideration of how the industry could be expected to fare under such a political scenario. A withdrawal of government support would have a large impact on both diversified producers such as ADM and Valero and independents such as Green Plains Inc. Pacific Ethanol and REX American Resources. Today’s ethanol industry has been largely shaped by U.S. legislation at the federal level and, as such, a negative policy environment would likely result in substantial losses to shareholders. This article discusses whether such an environment is likely to occur.


Modern U.S. ethanol policy came of age under the administration of President George W. Bush. In 2004 the state of California banned the use of methyl tertiary butyl ether [MTBE] as a fuel oxygenate due to concerns that it was leaching from fuel tanks and contaminating drinking water supplies. (Ironically, MTBE had been widely adopted the previous decade as a means of reducing tailpipe emissions of air pollutants.) This statewide ban was followed in 2005 by a Congressional decision to expose blenders to legal liability arising from MTBE groundwater pollution while maintaining fuel oxygenate requirements. Ethanol consumption leaped in subsequent years as blenders rapidly turned to it as an alternative fuel oxygenate and MTBE replacement. Consumption increased so quickly, in fact, that the original Renewable Fuel Standard [RFS1], which Congress had also passed in 2005 as a response to concerns over consumption of Middle Eastern petroleum and contained an escalating ethanol blending mandate, was obsolete almost immediately following its creation (see figure).

In 2007 Congress began work on a successor to the RFS1 that is now known as the revised Renewable Fuel Standard [RFS2]. Its introduction came on the heels of the Democrats retaking control of Congress and they left their mark on the revised mandate by tying participation of biofuel pathways to specific greenhouse gas emission reduction thresholds relative to gasoline, thereby introducing an environmental protection component to the mandate. President Bush signed the bill containing the RFS2 into law at the end of the year. In addition to the environmental protection component, the RFS2 was also notable in that it contained large increases to the required blending volumes but capped corn ethanol’s contribution at 15 billion gallons beginning in 2015.

Almost immediately the new mandate ran into strong opposition from environmentalists. While the overarching bill had been in conference to resolve differences between the Senate and House versions a paper had been published in the journal Science that predicted a large increase to Brazilian deforestation resulting from the increased biofuel production required by the revised mandate. A subsequent proposal by the Environmental Protection Agency [EPA], which oversees the mandate, to disqualify most corn ethanol production from participating due to the greenhouse gas emissions that would result from this projected deforestation was shelved in the face of heavy ethanol industry pressure, further increasing the ire of environmentalists.

Opponents of the RFS2 on the political left were joined by new opponents from the right in 2013, resulting in an unlikely marriage between environmentalists and refiners. This new opposition arose following a rapid increase in th price of Renewable Identification Numbers [RIN], as the flexible subsidy mechanism created within the RFS2 is known. RINs were designed to incentivize sufficient biofuel production and blending to meet the mandated volumes by increasing in value when warranted by market conditions. While ethanol overproduction up until the end of 2012 kept RIN prices hovering around $0.02 (each RIN corresponds to a gallon of ethanol-eq.), recognition by the market in early 2013 that the mandate required greater ethanol blending than is permitted by the 10 vol% blend wall caused RIN prices to soar to $1.45 within six months. Unlike conventional subsidies that are borne by taxpayers, RIN expenses are incurred by refiners (“obligated blenders” in the nomenclature of the mandate) required to demonstrate compliance with the mandate’s Renewable Fuel Volume Obligation [RVO] either directly in the form of RIN purchases or indirectly in the form of ethanol purchases (each RIN remains attached to the corresponding gallon of biofuel until blending, at which point the blender submits it to the EPA to demonstrate compliance with their share of the total RVO for the year). The 7000% increase in RIN prices caused many refiners to report reduced quarterly earnings in 2013, in turn angering many on the right who now saw the mandate as a new tax on fossil fuel producers being imposed by the Obama administration.

Repeal the RFS2?

The presence of bipartisan opposition to the RFS2, albeit for vastly different reasons, prompts occasional efforts by odd bedfellows in Congress to overhaul the mandate by including unconventional fossil fuel pathways such as CNG or even outright repeal of corn ethanol’s inclusion. While these efforts have yet to come to fruition, that hasn’t stopped some political observers from predicting a successful repeal, especially following the retaking of Congress by the GOP in the 2014 midterm elections. One line of thought is that enough Democrats will side with the GOP to gain the 60 votes needed to get a repeal bill through the Senate (a successful vote by the GOP-controlled House is assumed), at which point a Republican president elected in 2016 will sign the bill into law. Such a scenario would result in corn ethanol producers being faced with a lack of government support in a shrinking market and steep earnings losses would presumably result. The RFS2’s opponents on the political right point to the disappearance of the Volumetric Ethanol Excise Tax Credit [VEETC], or “blenders’ credit” as it was better known, as an example of the elimination of a wasteful government subsidy by a bipartisan.

It is unlikely to happen. Here’s why.

The case against repeal

First, no U.S. president facing reelection will be willing to proactively eliminate corn ethanol’s participation in the RFS2. Of the swing states that are expected to determine the 2016 presidential election, no fewer than three – Iowa, Ohio, and Wisconsin – are major corn ethanol producers (they rank #1, #7, and #8 for corn ethanol production capacity, respectively). Furthermore, Iowa is a crucial primary election state, meaning that few presidential candidates are willing to oppose corn ethanol even before general election campaigning begins. George Will famously labeled Mitt Romney “the pretzel candidate” in 2011 due to his contortions on corn ethanol policy during that year’s primary election campaign. Even Rep. Steve King of Iowa, whose right-wing political views recently caused him to be publicly labeled an extremist by the Service Employees International Union, has come out in support of the RFS2. The corn ethanol mandate is viewed as a livelihood in the Midwest rather than a mere party politics issue, and the region’s outsized influence in both presidential politics and the equally-weighted Senate will greatly hinder repeal efforts.

Second, the environmental and humanitarian disasters that were predicted by many academics to result from increased corn ethanol production have failed to materialize. Most of the co-authors on the aforementioned Science paper published a subsequent analysis of biofuel-induced deforestation and found their original deforestation result to be very sensitive to several poorly-quantified assumptions. Most importantly, the observational data has contrasted sharply with the prediction: Brazilian deforestation has fallen by 83% since 2004 even as U.S. corn ethanol production has increased by more than 200% over the same period (see figure). Predictions that corn ethanol production would cause price-induced famines in the developing world have achieved a similar result, as anyone familiar with today’s corn price in the face of historically-high ethanol production volumes can affirm. Simply put, the facts on the ground aren’t what they were in the past.

Third, the VEETC expired at the end of 2011 after Congress failed to renew it. Rather than being a sign of overwhelming Congressional opposition to corn ethanol, its expiration was the result of several factors, including its redundancy following the creation of the RFS2 (RINs were designed to be a cost-effective alternative to the windfall-producing VEETC), preoccupation with the deficit (recall that VEETC expenses were borne by taxpayers), and Congressional distractions in the form of the major budget battles that roiled Washington D.C. in the second half of 2011. Unlike the VEETC, however, the RFS2 has a long-term legislative horizon (annual blending volumes are established through 2022), does not impose a burden on the federal budget, and has not been made redundant by subsequent legislation.

Finally, and most importantly, the EPA recently delayed finalization of an earlier proposal to reduce the scale of the RFS2 in a move that was widely seen as a victory for the corn ethanol industry. As mentioned earlier, the EPA is tasked with overseeing the mandate and, barring legislative action, any attempt at repeal must go through the EPA. The EPA under the Obama administration has proven to be ultimately unwilling to reduce corn ethanol’s contribution to the RFS2, despite two EPA proposals to do so. Furthermore, the EPA is controlled by the executive branch of the federal government (as the U.S. saw during the Bush administration when the jurists on the Supreme Court found themselves in the odd position of ordering the EPA to prevent air pollution), and a post-2016 EPA comprised of different political appointees would still need approval from the president to limit corn ethanol under the mandate – a scenario that is unlikely for the reasons presented above. Much as the EPA’s restrictions on coal consumption were attributed by voters in coal country to President Obama in the 2012 election, an EPA-induced decline of the corn ethanol industry would be attributed to a President Jeb Bush or Christie by voters in corn country in subsequent elections.

This is not to say that ethanol doesn’t create a number of problems, both environmental and otherwise. No amount of industry lobbying will make the fuel compatible with unmodified engines in volumes exceeding 10-15 vol%, for example, and the contribution of Mississippi fertilizer runoff to the growing Gulf Sea dead zone is undisputed. Few voters are even remotely familiar with the concept of the blend wall, however, and hypoxia brings to mind unwanted medical conditions rather than an environmental issue to rally around. (It would certainly be a fascinating piece of political theater were pro-fossil fuel politicians in the GOP to attack corn ethanol on the premise of saving the Gulf of Mexico’s ecosystem, however.) Corn ethanol is an imperfect fuel, but that won’t prevent it from continuing to contribute to the RFS2 during the rest of this decade.


As interested as my inner-political scientist is to know whether or not a President Jeb Bush would be willing to sign into law the repeal of one of his brother’s landmark domestic programs, this is very unlikely to happen following a potential GOP landslide in 2016. Opposition to the RFS2 in general and corn ethanol specifically will not be able to overcome the twin hurdles of national political realities and observational data that disputes the veracity of modeling predictions. A scenario in which the GOP takes Congress and the White House is not one that is likely to damper the corn ethanol industry’s long-term earnings.