Farm-state economists find EPA’s views on E85 ethanol blend ‘inconsistent’

Source: Tiffany Stecker, E&E reporter • Posted: Tuesday, January 7, 2014

Two experts have published a paper on the economic benefits of promoting E85 — an 85 percent ethanol fuel blend — and criticized U.S. EPA’s analysis in its latest proposal for this year’s renewable fuel standard.

Iowa State University economists Bruce Babcock and Sebastian Pouliot found that if more E85 fuel pumps were installed in urban areas — most pumps in the country carry a 10 percent blend of ethanol (E10) — and sold at a competitive price, it would create a market for more ethanol in the country’s gasoline supply.

In the analysis, Babcock and Pouliot found that an additional 800 million gallons of ethanol could be consumed with an E85 retail price of $2.32 per gallon and no new stations. If 500 new stations were added, at a cost of $130,000 each, the retail price would rise to $2.71 per gallon.

Nearly two months ago, EPA released a controversial proposal to lower the mandate for biofuels for this year. The rule largely confirmed the numbers in a leaked draft from October — an almost 10 percent cut for corn ethanol from the 14.4-billion-gallon requirement for 2014 decided in the Energy Independence and Security Act nearly seven years ago.

“These results demonstrate that meeting a 14.4 billion gallon ethanol mandate is feasible in 2014 with no new stations, modestly lower E85 prices, and judicious use of available carryover RINs (Renewable Identification Numbers),” wrote the authors. RINs are credits that companies can buy and sell to comply with the RFS in a given year instead of blending actual biofuel gallons.

Will consumers buy E85?

The average price of regular gasoline is currently $3.33 per gallon, and the average price of E85 is $2.90 per gallon, according to the Oil Price Information Service.

EPA’s reasoning in its proposed rule is wrong because the agency assumes that it cannot scale up the annual biofuel requirements until enough E85 pumps are installed, said Babcock. The logic is backward, he added. It will take an expansion of the mandate to create an incentive for more E85 pumps.

“Investment had to take place to facilitate making almost all U.S. gasoline E10. It is inconsistent for EPA to now argue that they have to quit expanding mandates because of a lack of investment,” said Babcock. “There may be sound reasons for not expanding mandates, but the lack of fueling infrastructure certainly is not one of them.”

According to the researchers’ model, an additional 500 E85 pumps would drop RIN prices from 69 cents to 18 cents.

The Renewable Fuels Association welcomed the analysis.

EPA’s proposal marked the first time in the history of the RFS program that the agency has lowered the required volumes for both conventional corn ethanol and next-generation advanced biofuels. Assistant Administrator Janet McCabe justified EPA’s proposal in a blog post in November, saying the agency needed to address the oncoming “blend wall.” The blend wall is the point at which more ethanol is made than petroleum producers say is feasible to blend in the fuel supply.

The American Petroleum Institute, a staunch opponent of biofuel mandates, rejected the premise in the study.

“E85 has largely been rejected by consumers and is not a solution to the impending blend wall,” said API spokesman Carlton Carroll. “EPA chose to protect consumers by rolling back skyrocketing ethanol mandates that could damage vehicles [and] cause consumer confusion.