What would happen to ethanol if the RFS is repealed?

Source: Amanda Peterka, E&E reporter • Posted: Friday, July 26, 2013

As the House Energy and Commerce Committee this week weighs whether to repeal or change the federal biofuel mandate, experts agree that eliminating it wouldn’t necessarily halt the use of corn ethanol in transportation fuel.

While ethanol use might slightly decline without the renewable fuel standard in place, refiners would likely continue blending it into petroleum-based fuel for at least the next five years or so because the economics favor its use. Ethanol provides refiners with a cost-effective way to enhance the octane rating of gasoline, allowing for a performance boost in high-compression engines.

The sector of the economy that would take a hit with a complete repeal of the renewable fuel standard would be the nascent advanced and cellulosic biofuels fields, in which producers are attempting to scale up technologies that don’t use corn as an input, experts and lobbyists agree.

“Nobody knows for sure; we’ll just start with that statement,” Chris Hurt, an agricultural economist at Purdue University, said yesterday. “But we think repeal of the RFS does away with cellulose [biofuel] altogether. It’s gone.”

The 2007 renewable fuel standard requires that refiners blend 36 billion gallons of biofuel a year into the nation’s petroleum-based gasoline and diesel supply. By statute, more than half of that amount, or 21 billion gallons, is to come from advanced fuels. A subset of that amount is to be cellulosic biofuel, or fuel made from plant-based materials like agricultural residues, grasses and municipal solid waste.

Cellulosic fuels, though, are well behind schedule and unlikely to meet their targets by 2022. Meanwhile, corn ethanol has fallen out of favor among many lawmakers who tie its use to increased food and fuel prices. This week, the Energy and Commerce Subcommittee on Energy and Power held a two-day hearing to weigh whether to reform or repeal the standard.

A central question is whether repeal would make a difference or whether, in a free market, renewable fuels would be able to stand on their own.

In 1990, Clean Air Act amendments required that gasoline have a minimum oxygen content of 2 percent, a change meant to help the gasoline burn cleaner. Ethanol has long been favored by refiners as a replacement for methyl tertiary butyl ether (MTBE), a fuel component that increased the amount of oxygen in gasoline but has been tied to underground water contamination.

As an oxygenate, ethanol enhances the octane rating of gasoline sold to consumers. According to Hurt, the oil industry refines gasoline to an octane rating of about 84; adding ethanol increases that octane level to the more preferable level of 87. That number is the one typically seen on a yellow sticker on gas station pumps.

“We think that the use of ethanol would not change very much if the renewable fuel standards were eliminated because of the use by the industry of ethanol as an octane enhancer and a volume enhancer that’s cheap enough,” Adam Sieminski, administrator of the Energy Information Administration, told Energy and Power members at an RFS hearing last month. “They’re quite happy to add it to the gasoline.”

But whether refiners would use ethanol to replace approximately 10 percent of the petroleum-based fuel supply, as is the case under the renewable fuel standard, is a different question. And it’s unclear whether refiners might find a different, more efficient octane booster in the future and phase out ethanol altogether.

“If we assume that economics continues, then maybe there would not be a collapse in corn use for ethanol. Maybe,” Hurt said. “On the other hand, five years from now, the oil industry might find other ways to oxygenate and octane. So I think it doesn’t say it would all go away. In the short run, we don’t think a lot would go away.”

But Bob Dinneen, president and CEO of the Renewable Fuels Association, told lawmakers on Tuesday that he expected to see a “dramatic reduction” in the use of ethanol in fuel. Refiners, he said, would simply replace ethanol with more petroleum.

“Without the RFS, you’re going to see more oil production from this country,” Dinneen said.

Jack Gerard, president of the American Petroleum Institute, said that refiners compare fuels based on the energy punch they pack. While some studies say that ethanol has lowered the price of gasoline by as much as $1.09 per gallon, others say that a car driven on ethanol goes about 30 percent fewer miles than a car driven on straight gasoline.

Ethanol “does not cost less than gasoline. That’s an important consideration. You have to compare energy to energy,” Gerard said.

A key question on the future of ethanol is the relative price of corn versus the price of crude oil, Joseph Glauber, chief economist at the Agriculture Department, said at last month’s hearing on the RFS.

Put simply, if corn is cheap relative to crude oil, ethanol producers will continue to generate it.

“Ethanol producers would still have incentives to make ethanol, but understand that … absent mandates, it would be very sensitive to price disruptions,” Glauber said. “So higher corn prices, for example, you could expect some reduction. And if, indeed, over the longer period that were to cause a significantly lower area of ethanol from corn being produced, then you would expect that to have some impact on corn area.”

While there are uncertainties over the future of ethanol in a post-RFS world, there’s unanimous agreement that repealing the mandate would kill most advanced biofuel production.

Spurred by the incentives tied to the RFS, U.S. companies have spent $14.72 billion over the last six years to develop advanced technologies to make biofuels from feedstocks other than corn, according to Michael McAdams, president of the Advanced Biofuels Association. The government has also spent millions to build advanced biorefineries and help farmers establish fields of energy crops.

Just the debate over the RFS is already having a “chilling effect” on the investment community, McAdams said.

“To repeal the RFS would pull the rug right out from under them and change the rules in the first half of the game,” McAdams said. “This confusing policy signal is a benefit to incumbent players in the fuels market and a significant disadvantage to those trying to finance and build new, innovative technologies.”