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NTU Urges EPA to Reduce Ethanol Mandate

by Pete Sepp / /

To:
Environmental Protection Agency
1200 Pennsylvania Ave, NW
Washington, DC 20004
 
From:
Pete Sepp
President
National Taxpayers Union
25 Massachusetts Avenue, NW Suite 140
Washington, DC 20001
 
Subject:Docket ID: EPA-HQ-OAR-2016-20004

On behalf of the members of National Taxpayers Union (NTU), I write to express our concerns regarding the recently issued “Proposed Renewable Fuel Standards for 2017, and the Biomass-Based Diesel Volume for 2018.”  While the underlying policy has been an economic failure, the Environmental Protection Agency (EPA) deserves some credit for adhering to previously agreed upon deadlines and making this proposal available to the public in a timely manner. A clear picture of the coming year’s renewable volume obligations (RVO) are crucial to all stakeholders, including taxpayers and consumers – who pay a high price for the Renewable Fuel Standard’s (RFS) mandates.

Taxpayers are also grateful that the EPA acknowledges the impossibility of complying with the statutory RVOs set out by Congress, as well as the challenges posed by the E10 blendwall, specifically referencing “real world constraints, such as the slower than expected development of the cellulosic biofuel industry and constraints in the marketplace… .” However, the proposed RVOs, and the assertion that there will be “substantial growth over time in the production and use of renewable fuels,” are at odds with these obstacles.

While the volumes recommended by the proposal mark a modest reduction from the levels specified in the underlying statute, the overall increase versus 2016 volumes is out of step with marketplace realities and not sufficiently limited to provide the relief taxpayers need. It is unlikely that the U.S. will able to meet the 2016 standard and refiners are expected to exceed the E10 blendwall this year. For these reasons, it is unclear how our gasoline supply could accommodate the volumes this proposal lays out.

Despite an uptick in gasoline consumption, thanks to lower gas prices, consumers are not on track to use nearly the volumes of fuel required to satisfy the proposed RVO at current ethanol proportions. In fact, more stringent CAFE standards and other fuel efficiency guidelines will continue to exert an opposite, downward pressure on total fuel consumption even as ethanol volumes increase.

Ethanol manufacturers would like to see more widespread use of E15 or E85 in order to alleviate the glut of ethanol created by the rule, but there is little appetite among consumers for higher blends of ethanol. According to the American Automobile Association (AAA), 85 percent of vehicles on the road are not designed to use gasoline with more than 10 percent ethanol, and 94 percent cannot use E85. Misfueling can cause major damage and/or violate a vehicle’s warranty. Boats, motorcycles, and other small engines are also not equipped to use blends over E10. In addition to engine problems caused by higher temperatures, corrosion, and even phase separation, as ethanol content increases, consumers are also subject to overall higher spending on gasoline. Because a gallon of ethanol contains roughly two-thirds the energy of a gallon of gasoline, as ethanol content increases gas mileage decreases, forcing consumers to fill up more often.

Furthermore, few consumers are even able to utilize E85 – only 2 percent of gas stations can provide the fuel. This paucity is directly related to the cost of upgrading those facilities, which can run as high as $200,000. The small business owners who run most gas stations operate on very thin margins and cannot afford such an investment, especially when the return is so uncertain. E15 faces similar demand and infrastructure problems.

The U.S. Department of Agriculture has tried to address the high cost of infrastructure upgrades by funneling hundreds of millions of dollars toward blender pump installation. This has proved to be a serious misuse of taxpayer dollars. R. Timothy Columbus, partner at Steptoe & Johnson, LLC on behalf of the Society of Independent Gasoline Marketers of America (SIGMA) and the National Association of Convenience Stores (NACS), explained at a recent House Energy and Commerce Subcommittee hearing, this is not a “build it and they will come” scenario.

Mr. Columbus testified that the core problem with higher ethanol blends is that there is simply no significant market demand, and hence little profit or acceptable risk for gas station owners to sell E15 or E85. He stated:

More than anything else, the number one trait of any successful retailer is an ability to identify what his or her customers want to buy, and then sell that product at a cost that enables the retailer to earn a profit. Motorists do not purchase products because members of SIGMA and NACS sell them; members of SIGMA and NACS sell products because their customers purchase them. To date, very few retailers selling mid to high level ethanol-gasoline blends such as E15 or E85 have seen substantial sales of these products. Quite the opposite: most retailers that sell E15 or E85 have seen minimal sales of these products. Indeed, retailers have found that even consumers with E85-compatible-flex-fuel vehicles tend to purchase E10.

Together, these factors severely limit the potential market for higher blends of ethanol and make it unlikely that there will be a dramatic increase in demand for ethanol in the near term. This leaves fuel producers with few options when it comes to complying with the proposed volumes. Refiners could be forced to reduce production of E0, the preferred fuel for boats and many small engines, as well as E10, which would necessarily increase prices at the pump for consumers.

Over the past year, Americans have saved about $20 billion on gasoline, almost $200 per household. These low gas prices have been a boon to American consumers at a time when anemic growth compounds worries about future economic stability. To low-income Americans, who spend roughly 11 percent of their income on fuel costs (compared to the average household that spends 4 percent), these savings have been especially beneficial.

Unfortunately, if the EPA proceeds along the plan outlined in the rule these savings could be eliminated. Higher prices at the pump are only one immediate source of increased costs for consumers as greater transportation costs flow throughout the economy; raising the price of food and other goods that travel long distances.

These compounding costs effectively constitute a type of “hidden tax” that pervades the economy and hurts consumers whose budgets are already stretched thin due to rising health care costs, stagnant wages, and a rocky economic recovery.

For instance, corn ethanol production diverts 40 percent of the corn crop into fuel. This increases the prices of feed for livestock such as poultry, pork, and dairy – costs that are necessarily passed onto the consumer. According to the Environmental Working Group, the corn ethanol mandate has been a factor in the closure of more than 60,000 pork, poultry, and beef operations since 2007.

A government-guaranteed market for one product artificially increases its value, making formerly marginal land worth the labor necessary for even small yields and decreasing the availability of land for other crops. This has distorted ecosystems and has led to higher prices for other food input commodities such as wheat.

The widespread damage imposed by the RFS is an urgent reminder that government mandates make for bad economic policy. In a functioning marketplace for fuel –  renewable or otherwise – the ill effects described above would be quickly mitigated as a sustainable price equilibrium is reached between consumers and producers. An intractable government mandate is an obstacle to ever attaining such a balance.

In 2005 and 2007, when the RFS was enacted, Congress woefully misread future gasoline consumption and other market conditions, to the great detriment of consumers. Taxpayers have no reason to be more confident in the EPA’s current outlook, on which the proposed RVOs before us are predicated.

Rather than further tinkering with a broken policy in an attempt to force more of a product into an unwilling marketplace, the EPA has the authority and responsibility to set some sensible boundaries on this policy in the absence of Congressional action. The RVO levels established by the proposed rule continue to impose a significant cost to consumers; they should be brought into line with demand and avoid increasing ethanol content in the fuel supply.

I hope the EPA will find these comments useful in its deliberations.

Sincerely,

Pete Sepp, President