The End of the Political Ethanol Juggernaut

Last week, the Environmental Protection Agency reached agreement with gasoline refiners to issue long overdue rules implementing the federal Renewable Fuel Standard (RFS). The annual RFS rules set the volumes of ethanol and biodiesel that must be blended into the U.S. transportation fuel supply. The consent decree obligates EPA to issue final RFS rules for 2014 and 2015 by November 30 of this year.

EPA’s delay in issuing the rules, which in the case of 2014 is more than a year late, has forced refiners to guess at their legal obligations to blend renewable fuels and has resulted in unnecessary market uncertainty that ultimately harms the U.S. refining industry, biofuel producers, and consumers.

So while the fight still continues among policy hacks in industry over whether we should be pursuing an ethanol policy, let me be clear: the shine – both political and real – is off the ethanol industry, and its product is headed for oblivion.

Some are calling for Congress to scrap it entirely. But EPA has handled the issue so poorly that even advocates are reluctantly admitting something needs to be done to fix the program.  Recently, the advanced biofuels industry’s lead spokesman broke from the unified support of the past to call for much needed ethanol reforms.

It is hard to believe given the once powerful ethanol lobby’s standing. But problems with greenhouse gases, fraudulent credits, disagreement over setting standards, lower demand for  gasoline and a growing oil abundance in the U.S. have underscored fundamental flaws with ethanol.

The first serious cracks showed in December 2011 when, in a major loss, the ethanol industry had its tax credit and some tariff protection tossed aside, ending an era in which the federal government provided more than $20 billion in subsidies for the product.

Then, as we approached larger volume requirements, it became clear that Congress missed badly due to overly optimistic projections codified in 2007 energy law.  This failure was generally caused by the next generation biofuels industry’s inability to commercialize in the volumes necessary to meet the new targets.  And it hasn’t been for a lack of trying as Congress, the Obama administration, industry, biotech engineers and the farm community have all pushed forward with dollars, incentives and sweat equity.

The lack of new cellulosic blends forced the corn ethanol industry to search for ways to increase volumes in fuel or raising the blend wall from 10 percent ethanol to 15 percent.  But these changes forced ethanol’s hand in the wrong direction because of economic factors inside and outside the U.S., volumes outgrowing regulatory limits, concern over warranty terms governing U.S. automobiles and flattening gasoline demand.

Finally, the straw that broke the camel’s back occurred just before Thanksgiving last year when EPA  decided that it would not finalize its 2014 RFS proposal and decided to set final 2013 and 2014 targets this sometime this year, potentially with new requirements for 2015.  What they do this November is anybody’s guess, but it will be almost three years too late.

Perhaps ethanol’s bigger problem – if there could be one other than the flawed product – centers around gasoline supply and demand pressures. The renewable fuel target of 15 billion gallons by 2015 reflected gasoline demand assumptions of 150 billion gallons a year by the middle of the decade. Instead, using EPA’s “real world” vehicle efficiency estimate, demand is in fact shrinking to an expected 108 billion gallons per year of U.S. demand by 2022. And with new fuel economy standards likely to be implemented, that demand will fall exponentially more.  So while trying to expand, ethanol producers face a shrinking, saturated market.

For years, ethanol policy advocates have pursued bigger mandates, bigger targets, trade protection and more tax breaks. In both 2005 and 2007, they were thrown big bones because the majority – both Democrats and Republicans – pushed ethanol forward as a renewable fuel-based environmental solution.  They also said it helped farmers and created jobs.  While some of that is true, it is hard to exaggerate the extent to which ethanol generally has disappointed Congressional, industry and consumer expectations.

And now we’re at the start of the 2016 Presidential campaign, with Iowa in the front of politicos’ minds.  With ethanol reeling, expect candidates to not run away from it – which would be fatal in the corn-rich Hawkeye State – but not embrace it either.  It will be a delicate dance for candidates who aren’t big fans of ethanol and know the program is in desperate need of reform.

Ethanol’s fate has been defined by its penchant to play political blame games rather than meet challenges.  While ethanol often won short-term battles over things like tariffs, tax credits, mandates and MTBE, its fundamental flaw has always been that it was a poor product that just could never really progress to a second generation.  Having been completely exposed now by EPA mismanagement, it will suffer a fate like so many other products that fought to stay the same, like film, records and floppy disks.

I suspect American voters have finally had enough of the ethanol experiment.  And Iowa’s farmers will survive.  Now they are harvesting wind to sell to power companies feeding power-hungry consumers. I suspect that market will be more sustainable than the last 30 years of ethanol folly.

Frank Maisano is a senior principal in Bracewell & Giuliani LP’s government relations and strategic communications practice and is a Founding Partner in the firm’s Policy Resolution Group.