Gasoline prices hit a six-year high this
week amid the Colonial Pipeline shutdown and a rebound in demand as
more people hit the road. But
one overlooked cause of
higher prices at the pump is
Congress’s ethanol mandate.
Economists aren’t the best
at predicting how markets or
technologies will evolve, but
politicians are worse. In the 2007 Energy Independence and Security Act, Congress required
gasoline sold in the U.S. to contain increasing
volumes of “renewable” fuel—i.e., ethanol from
corn, algae and cellulosic waste.
The bill, in its unwisdom, tasked the Environmental Protection Agency with assigning
refiners and importers annual quotas for ethanol they must blend into gasoline or diesel fuel.
The businesses get tradeable credits known as
renewable identification numbers (RINs) for
each gallon of renewable fuel. Those that don’t
meet their quotas have to buy RINs from other
parties to comply.
Congress’s ethanol requirements were never
realistic, though its real goal was to boost corn
farmers in the Midwest and the nascent “advanced” biofuels, which are still nascent. The
blending mandates have become increasingly
unattainable as fuel economy has improved,
which is harming smaller refiners and pushing
up gas prices.
Refiners are crashing into what’s known as
the “blend wall”—i.e., the volume of ethanol
that can be sold given existing cars and infrastructure. Warranties don’t allow older cars to
run on ethanol blends higher than 10% because
it can corrode engines. Ditto storage tanks and
pumps at the gas station. The EPA has repeatedly reduced the targets—last year by 33%
overall—though small refineries have still
struggled to meet their quotas. Some spend
more on compliance and RINs credits than on
payroll, electricity and utilities.
As allowed under the law, the Trump EPA
granted some small refineries “hardship”
waivers from their quotas, only to be sued by
the ethanol lobby. The Tenth Circuit Court of
Appeals invalidated the waivers in January
2020. Afterwards RINs prices started creeping
up as traders who buy and
sell the credits anticipated
more refiners would need
credits.
RINs prices have been rising even more this year since
the Biden Administration has
signaled that it will ratchet up the ethanol
mandates and issue fewer waivers. The Biden
EPA also backed the Tenth Circuit’s ruling,
which the Supreme Court heard on appeal in
April. The Justices seemed conflicted over
EPA’s discretion under the law to issue the
waivers.
Hence, RINs prices shot up again. Corn
prices have skyrocketed 125% in the past year,
pushing up ethanol and RINs prices. RINs this
week were trading at $1.90 per gallon, up from
15 cents in January 2020. Our sources estimate
the ethanol mandate is adding about 30 cents
a gallon to the wholesale cost of gas on average. The federal gas tax is 18.4 cents.
Meantime, since the blending requirements
that Congress set end in 2022, the Biden EPA
is now working on new biofuel mandates for
subsequent years. The Obama EPA during its
final months considered assigning RINs credits
to electric-vehicle manufacturers and charging
stations, which companies could then sell to
refiners to boost their bottom lines.
Tesla has asked the EPA to revive the idea
to help super-charge the electric-vehicle industry. Tesla already makes hundreds of millions
of dollars each quarter selling regulatory credits that auto makers need to comply with fueleconomy mandates. Selling RINs credits would
give EV companies another subsidy while raising costs on fossil fuels—i.e., drivers of gaspowered cars.
The renewable fuel mandate is a classic example of a policy that benefits a few who pay
close attention while dispersing harm across
the many. Congress ought to repeal it, but the
ethanol lobby owns too many Members.