You might have heard that the EPA has decided to authorize the use of gasoline with a 15 percent blend of ethanol (E15) – beyond the current 10 percent blend (E10) – in vehicles built since 2007.  In doing so, I think the government is actually demonstrating some real problems with the federal Renewable Fuel Standard (RFS) – problems that could hurt consumers, the auto industry and other businesses alike.

The RFS was originally created by the Energy Policy Act of 2005 and required 7.5 billion gallons of renewable fuel to be blended into gasoline by 2012 – a target later extended to 36 billion gallons by 2022 under the Energy Independence and Security Act of 2007 (or RFS 2).  At the time, many policymakers promised that an increased use of corn-based ethanol would result in reduced greenhouse gas emissions and cuts in oil imports.

Through this federal intervention, policymakers attempted to manufacture a minimum “market” for ethanol. But the numbers are a problem. Thirty-six billion gallons per year, if achieved by blending ethanol into gasoline, would amount to 20 to 25 percent ethanol in gasoline. The vast majority of vehicles in use today – as well as marine and small engines — are not guaranteed to operate safely on ethanol blends higher than E10. Only about 3 percent of today’s vehicles are flex-fuel vehicles that can accommodate greater amounts of ethanol, and that percentage will grow slowly as new flex-fuel vehicles are introduced. Further, many flex-fuel vehicle owners prefer to use gasoline, which provides better fuel economy than high-level ethanol blends. And it’s worth mentioning that ethanol is almost always more expensive on an energy-adjusted basis than gasoline.

The recent economic decline exacerbates this problem. Fewer new vehicles are being sold, and demand for gasoline has dropped — yet the annual volumes of renewable fuels mandated by RFS remain fixed.

EPA’s E15 waiver attempts to address this problem.  

But introducing any new transportation fuel, such as E15, is a complicated process. Most engines have not been tested for E15, and it’s possible that vehicle warranties could be voided if vehicles suffer damage from higher ethanol blends. Additionally, most service stations do not have tanks and pumps that are certified for dispensing the higher ethanol blends – and the time required and costs of installing new equipment are significant.

A diverse coalition of stakeholders opposes a rushed E15 waiver for a variety of reasons:

• Environmental organizations, such as the Natural Resources Defense Council and Environmental Working Group, are concerned with land-use issues that could lead to increased greenhouse gases from corn ethanol production as well as with increased water and pesticide use.
• Food producers are concerned that using more corn for fuel could increase the cost of feeding livestock and poultry, thus increasing the overall costs for food production. 
• The automobile industry, marine manufacturers, small engine manufacturers, and consumer groups are concerned that E15 blends could damage engines and exhaust systems because, as I mentioned, very few engines (with the exception of flex-fuel vehicles) are designed to run on fuels with an ethanol content higher than E10.
• Retailers are concerned about confusion at the gas pump and potential for similar liability claims should drivers fill up their vehicles with the wrong fuel blend. Or, consumers could inadvertently use E15 blends for small engines such as lawnmowers or other machinery, which could cause damage. 

Lawmakers from both political parties are also concerned.  Leaders of the U.S. House Energy and Commerce Committee wrote to EPA Administrator Lisa Jackson in July, stating “[s]ome in Congress believe that renewable fuels can play a role in improving our energy security. However, these fuels can only play this role if they are introduced in a manner that adequately protects consumers. They must be integrated into the fuel system in a way that does not damage people’s cars, trucks, lawn mowers, boats, or other non-road equipment. … While E15 may work well in some types of vehicles, preliminary information raises significant questions about whether, in other types of vehicles or engines, E15 may cause durability or operability problems, or increased air pollution.”

Beyond the specific E15 issue, many observers have questioned government support of ethanol in general. They have seen that the federal government has provided substantial subsidies for ethanol fuel for more than 20 years, yet economic studies have concluded that the ethanol market could collapse without federal subsidies. Why? Observers and economists point to the fact that there are virtually no economies of scale associated with ethanol processing; production costs have not declined significantly over time; and ethanol production is a very mature technology.

Robert Bryce, senior fellow at the Manhattan Institute, summed up the situation in the Washington Examiner: “Why does the ethanol industry need a bailout?  Amazing as it may sound, because it was given too much in the way of subsidies and mandates.” 

What do you think?