King_Canute_Feature_05-2014

Calling forth the biofuel tides

Legend holds that King Canute once marched his royal entourage to the shores of the ocean.  There, standing at the edge of the rolling breakers, he commanded the waves to stop.  Canute knew that his royal proclamation was useless. The king wished to show his advisers the limits of government decrees against the forces of nature.

If only Congress could learn that lesson.

I was reminded of Canute’s story when considering the latest Environmental Protection Agency numbers for cellulosic ethanol – a hoped-for alternative to corn-based ethanol made from switchgrass and wood chips. The 2005 energy bill and a 2007 revamp mandated increasing volumes of cellulosic ethanol be blended into the nation’s gasoline and diesel supplies each year through 2022.

Cellulosic_Mandate_Chart_05-2014There’s just one problem: Despite Washington’s mandates – which fall on refiners and producers of motor fuels like ExxonMobil – cellulosic ethanol doesn’t actually exist in any meaningful volumes.

Congress apparently felt that merely passing a bill was enough to bring it into existence. They hoped the mandate would be sufficient to incentivize the biofuels industry to develop this new product.

It has not worked out as planned.

Consider the most recently completed calendar year. Washington originally figured the industry could produce 1 billion gallons of cellulosic ethanol annually by 2013, so that’s where it set the mandate for last year. The ultimate hope is that 16 billion gallons per year will be produced by 2022.

As 2013 neared, however, EPA realized a billion gallons was a pipe dream. Using its regulatory discretion, the agency slashed the figure by nearly 99 percent to a new 2013 level of 14 million gallons. Later, EPA would lower the requirement again, this time to 6 million gallons. But even that proved a wild stretch.

In the end, the industry was able to produce less than one tenth of one percent of the original legislative mandate, and only 14 percent of the drastically reduced mandated figure.

A good write-up of the economic challenges facing cellulosic biofuels can be found here, and the numbers in the nearby chart are the modern-day equivalent of the waves lapping at King Canute’s feet – proof that a government order is meaningless if it flies in the face of reality.

Why should anyone care? Because, as I wrote in 2012, under the current law, refiners (and, indirectly, consumers) have to pay a fee for failing to blend cellulosic ethanol into existing fuel supplies. Meanwhile, because there is no alternative but to pay the fee, it has quietly turned into a revenue-raising device that contributes nothing to energy, growth or jobs.

In 2012, when barely 20,000 gallons of cellulosic ethanol were produced, refiners like ExxonMobil paid $17 million in waiver fees and fines for failing to meet a government mandate that was, quite literally, impossible to comply with.  Fortunately, this unfair requirement was overturned in court, and EPA was required to refund those fees. But it requires a lot of time and money to refight this battle each year.

A thousand years ago Canute ordered the tides to stay back. Today, Washington calls for tides of cellulosic ethanol to roll forth. Not surprisingly, neither command is heeded. At least with Canute, no one was penalized for the tides’ failure to recede.

 


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