Mandates and taxes

July 9, 2012
By rule of the US Supreme Court, a penalty imposed on failure to fulfill a congressional mandate represents a tax. This historic determination should inform regulation of ethanol made from cellulose for blending into gasoline.

By rule of the US Supreme Court, a penalty imposed on failure to fulfill a congressional mandate represents a tax. This historic determination should inform regulation of ethanol made from cellulose for blending into gasoline. Indeed, a bill addressing the ethanol abomination emerged in Congress the day after the Supreme Court disclosed its analogous decision on health-care reform. The timing is interesting. But the legislation, useful as it is, doesn't go nearly far enough.

The court decision upheld the Affordable Care Act of 2010 and its controversial requirement that individuals purchase health insurance. In a twist certain to be discussed for many years, the court rejected the argument, made by supporters of the law, that Congress was constitutionally entitled to issue the mandate under its authority to regulate commerce; instead, five of nine justices said the mandate could stand under congressional authority to levy taxes. The health-care law imposes a penalty on citizens who don't buy health insurance. That, according to the high court, is a tax.

Similar mandate

A mandate for the sale of specified volumes of cellulosic ethanol with gasoline works similarly. The Environmental Protection Agency sets requirements for several types of renewable vehicle fuel each year, based on volumetric targets in the Energy Independence and Security Act of 2007 and adjustments the statute allows it to make. EPA calculates percentages of anticipated fuel output required nationwide to meet the statutory volume targets in each renewable-fuel category and applies those factors to sales of obligated refiners, blenders, and importers. Fuel suppliers unable to meet their requirements in any of the categories must buy waiver credits, essentially paying a penalty.

A direct mandate for cellulosic ethanol took effect in 2010, although the material also can fill a requirement for "advanced biofuel," which started in 2009. The direct requirement began at 100 million gal and rises yearly to a plateau level of 16 billion gal in 2022. This year's statutory requirement is 500 million gal. Because US capacity to produce cellulosic ethanol falls below the statutory targets, EPA has exercised its authority to set lower mandates. This year's requirement is 8.65 million gal. But even that greatly shrunken target creates problems. Cellulosic ethanol remains unavailable in meaningful amounts. No one is producing it commercially. But refiners and other obligated parties still must satisfy the mandate or buy waiver credits. Last year, when the mandate was 6 million gal, they paid $6.8 million.

The industry has complained that this works like a hidden tax. The Supreme Court now has made clear that it's more than like a tax; it is a tax. In relation to sales of the business that supplies US vehicle fuel, the amount isn't great. But it will increase as long as requirements grow for a substance that doesn't exist. And the unfairness will be compounded soon when a rising requirement for ethanol made from corn exceeds the amount needed by the US gasoline market.

The EPA could waive the requirement for cellulosic ethanol until the material becomes available. Instead, it continues to require the sale of something that doesn't exist and to collect penalties—taxes—for failure to do the impossible. Can this be what Congress intended?

Welcome gesture

The new legislation at least acknowledges this second-worst part of the problem with cellulosic ethanol. Introduced by Rep. Jeff Flake (R-Ariz.), the Phantom Fuel Reform Act would require EPA to base its annual requirement for cellulosic ethanol on actual industry production rather than predictions that have yet to come true. If it passes the House, the bill won't survive in the Senate. But it's a welcome gesture.

Much better would be congressional action on the worst part of the fiasco with ethanol, cellulosic or otherwise. The worst part is the existence of volumetric mandates set by the government for sales of any kind of fuel, renewable or otherwise.

Congress created that corrosive problem. Congress should admit the mistake and solve it.

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