For anyone wanting governments to make planet-saving energy choices, the US Renewable Fuel Standard should be instructive. This experiment in centralized energy decision-making began with the Energy Policy Act of 2015 and was expanded into the RFS by the Energy Independence and Security Act of 2017 (EISA).
The record does not sparkle with success. In fact, the RFS has succeeded mainly in expanding the market for corn as a feedstock for ethanol, by far the dominant renewable fuel. Assessed against national interests, the RFS has failed. The question now is whether politicians learn from mistakes.
Several lessons can be extrapolated from recent developments with the RFS:
• Governments do not predict energy markets well. That’s not to disparage governments. No one predicts energy markets well. But the politicians who run governments won’t confess to the weakness. When setting annual, volumetric targets for the RFS, Congress predicted substantially more growth in demand for gasoline than has occurred. For 2020, the EISA required that 30 billion gal of ethanol-equivalent renewable fuel be sold in the US. This month, the EPA used authority to adjust requirements in accordance with market realities to propose 20 billion gal instead. And that’s probably too high.
• Governments cannot regulate technology into practicability. The EISA required that 10.5 billion gal of ethanol-equivalent cellulosic biofuel be sold in 2020, aiming to create an industry for the manufacture of ethanol from plant waste. The industry scarcely exists. EPA set the 2020 requirement at 540 million gal. Most of that will be liquefied and compressed methane from biological sources.
• Governmental fuel choices misfire strategically. The RFS was supposed to help the US address a fuel shortage that didn’t develop. It also was supposed to combat climate change. But as the US Government Accountability Office concluded in a study published last May, “To date, the RFS has likely had a limited effect, if any, on greenhouse gas emissions.”
• Market mechanisms do not give policies with sales mandates free-market legitimacy. The RFS can’t be said to be a market-driven program just because it features tradability of compliance credits called renewable identification numbers (RINs). Distortions created by sales mandates make RIN prices volatile and at times damaging to regulated entities and consumers.
• Industries profiting from markets expanded by sales mandates always want more. Ethanol and agricultural interests have extracted from the Trump administration a volatility exemption allowing year-around sales of ethanol containing 15 vol % ethanol. The move was opposed by vehicle, boat, and equipment manufacturers worried about engine damage, by environmentalists worried about increased evaporative emissions of ozone precursors, and by refiners knowing who will catch blame for engine problems. But it helps Trump politically in farm states.
• Industries profiting from markets expanded by sales mandates guard their special treatment as an entitlement superseding the interests of industries suffering correlative damage. Ethanol interests bitterly oppose exemptions from RFS obligations for small refiners, arguing—incorrectly, as American Fuel and Petrochemical Manufacturers recently noted—that it lowers ethanol demand.
• Industries profiting from markets expanded by sales mandates are never satisfied. Ethanol interests now wail that EPA’s 2020 biofuel requirements didn’t increase enough to offset the small-refiner exemptions.
The July 5 response by Sen. Charles Grassley (R-Iowa) to EPA’s 2020 RFS proposal was illuminating. “It’s unacceptable that EPA would set biofuel volumes below demand at a time when farmers, biofuels producers, and agribusiness owners are forced to shed jobs and close plants,” Grassley said. “I urge President Trump to compel EPA to reverse course and keep his word to the forgotten Americans who have faithfully stood with him.” The full statement said nothing about national interests. And Grassley’s second-guessing about demand for biofuels was duplicitous. RFS volumes are minimum sales requirements, not caps.
Governmentally directed energy consumption always creates problems and inevitably forces politicians, like Grassley, to parochially defend national mistakes. In the search for responses to climate change, keeping politics out of energy choice should be a priority.
