The Great Ethanol Debate: Status Quo Or New Paradigm?

Sometimes there is a total disconnect that takes place somewhere between an idea that I have in my head, and a reader's interpretation of what I am saying. Whether I communicated poorly, or the reader filled in some blanks because they assumed I was saying something else, sometimes I receive responses that don't remotely correspond to what I actually wrote.

I am happy to report that today's column addresses a reader who understood me clearly, and who responded in a clear and informative manner.

Following my recent series of ethanol articles, the most substantive reply came from Douglas A. Durante, who is the Executive Director of the Clean Fuels Development Coalition, a pro-ethanol advocacy group.

Doug wrote and asked for an opportunity to clarify several points, and to challenge some of my arguments. I agreed, so we conducted a back and forth debate covering several topics. We were both satisfied that the conversation fairly presents our respective positions, as well as the objections to those positions.

In this first installment, we discuss the origins of the Renewable Fuel Standard (RFS), and debate whether a different approach is needed (my position). In Part 2, we will discuss Doug’s contention that EPA has engaged in an ongoing battle that has hurt the ethanol industry.

In addition to identifying Doug below, I will put his comments in block quotes so it's clear which one of us is responding.

Doug: With respect to your recent ethanol articles, I would like to give you a different perspective.

By way of introduction, I have been working in ethanol a long time -- longer than just about anyone in the business today. I was on the Clean Air Act Regulatory Negotiation team establishing the original clean fuel programs that morphed into the Renewable Fuel Standard (RFS), an adviser to the Senate committee establishing the RFS, and countless state and local air pollution commissions. I don't work for any of the ethanol associations or the corn growers, although I do interact with some of them and I represent some ag interests and ethanol-related firms through our broader coalition.

I appreciate the fact that you have not engaged in attacks in the pieces you are writing but there are so many other moving parts that you need to consider. The RFS is a necessity until the Environmental Protection Agency (EPA) stops their 30-year vendetta against ethanol and allows ethanol to compete. Using oil company engineers to put a thumb on the scale when measuring ethanol's emissions is not a fair fight and the revolving door of oil interests in and out of EPA has made it impossible for ethanol to compete."

Robert: Well, the core of my proposal is to get the federal government entirely out of this business and shift market control to the states where ethanol enjoys more political power. That would make EPA largely irrelevant when it comes to growing ethanol markets. Certainly, EPA will continue to regulate emissions across the country, and in some cases oil refiners may find that the only way they can meet those emissions is to blend ethanol. Or, a refiner in California might instead opt to blend methanol or build a new alkylate unit.

My proposal would involve tilting the playing field in the Midwest toward higher ethanol blends, because that would be a long-term secure market for the ethanol industry that won’t suffer from a shifting four-year cycle.

Doug: I’m all for making EPA irrelevant but it’s their sandbox. There are so many fundamentals missing from these arguments as to why we created an RFS in the first place. We passed an RFS –twice, because it was so successful the first time—to meet multiple public policy objectives. For starters although it was finalized in energy legislation, it was an amendment to the Clean Air Act to remove the oxygen requirement in reformulated gasoline used in the nation’s largest cities to control ozone.

But it did not relieve the petroleum industry from what Congress deemed was the need to diversify their slate of products by using renewables. Ethanol is a source of oxygen to facilitate complete combustion while providing non-toxic octane, diluting sulfur, and providing other benefits. Secondly, we were headed towards 60% oil imports at the time with a massive transfer of wealth out of the US and vulnerable to the slightest blip in world markets. Third was the need to increase demand for agricultural products and provide a stimulus to the rural economy.

I just don’t understand how people can suggest these are not national goals that benefit the entire country. To get national benefits you need national policies and the RFS was the solution to a lot of problems, and still is.

Your last column saying ethanol has a sense of entitlement may have some truth to it but there is plenty of justification for that."

Robert: This is the never-ending argument. Not everyone agrees that there is justification for it. So, it will always be a fight among vested interests. Sometimes, those interests that are lined up against ethanol are going to gain the edge, as they have since President Trump was elected. Whether you believe there is justification or not, this back and forth will continue unless the Midwest takes control of their own markets.

Doug: Not sure why you keep trying to make ethanol a niche, Midwest fuel.  We don’t restrict gasoline to the oil patch. Ethanol makes gasoline better. We use gasoline everywhere.  If refiners can come up with something better then they don’t have to use ethanol."

Robert: There seems to be some confusion around what I am suggesting. I am not trying to restrict ethanol. I am trying to increase ethanol consumption in places where it won’t be as susceptible to decisions by the federal government. We have niche fuels all around the country. The whole state of California has their own fuel standards. Many cities have specific standards for a fuel’s vapor pressure, and that changes throughout the year.

So, I just don’t see a problem in having a huge Midwest corridor in the middle of the country that runs primarily on E85 (or E30). It’s such a huge potential market and could have the political support of many Midwest states. Nowhere do I call for restricting ethanol. Not mandating something isn’t the same thing as restricting it.

Doug: I don’t see a problem with that either, but in the world’s largest gasoline market why would anyone be happy to be limited in their application?  The E85 idea is just one use. And again, we are sort of agreeing on the evils of the whims of government."

Robert: But you wouldn’t be restricting ethanol to the Midwest. You would just be encouraging more consumption there where the politics are in your favor. So, I don’t see a limitation, beyond the economics.

Doug: This leads us to something else we have talked about that if regulatory barriers were removed it could make the RFS irrelevant and allow ethanol to compete like any other fuel or additive."

Robert: What are some examples of these regulator barriers? I am all for removing barriers and providing incentives. I am against federal mandates that can wax and wane, but which impact the ability to make decisions on long-term capital projects.

Doug: Agree on the risk of hot-one-day-cold-the-next requirements. Just ask the utility industry and how the renewable portfolio requirements have whipsawed them.

But we do need quality controls on gasoline. I sense you do fall into the trap of forgetting this is an environmental program -- Congress adopted a renewable policy because it protects public health. Energy security and jobs/economic stimulus/rural support are additional benefits. And not incidental benefits -- they are part of the program."

Robert: Yes, there have always been these sorts of controls on gasoline. And, there should be. The objection I have is this one-size-fits-all mandate that ethanol is required to meet these specification. I maintain that sometimes this may be the case, but sometimes it isn’t.

And can you definitively say that ethanol has been an unqualified environmental success? Has anyone done a comprehensive assessment of all the environmental impacts – good and bad – of this massive increase in ethanol production? I am talking about everything from the change in air pollutants in congested cities to the impact on water quality in the Midwest. There are many peer-reviewed studies that focus on the negative environmental impacts as you know. I am just wondering if anyone has ever tried to objectively summarize the overall impacts in one comprehensive study.

Doug: We certainly have studies as well. Working with the Urban Air Initiative we have several independent new studies from the University of California Riverside, North Carolina State University, and an extensive meta-analysis showing significant emission improvements with higher ethanol blends. We have submitted extensive comments on the deficiencies in EPA modeling, both in terms of lifecycle analysis and emissions. I’ll concede that is an ongoing battle of studies but our argument is the manner in which these studies and tests are conducted does not reflect how fuel is blended in the real world.

Let me come back to the list of regulatory items that would be game changers, but first I would ask you and others who continually say the RFS requires obligated parties to blend ethanol into gasoline to STOP SAYING THAT. There is no such requirement in law, ethanol is simply one of the choices available and one they choose. Biodiesel, renewable natural gas, butanol, and even renewable methanol would be eligible. Corn ethanol shouldn’t have to apologize for being the most cost-effective way to comply with a renewable standard. Oil companies supported the RFS for that very reason -- so they could choose when, what, where and how to use renewables."

Robert: I have not actually seen much support from the RFS from the oil industry. Even Valero, which owns ethanol plants, has spoken out against the costs imposed on them under the current system. I think they are more than happy to have ethanol as an option to meet their octane requirements, but they oppose being told they must blend X% ethanol and they must bear the financial burdens associated with that.

I am extremely sympathetic to the plight of rural America, having grown up on a farm there. But I vehemently disagree with the way the ethanol industry is structured. It has always been a dependent of the federal government. I don't know why the ethanol industry has been so content to rely on federal mandates to create their markets. I have warned since the beginning that this wouldn't give them long-term prosperity. The status quo has put us in the position where the answer seems to be “We need more status quo.” That, in my opinion, is not a sustainable solution.

Doug: Well, OK, but in terms of being dependent on the federal government, what other industry that provides benefits to certain sectors and is deemed by every president from Carter to Trump, and Republican and Democratic Congress to be in the public interest then has to sell to its competitors? Does anyone believe the oil industry got where it is today without tax incentives? In corn ethanol’s case the tax incentives are now all gone. And I agree we need to build the industry on a sustainable basis but is a 10-15% share of a 140 billion gallon gasoline market too much to ask for as a base and a backstop? These are job creating, tax generating, food producing, pollution reducing businesses….isn’t it in all our interests to foster that by at least mitigating the risk factors, like not being able to sell your product?"

Robert: I think the relative tax breaks of the oil industry versus the ethanol industry are apples and oranges, but that’s an entirely different debate. Let me just say that large portions of the country don’t agree with the arguments you make above. It would appear at the moment that President Trump doesn’t fully agree that the benefits outweigh the costs to small refiners. A federal mandate isn’t a sustainable model. Midwest-driven subsidies and legislation designed to increase ethanol consumption would be because Midwest politics will always support ethanol.

To be continued...