Innovation and Stagnation: Ethanol and the Renewable Fuel Standard
Innovation and Stagnation: Ethanol and the Renewable Fuel Standard
By Arthur R. Wardle
The 20th century saw incredible strides in agricultural innovation, with major technological improvements revolutionizing the whole supply chain from the seed to the supermarket. Many of these innovations were made possible by combining private and public investment through institutions like the cooperative extension system. Indeed, these new developments enabled the yield improvements that made the last century’s unprecedented population and economic growth possible.
Against this backdrop, agriculture boosters in government continue to develop new programs with the stated aim of encouraging new agricultural innovations and the development of new markets for agricultural products. With so much success in the rearview mirror, it is easy to become uncritical of proposals for subsidizing even further innovation.
That credulity can cause major mistakes. Claims of upcoming innovations can lull policymakers into setting up subsidy programs that are difficult to remove when the promised technologies don’t pan out. The Renewable Fuel Standard (RFS) – an ambitious policy aimed at advancing a U.S. biofuel industry – offers a clear example of how this impulse can result in tremendous waste chasing innovations that are consistently “just a few years away.”
President George W. Bush invested heavily in getting the RFS passed, alongside a coalition of environmentalists, farmers and biorefiners. Advocates argued that using biofuels to transition away from fossil fuels could mitigate climate change and reduce American reliance on foreign oil producers. These arguments were evidently well-received, as the initial RFS passed with supermajority approval.
Using ethanol produced from feedstocks like corn or sugarcane to power vehicles was not a new idea—the engine of the Ford Model T was capable of running on ethanol from its introduction in 1908. What drew newfound attention in the mid-2000s was promising new developments in cellulosic ethanol: scientific advancements in creating fuel from the green parts of plants that would otherwise be discarded, like corn husks, or from grasses that could be grown on otherwise useless farmland. This would offer obvious advantages over feedstocks that directly compete with food like corn or sugarcane.
The fascination with cellulosic biofuel’s potential prompted many new subsidies and mandates, with the RFS being chief among them. The backbone of the RFS is a set of nested mandates that require fuel blenders to include various biofuels in their gasoline and diesel products.
In creating the RFS, Congress understood that cellulosic ethanol technologies were still in early development stages. To pave the way for cellulosic ethanol’s takeover, the RFS called for large and increasing ethanol blending mandates, beginning with only miniscule requirements for cellulosic ethanol that expanded dramatically over time. In the interim, the majority of the mandate could be met with corn ethanol. The 2010 statutory requirement, for example, required 12.95 billion gallons of biofuel blending, only 650 million of which needed to come from cellulosic feedstock.
By 2015, the portion of the mandate that could be satisfied with corn ethanol was supposed to cap out permanently, with future growth driven entirely by more advanced feedstocks. The hope was that corn ethanol mandates would prepare a market for cellulosic ethanol production so that new technologies could hit the ground running when finally ready for industrial-scale production. The promise of steadily increasing blending mandate for cellulosic biofuels would give the industry the security necessary to jumpstart investment.
Understood as a policy for getting cellulosic ethanol production off the ground, the RFS has been an unbelievable failure.
By statute, the 2021 mandate for cellulosic ethanol was supposed to be 13.5 billion gallons. Despite a guaranteed market for any cellulosic ethanol produced, the country as a whole managed to generate only 568.4 million gallons of RFS-qualifying cellulosic ethanol in that same year, less than 5% of the envisioned mandate. That figure assumes none of the cellulosic ethanol production was fraudulent, though fraudulent biofuel credits have repeatedly dogged administration of the RFS program. The technological advancements Congress envisioned never materialized and further progress seems to have stalled.
Statutory and Revised RFS Mandates 2010-20221
Faced with the ridiculous proposition of having to enforce a blending mandate for cellulosic ethanol that does not exist, the EPA has instead revised the RFS mandates year after year to bring blending requirements in accordance with reality. As a result, almost two decades since the beginning of the Renewable Fuel Standard, corn is still king and we’re continuing to mandate billions of gallons of blending for a biofuel that's older than the internal combustion engine.
It’s difficult to justify a mandate for corn ethanol blending without the promise of a transition to cellulosic ethanol. Recent figures indicate nearly 45% of U.S. corn is directed towards ethanol production.
Growing all that corn for ethanol production means less land for food production and natural preservation; the flagship Conservation Reserve Program has hemorrhaged enrollment in the Corn Belt since the RFS’ passage.
It also aggravates the many environmental issues associated with corn agriculture, including runoff of fertilizers into waterways, drawdown of groundwater aquifers and more, without any real climate benefit in comparison to traditional fossil fuels. The EPA’s own recently-released draft triennial report summarized its findings by saying the environmental impact of the RFS is likely negative.
After years of sputtering and with no obvious wave of cellulosic production capacity approaching, why keep the RFS around? Major opportunities to rein in the RFS have come and gone with no action. The public interest case is horribly weak, but the political explanation for its persistence is quite clear.
The RFS induced investment in corn ethanol biorefineries, cropland expansion and farm intensification. The farmers and biorefiners that have benefited from mandated markets for their products have every incentive to get Congress and the EPA to keep the program alive. The costs of the program, almost entirely pushed to consumers in the form of higher fuel costs, are dispersed among enough people that mounting organized opposition is difficult.
Importantly, the coalition keeping the RFS on life support has no reason to consider the cellulosic mandate as anything more than a fig leaf, leaving even less reason to expect anything more than ongoing stagnation. During the EPA’s annual mandate revisions, the ethanol lobby is out in full force to preserve the total volume of the overall mandate but is noticeably quieter about what portion of that volume ought to come from cellulosics.
In attempting to push cellulosic biofuels, Congress and the EPA have instead mired us with a seemingly permanent mandate for long-understood and environmentally detrimental fuels. The politics of eliminating the RFS are not favorable, largely because those invested in its continuation are much better politically organized than the opposition.
Of course, orchestrating a transition to innovative technology is no simple task, and there is no way of knowing ex ante which innovations will succeed and which will fail. The important point is that the heavy hand of government mandates and subsidies often lack an off-ramp and can easily impede progress rather than advance it.
As the RFS has spun its wheels, private investors interested in advancing clean energy in the transportation sector have all but abandoned biofuels in favor of electric vehicles and other technologies. What little interest remains in developing biofuel-focused vehicles seems aimed more towards soaking up the excess corn ethanol produced under RFS mandates than any optimistic vision of a cellulose-powered future.
Though its production volume would undoubtedly shrink without the captive market guaranteed by the RFS, corn ethanol production would continue in a world without an ethanol mandate thanks to its use as a fuel oxygenate. In absence of the RFS, the most productive biofuel refineries would persist and supply this need, while the Corn Belt could return its focus to being the breadbasket of the country.
Rather than pivoting, Congress and the EPA continue to allow the RFS to metastasize. Innovation policy, in agriculture and elsewhere, needs to consider how the incentives of regulatory bureaucrats differ from those in private industry and account for how to keep policy nimble. Otherwise we’ll keep falling for false transitions, allowing hopes of future developments to provide cover for senseless interventions.
Further Reading:
The figure depicts the mandates for overall biofuel production and the portion of that mandate reserved for cellulosic biofuel under the Renewable Fuel Standard. Statutory mandates were set out in the Energy Independence and Security Act of 2007, revisions are conducted by the EPA to align the statutory mandates with market reality. All data comes from this Congressional Research Service report, which includes further information on court decisions that affects actual mandate volumes. Total mandate volumes are calculated as the sum of the conventional, advanced, and cellulosic ethanol mandates plus the biomass-based diesel mandate expressed in ethanol-equivalent units.