The federal government is charting a different course for ethanol as early ambitions for renewable fuels have run into a different reality at the pump. Nebraska is the nation’s number two ethanol producing state behind Iowa, and a top corn state.
Each year, the EPA issues a rule determining how much ethanol oil companies must combine with the gasoline supply. For the first time, the EPA is proposing a reduction in the mandate for corn-based ethanol.
The original plan in the Renewable Fuel Standard (RFS) would mandate 14.4 billion gallons of corn ethanol next year. However, in the proposed 2014 numbers, the EPA pares that amount down to around 13 billion.
The agency often lowers the quota for biofuels like cellulosic ethanol - which can be made from switchgrass or corn stalks - when there’s not enough in production to meet the government’s goals. But corn ethanol has the opposite problem. It’s called the “blend wall.” Although there’s plenty of capacity to make more corn ethanol, at the typical blend of 10 percent ethanol and 90 percent gasoline drivers don’t burn enough fuel to consume more than around 13.3 billion gallons.
University of Illinois ag economist Scott Irwin says cutting the mandate in order to dismantle the blend wall is a dramatic policy shift.
“(Obama administration officials) appear to be doing a major policy U-turn where they’re effectively saying we’re not going to go any higher in terms of ethanol than the amount of that blend wall,” Irwin said.
When Congress passed the RFS in 2007, lawmakers assumed gasoline consumption would rise and the blend wall would be farther off. Instead demand for gas has fallen thanks to a combination of the recession, changing driving habits, and increased fuel efficiency.
Oil companies urged the EPA to curb the mandate, arguing they were being forced to buy more ethanol than could be used. Ethanol companies have argued that aggressive mandates encourage fuel retailers to sell more ethanol by putting higher blends at the pump, like E15 or E85.
“While only a proposed rule at this point, this is the first time that the Obama Administration has shown any sign of wavering when it comes to implementing the RFS,” said Advanced Ethanol Council executive director, Brooke Coleman, in a statement following the announcement.
A reduction in the mandate is a turnaround in ethanol policy, but Scott Irwin said it would not change much for people putting ethanol in their tank. And it may not mean much for corn farmers.
“Basically we’re stuck at a (demand) level of 4.9 billion bushels of corn for ethanol use,” Irwin said. “It’s probably not going to up or go down.”
If demand is stagnant, it lowers the potential ceiling for high corn prices. But Irwin said demand shouldn’t drop off by much because of changes to the mandate, so prices shouldn’t go down much either.
Irwin said it could actually be soybean prices that see a larger impact. Soybeans are the greatest source of biodiesel in the U.S., and biodiesel saw a jump in demand as oil companies bought more of it to meet RFS requirements. Changes in the RFS could mean that demand may dry up.
If the cuts are finalized after a period of public comment, ethanol producers are expected to appeal the EPA’s decision and those appeals could take months or years to work through the courts.