A New Environment for Biofuels

As election season approaches, politicians in Washington are trying to show Americans that they will work to lower gas prices. Renewable fuels are seen as an important part of the effort to bring down prices at the pump. But political opinion has shifted in the past year, dramatically changing the national conversation around renewable fuels such as corn-based ethanol.

Much has changed in the three years since the original Renewable Fuels Standard (RFS) was signed into law in August of 2005. At that time corn-based ethanol and soy-based biodiesel were the darlings of the renewable energy movement. Concerns about the environmental and social impact of food-based fuels were being vocalized by certain groups, but they were largely drowned out by the exuberance from policy makers and consumers. Within two years, as production levels ramped up ahead of schedule, the RFS was amended in 2007 to increase the target to 36 billion gallons by 2022.

About the time that the new RFS was signed into law, climbing food prices grabbed the nation's attention and turned exuberance into caution. According to the research and analysis firm New Energy Finance, food staples rose 244% from April of 2004 to April of this year. Corn was up 207%, soybean was up 136%, and palm oil was up 140%. Even though ethanol and biodiesel production have played a relatively small role in those price increases compared with other input costs, reports New Energy Finance, perceptions have certainly changed.

This May, presumptive Republican presidential nominee John McCain and 22 other Republican Senators wrote a letter to the Environmental Protection Agency (EPA) calling for a waiver of the RFS. The letter followed a similar letter in April from Texas Governor Rick Perry, who called the fuel mandate a "well-intentioned policy" that will have the "unintentional consequence of harming segments of our agriculture industry and contribute to higher food prices." He requested that the RFS be cut in half.

Last week, the EPA denied the request, saying that the RFS is not a serious detriment either to the U.S. or Texas economy. The 2005 legislation allows the EPA to waive the standard if it considers the program to be causing "severe harm" to the economy.

"After reviewing the facts, it was clear this request did not meet the criteria in the law," said EPA Administrator Stephen L. Johnson in a statement. "The RFS remains an important tool in our ongoing efforts to reduce America's greenhouse gas emissions and lessen our dependence on foreign oil, in aggressive yet practical ways."

The news was lauded by the renewable fuels industry, which has repeatedly pointed to rising oil and natural gas prices as the leading factor in the food price increase.

"Most economists now recognize the real severe economic harm is being done by the skyrocketing price of oil and not by ethanol production," said Renewable Fuels Association (RFA) president Bob Dinneen said in a statement issued after the decision. "In fact, without ethanol production the damage from high oil prices would be even worse."

Along with oil, the price of staples such as corn and soy have fallen significantly since June. But they remain relatively high compared with the last few years. Although it is been shown that ethanol is a fairly small player in the rising price of staples, the food versus fuel debate has had a lasting impact in Washington and in the media.

In 2005, when the Renewable Fuels Standard was being crafted, there was overwhelming support from politicians and news outlets. But as Christine Russell points out in the July/August issue of the Columbia Journalism Review, the "biofuel ethanol was ballyhooed as a big win for U.S. energy security, farmers, and the environment, but a funny thing happened on the way to the fuel tank...Suddenly many elected officials want to cut back on congressional mandates to produce far more ethanol...the public is left wondering what happened."

Now, writes Russell, journalists have become far more critical of the role that corn-based ethanol will play in the future fuel mix.

"But where were the skeptical scientists, politicians and journalists earlier, when ethanol was first being promoted in Congress?" she asks.

Yet despite all the recent bad press and negative rhetoric from some politicians, the RFA says that there is still widespread support for ethanol in the U.S. According to a survey of 1,200 registered voters released by the RFA last month, Americans still support ethanol by a 2 to 1 margin.

According to the study, 65 percent of respondents have heard something about ethanol in the news, with 28 percent saying that they have heard a lot about the fuel. Out of those respondents, 43 percent say their opinions about ethanol were not changed, 30 percent say the debate made them feel more favorably about ethanol and 23 percent feel less favorable toward the fuel.

"Over the last year as we've seen some of the sentiment about the domestic ethanol industry shift, we still see great support," says Nathan Schock, Director of Public Relations at POET, the world's largest ethanol producer. "Americans realize that ethanol helps reduce gasoline prices and will help enhance our domestic energy security."

But there's another non-domestic player in the ethanol industry that is hoping to capitalize on the support for ethanol among American drivers: Brazil.

Brazil is a net exporter of sugarcane ethanol. It is expected that the country will send about 550 million gallons of sugarcane-based ethanol to the U.S. this year. But if Brazil has its way and Congress lifts a US $0.54 tariff on imported ethanol, Americans will be burning a lot more sugarcane ethanol in their gas tanks.

The US $0.54-per-gallon tariff on imported ethanol was created in 1980 to ensure that foreign ethanol producers couldn't take advantage of the $0.54-per-gallon blenders credit for domestic producers. Now that the credit has been reduced to US $0.45 per gallon, the Brazilians argue that the tariff should be reduced to that level, if not eliminated altogether.

In July, the Brazilian Sugarcane Industries Association (UNICA) launched a media campaign against the ethanol tariff, saying that it was causing American drivers to pay more at the pump. If the tariff were eliminated, says UNICA Chief Representative Joel Velasco, it could reduce the price of ethanol by 30%. Because there is a mandatory 10% blend of ethanol in every gallon of gasoline, that reduction would then be passed on to consumers when they fill up their vehicles, Velasco says.

"We're trying to educate Americans that we can diversify the fuel mix, lower gas prices and help build the ethanol industry in the U.S.," says Velasco. "We can help lower grain prices further and create a bigger market for renewable fuels."

But POET's Schock says that there's currently no need to increase Brazilian ethanol imports — there's already an oversupply of domestic ethanol.

The Energy Information Administration projects U.S. gasoline consumption to be around 146 billion gallons next year. Although every gallon of gasoline requires a 10% blend of ethanol (called E10), a more realistic projection is that 90 percent of that gasoline will be blended, says Schock. That leaves a market for around 13 billion gallons of ethanol.

According to the RFA, current ethanol capacity is at around 9.4 billion gallons per year. If factoring in refineries under construction, capacity will be at around 13.6 billion gallons sometime in 2009. That means that there will be more ethanol than the market requires, says Schock.

"The elimination of the secondary tariff assumes that we are in an under supply when actually the opposite is the case," he says. "Bringing in more foreign ethanol will only make it harder to develop cellulosic ethanol because that industry, which needs those early years of support to grow, will be taken up by the foreign ethanol."

While the domestic ethanol industry is certainly concerned about the tariff being lifted, it doesn't appear that the policy will change anytime soon. So far, none of the bills that have come before the current Congress have been voted on. In addition, politicians don't usually make such dramatic changes in policy before an election.

"We're not really expecting anything to happen before the election cycle ends. But we have brought this to the table and we foresee action in the not-so-distant future," says Velasco.