Thanks to the farm lobby, the US is stuck with a broken ethanol policy

Overt demonstrations of special-interest power in Washington, D.C., are never pretty, but the farm lobby’s recent strong-arming of the Trump administration’s ethanol policy should be getting more headlines for its exceptional ugliness.

By making promises to opposing sides during the 2016 presidential campaign, President Trump put himself in a bind. He repeatedly said he would “protect” the Renewable Fuels Standard (RFS), which mandates 10 percent ethanol use throughout the country, while campaigning in Iowa in 2016. On the other hand, Trump’s administration is heavily influenced by unofficial advisors like legendary investor Carl Ichan, who owns a refining company and is unhappy with the costs the mandate creates for refiners, who must blend the fuel into their products.

Ichan probably thought he could influence Trump’s decision to ease the fiscal strain on refiners, who must either directly use ethanol or purchase credits on an expensive secondary market that uses what’s called Renewable Identification Numbers (RINs). It turns out Icahn was wrong.

{mosads}The announcement on Nov. 30 by the Environmental Protection Agency (EPA) kept the total amount of renewable fuel mandated to be blended with gasoline stock at 19.29 billion gallons, of which 15 billion would be corn-based ethanol.

This amount is roughly the same as last year’s level even though many within the Trump administration, especially EPA head Scott Pruitt, had been critical of the way the RFS distorts gasoline markets. It’s worth repeating that the market for ethanol has never operated freely since ethanol was first blended with refined fuel in the 1970s.

When people start talking about the “biofuel market,” it sets free-marketers, the oil industry and oil-state Republicans’ teeth on edge. There is not a free-market for ethanol. Instead, there is a congressionally-mandated market that operates as a hidden ethanol tax, since ethanol contains about one-third less energy than gasoline by volume. This energy deficit, in turn, forces refiners to purchase more expensive, high-octane fuel to blend into retail gasoline. This complicated blending system costs U.S. drivers more than $10 billion per year in extra fuel costs, according to the Manhattan Institute.

Earlier this year, the EPA proposed lowering the mandate for advanced biofuels and pondered other changes to the program, such as shifting the “point of obligation” for compliance with the mandate from refiners to the makers and distributors of ethanol.

But in a set of October meetings, seven U.S. senators — all Republicans from the Midwest — forced the EPA to essentially leave untouched the Renewable Volume Obligation (RVO) levels and to cease considering changes to the point of obligation.

For a couple weeks, Iowa’s two Republican senators, Joni Ernst and Chuck Grassley, threatened to hold up Trump’s nominees for positions within the EPA. In Iowa’s case, 3.5 percent of its gross domestic product — about $4.7 billion a year — can be tied directly to its renewable-fuels industry, so it’s understandable the senators are sensitive to any weakening of ethanol support.

In a letter on Oct. 19, Pruitt promised not to change the amount of ethanol to be blended in 2018, and on Nov. 28, the EPA announced it had rejected several petitions to change the point of obligation.

Ernst called Pruitt’s letter “the clincher” in the debate involving next year’s ethanol and biodiesel mandates. Chalk up another victory for the status-quo swamp. People talk about the powerful lobbies in Washington like the oil lobby, the pharmaceutical and medical lobbies, or the trial lawyers’ lobby, but few have a better record of blocking positive change in markets than the farm lobby in the last several years.

Politically, the promises of next-generation cellulosic biofuels not sourced from corn have not born out. This puts the lobby effectively in breach of the promise to the rest of country more than a decade since the mandate was first created in 2005. Hopefully, this will change someday. But not today.

William Murray is federal energy policy manager for the R Street Institute, a nonprofit group aimed at promoting limited government in Washington, D.C.