AAA cheers the news that the damaging fuel is unlikely to reach consumers this year or next

After refusing to back down from corn ethanol blending targets, the EPA this week swallowed its pride and agreed to push back the 2013 target by four months, while hinting that it may be forced to reduce the 2014 target as well.  The agency is at last acknowledging that without subsidies its planned corn ethanol quotas -- and the E15 that comes with them -- may not be possible.

I. Big Corn Sees Subsidies Slashed

The ties that once bound doth now divide.  The Energy Independence and Security Act of 2007 (EISA) [PDF] -- a bill which once brought the Bush administration and farm state Congressional members of both parties together -- has now become a bone of contention between the pro-ethanol lobby and a coalition of Congress, academics, and automotive industry lobbyists who are decrying this sweeping market manipulation scheme.

For a time Congress directly subsidized ethanol, a means to pour more money on large corporate farm conglomerates like Cargill, Inc., Archer Daniels Midland Comp. (ADM), Gavilon, and ConAgra Foods, Inc. (CAG) -- among the four farms that control 60 percent of the nation's grain crop [source] -- while masquerading as an effort to "help the small farmer."  Predictably ADM, ConAgra, and seed firms like Monsanto Comp. (MON) royally rewarded the farmland Congressmen who pushed these efforts, donating to their election campaigns.

corn profits
Deep donations endeared big corn to Congress. [Image Source:]

President Obama himself was among the lucky winners of handouts from big corn special interests, although his ties to the corn industry at times have been more sneaky.  After championing the Energy Act as a young senator back in 2005, ADM began flying Sen. Obama around on their private jet, a true VIP treatment.  And top Obama donor George Soros -- who gave nearly $5M USD to Obama and his fellow Democrats -- is a major owner of ConAgra spinoff, top corn grower, and number three corporate farm conglomerate Gavilon.

Unsurprisingly, the President supported pro-ethanol rules and indirect subsidization via blending quotas. In Dec. 2011, a coalition largely led by House Republicans beat back a $6B USD ethanol subsidy, which went mostly to big corn.  But a key pillar of the big corn money-backed politicians' strategy -- blending quotas remained in place.  Those quotas demanded that refiners use a certain number of gallons of ethanol per year or face fines.  More importantly every year those quotas bumped higher and higher, forcing an artificially inflated demand for corn ethanol.

The play has certainly paid off for big corn.  In 2012 ethanol consumed 42.9 percent of corn crop production, up from 30.7 percent in 2008-2099, the first year of mandated blending, according to a study by Iowa State Univ.  In other words of every 10 ears of corn grown, ethanol now takes more than 4 of them, due mostly to the government forcing fuel refiners to buy them.  It's a dream scenario for a business -- some is forcing customers to buy your product (inflated demand), with great flexibility given to how much you can inflate prices on it (inflated revenue).

II. Opponents Look to Kill Corn Ethanol Quotas, E15 Blends

However, a strange coalition of ethanol opponents has arisen since then that's pushing for the removal of that pillar.  Some in the movement are environmentalists, including academics who point out that corn ethanol produces more emissions over its life cycle than oil, and in some cases may even be an energy-negative process.  Regardless on your feelings about global warming theory, they raise a powerful point as one the major justifications of ethanol protectionism was the claim that it "fought warming" by cutting emissions, a claim that research definitively proved false.

Automakers also bucked the increasing blending quotas as they were outpacing growth in fuel consumption, forcing increasing high ethanol blends on customers.  As the U.S. Environmental Protection Agency (EPA) looked to approve the use of E15 as a way to allow refiners to reach their blending quotas and avoid fines, automakers cried foul saying a 15 percent ethanol-85 percent gasoline blend would seriously damage their vehicles.

Ethanol permeates and damages parts made of rubber, plastic, metal, and other materials in engines not specially sealed to allow the use of higher ethanol blends.  All automakers certify their vehicles for E10. Some automakers certify their vehicles for E15 use, but many don't.

Ethanol warning
E15 and above can damage engines and fuel systems not specially coated to prevent corrosion. [Image Source: Center for Environment and Commerce]

The automakers -- along with the nation's largest motor organization AAA -- demanded the EPA stop the rollout.  They pointed out that even among brand new vehicles many would be damaged by ethanol; and that's not to mention the scores of older vehicles on America's streets that would be damaged by the higher blend.  

They also point out that most engines -- even flex fuel ones -- run less efficiently on a blend, meaning that customers are getting much lower mpg and paying more at the pump.  This isn't even necessarily a knock on ethanol, but more a testament to the fact that ethanol and petroleum combust differently.  Thus it's impossible to design and engine that runs optimally for both -- you design an engine that's all ethanol/all petroleum and runs efficiently or you design a mixed engine that sacrifices a lot of its fuel economy to try to be a jack of all trades.

Triple A
AAA fought hard against E15. [Image Source: David Eppstein]

Yet more opposition came from livestock farmers -- both large and small -- who saw the cost of feed inflated by having to compete with ethanol.  Hit hard by the drought, many farmers had to abandon buying corn altogether, trying to feed their animals in creative ways like food stock waste.  However, this strategy ultimately was not sustainable or good for the health of livestock, so farmers pled with the EPA to scale back ethanol targets -- even if only for 2012-2013.

The Obama administration's EPA first stalled on its decision, then decided to reject the livestock farmers' pleas altogether saying "no" to a waiver.  The administration said livestock farmers -- particularly small ones -- were on their own and that if they went out of business it was too bad.  The EPA also called automakers liars saying E15 wouldn't damage engines, and that it knew more about how the engines worked than the companies that built them.  The U.S. Supreme Court seemingly agreed, refusing to hear a challenged to the blending bump.

III. Unable to Meet Quota w/out Subsidies, EPA Freezes Blending at Current Levels

But faced with state efforts to ban E15, and House debates on whether to cut the blending requirements entirely, the EPA caved slightly, freezing a planned bump to ethanol levels that was set for next year.  

Last year 4.55 billion bushels of corn was used to produce ethanol, according to the U.S. Department of Energy (DOE), down from 5 billion bushels in 2011.  The nation's 211 ethanol plants produced 13.33 billion gallons last year, missing the target of 15.2 billion gallons by 13 percent.

The credit -- or blame -- for this miss can largely go to the elimination of subsidies, grants, and tax credits for ethanol plants.  Corn has a vested interest in selling more ethanol (to create artificial demand/a guaranteed buyer).  Refiners have to blend in ethanol or face EPA fines.  By contrast ethanol distillers have free will -- if the government offers them financial incentives to build more plants they may; or if the corn industry offers to pass on some of their subsidies, they may choose to build more plants as well.

But now that there are no more subsidies, big corn doesn't have as much extra money to incentivize the distillers and still pad its own pockets.  Unsurprisingly there's been a chilling effect on growth in distilling facilities:
Ethanol plants
Ethanol plants stopped being built when the handouts stopped. [Image Source: DOE]

As can be seen, between 2008-2010 forty new plants were added, but between 2010-2012 only seventy plants were added.

To put this data in another light, the blending quota of 15.2 billion gallons represented about 9.7 percent of the fuel used nationwide.  By contrast, the end result represented only about 8.5 percent of the total fuel.  For this year the target was supposed to soar to 16.55 billion -- or about 10.5 percent of total fuel consumption.  But production will be lucky to hit last year's (2012) target, let alone this year's.

Refiners are helpless in this situation.  They can't get any more corn ethanol to produce E10 across their entire lineup, let alone E15.  The government may fine them for their "noncompliance", but in reality that's immaterial as the government's asking an objective that's impossible at present.  Thus there's no reason for refiners to begin to produce E15 in mass -- particularly given the public backlash surrounding the fuel.

ethanol refinery
Without subsidy handouts, the explosive growth of ethanol refineries ceased, freezing production levels. [Image Source: Ethanol Producer Magazine]

The EPA was thus faced with a tough decision.  Its original goal (as steered by the prevailing corn lobby interests) was to funnel money to big corn.  But without the subsidies fuel companies are opting not open more distilleries.  And without more distilleries big corn is unable to continue to pump ethanol into refiners hands at ever increasing rates.

The EPA could of course take its cane and punitively beat the refiners with fines, but it would face repercussions, both to its reputation and to the reputation of the Obama administration if it appears too punitive.  On the other hand, the opposition to E15 and corn ethanol protectionism is so strong at this point that there's no way a fresh effort to restore subsidies can make it through Congress and boost refinery construction.

IV. Government Pay Days, but No More "Pay Raises" Ahead for Big Corn

So ultimately the EPA opted -- in its "finalized" 2013-2014 targets [PDF] released this week -- to give refiners 4 more months to achieve 2013's mandate levels (16.55 billion gallons).  Even with that extra time, blending is expected to fall short of the mark, due to lack of corn ethanol refining production growth.  The EPA also drops a hint that it may be forced to cut 2014 targets, writing begrudgingly:

This notice also acknowledges that there are constraints in the market’s ability to consume renewable fuels at the volumes specified in the Clean Air Act in future years, and states that the EPA anticipates proposing adjustments to the 2014 volume requirements in the 2014 rule to address these constraints.

Thus the EPA isn't backing down from its efforts to artificially inflate corn ethanol demand, just recognizing that the Congressional push to pull the plug on corn ethanol subsidies has frozen them, if not killed them altogether as an elimination of the blending requirements would have.

EPA sign
The EPA has been forced to begrudgingly freeze corn ethanol blending targets.
[Image Source: Free Enterprise]

The industry is cheering this turn of events, particularly the fact that E15 -- although allowed -- will likely make it to few if any gas stations this year.

AAA, a strong opponent of E15, says the EPA's acknowledgement of reality is good news for the nation's 240 million drivers, 53 million of which are its members.  But AAA President and CEO Bob Darbelnet says that's not enough.  He comments:

AAA praises today’s decision by the EPA and it’s acknowledgement that there are constraints to the market’s ability to consume renewable fuels as directed by the RFS.  However, it is clear that congressional action is still needed to provide the EPA with the authority and direction needed to adjust unachievable fuel targets in the future.

E15 gasoline is simply not compatible with existing infrastructure or for use in the vast majority of vehicles on the roads today.  E15 can put motorists at risk of vehicle damage and voided warranties, which means it is not a viable option for meeting current RFS requirements.

It is time for Washington to send a clear signal that action will be taken to prevent serious problems for motorists.  While the many benefits of the RFS should not be dismissed, policymakers must ensure adequate and safe fuel supplies for American consumers.

Mr Darbelnet and others would like to see Congress -- at a minimum -- eliminate all plans to increase ethanol quotas past a blending wall of 10 percent.  While eliminating quotas -- and likely by proxy corn ethanol in U.S. consumer fuel -- altogether would give customers even better gas mileage, at least such a freeze would prevent the even worse fuel economy repercussions, and -- more importantly -- the damage to consumer engines that a bump to E15 levels would cause.

E15 (fortunately) may never make it to many pumps. [Image Source: Digital Trends]

 Thus big corn may still gets its pay day, but it's not going to get a raise if AAA and others can help it.

V. Cellulosic Ethanol Industry Produces Next to Nothing

Meanwhile, yet another embarassment is nearing for the Obama and Bush administration's biofuels policy.  The 2013-2014 policy calls for 2.75 billion gallons of so-called "advanced biofuels", such as algal biofuels or liquified natural gas (LNG), and 6 million gallons of cellulosic ethanol (which comes from non-food sources like waste wood or grass).

The EPA did meet the 2011 target for advanced fuels (543 million gallons), but thus far the DOE has refused to provide statistics on 2012 consumption, which is though to have missed.  With the target for next year at near five times 2011's rates, an even bigger miss is likely.

Likewise cellulosic ethanol target was slashed from the EISA target of 500 million gallons of fuel in 2012 to the EPA's concessionary target of 3.45 million.  But according to the DOE no meaningful amount of cellulosic ethanol was produced or sold in 2011 or 2012

Switchgrass may promise to solve cellulosic ethanol's biggest problem -- feedstock -- but it's not without problems of its own. [Image Source: Andy Anderson for Audubon]

In other words after making big claims companies like the General Motors Comp. (GM) backed Coskata found the logistics of cobbling together various agricultural and residential feedstocks (crop waste, waste wood, yard clippings, etc.) was simply to daunting and expensive.  As a result, the brightest among them (such as Coskata) have at best built "semi-commercial" plants that put out anywhere between 100 and 1,000 gallons of cellulosic ethanol a month.

For automakers and drivers, cellulosic ethanol presents a similar problem to corn ethanol -- it can damage car parts and reduce fuel economy.  But at least it actually does lower emissions, and at least it does not elevate food prices, as food crop ethanol does.  

Regardless of its superior profile, cellulosic ethanol is unlikely to gain significant traction unless some company can devise a way to get sufficient biomass to their plants.  

One possible solution -- with some limitations -- is switchgrass.  Coskata wrote that it obtained 100 gallons of ethanol from one dry ton of wood.  Assuming switchgrass -- which can yield 6 ot 8 dry tons per acre yearly [source] -- had similar yields, it would take over 625,000 acres (~1,000 mi^2) -- to meet the EISA's 2012 target.  The nation has 1.44 million square miles of farmland, so this is not infeasible in the long term.

On the other hand the EISA target of 16 billion gallons for 2022 is much more of a stretch.  That would require nearly 32,000 mi^2 of farmland, or roughly 2.22 percent of total farmland.  That number sounds tiny, but it would require massive levels of investment (purchasing farms) and could put serious pressure on food prices.

In other words, cellulosic ethanol is superior to its corn cousin, but faces similar problems from an automotive perspective, and offers only a trade-off in competition for crop land (cellulosic) as opposed to direct-competition for food crops (corn).

Sources: EPA [1], [2], AAA

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