December marks the tenth anniversary of the passage of the Energy Independence and Security Act (EISA), and its wildly expansive Renewable Fuel Standard (RFS), better known as the ethanol mandate.
President Trump recently paid homage to the RFS, as all feel they must do to play politics in Iowa. Too bad. Trump, who claims he wants to “drain the swamp,” will never manage it, if he fails to see that the swamp is full of ethanol.
People forget how we wound up with an ethanol mandate worth over $20 billion per year (and that doesn’t include various subsidies). EISA was passed because Americans besieged members of Congress, demanding a solution to soaring gasoline prices. Congress didn’t have one, but needed to “do something.” The something they settled on was ethanol.
There are, actually, two stages of the RFS. The first began in 2005 when, amid rising gasoline prices, Congress passed the Energy Policy Act (EPAct). That bill gave out subsidies for all sorts of energy development, but its main claim to fame was the RFS. Refiners would be required to blend up to 7.5 billion gallons of biofuels, in practice mainly corn-derived ethanol, into gasoline. The Wall Street Journal termed this “a gigantic transfer of wealth.”
But clearly it wasn’t gigantic enough. Gasoline prices continued to increase, and even President George W. Bush decided that the 2005 bill, which he’d touted, was inadequate for an America “addicted to oil.”
What did we need? More ethanol, of course. Almost five times as much ethanol as EPAct had required.
That would have taken more than 100 percent of the American corn crop if we had to make it all from corn. But Bush claimed there was going to be a great technological advance. With government support, he asserted, we’d have “cutting-edge methods of producing ethanol, not just from corn, but from wood chips and stalks, or switch grass.” Ethanol purveyors had convinced him that that development was on the verge of realization and would be ready by 2012, By 2025, America could produce 21 billion gallons of so-called advanced biofuels, mainly cellulosic (wood chips, etc.) ethanol.
Added to that would be twice the 7.5 billion gallons made from corn, (so the farm lobby was all in), and in one stroke we could replace 75 percent of imported Mideast oil with American-grown energy crops.
There was no hope, it seemed, of replacing Mideast oil with American oil. Some experts said little new non-OPEC oil would be found anywhere. The U.S. and most of the world had passed “peak oil,” they said. But American know-how supported by American tax money, would lead to radical innovation—an ethanol Manhattan Project!
Ethanol was also backed by environmentalists and their congressional supporters as part of the solution to climate change. Ethanol would create a “virtuous” circle. When burned it would produce carbon dioxide, which would then be absorbed by the plants used to make ethanol so that the net addition of carbon to the atmosphere would be zero.
So elegant did this solution seem, that the main worry, the New York Times said, was that the nation’s forests would be depleted to make wood chips.
A little history would have suggested some skepticism. Cellulosic ethanol had been on the verge of commercialization for 20 years, but still hadn’t gotten past…the verge.
And with fracking, American oil production was expanding not vanishing. Also, the ethanol circle proved not so virtuous after all. Production and use of ethanol has all sorts of environmental problems, and cannot do much, if anything, for the climate.
Nevertheless, in 2006, with the price of gasoline continuing to rise, Democrats had taken control of Congress by pledging to lower energy prices. They began by proposing penalties on oil companies, OPEC and, the newest energy villains, oil futures speculators.
Bush threatened to veto any legislation with such punitive elements, but he and the Democrats could agree on one thing: ethanol. When the price of gasoline rose above $3 per gallon in October 2007, pressed by constituents, Congress responded with EISA and its bloated ethanol mandate. On December 19, President Bush, with House Speaker Nancy Pelosi, D-Calif., by his side, happily signed.
EISA had no impact on gasoline prices, which kept rising until market forces sent them plummeting. Nor did EISA solve (the phantasm of) peak oil or climate change. Were it proposed today, there wouldn’t be any reason to pass it.
But the swamp will remain a swamp so long as it’s reeking of ethanol.
Peter Z. Grossman is the Efroymson Professor of Economics at Butler University (Indianapolis), and is the author of U.S. Energy Policy and the Pursuit of Failure (2013).
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