When “innovation” goes wrong

Let’s rethink the ethanol mandate

The start of summer brings back the welcome sound of lawnmowers. If you’re anything like me, especially as a new homeowner, it’s a time to spend the summer months outside. If you pay attention to your gas cap or the warning notes on the side of the mower then you might notice a sticker or imprint reading, “No E15,” or “E10 or Less”. And if you’ve spent any time in your local home improvement store this spring looking for your new summer toy, you might see notices about the type of gasoline to use in them.

All of these warnings stem the Renewable Fuel Standard (RFS). The RFS is a 2005 federal policy, started as a way to clean up the US fuel supply by requiring the use of biofuels and to reduce US dependence on foreign oil by jumpstarting a competing industry within the US. A major one of those biofuels was ethanol: grain alcohol made from corn.

These warnings are serious business. Small motors can’t handle ethanol. It corrodes them. Yet so many people have accidentally damaged their equipment without realizing what they were fueling their lawnmower with the wrong stuff. Ruining your lawnmower, however, is only a small part of the problem.

The real problems happen behind the pump in ethanol’s production and in the political decisions over how much ethanol should be blended into the fuel. Because the RFS’s mandate created massive demand for ethanol, farming expanded onto lands less suited for growing corn. In turn, that necessitates increased fertilizer water use.

Those sorts of environmental harms undermine the RFS’s goals, but there are efforts to expand ethanol’s use further. For example, the Environmental Protection Agency (EPA) concluded a comment period on April 29 for a rule change that would allow the sale of higher blends of ethanol all year. Instead of expanding the RFS’s ethanol mandate, policymakers should be reevaluating the RFS entirely. There are a few ways to do that.

The RFS drives most ethanol production

It’s important to understand the RFS’s impact on the ethanol produced in the US. The graph below shows how quickly ethanol production ramped up since the RFS’s enactment in 2005. Although production was already trending up before 2005, much of that increase is due to the RFS. After all, the RFS mandate was a deliberate attempt to increase US ethanol production by a factor of 10.

Figure from A Review of the Environmental Effects of the Renewable Fuel Standard’s Corn Ethanol Mandate.

The RFS requires that certain amounts of ethanol be blended into the gasoline supply each year. In total, the RFS includes three types of renewable fuels: biomass-based diesel, cellulosic biofuel, and advanced biofuel. The EPA requires refiners blend a total of 36 billion gallons of renewable fuel by 2022. Of that, corn ethanol has consistently made up about 15 billion gallons per year since 2013.

Source: Taxpayers for Common Sense.

Running into the blend wall

The blend wall refers to a combination of consumer disinterest and technological limits that constrain total amounts of ethanol that can be blended into the fuel supply. Vehicles built before 2001, for example, cannot handle levels of ethanol over 10%, according to the EPA. Automakers, by contrast, recommend continued gasoline use until much later model years. Ford, for example, says that their 2013 models and later are capable of using blends with 15%, E15, but earlier models should not. Honda recommends E10 and lower blends in their online fuel recommendations, though their recommendations vary by model year. The 2006 Honda Civic manual, for instance, says not to use blends higher than 10%. In contrast, the 2015 Civic manual recommends E15 and lower. Together these sorts of limitations create technical constraints on ethanol’s expansion that build up the overall ethanol blend wall.

Warnings like this are common in vehicle manuals. Source: Honda.

In addition to the technical constraints with the current vehicle fleet, most customers aren’t buying flex-fuel vehicles that can run on blends as high as 85% ethanol. In 2017, the US car fleet included more than 123 million conventional vehicles. That’s compared to only 9.3 million alternative-fuel cars, of which about half, 4.8 million, are ethanol-flex fuel vehicles. This represents the consumer disinterest side of the blend wall.

Think about the adoption of alternative fuel vehicles like any other new technology, there are some early adopters, but most people wait a long time to upgrade. In the case of cars, that ends up being a substantial portion of the total vehicle fleet that may not run well on ethanol blends. Given the differences between the EPA’s 2001 recommendation and automakers’ 2012 and even later recommendations, that’s a significant part of the vehicle fleet.

To add to that problem, the E15 adverse part of the fleet is likely to stay on the roads longer. The US Department of Transportation estimated that the average age of cars on the road in 2016 was 11.6 years. Research also suggests that the average vehicle age is going up. Cars are getting better, lasting longer, and driving farther on fewer gallons of gasoline, so why would consumers buy new cars as early as they used to?

Source: US Department of Energy Office of Energy Efficiency & Renewable Energy.

Increasing fuel efficiency is another aspect of the blend wall. The US Energy Information Administration (EIA) pointed out in November of 2018 how gasoline demand has been flattening out. In January of 2019, the EIA also pointed out that gas sales in 2018 ended up at a lower point than they began at the beginning of the year.

Source: Energy Information Administration.

Lower gasoline sales are a problem for blending additional ethanol into the fuel. Why? Because the RFS is a volumetric requirement. That is, it says refiners must blend in a certain amount of ethanol. If the gas sales decline, then the percentage sold to consumers in each gallon must increase if the refiner is to meet its legal obligation under the RFS. And because of the technical limitations of the existing car fleet, blends higher than 10% ethanol risk damage to consumer vehicles.

One important note on this point is the potential for the RFS to have regressive effects. The costs of higher blends may affect poorer segments of the population more than wealthier households. Considering newer models are able to handle higher blends better than older models, and newer cars tend to be owned by wealthier people, the costs of high ethanol blends in terms of increased car maintenance may fall hardest on poorer people.

Together, consumer disinterest in switching to high ethanol blends and the technical compliance problems facing those responsible for complying with the RFS create a formidable blend wall.

The RFS mandate encourages more ethanol and increases its environmental harms

Not only are there considerable technical compliance concerns to sort out, but regulators should also be thinking about whether or not the environmental goals of the RFS are being attained. For example, because the RFS dramatically increased the demand for corn, it created a variety of unintended consequences. Those unintended consequences have likely resulted in more harm to the environment than benefit.

One example of this is in the increased use of water and fertilizer to grow corn. Both increased irrigation and increased fertilizer use became necessary because corn production moved onto lands that were not well-suited for growing corn. In the case of fertilizer, the increasing use of nitrogen fertilizer contributes to the dead zone in the Gulf of Mexico. In fact, researchers suggest that every additional billion gallons of ethanol production enlarges the size of the Gulf of Mexico “hypoxic zone,” — an area that is inhospitable to aquatic life during the summer due to lack of oxygen — by 32.7 square miles.

Water usage also changed because of the ethanol mandate, and in a striking way. Every fuel source requires some amount of water in its production. For example, conventional gasoline requires a bit more than a tenth of a gallon to create enough fuel to power a vehicle for a mile. The most important factor when it comes to ethanol production’s water impacts is whether or not the corn is irrigated. As corn production expanded in response to the RFS mandate, more corn was grown in sub-prime areas where it had to be irrigated. That distinction between ethanol from irrigated corn and non-irrigated corn is important to keep in mind. Ethanol produced from unirrigated corn requires 0.25 gallons to create enough ethanol to power a vehicle for one mile. By contrast, ethanol from irrigated corn requires 28 gallons of water. That water use is especially harmful in areas where water is scarce or unsustainable amounts of water is being pulled from aquifers, like the Ogallala Aquifer in the midwest.

Lessons from the RFS for the future of innovation

Unsustainable water usage and its contribution to the dead zone in the Gulf of Mexico are only two of the many environmental problems that the ethanol mandate creates. But even just these two aspects of the RFS’s environmental legacy make it worth reconsidering. As the EPA considers expanding sales of E15, it should keep these environmental factors in mind.

It’s important to understand the source of those environmental concerns, however. Ethanol’s use is not inherently damaging. Instead, much of the environmental harm of ethanol originates in the size of the ethanol mandate. The mandate encourages poor farming practices which necessitate more fertilizer and more irrigation. Even lowering it by several billion gallons would in part rein in ethanol’s environmental harms and ethanol’s effects on consumer vehicles.

The wider lesson for environmental policy from the RFS is that secondary effects are vital considerations in making effective policy. The RFS represents a massive, 15 billion gallon bet on the effectiveness of ethanol as a way to clean up the environment. There’s room for such big bets in policymaking, but a better approach is making lots of small bets before so that lurking problems are brought to light. One way to do that is by setting performance standards instead of design standards like the RFS. Design standards require the use of a specific technology or method. Performance standards don’t prescribe the answer. Instead, they provide an assumed goal and let all technologies compete to achieve it.

Policies should encourage, or at least provide, room for experimentation and innovation, but big bets like the RFS make that difficult. Complying with them is often so difficult that there’s not any space left for new ideas.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.