The U.S. Ethanol Industry Is Under Attack

Jerry Jung’s passion for reforming the nation’s ethanol laws started when he noticed that the monarch butterflies had vanished from his hobby farm north of Clare, Michigan. After doing a bit of research, he learned that the monarch population had plummeted in recent years.

A key reason for the declining population is that large swaths of the country are being planted in corn and soybeans. Among other things, these monocultures put some native species at risk by depriving them of traditional food sources.

Most of the corn planted today is genetically engineered with a bacterial toxin that is harmful to the butterflies. It is also engineered to be herbicide tolerant. Herbicides are used to kill weeds that compete with corn, but that includes food sources for the monarchs like milkweed.

(Click to enlarge)

Crops planted to be herbicide tolerate (HT) or with genes from the bacterium Bacillus thuringiensis (Bt).

The total acreage planted in corn and soybeans (used to make biodiesel) has risen by ~20 million acres since 2005. That’s when the Energy Policy Act of 2005 created a Renewable Fuel Standard (RFS) that required billions of gallons of biofuel to be blended into the fuel supply.

Explosive growth of the U.S. corn ethanol industry ensued. In response, Jerry Jung formed Rethink Ethanol to fight against the nation’s ethanol mandates.

Rethinking Ethanol

Recently I spoke with Tim Constantine, a spokesperson for Rethink Ethanol, about the U.S. ethanol industry. He noted that many forces are aligning to significantly reform the RFS for the first time since its creation.

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Iowa Senator Chuck Grassley, perhaps the staunchest ethanol defender in Congress, has steadfastly refused to entertain changes to the RFS. Mr. Constantine noted that Senator Grassley had always enjoyed strong support from the White House, and never felt like he had to compromise. But now he is being forced to the negotiating table by a White House that seems intent on fixing an issue that refiners have complained about for years.

I highlighted some of these issues right after Donald Trump was inaugurated in Why The Ethanol Industry Should Fear President Trump. I followed up with more details of how the RFS is managed, and why refiners hate it so much in U.S. Ethanol Policy Set For Big Change.

RIN Review

In a nutshell, to track compliance, renewable identification numbers (“RINs”) are assigned to biofuels as they pass through the supply chain. Those defined as “obligated parties” are required to submit their quota of RINs to the EPA to demonstrate compliance.

Compliance can be met by purchasing the fuel with the associated RIN, or simply purchasing the RINs (which can be separated from the associated biofuel). This means that there is a value for RINs that has the effect of offsetting some of the production cost for the biofuel producer.

Refiners have spent billions of dollars on compliance. Valero, the largest refiner in the U.S. reported that it spent nearly a billion dollars on RIN compliance in 2017. These compliance costs help subsidize the ethanol industry at the expense of refiners, and they help to artificially increase the price of fuel at the pump.

Philadelphia Energy Solutions (PES), which owns the East Coast’s largest refinery, blamed RIN compliance in part for its recent Chapter 11 bankruptcy. But in a decision that made the ethanol industry livid, the EPA — which oversees RIN compliance — alleviated some of the company’s RIN obligations.

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The PES bankruptcy and subsequent alleviation of its RIN obligations reignited efforts to reform the RFS. Mr. Constantine stated that a lot of credit for that goes to Texas Senator Ted Cruz, who had aggressively pushed for changes even when campaigning (and winning) as a presidential candidate in Iowa in 2016. As supporters of the RFS resisted changes and attempted to avoid the discussion, Senator Cruz persisted and forced them to the negotiating table.

Reforming the System

I asked Mr. Constantine about the reforms he believes are needed. He responded:

“Short term, we think you need to have some limitations in the RIN market. When RINs sell, that is to confirm that refiners/producers are actually conforming to the requirements. There is no government or public benefit; all trades are private. It’s really a money maker for certain parties that drives the market up or down.

If you had RIN waivers issued by the EPA at some set fee (e.g., $0.20/RIN) then a small refiner could go to the EPA and ask for that waiver. It would help stabilize the RIN market and make the final product cheaper. Nobody would be paying $1.05 for RINs. RIN speculation is driving the market and costing consumers at the pump. RIN waivers would also potentially fund billions of dollars for the EPA, which could be spent on programs for the agricultural community.”

Mr. Constantine believes that we will eventually see an announcement from the White House on the nation’s ethanol program that the ethanol industry isn’t going to like.

“The most logical thing in the view of Rethink Ethanol would be to sunset the requirements after 2022 when the program shifts to the whim of the EPA administrator. The ethanol industry would have had 15 years to develop their market. If they are to stand on their own, they should be able to do so at this point. After 15 years they should be responsible for themselves and not depend on a government program. “

Of course, the ethanol industry will continue to protest that oil companies control the distribution and sales infrastructure. But there is nothing to stop a state like Iowa, which is the global leader in ethanol production, from moving aggressively to encourage ethanol (as E85, for example) to become the de facto fuel of choice for the entire state. If other states in the Midwest followed, the ethanol-producing states could control their own destiny.

By Robert Rapier

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