Friday, July 20, 2012

FarmEcon LLC "The RFS, Fuel and Food Prices, and the Need for Statutory Flexibility"

"Current U.S. biofuels policy contains escalating corn-based ethanol blending requirements (the Renewable Fuel Standard - or RFS) that do not automatically adjust to energy and corn market realities. That same policy contains cellulosic ethanol requirements that do not reflect the fact that the biofuels industry, despite decades of effort and large subsidies, has failed to develop a commercially viable process for converting cellulosic biomass to ethanol.

Corn-based ethanol blending requirements have pushed corn prices, and thus ethanol production costs, so high that the market for ethanol blends higher than 10 percent is essentially non-existent. That same policy has also destabilized corn and ethanol prices by offering an almost risk-free demand volume guarantee to the corn-based ethanol industry. Domestic and export corn users other than ethanol producers have been forced to bear a disproportionate share of market and price risk.

Increases in ethanol production since 2007 have made little, or no, contribution to U.S. energy supplies, or dependence on foreign crude oil. Rather, those increases have pushed gasoline supplies into the export market. Gasoline production and crude oil use have not been reduced. If the RFS is made more flexible, and ethanol production shrinks due to market forces, we can easily replace ethanol with gasoline currently being exported.

This paper will argue that it is time to reform the current RFS. Corn users other than the ethanol industry need assurance of automatic market access in the event of a natural disaster and a sharp reduction in corn production. Ethanol producers should bear the burden of market adjustments, along with domestic food producers and corn export customers. Ethanol prices should reflect the fuel’s energy value relative to gasoline, not a corn price that is both inflated and destabilized by the inflexible RFS.

Finally, the RFS schedule should be revised to reflect the ethanol industry’s inability to produce commercially viable cellulosic fuels. Policy should reflect reality when that reality does not reflect substantial and undeniable barriers to achieving policy goals. "

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