Ethanol Support in Congress Under Threat, Corn Farmers Worry

Congress is threatening to reduce its support of the corn-based fuel

Ethanol Support in Congress Under Threat, Corn Farmers Worry
An ethanol plant near Nevada, Iowa. Ethanol has added $20 billion to Iowa’s economy
Photograph by Danny Wilcox Frazier for Bloomberg Businessweek

Iowa is known as the Tall Corn State. That’s why on Dec. 5, Terry Branstad, the state’s Republican governor, woke at 4 a.m. to fly from Des Moines to Washington to testify at a public hearing held by the U.S. Environmental Protection Agency about ethanol’s future. Three weeks earlier, under pressure from a broad coalition of oil companies, food producers, and environmental groups, the EPA had issued a proposal to cut the amount of renewable fuel refiners are required to blend into the U.S. gasoline and diesel supply to 15.2 billion gallons in 2014 from its target of 18.1 billion. Most of that renewable fuel is corn ethanol. Since Iowa is the biggest U.S. producer of ethanol and corn, Branstad had a lot to stand up for. “This is a devastating blow,” he told reporters after testifying against the proposed cut. “People in Iowa feel betrayed.”

When Congress enacted the Renewable Fuel Standard program in 2005 and expanded it in 2007, the idea was to reduce dependence on foreign oil and cut greenhouse gas emissions by mixing biofuels with gasoline and diesel. Since 2005, U.S. ethanol production has more than tripled. Over that period, that has cut greenhouse gas emissions from cars and trucks by 210 million metric tons and reduced U.S. gasoline imports by about 600,000 barrels per day, according to the Renewable Fuels Association.

The ethanol quotas have been a boon for corn growers. Demand for corn ethanol by refiners helped triple the price of corn from 2005 to 2011. At nearly 14 billion bushels, the U.S. crop in 2013 is bigger than ever. The Iowa Renewable Fuels Association says ethanol production has added about $20 billion to Iowa’s economy since 2002 and increased the value of farmland in the state threefold.

The program’s flaws, however, run deep. The most immediate is that ethanol production has outpaced gasoline consumption. Almost all of the gasoline sold in the U.S. contains 10 percent ethanol, a blend known as E10. It wasn’t expected that Americans would use less gasoline when Congress directed the EPA to set the blending requirements for ethanol in 2007. If the EPA sticks with its requirement for 2014, those 18 billion gallons will account for more than 10 percent of the U.S. fuel supply. Gasoline marketed as E10 isn’t allowed to contain more than 10 percent ethanol. So more gasoline would have to be sold using higher blends, including E15, which contains up to 15 percent ethanol.

Only about 60 gas stations in the U.S. carry E15. They had to install new tanks and blending pumps to handle the blend. Although E15 is approved for use in all cars made since 2001, these autos weren’t designed to run on gasoline with high levels of ethanol. Most manufacturers say their warranties don’t cover cars that use it, making some drivers wary. “This is a potentially damaging fuel for vehicles,” says Avery Ash, director of federal relations for the AAA motor club. Higher blends of ethanol accelerate wear and tear on car engines, according to AAA.

With 40 percent of the gross U.S. corn harvest turned into fuel, the rest of the world has tried to make up for the lost food supply. While ethanol use has helped cut carbon emissions in the U.S., increased farming in the rest of the world releases large amounts of carbon as dense forest is cleared to create more farmland. When ethanol plants ramped up across the U.S. in 2006, corn prices rose 88 percent over five months. In January 2007, tortilla prices doubled in Mexico, sparking riots. “It was sudden and unplanned,” says Harry de Gorter, an agriculture and trade policy economist at Cornell University. “It’s a huge cost to society to draw resources into ethanol and away from the food supply.”

On Dec. 12, Oklahoma Republican Senator Tom Coburn and California Democratic Senator Dianne Feinstein introduced a bill to eliminate the corn-ethanol blending requirement for refiners. Oklahoma is the country’s fifth-largest oil producer, while Feinstein has long opposed use of corn ethanol, saying it raises food prices and hurts the environment. While the bill has broad Senate support, Barbara Boxer (D-Calif.), head of the Senate’s Environmental and Public Works Committee, strongly supports the current standards.

Zylstra, an Iowa farmer, is already feeling the pressure from low corn prices
Zylstra, an Iowa farmer, is already feeling the pressure from low corn prices
Photograph by Danny Wilcox Frazier for Bloomberg Businessweek

If the Coburn-Feinstein bill passed, ethanol advocates say the livelihoods of corn farmers like Roger Zylstra of Lynnville, Iowa, would be devastated. At around $4.25 a bushel, the price of corn is just above the cost of production. If that persists and oil companies no longer have to buy corn ethanol, “all that economic growth we’ve had just stops,” says Zylstra. It might not be that cataclysmic. Scott Irwin, an agriculture economist at the University of Illinois, has done research suggesting that in the short term, refiners would blend as much as they do today, because ethanol stretches out the supply of gasoline.

Coburn and Feinstein’s bill doesn’t touch what are known as advanced biofuels. When Congress updated the Renewable Fuels Standard program in 2007, it divided renewable fuels into two categories: The first includes fuels (mostly corn ethanol) that reduce emissions by 20 percent compared with gasoline. The second advanced category includes fuels that cut emissions in half. The most promising advanced fuel is cellulosic ethanol. Made from wood, grass, or any other organic material, it lowers carbon emissions without hurting the food supply. It’s hard to make, though. Unlocking energy from plant matter requires a more complicated chemical process than simply removing starch from corn to make ethanol. Still, in 2007 the government had high hopes for cellulosic ethanol, setting a target of 1 billion gallons for 2013. That’s since been cut to 6 million. With two cellulosic plants operating, just 360,000 gallons of cellulosic fuel have been produced in 2013, according to Bloomberg New Energy Finance.

That shortfall has given ethanol’s opponents an opening to press the EPA to roll back the entire renewable fuel program. Under the 2007 law, if production of either corn ethanol or one of the advanced biofuels falls below the blend requirements, the EPA can reset its targets. Since the shortfall in cellulosic production is so large, ethanol advocates were prepared for the EPA to lower only the cellulosic blend requirement, as it has every year since 2010. What they didn’t anticipate was that the EPA would bow to pressure to address all the other problems associated with the program and reduce the blending requirements for all biofuels, including corn ethanol. “That’s the big surprise,” says Brooke Coleman, executive director of the Advanced Ethanol Council.

Ethanol’s advocates say the EPA’s dramatic move raises big legal questions. Congress gave the EPA authority to dial back production quotas only when supplies fell short of the blending requirement, or when producing ethanol led to severe economic harm. Corn ethanol has neither problem, its lobbyists say. Ethanol prices have tended to be lower than gasoline, which has saved drivers money at the pump, according to AAA.

This legal battle is just beginning. The EPA’s 60-day comment period ends on Jan. 29. It will then likely take a couple of months to make a final decision on whether to reduce the total amount of renewable fuels that refiners are obliged to blend into the fuel supply. If the agency does lower the requirements, the ethanol industry could sue. Says Coleman, “The intent of this program is to go forward, not backwards.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE