The Ethanol Gasoline Tax – WSJ

A dispenser offering ethanol or no ethanol gas in Des Moines, Iowa in 2020.


Photo:

Brian Snyder / Reuters

Gasoline prices hit a six-year high this week as the Colonial Pipeline shut down and demand picked up again as more people took to the streets. One overlooked cause of higher pump prices, however, is Congress’s ethanol mandate.

Economists are not best at predicting how markets or technologies will develop, but politicians are worse off. In the Energy Independence and Security Act of 2007, Congress required that gasoline sold in the US contain increasing amounts of “renewable” fuel, that is, ethanol made from corn, algae, and cellulose waste.

The bill mandated the environmental protection agency, in its ignorance, to assign refiners and importers annual quotas for ethanol, which they have to mix in gasoline or diesel fuel. For every gallon of renewable fuel, companies receive tradable credits called RINs (Renewable Identification Numbers). Those who fail to meet their quotas will have to buy RINs from other parties in order to meet them.

Congressional ethanol needs have never been realistic, although its ultimate aim has been to support the Midwestern corn growers and the nascent “advanced” biofuels that are still nascent. The mixed mandates have become increasingly inaccessible as fuel consumption has improved, harming smaller refineries and driving up gas prices.

Refineries come up against the so-called “mixed wall”, ie the volume of ethanol that can be sold with existing cars and infrastructure. Warranties do not allow older cars to run on blends of more than 10% ethanol as this can damage engines. The same goes for storage tanks and pumps at the gas station. The EPA has cut targets repeatedly – a total of 33% last year – even though small refineries were still struggling to meet their quotas. Some spend more on compliance and RIN credits than they do on payroll, electricity, and utilities.

As permitted by law, the Trump EPA granted some small refineries “hardship cases” from their quotas only to be sued by the ethanol lobby. The court of appeal of the tenth district declared the exemptions invalid in January 2020. After that, RIN prices crept in as traders who bought and sold the credits expected more refiners to need credits.

The RIN prices have risen even further this year since the Biden administration signaled that it would tighten the ethanol mandates and issue fewer exemptions. Biden’s EPA also backed the Tenth Circle decision, which the Supreme Court heard on appeal in April. The judges appeared to be in conflict over the EPA’s legal discretion to issue the exemptions.

Therefore, the RIN prices rose again. Corn prices rose 125% over the past year, driving up ethanol and RIN prices. This week’s RINs traded at $ 1.90 per gallon, down from 15 cents in January 2020. Our sources estimate that the ethanol mandate will increase gas wholesale costs by an average of 30 cents per gallon. The federal gas tax is 18.4 cents.

Meanwhile, since the blending requirements set by Congress ended in 2022, the Biden EPA has been working on new biofuel mandates for the years to come. The Obama EPA has been considering giving RIN credits to manufacturers and charging stations of electric vehicles over the past few months, which companies could then sell to refineries to increase their bottom line.

Tesla has asked the EPA to revive the idea of ​​charging the electric vehicle industry. Tesla is already making hundreds of millions of dollars every quarter selling regulatory loans that automakers need to meet fuel consumption mandates. Selling RIN credits would give EV companies another subsidy while increasing the cost of fossil fuels – that is, for drivers of gas-powered cars.

The renewable fuel mandate is a classic example of a policy that benefits some who pay close attention while spreading the damage among many. Congress should overturn it, but the ethanol lobby has too many members.

Journal Editorial Report: Paul Gigot interviews physicist Steven Koonin, author of “Unsettled”. Image: Chip Somodevilla / Getty Images

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Published in the print edition on May 15, 2021.

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