Academic journal article AEI Paper & Studies

Biofuels, the Renewable Fuel Standard, and the Farm Bill

Academic journal article AEI Paper & Studies

Biofuels, the Renewable Fuel Standard, and the Farm Bill

Article excerpt

Executive Summary

The Renewable Fuel Standard (RFS) requires that biofuels such as ethanol and biodiesel be blended into the transportation fuel supply. The main potential public benefits of the RFS stem from greenhouse gas emissions reduction due to substitution from fossil fuels to biofuels. Additional effects of the program are to reduce oil imports and raise farm commodity prices.

The RFS is at a crossroads. Most greenhouse gas emissions reductions under the RFS were touted to come from cellulosic biofuel, which can be produced from the inedible parts of plants, but the technology has not developed sufficiently to make it cost effective. Instead, most biofuels are produced from corn or soybeans. Moreover, the RFS now requires more biofuel than the fuel industry can easily absorb. Congress and the Environmental Protection Agency, which administers the program, face important decisions about the future path of the RFS.

This paper draws three lessons from the RFS that are relevant to government policymaking in this and other areas:

1. Incorporate uncertainty when making, implementing, and analyzing policy;

2. Don't give the regulator too much discretion because it enables political forces and legal challenges to undermine policy; and

3. Don't mandate things that don't exist.

Biofuels account for more than 10 percent of farm crop revenue in the United States, so they are an integral part of the farm economy. In 2016, 40 percent of domestic corn production was used to produce ethanol, and a quarter of soybean oil was used for biodiesel. These biofuels are blended with petroleum products--ethanol with gasoline and biodiesel with diesel--and sold as transportation fuels.

The main policy governing biofuels is the Renewable Fuel Standard (RFS), which requires that at least a minimum amount of each category of biofuel be blended into the transportation fuel supply each year. The RFS was established by the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act (EISA) of 2007. The program sets ambitious standards for biofuel consumption, with the overt goals of reducing greenhouse gas (GHG) emissions and reducing dependence on foreign oil. (2) An additional effect of the program is to expand demand for corn, soybeans, and some other crops raised by US farms.

The RFS is at a crossroads. Until 2013, the fuel industry met the RFS mandates without too much difficulty. However, the mandates now require more biofuel than the fuel industry can easily absorb. As a result, compliance costs have increased, which in turn have increased lobbying pressures on the Environmental Protection Agency (EPA), which administers the program. The EPA, and by extension Congress, faces important decisions about the future path of the RFS.

Farm bills have devoted relatively few federal resources to biofuels. The energy title in the 2014 Farm Act contained a projected $125 million per year for biofuels, less than 1 percent of projected non-nutrition spending. Actual spending since 2014 has been even lower as appropriations committees have reduced funding. Energy title funding focuses on the development of non-corn-based biofuels, which have potentially larger GHG reduction benefits than corn ethanol and which constitute all of the RFS-mandated growth in biofuels after 2015. (3) As such, the energy title is best seen as an abetment to the RFS.

This paper addresses two questions:

* What lessons from the RFS are useful for the policymaking process?

* What farm bill initiatives could improve US biofuel policy?

I draw three lessons from the RFS that are relevant to government policymaking in this and other areas:

1. Incorporate uncertainty. Policymakers should make, implement, and analyze policy with a view to what might happen, rather than a single projection of what will happen.

2. …

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