Economist: RFS2 waiver costs could outweigh benefits

Policy tremors generated by suspension of federal ethanol mandates could significantly outweigh any short-term benefits of a Renewable Fuel Standard (RFS2) waiver, University of Illinois ag economist Madhu Khanna warns.

Martin Ross

Published: Oct 9, 2012

This week, the U.S. Environmental Protection Agency (EPA) ends public comments on a proposal requested by several governors and major livestock groups to reduce or eliminate 2013 RFS2 corn ethanol use requirements.

Unless post-harvest corn prices move “significantly higher,” a waiver likely would have little impact in reducing corn demand for ethanol, said Khanna, policy analyst with the U of I’s Energy Biosciences Institute. A key driver in ethanol use is the need to boost fuel octane (oxygen) levels, and ethanol remains the low-cost octane-boosting option, she noted.

Khanna thus questioned whether EPA should pare back RFS2 goals “if we want to seriously move toward energy security and greenhouse gas mitigation.” She cited the mandate’s role in reducing ethanol production costs and argued “the assurance of demand” is crucial to developing “advanced biofuels” that tap non-food, non-feed sources.

“We need to be taking a longer-term view on biofuels policy, rather than one that is very short-sighted,” she told FarmWeek. “Waiving the mandate for a year would cause so much policy uncertainty. It could have a detrimental effect in terms of future investments in biofuels.

“There are many plants poised to begin production in 2015 with cellulosic feedstocks. We’ve made a lot of progress moving down that path in the last five years. If there were uncertainty about the (RFS2), those investments could come to a crashing halt.”

Prospective new ethanol feedstocks include corn stover -- a commodity in relatively ample supply even in a drought year, Khanna noted. Crop residues and energy crops offer income diversification in drought years or for farmers with less productive lands, she said.

Last week, Ag Secretary Tom Vilsack questioned whether new USDA crop projections should weigh heavily in EPA’s decision -- “I don’t think the United States is going to run out of corn,” he said.

He cited already reduced ethanol production and noted fuel suppliers can use renewable credits to defer near-term biofuels purchases.

“Given the world situation ... we’re not looking at significant reductions in the price of corn as a result of any action EPA could take,” Vilsack said.

“And there are comments from the petroleum industry that, notwithstanding (RFS2 requirements), it’s still going to be relying on ethanol for octane purposes.”

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