Last week, the U.S. House of Representatives passed H.R. 1346, which would allow year-round sale of 15 percent ethanol motor fuel, known as E15. For years, ethanol lobbyists have sought more demand for the fuel to increase prices for corn, the main input into ethanol production. Its passage in the House is the culmination of a months-long effort to circumvent the normal legislative process and taxpayers' interests in order to expand failed federal ethanol policy. And the taxpayer costs will be high — $2.3 billion according to the Congressional Budget Office, plus numerous other expenses that will be passed onto consumers, motorists, and taxpayers at the federal and state levels.

How Did We Get Here? 

Ethanol use was primarily limited to E10, a blend of 10 percent ethanol and 90 percent gasoline, until the Environmental Protection Agency (EPA) approved E15 sales in 2011. The ethanol industry, at the time, sought expansion of ethanol use because the $6 billion tax credit—the Volumetric Ethanol Excise Tax Credit (VEETC)—ended that year. Moving from E10 to E15, the industry said, would help increase ethanol demand and production, reduce gas prices, enhance jobs, and spur economic development in rural areas. But none of this has come to fruition.

E15 has a higher vapor pressure, which causes smog-forming emissions. Under current law, E15 generally cannot be sold during the summer—June 1 to September 15—without temporary EPA waivers due to long-standing Clean Air Act restrictions. Ethanol advocates have long called to permanently waive emissions restrictions and allow the year-round sale of E15.

This latest push began earlier this year, when ethanol state lawmakers sought to attach language allowing year-round E15 to an annual government funding package. When that effort was blocked, House leadership created the Rural Domestic Energy Council as part of a compromise to move the broader legislation forward. But the council, which consisted of lawmakers representing ethanol, small petroleum refiners, consumers, and other interests, failed to reach a compromise. Then, the council's most recent—but unagreed to—proposal resurfaced as a proposed amendment to the farm bill. But opposition to the ethanol-industry-backed amendment was once again too strong. Instead, the House Rules Committee produced a Rule setting up a standalone vote as part of a compromise to move the farm bill forward.

On May 13, after clearing a procedural hurdle in the Rules Committee, the House passed H.R. 1346 with a vote of 218–203, with Democrats and Republicans on both sides. (You can see how your Member of Congress voted here – https://www.congress.gov/votes/house/119-2/164).

The winding legislative path reflects the larger reality that Congress still cannot build consensus around expanding E15. And instead of accepting defeat, ethanol-boosters continued to hold major legislative packages hostage in their efforts to force year-round E15.

What is in H.R. 1346? 

Under the Clean Air Act, gasoline with a Reid Vapor Pressure (RVP) over 9.0 psi cannot be sold during the summer. RVP is a common measure of gasoline volatility — how readily it evaporates and creates smog-forming emissions. To allow the sale of high-ethanol blends like E10 and E15, the Governor of a State may request a waiver by showing that the RVP limitations will actually increase, not decrease, air pollution. This then allows E10 and E15 with a higher 10 psi RVP to be sold. H.R. 1346 would permanently allow E10 and E15 to be sold year-round at the higher 10 psi RVP.

In an effort to gain the support of the oil and gas industry, the House-passed bill would also change how small oil refiners are treated under the Renewable Fuel Standard (RFS), which requires U.S. oil refiners to blend a certain amount of biofuels into U.S. transportation fuel each year. These mandates include both corn ethanol and soy biodiesel, in addition to other fuels such as renewable diesel—a substitute for diesel. While the RFS is in dire need of reform, this proposal is more about playing politics than actually fixing a broken mandate that increases costs for taxpayers and consumers.

Specifically, the House-passed bill, if enacted, would reduce the number of oil refiners that have to meet biofuel blending mandates as compared to current law. It would also prevent EPA from shifting biofuel blending mandates from small oil refiners to large oil refiners, which increases their cost of doing business. Additionally, the bill would automatically grant outstanding petitions for 2016, 2017, or 2018 and prevent EPA from increasing RFS volumes to account for small refiner exemptions.

The proposal also directs EPA to issue new rulemaking on fuel infrastructure and labeling requirements.

How Much Will H.R. 1346 Cost Taxpayers?

The Congressional Budget Office (CBO)—the nonpartisan budget keeper—estimated that enacting H.R. 1346 would add $2.27 billion to the national debt. CBO's estimate is based on the impacts that increased corn-based ethanol consumption would have on the agricultural industry and consumers at large.

Below is a summary of CBO's analysis of the impacts that will arise with more E15 consumption. Each of these impacts carries significant costs for taxpayers and consumers and complicates passage in the U.S. Senate and enactment into law:

• Increased Ethanol Production Will Increase Tax Credit Payouts: The consumption of corn, the primary ingredient in ethanol, would increase due to higher ethanol blends allowed to be sold year-round. The 45Z Clean Fuel Production Credit would be more expensive due to more ethanol being produced, since the credit is tied to the number of gallons of biofuels produced.
• Changing Soybean Prices Will Increase Farm Subsidies: Reforms to the RFS will decrease the total blending mandate and overall biofuel production, primarily that of soy-based biodiesel, which will decrease soy prices and increase taxpayer-funded subsidies to agricultural producers.
  • If the EPA can no longer require larger refiners to blend more biofuels, picking up the volumes small refiners are exempted from, the total biofuel blending mandate will decrease. 
    • This decrease will primarily come from biodiesel production and consumption, which will be unable to compete with more ethanol in the market. Biodiesel is largely derived from soybeans. 
    • As demand for soy-based biodiesel decreases, so will crop prices. Decreasing soybean prices will also cause prices for crops grown on competing farmland to drop (This impact is also estimated by Food & Agricultural Policy Research Institute).
    • These crop price drops would cause certain farm subsidy programs—those guaranteeing minimum prices and income tied to crop prices—to become more expensive for taxpayers, since they would be triggered more often by lowered crop prices.
• Low Gas Content in E15 Will Increase Gas Tax Revenue: Motorists would have to fill their tanks up more often when filling with E15. Ethanol contains less energy content than gasoline and thus, motorists cannot drive as far on a tank of E15 compared to E10 or regular gasoline. More fill–ups at the gas station mean more gasoline tax paid by consumers. 

As with many CBO cost estimates, not all costs are included. Higher demand for ethanol production may increase the amount of grasslands and pasture converted to cornfields. This in turn may increase the cost of the federal crop insurance program, if acreage qualifies for federal subsidies. This would also impact animal feed prices since less pasture and grazing land would require cattle producers to purchase feed instead of grazing on grass, increasing feed prices, livestock prices, and ultimately food prices.

Federal taxpayers may also subsidize fuel dispensers who install or upgrade ethanol blending and transportation infrastructure to be able to use E15, which is more corrosive than traditional gasoline. Installation of E15 fuel pumps may also be mandatory in certain states. Taxpayers have already spent more than $800 million supporting biofuel infrastructure projects, often through grants, subsidies, and tax breaks.

What are the other taxpayer and consumer costs of year–round E15? 

Ultimately, consumers and taxpayers will pay the price for more special interest carve-outs for the ethanol industry, which has received taxpayer subsidies since 1978.

Motorists will need to fill up at the pump more frequently, since E15 has a lower gas content than traditional gasoline. Drivers could experience increased costs if high vapor pressure from E15 causes vapor lock or engine start problems in vehicles. And they may face costly liabilities if small engines, off-road vehicles, and older engines—not certified for E15 use—malfunction or quit working due to consumers filling up with E15. This happens often as E15 labels are not always clear, so misfueling may occur, especially in vehicles manufactured prior to 2001, which are not warranted for E15 use.

In addition to the subsidization of ethanol through the 45Z tax credit (included in the CBO score), taxpayers also subsidize the production of its primary ingredient, corn, at an average of $8 billion annually via farm subsidy programs and federal crop insurance premium subsidies. Numerous other USDA grant and loan guarantee programs also subsidize corn, corn ethanol, and other biofuels.

Conclusion 

Government-mandated markets are seldom economically sustainable, instead relying on continued and ever-expanding federal subsidies to keep them afloat. Through tax breaks, government spending, and federal mandates, taxpayers created and, for decades, have propped up the ethanol industry. The push for year-round E15 is just the latest step in a decades-long fiscal folly in federal biofuels policy. For taxpayers, consumers, and agriculture itself, expanding federal support for ethanol is bad fiscal policy.