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Waiving Renewable Fuels Standard Is No Fix

Waiving Renewable Fuels Standard Is No Fix
For consumers, an RFS change could affect what they pay for fuel and food.

“…If U.S. ethanol consumption were somehow banned, then U.S. corn prices would drop to an average of $2.67/bu.,” says Bruce Babcock, Iowa State University Cargill Chair of Energy Economics. “But there is no mechanism for implementing a ban on corn ethanol production. The only tool that the U.S. government has at its disposal to lower corn prices is to waive the mandate.”

Babcock conducted a July study on the impact the current drought would have on crop and biofuel prices. He conducted it again with the lower corn productions estimated in the August World Agriculture Supply and Demand Estimates (see "Crop Progress Report Paints Dismal Picture"). Part of that explores the impact of a waiver for the Renewable Fuels Standard (RFS).

“Two findings stand out,” Babcock says. “The first is that the flexibility built into the RFS allowing obligated parties to carry over blending credits (RINs) from previous years significantly lowers the economic impacts of a short crop, because it introduces flexibility into the mandate. The 2.4-billion-gal. amount of flexibility assumed in this study lowers the corn price impact of the ethanol mandate in this drought year from $2.49/bu. to $0.58/bu. This means that waiving would lower corn prices by about 7.4%.

“The second finding is that if the current price of ethanol relative to gasoline accurately reflects the value of ethanol to blenders, then the price of ethanol will be supported at quite an attractive level as long as ethanol quantities are not pushing up against the blend wall. This implies that ethanol plants will be a strong competitor for corn even without a mandate…”

Another Look: House, Senate urge EPA to adjust ethanol mandate

Similarly, a study from Purdue University suggests corn prices wouldn't necessarily moderate if the federal government's corn ethanol mandate were temporarily suspended. The report, "Potential Impacts of a Partial Waiver of the Ethanol Blending Rules", suggests that corn prices could fall under some scenarios should the U.S. Environmental Protection Agency grant a partial waiver of the corn ethanol provision of the RFS, but only under certain market conditions.

“The range of impact of an RFS waiver goes from zero to $1.30/bu. for corn,” says Wally Tyner, a Purdue University energy policy specialist and the report's lead author.

In the Purdue study, Tyner, along with fellow ag economists Chris Hurt and Farzad Taheripour, looked at future corn and ethanol prices with and without an RFS waiver, how RINs and crude oil prices could factor in ethanol use, and what might occur if the drought worsens.

“If corn prices remain high, which seems likely, and crude oil remains at $100/barrel or lower, then reducing the RFS could reduce the demand for ethanol and, consequently, the demand for corn,” Tyner says. “If the waiver resulted in less demand for ethanol that would, in turn, lead to lower corn prices than would have existed without the waiver. It also could lead to more ethanol plant closings – at least temporarily.”

Conversely, an Environmental Protection Agency (EPA) waiver could have little effect if crude oil moves beyond $120/barrel and oil companies continue blending ethanol at current levels, Tyner says.

Under its normal schedule, the EPA has until October to gather information on the extent of any economic harm done by the original RFS level and to decide if it will issue a waiver. For consumers, the decision could affect what they pay for fuel and food.

Should a waiver lead to reduced ethanol use, the EPA could have an influence on who bears the brunt of the drought-related corn losses, Tyner says.

“The total amount of harm from the drought is in the tens of billions of dollars,” Tyner explains. “The EPA cannot change the loss. It can only potentially redistribute it among the affected parties: ethanol producers, livestock producers, corn growers, and domestic and foreign consumers.”

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