Biden Raises the Ethanol Gas Tax

Higher renewable fuel mandates may put refiners out of business 

WSJ editorial. 

"President Biden last week celebrated a small decline in gasoline prices. Meantime, his Environmental Protection Agency proposed changes to the renewable fuel standard—aka the ethanol mandate—that will raise them.

The 2007 Energy Independence and Security Act requires gasoline sold in the U.S. to contain increasing volumes of renewable fuel. EPA assigns refiners and importers annual quotas they must blend into gasoline or diesel. Those that don’t meet their quotas must buy credits from others to comply.

Last week EPA belatedly proposed volume blending mandates for 2020 through 2022. As usual Big Ethanol is grumbling—because EPA scaled back the corn-ethanol mandate for 2020 since gasoline consumption plunged during the lockdowns. This was a modest concession to economic reality and the EPA’s only one.

As fuel economy has improved over the last decade, the quotas have become increasingly unattainable. Gasoline blends with more than 10% corn ethanol can erode older car engines. Many refiners thus buy credits to comply with their quotas or turn to expensive advanced biofuels, much of which is imported.

Congress allowed small refiners to petition the EPA for an exemption if the program’s hefty compliance costs threaten their operations. Yet the EPA wants to deny exemptions to all 65 small refineries that have sought one. If these refiners shut down, there could be disruptions in the U.S. fuel supply, especially along the East Coast where small refiners are clustered. More fuel would be imported. But the shutdowns would make prices more volatile, as has happened in California.

EPA also proposes to raise mandates next year for cellulosic ethanol, biodiesel and advanced biofuels that—irony alert—have drawn enormous investments from Big Oil. Each gallon of pure biodiesel costs between $0.50 and $1 more than the petroleum diesel it displaces. Renewable diesel costs even more. These costs are passed onto drivers.

Oil giants invest in renewable and biodiesel because they can make more money than they can refining conventional gasoline or producing crude thanks to regulatory and tax credits. S&P Global Platts last fall estimated that the value of government credits for renewable diesel including from California’s low-carbon fuel standard was about $3.90 a gallon.

Due to EPA’s revisions, regulatory credits will become more valuable, which could bring a windfall to Big Oil and Big Ethanol, plus hedge funds that trade the credits. After EPA’s announcement last week, conventional ethanol regulatory credits jumped nearly 20 cents to $1.10 per gallon—the highest single-day jump since 2015.

Big Ethanol denies that the mandate raises gas prices. But compliance alone is adding about 14 cents to refiners’ cost per gallon of gasoline and diesel. Ethanol is currently trading at a premium to gasoline.

Last month Mr. Biden asked Federal Trade Commission Chair Lina Khan to investigate potential illegal conduct because unfinished gasoline (sans ethanol) prices had fallen while prices that consumers pay at the pump had risen. She doesn’t have to do much digging to find that ethanol prices this fall have increased significantly.

By the way, the ethanol mandate also contributes to higher food prices. About 40% of the U.S. corn crop is now used to produce ethanol, which increases corn prices, which raises meat prices. The Biden Administration’s energy policies are full of contradictions, and the renewable fuel standard is one more."