A Fine for Not Using a Biofuel That Doesn’t Exist

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A Fine for Not Using a Biofuel That Doesn’t Exist.”  That’s the headline on the front page of the New York Times Business section today.  And the story is yet another example of why U.S. citizens have lost faith in the federal government’s ability to do anything correctly.

This is a story of government mandates run amok in the face of a technology that stubbornly refuses to be developed.  In 2011 oil refiners were required to blend 6.6 million gallons of cellulosic ethanol into their gasoline.  I’ll get into the chemistry shortly.  But the economics is simple enough: there is virtually no cellulosic ethanol to be had on the market.  Anywhere.  At least on planet Earth.  Even worse, the mandated quantity increases to 8.65 million gallons in 2012.

Ethanol is created by fermentation of sugars.  The most technologically efficient feedstock for ethanol production is sugar.  The U.S. government mandates (there’s that word again) that ethanol made for use in motor vehicles in the U.S. must be made from corn.  Problem: sugar is converted into ethanol at about eight times the productivity of corn.  That’s why  the U.S. also has a $0.54 per gallon tariff on ethanol imported from Brazil.  Naturally, Brazilian ethanol is made from sugar.  While $0.54 per gallon might not sound like much, consider adding this tariff to the price of gasoline.  Now I hasten to add that’s not going to happen.  Even the most extreme environmentalists haven’t proposed banning gasoline sales and completely replacing gasoline with ethanol.  But comparing the size of the tariff with gasoline prices gives you some idea of how large this tariff actually is.

Cellulosic ethanol would be made from cellulose.  Plant stems are largely cellulose.  The largest quantity of plant stems are from trees.  That’s why you will read that cellulosic ethanol is made from wood chips.  But that isn’t necessarily the case.  There has been at least one attempt to genetically engineer plant stems so that they break down into ethanol.  And there have been many, many different technologies developed over the last couple of decades.  Commercial production of cellulosic ethanol is always five years away.  And it’s been that way for the last 20 years.

For example, in a press release dated February 8, 2007, M.I.T. professor of chemical engineering Gregory Stephanopoulos said, “‘The technology to produce cellulosic ethanol is not there yet,’ [but] he estimates that large-scale, economically feasible production of ethanol from cellulose could happen within 10 to 15 years.”  Prof. Stephanopoulos still has ten years to make good on his prediction.  At least his forecast is more realistic than the perpetual five years from now prediction.

 The EPA, naturally, weighs in on this.  From the Times article cited earlier:

“But Cathy Milbourn, an E.P.A. spokeswoman, said that her agency still believed that the 8.65-million-gallon quota for cellulosic ethanol for 2012 was ‘reasonably attainable.’ By setting a quota, she added, ‘we avoid a situation where real cellulosic biofuel production exceeds the mandated volume,’ which would weaken demand.”

That sentence tells you all you need to know about the EPA’s current expertise in economics.  Parsing Ms. Milbourn’s economic analysis, setting a quota somehow keeps cellulosic ethanol production from exceeding the mandated quantity.  Never mind the fact that it is simply impossible to meet this production goal for 2012.  And the remainder of the sentence defies economic logic.  An increase in supply weakens demand?  My students in microeconomic principles can explain why that’s not true.  (A hypothetical increase in the quantity of ethanol supplied would cause the price to fall, but would not effect the demand curve.  It’s a movement along a single demand curve, not a “weakening” of demand.)

In summary, the government has told refiners they must add a product to motor vehicle fuel.  This product does not exist and will not exist in commercial quantities in the foreseeable future.  But the refiners are still paying fines for not blending cellulosic ethanol into their product.  Unbelievable.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.