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Column: Well intentioned but flawed, U.S. biofuel policy in need of change

(Jason Bordoff is Director of Columbia University's Center on Global Energy Policy. Robert McNally is founder and president of Rapidan Group, an energy market and policy consulting firm. They served as White House energy advisors for Presidents Barack Obama and George W. Bush, respectively. The views expressed are their own.)

NEW YORK/WASHINGTON, July 26 - Gasoline prices have shot up nearly 20 cents since the start of July and are projected to rise higher yet. Gasoline prices are largely driven by global crude oil prices and usually rise during the summer driving season. But this year, in an ironic twist, they are being pushed up even more in part because US gasoline consumption is much lower than anyone anticipated just a few years ago.

Here's why: In 2007, in a laudable effort to reduce oil imports, Congress revised the Renewable Fuel Standard, or RFS, which mandated that refiners blend increasing volumes of ethanol into gasoline each year. For the most part, refiners cannot blend more than 10 percent ethanol into gasoline. Combine a rising and rigid volumetric ethanol mandate with declining gasoline use, and the result is that this year refiners hit that 10 percent "blend wall." This year, refiners and importers can comply by buying RINs generated in past years. But that option won't be available after this year, and the problem will get worse in coming years as the ethanol mandate keeps rising but gasoline consumption does not.

Hitting the blend wall means consumers pay more at the pump. To comply with the RFS, gasoline producers (such as refiners and importers) buy credits—known as Renewable Identification Numbers (RINs)—from blenders of ethanol into the gasoline supply.

As the blend wall approaches, the price of RINs has skyrocketed from a few cents at the start of the year to around $1.40 per gallon of ethanol in mid-July. RIN prices then declined sharply this week, to around $1.00, on hopes that the Obama Administration and Congress may be preparing to address the blend wall problem by easing the RFS.

Absent a legislative or regulatory fix, RIN prices will resume rising and increasingly be borne by consumers. Some refiners and importers will also reduce gasoline supply, import less and export more, tightening the market and pushing up gasoline prices. Diesel prices are also affected. Biodiesel prices have shot up in response to higher demand from refineries because using more biodiesel generates precious RINs that can be used to comply with the RFS.

There are no quick and easy ways around the blend wall. EPA permits gasoline containing up to 15 percent ethanol (E15) in vehicles model year 2001 and newer, but manufacturers warn E15 could damage engines and void warranties; few consumers will buy it. While 11 million "flex fuel" vehicles can take fuel up to 85 percent ethanol (E85), few stations outside the Midwest sell it, and it will take time before station owners install costly new tanks and pumps that would be needed to increase E85 availability.

We all want to reduce oil consumption. But it makes little sense to penalize consumers because in 2007 Congress did not foresee that our current energy infrastructure would be unable to accommodate higher ethanol blends.

So what should policymakers do? For starters, Congress should scrap the volume-based requirement in favor of a percentage requirement. That should initially be set around 10 percent of our gasoline consumption, a level that not only avoids the blend wall but also reflects the amount of ethanol that would likely be blended into gasoline anyway given ethanol's price advantage and ability to help gasoline burn more cleanly. Over time, the percentage could rise if and when consumers demand more ethanol and our energy infrastructure can handle it.

While, ultimately, congressional changes will be needed, EPA has discretionary authority to partially ease the compliance burden. For example, it could nudge down the overall ethanol blending mandate to reflect lower-than-anticipated supplies of certain specialized biofuels, such as cellulosic ethanol. Given that the purpose of the RFS was partly to boost production of these sorts of domestically produced, advanced biofuels that have not yet appeared, Congress should boost research on cellulosic ethanol at the same time that it loosens the RFS mandate.

Fixing the Renewable Fuels Standard shouldn't be a partisan issue. Both parties share responsibility for the current impasse, and both parties should support reforms that fix it. Leaders from both parties have recently made statements recognizing that the current law is unworkable and needs to be fixed. With gasoline prices still inching upward and the broken RFS poised to drive them higher, Congress should act quickly.

There is and always will be an important place for renewable fuels like ethanol in our fuel mix, and all of us support decreasing our reliance on imported oil. With the economy's recovery still fragile, we should avoid penalizing consumers at the pump with a well intentioned but flawed biofuels mandate. Americans' fuel usage has changed since the RFS was written and enacted. It's time for the RFS to change, too.

(Edited by Jonathan Leff)

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