Corn ethanol – policy lessons from Iowa election

Unsurprisingly, both economic and political factors are at play here, with ‘Big Corn’ – corn being the feedstock which supplies the ethanol industry in the US – strongly supporting an ethanol mandate. With an ethanol mandate recently legislated in Queensland, what parallels and implications are there for Queensland policy makers to consider?

Growth in ethanol consumption in the US has been driven by Federal legislation aimed at promoting renewable fuel sources for environmental sustainability and reducing reliance on oil imports to enhance energy security. This includes a Renewable Fuel Standard (RFS) program, administered, by the Environmental Protection Agency (EPA), that requires fuel retailers supply a specified level of renewable fuel, including corn ethanol-blended fuel. The EPA has the ability to waive the mandated volumes if it considers the program is causing severe economic or environmental harm, or there is inadequate domestic supply. This policy is complemented by legislation promoting the installation of more blender pumps capable of dispensing multiple ethanol blends and requiring an increasing proportion of vehicles to be manufactured and warranted to operate on non-petroleum-based fuels post 2014. Elements of these policies have been contentious and subject to litigation.

Iowa is the largest corn-producing state in the US, producing 2.4 billion bushels of corn grown on 13 million acres of land in 2014. With nearly half of all the corn produced in Iowa going into ethanol production, it is not surprising that the merits of mandating supply of ethanol fuel blends is a prominent election issue. Ethanol advocates argue that it is critical to the local economy, as well as for national energy security and environmental sustainability – a position supported by most presidential candidates. However, Republican candidate, Senator Ted Cruz, has argued for a market driven approach, arguing for the phase-out of the RFS, along with the elimination of all subsidies on all forms of energy.

Against this background, it is interesting to consider the recently legislated ethanol mandate in Queensland. The Liquid Fuel Supply (Ethanol and Other Biofuels Mandate) Amendment Bill 2015 was passed by the Queensland Parliament in December 2015. The objectives of the bill are to:

• provide assurance to existing ethanol and biodiesel producers and stimulate investment in a biofuels industry in Queensland;
• contribute to regional growth and jobs creation;
• reduce greenhouse gas emissions from motor vehicles; and
• take advantage of the emerging second generation technologies for biofuels from a range of feedstock.

The Queensland policy requires that 3% of regular unleaded petrol sales and ethanol blended fuel sales must be ethanol. In practice, this means that ethanol blended E10 fuel will have to make up at least 30% of petrol available for sale in Queensland, starting from January 2017. Some fuel sellers will be exempt, with liability subject to certain thresholds (based on scale of operations) and an exemptions framework. The Bill also requires that the mandated level will increase to 4% after 18 months. There is also a separate biobased diesel mandate requiring 0.5% of all diesel fuel sold to be biobased diesel.

The Queensland Government has the ability to adjust the mandated percentage downwards by regulation if required in response to technological or market changes. It also has the ability to suspend the mandate where there is an industry-wide shortage of sustainable biofuel or blends, there is not enough demand or there are adverse impacts on Queensland’s economy from requiring compliance with the mandate from all or a class of fuel sellers.

There are a number of parallels in the ethanol mandate policies of Queensland and the US, with the policies raising similar issues. The US policy experience and its implications for Queensland are therefore worth considering, in particular, the overall effectiveness of the mandate in meeting its objectives and any unintended consequences.

In both jurisdictions, the ethanol mandate provides support for the development of a biofuels industry by underpinning demand for ethanol blended fuels. However, the policy may have a number of unintended consequences:

• impact on fuel consumers –there may be circumstances (such as a shortage of feedstock) in which the mandate will contribute towards higher fuel prices. The Queensland policy seeks to address this risk by including a mechanism to suspend the mandate in certain circumstances. However, as this relies on a regulatory rather than a market mechanism to respond, there is a possibility of adverse consumer impacts at times. Costs borne by service station owners in installing the infrastructure necessary to handle ethanol blended fuels may ultimately be passed on to consumers;
• impact on food and other feedstock consumers – the ethanol mandate may result in a greater proportion of feedstock production going towards ethanol rather than food production, creating upward pressure on food prices. Cattle farmers and feedlot producers who use feedstocks for supplement feeding may also be affected;
• environmental impacts – as a renewable fuel, ethanol is regarded as a more environmentally friendly fuel. However, some questions have been raised in the US about ethanol’s sustainability given the large amount of land required for feedstock crops. The question of whether ‘indirect land use changes’ as a result of the ethanol mandate should be taken into account by policy makers has been a contentious issue in the US. This includes impacts on food production, deforestation and water use. Another issue is the overall energy balance of ethanol, taking into account its full life cycle.

The Queensland policy seeks to address environmental risks (such as the risk of increased use of fertiliser or run-off entering the Great Barrier Reef, or the sourcing of feedstock from environmentally damaging sources) by requiring that only ‘sustainable biofuels’ will count towards the target. These are biofuels which meet sustainability criteria which are to be prescribed by regulation.

Another issue is the overall effectiveness and practicality of the mandate. The ability of service stations to handle increasing amounts of ethanol blended fuel is a practical constraint on increased ethanol sales. The US has introduced policies to increase the installation of blender pumps able to dispense multiple blends. In Queensland, fuel sellers subject to the mandate will have to install this capacity if necessary to comply (although smaller scale operators are exempt).

Petroleum prices are another factor that will influence the effectiveness of the mandate. Where petroleum prices are relatively low (as has been the case in recently in the US) or where there are alternative fuel sources, ethanol blended fuel may be relatively less attractive to consumers.

The US experience also shows that, having introduced an ethanol mandate on which many businesses have based investment decisions, it can be extremely difficult to unwind such a policy. This can effectively lock Governments into an open-ended obligation to support a particular industry. This is a particularly serious risk where market developments have led to the policy intentions being achieved by other means – for example, the rapid growth in gas production in the US has furthered both the energy security and environmental sustainability objectives of the ethanol mandate policy.

Against this background, the recent electoral success of Senator Ted Cruz in Iowa – despite advocating the phasing out of the ethanol mandate and a market-driven fuel policy – is an interesting development in the policy (and politics) of ethanol.