Quit Digging

There is an old adage that when you are in a ditch, quit digging.  EPA with the help of corn state representatives dug a ditch when they created the ethanol mandate, the  renewable fuel standard and then created renewable identification numbers-RINs—as a mechanism to track compliance with  blending requirements.

RINs worked to the advantage of companies with blending capabilities but created a big disadvantage for independent refiners that had to buy RINs—blending credits.  In addition, traders found a way, as they always do, to turn RINs into a commodity that they could buy and sell and hence turn a profit.

Recently, the largest independent refiner on the east coast declared bankruptcy because of  the high cost of RINs.  According to the Wall Street Journal, Philadelphia Energy Solutions, has spent over $800 million purchasing RIN credits since 2012. That is more than the pay and benefits for its 692 workers.  Spending money to purchase credits certifying that a company has blended ethanol with its gasoline is shear insanity.  Ethanol has no environmental benefits, it can be corrosive to engine parts, lower gas mileage, it can’t be shipped by pipeline, and it raises food prices.  There is only one reason for the renewable fuel standard, to transfer wealth from motorists to corn growers and ethanol manufacturers.

Having distorted the gasoline market with a requirement that has no benefits, EPA now plans to make the situation worse by either setting a cap on the price of RINs or allowing independent refiners to purchase credits directly from the federal government.  We experienced price controls in the 1970s and they proved to be an economic disaster.  Markets set prices through the interactions of a large number of buyers and sellers.  This process conveys information on supply and demand.  To think that the federal government can duplicate that discovery process to determine the price of RINs is wooden headed folly.  There are only two things that are certain with the approach being considered.  A system that has no value beyond enriching the favored will become ever more complicated and traders will figure out how to game the system to continue making money from it.

EPA has made the ethanol hole bigger over time and should simply stop digging by beginning the process of withdrawing the useless renewable fuel standard.  In the meantime, EPA can simply give away RINs. Refiners report production to DOE, so gallons of gasoline produced would have to match assigned RIN credits.  A similar process could be used for imported gasoline.

Author: billo38@icloud.com

Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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