Federal Ethanol Mandate Imposes $42 Billion Fuel Tax on California

November 17, 2015

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(Center for Regulatory Solutions) San Francisco billionaire Tom Steyer and other national political figures have sold out California’s economy by supporting the federal government’s corn ethanol mandate. The mandate has already imposed $13.1 billion in higher fuel costs on Golden State consumers since 2005, with another $28.8 billion to come over the next 10 years, according to a new report from the Center for Regulatory Solutions (CRS), a project of the Small Business and Entrepreneurship Council (SBE Council). The report comes on the heels of a TV advertising campaign in Northern California by the American Council for Capital Formation, a group which opposes ethanol mandates.

The corn ethanol mandate, also known as the Renewable Fuel Standard (RFS), effectively imposes a $42 billion “ethanol tax” on California consumers, according to the CRS report. The vast majority of this wealth transfer goes to out-of-state ethanol producers, primarily concentrated in the Corn Belt of the Midwest. The ripple effects of higher fuel costs will depress labor income by almost $18 billion over 20 years, according to the report’s economic analysis, and depress labor demand by more than 17,000 jobs every year. At the same time, California’s dairy and poultry farmers face hundreds of millions of dollars in higher costs, because rising demand for corn ethanol has increased the cost of corn-based animal feed. Overall, the CRS report estimates the RFS will result in $31.6 billion in lost GDP growth in California by 2024.

The CRS report also analyzes the environmental impacts of RFS-mandated corn ethanol consumption in California, taking into consideration ethanol’s lifecycle emissions. According to the analysis, ethanol has generated an extra 6.3 million metric tons of carbon dioxide-equivalent (CO₂e) since 2005 – roughly the same as putting 1.3 million cars on the road for one year – and more than 100,000 tons of additional smog-forming emissions. These higher emissions will make climate-change and air-quality regulations out of Sacramento and Washington, D.C. even harder to meet. In fact, despite promises that the RFS would cut pollution, environmental groups have warned about corn ethanol’s higher emissions for years.

But few national political figures have been willing to challenge the ethanol lobby, even when they have deep concerns about the impacts of the RFS. For example, six Republicans and all three Democrats currently running for president have shown “strong and consistent support for the RFS,” according to the ethanol lobby. Even billionaire environmental activists like Steyer have learned to toe the line. Five years ago, when Steyer was focused on California politics and defending the state’s global warming laws, he openly mocked former vice president Al Gore for once supporting ethanol. But Steyer became more involved in national politics, he changed his tune. Steyer’s campaign arm, NextGen Climate, now calls the RFS “an important program” and describes ethanol as “clean energy.”

“Washington’s corn ethanol mandate has been breaking promises and taking a heavy toll on the economy and the environment for 10 years,” said Karen Kerrigan, President of CRS and SBE Council. “As our report outlines, these broken promises will cost California consumers and small businesses almost $42 billion in higher fuel costs – and thousands of jobs will be lost – unless the RFS is immediately reformed. Small businesses across the Golden State are wondering when the federal government will finally put an end to this disaster of a policy. There is no justification for it.”

“The RFS hangs on because of the power of the ethanol lobby in national politics. It is stunning to think that a billionaire environmental activist like Tom Steyer would drop his misgivings about corn ethanol and throw the economy of his home state under the bus. But he’s no different than many other political figures with national ambitions, including presidential candidates of both parties, who get ahead by siding with the ethanol lobby over consumers and small businesses.

“Across the country, there is a broad and growing bipartisan coalition that opposes the corn ethanol mandates of the RFS. It spans all the way from limited-government groups like Americans for Tax Reform to environmental activists like Bill McKibben. In California, Democrats, Republicans, environmentalists, organized labor, dairy farmers, academics, environmental regulators and newspaper editorial boards have been warning for years about its impacts. In fact, U.S. Sen. Dianne Feinstein (D-Calif.) is one of leaders of the RFS reform movement in Washington. The findings of this CRS report challenge national political figures to change course and support major reforms to the RFS before California suffers any further from this misguided and failed national policy.”

The CRS report for California is the fourth in a series, spanning the six states of New England and the corn-producing Midwestern states of Ohio and Indiana. The reports examine the economic and environmental toll of the federal corn ethanol mandate to inform the RFS debate at the local, state and federal level.

Background

In July 2005, Congress passed and President George Bush signed the bipartisan Energy Policy Act, which established the RFS. The RFS created a set of mandates – known as Renewable Volume Obligations (RVOs) – that require ever-increasing volumes of ethanol to be added to the nation’s fuel supply. In May 2015, the U.S. Environmental Protection Agency (EPA) again announced new proposed volumes to increase the amount of ethanol used in vehicles, creating new concern amongst a wide variety of bipartisan stakeholders.

Supporters of the ethanol mandate promised a cleaner environment, enhanced energy security, and greater economic support for domestic farmers and rural communities across the country. However, the targets set by Congress, which included a mandate for consumption of cellulosic ethanol, have proved elusive because converting cellulosic feedstock into usable energy is much more challenging than starch-based crops, like corn. Despite this setback, EPA administrator Gina McCarthy – whose agency is responsible for implementing the RFS – is pledging to get the RFS mandate “back on track” and eventually align its targets with congressional mandates.

The CRS report spotlights research from the scientific community which has warned about the environmental impacts of corn ethanol since the mandate’s inception. In fact, these findings led the EPA’s Inspector General to announce on Oct. 15 that it would conduct an investigation into EPA’s calculation of the lifecycle environmental impacts of the RFS. The investigation follows years of media scrutiny of the RFS, which raised serious concerns about the impact of corn-ethanol mandates. In 2013, the Associated Press reported that the rush to plant corn “wiped out millions of acres of conservation land, destroyed habitat and polluted water supplies.” In 2008, TIME magazine concluded that ethanol “increases global warming, destroys forests and inflates food prices.”

Key Findings of the Report

The lower energy content of ethanol relative to gasoline (ethanol has roughly two-thirds of the energy content of gasoline) costCalifornia consumers roughly $13.1 billion in higher fuel costs from 2005 to 2014. Moving forward, if the RFS remains intact, Californians will pay another $28.8 billion from 2015 to 2024. The vast majority of this $41.9 billion wealth transfer will go to out-of-state ethanol producers in the Midwest.
“Food vs. fuel” competition for corn forced California dairy farmers to spend $598 million more on feed costs in 2012, while the state’s poultry farmers spent an additional $126 million.
Over 20 years, the RFS will result in $31.6 billion in lost GDP growth in California by 2024, including lost labor income of almost $18 billion and lower labor demand of just over 347,000 job-years – the equivalent of 17,000 lost jobs per year.
Ethanol production tied to the RFS has added 6.3 million metric tons of carbon dioxide-equivalent (CO₂e) to the atmosphere since 2005, or the same amount of carbon emitted by 1.3 million cars in a year. The RFS also added more than 100,000 tons volatile organic compounds (VOCs) and nitrogen oxides (NOx), which together form ground-level ozone, or smog.
In the San Francisco Bay Area, higher fuel costs from corn ethanol may exceed $4.3 billion between 2005 and 2024. Over the same period, the Bay Area could lose $2.74 billion in GDP growth, $1.63 billion in labor income and more than 1,300 jobs per year.
Corn ethanol consumed in the Bay Area has generated an extra 655,000 metric tons of CO2e since 2005 – roughly equal to adding 138,000 cars to the road for one year – and produced more than 10,000 tons of smog-forming VOCs and NOx.
According to a CRS-commissioned poll, 75 percent of voters in the Bay Area believe the corn ethanol mandate has a negative effect on the environment, and 72 percent says it’s making climate change worse.

Years of Opposition to Corn Ethanol Mandates Across California

S. Sen. Dianne Feinstein (D-Calif.): “The federal mandate for corn ethanol is both unwise and unworkable.”
S. Rep. David Valadao (R-Calif.): “As a dairyman from one of the largest agriculture districts in the United States, I have witnessed firsthand, the negative impact of Renewable Fuel Standard Mandates that are largely fulfilled by corn.”
Joint resolution of California State Assembly and State Senate: “[We urge] Congress to reform the Renewable Fuel Standard program, or the United States Environmental Protection Agency to use all available authority, to expeditiously transition away from biofuel sources that compete with food production…”
San Francisco-based environmental group Sierra Club: “The [Sierra] Club opposes further deployment of corn-based ethanol based on its extremely dubious net carbon benefits and its unresolved direct and indirect environmental impacts.”
California EPA: “Converting land that is now a ‘carbon sink’ to farmland producing ethanol also defeats the purpose of the regulations, because land now absorbing carbon dioxide would be cleared to produce corn.”
San Francisco Chronicle Editorial Board: “The corn fuel seemed like a good idea when it was invented, but even our immense agricultural industry can’t feed us and fuel us at the same time. And some experts doubt that ethanol has any net benefit to air quality anyway, especially when the economic and environmental costs of producing it are factored in.”
San Jose Mercury-News Editorial Board: “Despite today’s optimistic aura surrounding biofuels, skeptics are right to question the heavy U.S. focus on corn ethanol. It has long been debatable whether the amount of water and energy needed to produce the fuel is excessive and whether it deserves the heavy taxpayer subsidies it gets.”
Orange County Register Editorial Board: “[T]he primary reason the ethanol mandate remains in place is because of the seeming unlikely coalition of the Midwest farm lobby and the renewable-fuels industry. It certainly isn’t because ethanol is somehow good for the environment.”
San Diego Union-Tribune: “We believe the ethanol mandate should be lifted immediately to provide relief to the American people – not just a few corn farmers and ethanol producers.” READ MORE and MORE (SFGate.com) Download report