RFA makes more exaggerated claims in new corn ethanol ads
Posted June 7, 2011 in Moving Beyond Oil, Solving Global Warming
UPDATED June 8th to correct an error made in the original post.
I wrote last week that we could soon expect the corn ethanol industry, faced with growing bipartisan calls to end corn ethanol subsidies, to start playing on consumer fears about rising gas prices and arguing that we need more corn ethanol because it reduces the price of gasoline at the pump. So arriving in Washington, D.C. this morning, I wasn’t at all surprised to see that the Renewable Fuels Association (RFA), one of the largest corn ethanol lobby groups, had rolled out a new ad campaign in the D.C. Metro. The new ad claims, amongst other things, that ethanol reduced the average American household’s gasoline bill by more than $800 and that if ethanol disappeared, “gas prices could rise by as much as 92%.”
RFA doesn’t cite the source of their numbers in their ad so there’s no way to trace their claims, but It’s not difficult to see that these claims are wildly exaggerated.
Under the Renewable Fuel Standard (RFS), oil companies are required to blend increasing amounts of corn ethanol into U.S. transportation fuels every year. On top of that, the federal government provides these oil companies a tax credit—known as the Volumetric Ethanol Excise Tax Credit or “VEETC”—for every gallon of ethanol blended with gasoline. Under the current VEETC, valued at $0.45 per gallon, American taxpayers spend roughly $6 billion per year subsidizing corn ethanol by essentially paying oil companies to obey the law.
So who benefits from these billions in subsidies? Depending on the price of ethanol relative to the price of gasoline—which affects the blending margin for oil companies—oil companies are able to pocket more or less of the VEETC (the rest goes to the ethanol producers themselves). Oil companies can then pass some of that value through to drivers in the cost of gasoline at the pump. But what’s clear is that American drivers are not at the top of the beneficiaries list.
An independent analysis by Hart Energy Consulting looked at the costs and benefits to taxpayers and drivers of continuing to subsidize corn ethanol with the VEETC. They found that the average benefit to U.S. drivers nationwide in 2009 was $8.76 on average—a far cry from the $800 benefit per household that RFA’s new ad claims. But because the mileage of gasoline blended with ethanol is approximately 2-3% lower than regular gasoline (ethanol blended gasoline has a lower British Thermal Units (BTU) content than all hydrocarbon gasoline), any benefit must be compared to the costs drivers incur from having to buy more ethanol-blended gasoline overall. Once this “BTU penalty” was taken into account, Hart found that there was no benefit to drivers at all in 2009. In fact, on a nationwide basis, the average driver was actually penalized $14.48 as a result of corn ethanol subsidies.
RFA’s ad is just the industry’s latest cynical attempt to try and reverse the rising tide of opposition to corn ethanol subsidies. But it doesn’t change the facts. The VEETC is redundant, wasteful and doesn’t benefit American taxpayers, drivers or the environment. There’s simply no rationale for continuing the VEETC any longer. This is a waste of very scarce resources that would be far better devoted to ensuring that we make the transition to sustainable advanced biofuels.
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Comments
Matt Hartwig — Jun 8 2011 09:17 AM
Sasha
It is not surprising that your blog doesn't provide readers with the whole story.
Our ads do cite our source, a report from the Center for Agriculture and Rural Deveopment, that clearly states "Based on the data of 2010 only, the marginal impacts on gasoline prices are found to be substantially higher given the much higher ethanol production and crude oil prices. The average effect increases to $0.89/gallon and the regional impact ranges from $0.58/gallon in the East Coast to $1.37/gallon in the Midwest."
If you multiply those savings with the average miles traveled for US families, the equation shows $800 worth of reduction in gas bills.
What would cost drivers and taxpayers money is eliminating the only widely available renewable alternative to gasoline available today. Taking ethanol out of the marketplace as NRDC, oil companies and others would like only leads to more imports of oil, higher prices at the pump, and yes, more GHG emissions as the easy sources of oil are gone.
Brooke Coleman — Jun 8 2011 11:50 AM
Sasha,
This type of post is unfortunate and misleading.
First, CARD is not only the source of the information, but is a source regularly cited by NRDC to support its own arguments.
Second, you cite an "independent" Hart Energy Consulting report looking at 2009. Gas prices and gasoline/ethanol deltas are totally different today than they were in 2009, when oil prices, ethanol prices, feedstock prices, etc. were totally different than they are today. And when did Hart Energy become an independent source of information? They are a fee for service consulting firm. There is nothing wrong with that, but here is their client list: http://www.hartenergy.com/pdf/2011clients.pdf
Finally, it is discouraging to see NRDC attack anything corn ethanol irrespective of the facts. We need to get over the corn ethanol obsession and engage in a more forward-looking discussion about how to more quickly bring about the commercialization of advanced ethanol fuels and technologies. This ongoing locking of the horns is well-past productive.
Sincerely,
Brooke Coleman
Advanced Ethanol Council
Geoff Cooper — Jun 8 2011 01:08 PM
Apparently you didn’t notice the giant asterisks and the citation in 1-inch letters at the bottom of the ad (and I noticed your photo was conveniently cropped to cut off the citation—talk about misleading!).
In case you’re still having trouble identifying and finding the source of the statistic, here is a direct link to the paper: http://www.card.iastate.edu/publications/synopsis.aspx?id=1160
. I might suggest you actually try reading the paper before (feebly) attempting to trash it. And here is a link to the original paper, which appeared in Energy Policy in 2009 (you’ll have to pay for access to this one, but I’m sure there’s money in your ethanol smear campaign budget for that): http://www.sciencedirect.com/science/article/pii/S0301421509002584 . Maybe after you’ve read those papers, you can come back to your little blog here and explain to all of us why the methodology employed by Drs. Hayes and Du (a pair of renowned economists, by the way) is incorrect. And maybe you can enlighten these accomplished professors as to how their modeling results are “wildly exaggerated,” since it seems you must know more about the econometrics of the oil refining and wholesale gasoline markets than they do. Or perhaps you’d be willing to debate them at the National Press Club about how best to estimate ethanol’s impact on gasoline prices, since their methodology just isn’t acceptable to you.
By the way, I find it downright laughable that you failed to mention that the “independent analysis” you cited by Hart Energy was funded by NRDC. I’m presuming that’s why you decided not to share a link to the Hart paper. (Incidentally, I’ve seen the Hart study cited in much of your propaganda, but have not yet seen the study itself, despite searching for it. Is it available to the public? If so, where?)
If you had bothered to read the Du and Hayes papers, you would have noticed that their methodology does indeed take ethanol’s relative energy content AND its other blending characteristics into account. In any case, adjusting all ethanol prices to reflect the fuel’s lower relative energy content, as Hart did, is a dirty old trick that completely ignores the actual utility and value of ethanol in the gasoline market. Blenders and refiners don’t use ethanol primarily for its energy value; rather, they use ethanol primarily for its oxygen and octane value. But of course you knew that, since you are an expert on ethanol’s role in oil refining, gasoline blending, and gasoline market economics. Oil refiners use high octane ethanol to upgrade otherwise unsellable low octane sources of gasoline (called “sub-octane”) to the octane level needed to meet minimum specifications for regular gasoline grades. This practice reduces the refiner’s cost of producing gasoline. Due to ethanol’s unique properties and special niche in the gasoline market, it is completely inappropriate to adjust ethanol’s market price to suggest it only has value as an energy replacement for gasoline.
Please let me know when you get that debate with Professors Du and Hayes scheduled….I’ll be in the front row.
Sasha Lyutse — Jun 8 2011 03:23 PM
Thanks for your comment, Geoff, and for providing a link to the relevant study. I did indeed miss the citation (and have corrected this error in my post above), but RFA has misused it. The 92% jump in gas prices that the RFA ad suggests American drivers would see in the absence of ethanol hinges on an entirely unrealistic scenario: one in which all ethanol was suddenly removed from the market and the “missing fuel” replaced with imports, requiring immediate large supplies of imported oil which may not be available in the short-run. The study's authors address this short-term supply problem by estimating just how much you’d have to spike gas prices to ration demand, which yields the 92% gas price increase figure quoted in the ad (at the highest end of the authors’ modeled results).
This predicted cost to drivers based on a totally unrealistic hypothetical is all well and good in the world of economic models, but there is no real world scenario in which ethanol would suddenly disappear from the fuel market, forcing the gasoline market to adjust on a dime. The ad remains highly misleading and relying on such a scenario makes it even more so.
Geoff Cooper — Jun 8 2011 04:26 PM
So you're saying the scenario in which gas prices could double is based on a counterfactual, hypothetical situation, right? Gee, that sounds a little like the hypothetical scenarios upon which ILUC economic modeling is based, wouldn't you say? Yet, NRDC quotes those ILUC economic modeling results like they are the gospel truth. So, relying on hypothetical economic modeling scenarios for setting policy and enforceable regulations on ILUC is OK, but it's not OK to highlight the results of such a scenario applied to gasoline/oil markets for an advertisement?? Seems like a bit of a double-standard wouldn't you say? I'd say it's a bit hypocritical for NRDC to be lecturing about the difference between the "world of economic models" and "real world scernarios" when NRDC continues to shout down any empirical analysis of land use change that utlizes real data from the real world.
Just recently in response to the latest paper by Kim & Dale on ILUC, NRDC said: "As you know, you can only measure ILUC compared to an analysis of what the world would look like without the demand for biofuels." So, again, you say we can only estimate ethanol's impact on land use change by examining a world without ethanol. But you're saying we cannot estimate ethanol's impact on gas prices by examining a world without ethanol. Hmmm. OK.
And is that Hart Energy paper available to the public? Do you have a link?Thanks.
Diego M. — Jun 8 2011 07:58 PM
Comment removed — as indicated in the below note (and in more detail on the About this Site page), we're not okay with personal or ad hominem attacks. – Ian @ NRDC.
Sasha Lyutse — Jun 10 2011 11:13 AM
A few comments have asked for the source of the figures I quote in this post. Please see my follow-up post today for details.