How Biofuel Mandates Raise Food and Energy Prices

Introduction

The U.S. biofuel mandate fails at its stated objectives, worsens food security, and increases costs for consumers. Biofuels are plant-derived substitutes for petroleum-based transportation fuels. Congress has mandated their use since 2005 as part of the Renewable Fuel Standard (RFS). The government’s mandate was justified by claiming it would reduce emissions, increase U.S. energy security, spur the development of more advanced biofuels, and help American farmers. In practice, the Renewable Fuel Standard has delivered on only one of its initial promises: boosting the incomes of American farmers. Conventional biofuels have proven to be more carbon intensive than fossil fuels, the technology advances that Congress had counted on have not come to fruition, and the U.S. is incapable of producing biofuels at the level the law requires. Rather than increasing American energy independence, the U.S. has become a net biofuel importer in order to meet the biofuel blending mandate. Inflexible federal policy has also meant that when corn and soybean prices rise, gasoline prices go up, harming U.S. consumers. By diverting crops from livestock feed and human food, biofuel blending mandates also worsen food insecurity, particularly in crises like the one triggered by COVID-19 supply disruptions and the Russian invasion of Ukraine.

In the 2007 Energy Independence and Security Act (EISA), Congress gave precise volumes of biofuels that U.S. fuel providers were supposed to use every year through 2022. The EPA was tasked with ensuring compliance, and given the ability to change the volume requirements if U.S. biofuel production capacity or the ability to incorporate biofuels proved incompatible with the Congressional mandates. The volumes laid out in the RFS have proved to be unrealistic, requiring the EPA to make ad hoc adjustments that leave the fuel industry in limbo. The law could have used blending percentage requirements rather than volume mandates or set requirements over multiple years instead of just one. This would have provided greater flexibility to respond to supply shocks like the biofuel price spikes in 2022, and demand shocks such as falling fuel use during the Great Recession and the COVID-19 pandemic. The U.S. government could also continue supporting biofuels by investing more in biofuel R&D to increase cost competitiveness with fossil fuels. However, given the shortcomings of biofuels, policymakers should consider other ways of achieving environmental and energy security goals.

The U.S. biofuel mandate has limited flexibility, and it bet on a technological advance that has not lived up to promises. The RFS also sought to support American farmers by mandating an increase in the demand for crops. This reduced food availability and increased prices. Support for farmers should instead focus on increasing agricultural productivity and encouraging farmers to adopt risk minimization strategies to mitigate supply shocks.

History and Overview of U.S. Biofuel Policy

Debates about biofuel use in the U.S. date back to the 1930s when policymakers thought that oil production had peaked. The oil crisis of the 1970s renewed interest in fuel alternatives, but analysis at the time concluded it was uneconomical. Biofuels constituted less than 1% of U.S. transportation fuel. Amendments to the Clean Air Act (CAA) in 1990 required the addition of oxygenates, such as bioethanol, to gasoline to reduce air pollution. This mandate led to a slight increase in biofuel use, but alternatives such as MTBE, typically derived from natural gas, proved to be more cost effective. MBTE, however, was soon banned in several states due to groundwater contamination concerns. Although biofuels largely replaced MTBE as the oxygenate of choice to satisfy the CAA rules, biofuel use remained low because only a small amount of ethanol is needed to meet these requirements. The 2005 Energy Policy Act first introduced the Renewable Fuel Standard, and the 2007 Energy Independence and Security Act created the current U.S. biofuel mandate policy. While President Bush argued that the RFS was motivated by environmental and energy security concerns, the history of the U.S. farm lobby’s involvement in pushing for biofuel use suggests the bill was mainly designed to reward this powerful interest group.

The RFS describes four basic types of biofuels and sets minimum blending requirements for each, which increase or stay the same each year from 2007 to 2022. The four types are

• Cellulosic biofuels: made from either non-food crops such as grass or the non-edible parts of food crops and supposed to have 60% lower CO₂ emissions than gasoline
• Biodiesel: made from vegetable oils (mostly soy in the U.S., canola or other oilseeds in other parts of the world), can only be used only in diesel engines, and supposed to have 50% lower CO₂ emissions than gasoline
• Non-corn based biofuels: made from various crops such as sugarcane, can be substituted for biodiesel to meet RFS requirements, and supposed to have 50% lower CO₂ emissions than gasoline
• Corn-based biofuel: by far the most widely used biofuel in the U.S. and supposed to have 20% lower CO₂ emissions than gasoline

Less carbon intensive biofuels can count toward fulfilling the mandate for more carbon intensive biofuels, but not the other way around. While all biofuels are supposed to reduce CO₂ emissions, recent life cycle analyses show that corn ethanol actually produces 24% more CO₂ than conventional fossil fuels because it requires carbon intensive inputs, like nitrogen fertilizer made from natural gas, and additional farmland which would otherwise be left to act as a natural carbon sink. 

The EPA can change the requirements set by the 2007 RFS, and issues an annual Renewable Volume Obligation (RVO) that lays out the actual requirements for that year. The EPA has had to set the RVO lower than the volumes set by the RFS every year since 2010. One reason for this is that the ability to produce more advanced biofuels like cellulosic biofuels has not grown at nearly the pace that Congress anticipated. By 2022, the U.S. was supposed to use 16 billion gallons of cellulosic biofuels, but can only produce less than a billion gallons. Additionally, total American fuel use is much lower than was projected in 2007. The original biofuel requirements, which were written as a fixed number of gallons, would constitute a much higher percentage of the total transportation fuel. If the original mandate was stuck to, biofuels would now constitute 26.7% of total U.S. fuel use, as opposed to the 13.7% that they currently do. Only 7.5% of U.S. vehicles can accommodate more than 15% ethanol gasoline (E15) without damage to their engine. Worse, only 1.5% of U.S. gas stations offer E15 fuel, and barely half of those offer higher ethanol blends. High ethanol content makes fuel more corrosive and less energy dense, requiring larger, reinforced fuel holding tanks, resulting in the so-called “blend wall”: the maximum amount of biofuels, as a percentage of total transportation fuel, that can be used without significant infrastructure changes. Given current constraints, the blend wall sits at around 10%. Since fuel use has dropped so much relative to 2007 predictions, at first because of the Great Recession and then because of fuel efficiency improvements, the original mandates would break this barrier.

The EPA often experiences long delays in issuing RVOs. Legal battles between farm groups, fossil fuel companies, and the EPA delayed the release of the 2014 and 2015 RVO until 2016, when the RVO had to be declared retroactively. Fuel providers fought to reduce the mandate below the blend wall, while farmers challenged the EPA’s authority to significantly alter the mandate. The EPA also had to make major adjustments during the COVID-19 pandemic as fuel demand plummeted. The RFS enforcement varies significantly under different administrations. Obama and Biden’s EPA have rejected petitions from small refiners seeking exemptions from burdensome blending requirements, but under Trump dozens of these exemptions were approved. Ongoing uncertainty reduces the fuel industry’s ability to plan for RVO changes, and the EPA’s discretion in enforcing the RFS reduces investment in the infrastructure needed to accommodate higher ethanol blends.

The Impact of Biofuel Mandates on Food and Fuel Prices

Biofuel mandates have important effects on food markets. In 2013, the EPA’s National Center for Environmental Economics (NCEE) conducted a meta-analysis that found every one billion gallons of ethanol mandated by the RFS contributes to a 2 to 3% rise in corn prices. Since 2015, the U.S. has required the use of 15 billion gallons, implying a 30 to 45% increase in prices. More recent estimates conclude that the ethanol blending mandate has driven corn prices up 30%, and that biofuel policies increased soybean prices by 20% as well. The start of biofuel mandates in the U.S., EU, and Brazil in the mid 2000s was widely blamed for contributing to the 2007/8 food crisis which left 75 million additional people facing starvation and drove 44 million into extreme poverty. Several G7 leaders suggested waiving biofuel mandates in the summer of 2022 to alleviate the current food price spikes, but the U.S., Canada and France rejected the proposal. 

The connection between biofuel policies and food prices is fairly straightforward. Roughly 36% of U.S. corn is now used for bioethanol production. The RFS therefore provided a massive increase in demand for America’s most important crop, a crop that accounts for nearly a fifth of all calories consumed worldwide. There was also some increase in supply, with U.S. corn acreage growing by an estimated 16.5% in response to this demand, but much of this came at the expense of soybean acreage. Similar displacement effects have been seen in other parts of the world, with increases in oilseed cultivation coming at the expense of wheat production in major wheat growing countries. Major grains — corn, wheat, rice — are substitutes, and so rising corn prices also impact other staple foods. The growth of additional crops to meet biofuel demand also competes with food and livestock feed for key inputs like pesticides and fertilizers, further raising food prices. 

Americans directly feel the increases in gas prices caused by biofuel mandates. Ethanol from corn is the main biofuel in the U.S., making up more than 83% of biofuels required by the EPA’s 2022 RVO (excluding biodiesel which can only be used by 3% of U.S. passenger vehicles). On a per-gallon basis, ethanol prices have been lower than gasoline prices 64% of the time for the past decade. However, ethanol is only two-thirds as energy dense as gas, so gas has actually been cheaper per unit of energy more than 97% of the time for the last ten years. This difference in energy density also means that blending ethanol into gasoline at a 10% rate, the standard in the U.S., leads to a 3 to 4% loss in fuel efficiency. When the biofuel mandates were first implemented, the National Renewable Energy Lab (NREL) analyzed the expected cost effectiveness of ethanol and found that mandates would often lead to lower prices at the pump. However, the study massively overpredicted the typical range of oil prices, and underpredicted corn prices.¹ Since higher oil prices and lower corn prices make ethanol more competitive, this error skewed the studies findings. The actual corn and oil prices have meant that ethanol is nearly always a more expensive fuel source that Americans are being forced to pay for. 

The RFS enforcement mechanism also increases gas prices. For every gallon of wholesale gasoline that oil refiners produce, they must provide a Renewable Identification Number (RIN) to the EPA. RINs are purchased from blenders who “produce” RINs when they blend biofuels into gasoline. RINs are tradable credits, and so refiners and blenders that acquire more RINs than they need can sell to companies that do not have enough RINs. These credits thus act as a tax on oil that subsidizes biofuels. The EPA has found that essentially all of the cost refiners incur by having to purchase RINs gets passed to consumers.

With the exception of a few spikes, RIN prices remained below $0.06 per gallon until 2013. At this point, they spiked to more than $1.00 because the RVO required ethanol blending rates above the blend wall. Since only a handful of blenders supply gas stations that can handle higher than 10% ethanol blends, ever since 2013 there have been few excess RINs in the market, raising their prices. In early 2020 RIN prices hovered between $0.20 and $0.30, but then ethanol prices soared and gas consumption dropped. In the summers of 2021 and 2022, RIN prices were between $1.30 and $1.60. If all of the estimated $30.5 billion net spent by refiners in 2021 on purchasing RINs was passed to consumers, distributed across the 134.83 billion gallons of gasoline sold that year, this would translate into a nearly $0.22 increase in the price of a gallon of gas. Accounting for the higher price of ethanol relative to gas on an energy equivalent basis, this brings the total cost of the RFS to about $0.26 per gallon, relative to a scenario where no ethanol was used and there were no RIN requirements. Several assessments that account for other variables, such as by Wells Fargo and the Energy Policy Research Foundation (EPRINC) found similar price effects of $0.30/gallon and $0.15 to $0.25/gallon, respectively.

Despite its drawbacks, corn ethanol can be an important fuel additive since it can be cost effective for increasing fuel octane ratings and meeting environmental standards. Since 1995, in places that have poor air quality, the EPA has required fuel providers to sell reformulated gasoline. This gasoline releases lower amounts of volatile organic compounds (VOCs) which contribute to air pollution. About 25% of U.S. gas is reformulated, and ethanol is an effective oxygenate for reducing VOC pollution. However, a blend of only 5.7% (much lower than the 10% used to comply with the RFS) is needed to meet EPA requirements. Blending ethanol into gasoline also increases the fuel octane rating, a measure of performance. Gas without additives has a rating of 85, while the standard rating is 87. Ethanol has a rating of 113, so adding 7% ethanol brings gas up to 87, but this is more than 30% lower than currently required by the RFS. Thus even if ethanol is the only octane additive used by refiners, they do not need to be blending at the more than 10% rate that they are currently obliged to. However, there are also other octane-enhancing additives, such as petroleum-derived aromatics that have higher octane ratings — so less can be used to the same effect — and are cheaper when corn prices are high, as was seen by their prices compared to ethanol prices in the summer of 2022. So while ethanol can make economic sense in some situations, it is often costly to add, and without biofuel mandates would likely not be blended at as high a rate as it currently is in the U.S. Other countries have much lower ethanol blend rates, such as China (2.1%) and Russia (1.2%). Were the U.S. to follow, significant amounts of crops would be freed for human or livestock consumption, and CO₂ emissions and gas prices would fall.

Options to Reform Mandates

Ethanol blending mandates are bad policy. They fail to accomplish the stated environmental and energy security goals that motivated them. The U.S. blending requirement should be removed, and Congress should look to more effective environmental, energy, and farm support policies. However, biofuel mandates are extremely popular in electorally important midwestern states, so completely abandoning the policy may not be politically feasible in the near term, and Biden’s EPA is aiming to “put biofuels back in growth mode.” Given these constraints, Congress should at least consider reforming the RFS or supporting biofuels through other programs with the goal of minimizing negative effects on American gas prices, global food security, and the environment.

Two structural changes to the RFS biofuel blending mandate could allow fuel providers to respond to commodity price changes, reducing adverse effects on food and fuel markets. The first is to change the mandate from a yearly RVO that gives specific volumes to a blending rate mandate. This way, if gas demand falls due to an economic contraction or some other disruption, refiners are not on the hook for trying to blend higher volumes of biofuels than they can accommodate with current infrastructure. The second reform is to set stable blending volume requirements over several years, as opposed to annual mandates. This would allow refiners to blend at higher volumes when ethanol prices are low, relative to oil, and blend at lower levels as ethanol prices rise relative to gas. Farmers would get more support when there is an over-supply of corn and prices fall, but the mandates would not require high blending rates when ethanol is most expensive, reducing the burden on energy consumers. Such a policy would also free up more grain when food prices increase, reducing food security concerns for the world’s most vulnerable.

Congress could also support biofuels by investing more heavily in R&D to reduce the competition between biofuel production and consumable food prices. Advances in biofuel production could make them more competitive with fossil fuels such that there would be no need to mandate their use. Efforts should focus on cellulosic biofuels, which are made from non-edible crop residues or non-food crops. These fuels need not compete with food crops, but still boost farmer incomes, although the positive effects on food security and the environment are not guaranteed. With these more advanced fuels, farmers can sell all of their crop as food or livestock feed, but also sell biofuel producers their crop residue (inedible parts) or non-food crops grown when fields would normally be left fallow. Currently, these fuels cannot be economically produced in large quantities, but further R&D may change this.

Policy Lessons

Many of the downsides of biofuel mandates could have been foreseen, and point to more general policy lessons. The U.S. has not been able to produce anywhere near the amount of advanced biofuels mandated in the 2007 RFS. This is a case of the government betting on a specific technology, as opposed to incentivizing innovation in whichever technological domain would produce the desired result, in this case reducing U.S. dependence on fuel imports and reducing CO₂ emissions. In 2007, typical fuel efficiency for transportation vehicles was much lower, and innovations in electric vehicles seemed distant. The natural gas boom also made America less dependent on energy imports, and the U.S. is now a net petroleum exporter. These developments reduce much of the initial impetus for biofuel use. In the future, the U.S. should adopt a more “technologically agnostic” approach to achieving policy goals. As agricultural economist Aaron Smith puts it, the RFS “mandated something that didn’t exist.”

Under 2007 projections of future gas use, the blend wall would not have posed nearly as much of a challenge to U.S. refiners, and the financial burden for consumers would be much lower. If the original volume mandates had been feasible, the EPA could have stuck to these and then the fuel industry would have known what regulations would require years in advance, giving ample time to adapt. However, since the volumes were set far too high to be economically incorporated into U.S. fuel supplies, the EPA had to declare new requirements every year, making the industry’s status unpredictable and opening the regulations up to legal challenges. This highlights the importance of policies that have structures to accommodate changes in future circumstances. A blending rate requirement would have served this purpose.

Congress’s desire to support U.S. farmers was clearly a significant reason that we have biofuel mandates. Many environmental and energy policies are more effective, but biofuels serve the interests of a powerful constituency. In the 1990s, U.S. agricultural policies underwent a massive change. The 1996 Farm Bill ended major commodity support programs like the Farmer Owned Reserves (FOR) program that heavily subsidized farm production by giving low interest loans to farmers to store excess product. The WTO Agreement on Agriculture came into effect in 1995 and liberalized agricultural policies around the world, requiring governments, especially in developed countries, to reduce direct farm subsidies. Biofuel mandates were a way to support farmers under the auspices of environmental and energy policy. However, simply increasing crop demand raises farmer profits but hurts consumers and worsens food insecurity. Congress clearly wishes to support the farm industry, even though it is actually quite financially healthy. This support should also serve consumers, reduce food insecurity, and provide actual environmental benefits. One way to do this is to invest in agricultural R&D. Public research has consistently increased food supplies, and adopting new technologies, such as genetically modified crops, increases farmer incomes. The U.S. government could also consider supporting farmers through renewed food reserve programs, which do increase demand for food but also hedge against production shocks, can stabilize prices, and improve the global response to food crises. A general lesson shown here is that federal support for an industry should not take the form of simply mandating an increase in demand, but should rather focus on increasing productivity and keep other important goals such as food security in mind.

Conclusion

U.S. biofuel policy fails on all of its stated objectives: it does not reduce carbon emissions or improve U.S. energy independence. It instead increases gas prices by mandating the use of corn ethanol well beyond the point that it is an economical fuel additive given current infrastructure constraints. Advanced biofuels with lower CO₂ emissions cannot be produced at the levels expected when the policy was crafted, forcing the U.S. to rely heavily on corn based ethanol that is more carbon intensive than conventional transportation fuel. Biofuel mandates do not contribute to U.S. energy independence, and America actually has to import biofuels to meet RFS requirements. By diverting 36% of U.S. corn and 30% of U.S. soy — America’s two most important crops — biofuels raise food and livestock feed prices, exacerbating food insecurity around the world.

Although biofuel mandates are bad policy, they are popular with important political constituencies. If mandates are kept, Congress should: 

1. Replace volume requirements with blending rate requirements to accommodate gasoline demand changes, rather than tying requirements to the EPA’s fuel use forecasts.
2. Set requirements over multiple years so that refiners can respond more flexibly to oil and crop price changes.

Alternatively or in addition, Congress could fund more R&D to make biofuels more competitive with conventional fuels.

Policy lessons from the failure of biofuel mandates are:

1. Avoid betting on a single technology to achieve a goal. Instead, incentivize innovation in any technology that could achieve the desired policy outcome.
2. Build in structured ways to respond to changing circumstances so that regulatory agencies do not have to make continuous adjustments.
3. Do not support specific industries by simply artificially increasing demand. Instead, increase supply by investing in efficiency increases while keeping the public’s interests in mind.

To this end, the U.S. should support farmers by funding innovation in advances in agricultural technologies and food reserves as a hedge against production shocks and food crises.