biofuel subsidies

Ten Most Distortionary Energy Subsidies - Update (long version)

Complex security, environmental, and economic trade-offs remain the norm for the energy sector.   Government intervention is also the norm, and too often involves a torrent of energy plans, white-papers, and legislation.  In an ideal world, government policies should work in tandem with market forces to achieve an adequate energy supply mix that is cleaner and more diverse than what preceded it.  These synergies do not currently exist.  Instead, there are thousands of government energy market interventions in place around the world - many of which act counter to stated energy securi

Ten Most Distortionary Energy Subsidies - Update (short version)

Complex security, environmental, and economic trade-offs remain the norm for the energy sector.   Government intervention is also the norm, and too often involves a torrent of energy plans, white-papers, and legislation.  In an ideal world, government policies should work in tandem with market forces to achieve an adequate energy supply mix that is cleaner and more diverse than what preceded it.  These synergies do not currently exist.  Instead, there are thousands of government energy market interventions in place around the world - many of which act counter to stated energy security, dive

Some interesting research coming out of MIT and UCAL Davis challenges claims by the biofuels industry that Renewable Fuel purchase mandates have resulted in enormous savings to fuel consumers.   Claimed savings have been massive, indeed.  Last month, energy economist Phil Verlager published an analysis concluding that

Crude oil today might easily sell at prices as high as or higher than in 2008. Preliminary econometric tests suggest the price at the end of August would have been $150 per barrel.

The implication for world consumers is clear. As noted in the August 2013 Petroleum Economics Monthly , the US renewable fuels program has cut annual consumer expenditures in 2013 between $700 billion and $2.6 trillion. This translates to consumers paying between $0.50 and $1.50 per gallon less for gasoline.

That's right:  as much as $2.6 trillion in savings every year.  In contrast, the few billion in subsidies sure look small.  These figures are included in an updated ad campaign (below) by the Renewable Fuels Association, a biofuels trade promotion group.

And Verlager is not alone in claiming very large economic impacts.  Using 2011 data, economists Dermot Hayes and Xiadong Hu of Iowa State University estimated average savings of $1.09 per gallon -- with savings in the mid-West region reaching as high as $1.69/gallon.  Their estimated savings over a longer period (2000-2011) were significantly lower, though, at about $0.29/gallon.

Economists Christopher Knittel (MIT) and Aaron Smith (UCAL Davis) reworked the estimation approach used by Hayes and Wu and found it had a number of problems.  They argued that a key metric (the crack ratio, or the price of gasoline divided by the price of oil) was over-generalized.  They also argued that the earlier paper suggested a causal relationship with ethanol and crack ratio movements, rather than mere correlation.  The Knittel and Smith analysis found a much smaller impact of ethanol blending mandates on prices to consumers.  Knittel noted in an interview with the MIT news office that

In the very short run, if ethanol vanished tomorrow, we would be scrambling to find fuel to cover that for a week, or less than a month.  But certainly within a month, increases in imports would relax or reduce that price impact.

The full paper can be accessed here.  There's a fair bit of interchange as well between Knittel and Smith, and Hayes, and this provides an interesting window into the methods of both parties:  Hayes 1Knittel and Smith 1Hayes 2

RFA Ad campaign touting large savings from ethanol

I expect that Knittel and Smith are much closer to the true impacts than either Hayes and Wu or Verlager.  The ethanol market share is simply too low to be causing shifts of such a large percentage of the market price.  Further, continuing shifts in fuel market structure are likely to weaken the marginal impact of ethanol on fuel prices relative to other factors.  These shifts include continued efficiency gains in the fleet, growing use of hybrids, ethanol fuel production above the blend wall, growing exports of refined fuels from the US, and increasing sources of oil. 

An important related point to this general discussion of price impacts is that one shouldn't claim savings in gas prices from blending mandates while ignoring the negative impacts that these mandates have on consumers in other ways.  For example, the ethanol subsidies (now dominated by the RFS) drive up the cost of animal feed and human food (the degree of which is another fiercely contested data point).  This is properly seen as an offset to whatever gains may exist at the pump.  There is also the direct cost of the subsidies themselves -- not only through biofuel support programs, but also from long-lived subsidy programs for irrigation and corn production are are increasingly being captured by the biofuels market segment as more and more crop ends up and fuel.   And globally, there are negative impacts on land use as artificially high prices for biofuel production displace other claims on the land ranging from different food crops to ecological uses.

Natural gas fracking well in Louisiana

1)  Biofuels:  More problems with renewable fuel compliance credits.  Remember back in July when it was discovered that investment banks were manipulating aluminum prices through an arcane and somewhat bizarre dance of trucks moving inventory to and fro among bank warehouses in Detroit?  Well, they've been at it again -- this time with Renewable Fuel Standards credits, which are traded as RINs, or "Renewable Indentification Numbers." Speculating on the credits, triggering a supply squeeze and price jump, seems to have been a central factor in price spikes of 20x over a six month period.   

This isn't the first problem to crop up in the subsidy-ridden biofuels markets.  There have been scams to run fuels across border to do a bit of blending ("splash and dash") in order to tap into large tax credits; and even counterfeiting of RINs themselves.  As I've noted earlier, if something acts like money, one needs to assume all of the bad things people try to do to enrich themselves and defraud others will come into play.  This type of gaming has happened in enough markets over enough time that ensuring market transparency and fraud-prevention rules are in place from the outset of new programs should be a top item on government policy maker's "must do before promulgation" check list.  That said, Valero Energy, quoted by the NYT as losing as much as $800 million from the RIN-squeeze, is a large and sophisticated company.  It ought to have been running a hedging program similar to what airlines do with aviation fuel.

2)  Biofuels:  More taxpayer losses in USDA's second sugar-to-fuel auction.  More fun with the nutty program that forces surplus sugar to be sold at a loss to biofuels producers to "avoid" taxpayer losses on sugar loan defaults, the subject of a blog post two weeks ago.  Front Range Energy, the winner of the first sugar auction, noted that they had only a week to respond to the solicitation and that this likely was a factor in having so few bidders.   They paid 6 cents per pound of sugar.  USDA promised to do better next time:

“Transportation, volume of sugar feedstock and other concerns appear to have limited bioenergy company participation,” the Agriculture Department said in its statement. “The USDA expects greater participation in FFP [Feedstock Flexibility Program] as these concerns are addressed.”

They must have meant the next, next time: Pacific Ethanol won the second action with a bid of only 4.1 cents per pound of surplus sugar, nearly a third lower than the price paid to USDA on its first auction.  Management noted that they expected "this purchase of sugar to significanly lower raw material costs..."

3)  Nuclear:  The US Export Import Bank offers more nuclear subsidies.  Export Credit Agencies such as Eximbank prop up exports by subsidizing the financing costs of risky projects or sales of large assets to risky countries.  In July, the Bank offered to provide subsidized loans for the $10 billion Temelin nuclear power project in the Czech Republic.  Terms:  25 years and a fixed interest rate of 3.5% -- pretty good for a nuclear reactor project.  The Prague Post notes that the guarantee could cover 40-50% of the project cost.  This would equate to about $4-5 billion. 

The financing is contingent on Westinghouse winning the bid -- Eximbank is about subsidies that help the US after all.  But the irony is that Westinghouse is no longer a US company, really.  Though still headquarted in Pennsylvania, and therefore generating some US jobs, the firm is 87% owned by Japan's Toshiba Corporation, 3% by Japan's IHI Corporation, and the remaining 10% by Kazatomprom, the national uranium company for the Republic of Kazakhstan.

4)  Nuclear:  National Journal (NJ) hypes small modular reactors.  Once it was clear that big nuclear reactor projects were not getting any banker love, the nuclear industry began scrambling for backup plans.  Small modular reactors (SMRs) have been one of them -- with proponents arguing that they are simpler, cheaper, easier, able to fit anywhere, and an all around good thing for the government to help them develop. 

The National Journal has unfortunately picked up the meme in its article "Small Reactors May be Nuclear Power's Future."  Ernest Moniz, the current Secretary of Energy in the US, hails from MIT, an institution long involved with nuclear research of all types and long in favor of government-supported nuclear power.  Nearly a half-billion dollars of federal money has been put into financing SMR construction, according to the NJ.  The National Journal lists economics as a main driver of the shift:  automated production, more standardization, less overhead for utilities.  But this goes against 50 years of engineering assessments that have sought to build ever-larger reactors to achieve economies of scale and lower costs per unit energy produced.  Other arguments put forth:  that new small reactors will be safer than the really old reactors still operating (though of course the older reactors will close on their own, and don't need to be replaced with new nukes); and that the US needs to keep subsidizing nuclear so we remain a big player in the industry and "have a voice in conversations about nuclear technology in the international arena."  On this last point, I would suspect our role as the world's military superpower might give us a similar "voice" regardless of whether we subsidize SMRs.  And, as we've seen time and again with nuclear issues, having a "voice" and having an impact are very different things.

5)  Nuclear:  Discussion on whether nuclear energy should get another layer of subsidies over at  This website, founded by entrepreneur Yossie Hollander, often has interesting debates on energy-related topics, both common and arcane.  This question asks whether nuclear energy ought to get environmental subsidies because it is low carbon.  My response I'm sure will be a big surprise:  of course not.  Nuclear energy is one way to reduce our carbon footprint, but hardly the most cost-effective.  It may gain market share once carbon is priced, but it should not be assumed the big winner in a carbon-constrained world.

6)  Transitions:  Kerryn Lang and Chris Charles.  Best wishes to both Kerryn Lang and Chris Charles, who are leaving the Global Subsidies Initiative in Geneva after many years and much good work there.  Both are returning to their native New Zealand.  It has been fun working with them on a number of projects during their tenure.  And while I wish we were nearing completion on our project to transition away from environmentally-harmful subsidies around the world, the reality is that there may well be opportunities to work with these two in the future, wherever they happen to be residing.

7)  Solving problems when people cooperate.  Congratulations to Amy Larkin, formally of Greenpeace Solutions, on the publication of her new book, Environmental Debt: The Hidden Costs of a Changing Global Economy. It's a quick read, and full of examples of where cooperative engagement between the environmental community and top management of big firms has resulted in rapid and tangible environmental gains. It is very nice to see the successes every once in awhile.

The EU Biofuel Policy and Palm Oil: Cutting subsidies or cutting rainforest?

The EU biofuels industry has increased its use of palm oil by 365 per cent over 2006-2012, from 0.4 to 1.9 million tonnes per year. The additional demand can be linked primarily to the growth in biodiesel production stimulated by government policies (primarily purchase mandates) during the same period. The increase in palm oil consumption in the biofuels sector has amounted to 1.6 million tonnes, or 80 per cent of the total increase in palm oil consumption in Europe (1.9 million tonnes) over 2006-2012.

It's an interesting time to watch biofuels markets.  A couple of years ago, with commodity prices spiraling, there was great concern that fuel markets were outbidding food and feed markets for edible biomass.  Now, reporter Judy Keen notes that the United States is facing drought in nearly 80 percent of the country's corn-growing area; and more of the country's landmass is facing drought than any time since 1956.

Back in 2006, biofuel proponents were touting the introduction of ethanol as a boon for domestic energy security.  National security was one of the central planks proponents used to advocate for continuing large and growing subsidies to the fuels.  The industry continues to highlight the energy security angle.  Here is the Renewable Fuels Association on energy security:

As a domestic, renewable source of energy, ethanol can reduce our dependence on foreign oil and increase the United States' ability to control its own security and economic future by increasing the availability of domestic fuel supplies. By displacing hundreds of millions of barrels of imported oil, the increasing reliance on domestically-produced ethanol is making available billions of dollars for investment in domestic renewable energy technologies.

Energy Security has More than one Parameter

There's a grain (sorry) of truth in this argument.  Being able to put ethanol into vehicles instead of gasoline provides a bit of competitive leverage against oligopolistic petroleum suppliers.  The leverage, however, is fairly limited.  The US Congressional Research Service recently concluded that

Despite the fact that ethanol displaces gasoline, the benefits to energy security from ethanol remain relatively small. While roughly 40% of the U.S. corn crop was used for ethanol in 2011, the resultant ethanol only accounts for about 7% of gasoline consumption on an energy-equivalent basis. Expanding corn-based ethanol production to levels needed to significantly promote U.S. energy security is likely to be infeasible.

Fuel substitution is only part of an energy security picture though, and it is important to look at the security issue  holistically.  Supply security also matters.  And, just as world events disrupt oil supplies causing price shocks and dislocations, so too can the supply of biofuels be disrupted.  Here's what I wrote on the issue six years ago (p. 58):

Biofuels do offer a diversification benefit, inasmuch as they may be less vulnerable to the same kinds of disruptions that threaten supplies of petroleum from politically unstable regions of the world. However, the cost per unit of displacement [i.e., subsidies per gallon of oil displaced] is very high, and there are likely many more efficient means to achieve the same end.  Moreover, the feedstocks from which biofuels are currently derived are also vulnerable to their own set of unmanageable and unpredictable risks, such as adverse weather and crop diseases.

It turns out that those "unmangeable and unpredictable risks" are not something that should be ignored.  The chart below is from a 2007 article by Bruce Babcock at Iowa State University, a frequent researcher on corn and biofuels issues.  He notes that corn harvests have regularly deviated from expected yields, and often by a large margin.  Shortfalls are particularly relevant with respect to biofuels markets that mandate particular consumption levels.  Responding to claims that crop innovation had made corn at a lower risk from drought than in the past, Babcock was skeptical:

It is an open question whether future supply shocks will follow the historical patterns. Many feel that current corn hybrids are better able to withstand hot and dry weather of the type seen in 1983 and 1988. This has yet to be demonstrated, though, as we have not had a severe drought since 1988. Dry weather in Illinois in 2005 and in the western Corn Belt in 2002 caused significant local yield losses, which suggests that corn crops remain vulnerable to drought.















Supply Shortfalls in the Face of Mandated Consumption

As crop production is threatened, food prices and crop futures rise. The higher prices send signals to all consumers that they might want to shift to other feedstocks or to figure out how to use the now more-expensive inputs more carefully.  This rationing process works best when all consumers of the affected commodity feel pressure to substitute or conserve.  Biofuel mandates mess up this process because they require diversion of a large portion of the corn crop into vehicle fuels -- even at very high prices.  In effect, the mandates hard-wire the markets so that transport uses for corn will outbid feed and fuel uses.

In an interesting review of corn market dynamics under the present drought, Darrel Good and Scott Irwin at the University of Illinois point out that compliance with the blending mandates does have some flexibility.  The rules allow some banking of prior year credits.  This carryover has been estimated at "at least 2 billion gallons" -- important, but still a small slice of the more than 13 billion gallons required for blending during the next mandate year.  Thus, when they estimated how markets would respond to rising corn prices, they assumed that carryover stocks of Renewable Indentication Numbers (commonly referred to as "RINs," and which are the market mechanism for tracking compliance with the RFS biofuel blending mandates) would be used first to reduce the need for buying actual (and expensive) corn.  This makes logical sense, but only solves part of the problem.  Good and Irwin further note that

without policy changes ethanol use after the stock of RINS is used up would become perfectly price inelastic.

Becoming "perfectly price inelastic" is economist terminology that means fuel markets will continue to buy the same amount of ethanol no matter how much the price of the fuel rises.  This is a big deal, because it means the residual demand for ethanol for fuel will outbid all other uses for corn during the period of scarcity:  food, animal feed, exports, everything.  And this will happen only because of the Renewable Fuel Standard subsidy, not because of the inherent economics of the product.

Good and Irwin point out that the ability to borrow credits from future years (up to 20% of the requirement) could theoretically be used to further reduce the need to buy actual corn for fuel markets.  However, they didn't see this strategy being widely deployed.  Borrowing for 2012/13 would mean the need to blend even more than the mandate for 2013/14 -- yet markets are already saturated with ethanol making incremental blending quite difficult. 

The drought brings into greater focus problems that have existed in biofuel markets for some time.  First, that biofuel feedstocks, like oil, are subject to supply disruptions and this volatility reduces the security element of the fuel.  Second, that the mandates result not only in market challenges but a moral one as well when the least important end-use from a societal stand point (fuel for cars) ends up diverting increasingly scarce supplies of corn or other biofuel crops from feeding people.

Ships Passing in the Night

Lest the mandated use of corn in cars rather than for food not cause enough heartburn, Tim Wise highlights another problem on his Triple Crisis blog.  While reducing carbon impacts was an early (though not always accurate) selling point of biofuels, current policies have resulted in Brazil and the United States shipping each other ethanol at the same time.  Here's Wise:

Why would the United States, which now devotes 40% of its corn crop to the production of ethanol, import more  than 4 billion gallons of ethanol from Brazil? And why would Brazil at the same time import a projected 2 billion  gallons from the U.S.? Couldn’t we just save all those transactions costs and shipping-related greenhouse gas  emissions by keeping our ethanol and cutting our projected ethanol imports from Brazil in half?

Not if your goal is to game the U.S. biofuel mandate.

The driver is the fact that corn ethanol and sugar ethanol are fall into different categories of the RFS.  Sugar-based fuels, because they supposedly have a lower carbon footprint, fall into a more constrained, and therefore more valuable, category of RINs.  Wise notes that

...the ultimate perversity is the ethanol-for-ethanol trade between the U.S. and Brazil. Under the FAO-OECD’s baseline scenario, Brazil would import 2 billion gallons of corn ethanol from the United States. Why, if it’s a major ethanol exporter and it produces more environmentally sustainable ethanol? To make up for the domestic shortfall created by its exports to the U.S., and to meet its own rising demand from its expanding fleet of flex-fuel cars. They’ll take our low-grade corn ethanol if they can get a higher price for their sugar-based equivalent.

And so it goes.

Just Pass the Wine

The inanity of it all is a bit mind-boggling.  But then I remember it has always been so in this nook of our global marketplace.  My first introduction to ethanol issues was in 1989 when I worked on an ethanol-related US trade case.  It turns out that Europe was producing too much wine due to their complex and wide reaching system of agricultural subsidies.  Wine can also be used to make ethanol fuels, and even then the US had generous subsidies for blending ethanol with gasoline.  Alas, the ethanol-from-wine couldn't come straight to our shores because then we'd have been flooded with supplies from around the world, and that would have hurt US corn farmers and processors.  Thus, a tariff (which ended only last year) was in place to render most imports (including European wine alcohol) far less competitive. 

To solve the problem, the wine was instead shipped first the Carribean basin, which due to a regional economic development plan passed by Congress earlier, had special tariff-free access to US markets.  But to comply, some value-added had to be done to the fuel in the Carribbean -- it couldn't just be transhipped.  So it was dewatered there, and entered our markets tariff-free where it was blended with our gasoline supplies to "green" our transport fleet.

How much easier it would have been if they'd just offered us the wine.

A large portion of the spending to develop alternative energy options for the military makes sense.  Delivering fuels to the front lines costs dramatically more than the raw cost of the fuel itself.  Military assessments estimate that the delivered cost of a mission-ready gasoline is almost always higher than $15 per gallon and routinely $20 or $40/gallon.  In extreme cases, such as when jet fuel need to be flown in to remote locations, the cost can be as high as $400 per gallon.  These are mere economic costs.  There are also human costs because fuel deliveries along long and insecure supply lines are routinely attacked, and these attacks result in injuries and deaths.  A recent Forbes article quoted Senator Mark Udall of Colorado as saying that "1 out of every 50 convoys in a combat zone results in a casualty, and the Army has accrued more than 3300 fatalities in convoys since 2001."

Shortening Supply Lines, Replacing Bulk Fuels

A10C thunderbolt, Joely Santiago/U.S. Air Force/Handout Thus, any innovations that reduce the need for long supply lines to fuel forward operations in the military make logical sense.  Replacing oil-fired generators with solar panels is an example, as are waste-to-energy systems that can convert base waste into power rather than having to truck it out.  Investments to improve the energy efficiency of military vehicles of all types make great sense as well.  Not only do the upgrades reduce the need for shipments of fuel at a delivered cost of $17.50 or $40 or $400 per gallon, but the new generations of equipment can operate over a longer range.  The economics are not driven by the average price of fuel outside the military, but by the marginal cost of supplying the front lines.  Incorporating the human cost as well further improves the return on many of these investments.

Biofuels Merely Replace One Bulk Fuel with Another

The logical case is far weaker for substituting one expensive-to-transport fuel with another.  Unfortunately, that is basically what is happening with the military's push for "green" jet fuels.  David Alexander's article in Planet Ark notes that these "drop-in" biofuels cost as much as $59 per gallon to buy.  The fuel producers claim that these high costs are temporary, reflecting small-scale test facilities.  At real production scales, they claim the fuels will be competitive.  Jeff Scheib, vice president for fuels at Gevo, the firm that manufactured the alternative jet fuel in the recent tests, noted in a carefully worded statement that:

Once the company builds a commercial-scale refinery, expected around 2015, "we believe we can be cost competitive on an all-in basis with petroleum jet fuel over the life of a contract," Scheib said.

Color me skeptical.  Scheib is clearly counting on continued federal subsidies to these fuels to help them compete.  Further, there are unanswered questions on whether aerospace applications for biofuels will dramatically restructure the market, or simply outbid land markets for limited, and heavily subsidized, supplies.  One finding from our detailed examination of state and federal subsidies to biofuels for road transport during the surging growth of the biofuels market in 2005 and 2006 was that limited (and uneconomic) supply of some of the fuels were following the largest subsidy dollars -- a process I refer to as subsidy arbitrage.  High state subsidies to biodiesel, for example, would merely pull in more of the country's production to that state.  Expect the same dynamic to occur with military spending on alternative jet fuels pulling supplies from ground markets.

My colleague Ron Steenblik at OECD has been watching the aviation biofuels push brewing for a couple of years, often remarking how similar the political arguments are to what the corn ethanol producers made a few years back for government support to ethanol for ground transport.  Despite Jeff Scheib's claim the aviation fuel producers will compete with conventional fuels, the airline industry itself is quite clear in asking for government handouts:

Industry officials are urging governments to help lift supplies, much as policies in the EU and United States have created a flourishing market in plant-based oils for cars and lorries. The industry contends that sustainable fuels – when combined with aerodynamic design, efficient engines and improved air traffic handling – will reduce emissions even as passenger traffic grows.

I love this language.  It's not just "sustainable" biofuels in aerospace that will result in a lower-carbon industry, but number of rather important (and obviously beneficial) activities such as more efficient aerodynamics, engines, and air traffic.  Add to it higher load factors in the vehicles and we've pretty much got every base covered.

What would be interesting would be to get the industry to assign the percentage of improved emissions attributable to each of the factors.  We would likely see "sustainable fuels" get the smallest credit for the gains.  After all, burning biomass in planes is subject to all of the same sourcing and supply chain complications as biofuels used anywhere else in the economy. The case is gray, at best.

My take-aways on military use of biofuels:

  • The high cost of the fuel in these tests is insignificant as compared to the labor and equipment costs of running the tests.  Despite their expense, the high cost of fuels is but one item on a very long list of things the military could do differently to save taxpayers money. 
  • It makes sense to test alternative fuels in existing equipment, but only to confirm the manner in which they could be used if for some reason that became absolutely necessary. 
  • The push for widespread adoption of biofuels into military equipment makes no economic or military sense.  It is more expensive, and ignores the many complex environmental issues with biomass sourcing that have cropped up with land-based biofuels markets.  Some blends may have lower power densities, and actually reduce mission-readiness and range.
  • In contrast, the military's push to replace delivered fuels with energy sources that have shorter or smaller supply chains does make sense.  I'd much rather see investments into more efficient vehicles, better logistics systems, using "fuels-at-the-front" prices in military budgets so ground-level commanders could see the real prices and make better trade-offs, and increased ability for equipment to use (if necessary) lower grade fuels without breaking.  
Natural gas fracking well in Louisiana

During the early part of 2010, when the volumetric ethanol excise tax exemption (VEETC) looked like it was heading towards elimination, ethanol industry contortionist Bob Dinneen of the Renewable Fuels Association worked hard to paint the subsidy as vital to all things American.  In yet another RFA-sponsored study by the industry's favored economist John Urbanchuk, RFA set out to quantify the bad things that would happen if VEETC expired.  They came up with quite a list, summarized by Ethanol Producer Magazine:

If VEETC is allowed to lapse, the study said, the price to producers would be reduced by 27.4 percent, resulting in a nearly 38 percent cut in supply by producers...

If the VEETC is eliminated, the immediate impact on the industry is expected to be severe," the study said. "A significant amount of capacity would likely go offline quickly. Some of that capacity may come back online as prices rebounded to an equilibrium point, but most of the lost production would not come back.

In Dinneen's own words:

Failure to provide the kind of assurance investors require to continue building out this industry by extending the tax incentives would be shortsighted, relegating future generations to a reliance on both foreign oil and foreign renewable fuels.

With such dire outcomes, how could Congress even consider stripping away the multi-billion dollar tax break? 

The manner in which the RFS and blending subsidies interact, however, paints a very different picture of the likely impacts from elimination.  The RFS sets a mandated consumption floor for favored fuels, in good times or bad, high corn prices or low.  This is great protection if you are an ethanol producer, though quite bad if you happen to be a member of the urban poor in the developing world trying to buy corn for food.  Because the RFS creates a price-insensitive mandate, the rising feedstock prices would not divert supply from fuel to food markets as quickly as without the mandate.  This increases the likelihood of rich world fuel markets outbidding developing world urban poor looking to buy corn to eat.  Not a great dynamic. 

But back to US fuel markets though.  The RFS generates a market-clearing price for providing a pre-set number of RFS-compliant gallons.  With a few exceptions (such as biofuels so environmentally-challenged they can't even meet the weak RFS2 ghg reduction standards), these are the very same gallons eligible to meet the RFS2 mandates. 

So how would the policies overlap?  For a given production cost structure, gallons earning a 45 cpg tax credit are able to remain in production at a lower RFS credit value than would be possible for them to do without the tax credit.  (The RFS credit value in the US is referred to as the RIN value, which is short for "Renewable Identification Number," the accounting units the program uses for RFS-compliant gallons).  Pull the tax credit and the equilibrium RIN prices will rise more or less the same amount.  Increase the credit and the equilibrium RIN prices are likely to fall in response.

And, despite the claims of Urbanchuk and Dinneen, this is exactly what seems to be happening.  Here's an article on what's happening in the biodiesel sector, from Biodiesel Magazine in November 2010:

Although the U.S. biodiesel industry has struggled since the lapse of the $1 per gallon tax credit, renewable identification number (RIN) prices are currently trading high enough to fill that void. One factor that seems to be contributing to the relatively high price of RINs is the volume requirements mandated by the U.S. EPA under the renewable fuel standard (RFS2)...

According to Sam Gray, a renewable fuels trader with VICNRG LLC, 2010 biodiesel RINs hit an all-time high on Dec. 8, trading at 96 cents per RIN. Since each gallon of biodiesel that is produced generates 1.5 RINs, that equates to $1.44 per gallon, which more than offsets the lost value of the expired $1 per gallon biodiesel tax credit. [Emphasis added]...

Current market conditions seem to be indicating tight biodiesel supply in 2011, leading to relatively high RIN prices, but McMartin and Gray agree that this will change if the biodiesel tax credit is reinstated. "If that $1 comes back, there is no way RINs can remain high, the market just wouldn't allow it," Gray said. "The market will correct that, so if the dollar comes back, you are going to see a large percentage of that dollar proportionally wipe away the 2010 and 2011 RIN value."

The policy take-away here?  The very least Congress can do here is kill the blenders' credits permanently.  No transformation of the credits into new or bigger subsidies, such as to ethanol refueling infrastructure and pipelines as industry group Growth Energy has advocated; just kill the blenders credits because doing so will save taxpayers lots of cash, and will have virtually no effect on market structure anyway.

Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals

The federal government supports the use of biofuels—transportation fuel produced usually from renewable plant matter, such as corn—in the pursuit of national energy, environmental, and agricultural policy goals. Tax credits encourage the production and sale of biofuels in the United States, while federal mandates specify minimum amounts and types of biofuel usage each year through 2022. Tax credits effectively lower the private costs of producing biofuels relative to the costs of producing their substitutes, gasoline and diesel fuel.

Biofuels and the need for additional carbon

Use of biofuels does not reduce emissions from energy combustion but may offset emissions by increasing plant growth or by reducing plant residue or other non-energy emissions. To do so, biofuel production must generate and use ‘additional carbon’, which means carbon that plants would not otherwise absorb or that would be emitted to the atmosphere anyway. When biofuels cause no direct land use change, they use crops that would grow regardless of biofuels so they do not directly absorb additional carbon.