Corn, Refiners and the Republican Family Feud Over Ethanol

There are two kinds of Republicans in this world: those who have been asked about ethanol in Iowa, and those who have not yet had the pleasure. The first group will tell you the question is a trap with a cornfield around it. The second group should be warned. Sooner or later, if you want to be taken seriously on energy, you have to say something about a fuel additive made from corn, and whatever you say will make half your friends angry.

I am not being cute. The Renewable Fuel Standard splits the conservative coalition as few other issues do. On one side stand farmers, rural co-ops and the plant towns that grew up around ethanol refineries. On the other stand oil refiners, independent gasoline marketers and the drivers who pay at the pump. Both sides stand up and say "free markets" with a straight face. Both sides are partly right, and both sides are partly spinning.

So here is my thesis: a consistent conservative should want the federal mandate phased out on a known schedule, the barriers to consumer choice removed in the meantime, and the discretionary exemption lottery ended. Let me walk you through how I get there.

How a corn mandate was born

The Renewable Fuel Standard, the RFS, began with the Energy Policy Act of 2005. That law, signed by President George W. Bush, required that a rising volume of renewable fuel be blended into the national gasoline supply, starting at 4 billion gallons in 2006 and reaching 7.5 billion gallons by 2012. At the time the argument was energy security, farm income and cleaner burning fuel.

There was also a practical backdrop. The Clean Air Act Amendments of 1990 had required oxygen-containing additives in gasoline in certain smoggy cities. The main additive, a chemical called MTBE, was found to have leaked into groundwater in some places, and states began moving to ban it. Ethanol was the ready substitute, and the 2005 mandate locked in a market for it.

Then came the Energy Independence and Security Act of 2007, signed by President Bush on December 19, 2007. It expanded the program to 36 billion gallons a year by 2022, and it divided the mandate into categories. Conventional corn ethanol was capped at 15 billion gallons, and the rest of the total was meant to come from "advanced" and cellulosic fuels, made from things like crop waste and grasses. The cellulosic dream, I will note, has repeatedly fallen short of the targets Congress wrote in 2007. Congress can set a number. It cannot make a technology arrive on schedule.

How the machine works

Here is the mechanism, and I will keep it plain, because it deserves to be understood by people who do not work in a refinery.

One: the law puts the legal obligation on refiners and fuel importers. Each year EPA sets the volumes of renewable fuel that must be used, and each obligated company's share is proportional to the gasoline and diesel it sells.

Two: every gallon of renewable fuel produced carries a credit called a RIN, a Renewable Identification Number. When the ethanol is blended into gasoline, the credit is separated from the physical fuel and can be traded.

Three: at the end of the year, each obligated company must hand in enough RINs to cover its obligation. A refiner that blends its own ethanol gets RINs along the way. A refiner that does not has to buy them from someone who has extra.

Four: RINs therefore have a market price, and that price moves with the gap between what the mandate requires and what the market would blend on its own.

A hypothetical shows the stakes. Suppose a refiner is 10 million RINs short at year end, and RINs trade at $0.50 each. The bill is 10,000,000 × $0.50 = $5,000,000. That cost lands somewhere, in the price of fuel, in refinery profits, or in the decision to cut capacity. The refiners say it lands on drivers. The ethanol side says it lands on oil company profits. Economists argue about how much goes where, and the true answer shifts with market conditions. That is itself an indictment of the design: a cost that nobody can trace is a cost nobody voted on.

The farmers' case

Let me state the Corn Belt side as strongly as I can, because it is stronger than its critics admit.

First, ethanol is a market. A large share of the American corn crop goes to ethanol plants, and the byproduct, distillers grains, goes back into the livestock feed market. When a plant opens in a farm county, it buys corn locally and employs people locally. That bids up corn prices and supports land values, and it helps the elevator, the trucker and the equipment dealer.

Second, ethanol is a legitimate fuel. It has a high octane rating, which is why refiners use it as a blending component. It burns cleanly enough that it displaced MTBE. And it is domestic.

Third, the fuel retail system is not a free market in the textbook sense. The gasoline business is dominated by a handful of large incumbents. Rules limiting sales of higher blends have held the product off the shelf. Take the Reid vapor pressure rule: ordinary E10 gets a one-pound waiver in the summer, but E15, a blend with 15 percent ethanol, historically did not, which meant it could not be sold in summer months in many places unless EPA issued an emergency waiver. EPA did exactly that in a series of summers, and in May 2019 it finalized a rule to allow year-round E15, though a court later vacated part of that rule. Farmers ask, fairly, why a customer with a compatible vehicle cannot simply choose the cheaper fuel.

Fourth, the oil industry has enjoyed tax provisions for a century, including the ability to expense intangible drilling costs and a depletion allowance. Farmers ask why they alone should be told to stand on their own.

Those are real arguments.

The refiners' case

Now the other side, equally fairly. A refiner makes gasoline. The federal government has told it to purchase a second product, from a third party, in quantities set by an agency. If it cannot or will not blend enough, it must buy credits on a market that Washington created. If the mandate exceeds what drivers will buy, the refiner pays for the gap.

That is a federal command to buy. It is hard to defend as a free-market arrangement. The argument gets sharper at the "blend wall," the point at which the mandated volume of ethanol exceeds what can be blended into gasoline at the ten percent level most vehicles and pumps handle. Once you cross that wall, the credits become the only way to comply, and RIN prices become the instrument of the mandate. Smaller refiners, with less blending flexibility, argue they are hit hardest.

And there is a physics problem. A gallon of ethanol contains about a third less energy than a gallon of gasoline. Do the arithmetic, roughly. Ten percent ethanol at one-third less energy lowers the energy content of the blend by about 10% × 1/3, or 3.3%. For E15, it is 15% × 1/3, or 5%. If gasoline costs $3.00 a gallon, E15 would have to cost about $3.00 × 0.95 = $2.85 to break even on energy. That is a rough figure, because engine efficiency differs and real mileage varies, but it explains why a driver should look at the price difference and decide for himself.

Who pays, who profits, who gets ignored

Strip away the acronyms and look at the people. The corn farmer gains when the demand for his crop is guaranteed. The plant worker in a small Iowa or Nebraska town gains from the same guarantee. The refinery worker in a coastal city sees the compliance bill land on his employer's books. The independent station owner is caught in the middle, deciding which pumps to install. And the commuter, who never attended a hearing and never heard of a RIN, pays whatever share of the cost is passed along at the pump.

Notice who is missing from the lobbying: the commuter. The farm groups have a trade association, the refiners have a trade association, and the ethanol producers have one too. The driver has a gas tank. Any policy that is argued out between three well-organized groups, and paid for by a fourth that is not in the room, deserves suspicion no matter which group wins.

The small refinery fight

Congress built in an escape valve. Refineries below a certain size, those producing fewer than 75,000 barrels per day, could petition EPA for an exemption if the mandate caused them disproportionate economic hardship. Over the years EPA has granted, denied and re-granted these petitions in ways that produced confusion and lawsuits. The corn side says the exemptions undercut the mandate and destroy ethanol demand. The refiners say the hardship is real.

The litigation reached the Supreme Court in 2021 in HollyFrontier Cheyenne Refining v. Renewable Fuels Association, which turned on whether a refinery whose exemption had lapsed could receive an extension. The Court sided with the refineries on that narrow question.

Step back and look at what this tells you. A program under which an agency decides, case by case, who has to comply and who gets a pass turns the decision into a lobbying contest. That is the opposite of a rule of law. Neither the corn growers nor the refiners can plan.

The Iowa connection

You cannot talk about this without talking about Iowa. The state holds the first Republican presidential contest in the country, and for years a candidate who crossed the ethanol industry in Iowa was supposed to be finished. Corn is not a footnote there. It is the economy.

The conventional wisdom has been tested. In the 2016 cycle, one candidate told Iowans he wanted to phase out the mandate over time, and he still won the caucus. I mention it not to settle the argument but to show that a candidate can disagree with the industry and survive, which should embolden anyone who believes the policy is wrong on its merits.

I do not blame Iowa farmers. They are responding to the incentives Congress created. If the government guarantees a market for your corn, only a fool would ask the government to stop. The fault is with the people who built the thing.

The strongest objection to my verdict

Here is the best argument against phasing out the mandate. Without it, say the farm groups, a few large refiners and fuel marketers would stop carrying ethanol, the biofuel industry would collapse, and the consumers who now enjoy a choice would lose it. A mandate is the only way to guarantee a market, because the incumbents control the shelf.

There is something to that. But follow the logic one step further. If the product is better or cheaper, the market will carry it. Ethanol has real value as an octane booster, and a lot of what is sold is blended because it makes economic sense, not only because Congress says so. If the product is not competitive, then the mandate is not a free-market correction. It is a subsidy by compulsion, paid by drivers who cannot see the bill. And where the objection is really about incumbents blocking consumers from the pump, the answer is to remove the legal barriers to consumer choice, such as the summer vapor-pressure rules, not to keep a quota in place.

A consistent conservative's verdict

Here is what I think a conservative with a straight face should want.

1. Phase out the volume mandate on a published schedule, long enough for farmers, plants and lenders to adjust. Predictability is a conservative value. A cliff is not.
2. Remove the legal barriers to consumer choice in the meantime, including year-round sales of higher blends where vehicles can use them. If drivers want a cheaper fuel, let them buy it.
3. End the discretionary exemption game. Rules that apply by lobbying are not rules.
4. Treat oil and corn the same way. If the federal tax code gives special treatment to one fuel, defend it on the merits or reform it across the board. Tax credits for ethanol, including the 45-cent per gallon blender credit and a tariff on imported ethanol, expired at the end of 2011. The mandate stayed. Conservatives should ask why the quota outlived the subsidy.

Is that a popular position in Des Moines? Probably not. But it is the one that follows from the principle, and it is better for farmers in the long run to stand on a market they can count on than on a political deal that can change with the next administrator.

Where to read next

If you want to see the larger fight over farm policy, Eight Myths About Farm Subsidies That Both Parties Keep Repeating sorts the claims on both sides, and From the 1933 Farm Act to Freedom to Farm, How the Safety Net Got Built shows how the safety net was built. The price logic behind my verdict goes back to Eight Days Into His Term, Reagan Scrapped Oil Price Controls for Good, where a different command on fuel ended with shortages and lines. If you want to see what a fuel market looks like when private owners are rewarded for being right, read The Texas Wildcatter Who Spent Twenty Years Cracking the Shale Code. And for the family budget, Trace Your Family's Energy Dollar From the Meter and Pump to the Grocery Bill follows the money from the pump.

The bottom line

• The RFS began in the 2005 energy law and was expanded in 2007. Refiners, not drivers or farmers, carry the legal obligation, and the RIN credit system is how they comply.
• The farm side is right that fuel retail is not a pure free market. The refiner side is right that a federal command to buy is not one either.
• A consistent conservative wants a published phase-out of the mandate, clear consumer access to higher blends in the meantime, and an end to case-by-case exemptions.
• If your family farms corn, plan for a market that does not depend on a quota. If you drive, compare prices at the pump and ask your representative why a quota outlived the subsidy that came with it.