Design of the Renewable Fuel Standard Implicated in Leading to the Ethanol Blend Wall
AAEA past president releases new research in JAAEA
The nested design of the Renewable Fuel Standard (RFS) is limiting incentives for blenders to sell higher blends of ethanol (E85) and has instead resulting in increasing blending of biodiesel to comply with the RFS. The nested structure of the RFS allows a more advanced biofuel (such as, biodiesel) to meet the requirements of the total renewable fuel standard (that is, corn ethanol). This has limited incentives for blenders to increase sales of E85 to flex-fuel owners by pricing it at energy equivalent parity with E10. Instead, together with the biodiesel tax credit and the cellulosic waiver credit, the nested RFS structure has resulted in a 15% retail price gap between E85 and E10 and led to an increase in biodiesel production by 21% more than mandated.
In the new article “Assessing the Efficiency Implications of Renewable Fuel Policy Design in the United States” published in the open access Journal of the Agricultural & Applied Economics Association, Past President Madhu Khanna from the University of Illinois at Urbana-Champaign and Jia Zhong at the Ford Motor Company, estimate the extent to which the design of the Renewable Fuel Standard has limited consumption of higher blends of ethanol (E85) in the United States and led to a “blend wall” at 10% blend of ethanol.
The research shows the benefits of the current suite of renewable fuel policies, including the RFS, the biodiesel tax credit and the cellulosic biofuel waiver credit for biodiesel producers and its deterimental effects on corn ethanol producers. These policies also limit demand for cellulosic ethanol in the long run and delay efforts to reduce dependence on gasoline. The authors recommend a shift towards a non-nested structure of the RFS in order to enable incentives to eliminate the price disparity between E10 and E85 and to create demand for cellulosic ethanol, which has significantly greater potential to reduce the carbon intensity of fuel than biodiesel.
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ABOUT AAEA: Established in 1910, the Agricultural & Applied Economics Association (AAEA) is the leading professional association for agricultural and applied economists, with 2,500 members in more than 60 countries. Members of the AAEA work in academic or government institutions as well as in industry and not-for-profit organizations, and engage in a variety of research, teaching, and outreach activities in the areas of agriculture, the environment, food, health, and international development. The AAEA publishes three journals, the Journal of the Agricultural and Applied Economics Association (an open access journal), the American Journal of Agricultural Economics and Applied Economic Perspectives & Policy, as well as the online magazine Choices and the online open access publication series Applied Economics Teaching Resources. To learn more, visit www.aaea.org.
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