By Dan Morgan- Dan is a special correspondent of The Washington Post and a Transatlantic Fellow at the German Marshall Fund of the United States. “Analysis from Washington” is posted exclusively at FarmPolicy.com.
Picture this hypothetical situation.
It is early 2009 and corn prices edge up to near $7 a bushel as U.S. ethanol plants and Asian traders bid for grain that is scarcer than expected after a disappointing 2008 harvest.
Responding to protests from U.S. consumers, the livestock industry and Asian customers, the new administrator of the Environmental Protection Agency, a Democrat, takes decisive action.
Using her broad authority under the 2007 energy bill, she waives the requirement that gasoline blenders use 11.1 billion gallons of corn ethanol in 2009. Unpopular as the action is in the Midwest, it breaks the corn price and eases inflationary pressures that are playing havoc with the U.S. economy.
Granted, it’s unlikely. The political consequences would be far reaching. Midwest voters still haven’t forgotten, or forgiven, Jimmy Carter’s 1979 grain embargo. And such dramatic action would scare off Wall Street investors needed to underwrite Washington’s huge bet on “advanced” biodiesel fuels.
But it isn’t entirely implausible, either.
American agriculture still hasn’t fully grasped the extent to which the energy bill shifted power over the farm economy to a corner of the executive branch where “production agriculture” has limited influence. In a Democratic administration attuned to the concerns of poor urban consumers and environmental groups, moderating food prices and protecting soil, water and air could take priority over hitting the ambitious biofuels targets in the energy bill.
Most commentary on the energy bill has focused on the broad outlines of what it does to require more fuel-efficient cars and require gasoline makers to drastically increase the use of ethanol and biodiesel fuels by 2022.
But this is a bill in which the Devil is truly in the details, complex as they are.
The biofuels provisions, for example, give the EPA administrator broad authority to scrap the annual requirements for corn ethanol, biodiesel and cellulosic ethanol that now underpin high commodity prices and soaring land values across the farm belt.
“In consultation with” USDA and the Energy Department, the administrator can waive the yearly requirements if she determines they would “severely harm the economy of a state, region or the United States” or finds that domestic supplies are inadequate to hit the target.
Much of the language in the new law was proposed by the Natural Resources Defense Council, and it reflects environmental priorities as much as those of the farming community.
“The only reason the environmental community is interested in biofuels is as a way to address global warming,” said Franz Matzner, NRDC’s chief forest and public lands advocate. The result, he added, was a good bill that allows a dramatic expansion of biofuels – but only if the increase can be achieved without harming water, soil, wildlife habitat and the climate.
The law, for example, gives EPA the job of establishing, within one year, the greenhouse gas baseline against which all new biofuels will be measured. Ethanol from corn won’t count unless EPA determines that growing, transporting and refining it emits 20 percent less carbon dioxide than a like quantity of gasoline. EPA must also consider “indirect” effects, such as carbon releases from cultivating virgin land or forest to replace corn diverted to fuel.
The Renewable Fuels Association signed off on this because most corn ethanol plants won’t have to meet that standard. The energy bill “grandfathers” 143 existing refineries and 64 new plants or additions under construction. Those plants will have a yearly capacity of 13.4 billion gallons, just shy of the 15 billion gallon ceiling set in the energy law.
However, future coal-fired refineries now on the drawing board probably won’t qualify, according to congressional aides familiar with the energy law. And refineries producing a new generation of cellulosic biofuels could face a much tougher challenge reaching the law’s 16 billion gallon requirement by 2022, according to industry experts.
These plants will qualify for generous federal loan guarantees and credits, but their ethanol won’t count against the requirement unless EPA finds that it is reducing greenhouse gases by 60 percent below the EPA baseline. (EPA can reduce that to 50 percent but no lower.)
Unless ethanol or other renewables count against the mandates in the energy law, refiners would have less incentive to purchase the product.
The details still have to be worked out, but all this gives EPA serious power over the farm economy, now heavily dependent on strong demand from the burgeoning biofuels industry. In effect, EPA now has principal responsibility for managing the demand for major crops. Indirectly, how it uses that authority will guide farmers’ decisions on plantings, a role once played by USDA.
A “crunch” could be coming sooner than we expect, according to Purdue University economist Wallace E. Tyner.
New ethanol refineries now rapidly coming on line guarantee an explosive growth in the demand for corn this year, he notes. He predicts production of at least 11 billion gallons of corn ethanol, up sharply from last year.
It will take some 25 million acres to grow enough corn to make that amount of ethanol, Tyner estimates. That is nearly 5 million more acres than were needed last year. But corn acreage this year is estimated to be down by three million acres. That explains why corn prices remain very high. How much higher they will go if the 2008 harvest is short is anybody’s guess.
Federal tinkering with the commodity markets seems out of the question in the next few months because EPA hasn’t yet written rules implementing the 2007 law—and this is an election year.
But with the ink on the new biofuels law signed in December still wet, it is already getting a second, closer look in Congress.
Sen. Jeff Bingaman (D-N.M.), chairman of the Energy and Natural Resources Committee, held a hearing in February to air concerns about the biofuels title which he said “some have suggested is flawed.”
Environmental lobbyists involved in writing the legislation made sure that biomass from public lands and national forests were put off limits to biofuel refineries that convert timber, brush and woodchips into cellulosic ethanol. Protecting public lands from raids by the biofuels industry was key to environmental support, said NRDC’s Matzner.
But Bingaman and Rep. Stephanie Herseth Sandlin (D-S.D.) want to reopen that issue. Herseth Sandlin’s congressional district encompasses the Black Hills National Forest.
Matzner said her bill would “remove all the safeguards that keep the energy bill from incentivizing the wholesale loss of our national forests…Her bill is saying we don’t want to have any safeguards.”
Congressional aides give Herseth Sandlin little chance of amending the energy bill anytime soon. It could only be done with the approval of Rep. John Dingell (D-Mich.), all-powerful chairman of the House Energy and Commerce Committee and czar of all clean air legislation.
But the conflict isn’t likely to go away as agriculture and forestry interests focus more closely on the extent to which Dingell, Bingaman and EPA now hold sway over their economic future.
By Dan Morgan