Renewable Fuel Standard Has Huge Price Tag

WASHINGTON, Oct. 26 -- Congressional leaders are considering establishing a renewable fuel standard mandating the increased use of ethanol in gasoline, which could have an enormous price tag. According to the Methanol Institute, one legislative proposal would cost over $63 billion, with half the cost coming from increased pump prices for gasoline and half from federal excise tax subsidies for ethanol.

One of the proposals being considered is the ``Renewable Fuels for Energy Security Act of 2001,'' introduced by Senators Chuck Hagel (R-NE) and Tim Johnson (D-SD) (S. 1006) and Rep. John Thune (R-SD) (H.R. 2423). The bill would mandate that the content of ethanol in gasoline rise from 0.8% of the gasoline pool in 2002, to 5% by 2016. Under this proposal, the amount of ethanol required to be used in the gasoline supply would increase from about one billion gallons in 2002 to nearly nine billion gallons in 2016.

Based on economic forecasts by the State of California, the Northeast States for Coordinated Air Use Management and others, the use of 10% ethanol blended gasoline may increase pump prices by $0.05 per gallon. By some estimates, the widespread use of ethanol in gasoline could lead to price spikes of as much as $0.50 per gallon. Based on a conservative estimate of $0.05 per gallon, the annual cost to consumers of the renewable fuel standard would reach nearly $4.5 billion by 2016, or a cumulative cost of $31.5 billion between 2002 and 2016.

Most of the ethanol-blended gasoline sold in the Midwest is a blend of 10% ethanol and 90% gasoline often referred to as ``gasohol.'' When blended at this level, each gallon of ethanol sold qualifies for the full federal excise tax subsidy of $0.53 per gallon. Assuming that ethanol refiners and gasoline distributors will maximize their use of the excise tax subsidy by blending at this level, the renewable fuel standard could result in lost revenues to the federal Highway Trust Fund of as much as $4.5 billion annually by 2016, or over $32 billion between 2002 and 2016.

``We are concerned that the laudable goal of increasing the use of renewable fuels in gasoline may come at too high a price,'' said Methanol Institute President & CEO John Lynn. ``Congress needs to consider whether the nation's 185 million licensed drivers should be forced to pay billions of dollars more at the pump, and the impact on driver safety this loss of federal highway funds will have on the country's roads and bridges.''

According to the U.S. Department of Transportation, 28% of all arterial road miles in the U.S. are in ``poor'' or ``mediocre'' condition, and 30% of the 172,572 U.S. bridges are either ``structurally deficient'' or ``functionally obsolete.'' In addition, 53% of urban interstate highways are congested during peak travel hours, at a cost to the economy of $78 billion each year.

Since 1979, the Highway Trust Fund has lost about $10 billion from the ethanol tax subsidy. Today, the ethanol tax subsidy costs nearly $900 million per year. The Texas Department of Transportation has estimated that its share of the revenue loss to the Trust Fund was about $64 million in FY 2000.

By 2016, the renewable fuel standard's yearly cost in lost Highway Trust Fund revenues of $4.5 billion represents over 15% of the $29 billion annual federal highway investment under the current TEA-21 program. This is roughly equal to the combined federal transportation funding for the states of Texas, New York and Massachusetts.

In large part, the highway funding allocated to individual states is dependent on the state's contribution to the Highway Trust Fund. According to the American Road and Transportation Builders Association, states that sell ethanol-based gasoline are at a disadvantage to states that do not use ethanol. Testifying before a Senate Committee in June 2000, Gordon Proctor, director of the Ohio Department of Transportation, said that Ohio's federal formula funds are reduced by $185 million annually because the state is the third largest purchaser of ethanol-based fuels.

The Methanol Institute serves as the trade association for the methanol industry. Methanol is one of the principal ingredients used in the production of MTBE, a clean oxygenate used in reformulated gasoline.