Impact on Corn Prices from Reduced Biofuel Mandates 

Bruce Babcock and Wei Zhou 

Working Paper 13-WP 543 

November 2013 

Center for Agricultural and Rural Development 

Iowa State University 

Ames, Iowa 50011-1070 

www.card.iastate.edu 

Bruce A. Babcock is Professor of Economics, Iowa State University. 

Wei Zhou is a graduate assistant, Department of Economics, Iowa State University. 

This publication is available online on the CARD website: www.card.iastate.edu. Permission is 

granted to reproduce this information with appropriate attribution to the author and the Center for 

Agricultural and Rural Development, Iowa State University, Ames, Iowa 50011-1070. 

Partial support for this work is based upon work supported by the National Science Foundation 

under Grant Number EPS-1101284. Any opinions, findings, and conclusions or recommendations 

expressed in this material are those of the author and do not necessarily reflect the views of the 

National Science Foundation. 

For questions or comments about the contents of this paper, please contact Bruce Babcock, 

468H Heady Hall, Dept. of Economics, Iowa State University, Ames IA 50011-1070. 

babcock@iastate.edu..

Iowa State University does not discriminate on the basis of race, color, age, ethnicity, religion, national 

origin, pregnancy, sexual orientation, gender identity, genetic information, sex, marital status, disability, or 

status as a U.S. veteran. Inquiries can be directed to the Interim Assistant Director of Equal Opportunity and 

Compliance, 3280 Beardshear Hall, (515) 294-7612. 
2 

Impact on Corn Prices from Reduced Biofuel Mandates 

Bruce Babcock and Wei Zhou 

November 8, 2013 

Abstract 

Press reports indicate that the Environmental Protection Agency may significantly reduce 

ethanol mandates to levels that can easily be met. To gain insight into what this decision 

implies about the price of corn we use a new model of the corn and RIN markets to 

project corn and ethanol prices and quantities through the 2019 marketing year under two 

ethanol mandate scenarios. The first scenario is the status quo where mandates that can 

be met with corn ethanol increase to 14.4 billion gallons in 2014 and 15 billion gallons in 

2015 and thereafter. Mandates at this level can only be met using E85 so also included in 

this scenario is 5,000 new locations where E85 can be purchased. The second scenario 

holds mandates at 13 billion gallons, a level that can be met with E10. The price of corn 

is higher by between 5 and 6 percent—about 25 cents per bushel—in the higher mandate 

scenario. RIN prices are close to zero most of the time in the lower mandate scenario and 

average between 50 and 60 cents in the higher mandate scenario. Though the corn price 

difference is economically meaningful to corn farmers and livestock feeders, it is small 

compared to the price swings that the market has experienced since 2006. This modest 

change in corn prices from alternative mandate levels suggests that the level of mandate 

should be determined more by consideration of broad policy objectives rather than the 

impact on the price of corn. Of key importance to the advanced biofuel industry is 

whether policy will support the expansion of biofuels consumption by creating incentives 

to invest in flex cars and fueling stations that will facilitate expanded consumption of 

low-carbon ethanol. Consideration of the costs and benefits of creating these incentives 

as part of a national energy policy is of greater long-run importance than the impact of 

mandates on the price of corn. 

 
3 

Impact on Corn Prices from Reduced Biofuel Mandates 

 

According to press reports the Environmental Protection Agency may reduce biofuel 

mandates in 2014 from 14.4 billion gallons to 13 billion gallons.1

 The likely justification 

for such a reduction is the belief that ethanol consumption cannot easily exceed the 

quantity that can be consumed in E10—gasoline that contains 10 percent ethanol. Many 

groups would applaud such a decision. Oil refiners would face practically no costs of 

complying with Renewable Fuel Standard mandates because they would be easy to meet. 

Livestock organizations and anti-hunger advocates are both against the use of corn to 

produce transportation fuel. Corn is the chief feed ingredient in livestock rations so 

diversion of corn from feed to fuel increases feed costs. Most anti-hunger groups simply 

oppose corn ethanol on the moral grounds that a crop that could produce food should not 

be used to produce fuel. 

That expansion of corn ethanol has increased corn prices is not surprising: after 

all why else would corn farmers be the ethanol industry’s biggest supporter? What causes 

more disagreement is whether government policy or market forces determine the level of 

corn ethanol production. Carter, Rausser and Smith (2010) estimate that the expansion in 

corn ethanol production between 2005 and 2010 increased corn prices by about 30 

percent. They evidently attribute all the increase in investment and production in the 

ethanol industry to mandates, so this 30 percent estimate is the impact of ethanol 

mandates. Babcock and Fabiosa estimate that corn ethanol mandates and subsidies 

together caused corn prices to be only 8 percent greater than they would have been from 

2006 to 2009. But they estimate that actual corn prices were 36 percent higher than they 

would have been over this period if ethanol production had remained constant at 2005 

levels. Thus the major disagreement between these two studies is the extent to which 

government intervention caused the dramatic expansion in the industry beginning in 

2005. 

Looking forward, the role of government policy in determining the size of the 

corn ethanol industry is a less relevant question because existing corn ethanol plants 

could produce more than 15 billion gallons, which is the maximum amount of corn 

 

1

 For example, see http://www.reuters.com/article/2013/10/10/epa-ethanol-idUSL1N0I023620131010 
4 

ethanol that can be used to meet RFS mandates.2

 Of more relevance to the level of future 

corn prices is the impact of government policy in determining the proportion of industry 

capacity that operates. The objective of this paper is to provide insight into this question 

with a focus on the imminent EPA decision about what mandate levels will be in 2014, 

and what that decision likely signals about mandates in future years. 

Mandates and the Demand for Ethanol 

If EPA decides to follow the mandate schedule in the Energy Independence and 

Security—the law that governs the Renewable Fuels Standard—then the biofuel mandate 

that can be met by corn ethanol is scheduled to increase from 13.8 billion gallons in 2013 

to 14.4 billion gallons in 2014 and reach its maximum level of 15 billion gallons ion 

2015, where it is scheduled to stay until 2022. The American Petroleum Institute and the 

American Fuel and Petrochemicals Manufacturers have petitioned EPA to reduce 2014 

mandates to levels that can be easily met with 10 percent blends, or about 12.9 billion 

gallons.3 The reason why oil industry groups want to limit mandates to this level is easy 

to understand: they have configured their refineries to produce low octane gasoline that 

needs to be blended with 10 percent ethanol to produce 87-octane regular gasoline. 

The key factor determining the impact on corn prices from ethanol mandates is 

the level of ethanol production that would occur without mandates. To estimate this 

production level requires estimation of the market demand for ethanol. The current 

configuration of refineries has created a short-run inelastic demand for ethanol at a 

quantity about equal to 10 percent of blended gasoline sales. Press reports indicate that 

EPA may reduce ethanol mandates to less than needed to meet this 10 percent blending 

level. If this occurs then ethanol mandates will impose no costs on owners of refineries, 

at least in the short run. 

It is difficult to determine if the current refinery configuration is long-run optimal. 

If it is, then the long-run demand for ethanol is also quite inelastic at an ethanol quantity 

equal to10 percent of gasoline sales. If this configuration is optimal only under the 

 

2

 The Renewable Fuels Association estimates that as of January, 2013 the capacity of the US ethanol 

industry stood at 14.7 billion gallons. Existing ethanol plants would only have to have to exceed their 

nameplate capacity by two percent to achieve 15 billion gallons. 

3

 The petition can be found at: http://www.api.org/news-and-media/news?page=3 
5 

constraint that a 10 percent ethanol blend is required by biofuel mandates, then the longrun demand for ethanol is more elastic than the current demand elasticity would suggest. 

In this report we assume that using a 10 percent ethanol blend in gasoline increases oil 

refinery profits so that they will keep refineries configured as they are currently unless 

the price of ethanol exceeds the price of gasoline. 

Babcock and Pouliot (2013) estimate the demand for E85, which is a blend of up 

to 85 percent ethanol and 15 percent gasoline. The demand for E85 is quite limited when 

the cost per mile driving on E85 is higher than E10. But demand becomes quite elastic 

when E85 prices become competitive with E10. Eventually demand becomes quite 

inelastic due to limits on the number of stations that sell E85. The range of E85 quantities 

where demand is elastic increases if additional E85 fueling stations become available 

because the bottleneck limiting demand for E85 is access to fueling stations not the 

number of flex vehicles. The Babcock and Pouliot (2013) demand curve for E85 will be 

used in this analysis to determine the level of market-driven demand for ethanol beyond 

E10 levels. 

Projecting Future Corn Prices 

It is important for groups with an interest in corn prices to better understand the impact of 

the imminent EPA mandate decision on those prices. If EPA decides to reduce mandates, 

will the price of corn in 2014 decrease significantly? If not, why not? What would happen 

to corn prices in 2015 and beyond if EPA kept mandates at levels that could easily be met 

with 10 percent blends? Answering these questions is inherently difficult because nobody 

can predict the future levels of key factors that will influence the market demand for 

ethanol and the supply of corn. The principle driver of potential ethanol demand will be 

oil prices. If they stay high or move higher, then demand for corn ethanol will be high. 

The principle driver of corn supply is planted acreage and growing-season weather. If 

Corn Belt summers return to more normal conditions, then corn yields will increase, 

supplies will be abundant, and planted acreage will move lower because of lower 

expected future corn prices. 
6 

Although we cannot predict what oil prices and summer weather will be in the 

future, we do have knowledge about the amount of likely variability in both and can 

account for this variability when projecting future corn prices. That is, future projections 

of corn prices can be made conditional on what oil prices and growing conditions turn out 

to be. 

An economic model of the corn market is needed to solve for the corn prices that 

will occur given a level of oil prices and growing season weather. This model needs to be 

forward looking because corn farmers have shown that their planting decisions depend on 

what price they expect to receive at harvest for their crop. The model should account for 

the demand for ethanol by consumers and the demand for corn by both ethanol producers 

and others. The model needs to account for how corn and RIN buffer stocks grow or 

shrink in response to large or small crops. And finally, the model should provide 

projections of corn prices for at least several years into the future because the Renewable 

Fuels Standard runs until 2022. A new model that includes all of these attributes is now 

available for corn price projections. Its first results are reported here in terms of providing 

estimates of the impact on corn prices, corn plantings, and ethanol production under two 

ethanol mandate scenarios. 

The first scenario is one in which EPA holds to scheduled increases in biofuel 

mandates and corn ethanol production expands to meet mandates that increase to 14.4 

billion gallons in 2014, and 15 billion gallons thereafter. This scenario also includes 

investment in additional E85 stations that allows for compliance with higher mandates. 

The second scenario is one in which investment does not occur because EPA holds 

mandates at 13 billion gallons, which is just below the maximum level that can be 

consumed in 10 percent blends. A comparison of corn prices under these two scenarios 

will indicate the impact of higher mandates and facilitation of E85 consumption through 

investment. 

Model Assumptions 

The model was solved for the 2014/15 marketing year through the 2019/20 marketing 

year. The 2013/14 marketing year was treated as known. Some key assumptions that 

drive results are as follows: 
7 

US Corn Yields 

We set 2014 expected corn yield per harvested acre to 158.5 bushels per acre in 2014. 

Mean yield was increased by two bushels per acre per year. The amount of yield 

variability was estimated using historical deviations from trend yield. Yield was assumed 

to be beta-distributed and the standard deviation of yield was kept constant from 2014 

through 2019. 

Wholesale Gasoline Prices 

Mean wholesale gasoline prices were fixed at $2.60 per gallon. The standard deviation of 

gasoline prices was fixed at $0.52 per gallon. Gasoline prices were assumed to be lognormally distributed. 

Ethanol Yields and Costs 

Ethanol yield was fixed at 2.76 gallons per bushel of corn processed. To facilitate 

calculations, approximately 30 percent of each bushel processed was returned to the corn 

market as feed. Thus the net yield of ethanol per bushel of corn processed is 3.81 gallons 

per bushel. The non-corn cost of producing ethanol was fixed at 0.5 per gallon. 

Non-Ethanol Demand 

The elasticity of non-ethanol, non-storage demand for corn was fixed at -0.44, Adjemian 

and Smith (2012). The position of the demand curve for each year of the projection 

period was based on USDA (2013) long term agriculture projections 

 

Corn Supply 

The elasticity of US harvested corn acreage was fixed at 0.2. 

Corn Storage Cost 

The physical cost of storing corn from one harvest to the next marketing year is fixed at 

$0.36 per bushel. A function relating marginal convenience yield to stocks to use ratios 

was estimated using data from 1989 to 2012. 

 
8 

Ethanol Trade 

To focus solely on domestic production and consumption, we assume that both exports 

and imports of ethanol are zero. This assumption results in lower demand for corn 

ethanol in the scenario where mandates are fixed at 13 billion gallons. Thus the results for 

this scenario underestimate ethanol production and corn prices. The impact of assuming 

no ethanol imports is more difficult to assess without expanding the scope of the model 

because imports are used to meet advanced RFS mandates and low carbon intensity 

targets in California. 

Solving the Model 

This new model of the corn market is solved by finding the level of planted acreage and 

ethanol production such that corn and RIN prices in a year are consistent with future corn 

and RIN prices through corn and RIN storage. That is, the model finds planted acreage 

and ethanol production levels that lead to corn prices where there is no incentive to store 

another bushel of corn to the next marketing year and RIN prices where there is no 

incentive to either borrow or bank an additional RIN to the next year, unless RIN banking 

or borrowing limits have been reached. 

For corn, in normal years, this means that corn price this year plus the cost of 

storage equals the expected corn price next year. If marginal convenience yield is high 

because of a short crop, then expected price next year equals this year’s price plus storage 

costs minus the value of the convenience of having a bushel of corn on hand because of 

supply shortages. Thus in corn-short years, next year’s expected corn price can be less 

than this year’s corn price. 

For RINs, the solution condition means that the expected price of RINs must rise 

at the rate of interest except when borrowing and banking limits are reached. The RIN 

price drops to zero when the banking constraint binds. Next year’s expected RIN price 

may be less than this year’s price plus interest costs when the borrowing constraint binds. 

This will occur when high RIN prices this year create an incentive to borrow RINs from 

the following year but statutory limits on borrowing have been reached. 

The model was solved using collocation methods developed by Judd (1992,1998). 

Others who have applied these methods to agricultural commodity markets with storage 
9 

include Miranda (1997), Peterson and Tomek (2005), and Gouel (2013). To our 

knowledge this is the first time this method has been applied to the corn market 

accounting for both corn and RIN storage. 

 

Model Solutions 

Table 1 shows the average model solution for the scenario in which EPA lets the ethanol 

mandate increase to 14.4 billion gallons in 2014 and 15 billion gallons in 2015. There is 

not a single model solution because the model is solved for a wide range of corn yields 

and gasoline prices. Because this model is solved on a marketing year basis, the mandates 

that are imposed on the model solutions are 14.2 billion gallons for the 2013/14 

marketing year and 14.8 billion gallons for the 2014/15 marketing year, and 15 billion 

gallons thereafter. To allow these mandates to be met, 5,000 additional stations that sell 

E85 are installed in the 2014/15 marketing year. 

The results show that the increased ethanol mandates can be met with the 5,000 

additional stations through a combination of expanded ethanol consumption and 

production and a drawdown in the number of banked RINs. The first-year drawdown of 

banked RINs is about 500 million RINs to meet the 14.2 billion gallon mandate. Thus 

about 13.7 billion gallons of ethanol are actually consumed. Thereafter, ethanol 

production and consumption are much more closely aligned, with the average size of the 

RIN bank slightly below zero in the last period. Average corn prices rise modestly 

through the projection period. This modest rise hides the actual volatility in the model 

solutions caused by yield variability. Harvested corn acreage falls from its high mark of 

89.1 million acres in 2013, stabilizing at an average level of 86 million acres. Average 

RIN prices are between 50 and 60 cents per gallon which implies that ethanol mandates 

push average ethanol consumption higher than what market demand would dictate in the 

absence of mandates. This level of RIN prices would likely incentivize additional 

investment in stations beyond the 5,000 stations that are considered in this scenario that 

sell E85 (or E15) which would then results in lower RIN prices. 

Average model solutions with reduced mandates and no investment in E85 

stations are shown in Table 2. Corn prices and production are modestly lower due to 

decreased demand for ethanol. Average RIN prices are close to zero which implies that 
10 

the 13 billion gallon ethanol mandate is largely irrelevant to ethanol production and 

consumption levels. Because the average price of RINs is so low, the bank of RINs grows 

and is used to buffer the effects of short corn crops. At the end of the projection period 

the bank of RINs grows to about 2 billion on average. 

Table 1. Average Model Solutions with Increased Mandates* 

 Marketing Year 

13/14 14/15 15/16 16/17 17/18 18/19 19/20 

Ethanol Mandate 14.2 14.8 15.0 15.0 15.0 15.0 15.0 

New E85 Stations 0 5,000 0 0 0 0 0 

Harvested Acreage 89.10 85.82 85.87 86.01 86.23 86.38 86.53 

Corn Production 13.84 13.60 13.78 13.97 14.18 14.38 14.58 

Corn Price 4.54 4.65 4.64 4.69 4.74 4.81 4.84 

Ending Corn Stocks 1.563 1.744 1.858 1.890 1.908 1.885 1.866 

Ethanol Demand Price 1.16 1.18 1.18 1.18 1.19 1.20 1.20 

Ethanol Production 13.71 14.86 14.86 14.84 14.86 14.85 14.85 

RIN Price 0.53 0.54 0.54 0.55 0.56 0.56 0.57 

Beginning RIN Stock 1.00 0.514 0.572 0.429 0.273 0.130 -0.025 

Notes: Units are billion gallons for ethanol mandate, ethanol production, and beginning RIN stock; million 

acres for harvested acreage $ per bushel for corn prices, $ per gallon for ethanol price and RIN price; and 

billion bushels for ending corn stocks and corn production. 

Table 2. Average Model Solutions with Reduced Mandates* 

 Marketing Year 

13/14 14/15 15/16 16/17 17/18 18/19 19/20 

Ethanol Mandate 13.0 13.0 13.0 13.0 13.0 13.0 13.0

New E85 Stations 0 0 0 0 0 0 0

Harvested Acreage 89.1 84.91 84.89 85.02 85.22 85.42 85.55

Corn Production 13.84 13.45 13.62 13.81 14.01 14.22 14.41

Corn Price 4.35 4.41 4.38 4.42 4.49 4.55 4.57

Ending Corn Stocks 1.446 1.677 1.807 1.857 1.848 1.838 1.813

Ethanol Demand Price 1.61 1.64 1.64 1.65 1.67 1.68 1.69

Ethanol Production 13.48 13.22 13.21 13.20 13.19 13.16 13.15

RIN Price 0.0253 0.0177 0.0142 0.0127 0.0116 0.011 0.0115

Beginning RIN Stock 1.0 1.476 1.691 1.878 1.963 1.995 1.980

*Units are billion gallons for ethanol mandate, ethanol production, and beginning RIN stock; million acres 

for harvested acreage $ per bushel for corn prices, $ per gallon for ethanol price and RIN price; and billion 

bushels for ending corn stocks and corn production. 

The impact of reduced mandates can be measured by comparing the Table 2 

results with the Table 1 results. Both the absolute difference in average results and the 

percent difference are shown in Table 3. Corn prices drop about 5 percent from reduced 
11 

mandates or about 25 cents per bushel. Corn production drops by about 100 million 

bushels which is between 1.1 and 1.2 percent. Ethanol production drops by about 11 

percent from reduce mandates. Corn prices would decrease even more from this drop in 

demand except that the decrease in corn supply from lower planted acreage boosts 

average prices. 

There are two ways of viewing these results. The rather modest decrease in corn 

prices from relaxing the mandates could be viewed as evidence that the agricultural crop 

sector would not be too badly hurt from a reduction in mandates. An alternative view is 

that a reduction in mandates would not be a panacea for livestock organizations or antihunger groups who want to see corn prices decrease by even more than they have in the 

last six months. The very low RIN prices in Table 2 also suggest that corn prices would 

not move any lower even if mandates were eliminated, because the mandate is not 

increasing the production of ethanol. This result hinges on the assumption that oil 

companies would continue to find it profitable to blend inexpensive ethanol with lowoctane gasoline to create 87 regular gasoline. In either case, it is difficult to argue that a 

change in corn prices provides an over-riding justification for either reducing mandates or 

letting them grow because the impacts of a reduction are modest. 

Table 3. Impact of Reduced Ethanol Mandates* 

 Marketing Year 

13/14 14/15 15/16 16/17 17/18 18/19 19/20 

Corn Production 0 -0.91 -0.98 -0.99 -1.01 -0.96 -0.98 

0.0% -1.1% -1.1% -1.2% -1.2% -1.1% -1.1% 

Corn Price -0.19 -0.24 -0.26 -0.27 -0.25 -0.26 -0.27 

-4.2% -5.2% -5.6% -5.8% -5.3% -5.4% -5.6% 

Ending Corn Stocks -0.117 -0.067 -0.051 -0.033 -0.06 -0.047 -0.053 

-7.5% -3.8% -2.7% -1.7% -3.1% -2.5% -2.8% 

Ethanol Demand Price 0.45 0.46 0.46 0.47 0.48 0.48 0.49 

38.8% 39.0% 39.0% 39.8% 40.3% 40.0% 40.8% 

Ethanol Production -0.23 -1.64 -1.65 -1.64 -1.67 -1.69 -1.7 

-1.7% -11.0% -11.1% -11.1% -11.2% -11.4% -11.4% 

RIN Price -0.50 -0.52 -0.53 -0.54 -0.55 -0.55 -0.56 

-95.2% -96.7% -97.4% -97.7% -97.9% -98.0% -98.0% 

Beginning RIN Stock 0 0.962 1.119 1.449 1.69 1.865 2.005 

*Units are billion gallons for ethanol production and beginning RIN stock; million acres for harvested 

acreage $ per bushel for corn prices, $ per gallon for ethanol price and RIN price; and billion bushels for 

ending corn stocks and corn production. 
12 

Before concluding it is useful to consider how a reduction in mandates would 

affect the distribution of corn prices and RIN prices. One justification for lower mandates 

is that mandates can exacerbate corn price spikes caused by short crops. Figure 1 shows 

the distribution of corn prices for the 2015/16 marketing year for the two scenarios 

considered. The distribution with the increased mandate is shifted to the right, which 

represents a higher average corn price, and it is slightly flatter, which indicates a bit more 

price variability. The increase in price variability is not greater because of the role that 

RIN and corn stocks play in buffering the effects of low corn yields. Corn stocks are 

drawn down in low yield years as are RIN buffer stocks. Due to the ability to borrow 

RINs from future years, the RIN stock can actually turn negative, further buffering the 

effects of low corn yields. 

Figure 1. Distributions of Corn Prices in 2015/16 

Figure 2 shows the two distributions of RIN price solutions in 2015/16. The 

distribution with reduced mandates shows that 60 percent of the RIN price solutions are 

less than one cent. This represents a return to the situation that mostly prevailed between 

2008 and 2011 when RIN prices were quite low. If mandates are increased and if 5,000 

0

20

40

60

80

100

120

140

2.00 3.00 4.00 5.00 6.00 7.00 8.00 density

$ per bushel

Increased Mandate

Reduced Mandate
13 

new E85 stations are built, then about 95 percent of RIN price solutions are between 50 

and 70 cents. 

Figure 2. Distributions of RIN Prices in 2015/16 

Policy Implications 

The price of corn has fallen dramatically in 2013. For example, the average price 

received by corn farmers in March was $7.13 per bushel. The average price received in 

October was $4.49 per bushel, a drop of 37 percent. Corn prices have not been this low 

since October of 2010. Barring another short crop in 2014, corn prices are unlikely to 

return to recent high levels and could drop further if growing season weather is favorable. 

In contrast to the large swings we have seen in corn prices, the results presented here 

indicate that EPA’s mandate decisions for 2014 and beyond will impact corn prices by 

about 25 cents per bushel, or by between 5 and 6 percent. This relatively modest impact 

suggests that whether ethanol mandates should be reduced to levels that can be easily met 

with 10 percent blends or increased above those levels should be determined by factors 

other than the impact on corn prices. 

A decision by EPA to reduce ethanol mandates in 2014 and 2015 would send a 

strong signal to car companies to reduce their production of flex vehicles, and to 

0

200

400

600

800

100 0

120 0

140 0

160 0

180 0

0 0.2 0.4 0.6 0.8 1

density

$ per RIN

Increased Mandate

Reduced Mandate
14 

investors to not invest in high-ethanol-blend fueling stations or in next-generation plants 

that convert cellulosic material to ethanol. It likely also sends a negative signal to 

investors in biofuel plants that can convert cellulosic material to non-ethanol biofuels, 

such as synthetic diesel or gasoline. It might not seem that an EPA decision to decrease 

support for ethanol would imply a decrease in support for these “drop-in” fuels because 

they can be easily integrated into existing fuel channels. But the cost of constructing 

plants that can produce drop in fuels is high. High investment costs imply high risk. A 

reduction in public policy support for ethanol would only increase the perceived risk that 

in the future EPA would also reduce its support for other biofuels. 

Two stated objectives of the RFS are to reduce greenhouse gas emissions and to 

reduce petroleum imports. Economists are nearly unanimous that the best way to cut 

emissions is with a widely-applied carbon tax because the cost of reducing emissions is 

minimized when a tax is applied equally to all emission sources. Similarly, the most 

efficient way or reducing oil imports is to tax imports. But politicians rarely agree with 

economists’ prescriptions so second-best policy instruments such as the RFS that only 

apply to liquid transportation fuels to meet policy objectives are utilized. 

RFS mandates stimulate biofuel production which substitutes for petroleum, a 

large part of which is imported. And almost all the growth in future mandates are for 

advanced biofuels which lower greenhouse gas emissions much more than conventional 

biofuels. Thus the RFS, however inefficiently, will meet its stated objectives. 

The question facing EPA and Congress is whether the costs of maintaining 

support for biofuels through the RFS are too high for the benefits that are obtained. If the 

costs are too great or if a more efficient policy is available, then this should be 

communicated as quickly as possible. The sooner that a decision to withdraw support for 

biofuels is made, the better, as this will allow investment dollars to be redirected to more 

profitable enterprises. However, if a withdrawal of support for biofuels is not 

forthcoming, then a decision to set mandates at levels that can be easily met sends exactly 

the wrong signal to investors because without investment, increased consumption of 

biofuels will never occur. This policy consideration should be of upmost importance, not 

the price of corn, which will increase marginally with scheduled increases in ethanol 

mandates. 
15 

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