### 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 approp riate 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-110 1284. Any opinions, fi ndings, and conclusion s or recommendations expressed in this material are those of the autho r 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 bas is 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 Assi stant Director of Equal Opportunity and Compliance, 3280 Beardshear Hall, (515) 294-7612.2 Impact on Corn Prices fr om Reduced Biofuel Mandates

Bruce Babcock and Wei Zhou

November 8, 2013

Abstract Press reports indicate that the Environmen tal Protection Agency may significantly reduce ethanol mandates to levels that can easily be me t. 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 quanti ties through the 2019 mark eting 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 bill ion gallons in 2014 and 15 billion gallons in 2015 and thereafter. Mandates at th is 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 highe r 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 ma rket has experienced since 2006. This modest change in corn prices from alternative mandate levels sugge sts 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 importa nce 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 crea ting these incentives as part of a national energy policy is of gr eater long-run importance than the impact of mandates on the price of corn.3 Impact on Corn Prices fr om Reduced Biofuel Mandates
According to press reports the Environmen tal 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 consum ption cannot easily exceed the quantity that can be consumed in E10—gasolin e that contains 10 pe rcent ethanol. Many groups would applaud such a decision. Oil re finers would face prac tically no costs of complying with Renewable Fuel Standard ma ndates because they would be easy to meet. Livestock organizations and an ti-hunger advocates are both ag ainst 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 increas ed corn prices is not surprising: after all why else would corn farmers be the etha nol industry’s biggest supporter? What causes more disagreement is whether government policy or market fo rces determine the level of corn ethanol production. Carter, Rausser and Sm ith (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 th at corn ethanol ma ndates and subsidies together caused corn prices to be only 8 pe rcent greater than they would have been from 2006 to 2009. But they estimate that actual corn prices were 36 percen t 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 que stion 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/artic le/2013/10/10/epa-ethanol-idUSL1N0I0236201310104 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 pol icy in determining the proportion of industry capacity that operates. The objective of this pa per is to provide insi ght into this question
with a focus on the imminent EPA decision a bout 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 sc hedule in the Energy Independence and Security—the law that governs the Renewabl e Fuels Standard—then the biofuel mandate that can be met by corn ethanol is schedul ed to increase from 13.8 billion gallons in 2013 to 14.4 billion gallons in 2014 and reach it s maximum level of 15 billion gallons ion 2015, where it is scheduled to stay until 2022. Th e American Petroleum Institute and the
American Fuel and Petrochemicals Manufact urers 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 re fineries 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 producti on 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 inelas tic 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 mandate s will impose no costs on owners of refineries,
at least in the short run.
It is difficult to determine if the curren t refinery configuration is long-run optimal. If it is, then the long-run dema nd for ethanol is also quite in elastic at an ethanol quantity equal to10 percent of gasoline sales. If th is 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 gallo ns. Existing ethanol plants would on ly 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=35 constraint that a 10 percent et hanol blend is required by biofuel mandates, then the longrun demand for ethanol is more elastic than the current demand el asticity would suggest. In this report we assume that using a 10 per cent ethanol blend in ga soline increases oil refinery profits so that they will keep refineries configured as they are currently unless the price of ethanol exceed s 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 pe rcent gasoline. The demand fo r 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 stati ons that sell E85. The range of E85 quantities
where demand is elastic increases if additi onal E85 fueling stations become available because the bottleneck limiting demand for E 85 is access to fueling stations not the
number of flex vehicles. Th e Babcock and Pouliot (2013) demand curve for E85 will be used in this analysis to determine the le vel 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 unde rstand the impact of the imminent EPA mandate decision on those pr ices. 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 quest ions is inherently difficult because nobody can predict the future levels of key factor s 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 highe r, then demand for corn ethanol will be high. The principle driver of corn supply is plan ted 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 weathe r 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 futu re corn prices. That is, future projections of corn prices can be made conditional on wh at 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 grow ing season weather. This model needs to be forward looking because corn farmers have sh own that their planting decisions depend on what price they expect to receive at harv est for their crop. The model should account for the demand for ethanol by consumers and th e 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 cr ops. 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 re sults are reported here in terms of providing estimates of the impact on corn prices, co rn plantings, and etha nol 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 th at increase to 14.4 billion gallons in 2014, and 15 billion gallons thereafter. This scen ario also includes
investment in additional E85 st ations that allows for comp liance with higher mandates.
The second scenario is one in which inve stment does not occur because EPA holds mandates at 13 billion gallons, which is ju st 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 mark eting year through the 2019/20 marketing year. The 2013/14 marketing year was trea ted as known. Some key assumptions that
drive results are as follows:7 US Corn Yields We set 2014 expected corn yield per harves ted 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 de viations from trend yield. Yield was assumed
to be beta-distributed and the standard devi ation of yield was kept constant from 2014 through 2019.

Wholesale Gasoline Prices Mean wholesale gasoline prices were fixed at $2.60 per gallon. The st andard 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 proce ssed. 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 produc ing ethanol was fixe d at 0.5 per gallon.

Non-Ethanol Demand The elasticity of non-ethanol, non-storage dema nd 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 harv est 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 assu mption results in lower demand for corn
ethanol in the scenario where mandates are fi xed 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 di fficult to assess without expa nding 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 solv ed 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 additi onal 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 co rn price next year. If margin al convenience yi eld 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, ne xt year’s expected co rn 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 bo rrowing and banking limits are reached. The RIN price drops to zero when the banking constrai nt binds. Next year’s expected RIN price may be less than this year’s price plus intere st 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 colloca tion methods developed by Judd (1992,1998). Others who have applied these methods to ag ricultural commodity markets with storage9 include Miranda (1997), Peterson and To mek (2005), and Gouel (2013). To our knowledge this is the first time this met hod 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 so lved 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 fo r 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 th e 2014/15 marketing year.
The results show that the increased et hanol mandates can be met with the 5,000 additional stations through a combinati on 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 cons umed. Thereafter, ethanol production and consumption are much more clos ely aligned, with the average size of the RIN bank slightly below zero in the last pe riod. Average corn prices rise modestly through the projection period. This modest rise hides the act ual volatility in the model solutions caused by yield variability. Harveste d 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 consumpti on higher than what market demand would dictate in the
absence of mandates. This level of RIN prices would likely in centivize 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 pri ces are close to zero which implies that10 the 13 billion gallon ethanol mandate is larg ely 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 ab solute difference in average results and the percent difference are shown in Table 3. Corn prices drop about 5 percent from reduced11 mandates or about 25 cents per bushel. Corn production drops by about 100 million bushels which is between 1.1 and 1.2 percen t. Ethanol production drops by about 11 percent from reduce mandates. Corn prices wo uld 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 result s. The rather modest decrease in corn prices from relaxing the mandates could be vi ewed as evidence that the agricultural crop sector would not be too badly hurt from a re duction in mandates. An alternative view isthat a reduction in mandates would not be a panacea for livestock organizations or antihunger groups who want to see co rn prices decrease by even mo re than they have in the last six months. The very low RIN prices in Table 2 also suggest th at 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 profita ble 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-ridi ng justification for eith er reducing mandates or letting them grow because the im pacts 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 -0.9 8 -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 -0.2 6 -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 -0.5 3 -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 c onsider how a reduction in mandates would affect the distribution of corn prices and RI N prices. One justification for lower mandates is that mandates can exacerbate corn pri ce 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 increa sed 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 e ffects of low corn yields. Corn stocks are drawn down in low yield years as are RIN buffer stocks. Du e 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 lo w. 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 8.00density

$ per bushel Increased Mandate Reduced Mandate13 new E85 stations are built, then about 95 perc ent 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 pe r bushel. The average price received in October was $4.49 per bushel, a drop of 37 percen t. Corn prices have not been this low since October of 2010. Barring another short cr op in 2014, corn prices are unlikely to return to recent high levels and could drop further if growin g 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 fo r 2014 and beyond will impact corn prices by about 25 cents per bushel, or by between 5 and 6 percent. This rela tively modest impact suggests that whether ethanol ma ndates should be reduced to levels that can be easily met with 10 percent blends or increased above t hose 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 th eir 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 1density

$ per RIN Increased Mandate Reduced Mandate14 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 th at can convert cellulosic mate rial to non-ethanol biofuels, such as synthetic diesel or ga soline. 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 investme nt costs imply high risk. A reduction in public policy support for ethanol w ould only increase the pe rceived risk that
in the future EPA would also redu ce its support for other biofuels. Two stated objectives of the RFS are to reduce greenhouse gas emissions and to reduce petroleum imports. Economists are near ly 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 polic y instruments such as the RFS that only apply to liquid transportation fuels to meet policy objectives are utilized. RFS mandates stimulate biofuel producti on 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 ga s 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 R FS are too high for the benef its that are obtained. If the costs are too great or if a more efficient policy is available, th en this should be communicated as quickly as possible. The s ooner 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. Howe ver, 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 consid eration should be of up most importance, not the price of corn, which will increase margin ally with scheduled increases in ethanol
mandates.15 References
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US Department of Agriculture. (2013) “USDA Agricultural Proj ections to 2022.” Office of the Chief Economist, World Agricultural Ou tlook Board. Long-term Projections Report OCE-2013-1.