EPA Declines to Reduce Ethanol Requirements

By SIOBHAN HUGHES, JESSICA RESNICK-AULT and LAUREN ETTER August 8, 2008

WASHINGTON -- The Bush administration denied a request to reduce the amount of ethanol that must be blended into the U.S. gasoline supply, dealing a setback to food producers, livestock ranchers and others who say the mandate is contributing to high food prices.
The decision marks a victory for U.S. corn growers and ethanol makers. But it is unlikely to settle the broader debate over U.S. biofuels policy and the degree to which the U.S. should continue to subsidize alternative fuels such as corn-based ethanol. Within minutes of the administration's announcement, groups representing poultry producers, livestock farmers and other industries vowed to take their case to Congress and the next presidential administration.
President George W. Bush has promoted ethanol as part of a plan to reduce U.S. dependence on foreign oil. Three years ago, he signed a law that mandated that 7.5 billion gallons of renewable fuel a year be added to the nation's fuel supply by 2012. Last year, he signed a law that increased that requirement almost fivefold, raising the requirement to 36 billion gallons by 2022.
The government's support for corn-based ethanol has frustrated chicken and hog producers, who say the mandate has increased the cost of feeding their livestock by diverting corn toward ethanol production and away from use as a feedstock. Earlier this year, Republican Texas Gov. Rick Perry petitioned the Environmental Protection Agency to reduce the requirement by half, from the nine billion gallons of renewable fuels mandated for 2008. By law, the EPA may waive the mandate if it determines that the requirement is causing "severe harm" to the economy.
On Thursday, the EPA acknowledged that high commodity prices are having "economic impacts," but it said there was "no compelling evidence" that the mandate is causing "severe economic harm." The EPA's administrator, Stephen Johnson, added that the requirement, known as the Renewable Fuels Standard, "remains an important tool" in the U.S. effort to fight global warming and to lessen U.S. dependence on foreign oil "in aggressive yet practical ways."
Corn traders had expected the EPA to reject Texas's request, and the ruling had little effect on prices. September futures rose 14.25 cents to $5.2225 per bushel on the Chicago Board of Trade. Corn prices are down sharply since hitting record prices in June, though they are still high compared with the $2 levels that existed before 2005, before the government increased its support for ethanol.
Annual ethanol demand in the U.S. is currently about nine billion gallons. Annual production capacity is expected to reach roughly 13 billion gallons early next year, according to Eitan Bernstein, an energy analyst at FBR Capital Markets.
Government mandates have been a powerful force behind the ethanol industry's rapid growth. Ethanol production has more than doubled since 2005, the year that Congress established the Renewable Fuels Standard program.
Even if the EPA cut back on ethanol requirements, it might not have much effect, as gasoline companies already are blending in more ethanol than required. They have been encouraged by new production and the recent fall in corn prices.
In recent months, however, policy makers around the globe have been under pressure to cut incentives for biofuels production, as food-price inflation has cut deeper into consumers' pockets. Increases in food prices have sparked riots in some countries. Ethanol producers say biofuels are being used as a scapegoat and that high oil prices are the bigger contributor to food-price inflation.
The Bush administration has been steadfast in its support for the ethanol industry, which has bipartisan political backing throughout the Midwest. Even before Thursday's announcement, some within the administration had expressed concern that easing the mandate would undercut private-sector investment in biofuel technology.
--Doug Cameron and Stephen Power contributed to this article.