The Federal Fuel Oxygenate Mandate Is Bad Policy

Just before the holiday I testified at a Congressional hearing in Diamond Bar, California, on the transition from MTBE to ethanol as an oxygenate in southern California’s fuel. The text of my written testimony is available at the Reason Public Policy Institute website.

The hearing was called by Doug Ose (R-CA), who is the Chairman of the Government Reform Committee’s Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs. The topic was essentially twofold: the stated focus was the transition from MTBE to ethanol in California to satisfy the EPA’s fuel oxygenate requirement, but the larger related issue was the examination of whether the EPA should reevaluate and ultimately eliminate the oxygenate requirement. California must use oxygenated fuel in most of southern California, which is an EPA non-attainment zone. The rest of the state uses CBG, California blended gasoline, which is a very clean-burning fuel.

Refining is not a “plug-and-play” activity, not by a long shot, and the hearing brought out the ways in which the refiners are adapting their processes to the ethanol requirement. But that requirement is a constraint, and the ensuing lack of flexibility makes their jobs much more difficult and increases their costs. The oxygenate requirement introduces rigidity into energy markets, rigidity that can lead to supply’s slow response to changing market conditions, even predictable changes.

My remarks focused on those rigidities and on the continually evolving science of the effects of ethanol on soil and water. My written testimony highlights the negative environmental effects of increased ethanol production (increased fertilizer production and use, killing fish in the Gulf of Mexico, etc.) as well as ethanol consumption and leakage into soil and water. But the ultimate point I tried to get across is that input-based fuel regulations are ill-suited to adapt to unknown and changing market and environmental conditions; nor do they induce the technological change that has been the foundation of our economic growth for the past two centuries and will continue to do so if such impediments are removed.

The past decade in particular has illustrated the power that incentives have to shape human behavior with regard to environmental quality. Regulations that rely on command instead of incentives have repeatedly shown that they are ill-suited to meeting the range of goals that we have, including environmental quality. Performance-based requirements that recognize incentives can generate improved environmental quality, as long as statutory regulations do not dictate how that is to happen.