CBO: Food prices unlikely to change under RFS repeal

New report looks at impacts of full compliance with RFS mandate of advanced biofuels levels and under full repeal.

Policymakers and analysts have raised concerns about the Renewable Fuel Standard, particularly about the feasibility of complying with the standard, whether it will increase prices for food and transportation fuels, and whether it will lead to the intended reductions in greenhouse gas emissions.

A new Congressional Budget Office report finds that full compliance with the ambitious mandates laid out in the Energy Independence and Security Act of 2007 (EISA) poses significant challenges. However, food prices would be similar whether the RFS was continued or repealed.

Roughly 40% of the U.S. corn supply is used to make ethanol. To the extent that the RFS increases the demand for corn ethanol, it will raise corn prices and put upward pressure on the prices of foods that are made with corn—ranging from corn-syrup sweeteners to meat, poultry, and dairy products, CBO said.

CBO expects that roughly the same amount of corn ethanol would be used in 2017 if fuel suppliers had to meet requirements equal to EPA’s proposed 2014 volumes or if lawmakers repealed the RFS, because suppliers would probably find it cost-effective to use a roughly 10% blend of corn ethanol in gasoline in 2017 even in the absence of the RFS.

“Therefore, food prices would also be about the same under the 2014 volumes scenario and the repeal scenario,” CBO said.

By contrast, corn ethanol use in 2017 would be about 15% (or 2 billion gallons) higher under the EISA volumes scenario. CBO estimates that the resulting increase in the demand for corn would raise the average price of corn by about 6%. However, because corn and food made with corn account for only a small fraction of total U.S. spending on food, that total spending would increase by about one-quarter of one percent.

Because fuel suppliers would be likely to use roughly a 10% blend of corn ethanol in gasoline in 2017 even without the RFS, the overall use of renewable fuels in that year would be very similar under the 2014 volumes scenario and under the repeal scenario, CBO estimates.

Consequently, prices of transportation fuels would probably be roughly the same in those two cases.

Under the EISA volumes scenario, however, fuel suppliers would have to use more than three times as many gallons of advanced biofuels, and they would have to add much more ethanol to the gasoline supply than could be accommodated by selling only a 10% blend. (Under all of the scenarios, CBO anticipates that EPA would sharply reduce the requirement for cellulosic biofuels, given the limited production capacity for those fuels expected to exist in 2017.)

Using a range of estimates of the price premium necessary to encourage sufficient additional supplies of advanced biofuels and the price subsidy necessary to motivate sufficient sales of E85, CBO estimates that complying with the EISA volumes scenario would have the following effects on the prices of three key types of transportation fuels in 2017:

  • The price of petroleum-based diesel would rise by 30 cents to 51 cents per gallon, or 9% to 14% (because the RFS requires fuel suppliers to bear the cost of ensuring that certain amounts of renewable fuels are used for each gallon of petroleum-based fuel that they sell);
  • The price of E10—which is currently the most commonly used transportation fuel in the United States—would increase by 13 cents to 26 cents per gallon, or 4% to 9%; and,
  • The price of E85 would decline by 91 cents to $1.27 per gallon, or 37% to 51%.

CBO said the success of the RFS in reducing the emissions from transportation fuels will depend mainly on the extent to which it causes people to substitute advanced biofuels—particularly cellulosic biofuels—for gasoline or diesel over the long run. A trade-off exists between the goal of limiting the cost of complying with the RFS (for example, by reducing the requirements for cellulosic biofuels) and the goal of providing a strong incentive for the development of better technologies for advanced biofuels.

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