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How not to set policy to reduce the price of gasoline

How not to set policy to reduce the price of gasoline

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High gas prices in the U.S. cause a lot of pain for Americans every time they take their vehicles to gas stations to fill up. To address the problem of high gas prices, the Biden administration announced in April that it would allow gas stations to sell a particular blend of “homegrown” fuel — known as E1 — throughout the year and not just in the non-summer months as was previously the case. Does this policy make sense? Let us investigate.

First, some history. In the Energy Independence and Security Act of 2007, Congress established the so-called Renewable Fuel Standard (RFS) which required all transportation fuels sold in the U.S. to contain some fraction of a biofuel such as ethanol. As a result, 95 percent of all fuel sold in America is E10, meaning that it contains 90 percent gasoline and 10 percent ethanol. The E15 blend, on the other hand, contains 85 percent gasoline and 15 percent ethanol.

To comprehend the Biden administration’s policy, we first need to understand why E15 sales were banned by the EPA during the summer months. The answer is that gasoline evaporates, and this evaporation is highest in the hot summer months when it is a key contributor to smog, which frequently leads to respiratory problems in humans. So, in its attempt to reduce smog, the EPA banned summer sales of E15 even though, as the economist Aaron Smith has noted, the smog-causing ability of E10 rivals that of E15.

Allowing gas stations to sell the E15 blend throughout the year means, at least in principle, that as a nation we would be relying less on imported (think Russian) gasoline and more on a homegrown blend of fuel that is also cheaper. The Biden administration has claimed that, on average, using E15 will save Americans 10 cents per gallon. To make sense of this claim, it needs to be compared with the fact that vehicles using E15 get 1 to 2 percent fewer miles per gallon than those that use E10.

In addition, data from the U.S. Department of Energy tell us that E15 is available only in about 2,300 (less than 2%) of the 145,000 gas stations in the U.S. So, there is a clear supply bottleneck about which little or nothing can be done in the short run. What about demand? Aaron Smith tells us that consumers don’t care much for this blend even during the non-summer months when its sale is permitted.

To recap, the Biden administration is attempting to reduce gas prices by encouraging the use of a fuel blend that can only be sold in less than 2 percent of all gas stations and for which there is anemic demand. The likelihood of achieving success with such a policy is low.

Finally, it is important to keep in mind that the whole point of using fuel blends instead of just gasoline to power vehicles is that ethanol burns more completely than gasoline and hence helps us fight climate change. But the problem with using blends such as E15 that contain more ethanol than E10 stems from the fact that most of the ethanol produced in the U.S. is from corn. My previous work shows that corn-based ethanol requires almost as much — and possibly more — energy to produce as it releases when it is burned. Also, recent research by Tyler Lark and his colleagues demonstrates that when one accounts for the changes in cropland that the RFS has given rise to, producing more corn for ethanol does not reduce carbon emissions at all.

In sum, the Biden administration is attempting to lower gas prices with a policy that has little chance of succeeding. In addition, this policy is also likely to detract from the necessary fight against climate change. So, no matter how well intentioned, it looks like we have a situation in which the proposed cure is worse than the disease.

Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology but these views are his own.