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Federal Document Clearing House
Congressional Testimony
June 14, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4547 words
HEADLINE:
TESTIMONY June 14, 2000 BOB SLAUGHTER GENERAL COUNSEL THE NATIONAL PETROCHEMICAL
AND REFINERS ASSOCIATION. SENATE environment & public works
clean air, wetlands, private property, and nuclear safety ETHANO AND THE CLEAN
AIR ACT
BODY:
JUNE 14, 2000 Statement of Bob
Slaughter, National Petrochemical and Refiners Association Good morning, Mr.
Chairman and members of the Committee. My name is Bob Slaughter. I am General
Counsel of the National Petrochemical and Refiners Association. NPRA is a trade
association which represents virtually all U.S. refiners and petrochemical
companies who have processes similar to refiners. We appreciate this opportunity
to appear before the Subcommittee to discuss the environmental effects of
ethanol under the Clean Air Act and the general question of whether ethanol
should be mandated. NPRA opposes fuel mandates. Mandates eliminate competition
and thus are likely to result in increased costs to consumers. They inevitably
foster market protections and monopolies and often result in unanticipated side
effects, such as supply curtailments and higher prices. Once in place, they are
then difficult to reverse. Mandating a product signals to consumers and industry
that a product is uneconomic and "can't make it on its own" without special
patronage. This is often harmful to the product's reputation and adversely
impacts its long-term commercial acceptability and market performance.
Basically, people don't like mandates. Americans value freedom of choice. Our
economy reflects that characteristic, and it has served us well. In contrast, it
is a foregone conclusion that gasoline subject to an ethanol
mandate will be more expensive than it would be in the absence of a mandate. We
have witnessed positive results with public policies which rely on market
forces, for example, the acid rain program, but by most accounts our experiment
with fuel mandates for RFG oxygenates and alternative fuels have had
unsatisfactory results. Given widespread dissatisfaction with the current
oxygenate mandate, proponents of continued interference with market forces in
fuel policies bear a heavy burden of persuasion. We do not believe that the
advocates of a new ethanol mandate under the Clean Air Act have come anywhere
close to making their case. Ethanol has a bright future as a
gasoline blendstock. Why risk the negative consequences of a
mandate? If MTBE use is constrained, ethanol is one way refiners can provide
reliable supplies of gasoline while meeting consumers' demands
for fuel performance. Studies by the U.S. Department of Energy and the
California Energy Commission predict significant ethanol growth in the Northeast
and California, respectively, under an MTBE phase-out without a mandate.
Northeast ethanol demand is estimated to exceed 550 million gallons per year if
there is withdrawal of MTBE from the market while ethanol demand in California
is estimated to reach 828 million gallons. The total annual ethanol demand
increase for these two regions would be almost 1.4 billion gallons--or just
slightly less than a doubling of today's 1.5 billion gallon usage. In addition,
the ongoing reduction of sulfur in gasoline
will lead to a significant increase in ethanol use. Many refiners will give
serious consideration to ethanol as a means of replacing octane lost when
sulfur is reduced. Absent a mandate, the projected increase in
ethanol use will take place where it makes the most economic sense to use it.
Much will depend on the price of ethanol in response to such an increase in
demand. However, with total U.S. demand for ethanol in 2006 estimated possibly
to double today's figure, it is clear that there should be substantial growth in
ethanol use even if some demand erodes as prices rise. The impact of an
extensive, national ethanol mandate on the environment is unknown. The EPA Blue
Ribbon Panel pointed out "Although ethanol is likely to biodegrade rapidly in
groundwater, because ethanol is infinitely soluble in water, much more ethanol
will be dissolved into water than MTBE." While the environmental track
record--with respect to groundwater contamination--of using ethanol in
gasoline has been good, a recent ethanol leak in the Lake Tahoe
area has received considerable press and public attention. This is an indication
that the environmental consequences of mandated use of this highly soluble
chemical are of concern. It seems wise to proceed with a measure of caution in
an area in which the public may feel that it has been recently ill-served (i.e.
by the oxygenate mandate). Air quality impacts are possible. A recent study
presented by Toyota to CARB has shown that if ethanol blended at 10% replaces
MTBE blended at 11% (by volume), tailpipe NOx emissions increase significantly.
Also, in non-RFG regions, ethanol benefits from an EPA waiver which allows it to
be blended at a higher volatility level, thus increasing evaporative emissions.
Further, if ethanol blended gasoline is mixed with
gasoline not containing ethanol, the ethanol causes an increase
in the volatility and the evaporative emissions of the mixture. Thus, an ethanol
mandate could have significant adverse impact in areas where increased ozone
(smog) producing emissions are of concern. With regard to effects on water,
experience to date with ethanol blends has been relatively benign. We do know
that microbes preferentially degrade ethanol present in a spill, which will
retard the rate of degradation of other components. Given the concerns expressed
about MTBE, we should be cautious about new programs that would significantly
increase usage of ethanol in gasoline beyond traditional
volumes. The EPA Blue Ribbon Panel recommended extensive testing of
gasoline constituents before widely extending their use, based
upon experience with the current oxygenate mandate. If left to the workings of
the free market, ethanol has positive attributes that will promote its use. The
Blue Ribbon panel described ethanol as "An effective fuel-blending component,
made from domestic grain and potentially from recycled biomass, that provides
high octane, carbon monoxide emission benefits, and which appears to contribute
to reduction of the use of aromatics with related toxics and other air quality
benefits; can be blended to maintain low fuel volatility ..." Reliance upon a
government mandate, however, could focus attention on ethanol's problematic
characteristics instead. The Blue Ribbon Panel goes on to say " ethanol ...could
raise the possibility of increased ozone precursor emissions as a result of
commingling in gas tanks if ethanol is not present in a majority of fuels;
ethanol is produced currently primarily in the Midwest, requiring enhancement of
infrastructure to meet broader demand; because of high biodegradability, ethanol
may retard biodegradation and increase movement of benzene and other
hydrocarbons around leaking tanks." An ethanol mandate will make it harder for
refiners to provide cleaner fuels to consumers at acceptable prices. An ethanol
mandate will hinder refiners' ability to optimize the quality and volume of
cleaner-burning gasoline. This will increase refining costs,
impacting both gasoline supplies and price. According to the
California Energy Commission, the costs of substituting ethanol-blended
gasoline in that state could increase refining costs by up to 7
cents per gallon. Without a mandate, refining costs are significantly reduced,
because refiners have the flexibility to economically blend
gasoline in a cost-effective way that meets octane requirements
while maintaining emission performance benefits. Distribution of ethanol blends
confronts refiners, other fuel suppliers and, ultimately, consumers with special
economic burdens which a national mandate would increase. Adding more ethanol to
gasoline is not just a matter of investment in new ethanol
production facilities. Ethanol is added to gasoline at
terminals, not at the refinery. Therefore, investment is necessary at terminals
not currently using ethanol for equipment to receive ethanol by rail or truck
(about $300,000 per terminal) to store ethanol in a tank ($450,000 for a new
tank) at the terminal and to install blending equipment ($450,000 per terminal).
In addition to environmental permitting requirements, these are sizable
investment requirements for terminal operators and they should not be forced by
a legislative mandate. The National Petroleum Council estimates that it ethanol
blends are required at all RFG terminals outside of the Midwest, the terminal
capital investment requirements would total $185 million. Total investment
expenses would be higher if conventional gasoline terminals in
the Southeast, Southwest and West also have to be converted for ethanol
blending. In addition, ethanol presents special logistical problems. Since
alcohols like ethanol tend to adhere to water and thus separate out of an
oxygenated gasoline blend, it is difficult to transport ethanol
blends by pipeline. Instead, a special gasoline blendstock is
made for ethanol fuels (both to ease transport and to compensate for the
increase in evaporative emissions associated with ethanol's higher volatility.)
The ethanol itself is shipped separately by railroad, truck or ship, and the
finished gasoline is blended (using special equipment) at
storage terminals near the area where it will be sold to consumers. As EIA
indicates in discussing ethanol logistics and costs, "Shipments to the West
Coast and elsewhere via rail have been estimated to cost an extra 14.6 to 18.7
cents a gallon for transportation." Ethanol is already heavily subsidized by
taxpayers. Ethanol has received a large federal tax subsidy since 1978.
Currently, this incentive is $.54 per gallon of ethanol. The incentive is
financed through diversion of moneys that would otherwise go into the Highway
Trust Fund. At current ethanol usage rates, the Highway Trust Fund loses about
$1 billion per year in revenues because of the reduced tax rate and diversion of
some receipts to the General Fund. The only way to avoid this situation is to
fund new ethanol incentives out of general revenues, which would have the
negative result of assessing every taxpayer to benefit fuel ethanol. As it is,
many, if not most, of those who benefit from the ethanol incentives also rely on
other agricultural assistance programs for corn. As the Administration states in
its most recent policy analysis: "Corn producers currently receive more in
direct farm support payments than producers of any other commodity." Proposals
for a national ethanol mandate seek to make energy consumers and highway users
pay even more for agriculture subsidies. Consumers already pay for corn and
ethanol subsidies that are funded out of the general treasury or Highway Trust
Fund. But advocates of a national ethanol mandate are proposing to take an even
bigger bite out of their pocketbooks. According to the Administration, "...the
potential trust fund impacts (of a national mandate), ranging between more than
$0.5 billion and a little under $1 billion per year, would be on the order of 1
to 2 percent of the total fund." This means that as much as $2 billion total of
revenues that would otherwise go to the Highway Trust Fund would be diverted to
ethanol. According to EIA modeling, "adding a 2 percent renewable fuels standard
is projected to increase gasoline prices in the 5 cents per
gallon range in 2005." As a rule of thumb, a one cent increase in
gasoline prices nationwide amounts to, in the aggregate, a $1
billion additional cost to consumers. Thus, the renewable mandate will cost
gasoline consumers $5 billion more in 2005 than an alternative
policy option of phasing-down MTBE usage without a mandate. The Administration's
latest paper on the renewables mandate is clear in assessing the likely
beneficiaries: "With 2.5 per cent of the nation's gasoline
consisting of ethanol by 2010...The price of corn would be 15 cents per bushel
more in 2010 than in the absence of the standard and average 11 cents per bushel
more during 2002-2010...U.S. farm income would increase by $1.4 billion in 2010,
and would average $750 million more per year during 2002-2010." Ethanol credit
trading pursuant to a national mandate could create regional winners and losers.
Many refineries do not produce RFG, do not blend MTBE in conventional
gasoline, or do not make blendstock for ethanol blending to
produce gasohol. Implementation of a national renewable mandate with averaging,
banking and trading could reduce investment requirements at refineries and
terminals outside of the Midwest. However, a national renewable fuel mandate
would segment the oil industry into winners (those in the Midwest who can offset
ethanol expenses by selling excess "credits" and losers (others who would have
to purchase "credits"). Consumers who purchase gasoline would
benefit or be disadvantaged depending on which category their supplier fits
into. Most of the winners would be located in the Midwest, with losers
disproportionately located in the Northeast and West. An ethanol mandate will
make it harder for refiners to comply with priority environmental programs.
Refiners are concerned with the possibility of supply disruptions as product
quality specifications are changed. A renewable mandate is the same as a product
specification change for refineries that do not currently use ethanol. Congress
should not impose a renewable mandate burden on these facilities that already
face significant new investment requirements for reducing
sulfur in gasoline and diesel fuel. The
industry is committed to current implementation of RFG 2 as it is to reducing
sulfur in gasoline and diesel. The imposition
of additional, wholly arbitrary requirements such as a nationwide ethanol
mandate will further stress refiners and the refining system. This means that
some of the programs may not achieve the projected environmental benefits.
"Truth in labeling" is needed to clarify, rather than confuse policy options.
The intent and import of the national ethanol mandate policy option would be
clearer to consumers/constituents if terms and statements made by its
proponents, especially the Administration, were more reflective of the likely
result. NPRA makes the following observations: 1. The "renewable fuels standard"
is a national ethanol mandate and should be recognized as such. The only
renewable transportation fuel likely to be used in the foreseeable future as a
gasoline blendstock is ethanol. The "standard" requires its
use, and is indistinguishable in intent or effect from a "mandate." Also, there
is no such thing as a "flexible mandate" which was EPA's initial euphemism for
this program. Like "living death" or "wakeful sleep" the words "flexible
mandate" are a contradiction in terms and hence oxymoronic. Policymakers who
advocate basing a significant portion of America's gasoline
supply on mandatory use of an already heavily subsidized product provided by an
extremely concentrated industry should say so. 2. The only likely beneficiary of
the national ethanol mandate is corn-based ethanol. Proponents of the national
ethanol mandate are claiming that it will provide significant benefits for
ethanol from biomass other than corn. The proponents allege that imminent
"technological breakthroughs" will enable non- corn- derived biomass ethanol to
reap significant benefits from the mandate. It would be imprudent to rely on a
significant portion of gasoline supply upon such a speculative
source. But the much greater likelihood is that corn ethanol will be positioned
to take all of the market for ethanol in the foreseeable future, and that
cellulosic biomass will fill only the tiniest increment of any ethanol actually
supplied. Once corn ethanol has occupied the additional market created by the
national mandate it is hard to imagine that its producers will step aside and
surrender any significant portion of that market to competing suppliers of
ethanol from cellulose. The Administration's emphasis upon the positive impact
of the national mandate on corn prices in its recent paper gives away the real
intent behind this national mandate. 3. The existing ethanol subsidy is unlikely
to be repealed. Opponents of the subsidy have been trying for two decades to
eliminate it. The result is usually extension of the subsidy far into the
future, and often an increase in the subsidy itself. This means that revenues
intended for the Highway Trust Fund will continue to be diverted. The only
alternative is to take these funds from general revenues, which has other
serious drawbacks. Analyses suggesting that reduction or elimination of the
subsidy is a real possibility are misleading unless they indicate that the
likelihood of this happening is very remote. Conclusions Federal policymakers
should reject the call for a national ethanol mandate. Congress and the
Administration should learn from, rather than repeat, the mistakes of the past.
The ethanol lobby has been trying to mandate ethanol throughout the national
gasoline supply for more than ten years. The oxygen mandate
that has led to current water quality concerns was supported by large
agribusiness in order to guarantee an ethanol market for them. Enacting another
mandate to replace the problematic current one could have much greater negative
consequences, including higher gasoline costs, tighter and less
reliable fuel supplies, the potential for increased smog-creating emissions and
a potential to create a consumer backlash. Refineries and ethanol producers can
work together better to provide America's future transportation fuels in the
absence of a national ethanol mandate. That will really clear the air. Congress
and EPA should follow the recommendations of the EPA's Blue Ribbon Panel. They
should help refiners serve the real energy and environmental needs of the nation
by repealing the federal oxygen mandate, and by reducing MTBE levels while
maintaining air quality benefits. And they should provide enough time for the
transition to allow refiners to continue providing adequate supplies of
gasoline and other petroleum products to consumers without
undue cost increases. I look forward to responding to your questions.
LOAD-DATE: June 15, 2000, Thursday