Real World Costs Show Effective, Low-Carbon Fuel Standard Costs $1.01 Per Gallon

May 30, 2014

There has been a great deal of debate about the potential cost of Governor Inslee's proposed low-carbon fuel standard (LCFS). In an effort to reduce carbon emissions, the Governor wants to require gasoline sold in Washington to be mixed with a certain percentage of biofuel, although he has not yet provided details.  

In response to criticism the Governor last week took to the radio to tell everyone to "calm down," about the higher cost his plan would impose on people and to note that he has not yet decided on a particular plan. He did pledge that his proposal would add no more than one dollar to the price of gas.

Thus far, the debate over Governor Inslee’s plan has been a battle of projections, with estimated higher costs ranging anywhere from four cents to over a dollar. We have written in the past about the problem with the projections at the low end of this estimated range.

The Governor has tried to waive off all projections, arguing that he has not yet released an actual proposal. There are only a few ways to craft an LCFS, however. Further, the Governor's Climate Legislative Executive Workgroup (CLEW) completed an analysis of an LCFS. The Governor himself has written and talked about his ideas for an LCFS in the past. Thus, there is a limited range of LCFS options from which the Governor can choose.

Further, there is a conflict between the Governor's insistence on imposing an LCFS and his insistence that we don't know enough to put a price range on the cost of his policy. If we don't know what his policy might cost, why insist we adopt it? Either his support is based purely on faith or he has a pretty good idea what an LCFS will cost and achieve, but he won't share that publicly.

What We Know About an LCFS

The basis of an LCFS is the requirement to mix biofuel with gasoline. Further, we know that transportation represents the largest portion of emissions to be reduced. Finally, we know that reducing the CO2 intensity of a gallon of gas by 10 percent yields a reduction of one MT of CO2 by 2020, which is about one quarter of the transportation emissions reductions necessary to meet the targets the Governor says are "the law."

Since there is no other policy offered by the Governor that is likely to cut transportation-based  emissions, the Governor would need to reduce the CO2 intensity of each gallon of gas by 40 percent.

In analyzing the LCFS policy I make one other assumption. I assume that biofuel is essentially carbon neutral since crops harvested to produce the fuel then regrow, theoretically absorbing the CO2 emitted by the fuel from the previous crop. This assumption is wildly generous to LCFS proponents and exceeds the most optimistic studies about cellulosic ethanol, a technology that still has not emerged.

Thus, I generously assume that for every 10 percent increase in the biofuel mix, there is essentially an equal reduction in CO2 emissions.

Real World Data

Given the inaccurate projections proponents made about the science and economics of biofuels in the past, we decided to look at the current, real-world cost of biofuel in Washington state to provide an accurate estimate for the near-term cost of imposing an LCFS.

Currently, Washington's gasoline contains 10 percent ethanol. There are gas stations where Flex Fuel vehicles can purchase gas with E85, which contains 85 percent ethanol. By comparing the cost of the two, we can get a rough estimate of how much mixing in ethanol increases the price of gas.

The one station we found that offers both regular, 87-octane gasoline (we'll call it E10) and E85 is in the Tri-Cities. E10 gas cost $3.85 last week. The E85 was 60 cents per gallon more expensive at $4.45.

To this, we need to add the taxpayer subsidy for ethanol. Taxpayers provide a subsidy of $1.00 per gallon for ethanol. Thus, the E85 costs about $1.35 per gallon more than E10. Only part of this cost is represented at the pump, but ultimately the taxpayer pays the full cost.

Finally, ethanol reduces engine performance.  The EPA notes that vehicles running on E85 "get roughly 15% to 25% fewer miles per gallon (MPG) than when operating on regular gasoline, which typically contains about 10% ethanol." So, as MPG drops consumers have to buy more fuel to travel the same distance with E85.

It Would Cost $1.01 More Per Gallon for an Effective LCFS

Using those numbers, the total taxpayer cost to increase the biofuel mix by each additional 10 percent is 23 cents per gallon. As we noted above, however, that would fall far short of the CO2 reduction targets the Governor and his supporters say are "the law." To reach those legal targets, the LCFS would have to increase ethanol content to about 45 percent. That would increase the total added cost of an effective LCFS to $1.01 per gallon.

Naturally, advocates of imposing an LCFS will raise a number of objections to this estimate.

First, they will claim the cost of biofuel will decline as demand increases. There is reason to believe the opposite, however. As the legal requirement for burning biofuel has increased, farmers have responded by planting corn in marginal lands. The result is a reduced yield per acre, driving prices up, not down. This does not take into account the additional cost of food crops that were displaced. The left likes to point to the "external" costs of pollution, but increased prices for displaced food crops is an external cost of increased biofuel production.

Biofuel advocates will also claim there are other elements of imposing an LCFS. For example, it uses more energy to process gasoline from the oil sands in Alberta than wells in Saudi Arabia. This is true, but the calculation is difficult and the technology changes over time. One cannot claim biofuels will be cheaper in the future due to technology, then ignore technology advances that make processing Albertan oil more efficient. This is also not to mention the ethical dilemma of preferring Middle East oil over Canadian oil.

Some will claim their estimates of the future are more reliable than actual data from today, but the predictions about the environmental quality, cost and availability of biofuels have been consistently inaccurate, and there is no reason predictions will suddenly become more accurate. The Governor himself predicted that “About 2011… meaningful amounts of cellulosic ethanol are becoming available at service stations across the country.” Three years after the Governor predicted, there is virtually no cellulosic ethanol available.

The Choice on LCFS

The Governor has made it clear that he will impose some kind of LCFS if he has his way. Given the high costs of an LCFS, however, he faces a dilemma. He can either:

  • Endorse an approach that will reach the CO2 emission targets for 2020, but the cost per gallon will be very high to taxpayers between the increase at the pump and additional taxpayer subsidies for biofuel.
  • Keep prices low by advocating an LCFS that falls far short of the 2020 targets and is little more than a symbolic gesture that rewards favored industries while doing little for the environment.

Given the political reality and the Governor’s claims that he will keep costs low, he is more likely to try the second approach. He will have to make up the gap between the LCFS emissions reductions and the target by applying cap-and-trade to gasoline. As we have written before, that shows how weak is the idea of imposing an LCFS. There is no reason to use both a cap-and-trade system and impose an LCFS to reduce transportation emissions. They are overlapping and contradictory policies.

The Governor’s office hand-picked a consultant to provide an analysis of the cost of imposing an LCFS. This group is different than the last group the Governor chose to estimate the cost of an LCFS. If that study is based more on conjecture than real world data, we are likely to see a repeat of the same mistakes we have seen with previous failed promises about biofuels.

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