Market Misconceptions and Alternative Fuels’ National Security Role

Biofuel pumps. Image Credit: Mariordo Mario Roberto Duran Ortiz

A  House Committee on Energy and Commerce hearing held Tuesday on alternative fuels and transportation demonstrated a sharp divide between democrats and republicans concerning the Renewable Fuels Standard. Under EPA administration, the RFS requires that 36 billion gallons of renewable fuels be blended into U.S. transportation fuel by 2022. Important lessons should be taken from the hearing.

Republicans claim the RFS is an encroachment upon consumer choice, even though the provision was included in the 2007 Energy Independence and Security Act which was backed by the Bush administration as well as numerous Republicans. American Petroleum Institute President, Jack Gerard, expressed concern that car manufacturers’ warranties are violated if drivers use gasoline containing more than 10 percent ethanol. He contends that mandating the inclusion of ethanol in gasoline gives consumers no choice but to use fuel that is destructive to their engines.

Increased ethanol production creates obvious market opportunities for farmers, and could prove economically beneficial for farm states, especially those growing large crops of corn (a primary constituent of ethanol). Surprisingly though, Rep. Mike Pompeo (R-KS) argued against the RFS claiming that it hinders innovation in the energy market. He also alluded to his constituency’s lack of demand for E85 gasoline. With a lack of demand for the fuel, Pompeo reasoned, why should the government require that it be brought to the market?

They argue for a more open market, yet Gerard and Pompeo miss an important point. Petroleum products have penetrated so deeply into the transportation fuel market that consumers may not be aware of or given the choice to use alternatives. After all, hydrocarbons make up over 96 percent of our transportation fuels. Moreover, explicit subsidies give fossil fuels a price advantage over renewable fuels. So, repealing the RFS and those subsidies would be necessary to create a level playing field for R&D and innovation across energy sectors. In fact, Republican presidential hopeful Jon Huntsman even proposed systematically getting rid of all energy subsidies. While GOP members welcome free market conditions for some fuels, the mature fossil fuels industry seems unlikely to lose its subsidies.

Democratic representatives and biofuel proponents also failed to point out the implicit subsidies granted to fossil fuels; the external costs associated with hydrocarbons are not included in the price at the pump. These costs range from adverse health effects caused by air pollution to their contribution to climate change. Nonetheless, they are real costs that will manifest themselves monetarily whether through health care bills or tax dollars spent on disaster relief. By allowing renewables to penetrate energy markets, at least some of those costs could be avoided.

Besides the financial advantage given to fossil fuels, existing refining and refueling infrastructure is largely geared toward oil. The need to drastically overhaul that infrastructure creates a barrier to entry into transportation markets for alternatives. Repealing the RFS would actually exacerbate these market imperfections despite claims that it would create a more competitive energy market.

Mike Breen, Vice President of the Truman National Security Project, argued for a shift away from petroleum based fuels giving special attention to the fact that oil is a global commodity. Even if the U.S. achieved oil independence, consumers would be subject to global price swings. Such price swings threaten consumers’ pocketbooks, as well as our military which is highly dependent on oil to meet its energy needs. Reducing oil dependence would certainly enhance U.S. national security, and could be realized by developing a more serious role for alternatives in our energy mix.

Rep. Henry Waxman (D-CA) appropriately labeled climate change the “elephant in the room.” Felice Stadler of the National Wildlife Federation served as a witness to the hearing, and articulated the need to move away from high carbon transportation fuels in order to avoid the dangerous consequences of climate change. Yet, in over two hours of questions, Mrs. Stadler received just two of them, one of which was a “yes or no” question directed toward the entire panel.

The lack of attention to climate change in the hearing is remarkable given the substantial consideration awarded to national security. Climate change and its devastating effects, which Rep. Waxman (D-CA) noted are already occurring, are driven by manmade greenhouse gas emissions. Because transportation currently accounts for roughly 27 percent of U.S. emissions, reducing the sector’s contribution is an important step toward mitigating climate change. Advanced biofuels, though, should be given consideration over corn-based ethanol which raises corn prices, entices land competition, is less efficient than oil, and does not significantly reduce greenhouse gases. These second and third generation biofuels derived from algae, wood, food waste, and other sources avoid those inefficiencies, and offer a promising carbon-free source of transportation fuel.

Climate change has become a direct threat to national security as citizens have lost their lives and homes in the wake of recent extreme weather and heat. Transitioning to cleaner fuels is a sure way to hedge against those security threats.  And, with several of the committee’s representatives citing the need for another hearing, climate change should take a stronger precedence in future discourses.

Republicans and Democrats are unlikely to agree upon the role for renewables and government intervention in the market place. Be that as it may, it’s hard to imagine disagreement over enhancing our national security. Alternative fuels can serve that end, and hopefully future proceedings will warrant their further infiltration into the market.

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