Economists analyze impact of ethanol mandates on E10, E85 prices

By Erin Voegele | September 23, 2014

Economists with Iowa State University’s Center for Agricultural and Rural Development have published a new paper that estimates price impacts of increased ethanol mandates under the renewable fuels standard (RFS). While the analysis finds that increased ethanol mandates would have little impact on E10, the impact on E85 would be significant. The report, titled “Impact of Ethanol Mandates on Fuel Prices when Ethanol and Gasoline are Imperfect Substitutes,” was written by ISU economists Sebastien Pouliot and Bruce Babcock.

The analysis relies on a model that was built to analyze the impacts of renewable volume obligation (RVO) levels on fuel prices. According to the paper, it demonstrates that the impact of U.S. ethanol mandates on the price of E10 will be small. This is because the impact of higher renewable identification number (RIN) prices on the price of gasoline is largely offset by a lower ethanol price that results from lower E85 prices needed to increase E85 consumption.

When compared to analysis published by the Congressional Budget Office earlier this year, the CARD analysis offers a consistent forecast of the impact on E85 prices. The CARD analysis and the CBO both predict higher ethanol mandates will result in lower E85 prices. However, while the CBO predicted the price of E10 could increase by 4 to 9 percent if ethanol mandates under the RFS are allowed to increase, the CARD analysis finds the price of E10 would not be much affected by increasing RFS ethanol mandates.

One reason for this difference is that CBO’s…analysis assumes that all biofuel mandates are increased as scheduled in the Energy Independence and Security Act,” Pouliot and Babcock wrote. “This would require that 24 billion ethanol-equivalent gallons of biofuels would need to be consumed—a level that far exceeds the existing capacity to consume, produce, or import biofuels in the United States. Thus, CBO’s…analysis was necessarily based on assumptions about what RIN prices would be, what mix of biofuels would be used to meet mandates, and the degree to which lower net values of biofuels due to high RIN prices offset higher costs caused by compliance. CBO…did not use an equilibrium model of supply and demand of fuels to derive their estimates.”

According to the report, extending the model to consider even higher ethanol mandate would be straightforward as long as increased mandates are made feasible by expanded E85 infrastructure that increase demand for E85.

A full copy of the paper can be downloaded from the CARD website.