The New Normal: A Policy Analysis of the US Renewable Fuel Standard

The cause of the rise in food prices throughout the 2000s has been difficult to ascertain, but the effects have been devastating to many of the poorest countries in the world. The Renewable Fuel Standard (RFS) mandates a certain level of alternative fuels to be blended into gasoline annually. The level increases each year. During the global food crisis of 2008 US ethanol policies were blamed for their possible role in rapidly rising food prices. This article examines whether and how the RFS has affected corn prices and global food prices. It seeks to identify what role, if any, the RFS had in the global food crisis in order to determine how to possibly moderate such a crisis in the future. A simple experiment is simulated which compares corn price to two control commodities. Economic models for estimating price are then developed for corn and a food price index. The variables in these models include corn production, soybean price, the RFS mandate level, corn input prices, per capita income, a food price index, grain production, wheat price, and barley price from 2003 through 2012. Findings indicate that the RFS has certainly caused an increase in corn prices but has had an indeterminate impact on global food prices. Individuals living in the poorest countries of the world spend the majority of their income on food. In the summer of 2008, rising food costs led to riots plaguing the streets in many of these nations (Bourne 2009). This period was a sign that food production is beginning to feel the strain of a growing world population. Many have claimed that US policies related to alternative fuel production, and specifically the production of corn-based ethanol, were to blame for rising food prices (Leff 2012). Since the early 2000s corn ethanol was alternatively vilified and praised in the popular press, but after the start of the global food crisis no report seemed complete without a claim that US ethanol policies were to blame. Over the course of the past forty years corn ethanol has progressed as a fuel source in the United States. Two factors led to the increase in ethanol production. First, the 1973 oil embargo led to increased fuel prices in the US, making ethanol more competitive as an alternative fuel to gasoline, although briefly (Solomon, Barnes, and Halvorsen 2007). Although oil prices quickly dropped in the 1980s following the end of the embargo, the ethanol subsidies and tax exemptions stayed in place. In the late 1990s, ethanol was promoted as a fuel additive to raise the octane rating of gasoline and began to receive its first government support, including subsidies and tax exemptions (Solomon, Barnes, and Halvorsen 2007). After leaded gasoline was phased out in the 1980s methyl tertiary butyl ether (MTBE) was used as an additive to raise octane ratings. Groundwater contamination discovered in the early 2000s led to the banning of MTBE as a fuel additive in 2005. Corn ethanol replaced MTBE, leading to further policies in support of its production and more attention on ethanol's potential as a renewable fuel. The Renewable Fuel Standard (RFS1) was introduced in 2005 through the Energy Policy Act (EPAct). The policy mandated the volume of ethanol to be blended with gasoline annually through 2012. Shortly afterwards, the policy was expanded through the Energy Independence and Security Act of 2007 (EISA). This second iteration of the Renewable Fuel Standard (RFS2) set blending levels through 2022. Although the policy focused exclusively on corn ethanol through 2009, RFS2 expanded the mandate to other advanced renewable fuels (Schnepf and Yacobucci 2013). The RFS2 mandate states that 9 billion gallons of renewable fuels were to be blended with gasoline in 2008, increasing stepwise to 36 billion gallons in 2022 (Solomon, Barnes, and Halvorsen 2007). The corn ethanol market has been heavily researched since the 1970s. The focus of that research shifted as corn prices rose rapidly between 2005 and 2008 and the world felt the pressure of the global food crisis. The corn market became the target of intense investigation, with a focus on the impact of ethanol production upon corn prices. Some of the research since the global food crisis focused on RFS1 and the initial policies associated with ethanol production, but RFS2 has been studied less because prices began to level. This article studies the impacts of RFS2, focusing on more data and a longer view of the policy.