Farm-state lawmakers want to require everyone else to pad ethanol producers’ pockets.

The Renewable Fuel Standard program, administered by the Environmental Protection Agency under the Clean Air Act, was created by Congress in the 2005 Energy Policy Act and then expanded significantly in the 2007 Energy Independence and Security Act. The ostensible goal was to strengthen “energy security” by increasing domestic production of biofuels such as corn ethanol, diesel fuel produced from biomass, and others derived from cellulose and other biomass materials.

However appealing intuitively, the “energy security” rationale for the program analytically is very weak. Instead, the RFS is a massive subsidy for biofuel producers, the most important of which is ethanol derived from corn. It is also a sop to the climate “crisis” lobby: The various fuels that qualify must yield specified reductions in life-cycle greenhouse gas emissions, even though the measurements are highly subjective, and any such reductions would have zero detectable impacts on global climate phenomena.

The biofuels either replace or are blended with conventional (fossil) fuels used in ground transportation and jet fuel. A producer of ethanol or other renewable fuel receives a “Renewable Identification Number” (RIN) for each gallon. That producer then sells the fuels and the associated RIN credits to refiners or fuel blenders, most commonly for blending with conventional fuels. The most familiar example is gasoline blended with 10 percent ethanol, or “E10,” which is what is sold at most gasoline stations now.

Each year, the Environmental Protection Agency (EPA) establishes the total volume of renewable fuels that must be used, either directly or for blending, as a percentage of the prospective production of gasoline and diesel fuel forecast by the EPA. Those percentages are used to determine the number of RINs — the volumes of renewable fuel — that refiners and importers of gasoline and diesel fuel are required to utilize to satisfy their “renewable volume obligations” (RVO). For various reasons, some refiners blend more ethanol than required or have surplus RINs from the previous year. Others lack the physical infrastructure to meet their requirements. Accordingly, there is a market for RINs; the latter can purchase credits from the former or from traders acting as middlemen. Failure by a refiner to obtain sufficient credits to satisfy its RVO quota leads to a significant fine imposed by the EPA.

Small refineries can apply for 100 percent exemptions from the RFS blending requirements, based on disproportionate economic hardship as defined in the Clean Air Act. Such applications often are granted only in part, but the small-refinery exemption is justified because the RFS requirements are much more burdensome for small refineries. They usually lack the integrated blending equipment typically found at larger refineries. Their smaller scale means they have less ability to adjust smoothly to fluctuations in market conditions, particularly if the EPA’s forecasts of gasoline and diesel production and required volumes of renewable fuels prove inaccurate. And many small refineries rely on pipelines not designed to withstand corrosion caused by ethanol-blended fuels.

As noted above, gasoline now commonly sold in the U.S. is E10. Under current law, the sale of gasoline blended with 15 percent ethanol (E15) is not allowed during the summer unless the EPA issues a waiver, because warmer temperatures increase fuel evaporation and, in turn, the formation of ground-level ozone, or “smog.” That is why E15 now is available at only about 3 percent of U.S. gasoline stations.

The House of Representatives earlier this month passed the Nationwide Consumer and Fuel Retailer Choice Act (H.R. 1346), which, if enacted by the Senate, would allow the year-round sale of E15 without a requirement for EPA waivers. This is an obvious political handout to the midwestern corn producers and their complementary suppliers and interest groups.

The act also would limit the small-refinery exemption from the ethanol blending requirements in two important ways. These changes have received less attention, but they are likely to prove far more damaging economically. As noted above, under current law, small refineries may apply for a 100 percent exemption from the blending requirements; HR 1346 reduces that to 75 percent, which would increase uncertainty and costs significantly.

The more important change is to the definition of “small refiner,” which under current law means any refinery processing no more than 75,000 barrels per day. Each refinery is considered individually, even if several are owned by a given company. Under HR 1346, any company processing a total greater than 75,000 barrels per day is excluded from the small-refinery exemption, even if each of its refineries processes less than 75,000.

This formula is perverse. Even if ownership of several small refineries yields some administrative efficiencies, the problems attendant upon the lack of integrated blending equipment, smaller scale, and pipeline constraints remain. Small refineries typically serve idiosyncratic markets, such as specific consumer centers, particular industrial operations, and military installations with strict requirements. Much of this specialized refining capacity is located close to the respective markets, as an obvious effort to economize on transportation costs.

The supply of fuels for those individual markets would not be efficient were it undertaken by large refiners located in distant regions, because pipeline and rail transportation costs would be too high relative to the smaller volumes of fuel to be shipped. The current structure of the refining sector is driven by the market imperative to economize on resource use. Consequently, such blunt-force distortions as those promoted in HR 1346 are economically destructive.

Based upon analysis of data reported by the Environmental Protection Agency, of the 38 refineries across 18 states eligible for the small-refinery exemption under current law, 25 across nine states would be eliminated from eligibility under HR 1346. Of the 1.8 million barrels per day of refining capacity currently eligible, 1.4 million no longer would be.

The special interests profiting massively from the renewable fuels requirements claim that the new approval for summer E15 sales will save fuel consumers up to 30 cents per gallon, or about 7 percent of the national average price of about $4.10. That is balderdash. Ethanol has about 33 percent less energy content than gasoline. Accordingly, fuel economy per gallon is about 1.74 percent lower for E15 relative to E10. Market forces, therefore, will establish an equilibrium in which E15 will sell for about 7 cents per gallon less than E10.

If E15 were cheaper than E10 by up to 30 cents per gallon, consumers would shift massively from E10 to E15 to take advantage of lower prices, compensating more than fully for the lower fuel economy. The effect of this demand shift — there are no free lunches — would be an increase in the price of E15, restoring a market equilibrium in which consumers are indifferent between E10 at a higher price and E15 at a lower price.

Republican senators recently discussed HR 1346 in private; unsurprisingly, there is sharp disagreement between farm-state senators seeking a transfer of wealth to rural agricultural interests and refining-state senators noting the damage this would cause to refiners. The senators also discussed Senator Deb Fischer’s (R., Neb.) version of the E15 bill, which excludes the changes to the small-refinery exemption. That would represent a substantial improvement over HR 1346, but allowing year-round sales of E15 without a rationale for an EPA waiver would remain detrimental to summer air quality.

Beware politicians attempting to “fix” market outcomes under pressure from rent-seeking interests. HR 1346 would limit the small-refinery exemption to a small group of firms with only one or two very small refineries. It would introduce a major distortion in the domestic fuel supply, particularly in specialized markets, without any offsetting benefit for the U.S. economy writ large. Consumers and businesses would be squeezed for billions of dollars more, all to enrich the ethanol lobby even further.