Earlier this month, the Environmental Protection Agency (EPA) rejected a request from the State of Texas to reduce the amount of biofuels that must be blended into gasoline over the next year. By rejecting the waiver request, the EPA has missed a golden opportunity to alleviate high global food prices. 

Congress established the biofuel mandate—known as the Renewable Fuel Standard (RFS)—in 2005 and substantially expanded it in the 2007 energy bill. The RFS requires that 13 billion gallons of renewable fuels be blended into gasoline in 2019; that number increases steadily until reaching 36 billion gallons in 2022, which amounts to a staggering 25 percent of fuel production at today’s consumption levels. 

Unfortunately, recent research suggest that the promised environmental benefits of biofuels are illusory. For example, one study found that corn-based ethanol does not reduce greenhouse gases compared to conventional fuels, once one accounts for all the factors that go into ethanol production. Other studies indicate that other air pollution (such as ozone) and water pollution (such as nitrogen fertilizer runoff) are actually worsened by a switch to ethanol production. 

By providing incentives to divert food products into fuel, U.S. biofuel policies have contributed to rising food prices.

But perhaps more troubling is the impact of biofuels on global food prices, which have jumped by 44 percent over the past year, compared to a 3.9 percent increase the previous year. Prices for corn—the major source of biofuels—are up by 75 percent over the past year, compared to an 18 percent increase the year before. These price increases weigh most heavily on the world’s poor, who spend a considerable portion of their income on food. Millions of people across the world are living on the knife’s edge of extreme poverty; even a small rise in food prices is enough to send them into dire conditions. 

To be sure, the biggest contributor to the food price spike is energy price inflation, which has raised fertilizer and transportation costs. Nonetheless, by providing incentives to divert food products into fuel, U.S. biofuel policies have also contributed to rising food prices.

What to do? The economically obvious—though perhaps politically difficult—first step would be to eliminate our subsidies for domestic biofuel production and to eliminate our tariff on imported ethanol. Both of these policies provide inefficient incentives to divert corn into fuel, thus raising food prices. 

A politically simpler step would be to give the EPA a helping hand in considering waiver requests for loosening the existing mandate. The EPA’s recent decision to deny the Texas request was based on the letter of the 2007 law, which requires a demonstration of “severe” economic harm. A clearer, economically sound approach would be to establish an explicit “safety-valve” mechanism that would guard against large spikes in food prices due to the biofuel mandate. 

A safety valve would act as a cap on the cost of complying with the mandate. Under the law, a refiner must blend a certain amount of biofuels into its gasoline, or else it must meet the requirement by buying credits from other refiners that over-comply. The price of these credits reflects the cost of the mandate, and is also tied to the price of food. A safety-valve price would allow refiners to purchase credits from the government at a pre-determined price rather than mix biofuels. This would cap the costs of the mandate each year. The safety-valve price would keep the incentive for producers to use less petroleum and to develop alternative fuel sources, but it would prevent the biofuel mandate from pushing up food prices inordinately. Establishing a clear safety-valve price would also provide regulatory certainty to refiners and biofuel producers. 

The safety valve would have little effect on the incentives of the biofuel mandate, since it would be triggered only if biofuel prices are inordinately high. Meanwhile, it would limit the impact of biofuel requirements on global food prices. Indeed, the safety valve was part of President Bush’s original energy policy proposal, and it was recently recommended by World Bank President Robert Zoellick in his “ten-point plan” to deal with the food crisis. We owe it to the world’s poor to take this sensible step. 

Ted Gayer is an associate professor at Georgetown University’s Public Policy Institute. From July 2007 to July 2008, he served as deputy assistant secretary of economic policy at the Treasury Department.

Image by The Bergman Group/ Darren Wamboldt.