Ethanol and Clean Air: The "Reg-Neg" Controversy and Subsequent Events

Migdon Segal
Analyst in Transportation Technology
Science Policy Research Division

June 22, 1993

93-614 SPR

TABLE OF CONTENTS

INTRODUCTION
THE "REG-NEG"
TECHNICAL ASPECTS OF THE CONTROVERSY
THE RELEVANT LAWS AND REGULATIONS
ETHANOL INDUSTRY EFFORTS TO REVERSE EPA'S PROPOSED REGULATIONS
PRESIDENT BUSH'S OCTOBER DECISION
CLINTON ADMINISTRATION POSITION
SITUATION IN MID-1993

SUMMARY

The Clean Air Act Amendments (CAAA), enacted in 1990, called for cleaner automotive fuels in order to upgrade air quality. This appeared to provide new market potential for ethanol, which is obtained from corn grown in the midwestern United States, and which is already in large-scale use in a blend of ten percent ethanol to ninety percent gasoline. The CAAA left specific details of the clean fuels program to be worked out by the Environmental Protection Agency (EPA), in consultation with the interested parties.

The EPA elected to use a process called regulatory negotiation, abbreviated as "reg neg". In a reg neg, agreement is reached among the parties before the regulations are written. The parties involved in this process included the oil industry, the automobile industry, the environmental movement, and Federal and State governmental bodies, as well as the ethanol and other alternative fuel industries. Agreement was reached in August 1991, and EPA then issued its proposed regulations in April 1992.

The CAAA and the subsequent regulations are primarily intended to prevent ozone formation, as ozone is a major contributor to urban smog. Carbon monoxide is another important air pollutant, not related to ozone. Ethanol is quite effective in reducing carbon monoxide pollution, and has been used for that purpose in many Western cities; it competes for that market with MTBE, a derivative of methanol. With regard to ozone reduction, however, the picture is less clear. Ethanol, when added to gasoline in the 10% blend generally used, increases the volatility of the mixture. The blend then has a higher tendency to evaporate than straight gasoline, and thus more volatile organic hydrocarbons (VOCs), which are precursors of ozone, would be emitted.

To be used in high-ozone areas, therefore, ethanol needed a 1 psi (pound per square inch) waiver from the established volatility limits, as measured by the Reid Vapor Pressure (RVP). Such waivers had been obtained in the past, but the "reg neg" agreement, as interpreted by the EPA and the other parties, did not give such waivers. The ethanol industry felt entitled to the waiver, because it had it in the past, and also because of the special position of ethanol, which, as a "home-grown" product of U.S. farms, contributes to national energy security and to farm income, and is also useful for carbon monoxide control. Therefore, after realizing it had lost the RVP waiver in the "reg neg", it then began a serious effort to reverse this portion of the agreement and obtain the waiver. It was opposed by an unusual coalition, including the oil industry and environmentalists among others.

In October 1992, under the pressures of the Presidential election campaign, President Bush granted the ethanol waiver, structured to put the burden on the oil industry by requiring that less volatile gasoline be sold in the high-ozone areas. This decision had yet to be implemented when the Clinton Administration took office.

Thus far in 1993, the Clinton Administration has not taken a position on the ethanol waiver. EPA has issued the proposed regulations which would implement the Bush decision and grant the waiver. Public hearings were held, and comments are being received. EPA expects to issue its reformulated gasoline regulations, which will include its final decision on the ethanol waiver, by September 15, 1993.

INTRODUCTION

The Clean Air Act Amendments (Public Law 101-549), enacted November 15, 1990, updated the original Clean Air Act and provided the framework for major advances in control of air quality in those areas of the United States most in need of cleaner air. As is often the case, the legislation was not self-enforcing but required the Federal Government, through the Environmental Protection Agency (EPA), to issue regulations implementing its provisions.

One portion of the Clean Air Act Amendments (henceforth CAAA) called for cleaner automotive fuels. This appeared to open the door for increased use of alternative fuels to gasoline, such as natural gas, methanol, propane, electricity, and the subject of this report--ethanol.

Ethanol already had a history of use as an alternative fuel, both in the United States and abroad. In the United States, significant use of ethanol as an auto fuel began with the enactment of the Energy Tax Act of 1978 which exempted ethanol blends from part of the Federal highway tax. With this incentive in place, a sizable industry came into being, as Midwestern beverage distillers and corn millers turned to providing ethanol for fuel purposes. The blend of 10 percent ethanol to 90 percent gasoline, originally known as "gasohol", increased in sales from zero in 1978 to about eight billion gallons in 1985 and remained at roughly that level through 1991. In 1992 sales rose to about 10.5 billion gallons, spurred by the increased use of ethanol (as well as other oxygenates) for control of carbon monoxide. (1) This meant that about 1.05 billion gallons of ethanol was used last year for automotive fuel--roughly one percent of the 100+ billion gallon per year U.S. gasoline market. Ethanol as a fuel has strong political support, primarily based in the Middle West. Its advocates see it as helping to achieve three major national goals: energy security from a "home-grown" fuel, increased farm income, and improved air quality. Ethanol also has its detractors, who see it as an artificial energy option kept alive by government subsidies.

This report will discuss the controversy regarding the role of ethanol in reformulated gasoline which developed following enactment of the CAAA, as the EPA carried out its function of issuing regulations to implement this legislation.

THE "REG-NEG"

As is the case with most public laws, the Clean Air Act Amendments established a broad framework, leaving the specific regulatory details to the executive branch--in this case the EPA. It then became EPA's responsibility to establish the reformulated gasoline program mandated by the CAAA, and to do so, if possible, in a way that would be acceptable to all the interested parties. In this case, the parties would include the oil industry, the ethanol and perhaps other alternative fuel industries, the auto industry, the environmental community, and Federal and State governmental bodies. Satisfying such a varied group looked to be, and was, a formidable task.

In the months following enactment of the CAAA, EPA and the other interested parties agreed on a process called a regulatory negotiation, shortened to "reg neg", covering the reformulated gasoline program mandated by the Act. This negotiation was intended to keep the potentially controversial regulations out of the courts, and to avoid future congressional involvement, by obtaining agreement among all interested parties before the regulations were written. EPA would then write the regulations, but this would presumably be a straightforward and noncontroversial task, embodying the principles already agreed to in the negotiated agreement.

The "reg neg" process had been infrequently used by EPA, and it would be severely tested in this situation. After laborious negotiations, agreement was reached in August 1991 and signed by all parties. EPA then outlined its proposed regulations in April 1992 based on the "reg neg" agreement. (2)

The negotiations had taken six months, and involved 30 parties, all of whom accepted the final version of the agreement. (3)(4)

According to Oxy-Fuel News, the final issue to be resolved before agreement was whether ethanol blends should be considered to cause an increase in exhaust emissions of nitrogen oxides (NOx), over such emissions from gasoline. It was agreed to assume that no such increase occurred in the "simple model" at oxygen levels of up to 3.5 percent (except during months with ozone violations, at the discretion of the affected State). (5)

TECHNICAL ASPECTS OF THE CONTROVERSY

Ozone is one of the most significant atmospheric pollutants, and is a major contributor to the irritating haze over urban areas commonly known as smog. One of the major goals of air quality legislation and regulation is to prevent ozone formation. The chemistry of ozone formation is complex, but in general it involves reactions among nitrogen oxides and hydrocarbons in the presence of sunlight and heat. Thus it is important to minimize emissions of nitrogen oxides (NOx) and of volatile organic hydrocarbons (VOCs) to the atmosphere from automobiles, or from any other source. Regarding emissions from automobiles, the combustion products emerging from the tailpipe include both NOx and VOCs. VOCs are also produced by evaporation, which takes place continuously, whether or not the auto engine is operating.

When ethanol is added to gasoline in the 10% blend generally used, the volatility of the mixture is higher than the original gasoline blendstock by about 1 psi (pound per square inch), as measured by the Reid Vapor Pressure (RVP). (6) This means that the blend has a greater tendency to evaporate than straight gasoline, and therefore that, other things being equal, more VOCs would enter the atmosphere from the blend than from straight gasoline.

As for ethanol and NOx, while there is some difference of opinion as to degree, it appears that combustion of ethanol does produce more tailpipe emissions of NOx than gasoline, because the ethanol blend can be burned as a leaner air-fuel mixture, resulting in higher combustion temperatures than with gasoline. As mentioned above, the "reg neg" parties agreed to assume that, within the defined composition limits, this increase did not exist in formulating the "simple model" for reformulated gasoline.

As noted in the introduction, ethanol advocates base their arguments for promoting the use of this fuel on three issues: air quality, national energy security, and farm income. They have felt justified in seeking, and until recently obtaining, waivers (by 1 psi) of RVP regulations for the ethanol blend, because of the energy security and farm income considerations. Thus application of the original Clean Air Act to ethanol was waived by EPA in 1978, although the fact that ethanol sales for fuel purposes were quite small at the time was a factor in EPA's decision.

In recent years the debate over alternative fuels has centered more on air quality issues, as a result of the two-year debate in Congress over the Clean Air Act amendments in 1989 and 1990, and the subsequent discussion of regulations to implement this legislation during 1991 and 1992. Here again ethanol supporters feel they have a valid argument not directly related to the RVP discussion: carbon monoxide (CO). Carbon monoxide is another important air pollutant, and standards have been formulated for CO concentrations in the atmosphere, as they have been for ozone. Generally, CO is a factor at different times and in different places than ozone. While ozone pollution peaks in the summer, and is a factor in most of the Nation's large urban areas, CO pollution peaks in the winter months and is a factor primarily in Western cities at higher altitudes. (Los Angeles and New York are exceptions to this, as they head the list for both NOx and CO pollution). (7)

Oxygenated fuels are known to reduce tailpipe emissions of CO, and ethanol is such a fuel. However, it is not the only such fuel. The other generally available oxygenate is methyl tertiary butyl ether (MTBE). MTBE is derived from methanol, and is more easily handled by the petroleum industry than is ethanol: MTBE can be transported through existing pipelines, while ethanol cannot due to its strong affinity for water, which causes it to separate from the gasoline blend if water is present. Thus, given the choice between MTBE and ethanol, the petroleum industry tends to prefer MTBE (although this is not unanimous; some oil companies in some regions prefer ethanol, provided that they can add it at their own terminals rather than "splash-blending" it in the field).

In June 1987, the State of Colorado made use of oxygenated fuels mandatory during the winter months in Denver and neighboring cities. Arizona, Nevada, New Mexico, and other States have since followed suit. These oxygenated fuels programs have generally been successful, as few consumer complaints were noted and atmospheric CO concentrations diminished. MTBE and ethanol have shared this market, with MTBE in the lead. Beginning with the winter of 1992-93, the CAAA mandated that this process be extended to 39 cities with CO levels above the EPA limits.

Thus, while ethanol in the ten percent blend increases the RVP and thus increases atmospheric ozone, the argument has been made that the increase should be disregarded because of other perceived advantages associated with ethanol use, including wintertime CO control, greater national energy security, and increased farm income. The next question to be considered is whether the Clean Air Act, the "reg neg" agreement, and the subsequent EPA regulations allow for such considerations in reformulated gasoline. On this point the parties to this debate strenuously disagree.

THE RELEVANT LAWS AND REGULATIONS

In the Clean Air Act Amendments of 1990 (P.L. 101-549), section 211 (h) limits fuels dispensed during the "high ozone season" to a Reid Vapor Pressure of 9.0 psi or less. The ten percent ethanol blend was allowed a waiver of 1 psi, meaning that it could have an RVP of 10.0 psi or less. (8)

However, section 211 (k), which specifies requirements for reformulated gasoline, did not include the waiver for ethanol. (9)

The "reg neg" agreement specified that the RVP for reformulated gasoline be no greater than 8.1 psi in northern cities and 7.2 psi in southern cities. It did not specifically include an ethanol RVP waiver. However, it did include language stating that for the "simple model", if a State's air quality authority agreed, and if an area was not in violation of the ozone requirements, up to 3.5%. oxygen would be "presumed to result in no NOx increase". (10) This language could be interpreted as protecting the ten percent ethanol blend, which contains 3.5%. oxygen. However, this provision was sufficiently unclear to permit differing interpretations by the various parties to the "reg neg"--and that is in fact what happened.

In April, 1992, EPA issued proposed regulations for reformulated gasoline, thus putting the "reg neg" agreement into regulatory form. EPA denied the RVP waiver sought by the ethanol industry. The agency stated that, under its understanding of the "reg neg", it had no choice but to deny the waiver. It added that ethanol might fare better when the "complex model" for reformulated fuel was developed and put into place beginning in 1997. As previously noted, the "simple model" which EPA proposed will apply for the first two years of the reformulated gasoline program, which will be 1995 and 1996. (11)

ETHANOL INDUSTRY EFFORTS TO REVERSE EPA'S PROPOSED REGULATIONS

By the time the proposed regulations were issued by EPA, the ethanol industry and its supporters were already concerned about the adverse effects to them that would follow from the denial of the RVP waiver. "New Fuels Report" states that the ethanol industry "lobbied heavily" for the waiver before the EPA action. (12) This having failed, they began a serious effort to reverse EPA's determination to deny the RVP waiver for ethanol in the final version of the reformulated gasoline regulations.

The ethanol industry contended that without a waiver, it would be locked out of the reformulated gasoline program, and that this was not the intent of Congress when the clean air legislation was enacted. (13)

Those opposed to the waiver soon began a counterattack, based on both procedural and substantive grounds. Procedurally, they contended that the ethanol industry was violating the "reg neg" agreement which it had signed, in which all parties had pledged to support the agreement's terms. Substantively, they claimed that an RVP waiver for ethanol would interfere with the goals of the reformulated gasoline program, not only by adding more NOx to the atmosphere, but also by making the RVP limits for reformulated gasoline more difficult, and therefore more costly, to achieve. (14)

The anti-waiver group included an unusual coalition of the oil industry and environmentalists, among others. According to The Energy Report,

At a Washington press conference last week, officials from the Natural Resources Defense Council, the Sierra Club, the American Petroleum Institute and the American Methanol Institute blasted ethanol lobbyists' efforts to pressure the Bush administration into waiving the vapor pressure standard in EPA's pending reformulated gasoline rules for ethanol".(15)

The ethanol industry turned to the Congress for support, with some success. On September 8, 1992, the Senate passed a "sense of the Senate" amendment (to an unrelated appropriations bill) calling the proposed regulations "illegal." The amendment, sponsored by Senator Durenberger (R--MN), contended that the regulations violated the Clean Air Act and the intent of Congress by limiting the role of ethanol. It passed by voice vote with little discussion. (16)(17)

A "sense of the Senate" measure is non-binding, but can be useful to its proponents, since it puts the Senate on record. It might be useful in court cases when the intent of Congress in passing legislation is in question.

Senator Durenberger claimed that the reformulated gasoline program passed the Congress only because of support provided by the farm community, and that farm-state legislators obviously would not have approved language precluding the use of ethanol. He contended that the 1-psi waiver in section 211-H of the clean air legislation obviously applied to section 211-K as well, even though section 211-K did not specifically say so. (18)

The debate over the ethanol waiver became entangled with the Presidential election campaign, as ethanol supporters pressed President Bush to overrule EPA and grant the waiver. (19)

PRESIDENT BUSH'S OCTOBER DECISION

On October 1, 1992, President Bush announced that he would grant the RVP waiver to the ethanol industry. His decision was structured to avoid harm to the environment and put the burden on the oil industry, by requiring a lower volatility level in gasoline sold in the high-ozone areas. (20)

According to the White House "fact sheet" issued to explain the new policy, "The waiver will be applied in a way that is fully consistent with the requirements of the Clean Air Act and fully protective of the environment, and which achieves all of the environmental benefits of the regulatory negotiation on this program". The waiver would apply to up to 30 percent of the reformulated gasoline market in the northern high-ozone cities, where the volatility of all gasoline sold would have to be reduced from 8.1 psi to 7.8 psi. In the southern high-ozone cities, volatility would be reduced from 7.2 psi to 7.0 psi, and the waiver would apply to 20 percent of the market. (21)(22)

The "fact sheet" also included two additional measures not related to this dispute but intended to promote ethanol: support of legislation to make the benefits of the blender's tax credit non-taxable for ETBE, which is an ethanol-derived oxygenate similar to MTBE; and assurance that the oxygenated fuels program for the coming winter would apply to 39 cities and that the States' ability to discourage ethanol use by capping the level of oxygenates would be limited. (23)

The immediate reactions to the Presidential initiative of October 1 were predictable. Ethanol advocates hailed the new policy while opponents condemned it. Litigation to block the policy was discussed, but no lawsuit has been filed since implementing regulations have not yet been promulgated. Aside from the specifics of the policy, there was disappointment expressed concerning the "reg neg" process. Opponents of the ethanol waiver felt that the reg neg agreement had been broken by the Administration, and that there was no point in taking part in such a process in the future if it could subsequently be broken in this manner. (24)

CLINTON ADMINISTRATION POSITION

With President Clinton's election and inauguration, the future course of this controversy is in doubt. President Bush's announcement of October 1 would have to be implemented by regulation if it were to take effect, and the Clinton Administration has yet to give a clear signal of its approach to this controversy.

Before the election, then-candidate Clinton did not express an opinion on the ethanol waiver issue. He generally favored alternative sources of energy, including ethanol; as Governor of Arkansas, he was a member of the Governors Ethanol Coalition. In late October 1992, "New Fuels Report" quoted "a key energy adviser to Clinton" as calling the Bush announcement "a pretty cynical attempt to buy votes for the corn growers before the election". (25)

On November 1, two days before the election, Clinton wrote to the National Corn Growers Association, pledging support for ethanol but not specifically endorsing the RVP waiver. (26)

In February 1993, the EPA received approval from OMB to issue the proposed reformulated gasoline regulations reflecting the Bush decision without change. These regulations were published in the Federal Register of February 26, 1993, as a notice of proposed rulemaking (NPRM). (27)(28) Under normal regulatory procedures, such a notice begins a period of time during which comments from the public and interested parties are received. After consideration of all public comment the regulations may be issued as proposed, may be changed, or may be re-proposed.

The EPA held hearings on April 14-15, 1993 on this matter. The hearings focused on two issues; (1) "commingling", which is the mixing of ethanol into gasoline other than the gasoline specifically prepared for blending with ethanol (this could happen, for example, when a motorist filled his tank with ethanol blended gasoline, then on his next refill went to another service station selling non-ethanol blended gasoline); (2) reactivity, which relates to the question of ethanol emissions reacting with sunlight to form ozone. Other issues raised, either in the hearings or in the written submissions to EPA, include technical feasibility, cost, cost effectiveness, and enforceability. (29)

SITUATION IN MID-1993

As of mid-1993, the new Administration's policy on this matter remained uncertain, with EPA considering the comments received on its proposed regulation. EPA is under a court order to issue its reformulated gasoline regulation by September 15, 1993, and expects to meet that deadline. (30)

The underlying issue to be decided is whether ethanol should have a preferential position among the possible alternative automotive fuels because of its status as a "home-grown" product of American agriculture, or should be treated the same as the other potential sources of oxygen for reformulated gasoline, such as MTBE. This is the judgment awaiting the Clinton Administration and, potentially, the 103d Congress.

Endnotes

1. U.S. Dept. of Energy. National Alternative Fuels Hotline, telephone conversation, June 17, 1993.
2. Ethanol's Role In Reformulated Gasoline Stirs Controversy. Chemical and Engineering News, Nov. 2, 1992. p. 7-13.
3. Final Agreement Reached on Reformulated Gasoline and Oxygenated Fuels Rules. New fuels Report, Aug. 19, 1991. p. 3.
4. E10-NOx Impasse Broken; Reg Neg Agreement Inked. Oxy-Fuel News, Aug. 19,1991. p.1.
5. In order to get the reformulated gasoline program underway as quickly as possible, EPA formulated a "simple model" to be used as the basis for its certification of reformulated gasoline during 1995 and 1996, with a "complex model" to be used thereafter. The simple model uses just two criteria, volatility and oxygen content, while the complex model will take more fuel characteristics into consideration. For more information on reformulated gasoline, see CRS Issue Brief 91008, "Alternative Fuels and Reformulated Gasoline", by David Gushee.
6. Chemical and Engineering News, Nov. 2, 1992 (op. cit.).
7. According to EPA data quoted in the 1990 House report on the Clean Air Act Amendments (H.Rept. 101-490, pages 230-231, 258-259) the five worst U.S. metropolitan areas with regard to ozone were Los Angeles, New York, Chicago, Houston, and Milwaukee, in that order. The five worst with regard to carbon monoxide from mobile sources were Los Angeles, New York, Spokane, Albuquerque, and Denver, in that order.
8. Public Law 101-549, section 216. (104 Stat. 2489-2490).
9. Ibid., section 219. (104 Stat. 2492-2500). (This situation is excellently summarized in the Nov. 2, 1992 Chemical and Engineering News article cited above.)
10. Oxy-Fuel News, op. cit., Aug. 19, 1991. p. 6.
11. EPA denies ethanol an RVP waiver in proposed reformulated fuel regulations. New Fuels Report, Apr. 6, 1992. p. 5.
12. Ibid.
13. Chemical and Engineering News, op. cit., p.8.
14. Ibid.
15. Environmentalists, Oil Industry Join To Fight Pollution Waiver For Ethanol. The Energy Report, Sept. 14, 1992. p. 616.
16. Amendment calling EPA RFG rules illegal passes Senate with no discussion. New Fuels Report, Sept. 14, 1992. p. 1.
17. Congressional Record, Sept. 8, 1992. p. S 12893.
18. Chemical and Engineering News, op. cit., p. 8-9.
19. National Corn Growers Call on Administration to Decide Ethanol Issue. Oxy-Fuel News, Aug. 10, 1992. p. 1.
20. Bush Bends to Farmers on Ethanol Exemption. Washington Post, Oct. 2, 1992. p. 13.
21. The President's Program to Encourage Ethanol Use in Meeting the Environmental Goals of the Clean Air Act. The White House, "Fact Sheet", Oct. 1, 1992.
22. The Clean Air Act specifies nine ozone nonattainment areas. Six of them are considered "northern" under existing EPA regulations: Baltimore, Philadelphia, New York, Hartford, Chicago, and Milwaukee. Three of them are considered "southern": Los Angeles, San Diego, and Houston.
23. Fact Sheet, op. cit.
24. U.S. Library of Congress. Congressional Research Service. Alternative Fuels and Reformulated Gasoline. Issue Brief No. IB91008, by David Gushee, Oct. 2, 1992 (continually updated). Washington, 1992.
25. Clinton Would Review Bush's Ethanol Plan, Strive For Equitable Package. New Fuels Report, Oct. 26, 1992. p. 1.
26. Clinton Team Says No Official Position on Ethanol-RFG "Waiver" Yet. Oxy-Fuel News, Dec. 7, 1992. p. 6.
27. Federal Register, v. 58, no. 37, Feb. 26, 1993. p. 11722-11763.
28. EPA Issues Long-Awaited Proposed Reformulated Gasoline Regulations. Alcohol Outlook, Mar. 1993. p. 1-2.
29. EPA Scrutinizing Two Issues That Could Make or Break RVP Waiver for Ethanol. New Fuels Report, Apr. 26, 1993. p. 5-6.
30. George Lawrence, EPA, telephone conversation, June 17, 1993.