EPA rejects Texas request to cut U.S. ethanol use

WASHINGTON Thu Aug 7, 2008 5:13pm EDT

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WASHINGTON (Reuters) - U.S. regulators on Thursday rejected a request to cut the amount of ethanol required in gasoline, saying there was no evidence that use of the corn-based fuel hurt the economy by driving up food costs.

The Renewable Fuel Standard still will require 9 billion gallons in renewable fuels to be blended into the nation's gasoline supply this year, and 11.1 billion gallons in 2009.

In April, Texas Governor Rick Perry asked the Environmental Protection Agency to cut the mandate by 50 percent. He argued that ethanol production was driving up the price of corn, making it more expensive for farmers to feed livestock.

The EPA said there was no evidence to support the claim by Texas that the mandate would "severely harm" the U.S. economy.

"This research found that the RFS mandate is not causing severe economic harm," EPA Administrator Stephen Johnson said. Johnson said the mandate was "strengthening our nation's energy security and supporting Americans' farming communities."

The EPA said reducing the mandate "would have no impact on ethanol production volumes in the relevant time frame, and therefore no impact on corn, food, or fuel prices."

Critics of ethanol use for fuel blame increased production of biofuels for skyrocketing food prices. World Bank economist Don Mitchell has said biofuels, speculative activity and food export bans increased global food prices by 70 to 75 percent.

The EPA said its research showed one scenario under which cutting the mandate could cut corn prices 30 cents a bushel and boost gasoline prices a penny a gallon.

The U.S. Agriculture Department has said it expects U.S. food prices to climb 5 percent this year, the largest annual increase since 1990, then rise by another 4.5 percent in 2009.

The spot corn price jumped in June to records above $7 a bushel, then retreated to around $5 in August -- still well above the 2005 average price of $2.

Critics have noted that about a third of this year's U.S. corn crop is going to produce ethanol. Parry issued a statement calling the EPA's decision "a mistake that will only increase the already-heavy financial burden on families while doing even more harm to the livestock industry."

Livestock producers have complained about higher feed costs. The U.S. Chicken company Pilgrim's Pride Corp said on Thursday the government's ethanol policy will increase its feed costs this year by $900 million.

But grain farmers and the ethanol industry blame record oil prices for higher food prices. The Renewable Fuel Association said in a statement that the ethanol mandate will save the average American household "as much as $500 a year in lower transportation costs."

The U.S. Department of Energy supported the EPA decision. Energy Secretary Samuel Bodman said the country needs "cost competitive technologies and sources to overcome our addiction to oil ... and biofuels constitute a prominent -- but not an exclusive -- promising pathway."

Conservation groups criticized EPA's decision, saying it did not consider environmental impacts of ethanol. The EPA only evaluated economic effects, the focus of Texas' petition.

"The misguided corn ethanol mandate is forcing farmers to plow up marginal land and wildlife habitat, while increasing global warming and dumping toxic fertilizers and pesticides into our precious water sources," said Environmental Working Group Director of Government Affairs Sandra Schubert.

(Additional reporting by Tom Doggett, Lesley Wroughton and Charles Abbott; Editing by David Gregorio)

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