In 1988, the United States government began allowing carmakers to use E85 flex-fuel vehicles—which run on a blend of 85 percent ethanol and 15 percent gasoline—to help meet Corporate Average Fuel Economy standards. For each mile-per-gallon a flex-fuel equipped vehicle is theoretically capable of getting from ethanol, the government said it would add to the vehicle’s total fuel efficiency rating. For example, an E85 light duty truck that averages 13 mpg is currently credited with about a 23 mpg rating.

What the credits essentially do is help automakers cook their fuel economy books by producing hundreds of thousands of flex-fuel vehicles that will likely never even use E85—all the while getting credit for decreasing the amount of gasoline used by their fleet.

When gas prices are low, there is often virtually no economic incentive for drivers to fill their cars and trucks with ethanol. What’s more, currently only about 2,500 of the 162,000 gas stations in the United States actually offer E85—and most of those are located in the Midwest. This means that many drivers of flex-fuel vehicles have no chance of using the fuel to significantly cut their petroleum consumption—even if they wanted to.

The End is Near?

The federal government’s special affinity for ethanol dates back decades, but it may be coming to an end soon. The E85 CAFE credits are scheduled to end in 2016, and a slew of other ethanol production and blending incentives have either expired or are scheduled to expire at the end of 2010.

Despite this, automakers say they’re on track to follow through with their promise to double production on flex-fuel vehicles over 2006 levels. General Motors, Ford and Chrysler say that by the end of the year they will be prepared to collectively produce 1.4 million flex fuel vehicles per year, beginning in 2011. By 2012, American automakers say that half of the vehicles they make will be flex-fuel-capable.

All of this seems to fly in the face of a report by Automotive News that cites several industry analysts as saying that flex-fuel vehicles will likely be phased out when the E85 CAFE credits expire in 2016. Or does it?

Carmakers Will Likely ‘Wait and See’

Manufacturing a car or truck to run on flex-fuel costs about the same as making one that runs just on gasoline, meaning that carmakers have been able to have their cake and eat it too on the E85 issue. Since it costs the industry almost nothing more to produce flex-fuel vehicles, why not just do it anyway while continuing to reap the regulatory and “green cred” PR benefits along the way?

A new loophole in the Energy Independence and Security Act of 2007 made CAFE credits exchangeable between different classes of automobiles and tradable between companies. It also allows carmakers to carry over credits for up to five years. So even though the allowable E85 credit for each automaker—averaged across its entire fleet—is 0.9 mpg each year, the flex-fuel boost that carmakers accumulate between now and 2016 can be carried over and traded until 2020.

Of course, there’s always the chance that Congress could act to extend E85’s special CAFE status well beyond 2016. Though many scientists, politicians and environmentalists have turned against ethanol in recent years—citing its multi-billion dollar per year cost to the taxpayer and evidence that it doesn’t decrease lifecycle carbon emissions over gasoline—there remains a considerable amount of support for the fuel on Capitol Hill.

The ethanol industry has teamed up with large agricultural corporations and trade groups to spend millions of dollars each year lobbying for government support. At any time between now and 2016, a deal could be made with some of ethanol’s most powerful supporters in Congress to extend the credits. Some of those supporters are key Midwest moderates whose votes are often crucial to getting a bill passed, meaning that if the Obama administration wants to pass a climate bill or some other piece of politically contentious legislation, Democratic leaders could be forced to strike a compromise on ethanol.