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Reviewing the Renewable Fuel Standard

December 11, 2013

Enacted in 2005 and expanded in 2007, the Renewable Fuel Standard (RFS) requires that an increasing amount of ethanol and other biofuels be added to America’s transportation fuel supply. Policymakers believed that mandating the substitution of oil-based fuels with biofuels derived from corn, switchgrass, wood, waste, algae, sugar, and fats would reduce oil imports, mitigate carbon emissions, and boost agricultural production. But under today’s energy paradigm, the RFS mandate has become problematic. The RFS is now responsible for increased food and fuel prices and threatens damage to engine and fueling infrastructure.

RFS volumetric targets
In billions of gallons

RFS volumetric targets

The “Blend Wall”

The RFS was put forward as a response to projections of rising American oil imports from volatile foreign countries. It was also lauded for its potential to reduce carbon emissions and to drive demand for agricultural products. What was not anticipated were free market developments like technological breakthroughs in hydraulic fracturing and horizontal drilling that led to the shale oil revolution. Today’s forecasts show America will produce more oil at home, import less from abroad, consume less gasoline, and emit less carbon from oil-based fuels. Most of the rationale for enacting the RFS has disappeared.

disappearing rationale for RFS

The RFS sets targets for the volume of biofuels to be produced each year – mostly from corn at first, then increasing the amount required from other sources in the future. The mandate for this year was 16.55 billion gallons, and is set to rise to 36 billion by 2022. Over the years since the RFS took effect, however, consumption of fuel has not increased at its previous pace. In 2007, experts predicted that the U.S. would consume 11.24 million barrels of gasoline a day by 2022. Those experts now predict that we will consume only 8.12 million barrels a day by then – a drop of 28 percent. By mandating annual increases in the total volume of biofuels to be mixed into the gasoline supply, and with the gasoline supply itself decreasing as Americans consume fewer gallons each year, the RFS ensures that the percentage of biofuels in the gasoline supply will increase.

Corn ethanol as a percentage of gasoline supply under RFS

Corn ethanol as a percentage of gasoline supply under RFS

Next year, ethanol could exceed 10 percent of the gasoline supply. That threshold is known as the “blend wall” -- the maximum level of ethanol that can be blended into gasoline. Gasoline blends containing more than 10 percent ethanol (E-10) can harm motor vehicles, other gasoline-powered equipment, and fueling infrastructure.[1] Their use will void most vehicle warranties. Breaching the blend wall threatens harm to gasoline consumers and retailers if RFS-prescribed volumetric targets are implemented.

Inadequate EPA Response

In November, the EPA acknowledged the blend wall problem when it proposed reducing the total amount of biofuels to be mixed into next year’s gasoline supply. If the proposed rule is finalized, it would reduce mandates by 2.94 billion gallons from 2014 statutory requirements, and biofuels could remain below 10 percent in 2014. But EPA’s proposal would provide only temporary relief, not the long-term certainty fuel markets need. The blend wall, and its harmful effects, will continue to loom as gasoline consumption declines and RFS requirements increase. The EPA alone cannot adequately safeguard the American people.

In 2010 and 2011, the EPA responded to industry concerns by issuing a partial waiver for gasoline blends containing up to 15 percent ethanol (E-15) for use in post-2001 vehicles, but not for pre-2001 vehicles, motorcycles, or non-road engines. The Congressional Research Service concluded, “the EPA waiver for E-15 is not sufficient, in and of itself, to ensure higher blending ratios,” so it does little to avert the blend wall.

Fuel producers still must register new fuel blends and submit health-effects testing to EPA. Gas stations still must get state approval and invest in changing pumps, storage tanks, and other infrastructure. Automakers still must warranty vehicles for E-15, which they are unlikely to do in the near term since it compromises engine durability, degrades fuel systems, and is incompatible with most fueling equipment. (Automakers currently warranty vehicles to run on E-10.)

Since 2010, the EPA has mandated that refiners blend millions of gallons of cellulosic biofuels into the gasoline supply even though none was commercially available. In January, the U.S. Court of Appeals for the D.C. Circuit vacated EPA’s 2012 cellulosic biofuels mandate (a subset of the RFS), concluding that EPA exceeded its authority by setting an unachievable standard in an effort to promote cellulosic biofuel development. The court said, “EPA applies the pressure to one industry (the refiners), yet it is another (the producers of cellulosic biofuel) that enjoys the requisite expertise, plant, capital and ultimate opportunity for profit. Apart from their role as captive consumers, the refiners are in no position to ensure, or even contribute to, growth in the cellulosic biofuel industry. ‘Do a good job, cellulosic fuel producers. If you fail, we’ll fine your customers.’”

RFS Leads to Unintended Consequences

Most U.S. biofuel production consists of ethanol derived from corn. According to CRS, the “significant shift towards greater corn use for biofuels has meant higher prices for other corn users, including both the livestock and export sectors.” Corn prices, which averaged $2.15 per bushel from 1997 to 2006, have risen to an average of about $7 per bushel. They are projected to remain in the $4 to $5 per bushel range through 2020. Higher corn prices mean Americans pay more for turkey, ham, beef, milk, eggs, cheese, and other basic food staples. One industry study estimated that each chain restaurant pays an additional $18,000 per year in food input costs because of federal ethanol policy. According to Stanford University’s Center on Food Security and the Environment, rising corn prices also “ripple through all of the world food economy markets,” affecting supply and demand of wheat, rice, soy, and other agricultural commodities. This hurts poor households in the developing world as well, since they spend 70 to 80 percent of their budget on food.      

Under RFS, corn prices soar

Adjusted for energy content, renewable fuels more expensive

In 2012, the governors of Arkansas, Delaware, Georgia, Maryland, New Mexico, North Carolina, Texas, Utah, Virginia, and Wyoming petitioned the EPA for a waiver of RFS requirements to reduce economic harm associated with higher feed costs for swine, poultry, and cattle. The Democrat governor of North Carolina said, “direct harm is caused by the RFS requirement to utilize ever-increasing amounts of corn and soybeans for transportation fuel, severely increasing the costs of producing food and further depleting already severely stressed grain supplies.” The EPA denied the governors’ request.

In addition to raising commodity prices, the RFS law also created a complicated system of tradable credits, called Renewable Identification Numbers (RINs). Each gallon of produced or imported renewable fuel is assigned a RIN. Refiners and other “obligated parties” use RINs to demonstrate compliance with the RFS. Fewer RINs are generated as fuel consumption declines, yet more RINs are needed as RFS requirements rise. As the RFS raises the amount of renewable fuels blended into a shrinking amount of gasoline, the mismatch between supply and demand for RINs grows, and their price skyrockets. As a result, obligated parties pay more in RFS compliance costs and Americans pay more at the pump. The Wall Street Journal reported this “ethanol tax” added 10 cents to the price of a gallon of gasoline last summer. As the RFS pushes the gasoline pool past the blend wall, gasoline prices may spike by 20 cents to $1.00 per gallon, according to the Energy Policy Research Foundation.

Adjusted for energy content, renewable fuels more expensive

Under RFS, corn prices soar

Beyond cost increases, the National Academy of Sciences found the RFS may not actually reduce global greenhouse gas emissions. Ultimately, the extent to which biofuel produced from energy crops results in GHG emissions savings compared to petroleum-derived fuel is at best “uncertain.” At worst, the standards do actual environmental harm.

“[O]verall production and use of ethanol will result in higher pollutant concentration for ozone and particulate matter than their gasoline counterparts on a national average.”  -- National Academy of Sciences, October 2011

The RFS was enacted to address market conditions that no longer exist. The policy’s contributions to energy security grow less relevant, and more adverse, by the day. The RFS must adapt appropriately.