Where Does the Renewable Fuels Standard Stand?

American Association of Petroleum Geologists (AAPG)

On November 21, the Environmental Protection Agency (EPA) announced that it would postpone setting requirements for the volume of renewable fuels that must be blended into motor fuels until some point in 2015. This decision was a blow to the refining industry which, based on EPA’s proposed rule for 2014, indicated that the Agency was strongly considering decreasing its volume requirements. The reasons EPA was, and still is said to be considering this include: lower than anticipated demand for gasoline, barriers with increasing the blending wall (which is currently 10% ethanol), and the lack of feasibility for the initial targets for the expanded biofuel categories, especially in the area of cellulosic ethanol.

The renewable fuels standard (RFS) was created as part of the Energy Policy Act of 2005 (EPAct) as a way to move the U.S. away from foreign sources of oil and to address climate change. The standard is administered by EPA. It mandated the use of 4 billion gallons of fuel from renewable sources by 2006 and 7.5 billion by 2012. EPA finalized the rules for RFS1, the statutory basis for the RFS program under EPAct, in April, 2007. RFS1 focused on first generation biofuels, which were derived from food sources and mainly corn based. In addition RFS1 set up renewable identification numbers (RINS) which were created to monitor compliance with the RFS. A RIN is a 38-character number, which is assigned to each gallon of renewable fuel that is produced domestically or imported. Once a renewable fuel is blended, RINs are used by refiners, blenders, and importers to show compliance with the volume requirements called for in the RFS.

In the Energy Independence and Security Act of 2007 (EISA), the volumes and types of biofuels were greatly expanded. EISA set a goal of 36 billion gallons by 2022 and also set specific goals for renewable fuel subcategories, which include total renewable fuels, advanced biofuels (made from non-food sources such as inedible plant and animal material), biomass-based diesel, and cellulosic biofuels (made from cellulose, hemicellulose and lignin contained in agricultural residues and woody crops).

As the RFS2 has been implemented, there has been much debate on whether or not the volumes called for are achievable and/or affordable. On one side, groups promoting the RFS, such as the Renewable Fuels Association (RFA), want to keep the numbers where they are because they believe that these targets are necessary to create a mature industry. In addition, they argue that a robust biofuels industry will help lessen U.S. dependence on foreign sources of energy, provide support to the U.S. agricultural sector, and help the environment through a decreased use of greenhouse gases (GHGs).

On the other side of the argument, the refining industry has been engaged in efforts to decrease the targets. They say that the RFS is merely a taxpayer subsidy to the agriculture and biofuels industries at the expense of consumers. They also oppose the federal government’s role in picking winners and losers by giving biofuels preference over other alternative energy sources. In addition, the EISA, which significantly expanded the program, was implemented before the shale gas revolution in the U.S., so dependence on foreign sources of oil is less of a priority.

Because they have found the current RFS program to be unworkable, the refining industry, represented by both the American Fuel and Petrochemical Manufacturers (AFPM) and the American Petroleum Institute (API) have urged the Obama administration to either kill the RFS program completely, or to at least significantly modify volume levels put forward in EISA.Although it looked like the industry’s position might be bearing fruit based on EPA’s proposed requirements for the 2014 RFS, the Agency decided to punt and postpone any decision until 2015. In EPA’s decision the agency noted that the proposal has generated “significant comment and controversy” regarding how volumes should be set in light of the lower gasoline prices as opposed to the higher demand that were forecasted in 2007, when EISA is enacted. EPA said that they have been carefully evaluating these concerns and is weighing them with the intent of the original statute and the Obama administration’s policies, which continue to be supportive of significantly ramping up the use of renewable fuels, reducing GHG emissions from the transportation sector, and diversifying domestic fuel supplies.

EPA’s inability to make a decision on 2014 requirements has upset both the refining and biofuel industries and was the topic of a recent hearing by the House Oversight and Government Reform’s Subcommittee on Energy Policy, Heathcare and Entitlements. At the hearing, EPA Acting Secretary for Air and Radiation Janet McCabe said that although she understands that the lack of a 2014 requirement creates uncertainty for both refiners and biofuel producers, she could not provide a target date for the standard to be issued in 2015. She said that the main reason for this is that the Agency is attempting to address issues with the “blend wall”, which is the limit at which ethanol can be added to the gasoline supply in order to comply with the RFS. The current “blend wall” is 10% (E-10) but the increasing amounts of renewable fuels required under the RFS is pushing this up rapidly to 15% and beyond. Although there are a very limited amount of flex- fueled vehicles that can run on E-15 and higher blends, there is a concern that these higher blends could damage the engines of other vehicles. In addition, there are very few gas stations that offer these higher blends currently.

In addition to her promise to issue the 2014 standard in 2015, McCabe also said that EPA will also issue the standards for both 2015 and 2016 in 2015. Both Chairman Lankford (R-OK) and Ranking Member Speier (D-CA) seemed to doubt that EPA would be able to issue requirements for 3 years of standards in one year, especially as EPA’s record in meeting deadlines for the RFS program historically has been less than stellar. In addition, both Representatives seemed extremely frustrated to hear that McCabe could not offer a target date for a decision for the 2014 requirements. Speier, who is supportive of the goals of the RFS program, went as far as to say that if EPA cannot set timelines for the RFS, that Congress should consider taking a hard look at repealing the program.

Adding to the debate on the uncertainty with the implementation of the RFS program at EPA was a recent report released by Bipartisan Policy Center (BPC). The report contained 40 policy options that policymakers could consider to improve the program. The BPC is a think tank in Washington DC that looks to promote bipartisan policy solutions in energy and other areas that can be recommended to Congress. These recommendations include reform of the program at EPA, legislation, or both.

Although this issue is likely to be revisited by Congress next year, an outright repeal of the program is unlikely because members of Congress with agricultural interests would strongly oppose this, but some legislative and/or regulatory modifications may be a possibility. Even EPA has admitted that the volumes in the RFS, especially in the area of cellulosic ethanol are unrealistic based on current technologies. In addition, there are real concerns with the RINs system, as they have been used by market speculators to drive up gasoline prices as well as for fraud.

In the meantime, the refining industry is using the courts to push back on EPA’s decision and the Agency’s inability to meet annual deadlines. If EPA is going to address requirements for 2014, 2015 and 2016 all next year, the Agency certainly has its work cut out for itself.

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