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Hearing More About the Dysfunctional RFS

Mark Green

Mark Green
Posted July 21, 2015

With another congressional hearing on the Renewable Fuel Standard (RFS) scheduled this week, a couple of glimpses behind the curtain at EPA help explain why the RFS is dysfunctional and needs to be repealed or dramatically overhauled.

Glimpse No. 1 comes from a U.S. Senate subcommittee hearing last month, chaired by Sen. James Lankford of Oklahoma. The witness was EPA’s Janet McCabe, acting assistant administrator for the office of air and radiation. Tune in at about the 1-hour, 24-minute mark of the archived video to see Lankford’s discussion with McCabe about how EPA sets annual ethanol use requirements under the RFS.

The overriding issue is the ethanol “blend wall” – the point where the RFS requires blending more ethanol into the national fuel supply than can be used in E10 gasoline. At that point some think that higher ethanol-blend fuels like E15 and E85 will help meet RFS ethanol mandates. But E15 can cause damage to engines and fuel systems in vehicles that weren’t designed to use it – as well as outdoor power equipment, boats and motorcycles. And E85 is less energy-dense than standard gasoline – getting fewer miles to the gallon. It represents a tiny fraction of overall gasoline demand, a strong signal from consumers.

Thus, Lankford wanted details on how EPA builds E85 growth assumptions that go into the agency’s overall proposal for required ethanol use under the RFS:

“You have this assumption that E85 is going to dramatically increase in usage, even six months from now. I’m trying to figure out the assumptions that went into that because my understanding is there are enough E85 vehicles on the road right now to meet the E85 requirements, but many of those individuals that have E85 vehicles choose to purchase E10. That’s a consumer preference there. So I’m trying to figure out how EPA assumed that E85 would suddenly jump when there are E85 owners that choose not to use that product.”

McCabe acknowledged that E85 isn’t being selected by flex-fuel vehicle owners as much as it could be but said EPA’s proposal is “intended to be forward-looking and optimistic because we understand that Congress wanted these fuels to be driven into the market.”

Lankford pressed on:

“Is the assumption that we’re going to try and push the issue here, but there’s not a method to say we anticipate, based on car purchases or anything else or availability, that people that have flex-fuel vehicles will start using this product more?”

McCabe said EPA doesn’t have a mathematical formula to estimate future E85 use (and that fuel’s ability to help absorb ethanol beyond the E10 blend wall). To which Lankford observed that EPA’s E85 assumption is “more of an aspirational goal rather than an actual, we see this, and so we anticipate this use.”

Then came the peek behind the EPA curtain. McCabe:

“I would say it’s an optimistic goal but informed by our judgment, our understanding of the way the market has developed so far, what in our judgment it can do. EPA has regulated the fuel market for many, many years, and this is all laid out for people to agree or disagree with in the (RFS) proposal, and we welcome that. It was all those things that went into that, but with respecting Congress’ clear intent that volumes of these fuels (should) increase and that it was going to take a push in order for that to happen. Our understanding is that Congress meant for more renewable fuel to be used than would be used without the RFS.”

Breaking this down: EPA’s main inputs on E85 use are the agency’s own “judgment” and “understanding” of the fuels marketplace. No doubt to Lankford’s continued puzzlement, EPA’s methodologies and its processes on E85 estimations are basically mysterious. (This must also be true about EPA’s projections for cellulosic biofuels, biodiesel, biogas and E15.) Bottom line: You may agree or disagree with EPA’s draft RFS proposal, but in the final annual setting of federal policy, the agency is both judge and jury – and, not surprisingly, quite sympathetic to its own “judgment” and “understanding.”

Now for Glimpse No. 2. Buried in the supporting documents for EPA’s latest RFS proposal, the agency published a paper that tries to make some sense of the 2013 rise in prices for Renewable Identification Numbers (RIN) – the federal credits that refiners receive for blending each gallon of ethanol – and the impact RINs had on fuel prices and the broader fuels marketplace.  The 31-page document is dense technical and economic data and includes some interesting and seemingly contradictory statements:

  • “While RIN prices were significantly higher in 2013 than in previous years, we did not see, nor would we expect to see, a corresponding net increase in the overall retail price of transportation fuels across the entire fuel pool.”
  • “… obligated parties [refiners] are expected to increase the selling price of the petroleum products they produce” and “higher RIN prices are expected to have an impact on the price of transportation fuels such as E85, E10 and diesel fuel based on their renewable content.”   

EPA analyzed what happened to RIN prices and the fuels marketplace with the arrival of the ethanol blend wall. Not surprisingly, EPA found that once the ethanol volume requirements under the RFS exceed the quantity of RINs that could be blended into gasoline, alternative sources of RINs were sought – such as E85, non-ethanol biofuels like biodiesel and RINs carried over from the previous year. 

EPA’s conclusion that there’s no net increase in price across the entire fuel pool is misleading because EPA creates an average – a price hike to one fuel offset by a reduction to another. Tom Buis of Growth Energy was misled (perhaps willfully) when he said on a conference call that the EPA report shows that RIN prices “didn’t and don’t have an impact on retail gas prices.”

What EPA does say in its report is that RINs “can reduce the price of fuels with high renewable content, such as E85, at the expense of fuels such as diesel that generally contain a small percentage of renewable fuel.” If you drive a diesel vehicle, you might want to read that again. EPA acknowledges that diesel costs increase to subsidize E85 for the fortunate few with flexible-fuel vehicles. 

EPA’s logic makes sense – and we’ve heard this story before.  NERA Economic Consulting authored a report in 2012, agreeing with EPA that as RIN prices increase the financial benefit from blending high renewable content fuels like E85 is subsidized by low renewable content fuels, like ethanol–free gasoline (E0) and diesel fuel.

EPA apparently believes that diesel truck drivers should feel better knowing that their increased costs are subsidizing somebody, somewhere with a flexible-fuel vehicle, allowing them to pay less for E85. We suppose, too, that grocery store owners should feel better paying higher transportation costs for each delivery they receive (on top of additional expenses for foods attributable to the RFS). Diesel vehicles transport just about everything we use, and increasing RFS ethanol mandates ultimately increases the cost of everything we buy. 

Therein lies concern with the RFS – that mandates for ever-increasing use of ethanol could breach the blend wall, potentially putting refiners in the position of having to reduce domestic gasoline and diesel production and/or exporting fuel to reduce their RFS obligation. This, in turn, could trigger cascading effects: higher diesel costs, for example, increasing the cost to move raw materials and finished goods, higher consumer prices, reduced consumption of goods and services and broad economic harm. The NERA study cautions against potentially broad economic impact from continued implementation of the RFS.

The problems with the RFS are significant, and EPA’s management of the program and the analyses that underlie its proposals for ethanol use don’t instill great confidence going forward. EPA should use its waiver authority to adjust RFS volumes in a way that recognizes the blend wall and avoids near-term economic impacts. Congress should repeal or significantly reform the RFS to protect consumers.

ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.