Repeal the Renewable Fuel Mandate

By: Patrick Hedger, Policy Director-American Encore

Excerpt from Blueprint for 2015: Setting the Stage for the Next Session

The Renewable Fuel Standard (RFS) is a federal government mandate designed to incorporate an increasing amount of fuels derived from non-fossil fuels sources, primarily biofuels, into the fuel supply of the United States. The RFS was born at a time when the nation’s increasing reliance on foreign energy sources was creating painful foreign policy quandaries. Without realizing the massive changes to the domestic energy market, and economy as whole lying right around the corner, Congress created a guaranteed market for these biofuels through the RFS.

However, the program is now creating a major strain between both the biofuels and fossil fuels industry and the Environmental Protection Agency (EPA), the chief governmental entity designated with the task of implementing and enforcing the program. Barring any changes, the program’s structural failures are set to wreak havoc on the US energy market, in one way or another. While the EPA has moved to mitigate these issues, the failure of the program stems from the work of Congress, and therefore the solutions rest there as well.

For all the difficulty that the RFS is creating today for both the government and private industry, the program has valiant origins. Congress created the program in 2005 through the Energy Policy Act, also known as the EPAct. At the time, the United States was heavily reliant on foreign sources of fossil fuels for transportation fuel, reflecting a several decade long trend of decreasing domestic resource production coupled with growing demand.^[1] In addition, the country was also at the height of its involvement in the Iraq War, a conflict still widely seen as waged in the interest of securing oil resources.^[2] Congress clearly perceived a need to not only move away from a dependence on foreign sources of oil for transportation fuel, but potentially entirely away from oil itself.

Washington set its sights on biofuels, or fuels produced from non-fossil biological material such as corn, which is used to make the biofuel ethanol. EPAct amended the extant Clean Air Act (CAA) by adding the first iteration of the RFS, known as RFS1. RFS1 created a guaranteed market for the biofuels it sought to bolster by mandating that producers of finished fuel products, mainly refineries and importers, blend specific and increasing gallon amounts of renewable biofuels in the nation’s fuel supply each year through 2012. For example, in 2006, RFS mandated that a minimum of 4 billion gallons of biofuels be blended into the refined products sold on the American fuel market.^[3]

In 2007, the RFS1 program was enhanced and expanded into the RFS2 program. Congress did so through the passage of the Energy Independence and Security Act (EISA), a name that leaves little doubt about Congress’s intentions with the RFS. New standards for the amount of gallons of biofuels to be incorporated into the national fuel supply were set for each year through 2022. The standards increased dramatically, calling for 36 billion gallons of various biofuels to be blended into the supply by 2022.^[4]

Under the reforms to RFS put in place by the EISA, Congress tasked the Environmental Protection Agency (EPA) to create the necessary regulations each year to enforce the mandated minimum gallon requirements set out by the law. Under the guidelines set out by EISA, EPA is to determine annual percentage standards that reflect the minimum gallon standard as a ratio of expected fuel consumption in the United States each year. The annual percentage standards are effectively a signal to the fuel producers and importers in the United States as to how much biofuel must be incorporated into the supply. EPA determines these annual percentage standards based on predictions made by Energy Information Administration (EIA), a federal agency nested within the Department of Energy tasked with collecting and reporting data in relation to the US energy market.^[5]

On paper, the process for determining the necessary annual percentage standard was fairly straightforward. The EPA had explicit gallon targets handed down by Congress through the EISA for it to achieve each year. Once the EIA had projected the raw national fuel consumption totals in gallons for the upcoming year, it was only a matter of a simple percentage calculation to determine the necessary RFS regulations. Yet, this process has proven to be easier said than done.

These explicit minimum gallon targets written in the EISA were supposed to make the enforcement of RFS easier. However, the EPA currently finds itself at odds with major stakeholders in the US fuels industry and internal government watchdogs over the RFS and annual percentage standards. As it turns out, Congress’s decision to set specific gallon targets for biofuels in the US supply through the next two decades back in 2007 is the primary reason why.

Since Congress, through the EISA, forces the EPA to use EIA data to structure RFS regulation, it’s safe to assume that Congress also looked to EIA data when determining the minimum gallon standards it was writing into law back in 2007. That year, based on EIA projections, Congress anticipated that total fuel consumption in the United States would grow by 30 percent by 2030.^[6] What they did not anticipate, however, were the events that would befall the nation the very next year.

In 2008, the worst financial and economic crisis since the Great Depression struck. This massive recession had a prodigious depressing force on economic activity and therefore energy and fuel consumption.^[7] According to the EIA, in 2007, the United States consumed roughly 7.58 billion barrels of crude oil and refined petroleum products. Just two years later, instead of consumption increasing as Congress and the EIA had predicted, annual consumption fell to roughly 6.852 billion barrels.^[8] Annual consumption is now projected by the EIA to continue to remain relatively stagnant well into the next several decades, sliding by a negative tenth of a percent by 2040.^[9]

However, while total fuel consumption began its fall, the mandated volumes of biofuels to be blended into the nation’s fuel supply, as set out by the RFS under the EISA, continue to increase. Since these congressionally mandated minimums are static gallon amounts, and not actual percentages, they cannot automatically adjust with changing economic and energy market conditions. This has resulted in the ratio of biofuels to petroleum-based products in the US fuel supply growing at a rate that is markedly more aggressive than industry stakeholders, particular fuel and engine producers, anticipated. In short, the country’s fuel infrastructure and vehicles are simply not ready for the additional volumes of biofuels required by law.

Industry experts have described this phenomenon as “the Blend Wall”. This term describes the point in which “the maximum concentration of ethanol that can be blended in gasoline and used by conventional gasoline-powered motor vehicles.” [10] The Blend Wall is considered to be struck when the mandated gallon amount of biofuels required in the gasoline supply reaches a volume in excess of 10 percent. This 10 percent limit exists because E-10, or gasoline where 10 percent of its content is the biofuel ethanol, is the only blended fuel approved by the EPA for use in conventional engines at this point in time.^[11]

However, stakeholders in the renewable biofuels industry, who unquestionably benefit from the guaranteed and growing market for their products provided by the RFS, have denied the existence of this “Blend Wall”. The Renewable Fuels Association for example, an industry trade group that represents producers of biofuels such as ethanol, claims that the Blend Wall issue could be completely resolved if the producers of finished fuel products simply marketed higher-blend fuels such as E-15.^[12] Additional sales of E-15, which is gasoline with 15 percent ethanol content, would of course raise the raw amount of gallons biofuel gallons sold per-year potentially into compliance with the existing RFS mandates set out by the EISA. Some have even suggested the increased usage of fuels with ethanol contents as high as 85 percent, or E-85 fuel, which would dramatically increase the number of gallons of biofuels blended into the national fuel supply.^[13]

Automakers and the producers of finished fuel products insist that such solutions are not feasible. Beyond the previously mentioned fact that only E-10 blended fuels have been approved by the EPA for conventional use in all engines, there are a number of basic infrastructure and marketplace issues that are obstructing increased sales and usage of these higher-blend fuels. E-85, for instance, has market forces stacked against its increased usage. According the American Fuel and Petrochemical Manufacturers (AFPM), an industry trade group that represents refineries and other finished fuel product manufacturers, the only vehicles on the road currently capable of using E-85 blended fuel are flex-fuel vehicles (FFVs), which are cars with engines designed to run on either pure or low-blend gasoline or high-blend mixed fuels like E-85. The problem in the immediate term in dealing with the RFS is that FFVs make up an insignificant portion of the domestic vehicle fleet, with little sign of any real growth.^[14] Further, E-85 contains lower energy content than regular, low or unblended gasoline. Essentially this means that one gallon of E-85 will not power a vehicle for as many miles as one gallon of regular gas. Adjusting for this difference, AFPM determined that E-85 costs consumers 58 cents more per gallon than regular gas.^[15] Considering that Americans are just now recovering from historically high prices at the pump in both nominal and real terms for all fuels, even FFV owners have no incentive to purchase the more expensive product.^[16]

Yet even before considering policy alternatives to circumvent these market-based issues with higher-blend fuels like E-85, industry stakeholders have raised concerns about even lower-blend fuels like E-15 and their potential impact on engines. Refineries and other finished fuel product manufacturers say there is little market demand for E-15 fuel as a result.^[17] According to the Association of Global Automakers, E-15 has the propensity to degrade engine and emission control components at a more accelerated rate than E-10 and regular gasoline. This occurs to such an extent that the automakers are concerned that their vehicles will be brought out of attainment with other EPA regulations on air pollution required under the CAA.^[18] Although the EPA has issued a waiver for E-15 fuel use in cars of the model year 2001 and later, most car makers refuse to cover any vehicle filled with anything above E-10 under warranty, potentially exposing millions of consumers to thousands of dollars in unnecessary repair costs.^[19]

Yet, despite the insistence of the biofuels industry that their higher-blend products are safe and that the Blend Wall is a fantasy of the finished fuel product manufacturers, the EPA decided early last year that, for the reasons stated, the Blend Wall is real and a major problem in RFS enforcement.^[20] In addition, the EPA has also announced that as of late 2013, the Blend Wall had been struck.^[21]

With the Blend Wall being an indisputable reality in the eyes of the EPA, the agency currently finds itself in a precarious situation. Doing nothing and still enforcing the mandates as set out in 2007 by Congress in the EISA is projected to have devastating economic effects.

A study by NERA Economic Consulting in 2012, commissioned by the American Petroleum Institute, estimated that running unabated up against the Blend Wall through 2015 could impact the national Gross Domestic Product by as much as $770 billion.^[22] While this is certainly a high-end estimate, their theory indicates that scarcity in the fuel market will occur as individual finished product manufacturers will scramble to comply with their RFS requirements. Since RFS regulations are issued as a percentage standard by the EPA, individual producers are incentivized to reduce their overall amount of product supplied in order to increase the percentage that the gallons of biofuels they do sell comprise of total sales.^[23] Scarcity necessarily drives prices higher, and higher fuel prices will suppress economic activity.

On the other hand, organizations like the Renewable Fuels Association insist that because the minimum gallon standards were written explicitly into law by the EISA, that the EPA has no authority to change the requirements unilaterally. The President of the Renewable Fuels Association even went so far as to exclaim that “any plan to roll back the targets ... under the guise of addressing the blend wall would be patently unlawful."^[24]

Despite the aggressive assertions of the biofuels fuels industry and its allies, the EPA has chosen to act unilaterally to stave off the approach of the Blend Wall. While Congress may not have been able to accurately predict the future of the nation’s fuel market, they may have anticipated the need for EPA to eventually alter the minimum gallon standards to some degree. A study commissioned by the Bipartisan Policy Center found that under the EISA amendments to the CAA, which created the RFS program to begin with, the EPA has general waiver authority over the gallon standards given certain criteria. The report states that “EPA may fully or partially waive any of the statutory renewable fuel volumes, in whole or in part, if EPA determines the requirement would (1) ‘severely harm’ the economy or environment of a region, state, or the nation or (2) there is ‘inadequate domestic supply.’”^[25]

The EPA has chosen to exercise this waiver authority under the inadequate domestic supply clause. They have proposed that RFS regulations for the year 2014 lower the mandated biofuel gallon standard to 15.2 billion gallons, a full 3 billion below the level set out in the 2007 EISA legislation.^[26] Assuming that it survives the inevitable legal challenges from those that have asserted that such action is unlawful, this partial waiver of the statutory gallon standard should eliminate the issue of the Blend Wall for 2014.

Again, however, RFS standards are set through 2022. Given the projection that overall fuel consumption is to drop in the near term and remain relatively stagnant in the long run, instead of grow as it was projected in 2007 by the EIA and Congress, for the foreseeable future, 2015 and beyond, the Blend Wall will continue to be an issue requiring address. Complicating matters even further is a recent report from the Government Accountability Office (GAO) that suggests that simply allowing the EPA to exert its waiver authority each year to mitigate the issue is not a viable option.

The GAO report found that the EPA is not only habitually, but also excessively late in issuing RFS regulations that stipulate the biofuel blend percentages that fuel producers and importers are subject to. The report shows that the EPA has missed its statutory deadlines, as outlined in the EISA, to issue the percentage standards each year and every year since 2009. The EPA is required to issue these percentage standards by November 30 of the preceding year for the upcoming calendar year. Yet the EPA’s inability to finalize these regulations in a timely manner resulted in the 2013 requirements not being published until mid-August of 2013.^[27]

Chart from the GAO report showing EPA's habitual tardiness in finalizing annual RFS regulations:

The delays stem from the way the EPA is forced by law to develop and enforce the RFS gallon and subsequent percentage standards. According to the GAO, “EPA must publish a proposed standard in the Federal Register, provide the public with the opportunity to review and comment on the proposal, and address comments received before finalizing the regulation.” The regulations are also subject to the inter-agency review process. This process ensures “regulations are consistent with the President’s priorities, among other things, and that decisions made by one agency do not conflict with the policies or actions taken or planned by another.” The report continues by explaining that the review process for the RFS is particularly cumbersome because, “the RFS standards involve complex and controversial issues and balance competing agricultural, energy, and environmental policy interests.”^[28]

This report also briefly explains why such delays in the finalization process of the RFS percentage standards are particularly concerning to industry stakeholders and the economy at large. The GAO found that delayed releases of the percentage standards that are derived from the gallon standards set out in EISA inhibit the fuel supply industry’s ability to plan and budget effectively. It has also been found to stall capital investments that these companies would otherwise be able to make.^[29] Just like the Blend Wall itself, this inability to plan compliance with federal regulations set out under the RFS could force fuel suppliers to either reduce supply or ramp up exports.^[30] Either way, scarcity results, leading to higher fuel prices across the national economy.

Now the threat of the Blend Wall adds another major step to this already protracted process, increasing the burden on the EPA and subsequently the fuels industry. The inevitable conclusion is that the RFS program requires immediate reconsideration by the only organization that can affect meaningful changes to the program outside of the EPA’s authority. That organization is Congress.

To avoid the lingering uncertainty created by the Blend Wall problem, which is now a structural issue with the RFS given the projections of the domestic fuel market and statutory gallon standards imposed in the EISA, Congress must act. At this point, two options exist. Congress can either repeal the RFS or restructure the program.

Calls do exist to repeal the program in its entirety.^[31] Considering changes in the energy market, outside of the mentioned issues with depressed consumption, there is a legitimate argument to be made that the program is no longer necessary. One of the core original intents of the program was to decrease American reliance on imported petroleum products. However, advancements in drilling technology have made oil reserves trapped in shale rock formations in America accessible. As a result, the United States is set to become the world’s largest oil and gas producer, over taking even Saudi Arabia, and will be nearly energy independent by 2015.^[32] The question is thus begged: are biofuels even necessary today?

Some will argue there are inherent environmental benefits to using biofuels, but even those claims are now in dispute. A recent study commissioned and funded by the federal government and published in the Nature Climate Change journal found that biofuel usage may actually increase greenhouse gas emissions compared to conventional fuel usage.^[33] Given this potentially major realization and the fact that biofuels are more expensive based on energy content than conventional fuels, the federal government mandating their increased usage doesn’t make sense.

The RFS should be repealed in its entirety.