The Renewable Fuel Standard and Its Challenges
September 2020
By Brian Garst
Calling it a matter of national and economic security, President George W. Bush signed the Energy Policy Act of 2005 that included creation of the Renewable Fuel Standard (RFS), or ethanol mandate. Expanded considerably in 2007, the RFS mandates a minimum volume of biofuel, increasing annually until 2022, that must be blended into the nation’s fuel supply by refiners and importers. Beyond 2022 the EPA is authorized to set volume amounts.
The RFS consists of four interrelated mandates with volume requirements specified in the statute: total renewable fuel, total advanced biofuel, cellulosic biofuel, and biomass-based diesel. Cellulosic and biomass-based diesel are both subcategories of advanced biofuel, which also includes a category for other advanced biofuels without a specified requirement. A requirement for conventional biofuels, corn ethanol, is also implied by the difference between the total renewable fuel and advanced biofuel mandates. The statute also provides various production and environmental requirements to qualify as a biofuel under the RFS.
Compliance is managed through a tradable credit system. Renewable identification numbers (RINs) are generated for each gallon of qualifying renewable fuel, which refiners and importers must submit to the EPA to meet their obligations as determined by sales volume and the annual mandates. RINs can either be generated by blending biofuels, remaining attached to them when they are sold, or purchased directly from those with a surplus.
The RFS was intended by its creators to reduce pollution from the use of fossil fuels and help achieve energy independence. In the 15 years of its existence, the RFS has failed to advance its stated purposes while leading to adverse consequences for consumers, refiners, and the environment.
Environmental Damage
Expectations were that the use of conventional corn ethanol would give way over time to more advanced, environmentally friendly biofuels. Technological advancement has failed to cooperate, and producers are overwhelmingly reliant on conventional ethanol to meet the annual total renewable fuel mandate.
Expansion of corn production due to RFS mandates has significant environmental consequences. Damage from life-cycle emissions for conventional ethanol exceed those of gasoline.1
Runoff from nitrogen-rich fertilizers required to grow corn travels the Mississippi River to the Gulf of Mexico where it contributes to an annual hypoxic zone, or “dead zone,” where oxygen levels are so low that it can kill sea life. The dead zone reached a record 8,776 square miles in 2017. Corn and soybeans, a feedstock for biodiesel, are estimated to contribute 52% of the nitrogen load to the Gulf of Mexico from the Mississippi watershed.2
Similar problems plague other regions. A National Wildlife Foundation report notes, “Concurrent to corn’s expansion has been an increase in the intensity and occurrence of annual algal blooms in the Great Lakes… In August 2014 the city of Toledo, Ohio suffered a drinking water shortage affecting half a million residents for three days thanks to the largest toxic algal bloom in Lake Erie ever recorded.”3
For all these and other reasons, such as decreased biodiversity and wildlife habitat loss, a majority of environmentalists have serious concerns with the RFS mandate.4
Economic Effects
The statutory total renewable fuel target has not been met since 2014. The Environmental Protection Agency (EPA) has statutory authority to waive, in part or in whole, the requirements for cellulosic and biomass-based biofuel, and total renewable fuels, when certain conditions are met. It is also required, beginning in 2016, to “reset” the volumes for future years to an unspecified amount when any of the mandates has been waived by at least 20% for two consecutive years or by 50% in one year.
The waiver authority and “reset” recognize that Congress would likely be slower than market participants to respond to new information and changing market conditions, but executive branch officials are still influenced by political concerns and not solely responsive to markets, to the extent the statute allows such considerations. These provisions also contribute to industry uncertainty. Volatility in RIN prices, for instance, is driven in large part because “[u]ncertainty around potential changes to the Renewable Fuel Standard (RFS) … disrupts the logic of the market and creates RINs price movements and volatility not normally seen under similar market conditions.”5
When RIN prices are high, RFS supporters argue, it encourages refiners to blend more biofuel to generate RINs either to meet their obligations or to sell. But this theory ignores the reality that many refiners lack the infrastructure to blend their own biofuel in response to any signal from this dysfunctional market and are beholden to RINs purchases no matter the cost. The unfortunate reality is that when statutory biofuel production requirements exceed market demand it leads to escalating RIN prices that threaten jobs and refining capacity, while increasing costs for consumers.
Additionally, directing corn increasingly toward the production of biofuels, and agriculture toward the production of corn, drives up prices on food and fuel.6
The use of corn as a feedstock for animals means consumers not only pay higher prices for corn and the crops losing acreage to corn production, but also for beef and poultry.
The difference between the expected pace of biofuel development and reality should come as little surprise, as economic developments are hard to predict. As Friedrich Hayek explained in “The Use of Knowledge in Society,” individuals, even large groups of individuals such as lawmakers and regulators, cannot possess the same level of information as exists dispersed throughout all participants of an economy, and thus will struggle to match the efficiency of decentralized resource allocation, much less do so for decades hence. The flexibility built into the statute attempts to mitigate this problem but has not succeeded.
The costs to consumers and producers have not led to the primary economic benefit promised by RFS drafters: energy independence. What gains have been made on that front have been driven by the shale boom’s increases in natural gas production, whereas the disconnect between RFS requirements and market conditions contributes to uncertainty, undermines refining capacity, and increases the costs of energy for consumers.
Political Challenges Remain
The RFS is a source of ongoing political battles between ethanol producers, environmentalists, refiners, oil companies, and consumer advocates. In 2019, President Trump’s EPA approved year-round sale of E15, gasoline with up to 15 percent ethanol, which in 2011 the Obama administration prohibited in summer months to limit smog. 7
EPA historically has used its statutory authority to grant more small refiner exemptions, which courts ruled had been erroneously denied during the Obama administration, relieving some financial pressure on small refineries in the process.
Since gasoline retailers and wholesalers still blend with ethanol the fuel that small refiners produce, with EPA pledging to offset waivers and maintain fuel targets, the exemptions avoid harming the key farming constituency. Future exemptions of this sort are in doubt, making serious EPA commitment to addressing manipulation of the artificial RINs market an even higher priority. Yet, despite being net beneficiaries of these changes, the ethanol industry continues to demand accommodations at the expense of consumers, the environment, and overall economic efficiency.8
Leading up to the 2020 election, President Trump pledged to allow sale of E15 blends through existing infrastructure previously limited to sale of E10 and denied scores of pending waiver requests from small refiners following pressure from farm state legislators.9
These most recent moves from the Trump administration will not resolve the disputes over the RFS. Farmers and the ethanol industry want to expand the RFS while the environmental and economic consequences accumulate. An evaluation of the effects of the RFS suggests the opposite is needed. The Renewable Fuel Standard has not achieved the policy goals for which it was created and requires serious reform if not outright abolition.
Brian Garst is Vice President of the Center for Freedom and Prosperity.
Notes
1. S. Kent Hoekman, Amber Broch, Xiaowei (Vivian) Liu, “Environmental implication of higher ethanol production and use in the U.S.: A literature review. Part I – Impacts on water, soil, and air quality,” Renewable and Sustainable Energy Reviews, 81, pp. 3140-3158. ↩
2. William F. Ritter and S. Rao Chitikela, “The Mississippi River Basin Nitrogen Problem: Past History and Future Challenges to Solve It.” In Watershed Management 2020, pp. 109-123. Reston, VA: American Society of Civil Engineers, 2020. ↩
3. David DeGennaro, “Fueling Destruction: The Unintended Consequences of the Renewable Fuel Standard on Land, Water, and Wildlife,” National Wildlife Foundation. ↩
4. “New Survey: Vast Majority of Environmentalists Want RFS Corn Ethanol Mandates Reduced,” American Council for Capital Formation, November 11, 2016. http://accf.org/2016/11/11/new-survey-vast-majority-of-environmentalists-want-rfs-corn-ethanol-mandates-reduced/ ↩
5. Testimony of Paul Niznik, Argus Media, Inc., before the House Energy and Commerce Committee (July 25, 2018), https://docs.house.gov/meetings/IF/IF18/20180725/108610/HHRG-115- IF18-Wstate-NiznikP-20180725.pdf ↩
6. See GAO, “Renewable Fuel Standard: Information on Likely Program Effects on Gasoline Prices and Greenhouse Gas Emissions,” May 2019. https://www.gao.gov/assets/700/698914.pdf ↩
7. https://www.reuters.com/article/us-usa-biofuels-ethanol/trump-lifts-curbs-on-e15-gasoline-to-help-farmers-angering-big-oil-idUSKCN1T11BN ↩
8. See “U.S. Ethanol Giant No Longer Wants to Rely on Trump’s EPA,” Bloomberg Law, August 7, 2020. ↩
9. https://www.reuters.com/article/usa-election-biofuels/trump-decision-to-cut-refiner-biofuel-waivers-followed-pressure-from-farm-states-sources-idUSL1N2FR2BX ↩
