What is the renewable fuel standard?
The RFS was established by Congress in the Energy Policy Act of 2005 and then expanded upon in the Energy Independence and Security Act of 2007 in an effort to decrease U.S. imports of foreign fuels and enhance America’s energy independence. Since then, the U.S. has greatly reduced its dependence on foreign oil due to the significant increase in domestic oil and gas production—but the way the government set up the RFS regulations have put domestic refiners at risk and sparked a massive increase in imports of foreign biofuels. The RFS began with a goal of using 4 billion gallons of renewable fuel in 2006 and aims to reach 36 billion gallons in 2022. This total renewable fuel target consists of both conventional, such as ethanol, and advanced biofuel.
Why did Congress adopt it?
The RFS was adopted to decrease U.S. imports of foreign fuel and enhance our energy security at a time when the U.S. was more reliant on foreign oil. This was prior to the shale revolution that made America the world’s largest oil and gas producer. The RFS was also established to create new markets for biofuels. It was never explicitly meant to become a continuously expanding safety net for agricultural communities, even if that’s how it’s popularly viewed in the Corn Belt today. In fact, based on projections for future gasoline demand when the RFS was passed, Congress never intended the ethanol part of the requirement to exceed 10 percent of the fuel supply – which is the maximum limit all engines and refueling infrastructure are built to physically handle.
Has the RFS succeeded in meeting its goals?
Not particularly. Reduced import dependence and enhanced energy security has come to pass largely thanks to the shale revolution in domestic oil and gas production. In fact, due to perverse incentives related to RFS compliance, the mandate has sparked a massive increase in biofuels imports from 2010 through 2019 in order to meet the renewable fuel mandate. In addition, ethanol is now blended on a consistent basis regardless of the target amounts of renewable fuel that EPA sets each year. In 2020, the U.S. imported nearly 1,000 barrels per day of biofuel, for a total of 475 million gallons of foreign biofuel, to meet obligations under the federal Renewable Fuel Standard.
How does EPA determine compliance with the RFS?
Each year, EPA establishes a new renewable volume obligation (RVO), which sets the minimum amount of biofuels that have to be blended into the national gasoline and diesel fuel supply. EPA is supposed to decide this volume based on projected fuel supply and other economic conditions, and the EPA administrator has waiver authority to reduce the volume if needed. The blending of renewable fuels is usually done by blenders at the fuel rack just before a hauler leaves to deliver fuel to retail gas stations. However, the current structure of the RFS places the responsibility of complying with the program on independent refiners — parties who have little to no ability or control over the amount of renewable fuel that’s blended into the gasoline and diesel sold into the market. Therefore, in order to comply with the RFS, they are required to purchase costly credits called Renewable Identification Numbers.
Where do Renewable Identification Numbers (RINs) come from?
EPA regulates RFS compliance through Renewable Identification Numbers called, “RINs.” RINs are credits that are only available for compliance when biofuel is physically blended with gasoline or diesel fuel. They can be sold or traded with no regulation. The greater the volume of biofuel that EPA decides must be blended into the gasoline and diesel fuel supply, the greater the number of RINs each refiner has to purchase and turn over to EPA to demonstrate annual compliance.
What is a small refiner exemption (SRE)?
The 2005 Energy Policy Act exempted small refineries – those producing less than 75,000 barrels per day of crude oil – from participating in the RFS through the 2010 compliance year. The EPA later extended these exemptions for 2011 and 2012. According to the statute, SREs may be further extended “at any time” to small refineries that demonstrate disproportionate economic hardship. Some in the biofuels industry contend that a recent decision in the 10th Circuit Court of Appeals limits the issuance of SREs—a decision with many legal weaknesses that is also inconsistent with other SRE-related decisions.
SREs are critical to small refiners and have been an important tool in lowering RIN prices for all merchant refiners. They provide an important lifeline to small refineries and a safety-valve that helps normalize RINs prices, without impacting demand for biofuels. As evidence, the blend rates for ethanol in the U.S. in November and December of 2019 – when extensive SREs were issued - were 10.63 percent and 10.58 percent, respectively—two of the three highest monthly blend rate figures in the history of the RFS.
What happens when RINs prices are high?
When the EPA fails to properly adjust the RVO or appropriately utilize waivers or exemptions, RIN prices can spike upward. High RINs prices do not correlate to higher ethanol blend rates or sales, as evidenced by historical Energy Information Administration data. In fact, since blenders and Wall Street traders make money when RINs prices are high, they have no incentive to blend more and risk easing the market. The impact of high RINs prices is felt almost exclusively by independent, domestic refiners and importers forced to pay more to meet their annual RFS obligation—money that could otherwise be invested in facilities or expanding operations. Two years ago, Philadelphia Energy Solutions, the largest refiner on the East Coast, cited the spiraling costs of RINs in its bankruptcy filing.
What policies can be adopted to address high RINs prices?
There is much that the EPA can do to ensure that RINs prices hold steady at a relatively low price, as intended when the RFS was established. EPA has the authority to:
- Lower the ethanol mandate to a level all engines and infrastructure were built to handle, which is a less than 10 percent ethanol concentration in gasoline. Accordingly, the federal biofuel mandate should not exceed the federal government’s projected ethanol demand for that year. This policy would significantly reduce RIN costs, lowering consumer fuel costs and protecting the long term viability of domestic refiners.
- Appropriately waive the national requirement to prevent “severe economic harm,” as allowed in the law. Several states hurt by unreasonable RVOs, including Pennsylvania, Texas, New Mexico, Delaware, and others, have previously requested EPA take such action.
- Allow refiners to purchase fixed and low-price government RINs—or “waiver-credits”—for the ethanol requirement if they are not able to obtain cost-effective RINs in the market, similar to what EPA does for cellulosic biofuel. Such a mechanism could generate revenue to assist with the marketing of biofuels.
- Undo the recently created, and illegal, policy of “reallocation,” under which the EPA increases the RFS requirement for refiners that do not receive SREs in order to “make up” for those exemptions. Since SREs are consistently shown not to reduce biofuel demand, reallocation serves only to increase RIN costs and enhance U.S. reliance on foreign biofuels to meet the RFS.
- Change the point of obligation under the RFS to the blenders who control RINs in the first place. The EPA is supposed to review the program annually and make changes necessary to improve its implementation, but so far it has failed to undertake this process. There is currently an appeal before the Supreme Court on this matter.
- Grant tradeable RINs for biofuels exports, thus advancing U.S. foreign and commercial policy while still meeting the statutory purposes of the RFS. Such a policy would incentivize exports while lowering the cost of RINs by adding more into the market.