What is the renewable fuel standard?
The Renewable Fuel Standard (RFS) is a federal mandate that requires transportation fuel sold in the U.S. to contain a minimum volume of renewable fuels. Established by the Energy Policy Act of 2005 and expanded in 2007 by the Energy Independence and Security Act, the RFS began with 4 billion gallons of renewable fuel in 2006 and aims to reach 36 billion gallons in 2022. The total renewable fuel target consists of both conventional (e.g., ethanol) and advanced biofuels (e.g., switchgrass and algae).
Why did Congress adopt it?
Principally, the RFS was adopted to decrease U.S. imports of foreign fuels, thus enhancing our energy security at a time when the U.S. was more reliant on foreign oil, i.e., 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 not explicitly established to control GHGs; in fact, ethanol production has long been criticized by environmentalists due to its life-cycle carbon emissions and other threats to the natural environment. Nor was it ever explicitly meant as a safety net for agricultural communities, even if that’s how it’s popularly viewed in the Corn Belt today. The agriculture industry faces challenges that have nothing to do with the RFS—reduced overseas markets, intra-industry competition, and the like. The RFS was not intended as a backstop for other ills.
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, it 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.
How does EPA determine compliance with the RFS?
EPA establishes a new renewable volume obligation (RVO) each year based on projected fuel supply and other conditions—although waiver authority allows the EPA Administrator to reduce the statutory volumes if necessary. EPA then regulates the compliance of obligated parties (generally refiners and importers) with the RFS using a system of tradeable credits called Renewable Identification Numbers (RINs). The annual RVO levels determine how many RINs each refiner must turn over to EPA to demonstrate compliance; as the RVO is pushed higher each year, refiners need to collect more RINs to cover their throughput.
Where do Renewable Identification Numbers (RINs) come from?
RINs are generated by blending biofuels into finished gasoline and diesel … but those refining or importing fuel are required to submit them. Sometimes those parties are the same, but oftentimes refiners and importers are NOT also blenders. It is those refiners—including some of the nation’s most vulnerable refineries—who can be left short of RINs, forcing them to purchase RINs in the marketplace, often from competitors. The RINs market is largely unregulated and frequently subject to gaming by third-party traders who manipulate the price. At the outset of the RFS program, RINs were predicted to trade at pennies; high RINs prices (which soared to $1.40 at one point) were never intended. Refineries have reported spending more to purchase RINs on an annual basis than the cost of their entire payroll.
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 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 were 10.63% and 10.58%, 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 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:
- Continue to issue SREs to small refineries that appropriately demonstrate disproportionate economic hardship, without increasing the RFS requirement for refiners that do not qualify for exemptions.
- Clarify EPA’s view of the recent 10th Circuit decision related to SREs, indicating that it will appeal and limiting its scope.
- Appropriately grant other waivers, particularly those requested by states hurt by unreasonable RVOs, such as Pennsylvania, Texas, New Mexico, Delaware and others.
- 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 generate 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.
- Allow refiners to purchase fixed-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.
- Grant tradeable RINs for biofuels exports, thus advancing U.S. foreign and commercial policy in line with the nation’s “Energy Dominance” 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.