No hurry to finalize RFS standards

Jul 11, 2014

The Environmental Protection Agency (EPA) missed its spring deadline for a final plan on the 2014 Renewable Fuel Standard (RFS) and according to the administration, there is no hurry to finalize it.

The ongoing RFS debate has divided parts of the ag industry with the food vs. fuel argument. In addition, policymakers have raised concerns with compliance of the current standard, citing rising food and fuel costs and debating whether or not the standards are actually reducing greenhouse gas emissions as planned.

To date, the RFS have been met largely by blending gasoline with ethanol made from cornstarch, but the Energy Independence and Security Act (EISA) requires the use of increasingly large amounts of “advanced biofuels,” which include diesel made from biomass (such as soybean oil or animal fat), ethanol made from sugarcane, and cellulosic biofuels (made from converting the cellulose in plant materials into fuel). One of the original goals for the RFS was to reduce U.S. emissions of greenhouse gases.

“We’re just taking the time we need to make sure that the Renewable Fuel Standard addresses those issues as best we can,” U.S. EPA Administrator Gina McCarthy said in a press call July 8. “The administration continues to have a strong commitment to biofuels—we want to make sure that the final [RFS] clearly reflects that interest.”

Last November, EPA hinted at lowering RFS volumes, but McCarthy said there are concerns over how the EPA has opted to adjust the volumes and whether the proposed adjustments still meet the agency’s goal of encouraging biofuels use.

“They’ll be seeing the final as soon as we can get it out, but I guess my goal is always to make sure we get it right,” she said.

The Congressional Budget Office (CBO) released a review in June, evaluating how much the supply of various types of renewable fuels would have to increase over the next several years to comply with the RFS. CBO also examined how food prices, fuel prices, and emissions would vary in an illustrative year, 2017, under three scenarios for the Renewable Fuels Standard:

• The EISA volumes scenario, in which fuel suppliers would have to meet the total requirement for renewable fuels, the requirement for advanced biofuels, and the cap on corn ethanol that are stated in EISA for 2017—but not the requirement for cellulosic biofuels, because the capacity to produce enough of those fuels is unlikely to exist by 2017;

• The 2014 volumes scenario, in which the Environmental Protection Agency (EPA)—which has some discretion to modify the mandates of EISA—would keep the RFS requirements for the next several years at the same amounts it has proposed for 2014; and

• The repeal scenario, in which lawmakers would immediately abolish the RFS.

The repeal scenario would require Congressional action. In the absence of such action (or of legal restrictions), CBO considers the 2014 volumes scenario much more likely than the EISA volumes scenario, which would require a large and rapid increase in the use of advanced biofuels and would cause the total percentage of ethanol in the nation’s gasoline supply to rise to levels that would require significant changes in the infrastructure of fueling stations.

The rising requirements in EISA would be very hard to meet, according to the CBO study, because of two main obstacles: the expense of creating cellulosic biofuels and the amount of ethanol that older vehicles are said to be able to tolerate.

For the scenario in which fuel suppliers would have to comply with the total volumes of advanced biofuels and of renewable fuels as a whole stated in EISA, CBO assumed that EPA would allow suppliers to substitute other forms of advanced biofuels for cellulosic biofuels, as it has done in the past. Fuel suppliers would most likely do so using two types of advanced biofuels: biomass-based diesel (mostly produced in the United States) and sugarcane ethanol (nearly all imported from Brazil). However, relying on that strategy for 2017 would necessitate extremely large increases in the production of those fuels: for example, more than a 100 percent rise in U.S. production of biomass-based diesel and more than a 45 percent increase in Brazil’s production of sugarcane ethanol.

According to the CBO study, food prices would remain steady, whether the RFS was continued or repealed. While ethanol does raise corn prices and puts pressure on foods made with corn, the study expects that roughly the same amount of corn ethanol would be used in 2017 if fuel suppliers had to meet requirements equal to EPA’s proposed 2014 volumes or if lawmakers repealed the RFS, because suppliers would probably find it costeffective to use a roughly 10 percent blend of corn ethanol in gasoline in 2017 even in the absence of the RFS. Therefore, food prices would also be about the same under the 2014 volumes scenario and the repeal scenario.

By contrast, corn ethanol use in 2017 would be about 15 percent (or 2 billion gallons) higher under the EISA volumes scenario. CBO estimates that the resulting increase in the demand for corn would raise the average price of corn by about 6 percent. However, because corn and food made with corn account for only a small fraction of total U.S. spending on food, that total spending would increase by about one-quarter of one percent.

While food prices under the scenarios are not expected to change, the CBO study says meeting the total volumes specified would have a significant effect on transportation fuels.

Because fuel suppliers would be likely to use roughly a 10 percent blend of corn ethanol in gasoline in 2017 even without the RFS, the overall use of renewable fuels in that year would be very similar under the 2014 volumes scenario and under the repeal scenario, CBO estimates. Consequently, prices of transportation fuels would probably be roughly the same in those two cases.

Under the EISA volumes scenario, however, fuel suppliers would have to use more than three times as many gallons of advanced biofuels, and they would have to add much more ethanol to the gasoline supply than could be accommodated by selling only a 10 percent blend. (Under all of the scenarios, CBO anticipates that EPA would sharply reduce the requirement for cellulosic biofuels, given the limited production capacity for those fuels expected to exist in 2017.) Using a range of estimates of the price premium necessary to encourage sufficient additional supplies of advanced biofuels and the price subsidy necessary to motivate sufficient sales of E85, CBO estimates that complying with the EISA volumes scenario would have the following effects on the prices of three key types of transportation fuels in 2017:

The price of petroleum-based diesel would rise by 30 cents to 51 cents per gallon, or 9 percent to 14 percent (because the RFS requires fuel suppliers to bear the cost of ensuring that certain amounts of renewable fuels are used for each gallon of petroleum-based fuel that they sell); The price of E10—which is currently the most commonly used transportation fuel in the United States— would increase by 13 cents to 26 cents per gallon, or 4 percent to 9 percent; and, The price of E85 would decline by 91 cents to $1.27 per gallon, or 37 percent to 51 percent.

Because the changes in the production and use of renewable fuels required under the EISA volumes scenario are so large—and because little information is available about how the supply of and demand for renewable fuels respond to changes in their price— those estimates are highly uncertain. Actual price changes could fall outside the ranges described above, CBO wrote in its review.

The CBO study also discussed reductions in greenhouse gas emissions, saying they would be minimal over the next few years, but long term could be more substantial. While research predictions vary substantially, some evidence suggests that replacing gasoline with corn ethanol has only limited potential for reducing emissions (and some studies indicate that it could increase emissions). The success of the RFS in reducing the emissions from transportation fuels will depend mainly on the extent to which it causes people to substitute advanced biofuels—particularly cellulosic biofuels—for gasoline or diesel over the long run.

Support in favor of leaving the RFS as is has come from farmers across the U.S. National Farmers Union (NFU) President Roger Johnson spoke at a briefing at the U.S. House of Representatives on the importance of the RFS. The briefing was hosted by Fuels America in cooperation with Reps. Bruce Braley, D-IA, and Lee Terry, R-NE.

“It is crucial that Congress not change the RFS and for the Environmental Protection Agency (EPA) to improve the 2014 RFS targets in order to provide certainty for farmers and the ethanol industry,” Johnson said.

“The RFS drives economic growth in rural America and supports around 300,000 direct jobs nationwide,” Johnson added. — Traci Eatherton, WLJ Editor