Written by IER
The Renewable Fuel Standard (RFS) was first put in place by the Energy Policy Act of 2005 and then was more than quadrupled by the Energy Independence and Security Act two years later—both bills signed by President George W. Bush. The RFS requires increasing amounts of biofuels to be blended with transportation fuel such as gasoline. Congress and the Bush Administration created the RFS schedule based on what they thought future demand for transportation fuels would be when they wrote the legislation. But they were dreadfully wrong.
Supporters of the bills in Congress and the Bush Administration thought that transportation fuel consumption would increase year after year, but after 2007 oil consumption plateaued. The requirement to blend ever-increasing amounts of ethanol has now left the nation with a “blend wall,” hitting up against the 10 percent mark of ethanol blended in gasoline. This means that the law is requiring more ethanol to be produced than can be consumed in a 10 percent blend by gasoline vehicles.
This problem has prompted the Environmental Protection Agency (EPA) to propose a cut back to the requirement for this year, but they have not finalized the amount. And, of course, the biofuels producers who have benefitted from a mandated market for their products are lobbying EPA to retain the original enacted number.
But the blend wall problem and Washington’s failure to accurately predict energy supply and demand are not the only reasons to wish the RFS to disappear. Ethanol was also billed as a way to reduce greenhouse gas emissions. However, today, studies show that greenhouse gas emissions from the entire fuel cycle for corn-based ethanol, the predominant biofuel produced in this country, is not that much different than petroleum based transportation fuels. And the other primary justification for the RFS—our use of foreign oil—is going away as the hydraulic fracturing revolution is leading to more and more oil production, at least on those lands not controlled by the federal government. The United States is now awash in oil due to shale oil production, and the boom created by hydraulic fracturing and horizontal drilling means that some are now urging that we lift the oil export ban because oil supplies are climbing so rapidly.
The biofuel mandates mean that food prices are up due to corn demand and corn prices are increasing from competition between ethanol producers and food and livestock producers for corn. Since ethanol is less energy efficient than petroleum fuels, automobile fuel efficiency declines. Gasoline prices are up. And, small motor owners –owners of boats, lawn mowers, etc.—have paid for repairs and/or additives to their gas lines to deal with the corrosive properties of ethanol.
On the other hand, the RFS has brought wealth to the American heartland where corn farms and ethanol producers abound.
In November, the EPA issued a proposal to lower the RFS requirement for 2014 from the initial congressional mandate of 18.15 billion gallons of ethanol and biodiesel for blending into gasoline to 15.21 billion gallons—a reduction of 16 percent. In 2013, the RFS requirement was 16.55 billion gallons.[i] Of that total, 13.8 billion gallons was corn-based ethanol and 2.75 billion gallons was advanced biofuel that is not made from corn.[ii] The proposed ruling would reduce the advanced biofuel requirement to 2.2 billion gallons.[iii] Even though it is now the second quarter of 2014, the mandate has not been finalized and is undergoing interagency review at the White House Office of Management and Budget.
The proposed lower RFS level was due to the slack in U.S. demand for transportation fuel and the closeness of the blend wall, the point at which the mandate will require the use of more ethanol than can be blended into the fuel supply at 10 percent per gallon. Oil refiners are reluctant to blend more than 10 percent ethanol into gasoline because of possible harm it could do to older vehicles and the fact that automakers will not warranty vehicles using a level higher than the 10 percent of ethanol blended with gasoline. This is despite the fact that EPA has authorized the use of gasoline blends with up to 15 percent ethanol content for cars built since the 2001 model year. Those cars represent about two-thirds of vehicles currently on the road.[iv] Notably, even though EPA says it is safe to use ethanol at higher levels, they have not offered to stand by their assurance by offering to pay for any damages the higher mix of ethanol might do to engines.
Another issue stemming from the 2007 legislation is that it also required set levels of cellulosic biofuel—biofuel to be produced from cellulosic biomass plants. In 2007, cellulosic ethanol was not economic to produce and it is not today either. When the Renewable Fuel Standard passed in 2007, lawmakers mandated cellulosic biofuel production of 1.75 billion gallons in 2014. Thus, to comply with the RFS, on a quarterly basis, 437,500,000 gallons of cellulosic ethanol must be produced. But, in the first quarter of 2014, only 72,111 gallons of cellulosic ethanol were produced — a mere 0.016 percent of the amount mandated.
Because only minimal amounts of cellulosic ethanol have been produced, EPA in its proposal, lowered that cellulosic mandate to 17 million gallons (the current rate of production would produce less than 300,000 gallons of cellulosic ethanol). Obviously, requiring refiners to buy 17 million gallons of cellulosic ethanol when only 300,000 gallons is likely to be available is unrealistic.
KiOR, one of the industry’s leading companies which makes cellulosic biofuels using woody biomass and non-food feedstocks, announced it was idling its flagship plant in Columbus, Mississippi, at the start of this year due to lack of funds. KiOR generated net losses of $347.5 million, $96.4 million and $64.1 million for the years 2013, 2012 and 2011, respectively, and total operating losses of $525.5 million since its inception through December 31, 2013.[v] It has recently obtained $25 million to operate through August.[vi] But, it is unlikely that it will meet EPA’s expected production level of 9 million gallons of the 17 million gallon requirement.[vii]
If refiners do not or cannot meet their renewable fuel requirements, they must purchase Renewable Identification Numbers (RIN), which are renewable fuel credits purchased from companies that have used more ethanol than required. The price of RINs increased to over $1 a gallon last year, from about seven cents at the start of 2013, adding to the cost of gasoline.[viii] They have since declined, but can easily escalate again if the required levels of biofuels are not available to be blended into petroleum fuels.
Growing biofuel crops on a large scale requires the conversion of agricultural land used for food crops or the destruction of forested land or the draining of wet lands to free up land for production. Destroying forests can offset reductions in carbon emissions from the use of biofuels. Besides destroying forestation, biofuel production requires water that stresses existing water supplies.[ix]
In a recent report, the United Nations warns that growing crops to make biofuel harms the environment and drives up food prices, and also indicated that biofuels, rather than combating the effects of global warming, could make them worse. In the summary for policymakers, the UN states: “Increasing bioenergy crop cultivation poses risks to ecosystems and biodiversity.” The report from the Intergovernmental Panel on Climate Change notes: “If production [of biofuels] is not carefully managed, biofuel feedstocks can displace land for food cropping or natural, unmanaged ecosystems.” Referring in part to deforestation, it says any benefit of biofuel production on carbon emissions “may be offset partly or entirely for decades or centuries by emissions from the resulting indirect land-use changes”. On biofuel production from corn, it adds: “Resulting increases in demand for corn contribute to higher corn prices and may indirectly increase incidence of malnutrition in vulnerable populations.”[x]
About 40 percent of the corn crop in the United States, about 5 billion bushels, is used for ethanol production.[xi] The increased demand has raised the total corn acreage planted from 78 million acres in 2006 to 97 million acres in 2012.[xii] A study by the National Council of Chain Restaurants found that the RFS increased food costs by $3.2 billion a year for chain restaurants because it increased the costs of poultry, beef, pork, and other agricultural products. Per restaurant, the RFS increased food costs by $18,000 a year and as high as $35,000 annually if the restaurant sells more beef than average.[xiii]
A recent report by the Government Accounting Office (GAO) found that the delay in issuing revised RFS levels puts financial strain on the refining industry.[xiv] The GAO recommends that the EPA adopt a plan for the timely release of the standards providing refiners with the amount of biofuels that they must blend into gasoline. According to the GAO, the EPA has missed its deadline in every year since 2009, i.e. in almost all years of the Obama Administration. According to the report, the rising biofuel content required each year under the RFS means higher costs for refiners, and delays in the release of the revised levels leads to uncertainty that could hinder refining-industry investment.[xv]
Demand for transportation fuels is expected to continue to be slack due to new Corporate Average Fuel Economy Standards (CAFÉ) that the Obama Administration has put into effect and the driving patterns of the younger generation, among other policies and trends. A study by Bloomberg New Energy Finance, for example, expects gasoline demand in California to drop by either 9 percent or 13 percent by 2020, depending on the scenario, due to federal CAFE standards, the RFS, and California’s Low Carbon Fuel Standard.[xvi]Nationwide, gasoline demand has dropped by 10 percent between 2005 and 2013. Cars are also getting much more expensive, which may be reducing the availability of personal transportation for a growing number of Americans.
If the goal is to increase the long-term demand for ethanol, two options exist: increasing the blending limits as EPA has proposed, or establishing a market for vehicles fueled by higher ethanol blends. Increasing the blending limits is a non starter for automobile warranties and for small engine owners. Similarly, increasing the market through other fuel types, such as E85 (a blend of 85 percent ethanol and 15 percent gasoline) requires consumer interest, expansion of the fueling infrastructure, and fuel favorability over its competition (i.e. electricity and hydrogen).[xvii]
Whether sourced from corn or other cellulosic materials, the demand for ethanol will decrease domestically without a mandate or an expanding market for higher blend fuels. But keeping the RFS mandate means lower automobile efficiency, higher fuel and food prices, more water and land usage, deforestation of forests, draining of wetlands, and no net positive effects for greenhouse gas emissions. Once again, it seems that when Washington passes an energy law, the only thing certain is that it will become a law of unintended consequences.
The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.