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The RFS was written by Congress into the Energy Policy Act of 2005 (EPAct) and subsequently modified through the Energy Independence and Security Act of 2007 (EISA). These laws established year-by-year volume standards for renewable fuel that generally must be used in transportation fuel, reaching a total of 36 billion gallons by 2022.
Critics of the RFS contend that the program as it is being implemented by the EPA was built on the mistaken premise that the demand for gasoline would steadily increase. This was a critical aspect of the legislation because the more gasoline produced, the simpler it is for obligated parties (typically refiners and importers of gasoline and diesel fuel) to meet their renewable fuel volume requirements. Conversely, if gasoline production/import decline because of reduced demand, there is less gasoline available in which to blend renewable fuel and hence, fewer avenues to meet the volumetric targets. And that is exactly what has been happening. In 2007, the United States was consuming 145 billion gallons of gasoline. The expectation was that this would grow to over 170 billion gallons. But factors that include the recession and the federal corporate average fuel economy (CAFE) standards have exerted downward pressure on gasoline demand. Currently, the U.S. Energy Information Administration (EIA) estimates that gasoline consumption in the U.S. will be 120 billion gallons in 2013. In other words, there is less gasoline available in which renewable fuel can be blended, making it more difficult to meet the volumetric requirements.
Any shortfall can be partly covered by extra renewable identification numbers (RINs) that some obligated parties have acquired and can use themselves or sell to other parties. RINs are issued by the EPA for specific volumes of a qualifying renewable fuel that is produced or imported. But there is not an unlimited supply of excess RINs, and unless the EPA issues more RINs, this avenue will not be a long-term solution to meeting the volume requirements.
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The Blend Wall
The second complicating factor is the market for ethanol blends. Gasoline that contains 10 percent ethanol (E-10) is used in virtually all gasoline-powered vehicles. E-15 has also been approved by the EPA for use in later models. It would seem, therefore, that obligated parties can take the next step in meeting their volume requirements by producing E-15. However, there is significant resistance from both vehicle manufacturers and the public about advancing to E-15. This is where the companies run into the blend wall. The phrase has been defined in various ways.
Mainly, the blend wall represents an ethanol blend percentage (i.e., 10 percent ethanol) that obligated parties will not pass because vehicle manufacturers believe any higher blend will cause major engine damage and, therefore, will not warrantee engines. There is also a public perception that higher ethanol blends result in poor engine performance. The ethanol industry counters by pointing to research conducted by the Department of Energy that showed no statistically significant loss of vehicle performance (i.e., emissions, fuel economy, and maintenance issues) attributable to the use of E-15 fuel compared to straight gasoline.
Also, many RFS skeptics cite a study by NERA Economic Consulting, which concluded that mandating E-15 will significantly increase the cost of a dwindling supply of RINs. In 2015, this will result in price hikes of 30 percent for gasoline and 300 percent for diesel, according to NERA.
A third factor is the diversion of the nation’s corn crop into the production of corn-based ethanol. The lawmakers who wrote the EPAct and EISA were somewhat aware that farmers could sell corn used for ethanol at a higher price than corn used for food and grain, which could raise prices for these commodities. The laws therefore allow for additional RFS pathways, such as biomass-based diesel and cellulosic ethanol, neither of which rely on corn. But the early high expectations for cellulosic ethanol have not been met; therefore, the ethanol industry’s reliance on corn has not diminished, and some say it has increased. The EPA has been searching for new ways to manufacture advanced biofuels that can be used to meet the RFS and recently proposed to allow the use of landfill biogas as a new pathway.
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These issues were discussed by witnesses at a June 5, 2013, hearing of the House Subcommittee on Energy Policy, Health Care and Entitlements. Apart from a statement from an EPA official, the witnesses, including testimony from a representative of the liberal Union of Concerned Scientists, were unanimous in the view that the EPA needs to exercise its authority to waive the RFS volume requirements. The EPAct and EISA allow the Agency to do so when meeting the standards would result in significant economic hardship. The EPA has granted waivers to adjust the cellulosic volume requirements in response to the absence of commercial production of this product, but the Agency has been unwilling to grant waivers because of the impact of the requirements on corn. For example, in late 2012, the EPA denied a request to waive the ethanol volume requirement made by several governors who said the RFS was creating significantly higher corn prices and was resulting in the economic hardship contemplated in the statutes. The EPA said its own analysis showed that the waiver requested would have little or no impact on corn, food, or fuel prices.
See tomorrow’s Advisor to find out what the representatives had to say at the hearing.