As prepared for delivery
API Testimony: RFS Public Hearing
Kyle Isakower, API group vice president for policy and economic analysis
March 8, 2013 Ann Arbor, MI
Good morning and thank you for providing the opportunity for API to testify at today’s hearing on the 2013 RFS standards. API is the national trade association representing all segments of the U.S. oil and natural gas industry. Since 2000, our members have invested over $2 trillion in capital projects in the U.S. to advance all forms of energy, including alternatives. Our refiner members are the obligated parties under the RFS and required to meet these standards.
Blendwall
Our members’ primary concern is with the ethanol blendwall. There are serious compatibility issues with vehicle and retail infrastructure with gasoline blends above 10%. Yet, EPA continues to apply aspirational criteria to set the annual standards. With this proposed rulemaking, EPA continues to not take seriously the problem of the ethanol blendwall. EPA effectively sets an ethanol standard over 10% of gasoline demand. This could result in significant fuel supply disruptions in the U.S.
The RFS is not a mandate to produce biofuels; it is a mandate for producers and importers of gasoline and diesel to obtain biofuel credits, or RINs, in proportion to the volumes of transportation fuels consumed in the U.S. Because of the RFS, refiners and importers can only legally produce or import as much gasoline and diesel fuel for U.S. transportation needs as they have RINs to satisfy their RVO obligations. As the mandated biofuel volumes exceed the 10% vehicle and retail infrastructure compatibility limits, RINs will be in short supply, and obligated parties will have limited options to comply with the RFS. We have serious concerns about the impact of E10 blendwall on domestic fuels availability and the cost to provide transportation fuels.
To comply with the ever increasing standard, our industry has minimized the supply of E0 and maximized the supply of E10. To continue to remain in compliance means potentially maximizing the use of high renewable content fuels, such as E15 and E85. But there’s a problem: consumers have rejected E85 in the marketplace, and our companies don’t own the retail facilities that need to make the financial investments necessary to distribute the fuel. E15 not only has infrastructure compatibility and long term engine durability problems, but has more recently been shown to cause vehicle fuel system breakdowns. E85 and E15 are not viable solutions, as they are suitable only for Flex-fuel vehicles; and a small fraction of the newest vehicles are designed and warranted to tolerate E15. EPA acted prematurely and improperly in approving E15, and the waivers should be rescinded.
The increasing price of renewable fuel credits is a clear indication that refiners have breached the E10 blendwall this year. According to OPIS, corn ethanol RINs averaged 2 to 3 cents each in 2012; and this week traded at 75 cents per RIN. This sudden, added cost of producing gasoline and diesel fuel could have profound impacts on the marketplace, potentially restricting fuel imports and encouraging fuel exports. This is just the tip of the iceberg, and the negative economic consequences are bound to get worse unless EPA acts to address the blendwall.
Reduction in Total and Advanced Biofuel Categories
EPA can reduce the Total and Advanced biofuel volumes when the cellulosic volume is reduced, yet the Agency is proposing no such action for 2013. API has supported this reduction in the past; and this year, the ethanol blendwall problem makes this issue particularly urgent. EPA already established an ambitious 2013 biomass based diesel standard, and recognizes in the proposal that the necessary volume of advanced ethanol imported from Brazil may not be available. A reduction in the Advanced and Total renewable categories is necessary and should be used to keep ethanol volumes under 10% of gasoline demand.
Cellulosic Biofuel
The Clean Air Act requires EPA to determine the mandated volume of cellulosic biofuels each year at the: “projected volume available.” There continues to be no commercial supply of the fuel.
API supports EPA’s use of the waiver mechanism to reduce the cellulosic standard below the statutory requirements. However, EPA’s proposal for 14 million gallons of cellulosic biofuel is aspirational, unreasonable, and completely out of line with the decision from the D.C. District Court vacating the 2012 cellulosic standard. The court’s decision should have caused EPA to change its failed “self-fulfilling prophesy” approach and adopt a neutral methodology when setting future cellulosic biofuel mandates. Instead, EPA continues to rely on the forecasts of cellulosic biofuel producers, which have been completely wrong in the past. This stealth tax on our industry is a clear example of bad public policy, with no environmental benefit that only adds a cost to providing transportation fuels.
EPA has not recognized the reality that startup operations are erratic, especially for first-of-a-kind techcnologies. EPA needs to use an outcome neutral methodology over an aspirational one. In a February 22
nd article, EIA revised their 2013 cellulosic biofuel estimate downward to 5 million gallons. This is much lower than the 14 million gallons that EPA is proposing. In the article, EIA mentions that for every year since the RFS started they have overestimated the actual cellulosic biofuels production. Given the obvious difficult task of forecasting cellulosic biofuel production, we continue to recommend setting a level consistent with actual cellulosic biofuel production for the last 3 months of each year, which for 2012 is practically zero gallons.
Timing
EPA was late issuing the 2012 standards, and here we are in March discussing the 2013
proposed rulemaking. The uncertainties created by the ethanol blendwall in 2013 are enormous; and EPA is only adding to the uncertainty with retroactive rules. EPA should also expeditiously move forward with proposal and finalization of the 2014 RVOs.
The biomass based diesel standard for 2013 is now final, but was also late. We should already have a final biomass based diesel standard for 2014, but EPA neglected to include this in the proposal. EPA has been issuing these proposals later and later each year. We urge EPA to take statutory deadlines seriously and issue timely rules.
Comment deadline
EPA set a comment deadline of April 7
th, which falls on a Sunday. Would you please clarify on the record today if EPA intends to accept comments submitted on Monday April 8
th?
In closing;
When congress passed the Energy Independence and Security Act in December of 2007, EIA was projecting increasing gasoline demand into the future. Instead, gasoline demand has fallen; EIA’s latest projection of gasoline demand for this year is nearly 12% lower than it forecasted in 2007; and EIA’s latest 2022 projection is 25% lower. Such reductions coupled with the annually increasing volumetric biofuel mandates accelerated the blendwall, and significantly increased its severity. The promises of cellulosic ethanol and advanced drop-in biofuels have not ramped up as was envisioned; and that’s despite our industry’s efforts to bring these fuels to market.
The RFS mandate is unworkable and API has joined a chorus of diverse interests calling on congress to repeal it. While we recognize that EPA has been charged by congress with the unenviable task of implementing this unrealistic mandate, API recommends that EPA exercise its authority and implement the following for the 2013 RFS standards:
1. Reduce the Advanced and Total renewable fuel requirements so that the total ethanol volume does not exceed 10% of EIA’s estimate for 2013 U.S. gasoline demand.
2. Reduce the cellulosic volume to a reasonable estimate based on three months of actual production. Based on practically zero production to date, the 2013 cellulosic RVO should be set at zero.
3. Expeditiously finalize and issue these 2013 RVOs
4. Expeditiously issue the proposal for the 2014 RFS standards.
Thank you again for the opportunity to discuss these issues, and I am happy to answer any questions you may have.