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RFS2, Ethanol Blendwall and NERA Study

RFS2 and Ethanol Blendwall

The Energy Independence and Security Act of 2007 (EISA) expanded the Renewable Fuel Standard (RFS2) with significant increases in biofuel volume mandates. Refiners comply with the (RFS2) by turning in renewable credits to the Environmental Protection Agency.  Every gallon of renewable fuel has a “tracking number” called a Renewable Identification Number (RIN).  When renewable fuels are blended with petroleum fuel for domestic consumption, the RINs accompanying that fuel are used to show compliance.  RINs are basically a “permit” to produce fuel and are needed for every gallon of gasoline and diesel fuel produced for the U.S.

However, while fuel demand has declined recently, mandates for renewable fuel volumes are increasing every year. The 2007 Annual Energy Outlook (AEO) projected that 2012 motor gasoline usage would be 9.76 million barrels per day (mbd), while actual usage was 10.5% lower (8.73 mbd) in 2012, according to AEO2013e. This gap between 2007 projections and the current reality is expected to grow to nearly 16% by 2015, and yet the biofuel mandates keep growing. Each year refiners must provide more RINs for blending higher levels of renewable fuels into less gasoline.

This year, we will reach the ethanol “blendwall,” meaning that the volume of ethanol required to meet the renewable fuel mandate will exceed safe limits, or 10% of total gasoline supply. The Renewable Fuels industry wants to increase the amount of ethanol that can be blended from 10% (E10) to 15% (E15), and also encourage increased production of fuels with up to an 85% blend (E85) for certain vehicles.

However increasing ethanol blends to E15 for use in millions of cars currently on the road could damage vehicles, void engine warranties, and damage gasoline station infrastructure.  E85 remains a specialty fuel, with low consumer demand, and infrastructure investments from gas station owners would be required to expand distribution.  


NERA Study:  Consumers could see, higher prices, as early as this year1

NERA Economic Consulting found that as increasing ethanol mandates force ethanol blending above the 10% limit, renewable credits – or RINs – become more costly. Underscoring this report is the reality that we have seen RIN prices skyrocket. This year, RIN prices have so far increased by 1,400%, according to press reports and prices reported by OPIS2


NERA predicts: The situation gets worse each year, creating the “death spiral” 1

As renewable mandates increase each year while demand for fuel decreases, refiners are forced to blend a larger percentage of biofuels into the gasoline and diesel pool. The NERA study shows that this will lead to a higher fuel costs.  The destructive cycle repeats year to year, compounding and further increasing the cost of fuel and reducing supplies.


NERA predicts: By 2015, impacts could include: 1

  • Severe rationing of diesel fuel that will cause extreme disruption in the commercial transportation sector,
  • 300% increase in diesel costs,
  • 30% rise in gasoline costs,
  • $580 billion decrease in take-home pay by American workers, and
  • $770 billion decrease in GDP.

NERA concludes:  There is a fundamental problem with the RFS2 mandate

The blending percentage standard for total renewable fuel will eventually exceed the maximum feasible level of renewable fuel that can be contained on average in a gallon of transportation fuel given the technological, behavioral, and infrastructure constraints in the economy.  After RINs banked in previous years have been used, NERA predicts gasoline and diesel costs will increase dramatically and result in drastic cuts in the sale of gasoline and diesel.

  1. NERA Economic Consulting, “Economic Impacts Resulting from Implementation of RFS2 Program” (2012)
  2. Gregory Meyer, Financial Times;“ US ethanol credits surge 1,400% this year” March 6, 2013