The Renewable Fuel Standard's 'Reality Gap'

Mark Green
Posted September 18, 2013

In a piece in Forbes, contributor Michael Lynch writes that the Renewable Fuel Standard (RFS) is “one of the worst-designed government policies since we had caverns full of surplus cheese.” Yeah, that’ll leave a mark.

Yet, Lynch's characterization is on target in the case of the broken, out-of-touch RFS – with its ever-rising mandates for ethanol use that are propelling us toward the refining “blend wall” and potential harm to consumers and the broader economy. Bob Greco, API’s group director of downstream and industry operations, detailed the “reality gap” reasons the RFS should be repealed in a conference call with reporters – reasons that also back industry’s request that EPA reduce the total renewable fuels volume requirement to a level below 10 percent of overall gasoline demand for 2014.

Let’s start with the “blend wall” that results from a yawning gap between the RFS’ mandate for renewable use and actual demand for the renewables to be blended into the U.S. gasoline supply:

Because demand is down – the U.S. Energy Information Administration (EIA) estimates the U.S. will use 424 million fewer barrels of gasoline this year that it projected – the RFS is requiring more ethanol to be blended into the overall fuel supply than is needed to give it the maximum 10 percent ethanol content for which most cars and trucks on the road were designed. That’s the “blend wall” – and the mismatch between policy and market reality.

Greco noted other reality gaps with the RFS:

• Although the RFS was created primarily to increase America’s energy security by reducing crude oil imports, dramatic increases in domestic crude production is doing the job. EIA projects the U.S. will produce 64 million barrels more and import 241 million barrels of crude less than was projected in 2007 when the RFS was enacted.
• Flex-fuel vehicles that can use higher ethanol blends – which theoretically could help absorb more ethanol into the fuel supply – have largely been rejected by consumers, making up less than 7 percent of the U.S. vehicular fleet. Fuel economy is a factor. The higher the ethanol blend, the lower the mileage. EIA’s fuel economy website says fuel costs can be more than $1,000 higher per year when consumers use an E85 blend.
• Assumed production levels of advanced cellulosic biofuels, which Congress thought eventually would make up the largest share of the RFS, have not occurred. Last year EPA mandated that refiners use 4 million gallons this year, but as of July only 142,000 gallons had been produced (see chart).

  
  

Greco:

“The (cellulosic) volume mandates envisioned by EPA are more science fiction than science-driven public policy. … And the company EPA hopes will account for the lion’s share of this year’s cellulosic production recently announced, once again, that it would not come close to meeting its production targets this year. All of this proves that while the RFS may have been well-intentioned six years ago, it is a dangerous relic of America’s era of fuel scarcity. Today, the RFS is not just outdated; it is bad public policy that is poised to harm millions of consumers.”

The potential harms:

• The RFS could cause a significant reduction in the U.S. fuel supply, the effects of which could ripple through the entire economy, according to a study by NERA Economic Consulting. NERA says the RFS could bring about a $770 billion decrease in U.S. GDP and a $580 billion decrease in take-home pay for American workers by 2015.
• Damage to millions of car, motorcycle, marine and small engines as a result of higher ethanol blends in America’s fuel supply.

While there has been talk on Capitol Hill of an RFS compromise, such as relying on EPA to use its authority to adjust the mandates, EPA has not exercised that authority in the past, and Greco said that fix ignores fundamental problems with the law. Greco:

“EPA has the authority to adjust the mandates on a year-by-year basis. … To be honest, they’ve been doing a very poor job of doing that. For example, the 2013 mandate just came out in August for this year, and they did not lower the mandates to below the 10 percent ethanol blend wall. So EPA has the authority, they have not utilized it properly and their short-term authority is nothing but a Band-Aid. It doesn’t fix the underlying problems with the RFS, which is why we need a long-term permanent solution.”

EPA has acknowledged problems with the RFS – that infrastructure and consumer demand isn’t there to support higher ethanol demands. But agency pledges to fix things in the future lack integrity because of its past performance. Greco:

“We need EPA to come through on those promises … EPA needs to get back on their schedule. This is a rule that’s supposed to be finalized in November. Here it is September and we don’t even have a proposal. So EPA is continuing their pattern of being late and poorly administering the authority they have over the RFS program.”

The RFS is broken and should be repealed. America’s oil and natural gas companies have proven their support renewable fuels – first, by being the biggest customer of ethanol mandated for use in the fuel supply and second, by being some of the largest investors in biofuels. Greco:

“This is not a battle of one industry against another. It’s a battle against bad public policy. We cannot allow an ever-increasing biofuels mandate to continue when it is unsafe for consumers and could put our economy at risk.”