ME. President Obama is at a crossroads on his energy legacy. As Senator Obama, he drafted part of the second Renewable Fuel Standard (RFS) passed in 2007. As President Obama, he implemented the RFS2 call for 36 billion gallons per year (bgy) of biofuels by 2022. The President has been on his way to leaving a legacy of improved homeland security and greater domestic energy independence while addressing climate change. However, now final public comments approach on EPA's proposed rule that instead calls for the first RFS reductions in biofuels that refiners are required to blend into gasoline.
BF. Yes, EPA’s proposed rule would require refiners to blend 15.21 bgy of renewable fuels into petroleum-based fuels during 2014 -- lower than the 18.15 bgy that Congress anticipated when it wrote the RFS2 into statute in 2007. Some folks like to blame the cuts on EPA as they are a favorite whipping post for those who believe the agency is over-run by environmentalists who in turn are over-zealous in over-regulating American business and economic activity. However, department and cabinet agency administrators serve at the President’s pleasure. It is unthinkable that such proposals make it to the public without sanction and approval by the White House. Some of the recent revelations suggest bureaucrats in the Office of Management and Budget (OMB) may have developed misplaced concerns about the possibility of higher gasoline prices due to Renewable Identification Numbers (RINS) and continuation of RFS mandate increases.
ME. There were some initial price fluctuations in RIN values last year that should have been anticipated as RFS mandates grew beyond the E-10 blend levels. But, gasoline prices are slightly lower than a year ago and it is wrong to conclude RINs necessarily cause higher gasoline prices long term. In the big picture, studies show that availability of biofuels for blending kept retail gasoline prices lower than would otherwise be the case in the absence of biofuels. This results in part because ethanol production costs are lower than the cost of gasoline. RINs are a tool for blending compliance and have become an important tool for attracting next generation investments as advanced biofuels are allocated higher RIN values than first generation biofuels. Feed and food industry concerns will subside with normal corn production and as 2012 drought memories fade.
BF. Of EPA's proposed total mandate, 13.01 bgy would come from corn ethanol. This is an 800 mgy cut from the 2013 final rule. It is also below the 14.4 bgy amount for corn ethanol in the statutory rule for 2014. EPA’s proposal freezes the 2013 biodiesel mandate at 1.28 bgy for 2014 and 2015, even though it was below the actual production level of 1.7 bgy for 2013. While EPA proposal increases the cellulosic biofuel mandate from 6 mgy in 2013 to 17mgy in 2014, the industry expectation was for a much greater amount as more than 3 cellulosic ethanol plants will come on line during 2014. Finally, EPA proposal for advanced biofuels was cut from 2.75 bgy in 2013 to 2.2 bgy 2014, even though the statutory volume required was 3.75 bgy for 2014.
ME. In a nutshell, instead of helping the biofuels industry over the “blendwall” as Congress intended for the RFS, the EPA has apparently proposed the “blendwall” as “de facto” RFS policy by using it as justification for a general waiver of RFS intent. This would have a chilling effect on future growth for advanced biofuels. According to suggestions by the renewable fuels interests, EPA exceeded its authority. Some are predicting that if the proposal becomes final there will likely be a legal challenge and the courts will decide whether EPA has acted within its authority.
BF. Waiver authority was made part of the RFS law in case of supply shortage concerns. It is curious EPA decided that there was no supply shortage after the 2012 drought, but now, “blendwall” market demand constraints are used as justification. The “blendwall” refers to constrained market access. This stems from the inability of ethanol producers to sell ethanol above the E-10 market equivalent blends due to fuel regulations and lack of stations selling E-15 and E-85. Brazil has 37 years of experience in manufacturing cars and selling higher ethanol blends. In the U.S., sale of the higher ethanol blends is heavily influenced by petroleum marketers, refiners, and domestic automobile manufacturers.
ME. A recent Iowa State University (ISU) study suggests the circular logic used by EPA seems contrary to Congressional intent. The ISU study suggests that demand for ethanol will not likely exceed the “blendwall” unless the RFS mandate calls for amounts that are greater than the “blendwall” for gasoline blending. So it is like saying that because we have a “blendwall”, we cannot impose a mandate to exceed the “blendwall.” Nonsense!
BF. You forget that higher gasoline prices of the past decade has also resulted in more fuel efficient vehicles and domestic diversification of energy resources, even beyond biofuels. The political landscape has been changing since the RFS was signed by President Bush. New extraction technologies have increased oil and gas reserves in North America. The U.S. is now predicted to become a net oil and gas exporter. Oil and gas interests have long influenced politics in Texas, Oklahoma, Kansas, and many southern and western states. But now, states like North Dakota, Illinois, Michigan, Ohio, and Pennsylvania have growing oil and gas interests thanks to “fracking” and horizontal drilling technologies. Many of these “swing states” have been in the agriculture-biofuels corner, but have seen oil and gas industry contributions to their state political economies.
ME. Yes, but biofuels are economically competitive today with oil and gas and should become more so over the next century as the extracted energy reserves are used up. Market access at the pump and consumer choice should be the key issue addressed by the RFS. Longer term, the policy choice comes down to a tradeoff between extracted energy sources that add CO2 and greenhouse gas emissions at the margin versus renewable energy sources that recycle CO2 and greenhouse gas emissions through the bioeconomy. Biofuels win the climate change arguments and new CO2-to fuel conversion technologies are around the corner. So the President’s potential legacy is one of addressing climate change with economically competitive solutions if RFS original intent is restored. If not restored, the legacy on energy issues becomes one of capitulation as new generation energy companies seek to invest in more sustainable environments.
* Edelman is a professor of economics at Iowa State University and Flinchbaugh is an emeritus professor of agricultural economics at Kansas State University.