Renewable Fuel Standard: Central Planning , Corporate Welfa - PowerPoint Presentation

Slide1

Renewable Fuel Standard: Central Planning , Corporate Welfare—What Could Possibly Go Wrong?

Marlo Lewis, Ph.D.

Senior Fellow

Competitive Enterprise Institute

American Dream Coalition

Austin, TX

November 7, 2015Slide2

Big Picture

The Environmental Protection Agency’s (EPA’s) Renewable Fuel Standard (RFS) program is

central planning scheme that transfers wealth from refiners, livestock producers, and consumers to biofuel producers and corn farmers.

Created

by the Energy Policy Act of 2005 and expanded by the Energy Independence and Security Act (EISA) of 2007, the RFS is a

17-year production quota schedule

prescribing volumes of biofuel

that

must be blended and sold in the nation’s motor fuel supply each year.

The

program has significant environmental downsides, inflates food and fuel costs, and is increasingly unworkable,

creating

regulatory uncertainty

instead of the

predictable marketplace its

advocates

envisioned.

The program’s original

energy-security and climate science rationales

are

dated and, arguably, false.

Even if it worked as intended and had no adverse impacts, economic or environmental, it would sill be a

system of corporate welfare and involuntary

servitude. It would still violate

the constitutional principle of equality under law. The RFS should be abolished.Slide3

Bare Bones History

Created and expanded in heyday of oil import alarm and climate alarm.

2005

EPAct

: 4bn

gals.

biofuel

in 2006, rising to 7.5bn. in

2012.

EISA 2007: 9bn

gals. in

2008,

rising to 36bn

in 2022

.

Wildly popular at first.

EPAct

: Bush & GOP-led Congress. EISA: Bush & Dem-led Congress.

In the abstract, who doesn’t like the idea of replacing “dirty”

fuels

imported from “unstable or hostile regions” with “clean, home-grown” energy supplied by American farmers? Slide4

Disillusionment Soon Followed

By late 2000s . . .

Environmental groups complain corn ethanol more polluting than petroleum it replaces.

Hunger groups blame

RFS for increasing the

cost of

staple commodities

in import-dependent poor countries.

U.S. Livestock producers blame RFS for aggravating spike in feed costs during 2012 drought, the worst in 50 years.

Manufacturers

&

owners of boats, motorcycles, lawnmowers complain harder to find low- and zero-ethanol blends that won’t damage engines or impair performance.

Refiners protest RFS is pushing them to buy and blend more ethanol than the market can absorb (the “blend wall” problem). Slide5

RFS Basics: Key Players

Refiners, blenders, and fuel importers are “obligated parties” under the RFS – companies required by law to blend and sell biofuel in the U.S. domestic motor fuel market. For them, the RFS is an implicit tax – an unfunded private-sector mandate.

Biofuel

companies and the farmers who provide

the feed stocks are

clients and beneficiaries. For them, the RFS is corporate welfare – a government-guaranteed market for their products.

EPA’s main

job: Determine

obligated parties’ annual “renewable volume obligations” (RVOs). RVOs are expressed as percentages, calculated by dividing each year’s biofuel blending targets

into the

nation’s total projected motor fuel supply

.

Hypothetical example: If RFS in year XXXX is 10bn gals. and projected motor fuel supply is 100bn gals., then each obligated party’s RVO is 10%. Separate RVOs for each biofuel type. So, e.g., if RFS for cellulosic is 2bn gals, then each party’s cellulosic RVO is 2%.Slide6

RFS Basics: “Nested” Blending Targets

Four “nested

” volumetric standards, one for each type of biofuel. Of the

36bn gals. of

renewable fuel required by 2022, at least

21bn

are to be “advanced,” of which at least

16bn are

to be “cellulosic” and at least

1bn “

biomass-based diesel.” Up to

15bn

of the

36bn

may come from “conventional” corn-based ethanol.

“Nesting” works as follows.

All cellulosic biofuel counts as advanced, and all advanced counts as renewable, but conventional cannot count as advanced, nor can other advanced fuels count as biomass-based diesel or cellulosic.

“

Conventional” and “advanced” differ in their carbon intensity. Advanced biofuels must emit 50% less carbon dioxide-equivalent (CO2e) emissions compared to petroleum-based fuels on a “lifecycle” (wells-to-wheels) basis. Cellulosic biofuels

made from nonedible

plant materials

must

emit 60% less CO2e compared to petroleum-based fuels. Slide7
Slide8

RFS: De-Facto Corn Ethanol MandateSlide9

University of Tennessee Institute of Agriculture, Oct. 2015

Includes expired

ethanol tax credit

as well as RFS.Slide10

Other RFS Basics: Credit Trading, EPA Waiver Authority

Every gallon of biofuel produced is assigned a unique 38-digit Renewable Identification Number (RIN). When an obligated party sells a gallon of biofuel in the retail market, it gets a RIN credit.

Obligated parties can meet their obligations by buying surplus RIN credits from other parties who over-comply (sell more biofuel than their RVO requires). Over-compliers can also bank up to 20% of their RINs to meet next year’s RVO.

EPA may waive statutory

blending targets

if it determines those would cause severe economic or environmental harm, or if there is an “inadequate supply,” which EPA broadly defines to include not just insufficient production but also market

conditions that constrain

“supply

to the ultimate consumer

.”Slide11

RFS: Environmental & Food Price Impacts

Ethanol was sold to policymakers and the public as a “green” fuel, but is it really?

A long debate over the RFS’s environmental impacts. I won’t focus on it today because our time is limited.

Suffice it to say the environmental impacts of corn ethanol are equal to or greater than those of the petroleum fuels it displaces.

If people are interested we can discuss this in the Q&A.

The RFS diverts 40% of the corn crop from food to fuel. It probably contributed significantly to food price spikes in 2008 and 2011-2012. Again, if people are interested we can discuss this in the Q&A.Slide12

Land Conversions (Lark et al. 2015)

7 million

acres of previously unharvested land was put into cultivation between 2008 and 2012, a period when corn ethanol production

doubled.

M

ost

of the converted land was untouched grasslands.

Of

the total, about 3.5 million acres were converted to grow corn and

soy (a feedstock of biodiesel fuel).

Although federal

law prohibits using these converted acres for renewable fuel production,

that restriction is not enforced.Slide13

The RFS did not create the

Connecticut-sized dead zone

i

n the Gulf of Mexico, but it does

e

xpand the dead zone. – AP studySlide14

Ethanol vs. Gasoline: Which Is More Polluting?

Gasoline life cycle:

extracting

and refining crude oil, and distributing and combusting the gasoline itself.

Corn ethanol life cycle:

growing

and fermenting grain, and distilling, distributing, and combusting the ethanol itself.

Combustion emissions of ethanol are lower than those of gasoline but production emissions are higher. On a

life-cycle basis, ethanol is the larger source of five

air

pollutants:

fine

particulate matter (PM2.5), nitrogen oxides (NOx),

ammonia

(NH3), volatile organic compounds (VOCs), and sulfur oxides (

SOx

).

– Jason Hill, University of MinnesotaSlide15

Ethanol up to 93x more water-intensive than dread Keystone crude.Slide16

Ethanol vs. Gasoline: Greenhouse Gas Emissions

Fargione

et al. (2008

):

“Converting rainforests, peatlands, savannas, or grasslands to produce food-based biofuels in Brazil, Southeast Asia, and the United States creates a ‘biofuel carbon debt’ by releasing 17 to 420 times more CO2 than the annual greenhouse gas (GHG) reductions these biofuels provide by displacing fossil fuels

.”

Searchinger

et al. (2008

): When farmers convert forest and grassland to corn production for ethanol manufacture, it “nearly

doubles greenhouse emissions over 30 years and increases greenhouse gasses

for

167 years.”

Hertel

et al. (2010

):

Fargione

and

Searchinger

studies overestimated

corn-ethanol life-cycle

CO2

emissions. Nonetheless

,

corn

ethanol offers no climate benefit compared to conventional

gasoline.

Wang et al. (2007): Corn ethanol reduces GHG emissions 20% compared to gasoline on life cycle basis. Even if true, RFS is highly inefficient mitigation strategy, costing hundreds-to-thousands of dollars for every ton of GHG avoided. Slide17

Food vs. Fuel

Food price impacts (Scenario I assumes RFS increases corn ethanol production

6bn gals.

i

n 2011;

Scenario II,

1bn gal.)

Another important topic I don’t have time to explore with you. RFS allocates 40% of U.S. corn crop to ethanol production.

Because corn competes for other crops for land and customers, and is a major feedstock for livestock production, the RFS puts upward pressure on grain and food prices generally.

RFS probably was a significant contributor to food price spikes in 2008 and 2011-2012.Slide18

National Security Policy?

New England Complex Systems

Institute study: Violent protests in 2008 and 2011 coincide with spikes in global food prices.Slide19

Don’t We Need RFS for “Fuel Choice”?

‘The

problem with gasoline is there is no competition in the motor fuel market. When you go to the pump, you can choose between gasoline and gasoline, and when you buy a car, you can choose between one that runs on gasoline and another that runs on gasoline

.’

We need the RFS to

break the ‘oil monopoly’ on the motor fuel market.

A monopoly is a single seller. A commodity with hundreds of thousands of sellers cannot be a monopoly.

Confuses absence of competition with results of competition. Ethanol as motor fuel has been around as long as gasoline. Henry Ford championed biofuel from vegetable matter (including cellulose) in the 1920s.

None of the alternatives performed as well as gasoline in term of energy density, portability, and cost.Slide20

“Fuel of the future”(Henry Ford, 1925)

Petroleum’s market dominance is the result of competition on a global scale over many decades.Slide21

EPA has had to continually reduce the cellulosic targets due to insufficient production.

Even those symbolic targets exceeded reality. Refiners

still had to buy RIN credits to cover its ‘failure’ to blend ‘phantom fuels’ that did not exist.

To save face for the RFS, EPA redefined cellulosic fuel to include compressed natural gas made from landfill waste.

Actual

production

of real cellulosic would

be too small to see on the graph.

Charles

Drevna

, Institute for Energy ResearchSlide22

“Practical and competitive with six years” – President G.W. Bush, 2006Slide23

In Nov. 2013, EPA Proposed for the First Time to Reduce Overall

RFS Blending Target

On

Nov. 30, 2013, EPA proposed to scale back overall renewable fuel targets for 2014 on grounds of

“inadequate supply” – i.e. constraints on the market’s ability to deliver the mandated supply to the ultimate consumer, a.k.a. the “Blend Wall.”

Blend Wall: the practical limit on how much biofuel can be sold in the domestic market due to lack of compatible vehicles and infrastructure, and lack of consumer demand for high ethanol blends.

EPA’s proposal

ignited a firestorm of protest from biofuel

interests, who claim “inadequate supply” solely means insufficient production. EPA should fine refiners who don’t blend and sell up to the statutory targets.

EPA

dithered for another 18 months before withdrawing the proposal and publishing a new proposed rule on May 29 of this year. The new proposal restores some of the cuts EPA proposed in Nov. 2013 but still scales back the statutory targets for 2014-2016.

EPA will make a final determination by Nov. 30, 2015

.Slide24

Statutory targets vs. EPA’s Proposed RuleSlide25

Renewable lobby claims blend wall is

product of

oil industry

skullduggery;

retailers bullied into not

offering high-ethanol blends.

Say refiners

are obligated to

“invest” in the retail infrastructure for E15 and E85.

Total bunk on both counts.Slide26

Blend Wall: Product of Two Factors. Factor 1: Overall size of motor fuel market

The Energy Information Administration (EIA) estimates that the total U.S. gasoline supply in 2014 was about

136bn gals.

Nearly

all gasoline sold in the U.S. is E10, or motor fuel blended with 10% ethanol

.

Hence

the maximum amount of ethanol that can be sold as E10 is

13.6bn gals.

The

statutory target for conventional biofuel in 2014 is

13.4bn gals.,

butting right up against the blend wall

.

Add

in the

3.75bn gal. statutory

target for advanced biofuels, and the overall target exceeds the blend wall by about

3.5bn gals.Slide27

EISA Congress’s RFS left hand didn’t know what it’s CAFE left hand was doing (shrinking future motor fuel market).

When

Congress enacted EISA in 2007,

EIA forecast

that demand “would continue to increase to 156 billion gallons in 2015 and 172 billion gallons in 2022.”

That

meant E10 – motor fuel blended with 10% ethanol – would suffice to meet statutory targets, at least for 2014 and 2015.

But

in EIA’s most recent forecast, gasoline demand is 11% lower for 2015 and 26% lower for 2022 than in the 2007 projection

.

This divergence between mandatory targets and market realities will increase as statutory targets ramp up.Slide28

Blend Wall Factor 2: How much biofuel can be blended in each gal. of motor fuel sold

The second factor determining the blend wall is a set of practical constraints on how much ethanol can be blended into each gallon of motor fuel sold. Warranty and liability concerns, lack of compatible fueling infrastructure, and, most importantly, anemic consumer demand effectively limit the standard blend to E10.

EPA approved the sale of E15 (motor fuel blended with 15% ethanol) in October 2010. If E15 were now the standard blend, refiners could sell 50% more ethanol than the E10 blend wall allows, which means they could easily meet the statutory RFS targets for 2014-2016.

But

circumstances

beyond both refiners’ control and EPA’s jurisdiction severely limit market penetration of E15.Slide29

Manufacturers do not recommend E 15 for most vehicles on the road. Using it can void the warranties of many vehicles older than

MY 2014

.

Fewer than 100 U.S. service stations have E15 blender pumps.

Typical cost of new fuel dispenser is $20k. Since average convenience store has 4 dispensers, total cost could be $80k just for the pumps.

Total cost: $200k if underground storage tanks are upgraded.

Typical service station is a small business with razer thin profit margins.Slide30

Virtually no demand for E15 because it reduces fuel economy.

Already we see that as ethanol content increases, energy content of motor fuel (hence fuel economy) decreases.Slide31

Hence also: Subsidies and mandates for flex-fuel vehicles and E85 infrastructure cannot eliminate the blend wall.

At

today’s prices

,

typical motorist would spend $550-$1,150 more per year to drive on E85.

This little known EPA/DOE Web site exposes the RFS as a consumer rip-off.

RFS statutory targets can be achieved only by producing higher and higher ethanol blends.

The higher the blend, the worse mileage your car gets, the more you have to spend to drive the same distance.

Slide32

Main Point (Suitable for Framing!)

If ethanol is such a great product, why do we need a law to make us buy it?Slide33

Response to Renewable Lobby Propaganda

If latent consumer demand for E15, E30, and E85 is as big as

you

say, why don’t

you

invest in the retail infrastructure to provide it? The RFS compels refiners to buy biofuel, process (add value to) it, and sell it to retail outlets. Isn’t that enough?

When will you put your money where your mouth is?

Refiners can’t use supply contracts or franchise agreements to keep E15 and E85 off the market. More than 95

% of gas stations are independent businesses, and more than 50% are unbranded single station operators.

EISA

already prohibits

oil companies from

barring the sale of higher ethanol blends. Franchisees and other retail outlets just need to invest in the necessary equipment – or partner with biofuel interests willing to risk their own capital.Slide34

Why can’t EPA just force refiners to buy more biofuel than they can sell in the U.S. market, as renewable lobbyists demand?

Remember, each obligated party’s RVO is a percentage of all motor fuel it sells domestically.

To avoid having to buy gallons of biofuel they can’t sell, refiners will sell less total motor fuel at home more abroad.

That, however, will decrease domestic motor fuel supply and increase domestic motor fuel costs.

As the statutory targets and RVOs increase, refiners will have to keep decreasing overall fuel production for the domestic market to avoid losses.

This “death spiral” towards shrinking supply and higher prices could severely harm consumers and the economy. EPA has no wish to take ownership of a debacle.Slide35

“Irony can be pretty ironic, sometimes” – William Shatner

Ironically, the abject failure of the cellulosic mandate is

the

only thing that prevents the entire RFS program from imploding.

If

biofuel companies were actually meeting the EISA cellulosic targets and on track to produce 9 billion gallons during 2014-2016, rather than the 345 million gallons EPA is proposing, renewable fuel production would hugely exceed the blend wall, ethanol prices would crash, and many biofuel companies would go out of business.

Jeer (hiss, boo)

if you like central planning!Slide36

RFS Rationale 1: U.S. doomed to future of increasing oil depletion, import dependence, decline.

Jan. 1920-Aug. 2015.

We’re almost

back to historic high (Winter 1970

). Yay fracking!Slide37

RFS Rationale 2: Climate change is a crisis endangering the survival of civilization

.Slide38

The DivergenceSlide39

Downward trend in U.S. hurricane power and landfalls 1900-2013Slide40
Slide41

Fossil energy-supported wealth and technology make environment safer and climate more livable!Slide42

In a free society, law treats people as equals. People in certain professions (e.g. physicians) are bound to render service to persons in need regardless of the latter’s ability to pay. But no business in a free society is bound to buy products from another business, add value to the other business’s products, or make a market for those products – except on the basis of voluntary contracts or agreements.

That’s not how the RFS works. The RFS literally compels one industry to purchase, process, and sell other industries’ products. In fact, it obligates one group of companies (refiners) to expand the market for competitors’

products.

It obligates one set of companies to ensure the success of another set of companies’ business plans.

Imagine

the howls from RFS supporters if Congress were to compel corn farmers to blend their produce with annually-increasing quantities of wheat, soybeans, or rice.

Imagine

the outcry if Congress imposed on corn farmers a 15-year plan establishing volumetric targets for the purchase of certain types of inputs (seeds, fertilizers, pesticides, harvesting

machinery)

We would all instantly

see the RFS for the moral monstrosity it is if the

shoe were on the other foot

.