Marlo Lewis, Ph.D.. Senior Fellow. Competitive Enterprise Institute. American Dream Coalition. Austin, TX. November 7, 2015. Big Picture. The Environmental Protection Agency’s (EPA’s) Renewable Fuel Standard (RFS) program is . ID: 560032
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Renewable Fuel Standard: Central Planning , Corporate Welfare—What Could Possibly Go Wrong?
Marlo Lewis, Ph.D.
Competitive Enterprise Institute
American Dream Coalition
November 7, 2015Slide2
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.
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
must be blended and sold in the nation’s motor fuel supply each year.
program has significant environmental downsides, inflates food and fuel costs, and is increasingly unworkable,
instead of the
predictable marketplace its
The program’s original
energy-security and climate science rationales
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.
in 2006, rising to 7.5bn. in
EISA 2007: 9bn
rising to 36bn
Wildly popular at first.
: Bush & GOP-led Congress. EISA: Bush & Dem-led Congress.
In the abstract, who doesn’t like the idea of replacing “dirty”
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
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.
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.
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.
obligated parties’ annual “renewable volume obligations” (RVOs). RVOs are expressed as percentages, calculated by dividing each year’s biofuel blending targets
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
” volumetric standards, one for each type of biofuel. Of the
36bn gals. of
renewable fuel required by 2022, at least
are to be “advanced,” of which at least
to be “cellulosic” and at least
biomass-based diesel.” Up to
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
emit 60% less CO2e compared to petroleum-based fuels.Slide7Slide8
RFS: De-Facto Corn Ethanol MandateSlide9
University of Tennessee Institute of Agriculture, Oct. 2015
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
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
to the ultimate consumer
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. Most 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
n the Gulf of Mexico, but it does
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
particulate matter (PM2.5), nitrogen oxides (NOx),
(NH3), volatile organic compounds (VOCs), and sulfur oxides (
– Jason Hill, University of MinnesotaSlide15
Ethanol up to 93x more water-intensive than dread Keystone crude.Slide16
Ethanol vs. Gasoline: Greenhouse Gas Emissions
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
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
et al. (2010
ethanol offers no climate benefit compared to conventional
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. in 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”?
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.
, 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
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.
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.
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
Statutory targets vs. EPA’s Proposed RuleSlide25
Renewable lobby claims blend wall is
retailers bullied into not
offering high-ethanol blends.
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).
Congress enacted EISA in 2007,
that demand “would continue to increase to 156 billion gallons in 2015 and 172 billion gallons in 2022.”
meant E10 – motor fuel blended with 10% ethanol – would suffice to meet statutory targets, at least for 2014 and 2015.
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.
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.
, 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.
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
say, why don’t
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.
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
only thing that prevents the entire RFS program from imploding.
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.
back to historic high (Winter 1970
). Yay fracking!Slide37
RFS Rationale 2: Climate change is a crisis endangering the survival of civilization
Downward trend in U.S. hurricane power and landfalls 1900-2013Slide40Slide41
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.
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.
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
We would all instantly
see the RFS for the moral monstrosity it is if the
shoe were on the other foot