Current Issues Surrounding the Renewable Fuel Standard

 Overview of the RFS

The Renewable Fuel Standard is just a single component of our nation’s broader energy policy approach. The RFS was originally created under the Energy Policy Act (EPAct) of 2005. In 2007, the Energy Independence and Security Act (EISA) expanded the original standard to what is now often referred to as RFS2. The RFS2 outlines annual renewable fuel use mandates in the United States, beginning with nine billion gallons in 2008 and reaching a total of 36 billion gallons by 2022. The overall mandate level in any year can be broken down into two major components: advanced biofuels and renewable or conventional biofuels, which are defined by the feedstocks used to produce the biofuels; and the level of greenhouse gas (GHG) emissions reductions that are achieved by using these biofuels in place of fossil fuels.

Advanced biofuels can be further broken down into three subcategories:

• Cellulosic biofuels are derived from biomass sources containing cellulose, hemicellulose, or lignin, and must achieve at least a 60 percent reduction in GHG emissions.
• Biomass-based diesel (or biodiesel) refers to diesel fuel produced primarily from vegetable or waste oils, and must achieve at least a 50 percent reduction in GHG emissions.
• The other or undifferentiated advanced category includes biofuels that also achieve at least a 50 percent reduction in GHG emissions, but can be produced from a wider variety of feedstocks than the more specific cellulosic and biodiesel categories that also fall under the advanced biofuel umbrella. The most common form of other or undifferentiated advanced biofuel used in the United States today is ethanol produced from sugar cane.

The conventional component of the mandate includes biofuels that achieve at least a 20 percent reduction in GHG emissions, and can be produced from a wide variety of feedstocks. Ethanol produced from corn is one example of a conventional biofuel, and undoubtedly the most well known in the United States. However, the conventional component of the mandate is not limited to corn-based ethanol. In fact, there is no mandate on corn-based ethanol use in the United States at all. The RFS could theoretically be met without using a single gallon of corn ethanol in our fuel supply. However, corn ethanol has been the most economical option available to meet the conventional component of the RFS since it was introduced.

The volumetric mandate levels for advanced and total renewable biofuels originally stated under the RFS2 are illustrated in figure 1. Total renewable fuel use was envisioned to increase from nine billion gallons in 2008 to 36 billion gallons by 2022. The conventional component of the mandate was originally intended to grow from nine billion in 2008 to 15 billion in 2015, while the advanced component was intended to become the larger component of the overall mandate with 21 billion gallons by 2022.

Figure 1. RFS2 Statutory Biofuel Mandate Volumes, 2008 through 2022.

Implementation and Enforcement

The volumetric mandates outlined in the RFS are implemented each year through rulemaking from the EPA. Although the mandates are expressed in volumetric terms, they are implemented using percentage standards. Rather than directly requiring obligated parties to blend a specific volume of biofuel during the year, they use short-term fuel use projections or estimates from the Energy Information Administration (EIA) to define a percentage of total fuel use that must be renewable biofuels. For example, suppose projected motor fuel use in the United States for the upcoming year was 135 billion gallons, and the volumetric mandate level for biofuels in the RFS was 13.5 billion gallons. EPA would set the blending percentage requirement at 10 percent (13.5/135), and require all obligated parties to show that at least 10 percent of the total fuel they produced for sale and use in the United States was a renewable biofuel. Because actual fuel use can differ from short-term projections, the actual volume of biofuels that are blended in any given year can also differ from the volumetric mandate.

Enforcement of the RFS mandates is handled through the Renewable Identification Number, or RIN, system. An RIN is a 38-digit number assigned to each gallon or batch of renewable fuel produced or imported into the United States. Each RIN travels through the supply chain with the biofuel it is associated with until it is separated, at which point the RIN can be applied toward the mandate of an obligated party or traded among other obligated parties or speculative traders, potentially for application towards the mandate at a future time. Thus, the RIN system allows obligated parties to meet their individual mandates by applying RINs representing biofuels that they have physically purchased and blended, or those that were purchased from another party through RIN trading.

In addition to the ability to be traded, RINs offer obligated parties additional flexibility in terms of complying with the RFS2 mandates in any given year through the system’s “banking” and “borrowing” provisions. During periods when biofuel blending rates exceed mandate needs, excess RINs, up to 20 percent of the next year’s mandate level, can be banked and rolled over for use during the next compliance period. Similarly, obligated parties can also borrow up to 20 percent of the next year’s mandate to be in compliance during a year when actual blending falls short of the percentage requirement implemented by the EPA.

RFS Mandates and the E10 Blendwall

One of the most controversial issues currently surrounding the RFS is the EPA’s decision to waive, or reduce, the mandate levels from their original statutory levels. While waivers of the cellulosic portion of the advanced mandate have been provided since 2010, the 2014 compliance year is the first time that EPA has suggested reducing the overall mandate level. Specifically, EPA recently announced proposed rulemaking for the 2014-2016 period which would reduce the RFS mandate levels for those years as shown in table 1.

Table 1. Original and Proposed RFS2 Mandate Levels (billion gallons)

For 2014, EPA proposed to reduce the advanced component from 3.75 billion to 2.68 billion gallons and the total mandate from 18.15 billion to 15.93 billion gallons. This results in a reduction in the conventional component of the mandate from 14.4 to 13.25 billion gallons. For 2015 and 2016, significant reductions in the advanced and total mandate levels are also being proposed. The significant reductions in the advanced component of the mandate are largely justified by the lack of growth in the cellulosic industry. In fact, the RFS regulations clearly state that EPA has the right to adjust the mandates to reflect conditions in which the market is unable to supply the required volumes – which happens to be the case for cellulosic.

However, the controversy over EPA’s proposed rulemaking is primarily focused on the reduction in the total mandate, and what that means for the conventional component (the difference between the advanced component and the total mandate in any given year). In terms of the conventional component, rather than reaching 15 billion gallons in 2015, EPA’s proposed rule implies 13.4 billion gallons in 2015 and 14 billion gallons in 2016. The justification for the reduction in the total mandate is primarily based on the E10 blendwall, or the difficulty in blending ethanol at rates exceeding roughly 10 percent of total fuel use. This is due to limitations on the number of vehicles in the United States that can use fuels with ethanol blends exceeding 10 percent, as well as infrastructure limitations, which make it difficult and costly to distribute significant volumes of fuel at higher blend rates.

If the E10 blendwall represents a real, physical barrier to increasing biofuel blending beyond 10 percent of current fuel use, why has EPA’s decision been so controversial? Proponents of biofuels and the RFS2 are quick to point out that, although increasing biofuel use beyond the blendwall may be difficult (i.e. costly), it is not impossible. For example, higher fuel blends such as E15 (15% ethanol) and E85 (85% ethanol) have been approved for some motor vehicles. The RFS2 was put in place to provide the incentives and foresight necessary to expand the biofuel economy over time. Reducing the mandate requirements in the face of economic adversity is viewed by some as going against the spirit and original intent of the law itself.

Another issue that RFS mandate waivers introduces is something of critical importance to agriculture throughout much of the Midwest – its effect on the corn market. As previously stated, the conventional component of the overall mandate is not a corn-based ethanol mandate. However, because corn ethanol does not qualify as an advanced biofuel, the conventional component is the only area where corn ethanol can contribute toward mandate compliance. Since the mid-2000s, the corn-ethanol industry in the United States has grown to an annual capacity of approximately 15 billion gallons, which translates to roughly five billion bushels in corn demand. This currently represents more than one-third of total corn production in the United States.

Although the magnitude of the effect can and is debated, the corn-ethanol industry has undoubtedly had a positive effect on the price of corn over the past decade. Reductions in the conventional component of the RFS2 mandate are viewed by many as direct reductions in the potential demand for corn for ethanol. The proposed mandate waivers for 2015 and 2016 reduce the conventional component by 1.6 and 1 billion gallons respectively. These reductions translate to potential reductions in demand for corn for ethanol of more than 500 million bushels in 2015 and more than 333 million bushels in 2016. With the current environment of lower commodity prices and continually increasing production costs, removing the growth in demand for corn for ethanol is an issue of major concern for farmers as well as all parties with which they do business.

Additional Readings

Coppess, J. “EPA Doubles Down on Questionable Reading of the RFS Statute.” farmdoc daily (5): 108, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 11, 2015.

Good D. and S. Irwin. “The Impending Collision of Biofuels Mandates with Market Reality.” farmdoc daily (2): 187, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 26, 2012.

Irwin, S. and D. Good. “The EPA’s Proposed Ethanol Mandates for 2014, 2015, and 2016: Is There a ‘Push’ or Not?” farmdoc daily (5): 102, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 3, 2015.

Irwin, S. and D. Good. “Is the Long Ethanol Boom Coming to a Close?” farmdoc daily (2): 99, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 24, 2012.

Paulson, N. “2015 1^st Quarter RIN Update.” farmdoc daily (5): 78, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April 29, 2015.

Paulson, N. “Is the Ethanol Mandate Truly a Mandate? An Estimate of Banked RIN Stocks.” farmdoc daily (2): 50, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 15, 2012.

Paulson, N. “Understanding the Lifespan and Maturity of a RIN.” farmdoc daily (2): 65, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April 6, 2012.

Paulson, N. and S. Meyer. “The Nested Structure of the RFS2 Biofuel Mandate and RIN Values.” farmdoc daily (2): 183, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 20, 2012.

Schnepf, R. and B.D. Yacobucci. “Renewable Fuel Standard (RFS): Overview and Issues.” Congressional Research Service http://www.fas.org/sgp/crs/misc/R40155.pdf