Three Main Concerns Emerge around EPA’s RFS Proposal
As the Environmental Protection Agency (EPA) solicits public comments on its proposed biofuel blending levels for 2020, 2021 and 2022 under the Renewable Fuel Standard (RFS) — with the deadline for public comment on Friday, February 4 — the agency is hearing from refinery workers, organized labor leaders, small business owners, regional business advocacy groups and elected officials alike, all urging the EPA to revise its proposal and prevent independent refinery closures.
During the public hearing on the rule-making earlier this month, common themes began to materialize throughout several testimonies as stakeholders urged the agency to reduce its 2022 Renewable Volume Obligation (RVO) to a realistic, achievable level aligned with the agency’s own data or further reduce the 2020 and 2021 RVOs to alleviate the costs of Renewable Identification Number (RIN)s, which are the credits used to demonstrate compliance with the regulation.
1. Availability of RINs: A looming shortage of the RIN bank.
Despite repeated calls from independent refiners and hundreds of refinery workers to fix the broken RIN-based compliance system, EPA’s proposal — specifically, its proposed RVO for 2022 — would ensure inflated RIN prices at a time when independent refiners have already reported spending more on RINs than any other operational cost, such as maintenance, healthcare, and payroll, combined.
As the Fueling American Jobs Coalition previously stated, the proposed 2022 RVO is decoupled from economic reality and data from the U.S. Energy Information Administration (EIA). The proposed 15-billion-gallon ethanol mandate will be impossible to meet based on projections of 13.8 billion gallons of ethanol demand in 2022, resulting in a deficit of 1.2 billion gallons that will tighten RIN markets. A recent economic report conducted by Rapidan Energy Group forecasted this will cause a historic gap, sending RIN prices soaring north of $2.00 per credit.
To make matters worse, the U.S. is already on track to run out of RINs. In 2021, EIA estimated that 800 million fewer RINs were generated than needed to comply with the law. This disparity would force independent refiners to demonstrate compliance with the RFS by purchasing RINs from the “RIN bank,” which represents the extra RINs integrated oil companies and large retail businesses have saved in reserve. As EPA describes in its proposal:
86 Fed. Reg. at 72,454/3: “A bank of carryover RINs is extremely important in providing a liquid and well-functioning RIN market upon which success of the entire program depends, and in providing obligated parties compliance flexibility in the face of substantial uncertainties in the transportation fuel marketplace.” The agency later describes that reducing liquidity in the carryover RIN bank would lead to significant negative impacts on both the fuels market and ongoing implementation of the RFS program.
However, EPA also notes that complying with the 2019 RVO cuts the RIN bank in half — and since the market is not producing enough RINs to keep up with the RFS requirement, EPA’s proposed 2022 RVO only puts us at greater risk of the RIN bank being depleted and a RIN shortage.
2. Achievability of the 2022 RVO: An unrealistic target based on the government’s own projections.
Higher RIN prices will not support the nation’s ethanol sector. Although the higher RVO for 2022 will cause higher RIN prices, it’s been proven that higher RIN prices do not lead to higher ethanol blend rates. EIA data confirms that the blend rate has remained unchanged for several years, whether RINs have averaged 18 cents or close to $2.00.
EPA even acknowledges this reality in its proposed RVO, despite setting volumes that ignore this reality:
86 Fed. Reg. at 72,477/3: “The RFS program has had limited success in helping to increase the use of higher ethanol blends, and growth in the nationwide average gasoline ethanol concentration has virtually stagnated as the market reached the E10 blendwall…We do not anticipate that growth in the use of higher ethanol blends through 2022 will increase rapidly enough to result in significantly greater volumes of ethanol consumption in the U.S., even with the incentives created by the RFS program standards and other governmental efforts such as Department of Agriculture’s (USDA’s) Blender Infrastructure Program and Higher Blends Infrastructure Incentive Program.”
The blend rate has “stagnated,” as EPA states, despite record high RIN prices over the last two years AND the fact that the Trump Administration waived EPA restrictions preventing retailers from selling E15 year round — gasoline containing 15 percent ethanol — in the summer due to its propensity to increase emissions in hot weather.
In other words, neither sky high RIN prices nor the ability to sell E15 year-round has done anything to increase the percentage of ethanol blended in gasoline. Additionally, the challenges increasing the percentage of ethanol in the fuel supply will be more acute this year, since a federal court overturned the Trump-era rule allowing for year-round sale of E15, ruling it violates the Clean Air Act, and the Supreme Court refused to reconsider this case on appeal.
The bottom line is that there is no physical way to meet a 15-billion-gallon conventional biofuel mandate through ethanol blending. That’s a fact that EPA even acknowledges, but then ignores in its unachievable proposed 2022 standard. And while lagging ethanol volume growth speaks to the need to change the 2022 RVO, it also speaks to the longer-term reforms needed to ensure the Renewable Fuel Standard achieves its original objective.
3. Ability to meet the mandate: Betting on advanced biofuel and foreign biofuel imports
EPA’s proposed rule also acknowledges that, because it proposes an ethanol standard greater than the “blendwall,” — the amount of ethanol that can physically be blended into the gasoline supply, given car engine and gas pump infrastructure compatibility limitations — domestic independent refiners will have to buy RINs associated with “advanced biofuels” — essentially bio and renewable diesel — above and beyond the requirement for those fuels detailed in the agency’s “advanced biofuel” proposed RVO.
The problem is, domestic biofuel producers are not producing enough of these fuels to meet the advanced requirement itself, let alone the extra needed to help meet part of the ethanol requirement that cannot physically be met with ethanol.
The fact that “advanced biofuel” RINs are appreciably more expensive than ethanol RINs but will be needed to meet the ethanol requirement (we know, this is ridiculous), the global oil conglomerates and large retail chains that control the RINs can unnaturally drive up the price for ethanol RINs, which they know will be scarce and which independent refiners will be forced to buy no matter the cost in order to meet compliance.
What’s more, EPA’s RFS proposal ensures the RFS remains a de facto foreign biofuel mandate. EPA even acknowledges that meeting the 2022 RFS proposal will likely require using more than one billion RINs associated with biofuel imports.
EPA can easily avoid setting an RFS standard that locks in high RIN costs and reliance on foreign biofuel, while putting domestic fuel supplies and union jobs at significant risk. The agency can simply set the ethanol mandate at a level below the previously mentioned “blendwall.” It could also set the “advanced biofuel” requirement at a level reflective of actual domestic production of advanced biofuels. History has shown that such a move would significantly lower RIN costs, without doing anything to decrease ethanol consumption. It would also help the U.S. avoid importing biofuel or refined fuel from countries that do not have stringent environmental standards, while better focusing the mandate on incentivizing expansion of lower GHG emitting, domestically produced advanced biofuel.
With the comment period set to close on February 4, 2022, time is running out for the public to provide input on EPA’s proposal.
But, fortunately, there is a path for EPA to save tens of thousands of jobs, protect domestic fuel supplies, and support the broader objectives of the RFS. By setting a 2022 standard that aligns with Congressional objectives, while giving EPA time to develop a longer-term fix as it works to revamps the mandate in accordance the law starting in 2023, there is a clear path forward for EPA to address concerns around this proposal in the short-term while making improvements for the long-term.
To join the refinery workers, organized labor leaders, small business owners, regional business advocacy groups and elected officials urging EPA to address these concerns and reform the RFS, click here to add your voice to the growing coalition asking EPA to revise its RFS proposal.