Following a meeting on Friday, reports are that Agriculture Secretary Sonny Perdue and EPA Administrator Scott Pruitt have put together a four-part proposal to address some of the damaging effects of the Renewable Fuel Standard (RFS). The proposal seeks to resolve a months-long standoff between Senators like Ted Cruz (R-TX) and Pat Toomey (R-PA), who represent states harmed by RFS mandates, and the small coalition of Midwestern Senators whose biofuel manufacturers subsist because of this illogical, market-distorting program.
A jolt to get this proposal put together came last month with the bankruptcy of Philadelphia Energy Solutions (PES), a Philadelphia-area refiner who blamed the prices of RINs (Renewable Identification Number) for their bankruptcy. RINs are the compliance mechanism for the RFS: in order to meet mandated levels, every refiner must collect sufficient RIN credits, whether by producing biofuel or purchasing RINs from other sources. RIN prices have increased in recent years, putting strains on refiners. For example, in its bankruptcy announcement, PES noted that the company spends more on RINs (meaning compliance with government edict) than it does on all payroll costs for its employees.
The four components of the plan drafted by Secretary Purdue and Administrator Pruitt discussed below are: capping the price of RIN credits; providing a year round waiver from an environmental standard for 15 percent ethanol fuel; allowing exported ethanol to generate RIN credits for domestic compliance; and transparency measures for the RIN trading marking.
Capping RIN Prices
The idea of capping prices for RINs has been promoted by Sen. Cruz; he has frequently suggested a cap at 10 cents. For comparison, last Friday RIN prices for ethanol traded at 60 cents, while prices have exceeded $1.50 at times during the last few years. RIN prices fluctuate based on a variety of factors, but the limited number of customers and opaque trading mechanisms make the RIN market highly volatile. RFS Protectors like Senator Chuck Grassley (R-IA) have rejected such a cap out of hand. RFS supporters seem very concerned that this cap would distort the market for RINs, a “market” that itself is a government-created distortion. Capping the price of RINs would essentially change a RIN credit from a salable instrument in its own right to a simple fine for every gallon of non-compliance with RFS.
This proposal may work as short-term relief for refiners and the fuel consuming public. Certainly the aggressive opposition of the biofuel industry and their senators indicated that they see such a proposal as harmful to the mandate that gives their industry life. However, the problem with RINs is not the price, per se, rather it is the entire premise of the RFS. RINs were created by the RFS and thus only exist because of the baleful effects of that mandate. Ultimately, the only fix for the problems of the RIN market is eliminating the RFS.
Year-Round Waiver for E15
In return for a cap on RIN prices, the Perdue-Pruitt proposal would give the biofuel industry something that it has lobbied for extensively for many years: a year-round waiver for the sale of E15 fuel. The waiver would apply to what is known as Reid Vapor Pressure (RVP), a measure of the volatility (meaning evaporation characteristics) of fuels. The EPA regulates the RVP of fuel sold because evaporating fuel contributes to ground level ozone. Ethanol blended fuel is more volatile than 100 percent gasoline. Thus, in order for ethanol blend fuels mandated by the RFS to be sold, an RVP waiver had to be granted for fuels up to a 10 percent ethanol blend (E10).
As the RFS mandate increased, even as US fuel demand has held steady, in recent years E10 alone, which is now nearly all retail fuel sold, is no longer sufficient to meet the government mandate. This has prompted the increased sale of 15 percent ethanol blended fuel (E15). However, while EPA has allowed E15 to be sold, it has not been able to grant E15 an RVP waiver. This has the effect of prohibiting the sale of E15 in many parts of the country during the summer season. The biofuel industry has thus lobbied Congress and the EPA for several years to grant E15 a year round RVP waiver, which the Perdue-Pruitt proposal would seek to do administratively.
One hiccup to this idea, however, is the question of whether EPA in fact has the authority to administratively grant E15 a year round waiver. The RVP waiver for E10 was granted by Congress, and is specifically written into the Clean Air Act (42 U.S.C. 7545 (h)(4)). EPA otherwise is given no statutory authority to grant RVP waivers beyond levels set by Congress. The biofuel industry asserts that EPA has implicit authority to expand this waiver, however the EPA has disagreed in the past, and the plain text of the Clean Air Act does not seem to allow for the biofuel industry’s interpretation.
Credits for Exported Ethanol
The Perdue-Pruitt proposal also revives an idea from 2017 from the EPA to allow for exported quantities of ethanol to generate RIN credits that can be counted toward domestic compliance with the RFS. Under current regulation, if a gallon of ethanol is exported, the RIN credit that was generated by the production of that ethanol is no longer valid. The United States is currently exporting more than 1 billion gallons of ethanol per year, so allowing those credits to be used for domestic compliance would likely have a significant impact on RIN prices.
The problem here is that the biofuel industry has already vehemently rejected this proposal when the EPA was considering it last year. After scorched earth threats from Senators Grassley and Ernst (R-IA) in particular, Administrator Pruitt was forced to write a letter disowning the minor reforms under discussion. It remains to be seen if the biofuel industry reaction this time will be any different.
Transparency Measures for the RIN Market
Unlike the other three prongs of the Perdue-Pruitt proposal, there is general agreement among both biofuel producers and refiners about increasing transparency in the RIN system. The opaqueness of the system has left an opening for extensive fraud as well as speculation from entities outside the fuel industry looking to make a quick buck. A cynic might say that this is an unsurprising outcome in an artificial market that only exists because of government engineering.
Ultimately, the Perdue-Pruitt proposal is fairly innocuous. If fully undertaken, it should reduce some of the costs of complying with the RFS. These costs are not just in lost jobs in the refining industry, but are passed on to every American in the form of higher fuel costs at the pump. To the degree that these costs are reduced, it is to the good. However, the ultimate problem with the RFS is that the government is mandating the purchase of a product that Americans don’t need and most Americans don’t want. The original justifications for the harm imposed by the RFS have long since been made obsolete by developments since the imposition of the program. The Perdue-Pruitt proposal will not save Americans from the RFS; only full repeal can achieve that.