The Renewable Fuel Standard (RFS) has become controversial this year because, for the first time, it will be difficult to meet the required RFS levels. The oil industry and other lobby groups have argued that the RFS should be scrapped, while the pro-biofuels lobby argued that it is working and can be made to function as it was intended.
The RFS is administered through Renewable Fuel Identification Numbers (RINs), which all obligated parties are required to submit to the U.S. Environmental Protection Agency (EPA) at the end of each year. All biofuels produced domestically or imported come with a RIN. Obligated parties just accumulate RINs as they blend during the year, and turn in their requirement at the end of the year. RINs are tradable, so if a company has too few or too many RINs, it can go to the market and buy or sell RINs. In addition, RINs can be carried forward from one year to the next if there are excess RINs. For corn ethanol, the RIN price prior to 2013 has generally been less than 5¢ per gallon. This low price indicated that the RFS really was not binding. However, in the first quarter of 2013, corn ethanol RINs shot up to more than $1 per gallon signaling that the RFS together with the blend wall are now binding.
On Aug. 6, 2013, the Environmental Protection Agency issued their final ruling for the 2013 RFS. (EPA Finalizes 2013 Renewable Fuel Standards, and 40 CFR Part 80, Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards.) In addition to providing all the final RFS levels for 2013, EPA also provided an indication that for 2014 and perhaps beyond, it intends to accept the reality that it will be difficult to meet the RFS levels that increase each year through 2022:
“Given these challenges, EPA anticipates that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements, including to both the advanced biofuel and total renewable fuel categories. We expect that in preparing the 2014 proposed rule, we will estimate the available supply of cellulosic and advanced biofuel, assess the E10 blend wall and current infrastructure and market-based limitations to the consumption of ethanol in gasoline-ethanol blends above E10, and then propose to establish volume requirements that are reasonably attainable in light of these considerations and others as appropriate. [EPA's 40 CFR Part 80, Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards]
Essentially what this implies is that EPA intends to reduce the overall RFS and the advanced RFS by the amount of reduction in the cellulosic component. So far, EPA has been forced to reduce the cellulosic mandate every year because the biofuel was not available. In reducing the cellulosic mandate, however, they have maintained the overall mandate at its original level. This means the shortfall in cellulosic biofuels must be made up from other advanced biofuels, such as sugarcane ethanol or biodiesel. However, today with the ethanol blend wall, biodiesel RINs are needed to meet the shortfall in ethanol, so it became pretty clear that moving forward, the RFS was not workable. The above paragraph also signals that EPA will take into account the ethanol blend wall in setting the RFS levels for 2014 and beyond.
By my calculations, certainly by 2015, it would be impossible to meet the overall RFS levels if EPA maintained their prior approach. In fact, I get a shortfall in 2016 of about 5 billion gallons. However, it becomes quite manageable if EPA does adjust the overall mandate in two ways. First, they reduce it by the amount of reduction in the cellulosic mandate. Second, they reduce it taking into account the blend wall. With these two changes, by my calculations the RFS becomes workable through 2016 and after.
All we have from EPA on what they intend to do for 2014 and beyond is in the text quoted above. The devil is in the details. However, it is clear that if EPA does what is implied in the text, the RFS moves from being unworkable to quite manageable. Thus, EPA has taken a preemptive strike to make the RFS continue to work in promoting renewable fuels without imposing undue costs on producers or consumers.