Reform of the Renewable Fuels Standard

EPA administrator Scott Pruitt and Senators Charles Grassley (R-Iowa), Joni Ernst (R-Iowa), and Deb Fisher (R-Neb.) met October 17 to discuss the future of the Renewable Fuels Standard (RFS), which regulates the production of biofuels.  At issue was whether the RFS might be lowered for 2018, as Administrator Pruitt suggested in recent months might be the case.  But, on October 20, EPA officials announced that the renewable fuel volumes for 2018 will be at or above what had been originally proposed, reversing the implication of statements made earlier in the year by Administrator Pruitt.

Such a decision matters, because U.S. grain and oilseed prices are highly dependent.  For example, 48 percent of the 2017 corn crop is anticipated for use in producing ethanol.  The percentage of corn used for ethanol has run between 40 percent and 50 percent since the RFS was introduced in the Energy Independence and Security Act of 2007 (EISA), and it is intended to grow through the year 2022.  The Congressional Budget Office (CBO) estimates that the mandated use of ethanol has contributed to about a 6-percent increase in the price of corn, which explains the interest of the three farm-state senators.  In contrast, food prices have increased by only a fraction of one percent, mainly because the raw products of corn (and oilseeds) constitute only a small percentage of retail food prices.

Jobs and agricultural product prices are more important issues.  A 2016 study conducted by LMC International, and released by the National Biodiesel Board, concluded the 2.1 billion gallons of biodiesel and renewable diesel Americans used in 2015 supported 47,000 jobs and $1.9 billion in wages.  According to the Renewable Fuels Association, the 15.3 billion gallons of ethanol supported 74,420 jobs directly and 264,756 indirect and induced jobs and added $42 billion to Gross Domestic Product (GDP).  Many believe that repeal of the RFS through repeal of the EISA would not significantly harm the industry because significant reductions in production costs have been achieved.  Nevertheless, the EISA is destined to remain controversial because it is complicated, hence the decision by EPA administrator Pruitt is unlikely the final resolution of the matter.

Basically, renewable fuels comprise corn ethanol, the requirement of which is now capped; biomass-based diesel; cellulosic biofuel; and other advanced biofuels.  The mandates require suppliers of gasoline and diesel fuel to use minimum amounts of renewable fuels in their blends or face substantial civil penalties of up to $32,500 per day.  An excellent chart of past actual and mandated future growth is on page seven of the CBO report.

Persisting issues are that meeting the total volumes of advanced biofuels mandated in the EISA would require quite large increases in their production and would likely have significant effects on the costs of transportation fuel.  The CBO report concludes that reduction in greenhouse gases would be small in the near term, although possibly large in the longer term.  So, while corn-based ethanol may be competitive on its own, the other categories may not be, at least not without continued considerable subsidies, which implies continued considerable controversy. 

EPA administrator Scott Pruitt and Senators Charles Grassley (R-Iowa), Joni Ernst (R-Iowa), and Deb Fisher (R-Neb.) met October 17 to discuss the future of the Renewable Fuels Standard (RFS), which regulates the production of biofuels.  At issue was whether the RFS might be lowered for 2018, as Administrator Pruitt suggested in recent months might be the case.  But, on October 20, EPA officials announced that the renewable fuel volumes for 2018 will be at or above what had been originally proposed, reversing the implication of statements made earlier in the year by Administrator Pruitt.

Such a decision matters, because U.S. grain and oilseed prices are highly dependent.  For example, 48 percent of the 2017 corn crop is anticipated for use in producing ethanol.  The percentage of corn used for ethanol has run between 40 percent and 50 percent since the RFS was introduced in the Energy Independence and Security Act of 2007 (EISA), and it is intended to grow through the year 2022.  The Congressional Budget Office (CBO) estimates that the mandated use of ethanol has contributed to about a 6-percent increase in the price of corn, which explains the interest of the three farm-state senators.  In contrast, food prices have increased by only a fraction of one percent, mainly because the raw products of corn (and oilseeds) constitute only a small percentage of retail food prices.

Jobs and agricultural product prices are more important issues.  A 2016 study conducted by LMC International, and released by the National Biodiesel Board, concluded the 2.1 billion gallons of biodiesel and renewable diesel Americans used in 2015 supported 47,000 jobs and $1.9 billion in wages.  According to the Renewable Fuels Association, the 15.3 billion gallons of ethanol supported 74,420 jobs directly and 264,756 indirect and induced jobs and added $42 billion to Gross Domestic Product (GDP).  Many believe that repeal of the RFS through repeal of the EISA would not significantly harm the industry because significant reductions in production costs have been achieved.  Nevertheless, the EISA is destined to remain controversial because it is complicated, hence the decision by EPA administrator Pruitt is unlikely the final resolution of the matter.

Basically, renewable fuels comprise corn ethanol, the requirement of which is now capped; biomass-based diesel; cellulosic biofuel; and other advanced biofuels.  The mandates require suppliers of gasoline and diesel fuel to use minimum amounts of renewable fuels in their blends or face substantial civil penalties of up to $32,500 per day.  An excellent chart of past actual and mandated future growth is on page seven of the CBO report.

Persisting issues are that meeting the total volumes of advanced biofuels mandated in the EISA would require quite large increases in their production and would likely have significant effects on the costs of transportation fuel.  The CBO report concludes that reduction in greenhouse gases would be small in the near term, although possibly large in the longer term.  So, while corn-based ethanol may be competitive on its own, the other categories may not be, at least not without continued considerable subsidies, which implies continued considerable controversy. 

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