Petroleum refiners get out the old fear-mongering playbook for attack on Renewable Fuel Standard

Despite oil industry claims of “$10 million in fines for non-existent fuels” – they paid exactly $19,010.16 for cellulosic ethanol waivers in 2010, costing US consumers 14 millionths of one penny per gallon.

So why exactly are refiners and their surrogates investing millions in an all-out effort to disable the RFS?

By Brent Erickson
Executive Vice President, BIO; head, Industrial Biotechnology section

It’s an election year with all of its hoopla, hyperbole and exaggerations. Not surprisingly, the Renewable Fuel Standard has become the main whipping boy for some environmentalists, livestock producers, some oil state politicians and the petroleum refiners’ trade groups. Despite the overblown rhetoric, the RFS is indeed working – it is increasing domestic energy security, reducing reliance on foreign oil, and contributing to a cleaner environment. Moreover, it’s working according to the rules that everyone agreed on when the policy was adopted. In a tough economic environment, advanced biofuel companies are making herculean efforts to get new plants up and running. What opponents – the petroleum refiners in particular – seek is to undermine the policy and keep the playing field tilted in their favor.

The petroleum refiners are following an old playbook. Does anyone recall how long it took to “get the lead out” of gasoline? From passage of the Clean Air Act in 1970, it was 25 years before the sale of leaded gasoline stopped in the United States. The petroleum refining industry first denied that air pollution from lead was a problem, stoked fear that it would impact car engines and raise prices at the pump, then sought to ease regulations (particularly as gas prices rose during the Arab embargo), and finally sued the EPA to block or delay implementation of the rules.

These tactics have a strangely familiar ring today. As ethanol has gained market share and CAFE standards have kicked in, the sharp elbows have come out. You can’t blame incumbents for wanting to protect market share, except when it is not in the consumer’s or the national interest. To use a basketball analogy, it is critically important for the biofuels world to deflect those sharp elbows and to keep driving to the basket.

Nearly 50 percent of the refining capacity on the East Coast has either shut down or is in danger of doing so. Why? Older refineries are losing money. Sunoco closed its Philadelphia-area refinery in late 2011 because had been losing millions of dollars. ConocoPhillips also closed its Trainer refinery near Philadelphia. Why are they really losing money? Simple, they are getting old and can’t refine the heavier oil coming into the market from Saudi Arabia, Venezuela, and Canada’s oil sand. While some oil refiners are shutting down old plants and laying off workers, the advanced biofuels industry is working hard and building new biorefineries and creating jobs.

Biorefineries use industrial biotechnology and the fact is new technological innovation is disruptive for incumbents in the marketplace. We see this not only in the biofuels space but in other areas where industrial biotech companies are developing biobased plastics and renewable chemicals that are now competing with petroleum-based counterparts. Critics of the RFS say, “Let the market work.”

Well we could do that, and advanced biofuels would eventually be commercialized – decades later than we need them. We can’t afford to wait! Look at the timeline for the evolution of the oil refinery. It took over one hundred years for the technologies to evolve from early distillation of kerosene to modern refineries and to be incorporated in our current refining infrastructure. In today’s world we need to compress the timeframe for advanced biofuels and “hurry the future.” And that is why we can’t afford to have the RFS undermined at this current juncture.

The Petroleum Refiners’ Arguments Don’t Hold Water

The petroleum refiners have spun a story that the EPA is forcing them to pay “fines” even though there is no cellulosic biofuel to meet the RFS (they made similar claims about unleaded gasoline). Further, they’re claiming this is a hidden “tax” on American consumers. This nonsense is a distortion of the Cellulosic Waiver Credit, which provides the refiners an alternative to purchasing or trading Renewable Identification Numbers (RIN).

But even the waiver credits were not needed for 2010, despite the shrill wails from the refiners that they were being forced to pay EPA up to $10 million for them. Petroleum refiners were able to purchase biofuels to meet nearly the entire RFS cellulosic requirement of 6.5 million gallons that year.

How is that possible? Under the 2005 Renewable Fuel Standard (RFS1), “cellulosic biomass ethanol” (ethanol produced in a facility that utilizes biomass for heat and energy) qualified for a cellulosic biofuel RIN. RFS1 was in effect until July 2010, when the 2007 Renewable Fuel Standard (RFS2) came into force. But even under RFS2, refiners were permitted to use cellulosic biomass ethanol RINs to satisfy the 2010 and 2011 obligations for cellulosic biofuels – and they did.

There were more than enough cellulosic biomass ethanol RINs generated in 2010 to satisfy the 2010 obligation and up to 20 percent of 2011 obligation for cellulosic biofuel. The obligated parties purchased only 12,186 cellulosic waiver credits to meet their 2010 obligation. At a fixed price of $1.56, their total cost was $19,010.16.

How much did this cost consumers? U.S. drivers spent a record $481 billion on gasoline in 2011. For every dollar of gasoline purchased, the cost of the cellulosic waiver credits purchased by refiners cost less than one ten-millionth of a penny. Out of the more than $4,100 each American household spent on gasoline last year, the cost was less than two thousandths of a penny.

Refiners have said that they’ve paid EPA $6.8 million this year for the cellulosic waiver credits needed to meet the 2011 obligation – equivalent to the entire 6 million gallon cellulosic biofuel obligation at a cost of $1.13 per gallon credit. EPA has not posted the total number of credits obligated parties purchased for 2011, but this outcome is unlikely. There were still some valid cellulosic biomass ethanol RINs available for use. And the obligated parties have yet another option – they can simply defer their obligation until next year.

The RFS2 rules give petroleum refiners extraordinary flexibility in complying through a variety of options, as outlined in the figure below. If they can’t purchase the fuel or the RINs – it is only RINs for cellulosic biofuel as defined under RFS2 that have been unavailable – the cellulosic waiver credit and deferral of the obligation are options.

Just as with the RFS1 RINs, each of these options has a different lifespan and therefore produces different opportunity costs to the obligated parties. That’s why changes to the RFS during any one year – such as a waiver – will have impacts on the fuel market and biofuel producers for several years.

The benefits of U.S. biofuel production are tangible. U.S. dependence on imported oil fell from 60.3 percent in 2005 to 49.3 percent in 2010 and to 45 percent in 2011, thanks to increased domestic production of both petroleum and biofuels. We are measurably less reliant on foreign oil, even though we continue to send nearly $1 billion a day overseas to import oil and spend $80 billion a year to protect its shipment from unstable regions such as the Persian Gulf. We need to finish the job and secure our energy future by increasing production of advanced biofuels and creating new supply chains of renewable resources.

There are already many thousands of Americans working to build the advanced biofuel industry in the United States. Small and large advanced biofuel companies have invested tens of millions of dollars to continue research and development, to build new biorefineries and to create new market distribution networks for biofuel. Large energy companies – such as BP, Shell, Chevron and Valero – have made significant investments in advanced biofuels development.

If opponents of the RFS get their way and destabilize this important policy, those investments could be forfeit. Technological developments for advanced biofuels will grind to a halt and American jobs will be lost. But American consumers will be the biggest losers – they’ll continue to be told by OPEC what they can put in their gas tank and how much they’ll have to pay to maintain their freedom of movement.

What About the Drought?

Now we have an election year and a drought – almost a perfect storm. The situation is the same with responses to this year’s drought in the Midwest. Members of Congress have proposed waiving the RFS in order to mitigate the drought’s impact on livestock producers. There’s little chance it would actually help them. Meanwhile, ethanol producers have been impacted by the drought as well – production is already down 17 percent for the year. But the waiver would continue to impact biofuel producers for several years.

The drought is hard on farmers and livestock producers. However, the desperate attempt to get the RFS waived is unlikely to provide relief for several reasons. First, a recent Iowa State study shows waiving the RFS will have little impact (less than 5 percent) in reducing feed prices. Second, undermining the RFS will have a chilling effect on the development of cellulosic feedstocks that are not used for food or feed. The RFS is important for all biofuels, but it is critically important for cellulosic feedstock process development.

To undermine the RFS now would wound this feedstock development effort that in the long run is going to help both farmers and ranchers. This aspect is often neglected by the media and is not well understood by cattle ranchers, pork and chicken producers.

The RFS must remain stable over the long-run in order to continue working as Congress originally intended.  Advanced biofuel companies are making progress, as made clear by recent announcements from INEOS Bio, Fiberight, KiOR, and Blue Sugars. Additional companies have made multi-year investments to construct new biorefineries to make these fuels and they are becoming a reality, boosting economic growth and creating employment opportunities, leading to a cleaner environment, and increasing our energy security.

Thankfully we have some leaders in Congress who are willing to stand up to maintain the integrity of the RFS. But make no mistake; this is a real political battle. The election year is not over and the drought will continue to cause hardship for farmers and ranchers in the coming months.  In the face of these unique challenges everyone in the biofuel industry needs to be united and to make sure their voice is heard by their elected representatives and the press. It’s time to take the whip away from those who make the RFS the whipping boy.

We can only do that if we all actively engage now. Biofuels leaders are very busy and have businesses to run. However, if the RFS is undermined their businesses will be too. The biofuels associations are working hard to make sure the biofuel voice is heard in Washington. At the end of the day though, to repeat an old saw, all politics is local. So it is important for biofuel producers to frequently engage their local Congressman and Senators and invite them to tour their facilities and to keep them up to speed on the exciting developments we are now seeing in this space. Most importantly during the August recess attend their town meetings and speak up or ask to meet with them in their state offices and tell them not to undermine the RFS and why it is important to their voters. Otherwise the politicians  will begin to believe the distortions and half-truths the opposition is putting out loudly and often.

The biofuels industry has come a long way and has a lot of accomplishments to be proud of. Yet the best years are ahead of us and great rewards are soon to come if we keep the RFS intact.