It’s Time for EPA to Get the RFS Back on Track

May 4, 2015 |

ericksonBy Brent Erickson, Executive Vice-President, Biotechnology Industry Organization, and Head, Industrial & Environmental Section

EPA’s April announcement that it will re-propose the 2014 RFS volume obligations along with the 2015 and 2016 rules provides an opportunity for the agency to get this vital program back on track. To move forward, EPA must recognize that the methodology it originally proposed for 2014 – nearly a year and a half ago – is fundamentally unworkable.

A new white paper by Harvard economist James Stock – a former member of the Obama administration’s Council of Economic Advisors – acknowledges as much. Unfortunately, the paper’s faulty analysis of the RFS leads to recommendations for detrimental changes to the program. Worst of all, the paper fails to acknowledge that the administration’s own delays in rulemaking have chilled billions of dollars of investment in advanced and cellulosic biofuels. The paper should not be interpreted by EPA as a justification for more unfounded methodology proposals. Right now, the only RFS course that will revive investment in advanced and cellulosic biofuels is a clear commitment by EPA and the administration to a methodology that ensures that all renewable fuels produced, up to annually prescribed volumes, will be used in the U.S. market.

EPA’s delays in rulemaking in 2013 and 2014 chilled investment in advanced and cellulosic biofuels just as the industry began commercial deployment of new biorefineries. When the RFS was established, companies began investing billions of dollars to build first-of-a-kind demonstration and commercial-scale biorefineries to utilize novel technologies. By 2013 and 2014, these companies began to reach commercial status, proving technologies, production processes and biorefinery designs that could be replicated quickly at much lower capital costs. The industry was finally poised for scale-up to meet the goals of the RFS. But EPA’s dithering about the rules made investors unsure that the RFS would continue to open the U.S. fuel market to advanced biofuels, and the capital necessary to build additional biorefineries dried up. BIO estimates that policy instability since 2013 was the primary cause of a $13.7 billion shortfall in investment in construction of new biorefineries.

The policy instability resulted from misinformation about the program, and Stock repeats some of it in his recent paper. It should be noted, first and foremost, that volumetric obligations are converted to percentages for no other purpose than to spread the RVOs equally among refiners. Even so, refiners pursue different strategies for meeting the obligations, with some avoiding the use of biofuels altogether. Those refiners’ beggar-thy-neighbor strategy inevitably increases compliance costs. For instance, in February 2013 obligated parties elected to defer nearly 2 billion gallons of the 2012 conventional biofuel RVO, automatically adding it to the 2013 obligation. The artificially added demand triggered the run up in RIN prices that started immediately after the settlement of 2012 obligations.

Mr. Stock is mistaken to assert that those RIN prices are an indication of the blend wall or a subsidy to biofuel producers. RIN markets are completely opaque, even to those involved in trading. In fact, the daily RIN prices published by OPIS and Platts are derived entirely from obligated parties’ self-reported bids, offers and deals – trading does not occur in regular markets like other commodities. The lack of transparency regarding RIN trading prevents the market from functioning freely, which Stock notes is a necessary assumption of his analysis. The red herring about RIN prices being passed to consumers was a big contributor to EPA’s delay in setting 2014 RVOs. But Stock’s paper fails to acknowledge that this policy uncertainty was costly to the biofuels industry.

Stock’s recommendations to change the RFS do not improve certainty in the program. In fact, as a recent analysis from Third Way points out, proposals aimed at taking market share away from the corn ethanol industry end up discouraging investment in the advanced biofuel market. One reason is that the corn ethanol industry is playing an indispensable role in developing and financing commercial-scale cellulosic biofuel production. Another reason is that an uncertain market for biofuel destroys the incentive for investing in novel processes and new energy crops by increasing risks for investors. The reforms proposed by Stock would simply compound the damage done to the advanced biofuels sector by EPA’s previous proposal.

EPA was right to withdraw the original 2014 proposed rule and to offer another opportunity for comments and feedback. But at the same time, it should deliver a strong signal that the RFS will continue to ensure that if the biofuel industry can produce cleaner fuels, then the U.S. market will be opened to them up to the statutory annual volumes. Anything less than this commitment will continue to chill necessary investment in advanced biofuels and subvert Congress’ original intent for the policy.

Recently 37 Senators wrote EPA Administrator McCarthy to remind her why Congress established the RFS. “The intent was a forward-looking policy that drives future investments in both biofuels production and the infrastructure necessary to bring these biofuels to market,” they wrote. The further noted that setting strong volume requirements and maintaining a stable policy are necessary to unlock investments and drive innovation. EPA should heed that strong message and reinstitute the original methodology, setting RVO numbers that will stimulate more commercial biorefineries instead of hindering investment.

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