Just before the August congressional recess the House Energy and Commerce Committee issued a press release on its progress in reviewing the Renewable Fuel Standard (RFS), the nation’s biofuels policy. Since 2005 the RFS has established an annual mandate for the amount of renewable biofuels that must be used in America’s fuel supply. The August press release promised more “bipartisan collaboration” through the recess and included an eight-sentence joint statement from Fred Upton, the Republican chairman, and Henry Waxman, the ranking Democrat. The word “bipartisan” or reference to “both parties” or “both sides of the aisle” appeared in five of those sentences. With such apparent comity, Capitol Hill observers expected a proposal soon after Congress’s return.
Now those reform efforts are faltering, despite clear warning signs that the RFS is broken. In retrospect, too much bipartisanship may have created some of the very problems Congress now needs to repair. The RFS was established in 2005 but was greatly expanded in 2007 to what is in place today. The expanded structure was proposed by President George W. Bush in his 2007 State of the Union address. By December 2007, the Democratic Congress had codified it—and much more—in the Energy Independence and Security Act.
The result was not a well-considered consensus forged from principled debate but good old-fashioned logrolling. There were goodies for everyone. For the Bush administration there was a vast expansion in the volume of biofuels to be produced—from the then-existing mandate of 7.5 billion gallons of ethanol a year, to a future goal of 36 billion gallons. That was the administration’s response to what it called a “geopolitical imperative” to reduce dependence on foreign (primarily Middle Eastern) oil. “We’ve got to get off oil,” President Bush said, “for the sake of national security.”
For environmentalists who were skeptical about the scope of the plan and its potential environmental impact, there were new categories of biofuels, so-called advanced and cellulosic ethanol, along with strict guidelines for reducing greenhouse gas emissions and land-use regulations to control where and how the feedstocks used for biofuels would be harvested. For farm interests, there was an expanded mandate for corn ethanol and biodiesel made from soybean oil, which would boost commodity prices.
There were incentives for auto manufacturers and the autoworker unions to make more “flex-fuel” vehicles capable of running on biofuels. In 2006, United Auto Workers then-president Ron Gettelfinger had pressed for just that. He said the federal government should “aggressively promote the production, sale and use of alternative fuel vehicles,” with the exception of gas-electric hybrids because components for the latter were “currently manufactured overseas.” The RFS fulfilled that goal.
There were concessions to the opponents of the RFS, designed to lower their resistance. The livestock and food manufacturing industries—facing higher corn and soybean prices—were assured there would be “off-ramp” waivers triggered if grain prices began to cause them grief. And for the obligated parties, the oil refiners and fuel blenders, there was the ability to store and trade compliance credits to ease the burden of meeting the heightened mandates.
All of these provisions were stacked one on top of another. Some were linked, some worked at cross-purposes, some were based on wildly unrealistic assumptions, and all had unintended consequences—which is why Congress is now in the position of reviewing the RFS. Consider that while the 2007 measure prescribes an increased amount of biofuels to be used each year, total fuel use has been declining significantly—down more than 6 percent since 2007 and projected to keep going down. That fuel squeeze is displacing U.S.-produced gasoline, much of which is now being exported—ironically, in the name of energy independence.
Moreover, most of the advanced ethanol mandated for domestic use is being imported from Brazil. That’s because Congress mandated the use of cellulosic ethanol (made from grasses and other plant matter) before it had been commercially developed. Under the 2007 statute, a total of 1.85 billion gallons should have been used by U.S. motorists by now; less than 150,000 gallons have actually been produced. Something had to make up the difference under the category of advanced ethanol and Brazil’s sugar-cane version fit the bill. Pity that cellulosic was also the category of fuel that was supposed to provide the greatest environmental benefits.
The safety valves to protect other grain users have failed as well. Severe drought conditions—the worst in 50 years—that reduced the corn supply last year did not meet the technical criteria to trigger the waiver administered by the Environmental Protection Agency. So a short supply of corn resulted in red ink on the ledgers of livestock feeders, meat packers, and food companies. Indeed, the corn market conditions were so bad that ethanol production suffered as well, with production dropping about 5 percent from 2011 to 2012.
As for the compliance credit system, it is the proverbial “canary in the coal mine” which has provided
the strongest signal to date that the RFS is in trouble. The tradable corn-based ethanol credits—known as renewable identification numbers, or RINs—allow refiners and blenders to meet their annual biofuel mandate either by producing the blended fuels themselves or buying RINs from other refiners and blenders with a surplus. The price of these credits has spiked from less than $.01 per RIN to a high of more than $1.40—a function of the reduced national fuel demand juxtaposed with the ever-increasing annual ethanol mandates and exacerbated by last year’s short supply of corn.
Taken together these dynamics have created a RIN market that is volatile and costly and is adding to the costs of America’s retail fuel supply. Moreover, the Environmental Protection Agency, which administers the system, is now trying to develop a verification system after discovering more than $9 million in counterfeit credits were sold in 2009-10 by one sham biodiesel company that produced no biodiesel yet sold the credits. More than 20 obligated parties were victimized by this fraud.
Finally, as for energy independence and security, it should be noted that since the RFS was passed, monthly oil production in the United States has increased by more than 38 percent. In May of this year (the most recent month for which statistics have been released), the United States produced more oil than Russia or any Persian Gulf country or member state of the Organization of Petroleum Exporting Countries (OPEC), including Saudi Arabia. That was the seventh month in a row that the United States led world production. When President Bush said we needed to “get off oil,” U.S. proven reserves were at 22.8 billion barrels; today they’re at 29 billion barrels, and potential reserves are vastly greater given the Bakken shale and Eagle Ford shale formations in North Dakota and Texas respectively, and the oil shale in the Green River Form-a-tion in Colorado, Utah, and Wyoming.
Indeed, House Energy and Commerce chairman Fred Upton was understating matters when he noted in a July hearing that “much has changed since the RFS was last revised in 2007, including the exciting new developments that have led to unexpected increases in domestic oil and natural gas production.” The committee commendably issued a series of four white papers over the spring and summer grappling with the changed policy environment and posing questions for discussion among stakeholders, noting however that “building consensus will not be an easy task.”
Unfortunately, the only consensus this self-described bipartisan effort has reached so far was stipulated at the outset: that the biofuel mandates will be reformed, not repealed. The entrenched special interests have not been as dynamic as the energy market and don’t want to see their favors and preferences wiped away. Nonetheless, repeal should not be off the table, even if reform is the ultimate goal. As one affected industry trade group—the National Turkey Federation, which bore the brunt of high feed prices under the RFS—has pointed out, “the RFS needs a fresh start in order to put in place a smarter policy.” The RFS has become a Gordian knot. Lawmakers need to take a sword to our nation’s biofuels policy.
Dave Juday is an agricultural commodity market analyst.