Realities of the Market

EPA's proposed rule reflects a fundamental misunderstanding of the RFS's purpose, which was designed to change the realities of the market and the way oil companies do business, and to spur investment in cleaner, low-carbon renewable fuels.
By Bob Dinneen | June 14, 2016

In May, as the U.S. EPA released its draft renewable fuel standard (RFS) and renewable volume obligations (RVOs) for 2017, EPA spokeswoman Laura Allen said the agency “set volumes that are ambitious, yet achievable given the realities of the market.”  Really?  The ethanol industry has demonstrated the ability to produce more than 15.3 billion gallons annually. What’s ambitious about setting the standard 500 million gallons below what the industry can produce?

The reason, of course, is that EPA has bought completely into the narrative of the oil industry regarding the blend wall, believing “the realities of the market” preclude the agency from setting the RVO for conventional biofuels above 10 percent of the market. There are two glaring problems with EPA’s logic.

First, the law does not allow the agency to use waiver language specifically designed to address shortages in supply to be used to respond to perceived infrastructure limitations and biofuel demand.  Indeed, EPA’s conflating of supply and demand is the subject of the industry’s ongoing lawsuit over the agency’s 2014, 2015 and 2016 RVO rule.  We remain confident the court will appreciate the difference between supply and demand. 

But more importantly, the EPA proposed rule reflects a fundamental misunderstanding of the purpose of the RFS, which was designed to change the “realities of the market” and the way oil companies do business, to spur investment in cleaner, low-carbon, renewable fuels and the infrastructure to accommodate higher blends. It was designed to give consumers more choices at the pump, lower gas prices and move beyond today’s market reality where biofuels are only used as gasoline additives to boost octane. The RFS was intended to create a wholly new market reality.

The second point, however, is that even if the agency could consider infrastructure and demand, there is no reason to set the standard for conventional biofuels below 2017 statutory levels. There is quite literally no circumstance in which any obligated party would be unable to meet its requirement. Prior to the release of the proposed rule, the Renewable Fuels Association met with EPA and the Office of Management and Budget to provide our assessment of how easy it would be to meet the 15 billion gallons standard in 2017. 

It is important to recognize at the outset that other biofuels qualify for D6 renewable identification numbers (RINs). Renewable diesel, some biodiesel, E15 and E85 contributed approximately 800 million gallons toward last year’s 14.5 billion gallons standard for undifferentiated renewable fuel.  Also, because of USDA’s infrastructure grant program and the Prime the Pump initiative, E85 and E15 sales are climbing at an unprecedented rate.  Gasoline demand is rising in response to low prices and a recovering economy.  The 15 billion gallons requirement easily could be met.

One final point. Even if our conservative demand estimates prove to be wrong, there is a 2 billion-plus surplus of D6 RINs that could be tapped, if necessary, by any obligated party finding itself short on its obligation—the ultimate insurance policy for a 15 billion gallons RVO.

If this administration wants to encourage investment in new technologies as it says, maximize greenhouse gas reductions consistent with its climate change rhetoric, boost a flagging farm economy and lower consumer gasoline prices, it will return the RFS to the statutory levels and finally begin to change the “realities of the market.”

 

Author: Bob Dinneen
President and CEO,
Renewable Fuels Association
202-289-3835