Saying the nation’s decade-old program mandating blending biofuels into gasoline and diesel is costly and fails to reflect the actual demand for gasoline, a group of oil refiners has petitioned the Environmental Protection Agency (EPA) to alter the structure of the nation’s troubled Renewable Fuels Standard (RFS).
The American Fuel and Petrochemical Manufacturers’ (AFPM) petition calls on EPA to shift responsibility for enforcing the RFS further downstream in the refining and distribution process.
“This is an administrative petition we’re filing to try to make the program better until Congress can step in and do what really needs to be done and repeal the program,” AFPM President Chet Thompson told Reuters in August. A similar petition was filed by Valero Energy Corp. in June.
Enforcing the RFS
The immediate issue for the refiners is the RFS’s enforcement mechanism, puts the onus on oil refiners and importers to show they have blended the mandated amount of ethanol and other biofuels into gasoline and diesel. AFPM has been joined in its call for a change by a newly-formed group, the Small Retailers Association, which argues the RFS unfairly tilts the government-created market for biofuels heavily in favor of their larger retail competitors.
The RFS controversy is rooted in the Energy Policy Act of 2005 and the follow-on Energy Independence and Security Act of 2007. The laws were billed as efforts to reduce U.S. dependence on foreign sources of energy and lower emissions of greenhouse gases. Among other things, the 2005 law created a national RFS, with EPA responsible for setting each year a blending target known as the renewable volume obligation (RVO). The RVO for 2010, for example, was 12.9 billion gallons of ethanol or other biofuels. By 2016, the amount rose to 18.1 billion gallons. The proposed target for 2017 is 18.8 billion gallons.
Gaming the RIN System
A new report by Bernard L. Weinstein of the Maguire Energy Institute at Southern Methodist University (SMU) highlights many of the problems plaguing the RFS. The report, “Renewable Identification Numbers (RINs) Trading under the Renewable Fuels Program: Unintended Consequences for Small Retailers,” notes Congress directed EPA to generate a system of tracking numbers to be used to ensure mandated blending requirements were being met by the “obligated parties.” The “obligated parties,” are refineries and gasoline-diesel importers, not the actual parties doing the blending, the SMU report points out.
In the elaborate scheme concocted by EPA, the agency assigns a 38-charracter tracking numbers, known as renewable identification numbers (RINs), assigned to each physical gallon of renewable fuel produced or imported and follows that gallon as it is transferred to a fuel blender. Upon sell of the blended fuels, RINs are separated from the blended gallons of gasoline or diesel, and used by obligated parties as proof they have met their blending obligations. Obligated parties may sell RINs to one another or to ‘non-obligated’ parties. The RINs generated from fuel blending commonly generate a return of 10 cents to 15 cents per gallon.
The SMU report shows selling RINs has become a huge business, one hurting small retailers. In 2014, EPA reported more than 50 billion RIN sales transactions, with 30 billion transacted by non-obligated parties.
Only large retailers or multinational oil companies have the financial resources purchase bulk quantities of blended gasoline, diesel, ethanol, and other biofuels and to participate in RINs trading; small retailers have neither the capital nor the market leverage to take positions in RINs trading. As a result, large companies have been, increasing their market share by taking ownership of fuels at the blending point and acquiring associated RINs they can sell at a profit, thereby generating additional revenues allowing them to undercut the prices for diesel and gasoline small retailers can charge.
Both the Small Retailers Association, which commissioned the SMU report, and the refiners want the RFS’s point of enforcement moved to the blenders. While small retailers favor a system that allows them to compete with larger competitors, the refiners’ ultimate goal, as AFPM’s Thompson says, is repeal of the RFS.
“AFPM opposes the mandated use of alternative fuels and supports the sensible and workable integration of alternative fuels into the marketplace based on market principles,” the organization says on its website. “Energy policy based on mandates is not a recipe based on success. There is no free market if every gallon of biofuels – including those that do not exist – is mandated. Mandates distort markets and result it stifled competition and innovation.”
“The RFS has not succeeded in reducing America’s dependence on foreign oil,” notes Isaac Orr, research fellow at the Heartland Institute publisher of Environment & Climate News. “Oil imports are at record lows because hydraulic fracturing has nearly doubled domestic oil production since 2008. Fracking, not the RFS, has made America more energy independent.”
“If there is a law in need of reform or repeal, it is the RFS,” said Dan Simmons, vice president for policy at the Institute for Energy Research. “The conflict over which parties should be the ‘obligated parties’ is just the latest in a long line of problems.
“The RFS was created for another time, when US oil production was in decline, not for today when we have increasing oil production, coupled with low oil prices,” said Simmons.
Bonner R. Cohen, Ph. D. ([email protected])is a senior fellow at the National Center for Public Policy Research.
Bernard L. Weinstein, “Renewable Identification Numbers (Rins) Trading Under the Renewable Fuels Program: Unintended Consequences For Small Retailers,” Maguire Energy Institute, Southern Methodist University; August 2016: https://heartland.org/publications-resources/publications/renewable-identification-numbers-rins-trading-under-the-renewable-fuels-program-unintended-consequences-for-small-retailers