And Yet Another RFS Warning

on September 11, 2015 at 2:00 PM

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NERA Economic Consulting has a new study warning of potentially dire economic impacts from continued implementation of the Renewable Fuel Standard (RFS), as written into law by Congress.

NERA set up its study that way for good reasons: Despite abundant evidence that RFS mandates for ever-increasing ethanol use in the nation’s fuel supply are detached from reality, and although it’s pretty clear EPA has mismanaged the RFS to the detriment of those obligated to meet its mandates – the ethanol industry insists that the program continue as statutorily set out in 2007.

That, according to NERA, is a roadmap to potential economic calamity and consumer pain.

The fundamental flaw in the RFS is that its requirements try to force more ethanol into gasoline than is safe for the majority of cars on the road today. Studies have shown that fuel blends with more than the 10 percent ethanol content of E10 gasoline that’s standard across the country could damage engines and fuel systems in millions of cars, as well as lawn and marine equipment.

Meanwhile, NERA’s study concludes that consumer demand for higher ethanol content gasoline like E15 and E85 is too small to serve as an outlet for higher ethanol volumes required by the RFS. Bob Greco, API’s downstream group director, discussed the study during a conference call with reporters:

“Rather than risk damage to vehicles, NERA predicts that refiners will instead be forced to reduce the nation’s supply of gasoline and diesel by as much as 30 percent. You don’t have to be an economist to know that removing almost one-third of our nation’s fuel supply would deal a crippling blow to our economy.”

NERA concludes that this year and beyond, it is not “feasible” to meet the statutory volumes of renewable fuel under the RFS:

The current level of gasoline demand, the blend wall limiting the share of ethanol that can be blended into the gasoline pool, and the lack of non-ethanol biofuels limit the market potential for total renewable biofuels. Similarly the current market potential for higher ethanol content gasoline like E85 and E15 is too small to have an immediate impact on the amount of ethanol that the gasoline market can absorb.

NERA says the RFS is workable only if EPA extensively uses its authority to waive the program’s statutory requirements. NERA’s main conclusion is consistent with what it found in a 2012 study, which also warned of severe economic impacts. Those impacts haven’t occurred, the new study says, because EPA has proposed volumes below statute levels – prompting ethanol producers to demand that the statutory volumes be enforced. NERA describes the ripple effects of that course:

The price increases in gasoline and diesel are accompanied by a reduction in demand for the transportation fuels. Since the transportation sector is interconnected with other sectors in a way that the transportation services are consumed by other sectors, the fuel cost increase creates the spillover effects that ripple through the economy. Higher diesel fuel costs increase the cost to move raw materials and finished goods around the country, thus eventually making everything that directly or indirectly depends on transportation services more costly. Likewise the higher gasoline prices leave consumers with less disposable income. As a result of these impacts, consumption of goods and services declines. All of these impacts lead to severe economic harm.

Greco said the path advocated by the ethanol industry would require 30 percent more Renewable Identification Numbers (RINs) – the federal credits refiners receive for blending each gallon of ethanol – than were generated in 2014. Greco:

“RINs are generated by the blending of biofuels. In order to achieve that, obligated parties have very limited tools to increase RIN generation by such a large amount. E85 and E15 are the first two that would be looked at, and the study looks at the constraints that limit the tremendous growth that would be needed in both of those (to satisfy the RFS). In effect, according to NERA, this would force refiners to actually reduce their obligation by reducing (domestic) production. That’s the other way to lower your (RFS) obligations, by reducing production of gasoline and diesel.”

Removing one-third of any commodity from the marketplace would lead to significant disruption, Greco said. Thus, NERA’s study details alarming potential economic harm from that kind of reduction in the fuel supply, forced by the RFS. Greco:

“It underscores the problem with any kind of economic or regulatory policy that could remove one-third of a product from the market. It’s an outrageous number, but it’s in response to an outrageous situation.”

EPA should do the right thing for consumers and their best interests, not the interests of ethanol producers. EPA should reduce the total renewable fuels volume and waive the cellulosic ethanol requirement for 2014, 2015 and 2016. Greco:

“Our message to policymakers is clear: the RFS is bad policy for anyone who drives a car, transports goods, or purchases products that rely on gasoline or diesel for transportation – in other words, virtually everyone.”

By Mark Green

Originally posted September 9, 2015

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