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RESPONSE TO CBO STUDY — The Renewable Fuel Standard: Issues for 2014 and Beyond

June 27, 2014


A new report from the Congressional Budget Office (CBO) suggests that full compliance with RFS requirements poses significant challenges and could increase fuel prices. The CBOs conclusions are largely based on a careless analysis that relies on unsupported assumptions. Further, the report blatantly acknowledges that the economic impact of substituting biofuels for gasoline and diesel (i.e., downward pressure on crude oil prices) has been purposely omitted. Finally, the CBO results contradict the findings of more credible research from independent university economists. Key flaws in the report are detailed below. 1. The reports main scenario contains a number of erroneous assumptions and fundamental errors that render the conclusions meaningless in the context of the ongoing debate over RFS implementation. The exaggerated economic impacts discussed in the CBO report result primarily from the EISA Volume Scenario, in which the EISA statutory volumes of advanced biofuel (9 bg) and conventional renewable fuel (15 bg) are consumed in 2017. This scenario is based on the faulty assumptions below (among others):

  • Most important, CBO improperly assumes EPA will require waivered cellulosic biofuel volumes to be entirely offset by other advanced biofuels. EPA has the statutory authority to waive the advanced biofuel standard and total RFS by the same, or lesser, amount as the waiver of the cellulosic biofuel standard. Thus, for example, if only 300 mg of cellulosic biofuel are available in 2017, EPA could (and likely would) reduce the cellulosic biofuel standard from 5.5 bg to 300 mg, reduce the advanced biofuel standard from 9.0 bg to 3.8 bg, and reduce the total RFS from 24 bg to 18.8 bg. Biodiesel and renewable diesel could very likely account for most of the 3.8 bg advanced biofuel requirement, while primarily ethanol would be used to fulfill the statutory 15.0 bg requirement for renewable fuel. In this example, which entirely comports with EPAs statutory authority, required renewable fuel blending would be 5.2 bg lower (-22%) than the extreme scenario used by CBO.
  • CBO somehow arrives at a total renewable fuel blend percentage of 14.5% in the 2017 EISA Volume Scenario (Table 1 of the report). However, EIA projects gasoline and diesel consumption of 191.7 bg in 2017, meaning the blend percentage from the EISA Volume Scenario would actually be 12.5%. But, as described above, CBO mistakenly assumes EPA will not exercise its authority to lower the advanced biofuel standard and total RFS by the same amount of the cellulosic waiver. If EPA were to use this discretion, as in the example above (i.e., total RFS of 18.8 bg), the total blend percentage for 2017 would be 9.8%.
  • CBO assumes only 1.5 bg of biodiesel (2.0 billion RINs) will be used toward the advanced biofuel standard in 2017. EPA data show that 1.57 bg of biodiesel was produced in 2013, generating 2.36 billion RINs. In addition, 386 million gallons of renewable diesel were produced, generating another 657 million RINs. Thus, biodiesel and renewable diesel generated more than 3 billion RINs in 201350% more than CBO assumes will occur in 2017.
  • CBO assumes ONLY corn ethanol is used to meet the statutory requirement for 15.0 bg of renewable fuel in 2017. EPA data shows this to be an erroneous assumption. More than 250 million (2% of the total) renewable fuel (D6) RINs generated in 2013 came from non-ethanol biofuels, including renewable diesel, biodiesel, and butanol. The share of non-ethanol fuels generating renewable fuel RINs is expected to grow slightlyparticularly if EPA limits the advanced biofuel standard.

Because the CBO EISA Volume Scenario is based on these fatal flaws, the reports discussion on RIN price impacts and transportation fuel price effects should be rejected out of hand. CBO should re-evaluate the EISA Volume Scenario and consider a case where EPA uses its statutory authority to lower the advanced biofuel standard and total RFS by the same amount as the cellulosic biofuel waiver. 2. The analysis adopts the oil industrys blend wall argument and grossly underestimates the ability of E15 and E85 to aid in compliance with future RFS requirements. CBO has apparently fallen victim to the same unclear thinking displayed by the oil industry with regard to the so-called blend wall. The report effectively dismisses E15 outright as a potential RFS compliance option moving forward, citing the same myths and misinformation propagated by the oil industry. Further, the reports discussion of E85 ignores real-world evidence from 2013 showing that higher RIN prices drove dramatically increased consumption of E85. Data from the state governments of Minnesota and Iowa showed a tripling and doubling, respectively, in E85 consumption over the period in which RIN prices increased. Meanwhile, retail gasoline (E10) prices were unaffected by the rise in RIN prices. 3. CBOs outlandish predictions regarding the impact of the RFS and RINs on gasoline prices contradict the observed real-world experience. The report adopts yet another of the oil industrys talking pointsthat the RFS, through higher RIN prices, will cause retail gasoline prices to increase. Such an assertion not only misunderstands how RINs are transferred and traded, but it also runs contrary to the observed experience of 2013. Retail gasoline prices were not correlated in any way with changes in RIN prices in 2013, and there is absolutely no evidence that pump prices were affected by RINs.   4. Unbelievably, CBO completely ignores the aggregate effect that using more renewable fuels would have on crude oil demand and prices.  In its haste to pin higher gasoline and diesel prices on the RFS, CBO admittedly makes a grave omission. According to the report, Because renewable fuels substitute for gasoline and diesel, they reduce consumptions of those fuelswhich could lower the world price of crude oil and thus the price that fuel suppliers pay for petroleum-based fuels. CBO did not account for that effect in this analysis The authors attempt to justify this omission by speculating that the effects would be small. However, renowned energy economists believe otherwise. According to recent analysis by energy economist Philip K. Verleger, a former energy advisor to Presidents Ford and Carter, the U.S. renewable fuels program has cut annual consumer expenditures in 2013 between $700 billion and $2.6 trillion. This translates to consumers paying between $0.50 and $1.50 per gallon less for gasoline. Economic analyses from Iowa State University and the University of Wisconsin, Louisiana State University, Duke University, Merrill Lynch, the U.S. Department of Energys National Renewable Energy Laboratory, and others have also concluded that increased substitution of ethanol for gasoline substantially reduces retail gas prices. 5. CBOs findings on potential economic impacts of RFS implementation contradict results from University of Missouri and Iowa State University. The reports doomsday findings about the potential economic effects of the RFS are contrary to the conclusions from respected economists who have conducted more detailed and comprehensive analysis. A recent analysis by FAPRI at the University of Missouri, for instance, analyzed a case in which EPA would reduce the advanced biofuel standard and total RFS by the same amount of cellulosic biofuel waivers (as noted above, CBO failed to examine such a case). In this case, gas prices were 0-2% higher than in the case where EPA froze the RFS at 2014 proposed levels (similar to CBOs 2014 Volumes Scenario). Ethanol prices in this case are just 53-60% the price of retail gasoline, which would encourage wider usage. Similarly, extensive analysis by Iowa State University has convincingly demonstrated that near-term statutory RFS requirements can in fact be satisfied without meaningfully affecting retail gas prices for consumers. CBO failed to discuss the other literature in this area and neglected to include reviewers from MO-FAPRI and ISU. 6. On the bright side, the CBO report gets two things right: 1) changes to the RFS would not have any effect on food prices, and 2) EPAs recent management of the RFS program has significantly discouraged investment in next generation biofuels and retail infrastructure to dispense higher volumes of renewable fuels. CBO recognizes that differences in food prices and spending under the agencys three scenarios for the RFS would probably be small. The report suggests that strong demand for ethanol even in the absence of RFS requirements means the program itself will have no effect on food prices. In addition, CBO rightly acknowledges that EPAs recent proposals regarding implementation of the RFS reduces incentives for companies to invest in production capacity for cellulosic and other advanced biofuels and to expand the availability of high-ethanol blends. This statement precisely underscores the importance of maintaining meaningful RFS requirements that are consistent with Congress intent and EPAs statutory authority.