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Demand Destruction Part 2? Allowing Exports to Count Toward RFS Compliance

May 9, 2018

           

It is being reported that Tuesday’s White House meeting on the RFS resulted in agreement on allowing E15 to be sold year-round and abandoning the idea of a price cap on RIN credits. However, the meeting apparently also included discussion of a potential proposal to allow exported renewable fuel volumes to count toward RFS compliance.[1] Simply put, allowing exported ethanol to count toward compliance with an oil company’s RFS obligation would lead to further demand destruction for U.S. ethanol producers and corn growers who are already suffering the consequences of EPA Administrator Scott Pruitt’s exuberant issuance of “economic hardship” RFS exemptions to dozens of small refineries. Further, allowing exports to qualify for the RFS would likely offset any benefit that would come from an RVP waiver allowing year-round sales of E15. Using 2017 data, here is an example showing why such a proposal would further devastate an RFS program already reeling from dozens of small refiner exemptions:

    • For the purposes of this example, let’s pretend for a moment that EPA hadn’t already destroyed demand via small refinery exemptions and that the full 15-billion-gallon (bg) renewable volume obligation (RVO) was being enforced for 2017. Let’s also set aside the fact that any regulatory change allowing exports to count toward RFS compliance would surely be litigated and challenged under WTO obligations.

 

    • EPA data show that 14.86 billion conventional ethanol (D6) RINs were generated in 2017.[2] However, data from the Census Bureau shows 492 million gallons (mg) of denatured fuel ethanol was exported.[3] Because the entire purpose of the RFS is to drive domestic consumption of renewable fuels, the regulations were correctly written in a way that disallows exports from counting toward RFS compliance. Thus, while RINs were initially assigned to the 492 mg of denatured fuel ethanol that eventually was exported, those RINs were separated and retired when the fuel was exported (i.e., those 492 million RINs are not available for RFS compliance). It is important to note that RINs are assigned only to denatured fuel ethanol; thus, the 820 mg of undenatured fuel ethanol that was exported in 2017 never had RINs attached.

 

    • Therefore, of the 14.86 billion RINs generated for conventional ethanol, roughly 14.37 billion remained available for compliance, implying that about 14.4 bg of ethanol was consumed domestically (this excludes a small number of RINs retired for other non-compliance purposes). Not surprisingly, this corresponds to the Energy Information Administration’s estimate of 2017 U.S. ethanol consumption, which was 14.395 bg.[4]

 

    • This means there was a “gap” of roughly 600 mg between the 15-bg RFS requirement and actual ethanol consumption. It is the magnitude of this “gap” that determines prevailing RIN prices. If the gap is perceived by the marketplace to be large, then RIN prices will be higher, in turn stimulating growth in the consumption of higher ethanol blends like E15 and E85 to close the gap. If the gap is small, then RIN prices will be much lower as it is implied that there is less of a need to expand renewable fuel consumption to meet the RFS requirements.

 

    • So, in this example, how would obligated parties fill the 600 mg “gap” and demonstrate compliance with a 15-bg requirement? There are several options.
        • First, they could blend non-ethanol conventional biofuels like conventional renewable diesel. Indeed, the EPA data show that 245 million conventional (D6) RINs came from renewable diesel in 2017, bringing U.S. conventional biofuel consumption to 14.62 bg and closing the “gap” between actual consumption and the 15-bg RFS to about 380 mg.
        
        • Second, they could use banked RINs from overcompliance in previous years, of which it is estimated there were more than 2 billion available as 2017 was coming to an end.
        
        • Finally, obligated parties can carry forward a compliance deficit for a year if they are unable to obtain the RINs necessary to demonstrate full compliance.
        
    • If denatured ethanol exports were allowed to count toward RFS compliance, the RFS “gap” in this example would have been erased entirely in 2017, as all 15.1 billion D6 RINs (14.86 billion RINs from conventional ethanol and 245 million from renewable diesel) would have remained available for compliance. RIN prices would have plummeted in this case, likely to 10 cents or less.

 

    • In all likelihood, if denatured fuel ethanol exports had been allowed to count toward RFS compliance, domestic consumption—and thus production—of conventional ethanol and renewable diesel would have been lower by roughly 100 mg (ethanol equivalent). This is because compliance with the 15-bg RFS could have been achieved with denatured fuel ethanol exports of 492 mg and about 14.5 bg of domestic conventional biofuel consumption, compared to actual U.S. consumption of 14.6 bg.

 

    • If ALL fuel ethanol exports (including undenatured ethanol that does not ever have RINs attached) were allowed to count toward RFS compliance, as suggested by some RFS opponents, the demand destruction in this example would have been far more severe. That’s because the 15-bg RFS requirement could have been met with 492 mg of denatured fuel ethanol exports, 820 mg undenatured fuel ethanol exports and just 13.7 bg of domestic conventional biofuel consumption. Such a scenario would have resulted in domestic conventional biofuel consumption falling more than 900 mg, or 6%, below the actual amount of 14.6 bg that was consumed.

   Obviously, allowing exports to count toward an oil company’s RFS obligations would be disastrous for ethanol and corn demand, adding to the immense pressure already felt in the marketplace as a result of EPA’s secret small refiner waivers.   [1] https://www.reuters.com/article/us-usa-biofuels-trump/trump-says-may-move-to-count-ethanol-exports-toward-biofuels-quotas-sources-idUSKBN1I919H [2] https://www.epa.gov/fuels-registration-reporting-and-compliance-help/public-data-renewable-fuel-standard [3] U.S.-Ethanol-Trade-Statistics-Summary_CORRECTED2.pdf [4] https://www.eia.gov/totalenergy/data/monthly/pdf/sec10_7.pdf