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CRS Trips Over Itself in Assessing Whether COVID-19 Will Affect RFS Compliance

May 4, 2020

Congress, EPA, RFS

           

The report “The 2020 Renewable Fuel Standard (RFS): COVID-19 Impacts” released last week by the Congressional Research Service demonstrates a conflicted understanding of the mechanics of the RFS, leading to vague and erroneous conclusions about whether compliance will be affected by the COVID-19 pandemic.

 

There are two key aspects of the RFS that ensure that this year’s obligations can be readily met:

 

  • The RFS contains a self-correcting mechanism. The annual requirements are expressed as percentages that specify what share of an obligated party’s gasoline and diesel production must consist of renewable fuels.  So, if fuel usage falls by a certain amount, the party’s obligation declines proportionally.
  • A bloated bank of RFS credits is available to obligated parties to meet the proportionally smaller requirement. These credits, referred to as renewable identification numbers (RINs), are available for 2020 compliance in lieu of blending physical biofuels, and as the RFS requirement declines along with gasoline and diesel consumption, the surplus RINs meet a larger share of the aggregate obligation.

Self-Correcting Requirements

As the CRS notes, “EPA converts the statutory RFS volumes—after adjusting for any waivers—into annual percentage standards for each fuel category … Obligated parties use the annual percentage standards to compute their renewable volume obligation (RVOs) for each fuel category. The RVO is the obligated party’s total gasoline and diesel sales multiplied by the annual percentage standard plus any deficit of renewable fuel from the previous year.”

 

For 2020, the total percentage requirement across all renewable fuel categories is 11.56% of gasoline and diesel use, within which the advanced biofuel standard is 2.93% and the implied conventional biofuel requirement* is 8.63%. This last category historically has been met mainly through the blending of ethanol.

 

The volumes associated with those percentage requirements were 20.09 billion gallons (BG) of total biofuels and 15.00 BG of conventional biofuel, given the volumes of gasoline and diesel then expected to be used in 2020.  However, the EIA’s latest Short-Term Energy Outlook forecasts that gasoline consumption will fall by roughly 10% this year.  If it is assumed that this reduction applies to both gasoline and diesel, only 18.08 BG of total biofuels and 13.50 BG of conventional biofuel will be needed for compliance (Figure 1).

 

 

Role of the RIN Bank

RINs carried over from the previous year can be used to meet up to 20 percent of the current year’s obligation for any RFS standard.  At the time the final RVO rule was issued, the EPA estimated that there were 3.48 billion total carryover RINs available, of which 680 million were advanced biofuel RINs.  The RIN bank has more than doubled since 2016.

 

EPA estimated that the “volumes of carryover RINs are approximately 17 percent of the 2020 total renewable fuel volume requirement and 13 percent of the 2020 advanced biofuel volume requirement …”  The agency did not state it, but the implied inventory of RINs primarily associated with ethanol was equivalent to 19% of the conventional biofuel requirement.

 

If the 2020 volume of gasoline and diesel declines by 10%, in line with the example above, then the RIN bank would be sufficient to meet 19% of the 2020 total renewable fuel volume obligation, and the implied number of RINs associated with ethanol would be above the 20% cap.  It is likely that the EIA’s forecast of the decline in fuel usage was conservative, given more recent public and private estimates of the reduction that has occurred to date.  In that case, the overall RIN bank would be above the cap.

 

The RIN system was designed to provide flexibility to help meet compliance obligations in years when conditions might warrant, and currently there is as much “dry powder” as obligated parties can use.

 

Conclusion

Despite the CRS report’s acknowledgement of percentage obligations, it ended by saying, “The COVID-19 pandemic may present a unique challenge to 2020 RFS compliance.  The 2020 standards were issued in December 2019—prior to the start of the COVID-19 mitigation measures—when gasoline consumption projections differed greatly from current conditions.” It even stated, “Congress gave EPA the authority to waive the RFS given certain conditions so that it could respond to uncertainties.”  The facts laid out above refute these conclusions and demonstrate that a waiver is completely unnecessary.

 

The RFS has a self-correcting, percentage-based mechanism that adjusts the requirements in line with changes in actual fuel use, as well as a credit-banking system that allows prior-year RINs to be used for compliance with this year’s obligations.  There is no “unique challenge to 2020 RFS compliance”—only a unique pandemic to which the nation has had to adapt.

 

* There is no specific mandate for ethanol.  The difference between the total renewable fuel and advanced biofuel standards can be met using any qualifying biofuel.

 

Scott Richman