NCC Consultant Dave Juday
The House Science Committee’s subcommittees on Oversight and the Environment held a hearing this week on the renewable fuel standard (RFS), entitled, “A Ten Year Review of Costs and Benefits.” As part of the hearing, the Congressional Budget Office presented an update of its June 2014 study, The Renewable Fuel Standard: Issues for 2014 and Beyond, which originally concluded that full compliance with the statutory mandates of the RFS would pose “significant challenges.”
CBO updated its projections of two base line scenarios: meeting the original statutory levels of biofuels provided by Energy Independence and Security Act (EISA) in 2017 and repeal of the RFS. Under the statutory mandates, corn ethanol use is estimated by CBO to be 15 billion gallons in 2017 – or one billion more than the proposed volume obligation set forth by the U.S. Environmental Protection Agency (EPA) for 2016. Under the repeal scenario, CBO projects that corn ethanol use would be 13.4 billion gallons, or 600 million gallons below the EPA’s proposed 2016 volume. That’s a spread of 1.6 billion gallons in domestic corn ethanol use, however, the CBO did not account for the growing export market for ethanol. Last year, according to data from the Department of Energy, about 846 million gallons of ethanol was exported; this year, exports through August are running about five percent higher. The impact of ethanol exports were one of the growing impacts of the RFS that the hearing did not consider.
Just Wednesday, 185 Members of Congress sent a letter to EPA Administrator Gina McCarthy raising serious concerns about the 2016 ethanol obligations exceeding the blendwall. In total, the letter had 169 Republicans and 16 Democrats representing 39 states. 17 of 22 committee chairs signed the letter, as well as both the Majority Leader and the Majority Whip.
According to CBO, the impact on corn prices would be a 12 cent per bushel increase in the price of corn in 2017 under the full legislative mandate of 15 billion gallons, and a decrease in corn prices of about seven cents under the repeal of the RFS scenario – or, in other words about a 19 cent per bushel spread. To be sure, price forecasting is difficult; it requires a complex and dynamic model, but aside from the math, we can breakdown the analysis into a key difference between the full implementation of the RFS and repeal – the impact of renewable identification numbers (RIN’s).
The impact of RIN’s can be considerable on corn prices. The RIN’s are the compliance mechanism that blenders and refiners must turn into the Environmental Protection Agency (EPA) to account for the amount of ethanol they blended into the fuel supply. RIN’s also trade in a secondary market – refiners and blenders with extra RIN’s can sell them, those who are short of RIN’s may buy them. In short, the RIN’s system is a mini cap-and-trade system. Indeed, the Advanced Biofuels Business Council testified at the hearing that higher RIN prices should not be considered “a bug” in the RFS as higher RIN prices actually provide an extra incentive for other obligated parties to physically blend liquid renewable fuel gallons, as opposed to forego the blending and buy the RIN’s. According to the Council, higher RIN values “facilitate the objectives of the RFS.” This is true; the RIN’s are the implicit subsidy to ethanol, thus higher RIN prices for conventional ethanol contribute to the disparity in purchasing power for corn between feed mills and ethanol mills.
As the US Department of Energy’s Energy Information Administration has noted, “higher RIN’s prices support continued ethanol blending despite lower gasoline prices” and RIN’s prices have “increased in value during times of higher RFS targets announcements” – like our current situation awaiting the 30 November volume requirements from EPA. That is why ethanol blending has kept pace this quarter despite ethanol being more expensive than gasoline for about 10 straight weeks. Again, according to EIA:
When the economics for ethanol blending may seem to be unfavorable based on spot prices, a higher RIN value reduces the “net of RIN” cost of ethanol blending. This affects blenders’ RFS compliance choices between the options of purchasing ethanol RINs and blending ethanol.
In short, the RIN values are embedded in the price of ethanol and provide an advantage to ethanol mills to buy corn over feed manufacturers and livestock producers. When RIN’s prices are relatively low, blenders and refiners are willing to forego blending ethanol and instead buy the RIN for compliance. When RIN’s prices are relatively high, however, physical ethanol will be blended with the RIN representing the subsidy to use more of the higher priced ethanol.
NCC supports the bipartisan RFS Reform Act authored by Representatives Bob Goodlatte (R-Va.), Peter Welch (D-Vt.), Steve Womack (R-Ark.) and Jim Costa (D-Calif.). The bill would effectively eliminate the implied mandate for corn ethanol, and with no mandate, there would be no need for RIN’s, which would eliminate the distortion the RIN’s impose on the fuel market. Ethanol would compete on its own economic value against gasoline, and ethanol manufacturers and livestock producers would compete on an equal footing for corn.
When mandated volumes exceed the blend wall the RFS effectively mandates more ethanol that the fuel supply can accommodate, which as EIA describes above, can significantly raise the price of RIN’s.
