Jason Bordoff is the Director of Columbia University’s Center on Global Energy Policy and a former advisor to President Obama. The Center on Global Energy Policy provides independent, balanced, data-driven analysis to help policymakers navigate the complex world of energy, approaching it as an economic, security, geopolitical, and environmental concern.
In December 2012, economists at the University of Missouri published a paper entitled “A Question Worth Billions: Why Isn’t the Conventional RIN Price Higher”? In the paper, they puzzled over why the price of Renewable Identification Numbers (RINs), used to prove compliance with the Renewable Fuel Standard (RFS), was only 5 cents, even though it was eviden tthat the so-called “blend wall” (the point at which the mandated volumes of ethanol exceed the roughly 10 percent of total gasoline consumption that our fuel infrastructure can accommodate) would need to drive RIN prices higher to incentivize the build-out of infrastructure capable of accommodating higher ethanol blends. They speculated perhaps it was because the market expected EPA to waive the broad mandates if RIN prices were to rise sharply.
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Hold that paper up to a mirror and reverse it, and that’s where the market stands today. The question right now is why RIN prices are not lower. And based on various analyst reports this week, a key part of the reason seems to be broad-based skepticism in the market that EPA will use its waiver authority to avoid the blend wall—even though EPA just went to unusual lengths to signal precisely that it will.
On Tuesday, EPA announced that it would keep the 2013 biofuel targets roughly in place.Significantly, however, EPA stated unambiguously that it understands the RFS will become unworkable next year and that it expects to lower the 2014 volume requirements, including advanced biofuel and total renewable categories.
In 2007, Congress revised the Renewable Fuel Standard to mandate increasing volumes of ethanol be blended into the gasoline supply each year. But whereas back then everyone expected gasoline use to rise, it has actually fallen. Combine a rigid and rising volumetric ethanol mandate with declining gasoline usage, and this year we hit the “blend wall”—the point at which blenders physically cannot put enough ethanol into the gasoline supply to comply with the law.
In theory, EPA has said that vehicles model year 2001 and newer can run on gasoline with 15 percent ethanol, but manufacturers warn E15 would damage engines and void warranties, so few consumers will buy it and virtually no one sells it. While 11 million “flex fuel” can take up to 85 percent ethanol, few stations outside the Midwest sell it. As EPA explained, “for 2014 the ability of the market to consume ethanol in higher blends such as E85 is constrained as a result of infrastructure- and market-related factors.”
Given that this week’s announcement was for 2013 targets, it was noteworthy that EPA went out of its way to find “that while the E10 blend wall may be manageable in 2013, in 2014 compliance is expected to become significantly more difficult.” EPA explained that it does not foresee a scenario in which the market could meet statutory biofuel targets next year.
Signaling that it would find we are going to hit the blend wall next year is unusual enough, but EPA went even further to indicate that it intends to be flexible in using its authority to make sure we avoid the problem. How? EPA explained it will estimate the available supply of advanced biofuel, assess the blend wall and infrastructure limitations to consumption of blends above E10, and then propose targets that are “reasonably attainable” in light of these considerations. Importantly, EPA made clear it believes it has the statutory authority to make these adjustments.
Although RIN prices fell somewhat, comments from various market analysts urged caution and criticized the EPA for being too vague about how it intends to fix the problem and what specific adjustments it would make.
Such criticisms are off base, and reflect a lack of understanding of how the notice-and-comment rulemaking process works. EPA has not even proposed the 2014 rule yet, so legally it could not prejudge the outcome and specify a precise course of action. It is already highly unusual for EPA to so strongly signal the direction of a proposed rule in advance of the actual proposal.
Bear in mind that the easiest and most typical course of action for EPA would have been to say nothing about 2014. So the fact that EPA went out of its way to signal it understands the current system is unworkable and stands ready to use its authority to address the problem was significant. EPA’s announcement should be welcomed by those who want to reform the RFS to maintain our commitment to renewable fuels while acknowledging that the fuel market has changed since the RFS was enacted.