The Renewable Fuel Standard (RFS) is on a collision course with reality.
Refiners have been saying this for years now, but in 2022, we may actually see it. There simply isn't enough road ahead for government to continue kicking the can on this policy.
For the uninitiated, the RFS is a government mandate, created in 2005 and expanded in 2007, that requires increasing volumes of biofuels to be blended into U.S. gasoline and diesel every year. Before the start of every year, the EPA references the original blending targets Congress drafted in 2007 and determines how much biofuel must be blended in the coming year. American refineries and consumers pay for the law, spending billions of dollars every year on RFS-mandated biofuel blending required to prove to EPA that sufficient blending has taken place.
This is the last year that EPA has Congress' statutory tables to guide the blending targets. The tables don't extend beyond 2022, so while EPA works to finalize this year's long overdue mandates, it is on deadline to draft its own program targets for future years so stakeholders have blending targets to plan for.
Record-high RFS compliance costs, a rapidly depleting renewable identification number (RIN) credit bank, and blending mandates that have continued to increase in spite of declining fuel consumption add additional pressure to EPA's task at hand. Today, the RFS is making it more expensive to produce gasoline and diesel fuel in the U.S., and the cost is reflected in the price of every gallon of gasoline and diesel fuel that leaves refineries en route to consumers. These costs will grow unless there is meaningful reform aimed at the foundational problems in the current RFS program.
Blending mandates tethered to 2007, not reality. The original RFS blending targets published in 2007 were informed by projections at the time that suggested gasoline and diesel consumption would rise for decades. That's not been our experience, but the gallon- based targets remain.
This creates a conflict because only so much ethanol can be blended into the U.S. gasoline pool. That limit - the "blend wall" - sits at roughly 10 percent of total gasoline. Where other biofuels are concerned, the availability of feedstocks, higher costs and domestic production volumes act as constraints.
When government mandates exceed those limits, refineries have to find other ways to meet their RFS obligations. That's an expensive proposition.
Hurtling toward RIN "bankruptcy." RINs can be thought of as receipts that correspond to specific volumes of biofuels. Refineries need to submit a certain number of RINs to EPA every year to meet their RFS obligations under the Clean Air Act.
When annual biofuel mandates are achievable, there are plenty of RINs to go around. But when the blend wall is reached, RINs become scarce and more expensive. There are only a few ways for obligated parties to acquire more. Some facilities have made huge, market-shaping investments in advanced biofuel production. Others have had to import expensive foreign biodiesel. There are some extra RINs from the early years of the program when blending targets were below the blend wall, but those are dwindling.
Record high compliance costs. In recent years, RFS expenses have soared, shattering records many times over. Some refineries spend more on RINs every year than they do on employee payroll and the electricity to run their plants. The expenses are unsustainable and, if left unchecked, could threaten the viability of entire facilities, the certitude of good union jobs, and regional energy security in areas served by small and merchant refiners.
Fixing the RFS beyond 2022. President Biden has numerous options to address RFS challenges, but meaningful resolution demands he go straight to the core. Moving forward, RFS mandates must reflect 1. the realities of gasoline and diesel markets at the times they're set, and 2. actual domestic production of advanced biofuels.
AFPM
Using these guideposts, ethanol would maintain strong market demand as a key source of octane in gasoline and the market for advanced biofuels would continue to strengthen. Consumers and refiners will be spared from the chaotic price turns of the RIN market.
For more information, visit www.afpm.org or call (202) 457-0480.
