The Renewable Fuel Standard: Taxpayer Costs and False Promises

The Renewable Fuel Standard: Taxpayer Costs and False Promises

Agriculture, Energy & Natural Resources  | Research & Analysis
Jul 8, 2017  | 21 min read

Over the past decade, biofuels have been portrayed as a way to help achieve U.S. energy independence, reduce greenhouse gas (GHG) emissions, and spur rural economic development. However, the industry has failed to achieve these goals while spurring numerous unintended consequences, and long-term liabilities resulting in more harm than good. Taxpayers have also paid out tens of billions of dollars in subsidies, special interest tax breaks, and other forms of support to entities throughout the supply chain. Growers, producers, oil and gas companies, fueling stations, and others have benefitted from government handouts. Biofuels also enjoy a guaranteed market, mandated by the government, through the Renewable Fuel Standard (RFS).

Corn ethanol and advanced biofuels are the two primary types of renewable fuel that receive both taxpayer subsidies and a guaranteed market through the RFS. Despite Congressional intent to help spur production of the next generation of biofuels produced from non-food crops through the RFS (primarily cellulosic biofuels derived from agricultural and forest residues), the cellulosic industry has only achieved 5 percent of its mandate set forth in the 2007 energy bill. Meanwhile, production of corn ethanol has soared, resulting in higher food and fuel prices, small engine problems, and greater GHG emissions and water pollution as millions of acres of land have been converted into corn production since 2007. Most corn ethanol production was grandfathered into the RFS, meaning it was not required to meet even a minimum 20 percent GHG reduction threshold. Several independent analysts – including the Government Accountability Office (GAO), Congressional Budget Office (CBO), and the National Academy of Sciences (NAS) – have recently questioned the RFS’s ability to achieve its goals given the slow development of advanced and cellulosic biofuels. They have also questioned the fact that the mandate has primarily been filled with corn ethanol – a biofuel that may actually increase GHG emissions.[ii] As the GAO recently concluded, “It is unlikely that the goals of the Renewable Fuel Standard will be met… because there is limited production of advanced biofuels to be blended into domestic transportation fuels.”[iii]

Federal Energy Legislation Supporting Biofuels

Domestic biofuels policy is primarily supported by three major pieces of legislation, 2005 and 2007 energy bills, and the farm bill. Annual tax credits are also renewed in various tax extenders and other legislation. The 2005 energy bill established several supports for advanced biofuels, including the renewable diesel and biofuels infrastructure tax credits, but more importantly, it was the first time the U.S. mandated consumption of renewable fuels. The first RFS required 7.5 billion gallons (BG) of renewable fuels to be blended with gasoline or diesel by 2012. In the 2007 energy bill, the RFS was greatly expanded to require 36 BG of biofuels to be consumed by 2022. The RFS2, as it is referred to, requires the following number of gallons of renewable fuels to be blended with gasoline and diesel each year (see Table 1 ). However, in 2016, for instance, the Environmental Protection Agency (EPA) – the Agency responsible for administering the RFS – reduced the RFS total renewable fuel mandate from 22.25 BG to just 18.11 BG, given lower actual production of cellulosic and advanced biofuels than previously expected.[ii]

Table 1: Total Gallons of Renewable Fuel that Must be Blended with U.S. Motor Fuel in the Renewable Fuel Standard

Year
Billions of Gallons/Year Mandated by the RFS
Actual Volume in Billions of Gallons/Year, as Adjusted by EPA
2010
12.95
12.95[iii]
2011
13.95
13.95[iv]
2012
15.2
15.2[v]
2013
16.55
16.55[vi]
2014
18.15
16.28[vii]
2015
20.50
16.93[viii]
2016
22.25
18.11[ix]
2017
24
19.28[x]
2018
26
2019
28
2020
30
2021
33
2022
36

As stated above, production of cellulosic biofuels has fallen significantly (more than 90 percent) below Congressional mandates. Figure 1 (below) shows the discrepancy between Congressional mandates for cellulosic biofuel consumption (required by law) and actual mandates that were revised downward by EPA in each of the past several years (referred to as RVOs, or Renewable Volume Obligations). Meanwhile, corn ethanol production has easily reached its statutory mandate of 15 BG (as of 2017).[xi]

The RFS2 specifies that two different categories of renewable fuels – conventional ethanol and advanced biofuels – be used in increasing amounts through 2022. Both must be produced from “renewable biomass” to qualify as RFS-approved feedstocks, defined in the 2007 energy bill as one of the following:

 

  • Planted crops and crop residue harvested from agricultural (non-forested) land cleared or cultivated at any time prior to December 19, 2007,
  • Planted trees and tree residue from actively managed tree plantations on non-federal land cleared at any time prior to December 19, 2007,
  • Animal waste material and animal byproducts,
  • Slash and pre-commercial thinnings that are from non-federal forestlands, but not forests or forestlands that are ecological communities, old growth forests, or late successional forests,
  • Biomass obtained from the immediate vicinity of buildings and other areas regularly occupied by people, or of public infrastructure, at risk from wildfire,
  • Algae, or
  • Separated yard waste or food waste, including recycled cooking and trap grease.

 

However, while Congress enacted protections for native grasslands, wetlands, and other sensitive acres, the EPA has failed to properly implement and enforce these regulations.[ii] This has led millions of acres of wildlife habitat and other sensitive land to be converted into biofuel feedstocks production – primarily corn and soybeans.[iii] This land conversion, driven by farmers responding to government mandates and subsidies, has also caused GHG emissions, water pollution, soil erosion, etc. to increase.

Table 2 (below) distinguishes conventional ethanol from advanced biofuels by comparing their statutory definitions, volume requirements, and providing examples of each. The table also specifies the percentage reduction in GHG emissions that each fuel must achieve to qualify as an RFS2-approved biofuel. Table 3 (below) further describes the three different categories (cellulosic biofuels, biomass-based diesel, and “other” advanced biofuels) that make up the 21-billion-gallon advanced biofuels mandate. Hence, the advanced biofuels are sometimes referred to as a “nested” mandate.

 Table 2:  Types of Biofuels Mandated in the RFS

Type of Biofuel Annual Production Mandate by 2022 Definition of Biofuel Examples Minimum Reduction in Greenhouse Gas Emissions
Conventional ethanol 15 billion gallons/year Ethanol derived from corn starch – Corn starch ethanol 20%, but due to a grandfathering clause, nearly every ethanol facility was able to circumvent this minimal requirement
Advanced biofuels (subdivided into other categories – see advanced biofuels table definitions) 21 billion gallons/year “Renewable fuel, other than ethanol derived from corn starch, that has lifecycle greenhouse gas emissions (GHG) that are at least 50% less than baseline GHG emissions” – Cellulosic ethanol – Ethanol from non-corn feedstocks such as sugar – Ethanol from waste materials such as crop residues, food waste, animal waste, etc. – Biodiesel from soybeans, other vegetable oil, animal fats, etc. – Biogas from landfills – Butanol from renewable biomass such as corn (approved for a certain facility in MN – Gevo) 50%

 Table 3:  Types of Advanced Biofuels Mandated in the RFS

Type of Biofuel Annual Production Mandate by 2022 Definition of Biofuel Examples Minimum Reduction in Greenhouse Gas Emissions
Cellulosic ethanol 16 billion gallons/year Renewable fuel derived from any cellulose, hemicellulose, or lignin – Ethanol produced from agricultural residues (corn stover, for instance), forest residues, food or municipal solid waste, perennial grasses, etc. Corn kernel fiber cellulosic ethanol was also recently approved by EPA. 60%
Biomass-based diesel At least 1 billion gallons/year, set annually by EPA Biodiesel produced from vegetable oil or “a diesel fuel substitute produced from nonpetroleum renewable resources [including] animal wastes, including poultry fats and poultry wastes, and other waste materials, or municipal solid waste and sludges and oils derived from wastewater” – Biodiesel produced from soybeans, corn oil, other vegetable oil, animal fats, used cooking oil, etc. – Other diesel fuel substitutes produced from municipal solid waste, animal wastes, etc. 50%
“Other” advanced biofuels 4 billion gallons/year Any other fuel that meets the definition of an “advanced biofuel” – Ethanol from non-corn feedstocks such as sugar – Butanol from renewable biomass (including butanol derived from corn, which was recently approved by EPA for a certain facility – Gevo – May also include biomass-based diesel (see above) 50%
Costs and Unintended Consequences of the RFS

While corn ethanol was once promised to be a “bridge” to advanced and cellulosic biofuels, it has failed to spur meaningful production of non-corn-based biofuels that significantly reduce GHG emissions. This is despite several decades of generous subsidies and government mandates. Mandates and subsidies for corn ethanol and other food-based biofuels have also spurred numerous unintended consequences and costs for both consumers and taxpayers. And since the U.S. has hit the “blend wall,” or the maximum amount of ethanol that can safely be blended into the current vehicle fleet (without harming older vehicles or small engines), corn ethanol is also crowding out the development of next-generation cellulosic biofuels.

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Just a few of the numerous direct and indirect costs of the RFS for consumers and taxpayers include the following:

 

  • Higher food and feed costs, particularly for the poor in the U.S. and developing countries, since most RFS biofuel gallons are derived from food and feed crops such as corn, soybeans, and sugar.[ii]
  • Higher fuel costs:  EPA estimated that RFS mandates just for calendar years 2014-16 would result in higher fuel costs totaling $1.6-$3.5 billion.[iii] CBO also estimated that if RFS biofuels production volumes continued on auto-pilot (except for cellulosic ethanol since production levels are so low), the price of 10 percent ethanol – the primary gasoline blend in the U.S. – would increase 13-26 cents per gallon, and the price of diesel would jump 30-51 cents per gallon.[iv]
  • Higher – instead of lower GHG emissions since the mandate has primarily been filled with corn ethanol, a biofuel that was largely exempt from RFS requirements to reduce GHG emissions through a grandfathering provision.[v] Converting trees into biofuels or bioenergy may also result in more GHG emissions than gasoline, depending on the production method.
  • Higher costs to replace small engines and older vehicles that cannot run on higher ethanol blends.[vi]
  • Environmental, social and public health costs as sensitive land – highly erodible acres, wetlands, and grasslands – are unlawfully converted into corn and soybean production.[vii] In particular, corn uses more inputs (such as nitrogen fertilizer and pesticides) than other crops, which contributes to water pollution when they run off into nearby waterways.
  • By promoting food and crop-based biofuels, the RFS undermines other federal policies aimed at reducing environmental liabilities associated with climate change and water pollution, just to name a few. As an example, mandates promoting corn ethanol encourage more corn plantings on sensitive land while U.S. Department of Agriculture (USDA) conservation programs pay farmers to retire this same land. These types of programs work at odds with one another, wasting taxpayer dollars in the process.

 

Current Status and Future of the RFS2

With cellulosic biofuel consumption falling greatly below Congressional targets, in recent years, EPA has backfilled gaps in advanced biofuels mandates with other food-based biofuels such as sugarcane ethanol and palm- and soybean-based biodiesel. This problem will only worsen as RFS cellulosic and advanced biofuel mandates grow in the future without sufficient cellulosic biofuel production to fulfill them. To make matters worse, EPA has recently approved other corn-based biofuels to help achieve the advanced biofuels mandate (and cellulosic mandate which is nested underneath it). These include corn oil biodiesel and corn butanol (for one facility in MN in particular) as advanced biofuels and corn kernel fiber ethanol as a cellulosic biofuel.[viii] These corn-based biofuels have made their way into the RFS advanced biofuels bucket despite Congress’s intent to reserve these mandates for next-generation, non-food-based biofuels (through a prohibition on corn ethanol qualifying as an advanced biofuel). The corn ethanol industry has lobbied for years to allow corn ethanol and other corn-based biofuels to qualify for the advanced biofuel mandate in order to increase their market share beyond the 15 BG conventional (corn ethanol) mandate.[ix] Already 40 percent of the corn supply is sent to ethanol facilities each year, which would only grow if these other corn-based biofuels were produced in significant quantities.[x] Allowing corn-based biofuels into the advanced biofuels mandate couldn’t be further from the initial goals of the RFS.

With corn-based biofuels increasing their market share, production of non-food-based biofuels has fallen significantly below Congressional RFS mandates. However, while cellulosic and advanced biofuels were intended to improve the environment, some experts question the environmental and consumer benefits of these biofuels, particularly if the RFS spurred large production levels of perennial grass-based biofuels, for instance. Since they may be planted on former cropland, current food and feed production may be displaced as production ramps up, resulting in conversion of other sensitive land to cropland to make up for food and feed losses, resulting in more GHG emissions, soil degradation, etc. Lessons should be learned from decades of subsidies for corn ethanol and soy biodiesel: when government mandates push biofuel production beyond what the market would otherwise demand, taxpayers and consumers lose. In addition, soil health may also be harmed if significant amounts of agricultural residues like corn stalks, cobs, and leaves are removed from farmland after crop harvests to produce cellulosic ethanol. While current production of corn stover-based cellulosic ethanol is small compared to corn ethanol, several companies are working to scale it up in the future. These are just a few of the unintended consequences that could arise in the future if RFS mandates are greatly scaled up.

Recommendations

In summary, the RFS mandate has failed to achieve its objectives and has instead created long-term liabilities that cause more harm than good. The RFS has increased food and fuel costs for consumers, caused environmental damage, and failed to significantly reduce GHG emissions. Federal subsidies, tax credits, loan guarantees, and other supports for biofuels have wasted taxpayer dollars on the mature corn ethanol and soy biodiesel industries. Instead of picking winners and losers through mandates, the tax code, and other federal programs, the government should allow the biofuels industry to compete on a level playing field without market distortions. Taxpayers deserve energy and agricultural policies that limit long-term liabilities, stand up to special interests, and prevent unintended consequences instead of promoting biofuels that waste taxpayer dollars and increase consumer costs.

For more information, contact Taxpayers for Common Sense at 202-546-8500.

 


https://www.ers.usda.gov/topics/farm-economy/bioenergy/findings/

[ii] https://www.epa.gov/renewable-fuel-standard-program/approved-pathways-renewable-fuel

[iii] https://www.gpo.gov/fdsys/pkg/FR-2016-05-31/pdf/2016-12369.pdf

[iv] https://www.cbo.gov/publication/45477

[v] http://www.catf.us/resources/whitepapers/files/20130405-CATF%20White%20Paper-Corn%20GHG%20Emissions%20Under%20Various%20RFS%20Scenarios.pdf

[vi] http://www.gao.gov/new.items/d07713.pdf

[vii] http://www.nwf.org/News-and-Magazines/Media-Center/News-by-Topic/General-NWF/2017/3-21-17-New-Study-Links-Habitat-Destruction-to-Ethanol-Production.aspx

[viii] https://www.epa.gov/renewable-fuel-standard-program/approved-pathways-renewable-fuel

[ix] http://www.ncga.com/upload/files/documents/corn_congress/Policy-and-Position-Papers-v.-3.4.17-FINAL-a.pdf

[x] https://www.usda.gov/oce/commodity/wasde/latest.pdf

42 U.S. Code § 7545(o)(1)(I).

[ii] http://www.nwf.org/~/media/PDFs/wildlife/farm%20%20bill/RFS_factsheet_v1_10-11-13.pdf

[iii] http://iopscience.iop.org/article/10.1088/1748-9326/10/4/044003/pdf

http://www.fas.org/sgp/crs/misc/R40155.pdf

[ii] https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2014-2015-and-2016-and-biomass-based

[iii] https://www.epa.gov/renewable-fuel-standard-program/renewable-fuel-annual-standards

[iv] https://www.epa.gov/renewable-fuel-standard-program/renewable-fuel-annual-standards

[v] https://www.epa.gov/renewable-fuel-standard-program/renewable-fuel-annual-standards

[vi] https://www.gpo.gov/fdsys/pkg/FR-2013-08-15/pdf/2013-19557.pdf

[vii] https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2014-2015-and-2016-and-biomass-based

[viii] https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2014-2015-and-2016-and-biomass-based

[ix] https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2014-2015-and-2016-and-biomass-based

[x] https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2017-and-biomass-based-diesel-volume

[xi] https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2017-and-biomass-based-diesel-volume

 

https://www.epa.gov/sites/production/files/2015-08/documents/420r10006.pdf

[ii] https://www.cbo.gov/publication/45477, http://dels.nas.edu/Report/Renewable-Fuel-Standard-Potential-Economic/13105

[iii] http://www.gao.gov/assets/690/681252.pdf