RFS Under Fire

During last summer’s blistering drought, meat industry representatives and governors from nearly a dozen states petitioned the federal government to ease up on the Renewable Fuel Standard (RFS), which mandates the use of renewable fuels, including ethanol. Since most ethanol in the U.S. is made from corn and corn prices were already high from the drought, they argued that the ethanol requirement would put more strain on the corn supply, forcing up the cost of groceries and livestock feed.

But by November, the corn yields looked better than expected and the U.S. Environmental Protection Agency dismissed the claims: Any economic harm caused by the Renewable Fuel Standard mandate wasn’t serious enough to warrant a waiver, the agency ruled. The debate, however, is far from over.

Policy supports, especially mandates, for biofuels have always been contentious.

On the one hand, the RFS has helped to create and guarantee a huge demand for biofuels, ushering in a thriving U.S. grain ethanol industry that supports farmers and rural communities. Proponents say it should be sustained or even expanded, perhaps augmented with other standards to expand the domestic industry for low-carbon second-generation fuels. They argue that mandating renewable fuels is good for both energy independence and the environment.

On the other hand, opponents say the RFS should be killed or scaled back. They contend that the RFS has distorted the agricultural commodities market and threatens to drive up the cost of food, at the peril of the poorest Third World consumers. Opponents also argue the RFS misses the target on environmental grounds because it makes allowances for first-generation biofuels, such as corn ethanol, that do far less than advanced biofuels remedy global warming.

In November, the American Petroleum Institute, which represents energy giants such as ExxonMobil and ConocoPhillips, told Congress that the RFS should be scrapped because it’s not working well and will force higher concentrations of ethanol into gasoline, which they assert can harm vehicles.  Although this appears unlikely, the impacts of the RFS on consumers, the economy, and the biofuel industry itself are still unfolding. 

From RFS to RFS2

The federal Energy Policy Act of 2005 created the RFS, which required that 7.5 billion gallons of renewable fuel be used in motor vehicles by 2012. Even though it has been interpreted by many to be an ethanol mandate, the RFS was very general. Renewable fuel was defined as  “[M]otor vehicle fuel that is produced from grain, starch, oilseeds, vegetable, animal, or fish materials including fats, greases, and oils, sugarcane, sugar beets, sugar components, tobacco, potatoes, or other biomass; or is natural gas produced from a biogas source, including a landfill, sewage waste treatment plant, feedlot, or other place where decaying organic material is found; and is used to replace or reduce the quantity of fossil fuel present in the fuel mixture used to operate a motor vehicle.”

The Energy Independence and Security Act of 2007 both expanded and further defined the standard. The RFS2 calls for to 36 billion gallons of renewable fuel by 2022. The law also set new categories of fuels, with separate volume requirements for each, based on lifecycle performance thresholds. To meet the minimum standard, a renewable fuel will have to generate  at least 20 percent fewer greenhouse gasses than the fossil fuel it would replace. To qualify as an advanced biofuel, the lifecycle emissions have to be less than 50 percent of fossil fuel. Cellulosic biofuel was held to the highest standard, with a 60 percent reduction in greenhouse gasses required.

Attacks on the RFS2 are nothing new. In October 2011, the Renewable Fuel Flexibility Act was proposed in the U.S. House of Representatives by Bob Goodlatte (R-VA) and Jim Costa (D-CA). The bill, which would limit the volume mandate based on corn stocks-to-use ratios, was picked up in the Senate in July 2012. Perhaps the most wide-reaching change was proposed by Representative Pete Olson (R-TX) in January 2012. His Domestic Alternative Fuels Act would extend the RFS to include alternative fuels from domestic coal and natural gas. That change plays on the political drivers of energy independence and security but walks away from the "renewable" limitation completely.

The impact of renewable fuel standards

What have the RFS and RFS2 accomplished?  For starters, they have helped to create a bioethanol industry, which has, in turn, grown the nation’s corn crop. Ethanol consumes a third of the nation’s corn crop. (Actually about 40 percent by acreage, but some byproduct known as distillers grains comes back as livestock feed.)

While this seems like a big number, it is sometimes difficult to tell what the effects have been since a lot has happened to corn since that start of ethanol in the mid-1970s. The yield per acre has risen by 1.6 bushels per acre per year. The number of corn acres also increased from roughly 75 million in 2001 (a low point in the trend) to 88 million acres in 2010 (a return to the acreage used for corn production in 1948). Although more corn is going into ethanol, it has not affected the other uses of corn. Feed corn and residual use has been steady, fluctuating between 5 and 6 billion bushels per year from 1992 to 2009. And, with the exception of this drought year, exports have remained steady, at around 2 billion bushels per year.

Once the corn ethanol industry was created, the effect of the RFS on grain prices was “modest,” says Bruce Babcock. professor of economics and Cargill chair of energy economics at Iowa State University. “A lot of ethanol would have been used by oil companies even without the RFS in place,” he says. “You can’t have expensive gasoline and cheap corn. Those two don’t mix.” Some also argue that phasing out of additives like lead and MTBE have cemented a place for ethanol in the gasoline mixture regardless of any mandate.

But others say the effects have been been more pernicious. In July, even before the full impact of the Midwestern drought was apparent, Colin A. Carter, a professor of agricultural and resource economics at the University of California–Davis, and Hoover Institution fellow Henry I. Miller,  argued in an op-ed for The New York Times that the EPA should waive the mandate.  Doing so, they said, would “divert vast amounts of corn from inefficient ethanol production back into the food chain, where market forces and common sense dictate it should go.”

The combination of the drought and American ethanol policy will lead in many parts of the world to widespread inflation, more hunger, less food security, slower economic growth and political instability, especially in poor countries,” they concluded.

Brian D. Wright, professor and chair of the department of agricultural and resource economics at the University of California–Berkeley, largely agrees. He says the first-generation biofuels such as corn ethanol, manufactured to meet the RFS2 mandate, have increased the cost of food and animal feed around the world—not just of corn but of many grains. (Worldwide, grain prices are tied together because they are grown on the same land or can be substituted for some of the same uses.)

In fact, Wright says, RFS2 not only drives grain prices higher, but causes grain prices to be more volatile. Under most market situations, as grain prices rise, buyers such as livestock growers find alternatives and cut back consumption. But fuel blenders, driven by the RFS2 mandate, take their full measure of corn-derived ethanol regardless of price, depleting grain reserves and leaving other consumers to bid up the remainder.

Measures such as the RFS2 “will raise the price of food for everybody, including lots of people who are way less wealthy and who spend much more of their income on food.“In some countries, if you raise the price of calories by 30 or 50 percent, that could be like 15 or 20 percent of your total income. That’s huge!” ,” says Wright, who favors non-food sources of biofuel.

Several studies seem to contradict opponents’ claim about the effects of the RFS on corn and animal feed. A study by Du and Hayes concluded that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. An International Centre for Trade and Sustainable Development study found no change in corn prices for 2009-2010, with and without the RFS and the Volumetric Ethanol Excise Tax Credit.

Researchers from the Texas A&M Agricultural and Food Policy Center looked at the economics of cow, calf and dairy ranches before and after the 2007 Energy Independence and Security Act (EISA) which spurred the RFS2. They found that corn and soy prices did go up, as did everything else, including fuel, taxes, fertilizer, herbicides and other inputs that affect the cost of production. Overall, feed costs were only a third of the increase in cost. But that isn't the end of the story. Ranchers and dairy famers also sold at higher prices, and incomes increased. For example, the cost of dairy production in California increased $1.1 million, but cash receipts went up by $1.8 million.

Second-generation fuels gearing up

Unfortunately, RFS2 hasn’t yet unleashed a flood of second-generation biofuel. Among these are cellulosic ethanol, which by EPA mandates must cut greenhouse gas emissions 60 percent over its life cycle compared with the fossil fuel it replaces.

RFS2 set a goal of 16 billion gallons of cellulosic ethanol to be blended with gasoline by 2022. But that’s 10 years from now. In 2012, the requirement was only 8.65 million gallons. Yet, blenders couldn’t manage even that small amount, and the EPA provided a temporary waiver credit.

Why? Because on a commercial scale, there is no cellulosic ethanol. The industry is still trying to scale up. The lack of cellulosic product was highlighted in the Phantom Fuel Reform Act of 2012, proposed in the House in by Representative Jeff Flake of Arizona in June 2012.

“The goals are way too ambitious in terms of the timeline of bringing on the billions of gallons of cellulosic fuels,” says Babcock.

For that reason, Babcock is eagerly awaiting the completion of commercial-scale cellulosic ethanol plants scheduled to come on line soon. Some will process ag waste; others, wood waste. “I want to see these commercial-scale plants—how they’re going to operate, how they’re going to solve the logistic problems of getting biomass to the plants, what their margins or cost of production are going to be, how fast the cost of production [will] come down,” says Babcock. “I think we’re going to learn a lot if these plants get built in the next 18 months.”

Meanwhile, Wright says direct research support for the cellulosic industry might produce results faster than creating a market—at least until the industry demonstrates it can produce cellulosic ethanol in commercial quantities.

A new standard, with teeth?

Madhu Khanna, a professor of economics at the University of Illinois, has a different view. She supports the RFS2, even as it exists today, as a way to maintain a market for fuels—even fuels not yet available.

“A requirement for blending biofuels—even if they are expensive—creates a sure demand for biofuels. And that provides some certainty in the market and for investors. I think that is the biggest advantage,” she says. “Research and development will go where there’s a likelihood of a market.”

In fact, Khanna would like to see an even stronger RFS2. “By waiving the RFS, you create uncertainty for cellulosic biofuels. That creates uncertainty about how serious the EPA actually is about having a mandate,” she says. “It’s not got enough teeth in it, really.”

But, Khanna says, the RFS2 fails to do enough to reward new biofuels that have a very low carbon footprint throughout their life cycles. That’s why she would like to see the addition of a low-carbon fuel standard (LCFS), such as one enacted in California in 2009 (see sidebar, left). 

 “From our research it definitely seems to be a way to change the mix of fuels to meet the RFS. The low-carbon standard can lead to this transition from first generation to second generation [biofuels]. In addition, it could reduce the amount of land required for biofuel production and benefit food consumers as well,” she says.

And, of course, such a standard could reduce biofuels’ carbon footprint. “People respond to price signals,” Madhu says. “To save the planet, we need to price the environmental harm caused by human activities.”  

One advantage of an LCFS is that it is technology neutral. Where the RFS defines different categories of fuels and defines volumes, the LCFS in California simply sets a threshold for greenhouse gas emissions. When corn ethanol from the mid-west did not meet the standard determined by the California Air Resources Board, the policy came under fire as violating interstate commerce laws. This has frustrated California policy makers, who are trying to meet the requirement of the landmark California Global Warming Solutions Act of 2006.

While a federal LCFS would solve this problem, it seems highly unlikely we will see changes any time soon, given the current political situation in Washington. Scientists and economists at the National LCFS project, funded by the Energy Foundation, have been working hard to change that. They face an up-hill battle. In 2009-2010, only 3 percent of bills introduced in Congress were enacted.




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