Over the past several months, beginning in December of 2017, both Big Corn and Big Oil have been embroiled in public debates about the implementation and efficacy of the Renewable Fuel Standard (RFS), put into place in 2005 and updated in 2007. Following the release of stagnant rates for the 2018 RFS in December of last year, and the bankruptcy filed by Philadelphia Energy Solutions (with blame attributed to the RFS as a reason for financial struggles), both the renewable fuels and petroleum industries have been at odds about the future of the now 13-year-old policy.
Just last week, President Donald Trump, Environmental Protection Agency (EPA) head Scott Pruitt, Secretary of Agriculture Sonny Purdue, waded into the debate between influential U.S. Senators about the effects of the RFS on refineries and prices at the pump. Meeting and lobbying efforts by both industries over the last several weeks has led to Trump publicly advocating for a compromise that would put a temporary cap on Renewable Identification Numbers (RINs), while lifting restrictions on higher ethanol blended gasolines. While the compromise, on the surface, might appear attractive to renewable fuel advocates, experts say that the trade off between the two parties would be unbalanced.
Scott Irwin and Jonathan Coppess, both of the University of Illinois, argue that based off of Texas Republican Senator Ted Cruz’s policy approach that would enact a 10 cent cap on all RINs, an expansion of higher ethanol blends of gasoline on the market would actually hurt the renewable fuels industry.
“[The compromise] would be a giant stick the size of a MAC Truck [RIN capping], and the carrot [expanded ethanol blends] would be the little tiny end of your finger by comparison,” Irwin said.
RIN prices have been a point of contention for petroleum companies since the expansion of the RFS back in 2007, said Coppess, due to the fact that the program inherently forces oil refiners to spend money blending renewable fuels into that domestic oil supply. When ethanol and other renewable fuels are produced, a RIN number is created and attached to the unit. The unit and the RIN are then sent to a refiner who blends the materials into gasoline, such as E10, and the RIN is detached from the unit that was blended. As mandated in the RFS, the refiner must present the RIN to the EPA as proof of compliance with the program. In some instances, RINs can be purchased from other refiners to satisfy the quota set by the RFS. RIN prices vary depending on the market, and fluctuate based on oil and gasoline demands, due to the fact that there is a limit to how much ethanol can be in gasoline for optimum engine performance. With lower demand, RIN prices increase, causing refiners to spend more money. This was the argument given by Pennsylvania Energy Solutions (PES) earlier this year, when they alleged that the high RIN prices are what led in part to filing bankruptcy, and has been an argument that Cruz has made, as an opponent of the RFS.
However, according to Irwin and Coppess, PES’ claim is an anomaly in an industry running at between “93-95” percent at capacity.
“This is the only case that this has even be alleged,” Irwin said. “Let’s accept at face value that RIN contributed to their bankruptcy, let’s accept that there’s no way that that was most important factor.”
Both Republican Senators of Iowa, Chuck Grassley and Joni Ernst, previously said that PES’ management is the main factor that contributed to its bankruptcy. Both Irwin and Coppess said that PES’ business model was dependent on cheap crude from the Bakken region that happened to flow their way via pipeline. Coppess explained that until there’s analysis done on the ways in which PES used, bought, or sold RINs, there’s no way to discern if that was the reason why the refinery failed. Irwin also added that stock prices for refiners have not been plummeting and are mostly “up,” despite claims that RINs are hurting their operations.
“If the political rhetoric equaled actual financial on the ground impact, we should see a lot more financial stress for refineries,” Irwin said.
As to whether or not any such compromise can be achieved between the the renewable fuels and oil industries, Irwin and Coppess said that within the framework of the RFS, such a compromise would only be able to achieved with new legislation, which would be too difficult to achieve the votes for and also avoid a filibuster.
Irwin said that the “North Star” of the RFS is RIN. Because the RFS contains the RIN incentive, the system that creates E10, E15, E85 and biodiesel, works. Without an uncapped RIN, or RIN at all, refiners would have no incentive to blend fuel. Even if only ethanol RINs were capped, creating more incentive for biodiesel, the incentive to use ethanol would not be there, making the desire to blend it diminish. Without a RIN, or anything like a RIN, the RFS wouldn’t work, Irwin said. The blend wall — the level at which fuels are mandated to be blended (currently E10) — could be expanded to E15 or higher, which would increase the supply of RINs on the market, driving their prices down, but there has been no support on behalf of the oil industry for that.
Despite Trump calling for a compromise, Coppess said that the EPA can’t amend the RFS with a RIN cap and have the action hold up in court, meaning that any change to the RFS would have to go through Congress.