Testimony on the Renewable Fuel Standard: Issues for 2015 and Beyond
Terry Dinan, Senior Advisor for CBO’s Microeconomic Studies Division, testifies on the Renewable Fuel Standard before the House Committee on Science, Space, and Technology’s Subcommittee on Oversight and Subcommittee on Environment.
Testimony by Terry Dinan before the Committee on Science, Space, and Technology’s Subcommittee on Oversight and Subcommittee on Environment, U.S. House of Representatives.
The Renewable Fuel Standard (RFS) establishes minimum volumes of various types of renewable fuels that suppliers must blend into the United States’ supply of fuel for transportation. Those volumes—as defined by the Energy Independence and Security Act of 2007 (EISA)—are intended to grow each year through 2022. In recent years, the requirements of the RFS have been met largely by blending gasoline with ethanol made from cornstarch. In the future, EISA requires the use of increasingly large amounts of “advanced biofuels,” which include diesel made from biomass (such as soybean oil or animal fat), ethanol made from sugarcane, and cellulosic biofuels (made from converting the cellulose in plant materials into fuel).
Policymakers and analysts have raised concerns about the RFS, including whether complying with the standard will be feasible, whether it will increase prices for food and transportation fuels, and whether it will lead to the intended reductions in greenhouse gas emissions. Because of those concerns, some policymakers have proposed repealing or revising the Renewable Fuel Standard.
In this testimony, CBO assesses how much the supply of various types of renewable fuels would have to increase over the next several years to comply with the RFS. CBO also examines how prices for food and fuel would vary in an illustrative year, 2017, under three scenarios for the Renewable Fuel Standard:
- The 2016 volumes scenario, in which the Environmental Protection Agency (EPA)—which implements the RFS and has some discretion to modify the mandates of EISA—would keep the RFS requirements for 2017 at the same amounts it has proposed for 2016;
- The EISA volumes scenario, in which fuel suppliers would have to meet the total requirement for renewable fuels, the requirement for advanced biofuels, and the cap on corn ethanol that are stated in EISA for 2017—but not the requirement for cellulosic biofuels, because the capacity to produce enough of those fuels is unlikely to exist by 2017; and
- The repeal scenario, in which lawmakers would immediately abolish the RFS.
The repeal scenario would require Congressional action. In the absence of such action (or of legal restrictions), CBO considers the 2016 volumes scenario much more likely than the EISA volumes scenario, which would require a large and rapid increase in the use of advanced biofuels and would cause the total percentage of ethanol in the nation’s gasoline supply to rise to levels that would require significant changes in the infrastructure of fueling stations. As a result, CBO uses the 2016 volumes scenario as a reference case against which to measure the effects of the other two scenarios. If EPA used its discretion to set standards for volume in 2017 lower (or higher) than the proposed 2016 volumes, then the effects of repealing the RFS on food and fuel prices would be correspondingly smaller (or larger).
Full Compliance With the Mandates in EISA Poses Significant Challenges
The rising requirements in EISA would be very hard to meet in future years because of two main obstacles, which relate to the supply of cellulosic biofuels and the amount of ethanol that older vehicles are said to be able to tolerate. Fuel suppliers have had trouble meeting the annual requirements for cellulosic biofuels because making such fuels is complex, capital-intensive, and costly. Although production capacity is expanding, only a few production facilities are currently operating. The industry’s capacity in coming years is projected to fall far short of what would be necessary to achieve the very rapid growth in the use of cellulosic biofuels required by EISA.
Ethanol is the most common form of renewable fuel; however, adding increasing volumes of it to the U.S. fuel supply could be difficult. Currently, most gasoline sold in the United States is actually a blend (referred to as E10) that contains up to 10 percent ethanol—the maximum concentration that is feasible to avoid corrosion damage to the fuel systems of older vehicles. EISA’s increasing requirements for the total gallons of renewable fuels to be used each year, combined with a projected decline in gasoline use, suggest that the average concentration of ethanol in gasoline would have to rise to well above that 10 percent “blend wall,” potentially increasing to about 25 percent by 2022. More ethanol could be accommodated in the fuel supply if motorists who drive “flex-fuel” vehicles, which can run on blends that contain as much as 85 percent ethanol (referred to as E85), bought larger amounts of such fuel. But at present, only a little more than 2 percent of filling stations in the United States sell high-ethanol blends.
Because of the challenges described above, EPA has been eliminating or greatly reducing the annual requirements for cellulosic biofuels, advanced biofuels, and total renewable fuels in its final and proposed rules in recent years. Although scaling back those standards addresses existing compliance problems and decreases compliance costs in the short run, it also reduces incentives for companies to invest in production capacity for cellulosic and other advanced biofuels and to expand the availability of high-ethanol blends.
Using the Total Volumes of Advanced Biofuels Specified in EISA Would Require Extremely Large Increases in the Production of Those Fuels
For the scenario in which fuel suppliers would have to comply with the total volumes of advanced biofuels and of renewable fuels as a whole stated in EISA, CBO assumed that EPA would allow suppliers to substitute other forms of advanced biofuels for cellulosic biofuels, as it has done in the past. Fuel suppliers would probably do so by using two types of advanced biofuels: biomass-based diesel (mostly produced in the United States) and sugarcane ethanol (nearly all imported from Brazil). However, relying on that strategy for 2017 would necessitate extremely large increases in the production of those fuels. For example, even a 60 percent increase in the projected U.S. production of biomass-based diesel in 2017 and a 50 percent increase in Brazil’s projected production of sugarcane ethanol would not provide enough additional gallons of advanced biofuels to meet the higher volumes required in the EISA volumes scenario than in the 2016 volumes scenario.
Food Prices Would Be Similar Whether the RFS Was Continued or Repealed
Roughly 40 percent of the U.S. corn supply is used to make ethanol. To the extent that the Renewable Fuel Standard increases the demand for corn ethanol, it will raise corn prices and put upward pressure on the prices of foods made with corn—ranging from corn-syrup sweeteners to meat, poultry, and dairy products. Corn ethanol use in 2017 would be about 7 percent (or 1 billion gallons) higher under the EISA volumes scenario than under the 2016 volumes scenario. CBO estimates that the resulting increase in the demand for corn would raise the average price of corn by about 3 percent. However, because corn and food made with corn account for only a small fraction of total U.S. spending on food, that total spending would increase by about 0.1 percent.
CBO expects that, if lawmakers repealed the RFS, the amount of corn ethanol used in 2017 would be smaller by less than 1 billion gallons than if the 2017 requirements were equal to EPA’s proposed 2016 volumes. Suppliers would probably find it cost-effective to use a roughly 10 percent blend of corn ethanol in gasoline in 2017 even in the absence of the RFS. Therefore, food prices would be only slightly lower in 2017 (by less than 0.1 percent) if the RFS was repealed than under the 2016 volumes scenario.
Compared With the 2016 Volumes Scenario, Meeting the Requirements in the EISA Volumes Scenario Would Have Significant Effects on Prices of Transportation Fuels
Under the EISA volumes scenario, fuel suppliers would have to use more than twice as many gallons of advanced biofuels than under the 2016 volumes scenario, and they would have to add much more ethanol to the gasoline supply than could be accommodated by selling only a 10 percent blend. The cost of boosting consumption of high-ethanol blends (such as E85) would fall on the producers and consumers of gasoline and diesel. Specifically, the policy would increase the price of petroleum-based fuels and lower-ethanol blends (such as E10) while lowering the price of E85. (Under both scenarios, CBO anticipates that EPA would sharply reduce the requirement for cellulosic biofuels, given the limited production capacity for those fuels expected to exist in 2017.)
In this analysis, CBO used a range of estimates of the price premium necessary to encourage sufficient additional supplies of advanced biofuels and the price subsidy necessary to motivate sufficient sales of E85. The agency estimates that, compared with the 2016 volumes scenario, complying with the EISA volumes scenario would have the following effects on the prices—rounded to the nearest 5 cents—of three key types of transportation fuels in 2017:
- The price of petroleum-based diesel would rise by 25 cents to 45 cents per gallon;
- The price of E10—which is currently the most commonly used transportation fuel in the United States—would increase by 15 cents to 30 cents per gallon; and
- The price of E85 would decline by $0.80 to $1.20 per gallon.
Because the changes in the production and use of renewable fuels required under the EISA volumes scenario are so large—and because little information is available about how the supply of and demand for renewable fuels respond to changes in their price—those estimates are highly uncertain. Actual price changes could fall outside the ranges described above.
Compared With the 2016 Volumes Scenario, Repealing the RFS Would Have Very Modest Effects on Prices of Transportation Fuels
small effects on prices in comparison with the 2016 volumes scenario. Specifically, CBO estimates that repealing the RFS would have essentially no effect on the 2017 price of E10, would lower the 2017 price of petroleumbased diesel by roughly 5 cents, and would increase the 2017 price of E85 by about 15 cents. The effect on fuel prices of repealing the RFS is limited because a significant quantity of renewable fuels would continue to be used even in the absence of the mandate.