One-Page Summary of The Renewable Fuel Standard: Issues for 2015 and Beyond

Posted by
Terry Dinan
on
November 3, 2015

Today I testified about the Renewable Fuel Standard before the Subcommittees on Environment and Oversight of the House Committee on Science, Space, and Technology, and they requested a one-page summary of my written statement.

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. The Congressional Budget Office has assessed 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 has also examined how prices for food and fuel would vary in an illustrative year, 2017, under three scenarios:

  • The 2016 volumes scenario, in which the Environmental Protection Agency—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; and
  • The repeal scenario, in which lawmakers would immediately abolish the RFS.

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. First, fuel suppliers have had trouble meeting the annual requirements for cellulosic biofuels because making such fuels is complex, capital-intensive, and costly. Second, 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 10 percent—the maximum concentration that is feasible to avoid corrosion damage to the fuel systems of older vehicles.

Food Prices Would Be Similar Whether the RFS Was Continued or Repealed

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. Under the EISA volumes scenario, CBO estimates that the resulting increase in the demand for corn would raise the average price of corn by about 3 percent relative to the 2016 volumes scenario. 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 fuel 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

CBO 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—a blend containing up to 10 percent ethanol and 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, containing up to 85 percent ethanol, would decline by $0.80 to $1.20 per gallon.

Compared With the 2016 Volumes Scenario, Repealing the RFS Would Have Very Modest Effects on Prices of Transportation Fuels

CBO estimates that repealing the RFS would have only 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 petroleum-based diesel by roughly 5 cents, and would increase the 2017 price of E85 by about 15 cents.

Terry Dinan is a Senior Advisor in CBO’s Microeconomic Studies Division.