Congressional Budget Office Takes on RFS Evaluation

Congressional Budget Office Takes on RFS Evaluation

Renewable Fuel Standard repeal could reduce gas prices, CBO analysis says, but food prices would remain similar

In a review of the Renewable Fuel Standard released last week, the Congressional Budget Office says a repeal of the policy could lower gas prices and would have limited effect on greenhouse gas emissions.

The RFS – a policy that establishes the minimum volumes of renewable fuels that must be blended into U.S. fuel supplies – has long been a source of disagreement for many economists.

Some argue that the policy is unsustainable in its current projection to blend more renewables into the supply each year until 2022. Others say the policy contributes to higher food prices. Still more suggest that it's a smart way to wean American off of fossil fuels.

Renewable Fuel Standard repeal could reduce gas prices, CBO analysis says, but food prices would remain similar

Related: EPA Proposes Lower RFS Volumes for 2014

To evaluate some of those postulations, CBO's recent review evaluates how much the supply of various types of renewable fuels would have to increase over the next several years to comply with the RFS, and how food prices, fuel prices, and emissions would vary in an illustrative year, 2017, under three scenarios for the RFS:

• The Energy Independence and Security Act of 2007 volumes scenario, in which fuel suppliers would have to meet the total requirement for renewable, advanced and cellulosic biofuels, and the cap on corn ethanol per the original outline of the EISA's RFS.

• The 2014 volumes scenario, where the U.S. EPA would keep the RFS requirements for the next several years at the same amounts it has proposed for 2014; and

• The repeal scenario, in which lawmakers would immediately abolish the RFS.

CBO considers the 2014 volumes scenario much more likely than the EISA volumes scenario, it said.

RFS Challenges
CBO says the rising requirements in EISA would be very hard to meet in future years because of two main obstacles: the supply of cellulosic biofuels – which has yet not reached expected commercial production levels – and the amount of ethanol older vehicles can tolerate.

The analysis supports the notion of a "blend wall" – the point at which there more ethanol than can be used to blend into the fuel supply at a 10% level.

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More ethanol, however, could be accommodated in the fuel supply if motorists who drive "flex-fuel" vehicles bought larger amounts of such fuel – if they can find it. Fewer than 2% of filling stations in the U.S. sell high-ethanol blends.

Related: 2013 RFS Compliance Deadline Extended; 2014 Volumes Expected Soon

"Given the design of the RFS, the cost of encouraging additional sales of high-ethanol fuel falls on the producers and consumers of gasoline and diesel," the report says.

This challenge has led to EPA's decision to ease the proposed volumes for 2014 – decreasing compliance costs in the short run while reducing incentives for companies to invest in renewables production capacity.

For the scenario in which fuel suppliers would have to comply fully with EISA volumes, 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 most likely do so using two types of advanced biofuels: Mostly U.S.-produced biomass-based diesel and Brazilian sugarcane ethanol.

Relying on that strategy for 2017, however, would necessitate extremely large increases in the production of those fuels, CBO estimates.

Food prices
CBO estimates that if roughly 40% of corn would be used to make ethanol in 2017 if fuel suppliers had to meet requirements equal to EPA's proposed 2014 volumes or if lawmakers repealed the RFS, keeping food prices relatively steady.

By contrast, the report says, corn ethanol use in 2017 would be about 15% higher 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 %.

Because corn and food made with corn account for only a small fraction of total U.S. spending on food, however, that total spending would increase by about one-quarter of 1%, the analysis says.

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Fuel prices
Because fuel suppliers would be likely to use roughly a 10% blend of corn ethanol in gasoline in 2017 even without the RFS, the overall use of renewable fuels in that year would be very similar under the 2014 volumes scenario and under the repeal scenario, CBO estimates.

Consequently, prices of transportation fuels would probably be roughly the same in those two cases.

Under the EISA volumes scenario, however, fuel suppliers would have to use more than three times as many gallons of advanced biofuels, and they would have to add much more ethanol to the gasoline supply than could be accommodated by selling only a 10% blend.

Related: Ethanol Interests Reflect on Six Years of RFS

CBO estimates that complying with the EISA volumes scenario would have the following effects on the prices of three key types of transportation fuels in 2017:

• The price of petroleum-based diesel would rise by 30 cents to 51 cents per gallon, or 9% to 14% (because the RFS requires fuel suppliers to bear the cost of ensuring that certain amounts of renewable fuels are used for each gallon of petroleum-based fuel that they sell);

• The price of E10 would increase by 13 cents to 26 cents per gallon, or 4% to 9%; and,

• The price of E85 would decline by 91 cents to $1.27 per gallon, or 37% to 51%.

GHG emissions
The production and use of different types of renewable fuels involve different amounts of greenhouse gas emissions. Estimates of those emissions are uncertain, and researchers' predictions vary considerably, CBO says, but available evidence suggests that replacing gasoline with corn ethanol has only limited potential for reducing emissions.

The success of the RFS in reducing the emissions from transportation fuels will depend mainly on the extent to which it causes people to substitute advanced biofuels—particularly cellulosic biofuels—for gasoline or diesel over the long run.

Despite CBO's grim outlook for GHGs, it says a trade-off exists between the goal of limiting the cost of complying with the RFS (for example, by reducing the requirements for cellulosic biofuels) and the goal of providing a strong incentive for the development of better technologies for advanced biofuels.

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Industry Reaction
Following the report, Growth Energy CEO Tom Buis said it does little to address benefits of the RFS like a reduced reliance on foreign oil and job creation.

"Put simply, increased domestic fuel production and a decreased dependence on foreign oil would help provide stability and reduce the massive price spikes consumers already are experiencing at the pump," Buis said in a statement Friday. "Clearly, this report is agenda driven and ignores the facts."

Related: Ag Industry Groups Meet with EPA Official to Discuss Future of RFS

National Farmers Union Senior Vice President of Programs Chandler Goule also expressed concerns about CBO's characterization of fuel prices, noting that the study does not account for overall reduced consumer demand for oil.

Despite its flaws from the NFU point of view, Goule says its review of food price changes is valid.

"Thankfully, the CBO study does acknowledge that the RFS is not driving up food prices. Additional studies from the U.S. Department of Agriculture and the World Bank clearly show that ethanol does not increase prices in the grocery store," he said.

View the full report: The Renewable Fuel Standard: Issues for 2014 and Beyond
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