Regulatory Fixes Will Open the Market to Ethanol Quickly
by Adam Gustafson, Attorney with Boyden Gray and Associates
Ethanol policy chatter in D.C. has been dominated lately by complaints about the price of RINs—the renewable identification numbers EPA uses to verify compliance with the Renewable Fuel Standard. Independent refiners that do not blend ethanol into their own fuel have to purchase RINs from blenders who do, and the refiners complain that the costs are too high. In response, Senator Ted Cruz has proposed capping the price of RINs. And one refinery, Philadelphia Energy Solutions, even asked a court to discharge its RIN obligations in bankruptcy.
Such short-term fixes to high RIN prices ignore their underlying cause—EPA’s artificial constraints on the volume of ethanol that can be blended into the nation’s fuel supply. Basic rules of supply and demand hold that increasing the volume of E15 and higher blends (and thereby increasing the supply of RINs) would lower RIN prices.
EPA could solve both problems simultaneously—removing anticompetitive regulatory barriers to ethanol and lowering RIN prices. And it could do this under its existing statutory authority, without any need for new legislation. This is an important consideration, because Congress shows little appetite for sweeping “reforms” of the RFS.
First, EPA should reinterpret a law governing Reid Vapor Pressure—a measure of fuel volatility—to apply the same standard to regular E10 gasoline and higher ethanol blends. Adding more ethanol to E10 actually lowers volatility (and thus reduces ozone formation), but EPA has needlessly interpreted a more favorable volatility standard to apply only to gasoline with between 9 and 10 percent ethanol, violating the intent of Congress. EPA Administrator Scott Pruitt has said he will fix EPA’s discriminatory volatility regulations if the law allows, and there is no reason for delay.
Second, EPA should approve an alternative certification fuel with between 25 and 30 percent ethanol. EPA has acknowledged that such a fuel would help automakers build more efficient vehicles. EPA is currently evaluating the appropriateness of its increasingly stringent greenhouse gas standards, but no matter what the standards may be in the future, midlevel ethanol blends will help automakers meet them and save drivers money at the pump.
Third, EPA needs to fix its fuel economy formula to stop cheating ethanol blends. The equation’s “R-factor” was supposed to enable apples-to-apples comparisons of fuel economy despite changes in the energy density of the test fuel. But the R-factor is based on outdated data from carbureted engines of the mid-1980s. EPA has admitted that the R-factor is inaccurate for today’s vehicles. Despite promising automakers in 2012 that it would fix this problem “in a timely manner,” it still has not done so.
Fourth EPA should also correct the fuel economy formula to recognize ethanol’s petroleum displacement effect. The point of the fuel economy program Congress enacted is to reduce petroleum consumption, and that is what ethanol blending does.
Likewise, EPA should correct the greenhouse gas formula to recognize that ethanol’s tailpipe emissions are carbon neutral: they do not add to atmospheric carbon, because the only carbon ethanol releases upon combustion was taken out of the atmosphere by the corn plant from which the ethanol was made.
If the oil industry were serious about lowering RIN prices, it would support these regulatory measures. But many petroleum interests benefit from high RIN prices. More fundamentally, the oil industry wants to maintain regulations that protect petroleum’s market share from competition. Ethanol is the least costly (and cleanest) high-octane fuel additive on the market. If retailers could sell more cost-effective higher ethanol blends, drivers would burn less oil.
EPA has a choice to make between opening the fuel market to competition or maintaining anti-competitive regulations that protect petroleum’s 90% market share.
That should be an easy choice. Removing regulatory barriers to midlevel blends would further the Administration’s stated policies of promoting domestic energy and American agriculture. It would also fulfill EPA’s core mission of protecting America’s air quality. Petroleum-based octane additives represent the most toxic portion of gasoline. Ethanol provides a higher octane value while reducing toxic air pollution. If EPA wants to improve air quality while promoting domestic energy, American agriculture, and the free market, the choice is clear.