Proposed RVO raises multiple questions for Illinois economists

By Susanne Retka Schill | June 11, 2015

The U.S. EPA’s May 29 proposed renewable volume obligations (RVO) is under scrutiny by University of Illinois economists in recent FarmDocDaily posts.

Jonathan Coppess examines the argument that EPA appears to be turning the renewable fuel standard (RFS) upside down, “switching it from one that was meant to force industry action to one that permits industry inaction to override the statue.” Coppess’ post, “EPA doubles Down on Questionable Reading of the RFS Statute,” evaluates EPA’s waiver arguments. He picks apart the EPA’s commentary in the proposed RVO document and compares that with the language in the statute, as well as the legislative history for the RFS. “It is very difficult to square the statute's words with EPA's reading of them,” he concludes. “The RFS was designed to push the renewable fuel industry to supply, and the blending/refining industry to purchase, renewable fuels. EPA admits that ‘there is no shortage of ethanol’ but it feels that ‘legal requirements limit[ing] ethanol content of most gasoline to 10 percent’ and ‘marketplace and infrastructure constraints’ are sufficient to justify the agency's revision of the Congressional mandate.”

Scott Irwin and Darrel Good continue to examine whether the proposed RVO does work as a ‘push’ for ethanol consumption, particularly looking at alternative scenarios in the post “Does it Matter Whether the EPA Targets Volumetric or Fractional RFS Standards?” 

EPA develops two sets of RFS compliance numbers when it publishes the RVO for each year. The first is an overarching volumetric RVO which is also expressed as a percentage standard. The percentage standard for a given year is the mandated national biofuels volume divided by total national use of transportation fuel.  The preliminary proposal for 2014, released in November 2013, projected total gasoline and diesel use at 165.27 percent, with a conventional ethanol mandate set at 13.01 billion gallons for an implied fractional mandate of 7.87 percent for corn ethanol.

The recently released revised RVO proposal projects EPA estimated total gasoline and diesel use in 2014 at 176.68 billion gallons, “a substantial increase from the forecast in the first proposal,” Irwin and Good comment. “The conventional ethanol mandate was increased to 13.25 billion gallons in the latest proposal, but this resulted in the (implied) fractional mandate dropping to 7.5 percent (13.25/176.68). The EPA, in essence, ‘reset’ the volumetric standard to a lower percentage of total transportation fuel use. If the EPA had maintained the fractional mandate from the first proposal, the conventional ethanol mandate for 2014 would have been set in the latest proposal at 13.91 billion gallons (0.0787 X 176.68) instead of 13.25 billion.”

In comparing the 2014 RVO with the 2015 and 2016, the economists note the ethanol mandate, taken at face value, imply a substantial push above the E10 blend wall. They also suggest the assumptions for a 1.4 percent in gasoline use in 2015 and a drop in 2016 may be too conservative based on recent Department of Transportation data. Good and Irwin examine three scenarios: keeping the volumetric standards fixed, versus keeping the fractional standards fixed and a third where EPA targets the magnitude of the push. “Our analysis highlights the sensitivity of estimates of the push in conventional ethanol mandates to the policy target of EPA. It does indeed matter whether the EPA targets fixed volumetric standards, fixed fractional standards, or a fixed push in the standards.”

Pointing to the collapse in the D6 RINs market, the renewable identification numbers used by blender to demonstrate RFS compliance, they add, “RINs market participants appear to believe that the EPA is targeting a fixed volumetric standard and the degree of push in the conventional ethanol mandates will largely disappear if, as expected, gasoline and diesel use increases more rapidly. If these expectations are incorrect the RINs market could be setup for a major surprise when the EPA finalizes the standards for 2014-2016.”

They note that the EPA’s behavior when comparing the November 2013 proposal with the May 29 suggests the agency leans towards a fixed volumetric standard. The language in the most recent proposal, however, “suggests the EPA currently leans more towards a fixed fractional standard, or even a fixed push in the standard.” The bottom line, they conclude, “is the EPA needs to much more clearly communicate the target it is currently using in setting the RFS standards. Much may hang in the balance for biofuels producers, feedstock suppliers, obligated parties under the RFS, and RINs market traders.”