RFS Fix or Caving to Big Oil?

EPA's decision to rollback mandates brought windfall profits to oil companies while corn prices and ethanol prices now struggle.

Reaction from the Environmental Protection Agency's proposed changes to the renewable fuels standard continues to come in mixed and will likely drag on with both sides threatening to challenge the rule in the court system.

On one side, you've got livestock producers, food companies and oil interests saying thanks for the rollback, but it isn't enough. Their issue is with the premise of RFS which acts as a deterrent to real market forces.

Over the last decade, I've covered agricultural policy and watched as these same groups have continued to ask for one policy change after another. First it was the elimination of the ethanol tax credit. Then it was a waiver to reduce the overall RFS mandate. And now it's an all-out repeal of the RFS.

But in the same breath, these groups all say they support cellulosic ethanol. But that just doesn't mesh with the requests being made.

The method the EPA has come up with in determining the mandate levels for the various biofuel categories can be boiled down to what is a fairly simple rule which takes into account their assumptions about the industry's  underlying ability to produce and blend each type of biofuel and the public's ability to utilize those fuels.

The EPA has proposed lowering its mandate for corn ethanol production from the current 14.4 billion gallons to 13.01 billion, which Wally Tyner, Purdue University agricultural economist, said was a mistake to make so low. Instead he recommended that the corn ethanol requirement be set at 13.9 billion gallons to provide inventive for refiners to blend and sell more E85 fuel. Other cars use gasoline that contains 10% ethanol. That level also would not put undue pressure on corn prices, he said.

Refiners have incentive to produce more E85 because the ethanol price is falling compared with gasoline and they may be able to get added revenue from their blending credits called RINs, short for renewable fuel identification numbers.

Bruce Babcock of Iowa State University Center for Agricultural and Rural Development (CARD) demonstrates in a new paper a scalable model that shows a $325 million investment in E85 infrastructure would reduce compliance costs by $1.75 billion.

"Obligated parties have turned to the EPA and asked for relief rather than create their own relief through expansion of E85 infrastructure, which is the intent of RFS. Stand firm on higher mandates and the market will be opened to E85, and consumption levels will rise. Lower the mandate significantly and it is a signal that the federal government is not committed to expanded consumption of biofuels as envisioned in the RFS," Babcock and Sebastien Pouliot write in their paper, The Economic Role Of RIN Prices.

The consequence of setting the RFS at 13.01 billion gallons for corn ethanol would be to "destroy that incentive," Tyner said.

In passing a fuel standard, Congress intended to provide a strong incentive to bring more renewables into the market. "When Congress passes a mandate, they expect it to pull the mandated product into the market. Otherwise, they would not pass a mandate," Tyner said.

And I think that's one of the most disappointing considerations in this year's change.

Money speaks

As to how the decision could pan out, we're already seeing some impact.

An independent index of ethanol and biofuel stocks has fallen by more than 6% following the release of the draft rule. 

The National Corn Growers Association projects that the farm price of $4.25 per bushel would be required to cover production costs. The psychological impact of EPA’s proposal is anticipated to push corn prices well below the cost of production.  To further put this into perspective, if corn prices dropped to $3.50 a bushel farmers and the rural economy would lose more than $10 billion.

However, Americans United for Change reported that in the day EPA released its proposed RFS reduction, the Big Five oil companies reaped a combined $23 billion windfall, and the value of their outstanding shares increased by an average of more than 2% in a single day. 

"Congress must carefully weigh the ramifications any changes to the RFS would have on agriculture and related industries. The U.S. economy and consumers can ill afford a downturn in this sector,” said NCGA President Martin Barbre. “EPA is making a conscious decision to limit ethanol’s access to the market even with the significant price advantage of ethanol compared to gasoline.” 

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