A ‘win-win’ on the Renewable Fuel Standard

As a former senator from an agricultural state and a former U.S. Energy secretary, I want to see both American agriculture and our independent refineries succeed. Unfortunately, the current structure of the federal biofuel mandate — called the Renewable Fuel Standard, or RFS — fails to achieve these goals.

The broken credit system set up to track RFS compliance has resulted in a multibillion-dollar government commodity that enriches Wall Street speculators and global oil giants at the expense of independent American refiners. Furthermore, it does little to greatly advance biofuel consumption. President Trump must act to fix this broken system in a manner that protects domestic manufacturing jobs while ensuring robust biofuel consumption. 

{mosads}The RFS requires certain volumes of biofuel, primarily ethanol, to be mixed into the nation’s fuel supply. Refiners are responsible for complying with this mandate, which is tracked with credits called Renewable Identification Numbers (RINs). These are separated from ethanol and other biofuel when it is blended into gasoline at large terminals, before it is shipped to local gas stations.

The problem is, only the largest refineries control enough blending facilities to collect RINs via this fuel mixing. Small and independent refiners who do not control such large-scale blending operations have to buy RINs, from either their global oil giant competitors, large marketing firms that control blending and distribution to consumers without being encumbered with any RFS requirement, or Wall Street speculators that trade on an opaque, unregulated RIN market.

This poorly designed system has turned RINs into an unregulated tradeable commodity worth $10 billion to $20 billion — one that’s already led to job losses and threatens more economic harm.

While initially only a few cents, RIN prices skyrocketed to nearly $1.40 in 2013 and have fluctuated wildly between 20 cents and one dollar ever since. Soaring RIN costs led to the largest independent refiner on the East Coast, owned by Philadelphia Energy Solutions (PES), to shed 100 jobs and file for bankruptcy earlier this year. The company spent over $800 million on RIN since 2012; its annual costs were double its pay roll. 

I serve on the board of PBF Energy, another independent refiner, and those facts make me wince, because I see how much damage the program has caused. Adding insult to injury, soaring RIN prices have done nothing to appreciably increase ethanol consumption, which has stayed at around 10 percent of the fuel supply for several years, regardless of whether RINs were 3 cents or more than a dollar. Failure to take more permanent action to prevent RIN costs from skyrocketing again threatens hundreds of thousands of jobs in and supported by independent refineries across the country.

Fortunately, after the president held a series of high-level discussions on RFS reforms and issued numerous small refiner waivers earlier this year, RIN prices came down from a 2017 high of 90 cents in November to about 20 cents recently. Reports of a deal materialized that was fairly simple: the administration would waive regulatory barriers to allow fuel containing 15 percent ethanol to be sold year-round — something the biofuel industry has wanted for 15 years — and refiners would receive more permanent relief from highly volatile and often astronomical RIN costs. 

Unfortunately, the biofuel industry derailed this commonsense proposal, claiming the small refiner waivers resulted in over a billion gallons of “demand destruction” for ethanol and asserting that any action to control RIN costs would further reduce ethanol consumption.

However, the facts prove otherwise. Despite falling RIN prices and small refiner waivers, data from both the Environmental Protection Agency and the Energy Information Administration show that domestic biofuel use remains robust. Witnesses at a recent congressional hearing verified these facts; they highlighted EPA data indicating biofuel use is right on track to meet the RFS-mandated biofuel volumes for this year, and noted record domestic ethanol production and consumption. One of the only states that regularly reports sales of fuel with greater than 10 percent ethanol, Minnesota, is also reporting record sales of this product.

The facts show that federal policy can control the cost of RINs without adversely impacting domestic biofuel use.

As the U.S. Energy secretary during the passage of the first RFS, I can categorically state that the RIN system was not meant to create a multibillion-dollar commodity market that serves to subsidize large-scale blenders and vertically integrated oil companies at the expense of smaller and independent refiners. The administration and Congress must act to reform the RFS in a way that keeps RIN costs under control, while also ensuring robust domestic biofuel use. Recent experience proves such a “win-win” can be achieved to save manufacturing jobs in the Rust Belt, without adversely impacting the Corn Belt.

The president previously considered taking more permanent action to achieve this goal. Now would be a great time for him to finish the job.

Spencer Abraham is the former U.S. secretary of Energy (2001-2005) and a former U.S. senator from Michigan (1995-2001). He is CEO of The Abraham Group, which consults on energy and other policy areas before the government, and is a member of the board of directors of PBF Energy, a New Jersey-based refiner.