Why The EPA Cut Down The Biofuel Standard For The First Time Ever

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Within D.C. journalism, the “Friday news dump” has become something of an institutional joke — the option newsmakers grudgingly take when they’re obliged to announce decisions, events and developments they’d just soon see disappear down the memory hole.

In that tradition, the Environmental Protection Agency (EPA) announced Friday that, for the first time, it intends to revise the U.S. biofuel mandate downward. That mandate, laid out in the Energy Independence and Security Act of 2007, calls for a certain number of gallons of biofuel to be mixed into the national fuel supply annually. Called the renewable fuel standard (RFS), this amount rises each year, and was originally scheduled to hit 18.15 billion gallons in 2014. The EPA’s proposal on Friday would scale that back to 15.21 billion gallons — not only lower than the original requirement, but lower than 2013’s level of 16.55 billion gallons.

There will be a 60-day period for public comment on the proposal before the agency finalizes the numbers this coming Spring.

It’s been the hope of both the current White House and the previous one that biofuels would make serious headway into the domestic fuel supply, leaving the American economy both more climate-friendly and less dependent on the international oil market. Friday’s historic announcement was a tacit admission that things are not panning out as hoped.

Here’s what happened.

Getting North Of The Wall

Right now, the vast majority of biofuel comes in the form of ethanol — an alcohol that’s hard on car engines and the existing fuel infrastructure. It can’t be moved via pipeline, making transport difficult, and only newer and more advanced cars can take an ethanol mix over 10 percent.

That limit is what’s become known as the “blend wall.” Lawmakers turned it into a lurking problem when they designed the 2007 mandate in absolute numbers of gallons rather than as a percentage of the fuel supply. If America’s overall consumption of gasoline had held to the levels predicted back then, the blend wall probably wouldn’t be a problem. But new fuel efficiency standards proved unusually successful in cutting down gasoline use, and the economic crash of 2008 — as well as driving habits — drove down demand further. As a result, gasoline consumption collapsed from 154 billion projected gallons in 2014 to 133 billion. The RFS’ requirements became a bigger portion of a shrinking pool, threatening to drive ethanol past 10 percent of the fuel supply.

“The original Bush-Cheney renewable fuels standard was designed to reduce imports of foreign oil while boosting farm income [from corn-based ethanol],” explained Dan Weiss, a Senior Fellow and the Director of Climate Strategy at the Center for American Progress. “Little consideration was given to the ‘blend wall’ that limits ethanol to 10 percent of a gallon of gasoline.”

The EPA works with auto manufacturers to qualify cars for higher blend levels — E10 for ten percent, E15 for fifteen percent, and so on. And some car models from 2001 and later are approved for E15. But the warranties of many automakers don’t cover use of E15 fuel, and the industry is split over the wisdom of expanding approval further. The Alliance of Automobile Manufacturers and the American Automobile Manufacturers in particular insist the EPA is pushing E15 too hard and too fast. Service stations also struggle with the costs and practical challenges of updating their equipment to take E15 blends and higher. Part of the problem is that many owners of “flex-fuel” cars don’t understand what the mixes mean, and what blends their vehicles can take. But oil companies also structure their contracts with service stations to hold down the sale of higher blends and to prevent advertising.

“If big oil companies are so concerned about surplus ethanol, they could make it much easier for service stations to sell [higher blends],” Weiss continued.

For its part, the biofuel industry points to extensive government-sponsored testing to make the case the case that E15 is safe for all post-2001 vehicles. “There are no corrosive issues with E15,” Bob Dinneen, CEO of the Renewable Fuels Association, told USA Today. “If there’s an issue with E15 [damaging vehicles] we’re going to know about it, and the EPA is going to know about it.”

Not surprisingly, the automakers and the oil companies have their own study suggesting E15 fuels raise issues even for post-2012 vehicles.

Just What Does The Law Allow EPA To Do?

Along with the veracity of the blend wall, a parallel battle is going on over just what, if anything, the law empowers the EPA to do about it.

When word began to leak that EPA might scale the 2014 RFS back, the language of the proposal included the admission that the blend wall was an “important reality.” The language of the law allows the agency to adjust the RFS in cases of “inadequate domestic supply,” which it apparently takes to include consideration of the blend wall. “We interpret the term ‘inadequate domestic supply’ as it is used under the general waiver authority to include consideration of factors that affect consumption of renewable fuel,” the agency wrote in its proposal.

Oil companies piled on, and took Friday’s confirmation of the proposal as vindication. “For the first time EPA has acknowledged that the blend wall is a dangerous reality,” Jack Gerard, the president of the American Petroleum Institute, told reporters.

But biofuel makers contend this is a flawed reading of the statute, and the blend wall doesn’t qualify as a basis for adjusting the RFS. Their consternation over the EPA’s proposal was palpable during a conference call on Friday: “The minute you introduce blending capacity or blend wall considerations, into a decision as to whether or not to waive the program is the minute you take the nation’s renewable fuel policy away from the statute and you put it in the hands of the oil companies,” said Bob Dineen, the president of the Renewable Fuels Association.

The underlying reality here is that market pressure is what usually induces innovation, but there’s no inherent way markets can assess the value of avoiding catastrophic climate change, or for the benefit of disentangling ourselves from the geopolitical and national security concerns that come along with serious dependence on the international oil market. So even if those are goals worth pursuing, the market won’t do so if left to its own devices. Oil refiners, car companies, and station supply chains have no inherent motivation to see how far they can push the technology for higher blends, and like all businesses are loath to take on those added costs and risks without a concrete incentive. The pressure to drive that innovation must come from the government — which means the RFS.

“It’s a very loose interpretation of the criteria,” Dave Juday, a commodity market analyst in Washington D.C., told Reuters back in October while the EPA’s initial proposal was still making the rounds. “I would not be surprised if it was challenged.”

In short, how — or even if — the EPA should factor the blend wall into its rulemakings is a genuinely fraught legal question.