Renewable Fuel Standards Hits the Wall

from USDA

The Environmental Protection Agency, EPA, has finalized the Renewable Fuel Standard, RFS, for 2013 and indicated that they will propose to cut the RFS for 2014. This is a response to the fixed volume of ethanol that the RFS requires as the gasoline use in the United States has fallen and the hearings that the U.S. House Committee on Energy and Commerce Subcommittee on Energy and Power have been holding to examine the RFS. Annual U.S. gasoline use has declined from its 142-billion-gallon peak in 2007 to about 133 billion gallons in 2012 and ethanol now represents 9.74% of gasoline. There appears to be a pratical limit of 10% of ethanol in gasoline. The so called "blend wall," as the point at which the U.S. gasoline infrastructure can no longer absorb additional ethanol is known, is the result of the pipelines, pumps and service station infrastructure not being able to handle gasoline with higher amounts of ethanol. There is also some question about the ability of a large number of automobiles to handle 15% ethanol in gasoline.

The EPA was first petitioned in 2009 to allow the sale of 15% ethanol gasoline, E15 and subsequently have approved the use of the fuel in about half of the cars on the road, automakers have approved less than 5% of cars on the road to use E15. It was thought that the percentage of ethanol in gasoline could simply increase to 15% to meet the RFS. The Renewable Fuel Association, RFA, “E15 Retailer Handbook,” outlines potential issues with the fuel. The handbook advises gasoline retailers that “some Underground Storage Tank systems and related underground equipment may not be compatible with E15 blends” and cites the Underwriters Laboratories’ warning that “some equipment, both new and used… demonstrated limited ability to safely accommodate exposure to fuels such as E15.”

The U.S. House Committee on Energy and Commerce Subcommittee on Energy and Power have been holding hearings examining the merits and shortcomings of the RFS. AAA in its role of representing consumer interests urged the Committee to consider whether adjustments to the target volumes of ethanol need to be made to avoid putting consumers and their automobiles at risk. In his testimony before the Committee Robert L. Darbelnet President and CEO of AAA stated “If the only way to meet the RFS requirement is to introduce E15 before agreement has been reached on which vehicles can safely use it and the consumer has been adequately educated, then the RFS requirement should be modified.”

The Energy Independence and Security Act (EISA) established the Renewable Fuel Standard, RFS, program. The RFS program was created in 2005, and established the first renewable fuel volume mandate in the United States. The original RFS program required 7.5 billion gallons of renewable fuel (primarily ethanol) to be blended into gasoline by 2012. Under the Energy Independence and Security Act (EISA) of 2007, the RFS program was expanded to include diesel, in addition to gasoline; increase the volume of renewable fuel required to be blended from 9 billion gallons in 2008 to 36 billion gallons by 2022; and established new categories of renewable fuel, and set separate volume requirements for each one. In addition, it was required that the blended fuel emit fewer greenhouse gases than the original petroleum fuel.

Compliance with the RFS is implemented through the use of tradable credits called Renewable Identification Numbers (RINs), each of which corresponds to a gallon of renewable fuel produced in or imported into the United States each year. This program was developed to encourage the production of renewable fuel and lessen the nation’s dependence on foreign oil. Things change, in the past few years there has been a domestic boom in oil production, the growth in fuel used for transportation has not met projections, and for the past few years drought has significantly impacted the corn crop in the United States.Last year the subsidized ethanol production took half the corn crop.

EPA has continued to enforce the increases in the RFS, though they have received many requests for waivers, and objections. EPA has determined for the most part that the objections raised did not warrant a reconsideration of the RFS requirements; however, a January 2013 ruling by the U.S. Court of Appeals required the agency to reevaluate projections for biofuel to reflect market conditions. In addition, it became clear that the mandate for renewable fuel was going to exceed 10% of all fuel sold. Gasoline (and other fuels) would hit the “E10 blend wall” in 2014.

Most gasoline sold in the U.S. today is E10, it contains 10% ethanol. The “E10 blend wall” refers to the difficulty in incorporating ethanol into the fuel supply at volumes exceeding 10% and since the demand for gasoline has not grown as expected by the EPA due to reduced driving and increased mileage in the cars on the road (see mileage emission standards). The industry cannot practically incorporate more than 10% ethanol into gasoline. So, on Tuesday the EPA announced that it will propose to use “flexibilities” in the RFS statute to reduce both the advanced biofuel and total renewable volume requirement 2014. The EPA is going to adjust the mandate to not exceed the 10% practical limit on fuel blends.

The Renewable Fuel Standard, Fraud and Misuse

Last Friday, Rodney R. Hailey, of Perry Hall, Md., was sentenced to 12 years and six months in prison, for selling $9 million in phony renewable fuel credits from his company, Clean Green Fuel, LLC.  Mr. Hailey registered Clean Green Fuel, a company that only existed on paper, with the U.S. Environmental Protection Agency under the Renewable Fuel Standard, RFS, program as a producer of bio-diesel fuel, a motor vehicle fuel derived from waste restaurant grease and diesel fuel. Though he manufactured no fuel, Mr. Hailey sold the fuel credits and pocketed all the money. Mr. Hailey was also ordered to pay restitution of approximately $ 42.2 million to over 20 companies and forfeit the $9.1 million in proceeds from the fraud, including cars, jewelry, his home and bank accounts, which had already been seized by the government. Mr. Hailey shows no signs of having any other money to pay the restitution.

To encourage the production of renewable fuel and lessen the nation’s dependence on foreign oil, oil companies in the U.S. are required to produce a given quantity of renewable fuel or to purchase credits, called renewable identification numbers (RINs) from producers of renewable fuels to satisfy their renewable fuel requirements. The Energy Policy Act of 2005 established the first renewable fuel volume mandate for the United States. The original RFS program required 7.5 billion gallons of renewable fuel (primarily ethanol) to be blended into gasoline by 2012. Under the Energy Independence and Security Act (EISA) of 2007, the RFS program was expanded to include diesel, in addition to gasoline; increase the volume of renewable fuel required to be blended from 9 billion gallons in 2008 to 36 billion gallons by 2022; and established new categories of renewable fuel, and set separate volume requirements for each one.

Between March 2009 and December 2010, Mr. Hailey engaged in a fraud scheme, selling over 35 million RINs (representing 23 million gallons of bio-diesel fuel) to brokers and oil companies, when in fact Clean Green Fuel had produced no fuel at all and Mr. Hailey did not even have a facility capable of producing bio-diesel fuel. Apparently, there was no requirement to verify production of renewable fuel to register the facility. Federal law enforcement agents investigated the scheme after a tip about the large number of luxury cars parked in front of Hailey’s house. Hailey took in more than $9.1 million from selling the false RINs and used the money to purchase an extraordinary number of fancy cars, including BMWs, Mercedes Benz, a Rolls Royce Phantom, a Lamborghini, Ferrari, Maserati and others, as well as real estate and more than $80,000 in diamond jewelry.

The traders and major energy companies who purchased Hailey’s false RINs are reported to have lost more than $40 million, but the loss also extends to small bio-diesel companies, who had real costs of production and, as a result of Hailey’s scheme, were unable to sell their RINs to recoup any of their real costs and were forced out of business.  “When invalid renewable fuel credits are ‘produced’ and sold, it undermines the integrity of an important program designed by Congress to reduce the nation’s dependence on foreign oil and to grow the nation’s renewable energy industry,” said Cynthia Giles, assistant administrator for EPA’s Office of Enforcement and Compliance Assurance.

Verification of securities is not a new problem, but how EPA chose to operate this market left it open to this kind of fraud. After this fraud came to light, EPA proposed a voluntary quality assurance program to verify that RINs generated under the RFS program have been validly generated. EPA hopes that this will make the RFS program more efficient and effective.  This blatant fraud is unlikely to be the only unintended consequence of the RFS program and how EPA chose register producers of renewable fuel and have RINs generated. The environmental attributes and the federal government created markets may be the wrong tool for achieving their stated environmental or energy independence goals.

While changes the EPA proposes may remedy some of the problems with the sale and marketing of RINs, putting ethanol into gasoline and vegetable oil into diesel is neither cost effective nor does it make the environment a cleaner. Its impact on the U.S. less dependence on foreign oil was never measured. The energy expended in growing and processing the corn or collecting and processing the vegetable oil is an environmental cost that is hidden by various subsidies.  

The RFS is not only subject to fraud (the cheapest RIN is always the fraudulent one), but the RFS’ demand for Biofuels has the ability to change the demand and price of food. The RFS diverts half of the U.S. corn crop into fuel leading to diminished supplies for livestock and food. The RFS determines the crop mix in the U.S. by distorting price and still we might end up importing corn to feed our nation either directly or feed livestock while we pay to convert corn into subsidized ethanol. In 2011, approximately 40% of the corn crop was used for making ethanol to meet the RFS; in 2012 it looks like it will take almost 50% of the corn crop, or 5.05 billion bushels. The USDA has estimated total corn production for 2012 at 10.7 billion bushels, down 13% from 2011. This was the lowest U.S. production of corn since 2006 yet the RFS demand continues to grow. 

2012 the Warmest Year for U.S., but not for the Earth

NOAA 2012 Temperature Map

On Tuesday the National Oceanic and Atmospheric Administration (NOAA) National Climate Data Center announced that 2012 had been the warmest year on record for the contiguous United States  with average temperatures 3.2°F above the 20th century average. While global temperatures are unlikely to reach a record for 2012 (only data through November 2012 is available) still, according to the latest data from the National Climatic Data Center, the high average global temperatures for November 2012 combined with record to near-record warmth over land from April to September and warmer-than-average global ocean temperatures contributed to the first 11 months of 2012 ranking as the eighth warmest 11 month period on record with 1998 remaining the warmest year on record for the earth.

According to the weather scientists at NOAA the average temperature for the contiguous United States for 2012 was 55.3°F, which was 3.2°F above the 20th century average and 1.0°F above the previous record from 1998. Every state in the contiguous United States had an above-average annual temperature for 2012. On the national scale, 2012 started off much warmer than average, with the fourth-warmest winter (December 2011–February 2012) on record, but the real and immediate problem is water.  The winter snow cover for the contiguous United States last winter was the third smallest on record, and snowpack totals across the Central and Southern Rockies were less than half of normal. The warm spring resulted in an early start to the 2012 growing season in many places, which increased water demand on the soil earlier than what is typical. In combination with the lack of winter snow and lingering dryness from 2011, the record-warm spring laid the foundation for the great drought of 2012. The average precipitation total for the contiguous U.S. for 2012 was 26.57 inches, 2.57 inches below average, and the 15th driest year on record for the nation.  

Regulators at the Environmental Protection Agency remain focused on carbon dioxide (CO2) emissions, but if CO2 is the main driver of climate change and these new temperature highs in the United States are evidence of climate change and not just extreme weather, then it is too late and the United States at about 16% of global carbon emissions and falling cannot stop the growth in CO2 emissions. According to the International Energy Agency, IEA, 2011 estimates of world CO2 emissions from fossil fuel combustion, World CO2 emissions rose by 1 billion metric tons in 2011, a 3.2 % increase  to reach 31.6 billion metric tons. In 2011 the top four world generators of CO2 emission from fossil fuels were in descending order China, the United States, the European Union and India who edged out Russia to take the number four slot. China, the largest emitter of CO2 increased their emissions the most. China contributed almost three quarters of the global increase, with its emissions rising by 720 million metric tons, or 9.3% to 8.46 billion metric tons of CO2, and are now driving global CO2 emissions. It is estimate that China will emit around 10 billion metric tons of CO2 in 2013. CO2 emissions in the United States in 2011 fell by 92 million metric tons of CO2 or 1.7% to an estimated 5.32 billion metric tons.  U.S. emissions have now fallen by 430 million metric tons or 7.7% since 2006, the largest reduction of all countries or regions and no real growth is forecast. There is no interest in reducing CO2 emissions or even stopping emissions growth in China. They are not yet a rich nation and are currently experiencing the coldest winter in 28 years. China remains focused on food and growth. 

In the U.S. the EPA has used regulation to ensure that total CO2 emissions are reduced over time. In 2012 EPA proposed the first Clean Air Act standard for carbon dioxide. Under the new rule, new power plants will have to emit no more than 1,000 tons of carbon dioxide per megawatt-hour of energy produced. That standard effectively changes the fuel of choice for all future power capacity additions to natural gas, nuclear, or the renewable category (with government subsidies).  In addition the EPA and the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) new millage and emission standards for automobiles and light trucks for model year 2012 through 2025 requiring continued improvement of about a 5% per year in average fuel economy from 2016 when they are required to have at least a 35.5 mpg fleet average for vehicles sold in the U.S. and will have to boost car and light truck fuel economy to an average 56.2 miles per gallon by 2025 significantly reducing the use of fuel.   The major users of energy in the United States are heating of residential and commercial buildings (11%), industry (20%), transportation including cars, trucks, trains, planes and ships (27.4%), and electric power generation (40%). Passenger cars, light trucks and motorcycles represent 17% of the national greenhouse gas emissions. With the CO2 standard and fuel economy standards the U.S is on track to reduce their CO2 emission in the coming decades.

The climate of the earth is constantly changing on a geological time scale, but the geological record hints that sudden shifts can happen. The controversy over both the science and policy relating to climate change is far from over, but policy mandates to have the United States adopt constraints on fossil fuel energy consumption will have little impact on the global level of CO2. The earth’s atmosphere is interconnected and worldwide CO2 emissions will continue to grow powered by China and India in the short run. We need now to appropriately respond to the continuing drought.

Drought conditions November 2012 NOAA

The Renewable Fuel Standard, RFS, creates a regulatory mandated demand for corn in the United States. In 2012 the RFS mandated ethanol consumed 5.05 billion bushels of corn almost 50% of the corn crop. The USDA has forecast total corn production for 2012 at 10.7 billion bushels, down 13% from 2011. The lowest U.S. production of corn since 1995. Much of the Midwest remains in drought conditions, and according to the most recent USDA and NOAA reports drought could impact the corn crop next year, too. To fulfill the RFS mandate we are using up our water resources (using the Ogallala Aquifer) and we might be forced to buy corn, taking food from the mouths of poorer nations. Yes, we can buy more corn if need be. The United States is still a rich enough country and we will eat meat and the long list of food made from corn products and make lots of ethanol to dilute gasoline, but the cost is the United States is exporting hunger to fulfill the RFS.

Ethanol for Fuel takes 50% of Corn Crop

The U.S. Environmental Protection Agency (EPA) announced on Friday that would not grant a waiver of the Renewable Fuels Standard (RFS) this year. The EPA reported that they performed economic analysis with the U.S. Department of Agriculture (USDA) and U.S. Department of Energy (DOE) that showed waiving the mandate would reduce corn prices by approximately 1%. Economic analyses by DOE, showed that waiving the mandate would not impact household energy costs. As expanded under the Energy Independence and Security Act (EISA) of 2007, the RFS requires the volume of renewable fuel blended into gasoline to increase from 9 billion gallons in 2008 to 36 billion gallons by 2022.

Last year, approximately 40% of the corn crop was used for making ethanol, this year it looks like it will take almost 50% of the corn crop, or 5.05 billion bushels. The USDA has forecast total corn production for 2012 at 10.7 billion bushels, down 13% from 2011. The lowest U.S. production of corn since 2006. Yields are expected to average 122.3 bushels per acre, 24.9 bushels below the 2011 average and the lowest average yield per acre since 1995.

In wet weather and dry weather we are the largest producer of corn in the world, but we have a problem that nature and Congress created together, The Renewable Fuel Standard, RFS, creating a regulatory mandated demand for corn. In 2012 the RFS mandated ethanol consumed 5.05 billion bushels of corn. Much of the Midwest remains in drought conditions, and according to the most recent USDA report could impact the corn crop next year, too.

A significant portion of this year’s corn crop was destroyed by drought added to last year’s flood reduced yield, and lower corn inventories by 12%. The RFS diverts half of the corn crop into fuel leading to diminished supplies for livestock and food. We should not have to import corn to feed our nation either directly or feed livestock while we pay to convert corn into subsidized ethanol.

We are over using our water resources and essentially mining non-renewable water to expand our crops. Somehow the government decided for a slew of reasons that the corn crop needs to be double the demand for food and we should use corn to make ethanol to dilute gasoline. To fulfill this mandate we are using up our water resources and  we might be forced to buy corn, taking food from the mouths of poorer nations. Yes, we can buy more corn if need be. The United States is still a rich country and we will eat meat and the long list of food made from corn products and make lots of ethanol to dilute gasoline, but should we be doing that?

According to Tyler Cowen, professor of Economics at George Mason University, in his book, An Economist Gets Lunch, New Rules for Everyday Foodies, “(To put ethanol into gasoline) costs a lot more money than does traditional gasoline, once the cost of the subsidy is included. Sadly, it does not even make the environment a cleaner place. The energy expended in growing and processing the corn is an environmental cost too…the nitrogen-based fertilizers used for the corn are major polluters. Ethanol subsidies are a lose-lose policy on almost every front, except for corn farmers and some politicians.” “For millions of (people in poor countries) it is literally a matter of life and death and yet we proceed with ethanol for no good reason…(Biofuels) has thrown millions of people around the world back into food poverty.”

Energy Policy Act required EPA to implement a renewable fuels standard to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel. Ethanol may not be as renewable as the authors of the Energy Policy Act believed. This is the second time that EPA has denied a RFS waiver. In 2008, the state of Texas was denied a waiver. Both times EPA has concluded that the mandate did not impose severe harm. 

Drought, Ethanol and the World Hunger Games

It is early August and the few acres of clover, weeds and grass that surround my house are once more green and growing. All through the spring and early summer I have kept a close watch on the water level in the U.S. Geological Survey, USGS, groundwater monitoring well up the road and read with anticipation each week Mark Svoboda’s of the National Drought Mitigation Center weekly report. The USGS has been continually monitoring groundwater levels at a nearby well since 1979 and posting the level daily. It has been unusually hot and dry and I watched the water level troughs in April and late June each followed by enough rainfall to bring the water level in the monitoring well (and I assume my drinking water well) to normal levels and increase the depth and flow of the creek in the woods at the bottom of my land. We have managed to avoid drought around here. The Midwest and much of the Great Plains have not been as lucky.

Most of the Midwest of the county has experienced above-normal temperatures with July coming in at 5-10 degrees above normal. Five to ten degrees! The region continues to be impacted not only by oppressive heat, but also drought. Not enough rain has left desiccated pastures and widespread crop damages, farmers are culling their livestock and the fire risk is elevated. The drought persists but some rain has fallen sporadically over the region. In The Great Plains drought has continued to expand and the temperatures remained 5 to 10 degrees above normal there, too.  The drought continues to advance across more of eastern Nebraska, southeastern South Dakota, Kansas, Oklahoma and the Texas Panhandle, stressing pastures, crops, livestock/wildlife, and trees. The one cheerful note is southeastern Texas, which has continued to recover from last year’s drought over the past several months. Overall, about 60% or more of the lower 48 states are experiencing some level of drought. Drought is not everywhere, but it is significant.

The National Agricultural Statistics Service (NASS) of the U.S. Department of Agriculture will release the yield and production forecasts for the 2012 U.S. corn and soybean crops on Friday, August 10th .  The U.S. corn crop is the largest in the world.  The USDA has been cutting its U.S. preliminary corn crop forecasts as the drought has progressed. Last word was that 45% of the corn crop is now estimated to be in poor or very poorcondition. Iowa the biggest corn producing state had 37% of their crops listed as in fair condition. This drought follows significant flooding last year in several parts of the county that reduced overall corn crop yields to under 12.5 billion bushels.

Congress has been deadlocked on passing a full farm bill because they don’t have enough support in the Senate for the five-year farm bill that came out of the House.  Instead with potentially half the corn crop  lost to the drought and pressure from cattle producers and other livestock producers who are worried about the cost of buying feed or culling their herds, the U.S. House passed a $383 million emergency relief package for livestock producers affected by the drought. The bill would have allowed payments of up to $100,000 per farm, for cattle and sheep ranchers but not hog and poultry farmers. Row crop farmers have insurance programs available to them, but the livestock programs expired in 2011 and this bill was an attempt to fill the gap. The Senate did not pass the drought measure before their five week recess on Friday and it was tossed into the pile of unfinished business.

In wet weather and dry weather we are the largest producer of corn in the world, but we have a problem that nature and Congress created together, The Renewable Fuel Standard, RFS, creating a regulatory mandated demand for corn. Last year the RFS mandated ethanol consumed 5.05 billion bushels of corn. Almost two thirds of the nation is in drought, and according to the most recent USDA report only 26% of the corn crop is in good or better condition, there are estimates that more than half of the corn crop is gone and still we have to meet the RFS.  The original United States Renewable Fuel Standard required that 7.5 billion gallons of renewable fuel (mostly ethanol made from corn) was to be blended into gasoline by 2012, but the program was expanded under the Energy Independence and Security Act (EISA) of 2007, which increased the volume of renewable fuel required to be blended into gasoline from 9 billion gallons in 2008 to 36 billion gallons by 2022. Last year, approximately 40% of the corn crop was used for making ethanol.

With half of this year’s corn crop potentially destroyed by drought added to last year’s flood reduced yield, and lower corn inventories; the RFS will make the crop situation worse by diverting most of the remaining corn crop into fuel leading to diminished supplies for livestock and food producers.  It is the unrelenting demands of the RFS against the livestock and food producers. We should not have to choose fuel over food or more likely have to import corn to feed our nation while we pay to convert corn into subsidized ethanol.

On Thursday, Bob Goodlatte of Virginia and 155 other member ofcongress sent a letter to Administrator Lisa Jackson of the U.S. EnvironmentalProtection Agency, EPA asking the Administrator to exercise her authority under the Clean Air Act section 211 (o) 7 to reduce the required volume of renewable fuel based on harm to the economy. This is a wonderful opportunity to actually live in harmony with nature and prevent the cost of food from rising even more and prevent us from taking food from the mouths of poorer nations. Yes, we can buy more corn if need be. The United States is a rich country and we will eat meat and the long list of food made from corn products. According to Tyler Cowen, professor of Economics at George Mason University, in his book, An Economist Gets Lunch, New Rules for Everyday Foodies, “(To put ethanol into gasoline) costs a lot more money than does traditional gasoline, once the cost of the subsidy is included. Sadly, it does not even make the environment a cleaner place. The energy expended in growing and processing the corn is an environmental cost too…the nitrogen-based fertilizers used for the corn are major polluters. Ethanol subsidies are a lose-lose policy on almost every front, except for corn farmers and some politicians.” “For millions of (people in poor countries) it is literally a matter of life and death and yet we proceed with ethanol for no good reason…(Biofuels) has thrown millions of people around the world back into food poverty.” Is it our goal to be the people of the Capital of Panem and have tributes from poorer nations play the Hunger Games?