CBO predicts higher gas prices under the renewable standard

Source: Amanda Peterka, E&E reporter • Posted: Monday, June 30, 2014

Meeting the renewable fuel standard’s total volume mandates would raise gas prices and have a negligible effect on food prices, according to the Congressional Budget Office.

In a report released yesterday, the office found that complying with the renewable fuel volumes that Congress laid out in the 2007 RFS would raise diesel prices by up to 14 percent by 2017. Gasoline containing 10 percent ethanol would rise by up to 9 percent and gasoline for flex-fuel vehicles would rise by up to 51 percent in that timeframe.

On the other hand, total U.S. spending on food would increase by less than 1 percent by 2017, if the congressional mandates held.

The renewable fuel standard, which Congress passed into law in the 2007 Energy Independence and Security Act, requires refiners to blend certain levels of ethanol and advanced biofuels into gasoline and diesel each year.

It called for 36 billion gallons of renewable fuel use by 2022 — 21 billion gallons of which was to be advanced biofuel — but gave U.S. EPA some flexibility to lower the targets on a yearly basis.

CBO examined three different scenarios: keeping the mandates for total renewable fuels and advanced biofuels at their full yearly levels, lowering the mandates as EPA has proposed for 2014, and repealing the RFS entirely, as some opponents have called for.

Prices for transportation fuels would likely be the same under both the repeal and 2014 scenarios in the short term, according to CBO, because fuel suppliers would be likely to blend about 10 percent ethanol into gasoline in either case.

But prices would jump significantly by 2017 if the full RFS volumes were met. Diesel would rise by between 30 cents and 51 cents a gallon; E10 would rise by between 13 cents and 26 cents a gallon; and E85 — gasoline for flex-fuel vehicles that contains up to 85 percent ethanol — would rise by between 91 cents and $1.27 cents a gallon.

The increases come because of increases in the amount of advanced biofuels and ethanol that would be required under the full RFS volume levels, CBO said.

Food prices would be similar regardless of whether the RFS is repealed or held at EPA’s proposed 2014 levels, CBO said. Meeting the full RFS volumes would raise the average price of corn by 6 percent in 2017 but increase total food spending by about one-quarter of 1 percent.

Still, meeting the RFS’s full mandates would be difficult, CBO said, because of infrastructure challenges to adding more ethanol into gasoline and the lower-than-expected supply of cellulosic biofuels. Cellulosic biofuels are a subset of advanced biofuels and refer to fuels made from plant-based materials such as grasses, agricultural residues and municipal solid waste.

EPA’s proposal to scale back renewable fuel use this year by 16 percent compared to the EISA levels would help, but it poses its own challenges, CBO said.

“Although scaling back those standards addresses existing compliance problems and decreases compliance costs in the short run, it also reduces incentives for companies to invest in production capacity for cellulosic and other advanced biofuels and to expand the availability of high-ethanol blends,” the budget office said.

CBO said that there were routes to get around the challenges, such as increasing the amount of E85 to owners of flex-fuel vehicles. Refiners could also blend more biodiesel and sugar cane ethanol imported from Brazil to make up for cellulosic biofuel that doesn’t exist.

But it noted that E85 still represents a small portion of the gasoline pool and that biodiesel and sugar cane ethanol production would have to increase substantially to make up the full cellulosic gap.

Biofuels advocates were quick to slam the report as an unrealistic look at the RFS in the coming years. They said it didn’t take into account cellulosic fuel expected to come online in the coming years and EPA’s flexibility to lower the total advanced biofuel mandate.

Brooke Coleman, executive director of the Advanced Ethanol Council, also criticized the report for failing to take into account the benefits of the RFS — namely, that it reduces consumer demand for petroleum gasoline and diesel coming from overseas.

“CBO reports are supposed to be impartial and objective, and therefore informative,” he said. “This particular report appears to detail a fantasy world that does not inform the current debate.”

Other studies by Iowa State University have found that adding 10 percent ethanol to gasoline has reduced consumer gas prices by more than $1 a gallon