White House urged EPA restraint on 2014 RFS targets

Source: Amanda Peterka, E&E reporter • Posted: Tuesday, January 7, 2014

Correction appended.

U.S. EPA modified its proposed 2014 renewable fuel standard rule last year after the White House raised concerns about production targets being too high and based on unreliable analyses, according to documents from interagency reviews of the draft proposal.

In response to those concerns, EPA added language to address the ethanol “blend wall” — the limit to how much ethanol can be blended into gasoline — and uncertainty over advanced biofuel production and the future of the biodiesel industry, documents show. But the agency stuck to its target originally proposed for overall renewable fuel production.

At the heart of White House concerns was how the proposal would affect the credits associated with renewable fuels — known as Renewable Identification Numbers, or RINs — that are available for refiners to buy and sell to meet their annual obligations for the renewable fuel standard (RFS).

“If volumes are too low, no harm no foul,” Office of Management and Budget reviewers wrote last August. “If volumes are too high, then the prices of RINs will be high and we will face a real problem.”

EPA’s proposed rule released in November calls for the first-ever reductions in the amount of conventional, corn-based ethanol and advanced biofuels that refiners must blend into gasoline. Its release shook markets for corn and energy and alarmed biofuel producers scrambling to secure investments.

The rule would require refiners this year to blend 15.21 billion gallons of renewable fuels into petroleum-based fuels — lower than the 18.15 billion gallons that Congress anticipated when it wrote the RFS into statute in 2007 (Greenwire, Nov. 15, 2013).

Of EPA’s proposed total, 13.01 billion would come from corn-based ethanol and 2.2 billion from advanced biofuels. Of the proposed advanced target, 1.28 billion gallons would be biodiesel — fuel made from soybean oil, animal fats and used cooking grease — and 23 million gallons would be cellulosic biofuels made from plant-based materials like grasses and agricultural residues.

EPA is taking public comments on the proposed rule until Jan. 28, with the aim of finalizing it in February. There were almost 11,000 comments filed as of Friday.

OMB’s review of the 2014 standards began in August and ended in November, shortly before the rule’s release.

The White House said nothing publicly during the long review, even after a partial draft of the proposal was leaked and caused a stir among biofuel stakeholders. But hundreds of pages of documents relating to the review, including incremental versions containing line-by-line comments and emails by reviewers, are now publicly available on the federal docket.

The blend wall was a major issue for OMB. Last year, the price for renewable fuel credits spiked — soaring from a few cents per credit to $1.44 — as refiners sounded alarms about hitting the wall.

“What is the target RIN price? What is EPA’s expected price if the numbers in the proposal were the same in the final?” OMB asked EPA in late August. “There needs to be a buffer volume so that the market has some margin in which to operate without sending prices high. We are concerned that lack of a buffer and lack of market transparency also creates an opportunity for market manipulation.”

OMB also said EPA had overestimated the amount of E85 — a blend of 85 percent ethanol and 15 percent conventional gasoline — that will be used by flex-fuel vehicles in 2014. E85 is seen as a means of overcoming the blend wall — high RIN prices have stimulated growth of the E85 market this year — and EPA originally estimated that up to 400 million gallons of the fuel would be used in cars this year, according to an early version of the rule.

But reviewers said that the figure and EPA’s corresponding calculations failed to consider how RIN prices shaped by the proposal would affect E85 use and the lack of conveniently located E85 filling stations in the country.

“A standard built on a too-low estimate will forego [greenhouse gas] emissions reductions,” OMB reviewers warned, “while a standard based on a too-high estimate will induce market distortions that can be costly in the long run and even more costly in the short run, far outweighing the GHG emissions benefits.”

EPA’s ultimate proposal was considered an official recognition of the wall by the government. It was harshly criticized by biofuel producers and supporters who believe that the wall is a fiction created by refiners that don’t want to invest in new biofuel infrastructure.

Emphasis on ‘flexibility’

EPA also added language about the effect of the price of RINs and the scarcity of stations on E85 use. Several iterations later, EPA lowered its estimate of E85 use to 240 million gallons. In the final proposal, the agency estimates that up to 300 million gallons will be used this year.

The White House also raised concerns over EPA’s use of a Monte Carlo analysis, a way of aggregating the expected production levels from different facilities, to estimate next year’s renewable fuel volumes, particularly cellulosic biofuel.

OMB said it worried that the agency’s analysis overshot the amount of cellulosic biofuel that would be produced in 2014 because it relied on the average of the expected range of cellulosic production.

There is a “compelling policy/economic reason” for considering other measures to determine renewable fuel volumes, OMB wrote in August.

“Given the track record of optimistic projections and [EPA’s] need to rescind the 2011 and 2012 standards,” reviewers followed up in later comments, “reviewers recommend that the low range or some low percentile might be preferable to the mean.”

The final proposal continues to use the analysis, but EPA watered down its confidence in it and acknowledged that there are those opposed to its use. The agency requested comments on whether it should have chosen a lower figure for projected cellulosic gallons.

Of the advanced biofuel category, the White House voiced the most concern over EPA’s target of 1.28 billion gallons for biodiesel production this year and in 2015.

In early versions of the draft, EPA said it expected the industry to far exceed the target as it has in previous years.

But White House reviewers consistently said they were concerned that biodiesel producers would meet even the target itself. They correctly anticipated that Congress would allow the industry’s $1-a-gallon tax credit would expire on Jan. 1 and leave biodiesel producers in the lurch.

“Seems like supply would collapse if credit is not extended,” reviewers wrote in an early version of the proposed rule.

On Sept. 25, Ron Minsk, one of President Obama’s economic advisers, urged Joel Beauvais, then-associate assistant administrator in EPA’s Office of Air and Radiation, to lower the numbers for advanced and total renewable fuels by hundreds of millions of gallons before releasing the proposed rule to the public. He said EPA should lower the biodiesel target by 120 million gallons of fuel

“The tax credit is currently scheduled to expire at the end of the year, and an extension of that tax credit, was not in the president’s FY14 budget,” wrote Minsk of the National Economic Council in an email to Beauvais. “As a matter of policy, we ought to assume a future in which current law applies, unless we have an administration proposal on the table that would modify current law.”

EPA added language to address the uncertainty in the industry, but the White House continued to voice concerns through October. “We think this is an important point to make,” reviewers wrote.

Later versions of the rule explicitly assume that the credit will expire and that biodiesel volumes wouldn’t far exceed 1.28 billion gallons.

While EPA added language that stresses support for biofuels, the administration acknowledges uncertainty in the estimates of projected targets and the need for “maximum flexibility.”

“Just to be clear, our primary interest is in preserving maximum flexibility for the final rule,” OMB’s Jim Laity told Karl Simon, director of EPA’s Transportation and Climate Division, in an Oct. 25, 2013, email. “However this unfolds, we don’t want to be in a position where we can’t do whatever seems right at the time of the final rule.”

Correction: An earlier version of this story incorrectly stated the composition of E85. It is a blend of 85 percent ethanol and 15 percent conventional gasoline.