Reforming the Renewable Fuel Standard

DESCRIPTION: The Renewable Fuel Standard (RFS) was established by the Energy Policy Act of 2005 and was substantially expanded as part of the Energy Security and Independence Act (EISA) of 2007. The goals of the program, and of US biofuels policy more broadly, are threefold: to enhance energy security through additional domestic production of biofuels, to support rural economies, and to promote second-generation transportation fuels with low life cycle greenhouse gas footprints.

The RFS has achieved some but not all of these goals. Since the EISA was passed, domestic production and consumption of biofuels has more than doubled. In 2017, domestic consumption of biofuels displaced approximately one million barrels per day of refined petroleum product. This growth has supported farm incomes through the demand for ethanol made from corn starch and for biodiesel made from soybeans and other crops. However, second-generation biofuels have failed to live up to the early hopes of the program to use feedstocks that are not food-competing as part of a broader transition to a low-carbon transportation sector. Moreover, the RFS has evolved into a complex program fraught with regulatory uncertainty and high and volatile compliance costs, which has impaired its effectiveness.

As stakeholders have struggled to work within the program, they have developed a variety of reform proposals intended to address their own perceptions of the program’s shortcomings. This paper collects a number of these reform proposals into an integrated package and examines their interactions and collective economic consequences.

OUTCOMES: The RFS is at a crossroads. Under the RFS and other biofuels policies, the United States has greatly expanded its use of first-generation biofuels. But despite five years of high RIN prices, there has been little growth in sales of blends higher than E10. Given this track record, domestic fuel ethanol consumption is likely to decline if gasoline demand contracts as the EIA projects. Moreover, with some isolated exceptions, the RFS has been largely unsuccessful in promoting the development and commercialization of low-GHG, second-generation fuels produced using nonfood feedstocks. Without changes, the RFS is not well suited to handle the challenge of declining gasoline demand, nor will it provide the support to low-GHG second-generation technologies needed as part of the transition to a low-carbon transportation sector.

Fortunately, through suitable reforms, it is possible to reduce and stabilize total compliance costs, to provide a path for increased market penetration of midlevel blends, and to provide meaningful and reliable support for second-generation fuels. The various parts of the package examined here interact with each other, so it is important to get the details right for the entire package to work. Taken together, these reform proposals have the potential to make US biofuel policy more efficient and more effective.