THE renewable fuel standard (RFS) continues to be a deeply divided issue. A July 23-24 hearing in the House Energy & Commerce Committee hoped to start the process of "consensus building" on a path forward, with potential adjustments that could align the program with current energy realities, explained Rep. Ed Whitfield (R., Ky.), chairman of the subcommittee on energy and power.
The members heard testimony from three panels of 16 total witnesses that included fuel users, developers and representatives from the agricultural and environmental communities. Panelists discussed a range of topics, including the potential effect of the RFS on fuel and food prices, "blend wall" and compatibility issues and impacts on the nation's agriculture sector and the environment.
The RFS was last revised in 2007 — and relabeled RFS2 — but in the ensuing years, the nation's energy landscape has transformed dramatically. As a result of these changes in the nation's energy mix and other unforeseen circumstances, several implementation challenges have emerged.
In some respects, the RFS has unfolded as expected, but in others, it has not. Committee leaders noted their commitment to addressing these challenges.
Issues at hand
Purdue economist Chris Hurt testified that the RFS2 has increased the use of corn for ethanol production and, to a smaller extent, the use of soybean oil for biodiesel. Often overlooked in the discussions of RFS impacts is the tremendous increase in exports of soybeans to China (Figure).
"Biofuels policy could still be an influential factor in how the agricultural and food sectors evolve in coming years," Hurt testified.
He explained that meeting the 16.55 billion gal. RFS2 mandate in 2013 is becoming increasingly difficult — not to mention the 18.15 billion in 2014, the 20.5 billion in 2015 and so forth to 36 billion in 2022, just nine years away.
"The problems arise from the blend wall, from the inability of a cellulosic industry to develop and from a slow start toward E15 or E85 (ethanol fuel blends)," he said.
"Unless breakthroughs are seen in the movement to greater acceptance of E15 among gasoline retailers or corn and ethanol prices drop sufficiently to make E85 more costs competitive, then corn use is capped at about the E10 use level plus ethanol exports," Hurt said.
This puts annual corn use for ethanol near 5.0 billion bu. (as measured by the U.S. Department of Agriculture), a level that U.S. farmers can currently supply while still leaving some room for animal feed, exports and other industrial uses.
He said the animal sector and food consumers want to avoid political mandates in an RFS that increase demand for crops at a faster rate than the U.S. and world supplies can reasonably meet.
Because of China's growing appetite for soybeans, it would be difficult to expand oilseed production to a level to meet the multibillion-gallon mandates called for in the advanced biofuel section without causing major distortions to food market segments, Hurt explained.
Food price impact
Renewable Fuels Assn. president and chief executive officer Bob Dinneen testified that annual food inflation rates have, on average, been lower since passage of the RFS than they were in the years preceding the program.
Annual food inflation has averaged 2.9% since 2005, the year the original RFS was enacted. By comparison, annual food inflation rates averaged 3.02% in the 20 years prior to enactment of the RFS. Furthermore, two of the lowest annual food inflation rates in the last 50 years have occurred since passage of RFS2 in 2007.
Hurt testified that since roughly 20% of food inflation is attributed to higher commodity prices, that means with average annual retail food inflation of 3.2%, about 0.5-0.6% of that is due to higher commodity prices.
"Food is a $1.4 trillion industry, so one-half of 1% represents about $7 billion of higher food costs per year related to the higher commodity prices," he said.
Hurt did add that food inflation is expected to drop below core inflation if crop supplies are replenished this year, which will help moderate food price inflation.
Ed Anderson, a Wendy's franchisee and Feed Food Fairness coalition member who spoke on behalf of the National Council of Chain Restaurants, said if Congress repeals the RFS, it would level the playing field and, over time, restore normalcy to the food supply chain so everyone competes fairly and food becomes more affordable.
A recent study by PricewaterhouseCoopers found that the RFS is costing the chain restaurant industry $3.2 billion annually. Quick-service restaurants face an additional 10% cost increase, and full-service establishments bear a nearly 9% increase.
Importance of acting
"Many businesses and many jobs are at stake — from corn farmer to refinery worker to gas station employee to lawnmower maker to ethanol plant worker, and just as important, the interests of consumers are directly impacted by the RFS. The end goal of this process is an RFS that works as best as possible for everyone," Whitfield said.
Dinneen called the RFS an unmitigated success.
"It has reduced our dependence on imported petroleum, stimulated investment in new technologies, reduced consumer gasoline prices, created jobs and economic opportunity across rural America, saved taxpayer dollars by lowering farm program payments and is the only program we have that lowers greenhouse gas emissions from transportation fuels," he said.
Dinneen testified that Congress did an excellent job of crafting the RFS, building in a great deal of administrative and market flexibility to deal with issues as they arise.
"As a result, there is nothing wrong with the RFS that cannot be fixed with what is right with the RFS, and there is no need to legislate changes to a program that is working well today," he said.
On the flip side, Jack Gerard, president and CEO of the American Petroleum Institute, testified that "the RFS, while well-intentioned, is today completely untethered from reality and, unless it is immediately halted, will unnecessarily cost our economy and consumers billions of dollars."
He said an increased domestic energy supply and technology advances have contributed to one of the original RFS goals of reducing dependence on foreign oil. The institute is advocating a full repeal of the RFS.
Bill Roenigk, testifying on behalf of the National Chicken Council, said for conventional biofuels, the RFS is "broken."
He added, "It is most imperative and important at this time for Congress to take a critical, hard look at the RFS. If Congress concludes, as we do, that the RFS cannot be fixed because it is broken beyond repair, then Congress must do the right thing."
Pam Johnson, who testified on behalf of the National Corn Growers Assn., said corn producers would support modifying the RFS, as long as it avoids pitfalls.
She noted that many of the problems being encountered today were predicted at the time the RFS2 was written, most notably the oil industry's unwillingness to make higher ethanol fuel blends available.
During questioning, Rep. John Shimkus (R., Ill.) reiterated that many private investors and companies have acted on government promises to build refineries to help meet the RFS mandates, so it is important to "find the sweet spot" and not keep changing the rules in the middle of the game that could bankrupt those who have invested private capital.