The Renewable Fuel Standard (RFS) program is unlikely to meet its targets for reducing greenhouse gas (GHG) emissions and expanding the U.S. renewable fuels sector, a new Government Accountability Act (GAO) report noted. “Advanced biofuels — fuels that achieve the most greenhouse gas reductions — aren't being produced at the necessary levels, and they likely won't be by 2022,” the report stated.
The RFS generally mandates that domestic transportation fuels be blended with increasing volumes of biofuels through 2022, with the goals of reducing GHG emissions and expanding the nation's renewable fuels sector while reducing reliance on imported oil. Annual targets for the volumes of biofuels to be blended are set by statute. EPA oversees the program and is responsible for adjusting the statutory targets through 2022 to reflect expected U.S. industry production levels, among other factors, and for setting biofuel volume targets after 2022.
Less than 5% of the 3 billion gal. advanced biofuel RFS target was produced in 2015, and additional investments for commercialization seem “unlikely,” GAO said.
Further expansion of biofuels use will require increasing cellulosic biofuels, and according to another companion GAO report, the most likely cellulosic biofuel to be commercially produced in the near to midterm will be cellulosic ethanol. “However, reliance on adding more ethanol to the transportation fuel market to meet expanding RFS requirements is limited by the incompatibility of ethanol blends above E10 with the existing vehicle fleet and fueling infrastructure,” GAO said.
Many experts told GAO that uncertainty about the future of the RFS is limiting investment in advanced biofuels. In particular, some experts stated that the possibility of a repeal of the RFS has caused potential investors to question whether the RFS will continue to exist until 2022 and beyond.
Experts cited multiple federal actions that could incrementally improve the investment climate for advanced biofuels, such as reducing uncertainty about the future of the RFS and tax credits.
Some experts stated that the Second Generation Biofuel Producer Tax Credit — an incentive to accelerate commercialization of fuels in the advanced and cellulosic biofuels categories — has expired and been reinstated (sometimes retroactively) about every two years, contributing to uncertainty among cellulosic fuel producers and investors. These experts told us that investment in cellulosic biofuels could be encouraged, in part, by maintaining the Second Generation Biofuel Producer Tax Credit consistently rather than allowing it to periodically lapse and be reinstated.
Specifically, one expert suggested three major changes to the advanced biofuel tax credits:
• Extending the tax credit long term (e.g., 10 years) to provide investors with sufficient investment return certainty for the large investment of building a biofuel plant until a cumulative level of second-generation biofuel has been produced and costs have fallen;
• Making the producer tax credit refundable to guarantee that biofuel producers receive the subsidy in the early years when they are carrying losses, and
• Coupling the producer tax credit with an investment tax credit to decrease capital costs and improve the financial incentives for building cellulosic biofuel plants.
Corn-starch ethanol plants that were in operation or under construction before Dec. 19, 2007, were not subject to the requirement to reduce GHG emissions by at least 20%. GAO said according to an August 2016 EPA Inspector General report, grandfathered production that is not subject to any GHG reduction requirements was estimated to be at least 15 billion gal., or more than 80% of today’s RFS blending volume.
Specifically, some experts said that the RFS does not incentivize the production of advanced biofuels, which achieve the greatest GHG emission reductions. For example, a cellulosic fuel that reduces GHG emissions by 80% receives no more credit under the RFS than one that reduces GHG emissions by 60%, the baseline for the cellulosic category. As a result, fuels that may be slightly more costly to produce but achieve far greater GHG reductions may not be developed and brought to the market. Further, one expert stated that the RFS design creates a market rebound effect. That is, increasing the supply of biofuels tends to lower energy prices, which encourages additional fuel consumption that may actually result in increased GHG emissions.