Renewable Fuel Standard

Highlights

• The renewable fuel standard (RFS) is a requirement that a certain percentage of petroleum transportation fuels be displaced by renewable fuels. RFS1 started with the Energy Policy Act of 2005. Congress updated the standard in the Energy Security and Independency Act of 2007 (EISA). This new renewable fuel standard is known as RFS2.
• RFS2 is a renewable fuel standard for biofuels only that requires obligated parties to sell a certain amount of biofuels per year through 2022.
• RFS2 contains a four-part mandate for lifecycle greenhouse gas emissions levels relative to a 2005 baseline of petroleum: for renewable fuel, advanced biofuel, biomass-based diesel, and cellulosic biofuel.
• The EPA published the final rule for RFS2 on March 26, 2010.

Background

The Energy Policy Act of 2005 created a Renewable Fuel Standard (RFS1) in the U.S. that required 2.78 percent of gasoline consumed in the U.S. in 2006 to be renewable fuel. The EPA finalized this requirement for RFS1 [1] in April of 2007.

Congress expanded U.S. renewable fuel usage with the Energy Independence and Security Act (EISA) of 2007. The Act included a provision for a new Renewable Fuel Standard (RFS2), which increased the required volumes of renewable fuel to 36 billion gallons by 2022 or about 7 percent of expected annual gasoline and diesel consumption above a business-as-usual scenario. The Act gave the EPA the authority to revise and implement regulations related to RFS2.

Figure 1: Renewable Fuel Standard requirements through 2022

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The EPA issued a notice of the proposed rulemaking [3] for RFS2 in May of 2009 and the final rule [4] in March of 2010. Table 1defines the four categories of renewable fuel according to the EPA. In order to be classified under one of these categories, a fuel must meet the percentage reduction in life-cycle greenhouse gas emissions shown in the table. The EPA’s rule defined the renewable fuel volume requirements from 2008 through 2022. From Figure 1, one can see the RFS2 slowly ramps up advanced biofuels (cellulosic, biomass-based diesel, and non-cellulosic advanced) until they overtake conventional biofuels in consumption levels by 2022.

Table 1: Renewable fuel types in RFS2

* EPA could have exercised the 10 percent adjustment allowance provided for in EISA for the advanced biofuels threshold to as low as 40% but did not do so. ** Transportation fuel includes gasoline, diesel, heating fuel, and jet fuel. It can also include electricity, natural gas, and propane if it can be determined that the source of the fuel is renewable and the fuel is used for transportation. Source: Federal Register. (2010, March 26). Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program: Final Rule. 74(99). Washington: National Archives and Records Administration.

RFS2 Impacts

• On petroleum consumption, energy security, and fuel costs:
  • RFS2 will displace about 13.6 billion gallons of petroleum-based gasoline and diesel fuel in 2022; this represents about 7 percent of expected annual gasoline and diesel consumption in 2022.
  • RFS2 will decrease oil imports by $41.5 billion, and will result in additional energy security benefits of $2.6 billion by 2022.
  • By 2022, gasoline costs should decrease by 2.4 cents per gallon and diesel costs should decrease by 12.1 cents per gallon because of the increased use of renewable fuels.
• RFS2 will reduce greenhouse gas emissions by 138 million metric tons in 2022; this is equivalent to taking about 27 million vehicles off the road.
• Agriculture sector and related impacts:
  • RFS2 will increase net farm income by $13 billion dollars (or 36 percent) in 2022.
  • RFS2 will decrease corn exports by 8 percent and soybean exports by 14 percent in 2022.
• RFS2 will increase the cost of food $10 per person in 2022.

Changes from RFS1

• RFS2 peaks at 36 billion gallons of renewable fuel by 2022 instead of 7.5 billion gallons by 2012
• RFS2 set volume requirements for newly defined renewable fuel types; see Figure 1.
• RFS2 goes beyond gasoline replacement by also including biodiesel.
• Added greenhouse gas reduction thresholds for different fuel types (see Table 1) and takes into account indirect land use change. From C2ES’s report, Reducing Greenhouse Gas Emissions from U.S. Transportation [5], “[i]f land is converted to another agricultural use to produce biofuel, this will tend to raise the price of the agricultural commodity displaced. The higher price will encourage land somewhere in the world to be converted to agricultural use. If the land is cleared, carbon sequestered in the biomass and in the soil will be released to the atmosphere. The release of sequestered carbon will offset some of the potential GHG benefit of biofuel use.”
• RFS2 limits fuel from corn starch to 15 billion gallons by 2022; there are no limits from corn stover (waste).

Final EPA Analysis

• Released in February, 2010.
• Indirect land use change assumptions defined such that almost all corn ethanol qualifies for program as a conventional biofuel feedstock (see Figure 2).
• Under the final rule, EPA must reduce the cellulosic biofuel requirements if there is insufficient supply. EPA did so for 2013 for the fourth year in a row (see Table 2).
• Grandfather Clause: According to the final rule, renewable fuel from existing facilities, which commenced construction on or before December 19, 2007, is exempt from the percent reduction from displaced gasoline/diesel for “renewable fuel” defined in Table 1. Ethanol plants that use natural gas or biodiesel for process heat, which commenced construction on or before December 31, 2009 are also exempt.

Figure 2: Fuel Pathways from EPA in 2022

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Source: Federal Register. (2010, March 26). Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program: Final Rule. 74(99). Washington: National Archives and Records Administration.

Final EPA Requirements

Table 2: RFS Ethanol-Equivalent Volume Requirements, 2011 – 2013 (billion gallons unless noted)

Note: Volumes are ethanol-equivalent, except for biodiesel, which is actual volume, Source: EPA, Renewable Fuel: Standards and Regulations,  http://www.epa.gov/otaq/fuels/renewablefuels/regulations.htm [7]

Compliance Details

Obligated Parties

Refiners that produce gasoline or diesel as well as importers of gasoline or diesel in the lower 48 states and Hawaii are the obligated parties for RFS2. Parties that add renewable fuel to gasoline or diesel (blenders), the state of Alaska (which can opt in), small refiners (whose exemption could expire on December 31, 2010), and gasoline exporters are exempt from RFS2.

Renewable Fuel Requirements and Penalties

Each year, the EPA must determine how much renewable fuel an obligated party must sell in order to meet RFS2. The EPA does this by determining the percentage of each of the four types of renewable fuel (see Table 1) that must be in the entire market in order to achieve the volume required by the standard for that year. It then requires each obligated party to own RINs (see box below) representing the same percentage of each of the four types of renewable fuel (known as renewable volume obligations or RVOs). See Appendix A for a description of the formulas the EPA uses to calculate obligation requirements. A provider may acquire these RINs either through producing the biofuel or through purchasing RINs on the open market. Most obligated parties are not biofuel producers so they would be expected to meet their obligation through the purchase of RINs. Thus, RFS2 establishes a credit trading system to attain the lowest possible cost of compliance.

If an obligated party is out of compliance, the EPA may impose fines up to $32,500 as specified under sections 205 and 211(d) of the Clean Air Act for every day the entity is in violation and the amount of economic benefit or savings resulting from each violation.

 References

EPA. 2010. EPA Finalizes 2011 Renewable Fuel Standards. November. Accessed December 6, 2010. http://www.epa.gov/otaq/fuels/renewablefuels/420f10056.htm [8].

Federal Register. 2010. "Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program: Final Rule." Vol. 74. no. 99. Washington: National Archives and Records Administration, March 26.

Greene, David, and Steven Plotkin. 2011. Reducing Greenhouse Gas Emissions from U.S. Transportation. Arlington, Virginia: Pew Center on Global Climate Change.