Congressional Budget Office: Doing its job on biofuels

But it is time to fix the Renewable Fuel Standard to fit reality

nixonThe non-partisan Congressional Budget Office (CBO) was conceived in 1974 by the Congressional Budget and Impoundment Control Act of 1974.  That was a period when then-President Richard Nixon and the 93rd Congress came to loggerheads over spending issues.

The 1974 Act laid out a whole new budget process for the Administration and Congress to follow, including the CBO’s role as an independent, objective, and professional source of economic analysis and budgetary impact of legislation.   Prior to that, the Administration was responsible for generating the economic analysis of the legislation and budget proposals that it supported or opposed.

The CBO’s role was to add a level of professionally competent institutional capacity to budgetary analysis that was divorced from any political or policy agenda.  Indeed, the CBO regularly issues a baseline projection of federal spending, a monthly review of federal spending, cost estimates for all new legislation, and budgetary scorekeeping on enacted legislation.

The Washington Post has said that the CBO has proved its “political independence and willingness to defy the expectations of both parties.”  Fox Business News has similarly concluded, the CBO is “considered the main source for credible, non-partisan numbers.”  In short, the agency has no axe to grind.

In keeping with its scorekeeping and economic projection mandate, the CBO recently released a report entitled The Renewable Fuel Standard: Issues for 2014 and Beyond.  The renewable fuel standard (RFS) is the federal mandate that provides the volumes of renewable biofuels under various categories that must be blended into the nation’s motor fuel supply: corn ethanol, advanced ethanol from non-corn feedstock, cellulosic ethanol from converting cellulose in plants, and biodiesel made from vegetable oils and animal fats.

The report is timely, as the Environmental Protection Agency (EPA), which administers the program, has this year proposed to reduce the levels of biofuels45477-land-figure1bunder the RFS.  The EPA’s rationale was that the fuel supply cannot handle increasing levels of corn ethanol – the so-called “blend wall” issue – and that the RFS requires increasingly larger amounts of advanced biofuels of which the supply is limited.

The EPA’s proposed levels for 2014 have yet to be finalized, now more than half way into the compliance year.  In 2013, the mandatory levels were not set until August.  According to a separate report from the  U.S. Government Accountability Office (GAO), these late rulings impact the energy industry, because they “contribute to industry uncertainty, which can increase costs because industry cannot plan and budget effectively. 

Aside from the tardiness of the mandates, the CBO notes, “Policymakers and analysts have raised concerns about the RFS, particularly about the feasibility of complying with the standard, whether it will increase prices for food and transportation fuels, and whether it will lead to the intended reductions in greenhouse gas emissions.”   Hence, their analysis.

In order to meet the current RFS mandates as proposed, the CBO projects that by 2017, the cost of producing petroleum-based diesel would rise by 30 to 51 cents per gallon, or by 9% to 14%.  That’s because the RFS requires fuel suppliers to bear the cost of ensuring that certain amounts of renewable fuels are used for each gallon of petroleum-based fuel that they sell.  The cost of producing E10 – a blend of 10% ethanol and 90% gasoline, the most commonly used transportation fuel in the United States – would increase by 13 cents to 26 cents per gallon, or by 4% to 9%.  Again, this is the added cost of production; retail prices of these fuels would likely increase more.

Alternatively, the wholesale price of E85 – a blend of up to 85% ethanol with gasoline – would decline by 91 cents to an average of $1.27 per gallon. That’s a reduction of 37% to 51%.  The cloud around that silver lining, however, is this price reduction would be the result of the subsidy funded by higher E10 and higher diesel prices.  The subsidy would be passed on to E85 through the complex compliance process under the RFS.  Compliance is demonstrated through credits known as a renewable identification numbers (RINs) that each refiner and blender must provide to EPA for every gallon of biofuel blended, or save and trade on a secondary market to other blenders not in compliance with the RFS.  The price of RINs on the secondary market would provide the subsidy to E85 producers – a closed loop that would provide no net new savings.

e85pumpMoreover, E85 provides lower mileage of about 25%, which would offset at least some of the per-gallon price savings.  The average price of E85 this Spring, according to the U.S. Department of Energy’s Energy Information Administration (EIA), was about 18% higher than its mileage equivalent price for gasoline.  The net effect is the price reduction on a mileage equivalent basis could be less than 10%, at the most, on a limited supply of fuel as E85 is available at fewer than 2% of all gas stations nationwide.

The CBO has done its job advising Congress that the current RFS – if left as is –  would “pose significant challenges” as well as costs.  It’s time for Congress for Congress to fix the RFS.

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About the Author: Dave Juday

Dave Juday is a commodity market analyst and the principal of The Juday Group; he also serves as a CFACT policy analyst.