- - Friday, October 20, 2017

ANALYSIS/OPINION:

Former German Prime Minister Konrad Adenauer was right:  “In view of the fact that God limited the intelligence of man, it seems unfair that he did not also limit his stupidity.”

The U.S. Environmental Protection Agency’s obtuse favoritism of ethanol or biofuel diesel imports over exports in administering the Renewal Fuel Standard (RFS) is illustrative.

To diminish dependence on foreign sources of fuel and to spur domestic agriculture, the RFS arbitrarily mandates the production of 15 billion gallons of renewable fuels annually. It also requires the “blending” of a specified percentage of ethanol and biodiesel into the total volume of fuels sold at retail gasoline outlets.  

Refiners and distributors are required to meet their quota of renewables by blending, or alternatively buying credits from a third party to satisfy their RFS obligation. A secondary market dominated by speculators has predictably emerged for these tradable credits, which are called Renewable Identification Numbers (RINs).

To comply with the 15 billion gallon renewable floor, refiners and distributors commonly import renewables because they qualify for RINs credits. But importation confounds the purposes of the RFS. It makes the United States more rather than less reliant on foreign fuel sources. And, it diminishes demand for American agricultural products like corn as staples for biofuels.

In contrast, the export of renewables both lessens our dependence on foreign sources and enhances demand for our farm outputs.  But the EPA refuses to RINs credits for renewables made in the United States if they are exported.        

Refiners and distributors are often given a Hobson’s choice to satisfy their RFS quota: either import renewables, or purchase RINs from speculators at premium prices.   

Some refiners or distributors produce more ethanol or biodiesel than the domestic market demands.  If they sell the renewables abroad and diminish our staggering trade deficit, they receive no RIN credit for production of the biofuels.

EPA also distorts the renewables market because with its authority to mandate escalating renewable fuels quotas irrespective of domestic market demand.  Most gasoline currently sold in the United States is 10 percent ethanol (E10).  Higher concentrations are unsuitable for the millions of passenger cars made before model year 2001. Some newer cars can operate on 15 percent ethanol, but many years will elapse before the pre-2001 model year vehicles are out of circulation.

A solution is staring EPA in the face. Amend its regulations to permit RFS quotas to be satisfied by the production and distribution of renewables in either domestic or foreign markets. Such a regime would create a market incentive to expand production of renewables to satisfy a global demand.  American farmers would be happy.  And the importation of foreign renewables would be slashed or eliminated.  

Another EPA folly requires a gallon of ethanol to be denatured, i.e., made poisonous to deter human consumption, to generate RINs that obligated parties may use to comply with their RFS quotas.  Although all fuel ethanol consumed in the United States includes denaturants, foreign markets are different.  Brazil and India, for example, specifically require undenatured ethanol.  EPA should adapt its regulations to global market realities by erasing the distinction between denatured and undenatured ethanol for purposes of receiving a RIN credit.  

By increasing the supply of RINs generally, these RFS regulatory changes would depress their price and retail fuel costs for American drivers.  If President Donald Trump does not direct EPA to make the changes, Congress should do so by new legislation.

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