Senators Urge EPA to Burst RFS Blend Wall

A bipartisan group of 19 Senators led by Sen. Chuck Grassley (R-Iowa) and Amy Klobuchar (D-Minn.) is urging EPA Administrator Gina McCarthy to get the Renewable Fuel Standard (RFS) “back on track”—code for compelling refiners to comply with the program’s increasingly unattainable statutory goals.

The RFS is a central planning scheme requiring specified volumes of biofuels to be sold in the nation’s motor fuel supply over a 17-year period. Created in 2005 and then expanded in 2007, the quota for total renewable fuels increase from 4 billion gallons in 2006 to 36 billion gallons in 2022.

The RFS, however, also authorizes EPA to reduce the annual statutory targets if the administrator determines there is an “inadequate domestic supply.” For example, EPA drastically reduced the sub-targets for cellulosic biofuel in 2010, 2011, and 2012 when commercial production turned out to be virtually non-existent—contrary to the confident predictions of the program's architects in the mid-2000s.

But in November 2013, EPA for the first time proposed to reduce the total annual RFS mandate below the statutory target. What’s more, EPA for the first time decreased the target based on the “blend wall”—a set of market constraints limiting the supply of ethanol that can actually be sold to about 10% of the nation’s gasoline supply.

EPA’s proposal outraged the biofuel lobby, and the agency dithered over the next two years. The final rule, adopted in November 2015, restored some of the cutbacks EPA had proposed in 2013. Indeed, the rule requires refiners to exceed the blend wall in 2016. That, however, was not enough to satisfy biofuel interests—or their Senate patrons.

In their joint letter to McCarthy, Grassley et al. claim the blend wall is not a factor EPA may take into account when determining refiners’ annual requirements, known as Renewable Volume Obligations (RVOs). Specifically, they contend that “lack of distribution infrastructure was explicitly rejected by Congress as a reason to grant a waiver [from statutory RVOs] in 2005."

The Senators don’t provide a source for their statutory interpretation. Even if correct, however, their claim is irrelevant. The blend wall had no bearing on the RFS as created in 2005, because the original RFS targets maxed out at 7.5 billion gallons in 2012. That's only about half the quantity of ethanol U.S. markets can absorb as E10—gasoline blended with 10% ethanol. Under the 2005 RFS, there was simply no prospect of biofuel production butting up against the E10 blend wall.

Contrary to ethanol lobby propaganda, the blend wall is not a product of oil industry machination but of economic and technical realities. As discussed in greater detail here, almost 95% of vehicles on the road today, as well as lawn mowers, motorcycles, boats, and other small engines, are not designed or warrantied to use blends higher than E10; only 6% of cars on the road and 2% of gas stations are capable of handling E85 (motor fuel blended with 85% ethanol); and only about 100 stations out of 150,000 offer E15.

More importantly, the reason for the dearth of flex-fuel vehicles and E85/E15-capable infrastructure is also not oil industry skullduggery or EPA indolence but lack of consumer demand.

Ethanol contains about one-third less energy than an equivalent amount of gasoline. The higher the blend, the worse mileage your car gets, and the more you have to spend to drive a given distance. For example, according to FuelEconomy.Gov, at current fuel prices, the typical owner of a 2015 Chrysler Town and Country flex-fuel vehicle would spend an extra $550.00 annually to operate the vehicle on E85 instead of regular gasoline.

EPA could, of course, ignore market realities and set RVOs in line with the RFS statutory targets. However, the economic repercussions could be severe, and neither the agency nor Sens. Grassley and Klobuchar would want to face the political blowback.

Under the RFS, refiners are obligated to blend biofuel only into gasoline and diesel sold in the U.S. domestic market. Refiners lose money when they buy and blend biofuel they cannot sell. So if RFS targets exceed the blend wall, refiners will act to reduce their blending obligations. There are only two ways they can do that: decrease production or increase gasoline and diesel exports to foreign markets.

Either way, annual increases in RFS volumes beyond the blend wall can reduce the domestic supply of gasoline and diesel. That in turn can inflate motor fuel prices—in some scenarios dramatically, imposing substantial costs on trucking, commerce, and the economy as a whole.