E&E news reporter Monica Trauzzi yesterday interviewed Bob Dinneen, President and CEO of the Renewable Fuels Association (RFA). They discussed the future of the Renewable Fuel Standard (RFS). Today’s post will examine one of Dinneen’s answers that is dense with misinformation. Before examining it, though, some basic background may be helpful.
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. As incorporated into the Clean Air Act by the so-called Energy Independence and Security Act (EISA) of 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 the Environmental Protection Agency to make annual adjustments to the quota (known as Renewable Volume Obligations or RVOs) if the administrator determines there is an “inadequate domestic supply.”
Renewable fuel lobbyists have been castigating EPA ever since November 2013 when the agency, for the first time, proposed to reduce the statutory targets based on the “blend wall” — a set of market constraints limiting the supply of biofuels that can actually be sold to consumers. Although the final RVOs adopted by EPA in November 2015 restored much of the cutbacks proposed in 2013, Dinneen and other renewable fuel lobbyists continue to cry foul and demand that EPA force refiners to buy ethanol at the statutory volumes.
Contrary to popular misconception, the RFS does not expire after 2022. Rather, the Clean Air Act leaves it up to EPA to decide post-2022 targets based on the agency’s assessment of various factors such as the impacts of biofuel production and use on the environment, energy security, and job creation.
Bumper Crop of Misinformation
Monica Trauzzi: So you need the RFS post-2022?
Bob Dinneen: Again, until there is a truly free marketplace. You know, ethanol is not subsidized today. The only liquid transportation fuel that receives a subsidy from the taxpayer is, oh, oil. You know, we’re paying refiners to drill deeper in the Gulf of Mexico and to frack in North Dakota and Texas. We aren’t subsidized. I want to see the renewable fuels industry continue to evolve. I want to see new technologies. I want to see new feedstocks. I want to see us get beyond the 10 percent blend wall. All of that happens if the EPA grows a backbone and implements this program in the way that it was intended to be implemented so that refiners have to invest in the infrastructure to allow E85, to enable E15 to be sold. It’s not that hard.
Dinneen has made those points before, so he’s not speaking off the cuff but presenting a settled position. Time for a fact check.
Falsehood #1: Refiners Are Obligated to Invest in Biofuel Infrastructure
“I want to see us get beyond the 10 percent blend wall. All of that happens if the EPA grows a backbone and implements this program in the way that it was intended to be implemented so that refiners have to invest in the infrastructure to allow E85, to enable E15 to be sold.”
Vintage biofuel industry propaganda. For years they’ve been saying the RFS obligates refiners to provide the infrastructure requisite to meeting the RFS statutory blending targets. But exactly where in the Clean Air Act is the supposed “obligation” discussed or mentioned?
Dinneen has never cited any such provision because it does not exist. Apparently, he wants us to believe that if Congress willed the end, it must also have willed the means. But sausage making (legislation) is generally not an exercise in abstract logic. Laws embody tradeoffs and compromises, and don’t usually give the affected interests everything they want.
In its deliberations on EISA, Congress considered several legislative proposals directing the Secretary of Energy to require major oil companies to install E85-capable equipment at their affiliated service stations. Those bills included the Biofuels Security Act of 2007 (H.R. 559, S. 23), National Fuels Initiative Act of 2007 (S. 162), SAFE Energy Act of 2007 (S. 875), and Global Warming Reduction Act of 2006 (S. 4039). None of those provisions made it into EISA as passed by Congress and signed by President G. W. Bush.
Moreover, the chief obstacle to consumer demand for E85 is not lack of compatible fuel infrastructure but crummy fuel economy. 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.
Falsehood #2: Ethanol Is Not Subsidized
“You know, ethanol is not subsidized today.”
First off, any tax or regulatory scheme that rigs the market in favor of specific companies or industries is a subsidy. Rigging the market for the benefit of biofuel producers is what the RFS is all about. The program is one big subsidy. It mandates that refiners buy, blend, and then create a market for biofuels, artificially expanding ethanol producers’ sales by forcing consumers to buy ethanol whether they want to or not.
But even if “subsidy” is narrowly defined as a government grant, preferential loan, below-market loan guarantee, or special tax break, the biofuel industry is the recipient of multiple federal and state subsidies.
The U.S. Department of Energy (DOE) has a Web site listing all federal incentives for alternative fuels, vehicles, and infrastructure. Some of those directly benefit ethanol producers. For example, the Alternative Fuel Infrastructure Tax Credit provides a tax credit up to 30% of total cost or $30,000 for fueling equipment for “natural gas, liquefied petroleum gas (propane), liquefied hydrogen, electricity, E85, or diesel fuel blends containing a minimum of 20% biodiesel installed between January 1, 2015, and December 31, 2016″ (emphasis added). Similarly, the Ethanol Infrastructure Grants and Loan Guarantees program provides loan guarantees up to $25 million for eligible renewable energy systems, including “flexible fuel pumps, or blender pumps, that dispense intermediate ethanol blends.”
In addition, states provide numerous subsidies to biofuel interests. Iowa, for example, offers various tax incentives to business projects for the production of biomass or alternative fuels. “The incentives may include an investment tax credit equal to a percentage of the qualifying investment, amortized over five years; a refund of state sales, service, or use taxes paid to contractors or investment tax credit equal to a percentage of the qualifying investment, amortized over five years; a refund of state sales, service, or use taxes paid to contractors or subcontractors during construction; an increase of the state’s refundable research activities credit; and a local property tax exemption of up to 100% of the value added to the property.”
Falsehood #3: RFS Is Necessary to Offset Refiner Subsidies
The only liquid transportation fuel that receives a subsidy from the taxpayer is, oh, oil. You know, we’re paying refiners to drill deeper in the Gulf of Mexico and to frack in North Dakota and Texas.
To begin with, Dinneen is comparing apples to oranges. Refiners do not drill in the Gulf or frack in North Dakota and Texas. Drilling and fracking — exploration and production – are the business of the “upstream“ sector of the oil and gas industry; refining is the business of the “downstream” sector.
By analogy, corn agriculture is the “upstream” sector of the ethanol industry; biofuel manufacture, the downstream sector. The RFS indirectly subsidizes corn farmers by artificially boosting demand for their produce. But corn producers have long been prime beneficiaries of direct subsidies paid by federal taxpayers. The Environmental Working Group calculates that federal farm programs supported U.S. corn producers to the tune of $94.3 billion during 1995-2014. And despite efficiency reforms enacted by the 2014 Farm bill, corn and soybean farmers are expected to receive $4.8 billion in taxpayer payments in 2017, nearly double the federal support for the two crops in 2014.
In contrast, the “upstream” oil industry receives no taxpayer-funded entitlements. It’s not clear what Dinneen means by “paying” oil and gas companies to frack in Texas and North Dakota. Paying producers to “drill deeper in the Gulf” is probably a reference to a tax code provision that allows upstream companies to expense intangible drilling costs (IDCs).
The IRS defines IDCs as “certain drilling and development costs for wells in the United States” such as “wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production,” including the “cost for any drilling or development work done by contractors under any form of contract.”
Some oil industry critics claim IDC expensing is a “subsidy” because it is specific to oil and gas producers rather than generally available to all businesses. Actually, IDC expensing is also available to firms that drill wells for “geothermal steam or hot water.”
More importantly, although all businesses have expenses, not all businesses incur the same types of expenses. Oil companies cannot deduct or expense purchases of planters and harvesters because they don’t grow crops for a living. By the same token, corn farmers don’t have intangible drilling costs because they don’t drill oil, gas, geothermal, or hot water wells for a living.
A reasonable tax code allows businesses to deduct bona fide expenses for the purpose of calculating taxable income. Expenditures for “wages, fuel, repairs, hauling, and supplies related” to capital projects are real costs, as any farmer can tell you.
The tax provision to which Dinneen appears to allude is not a subsidy. Which brings us back to the main point. The RFS is one big subsidy – a scheme to transfer wealth from refiners and motor fuel consumers to biofuel producers and the “upstream” farmers that grow their feed stocks.
The next President and Congress should enact legislating terminating the RFS after 2022. Enough is enough.