Today, the National Association of Convenience Stores (NACS) published a study on the challenges facing the more than 120,000 U.S. convenience stores that sell motor fuel in a market increasingly shaped by the competing requirements of two federal programs: renewable fuel standard (RFS, a.k.a. the ethanol mandate) and corporate average fuel economy (CAFE).

I may have more to say about the study in a later post, but the skinny is that RFS and CAFE may whipsaw the retail fuel outlets upon which most of us depend to fill our tanks. CAFE will decrease the amount of fuel purchased and the frequency of consumer transactions at convenience stores, while the RFS will force convenience stores to make costly investments in storage tanks and blender pumps to sell increasing amounts and percentages of high-ethanol blends.

The excerpts below from NACS’s press release paint a disturbing picture on an industry caught in the regulatory cross hairs:

“RFS and CAFE policies cannot coexist without substantial changes in the retail and vehicle markets to accommodate significantly higher concentrations of renewable fuels, an unlikely scenario given that we may not even meet current requirements as they stand in 2012,” said John Eichberger, NACS vice president of government relations and the author of the new NACS whitepaper, The Future of Fuels: An Analysis of Future Energy Trends and Potential Retail Market Opportunities.

The Renewable Fuels Standard, revised by Congress as part of the Energy Independence and Security Act of 2007 (EISA), requires that increasing amounts of qualified renewable fuels be integrated into the motor fuels supply, culminating at a minimum of 36 billion gallons in 2022. This mandate was expected to increase renewables to approximately 20% to 25% of the overall gasoline market in 2022, about double the rate of 10.4% last year.

Meanwhile, in 2011 the Obama administration proposed new CAFE standards, which are expected to be finalized this summer, that seek to increase the average fleet fuel efficiency to an equivalent of 54.5 miles per gallon by 2025. The cumulative effect of the two mandates is that renewable fuels will be required to represent a significantly greater share of the market than originally anticipated — perhaps as much as 40%, or four times higher than today.

“This level of renewable fuels penetration in the market will impose significant economic burdens on the retail fuels market and consumers,” said Eichberger. “To meet such a high renewable fuels concentration, it is likely that most retailers in the country will have to replace their underground storage tank systems and fuel dispensers. For the convenience industry alone, this will require a minimum infrastructure investment that will add nearly $22 billion to the cost of retailing fuels.” [And where will they get the scratch, I wonder, with CAFE depressing motor fuel demand and sales?]

Even after this enormous infrastructure investment, it still may be impossible to satisfy the RFS, considering that only one in six consumers will drive vehicles capable of running on the mandated fuels. The U.S. Energy Information Administration (EIA) projects only 16% of on-road vehicles in 2022 will be flexible fuel vehicles.

“Unless something dramatic happens, we will hit the ‘blend wall’ within the next two years and will not be able to meet RFS requirements. This will trigger massive fines throughout the petroleum distribution system that will increase the cost to sell motor fuels,” said Eichberger.

An industry expert explains the problem to me as follows:

It’s all about the drop in demand caused by increased fuel economy running up against inflexible volumetric mandates and an infrastructure that can’t meet those targets.

In a 140 billion gallon gasoline market, the ”blend wall” (how much ethanol may be blended annually into the nation’s motor fuel supply) is 14 billion gallons (full market penetration of E10 — motor fuel made with 10% ethanol).

If CAFE drops demand to 100 billion gallons, the blend wall drops to 10 billion gallons of ethanol. But the RFS requires the sale of 36 billion gallons by 2022. To sell 36 billion gallons of ethanol and meet and the proposed CAFE standards, E-10 must be replaced with E-40 nationwide. However, pumps and storage tanks at most convenience stores, most cars, and nearly all outboard motors, lawn mowers, and other small engines can’t handle E-40.

The goals of the two programs — cut fuel consumption, expand ethanol consumption — conflict with each other.

Folks, your government’s left hand does not seem to know what its other left hand is doing. Honk if you think central planners can’t plan!

Yesterday, the House Appropriations Committee approved an amendment to the Fiscal Year 2012 Interior, Environment, and Related Agencies appropriations bill that would block EPA from using any funds to:

• Develop greenhouse gas (GHG) emission standards for new motor vehicles and vehicle engines manufactured after the 2016 model year; and
• Consider or grant a Clean Air Act waiver allowing the California Air Resources Board (CARB) to establish GHG emission standards for new motor vehicles and vehicle engines manufactured after the 2016 model year. 

Capital Alpha Partners, LLC, a firm providing political and policy risk analysis to institutional investors, rightly notes that the amendment, sponsored by Rep. Steve Austria (R-Ohio), could ”shift the debate over fuel economy standards and pressure the administration to soften its 56.2 mpg target floated two weeks ago.” In addition, the measure “would slice two of the three currently-involved agencies [EPA and CARB] out of the rule-making loop,” leaving fuel economy regulation to the National Highway Traffic Safety Administration (NHTSA), ”the one agency seen as ‘most reasonable’ by industry and other observers.” 

Capital Alpha reckons the measure “has a 25% chance of enactment into law this year.” If enacted as part of the one-year EPA funding bill, the measure would expire on September 30, 2012. “However,” says Capital Alpha, ”should it make it into law, opponents would be hard-pressed to strip it out in future years.” An exciting prospect for liberty-loving Americans!

As explained previously (here, here, and here), EPA is ’legislating’ climate policy under the guise of implementing the Clean Air Act (CAA), a statute enacted in 1970, years before global warming became an issue. Al Gore’s “planetary emergency” is bogus, but America’s constitutional crisis is real. Under the U.S. Constitution, only the people’s representatives get to make the big decisions concerning the content and direction of national policy. When agencies legislate, the separation of powers is breached, and the people have no one to hold accountable at the ballot box for the burdens government places upon them. 

EPA’s power grab is breathtaking. EPA is not only making climate policy through the regulatory backdoor, it has also hijacked federal fuel economy regulation by establishing GHG standards for new motor vehicles.

As explained here, here, and here, motor vehicle GHG standards are almost 95% fuel economy regulation (because 94-95% of all motor vehicle GHGs are carbon dioxide from the combustion of motor fuel, and because there is a single pool of technologies that reduces motor fuel consumption and thereby CO2 emissions as well). This means EPA can effectively tighten federal Corporate Average Fuel Economy (CAFE) standards just by tightening its GHG standards. Yet the CAA provides no authority to EPA (or any other agency) to regulate fuel economy. And although 1975 Energy Policy Conservation Act (EPCA) and 2007 Energy Independence and Security Act (2007) authorize EPA to test automakers’ compliance with CAFE standards, those statutes reserve the authority to prescribe CAFE standards to NHTSA.

The auto industry supported EPA’s GHG standards, but only to escape a worse regulatory fate. EPA threatened to inflict a patchwork quilt of GHG/fuel economy standards on the U.S. auto market by granting CARB’s request for a waiver to establish GHG emission standards for new cars sold in California. A baker’s dozen other states were poised to opt into the CARB GHG/fuel economy regime. “Are you gonna come along quietly, or do we have to let the California Air Resources Board muss ya up?” That was the gist of the deal EPA offered in 2009 to obtain auto industry support for a “national” GHG/fuel economy standards program.

To run this greenhouse protection racket, however, EPA had to flout EPCA Sec. 32919, which prohibits states from adopting laws or regulations “related to” fuel economy standards. To repeat, GHG motor vehicle standards are largely fuel economy standards by another name.

Rep. Austria’s amendment would put the kibosh on further mischief of this sort during FY 2012. And, as Capital Alpha opines, if the amendment is enacted into law, “opponents would be hard-pressed to strip it out in future years.”

This post updates my June 14 post on the mantra intoned by EPA, the California Air Resources Board (CARB), and the National Highway Traffic Safety Administration (NHTSA) that EPA/CARB’s greenhouse gas (GHG) motor vehicle emission standards are “harmonized and consistent” with NHTSA’s fuel economy standards.

EPA Associate Administrator David McIntosh recently sent written responses to questions from House Energy and Commerce Committee members following up on a May 5, 2011 hearing entitled “The American Energy Initiative.”

In a nutshell, EPA defines “harmonized and consistent” as “whatever we say it is.”

The 2007 Energy Independence and Security Act (EISA) extended the Corporate Average Fuel Economy (CAFE) credit granted to manfacturers of flexible-fueled vehicles (FFVs), phasing it out in 2020. 

In his question to EPA, Rep. John Shimkus (R-Ill.) notes that EISA extended the FFV credit “specifically because Congress wanted to encourage the production of vehicles that can run on E-85 [motor fuel blended with 85% ethanol].” He further notes that EPA’s GHG emission standards program allows FFV credits “only during the period from model years 2012 to 2015.” After model year 2015, “EPA will only allow FFV credits based on a manufacturer’s demonstration that the alternative fuel is actually being used in the vehicles.” Congress included no such limitation in EISA.

Shimkus asks:

How can this rule be characterized as “harmonized and consistent” if the way EPA treats FFV [credits] is markedly different than the way Congress mandated FFV credits be treated under CAFE?

EPA’s response:

EPA treats FFVs for model years 2012-2016 the same as under EPCA [Energy Policy Conservation Act of 1975, which EISA amended]. Starting with model year 2016, EPA believes the appropriate approach is to ensure that FFV emissions are based on demonstrated emissions performance, which will correlate to actual usage of alternative fuels. This approach was supported by several public comments.”

Starting in 2016, EPA will not give an automaker a CAFE credit for building FFV vehicles unless the automaker can demonstrate that its customers actually use alternative fuels — a requirement not only not included in EISA but inconsistent with it. Several people submitting comments on EPA’s GHG standards supported this approach. And that, apparently, is all the justification EPA needs to override the policy set forth in law.

As discussed in my previous post, EPA’s deviation from EISA partly explains how it is possible for EPA’s GHG standards to reduce fuel consumption more than NHTSA’s CAFE standards, even though EPA, CARB, and NHTSA all profess to believe that GHG standards are not sub-rosa fuel economy standards.

So…

In 2016-2020, NHTSA gives credits for building FFVs.

In 2016-2020, EPA doesn’t give credits for building FFVs.

EPA defines the above two policies as harmonized and consistent.

And 2 + 2 = 5. 

As also discussed in the previous post, since automakers cannot comply with EPA’s GHG standards and also offset their CAFE standards with FFV credits, the two sets of standards are “harmonized and consistent” only in the sense that EPA’s rules trump both NHTSA’s rules and the CAFE program Congress authorized in 2007.

But this is getting into the weeds. The big picture is this. Motor vehicle GHG standards are almost 95% fuel economy standards by another name (because 94.9% of all motor vehicle GHGs are carbon dioxide from the combustion of motor fuel). This means that EPA can effectively tighten NHTSA’s fuel economy standards just by tightening its GHG standards. Yet the Clean Air Act provides no authority to EPA (or any other agency) to regulate fuel economy. And although EPCA/EISA authorize EPA to test automakers’ compliance with CAFE standards, those statutes reserve the authority to prescribe CAFE standards to NHTSA.

Among other questions, Shimkus asked: “Could the logical reason for Congress’s silence on FFVs in section 202(a) [of the Clean Air Act] be that Congress never envisioned the Clean Air Act would be used to regulate fuel economy?”

A rather straightforward question, yes? Unsurprisingly, it’s the one question from Rep. Shimkus that EPA Associate Administrator McIntosh chose not to address.

The California Air Resources Board (CARB) boasts that its greenhouse gas (GHG) emission standards save more fuel than the National Highway Traffic Safety Administration’s (NHTSA) Corporate Average Fuel Economy (CAFE) standards – but denies that GHG standards are fuel economy standards. Huh?

Well, of course, CARB denies it, because the Energy Policy Conservation Act (EPCA) prohibits states from adopting laws or regulations “related to” fuel economy.

But CARB has to trumpet the fuel savings from its GHG standards to attack H.R. 910, the Energy Tax Prevention Act. H.R. 910, says CARB, would make America more dependent on foreign oil by prohibiting CARB and EPA from adopting tougher GHG standards.

H.R. 910 opponents talk as if policymaking were a game in which the regulatory option with the biggest fuel savings wins. By that criterion, why not just let EPA and CARB impose a de facto 100 mpg CAFE standard and declare America to be “energy independent”?

If Congress thinks NHTSA’s standards don’t go far enough, there is a simple fix. Pass a law! What H.R. 910 opponents want is for EPA and CARB to legislate in lieu of Congress. That is neither lawful nor constitutional.

EPA, NHTSA, and CARB claim that EPA’s GHG standards for model year (MY) 2012-2016 passenger cars and NHTSA’s CAFE standards for those same vehicles are “harmonized and consistent.” Yet they also contend that NHTSA’s standards de-coupled from EPA’s standards would result in 25% more oil consumption over the lifetimes of those vehicles. How is that possible?

That’s the question House Energy and Commerce Committee Chairman Fred Upton (R-Mich.) asked California Air Resource Board (CARB) Executive Director James Goldstene regarding the latter’s testimony at a hearing on H.R. 910, the Energy Tax Prevention Act. (The House passed H.R. 910 by 255-172. Although the bill failed in the Senate, where it fell 10 votes shy of the 60 needed to overcome a filibuster, sponsors say they’ll try to force additional votes in the future.)

H.R. 910 would stop EPA from ‘legislating’ climate policy under the guise of implementing the Clean Air Act (CAA), a statute enacted in 1970, years before global warming was a gleam in Al Gore’s eye. H.R. 910 would overturn all of EPA’s GHG rules except for the agency’s current GHG standards for MY 2012-2016 passenger cars and the agency’s proposed GHG standards for MY 2014-2018 heavy trucks. However, H.R. 910 would preclude EPA from setting new, tougher GHG motor vehicle standards in later years. Similarly, it would prohibit EPA from granting waivers to CARB to set tougher standards. But that means, opponents argue, that H.R. 910 would have the effect of making America more dependent on foreign oil.

Are the opponents correct? And even if so, is that a valid reason for allowing CARB to determine the stringency of national fuel economy regulation or for allowing EPA to dictate climate policy?

As noted, H.R. 910 would not repeal EPA’s MY 2012-2016 GHG emission standards (a.k.a. Tailpipe Rule) nor EPA’s proposed GHG standards for MY 2014-2018 medium- and heavy-duty trucks (a.k.a. Heavy Truck Rule). It’s not that the bill’s sponsors — Rep. Upton and Sen. James Inhofe (R-Okla.) — have any great fondness for those rules. Nor is it the case that Congress would have adopted those standards anyway via legislation. H.R. 910 would leave EPA’s current and proposed GHG motor vehicle standards in place because automakers and engine manufacturers have already made plans and investments to comply with them.

But that just means EPA is using the regulatory process to preempt congressional deliberation and narrow Congress’s policy options. Congress must act soon before stationary sources (power plants, steel mills, pulp and paper factories, refineries, cement production facilities) also spend big bucks complying with GHG-related “best available control technology” (BACT) standards and New Source Performance Standards (NSPS).

A common argument by opponents of H.R. 910 is that, even though it would leave intact NHTSA’s Energy Policy Conservation Act (EPCA) authority to establish Coporate Average Fuel Economy (CAFE) standards for new motor vehicles, NHTSA-only regulation would do less than joint EPA-NHTSA regulation to reduce U.S. oil consumption. Typically, opponents cite CARB’s estimate that stripping EPA’s portion out of the Tailpipe Rule would reduce fuel savings by 25% over the lifetimes of MY 2012-2016 vehicles.

CARB is by no means a disinterested bystander. EPA’s GHG standards are none other than the GHG standards CARB developed and EPA approved (in May 2009) via a waiver from federal preemption of state emission standards.

Here’s the puzzle for which Upton sought clarification. EPA, NHTSA, and CARB claim that EPA and NHTSA’s portions of the Tailpipe Rule are “harmonized and consistent.” Yet the agencies also contend that NHTSA’s portion of the Tailpipe Rule would reduce oil consumption by 58.6 billion barrels over the lifetimes of MY 2012-2016 vehicles whereas the complete rule including CARB/EPA’s GHG standards would reduce oil consumption by 77.7 billion barrels. How can this be?

In a letter dated March 11, 2011, but just now making the email rounds, CARB executive director Goldstene offers this explanation:

That the National Program [NHTSA + EPA] achieves greater emissions reductions and fuel savings than the CAFE standards alone is a result of the different underlying statutory authority that results in different program components. The four key differences are: 1) unlike the Energy Policy Conservation Act (EPCA), the CAA allows for the crediting of direct emission reductions and indirect fuel economy benefits from improved air conditioners, allowing for greater compliance flexibility and lower costs; 2) EPCA allows Flexible Fuel Vehicle (FFV) credits through model year 2019, whereas the EPA standard requires demonstration of actual use of a low carbon fuel after model year 2015; 3) EPCA allows for the payment of fines in lieu of compliance but the CAA does not; and 4) treatment of intra firm trading of compliance credits between cars and light trucks categories. 

Difference 1) doesn’t get us anywhere near the additional 19.1 billion gallons in projected fuel savings. According to the Tailpipe Rule, (i) carbon dioxide (CO2) emissions related to air conditioner-related loads on automobile engines account for only 3.9% of total passenger car GHG emissions (p. 25427), and (ii) various technologies could reduce air conditioner CO2 emissions by 10% to 30% (p. 24528). Even a 30% reduction of the 3.9% of motor vehicle emissions associated with air conditioner engine load would reduce oil consumption by only 1.1% — nowhere near the additional 25% fuel savings that supposedly depend on EPA’s GHG standards.

Differences 2) and 3) are likely the big factors. Per difference 2), automakers cannot comply with EPA’s GHG standards by manufacturing flexible-fueled vehicles. And per difference 3), automakers cannot pay fines in lieu of compliance with EPA’s GHG standards. 

Why do those differences have the effect of tighening fuel economy standards? Because EPA’s GHG emission standards are basically fuel economy regulation by another name! As EPA acknowledges, 94-95% of motor vehicle GHG emissions are carbon dioxide from motor fuel combustion. And as both EPA and NHTSA acknowledge, “there is a single pool of technologies for addressing these twin problems [climate change, oil dependence], i.e., those that reduce fuel consumption and thereby reduce CO2 emissions as well” (Tailpipe Rule, p. 25327). 

Because of differences 2) and 3), EPA will always be able to make NHTSA’s fuel economy standards more stringent than they would be if administered under the statutory scheme Congress created.

What this means, of course, is that the Tailpipe Rule is “harmonized and consistent” only in the sense that EPA and CARB are now calling the shots. The consistency and harmony is that of the first mate saying “aye aye, sir” to the captain. That should trouble a Congress jealous of its constitutional prerogatives, because Congress delegated the power to prescribe fuel economy standards to NHTSA, not EPA — and certainly not CARB.

EPA’s authority to set motor vehicle emission standards, and to grant CARB waivers to regulate motor vehicle emissions, comes from the CAA. The CAA confers no authority on any agency to regulate fuel economy. EPCA authorizes EPA to monitor automakers’ compliance with CAFE standards, but it delegates to NHTSA only the authority to prescribe CAFE standards.

Moreover, EPCA prohibits states from adopting laws or regulations that are even “related to” fuel economy standards. CARB’s GHG standards are massively “related to” fuel economy standards.

EPCA Sec. 32919 states:

a) General. – When an average fuel economy standard prescribed under this chapter is in effect, a State or a political subdivision of a State may not adopt or enforce a law or regulation related to fuel economy standards or average fuel economy standards for automobiles covered by an average fuel economy standard under this chapter.

In his letter to Upton, Goldstene tries to explain why EPCA does not preempt CARB’s GHG standards:

CARB has never claimed that there is no relation between the pollution [CO2] emitted by burning fossil fuels and the rate at which they are burned [gallons of fuel consumed per distance traveled, i.e. fuel economy].  CARB merely maintains the fact that pollution control and fuel economy are not identical — fuel economy and pollution control regulations have different policy objectives, utilize different incentive and flexibility features, and there are technologies that reduce pollution that are not counted under fuel economy measures, and some fuel economy improvements do not reduce emissions commensurately.

That doesn’t cut it. Let me count the ways.

1. A GHG standard does not have to be “identical” to a fuel economy standard to be “related to” it.
2. CARB is hardly one to maintain that fuel economy and GHG standards “have different policy objectives” when CARB’s big selling point for GHG regulation is that it saves more fuel than CAFE standards do! 
3. The fact that CARB/EPA’s GHG standards utilitize “different incentives and flexibility features” is irrelevant. Neither GHG regulation nor fuel economy regulation is defined by those features and incentives. The CAFE program, for example, would still be a fuel economy program even if it did not allow for payments of fines in lieu of compliance or award credits for flex-fuel vehicle sales. 
4. Just because some technologies — e.g., improved sealants for automobile air conditioning systems — “are not counted under fuel economy measures” does not mean that the Tailpipe Rule does not chiefly regulate fuel economy. Only 5.1% of motor vehicle GHG emissions are due to leakage of air conditioner refrigerants (Tailpipe Rule, p. 25424), which means CO2 from motor fuel combustion makes up 94.9% of all motor vehicle GHG emissions. To repeat, there is a “single pool of technologies . . . that reduce fuel consumption and thereby reduce CO2 emissions as well.” Almost 95% of EPA and CARB’s GHG reductions come from fuel economy enhancements.
5. Because 5.1% of motor vehicle GHGs are leaked air conditioner refrigerants, ”some fuel economy improvements do not reduce emissions commensurately.” But fuel economy improvements do reduce emissions commensurately for 94.9% of all motor vehicle GHG emissions.

H.R. 910 opponents talk as if policymaking were a game in which the regulatory option with the biggest fuel savings wins. By that criterion, why not just let EPA and CARB impose a de facto 100 mpg CAFE standard and declare America to be “energy independent”?

If Congress thinks NHTSA’s standards don’t go far enough, there is a simple fix. Pass a law! What H.R. 910 opponents want is for EPA and CARB to legislate in lieu of Congress. That is neither lawful nor constitutional.

What should drive fuel efficiency? Select the answer you think is correct: 

(a) Government;

(b) Markets; or

(c) Please pass the sweet and sour shrimp.

If you chose (a), then go straight to www.allsp.com (Season 10) and watch my favorite South Park episode, “Smug Alert.”

If you chose (c), then you’re on your way to a promising career as a diplomat.

Today, on National Journal’s energy blog, I explain why the correct answer is (b).

Last week the Consumer Federation of America issued another of those consumer “surveys” supposedly showing that the public solidly supports higher energy efficiency standards.  The previous one in this series was a Federation survey in March of alleged consumer demand for more stringent home appliance standards.  Even though affordable top-loading washers have pretty much been ruined by existing federal regulations, the March survey “found” that consumers wanted even tougher regs. The Federation’s trick: just ask pie-in-the-sky questions that portray these mandates as win-win situations.  Never suggest that the mandates mess up appliance performance, even when the evidence is staring you in the face.

The topic of last week’s survey was autos and fuel economy standards.  The Federation dressed its report up in the usual language of “ending our addiction to oil”.  But if you think oil is addictive, are you really fighting that addiction by squeezing more miles out of every gallon? Doesn’t that make oil even more addictive?

But let’s leave that question aside for the time being, and get back to the Federation’s surveying expertise.  Only one question in the survey hints at any downside to higher efficiency regs.  That downside is the possibility these regs will raise new car prices.  But aha—not to worry!  The question then has us imagine that these higher prices will be offset by lower gas costs over 3, 5 or 10 years.  In this fairytale land, support wavers only slightly as the payback period grows.

I wonder how people would have responded if the Federation had admitted that the higher car prices might never be recouped?  Or that the cars would perform worse, or be less safe (as a National Academy of Sciences concluded in 2002)?

Or let’s take a fuel economy measure reported just yesterday—that some carmakers are planning to eliminate spare tires from new cars in order to boost fuel economy? Will this milestone in the regulatory history of the car be mentioned in the Consumer Federation’s next survey?

Don’t hold your breath.

(And by the way, a major government announcement on fuel economy regs is reportedly scheduled for this morning, so you may want to watch your wallet as well.)

Richard Morrison, Jeremy Lott and the American Spectator’s Joseph Lawler assemble to bring you Episode 77 of the LibertyWeek podcast. We talk about Myron Ebell’s recent global warming debate during the Detroit Auto Show and the future of cap and trade in Congress. Segment starts approx. 12:30 into the show.