GAO Criticizes Renewable Fuel Standard

The U.S. Government Accountability Office (GAO) recently released two reports on the federal Renewable Fuel Standard (RFS) that raised concerns about the program’s performance. The RFS is important to the heating oil industry because it provides financial incentives for the use of biodiesel, which is the drop-in fuel that marketers use to create Bioheat® fuel.

Biodiesel also has benefited from the Biodiesel Tax Credit, a $1/gallon credit that is also under fire within the federal government. Without these incentives, Bioheat fuel would face new challenges to price that could hinder adoption of Bioheat, which is already mandated in New York City and Rhode Island.

The GAO addressed two aspects of the RFS in separate reports: reduction of greenhouse gases and production of advanced biofuels.

In the report on advanced biofuels, the authors noted that the Renewable Fuel Standard mandates that transportation fuels be blended with increasing volumes of biofuels through 2022, with the goals of reducing greenhouse gas emissions and expanding the nation’s renewable fuels sector while reducing reliance on imported oil. “Blending of conventional renewable fuels, primarily ethanol derived from corn starch, which is required to reduce greenhouse gas emissions by 20 percent compared with petroleum-based fuels, has nearly reached the maximum called for under the RFS,” the report states. “Further growth in renewable fuels is to come from advanced biofuels, which must reduce life-cycle greenhouse gas emissions by at least 50 percent compared with petroleum-based fuels to qualify under the RFS. However, production of advanced biofuels has not kept pace with statutory targets.”

Focus on Drop-In Fuels
The federal government has supported research and development (R&D) related to advanced biofuels through direct research or grants, and the focus is shifting away from cellulosic ethanol and toward drop-in biofuels, according to GAO. “Unlike corn starch-based or cellulosic ethanol, drop-in fuels such as renewable gasoline are fully compatible with existing infrastructure, such as vehicle engines and distribution pipelines. In fiscal years 2013 through 2015, the federal government obligated more than $1.1 billion for advanced biofuels R&D. Of this amount, the Department of Energy (DOE) obligated over $890 million,” the report adds.

Other obligations are through the Department of Agriculture (USDA), the Environmental Protection Agency (EPA), the Department of Defense (DOD), and the National Science Foundation (NSF). According to agency officials, agencies are shifting their focus to drop-in fuels in part because they are compatible with existing infrastructure. Officials from one federal funding agency said this compatibility makes drop-in fuels more desirable than cellulosic ethanol.

“Experts said that several advanced biofuels are technologically well understood and some are being commercially produced, but they noted there is limited potential for increased production in the near term and cited several factors that will make significant increases challenging,” GAO wrote. “Given that current advanced biofuel production is far below RFS targets and those targets are increasing every year, it does not appear possible to meet statutory target volumes for advanced biofuels in the RFS under current market and regulatory conditions.”

Biofuels that are technologically well understood include biodiesel, renewable diesel, renewable natural gas, cellulosic ethanol, and some drop-in fuels. “A few of these fuels, such as biodiesel and renewable diesel, are being produced in significant volumes, but it is unlikely that production of these fuels can expand much in the next few years because of feedstock limitations,” the report states.

Experts told GAO that technologies for producing other fuels, such as some drop-in fuels, are technologically well understood, but that these fuels are not being produced because production is too costly. “Among the factors that will affect the speed and volume of production, experts cited the low price of fossil fuels relative to advanced biofuels. This disparity in costs is a disincentive for consumers to adopt greater use of biofuels and also a deterrent for private investors entering the advanced biofuels market,” GAO wrote. “Experts also cited uncertainty about government policy, including whether the RFS and federal tax credits that support advanced biofuels will remain in effect. While such policies should encourage investment, investors do not see them as reliable and thus discount their potential benefits when considering whether to invest.”

Biomass-based diesel, which has its own minimum statutory volume target set in the RFS, is the exception among the categories in that it exceeded its minimum of at least 1 billion gallons for 2015. In 2015, about 1.5 billion gallons of biodiesel were produced, according to EPA. In addition, about 300 million gallons of renewable diesel were produced in 2015. “Experts agreed that expansion potential for these fuels is limited by the availability of feedstocks (fats and oils), for which there are competing uses,” the report states. “For example, soybean oil is also used as a cooking oil.”

Low Fossil Fuel Prices Change the Equation
The report cites experts as saying that low fossil fuel prices affect advanced biofuels in two ways. First, getting consumers to accept higher blends of advanced biofuels at the pump will require those biofuels to be priced competitively with equivalent fossil fuels. “While the average retail gasoline price was over $4 per gallon in May 2011, it dropped to under $2 per gallon in early 2016, making it harder to compete on price at the pump. Similarly, retail diesel prices were over $4 per gallon as recently as March 2014, but briefly fell below $2 in early 2016,” the report states.

Second, experts said low fossil fuel prices are a significant impediment to biofuels investment. “One expert noted that investment in advanced biofuels technology has dropped since oil prices have dropped, making it difficult to fund the R&D needed to reduce the cost of biofuels,” GAO wrote. Experts agreed that one option to overcome this fossil fuels price advantage would be to put a price on greenhouse gas emissions—for example, through a carbon tax or similar mechanism.

Uncertainty about government policy “is a major barrier for the commercialization of advanced biofuels because it sends mixed signals to the market, which can limit investment,” GAO wrote. The future of the RFS, the Biodiesel Income Tax Credit, and the Second Generation Biofuel Producer Tax Credit may all be sources of uncertainty, the report adds.

Regarding the RFS, there is uncertainty about whether it will remain in place, and uncertainty about where EPA will set annual volume requirements. Meanwhile, the tax credits have been allowed to expire and then have been retroactively extended in the past. “This uncertainty affects all stages of biofuel production. For example, one expert stated that producers of farm equipment will not invest in new harvesting technology to maximize biomass feedstock yields if they see too much uncertainty in the market for advanced biofuels over the next 10 years, while other experts noted the difficulty in obtaining capital to build commercial-scale plants,” GAO wrote. “Every advanced biofuels producer we interviewed also cited uncertainty about government policy as a major barrier to commercial-scale production.”

Missing GHG Targets
In its report on greenhouse gas emissions, GAO found that it is unlikely that the goals of the RFS to reduce greenhouse gas emissions and expand the nation’s renewable fuels sector will be met as envisioned. Advanced biofuels achieve greater greenhouse gas reductions than conventional biofuels, i.e. ethanol, but there is limited production of advanced biofuels and limited potential for expanded production by 2022.

The cellulosic biofuel blended into the transportation fuel supply in 2015 was less than 5 percent of the statutory target of 3 billion gallons. In part as a result of low production, EPA has reduced the RFS targets for advanced biofuels through waivers in each of the last four years. “According to experts GAO interviewed, the shortfall of advanced biofuels is the result of high production costs, and the investments in further research and development required to make these fuels more cost-competitive with petroleum-based fuels even in the longer run are unlikely in the current investment climate,” the report states.

Advanced biofuels are those that achieve at least a 50-percent reduction in life-cycle greenhouse gas emissions, as compared with 2005 baseline petroleum-based fuels. The category may include a number of fuels, including fuels made from any qualified renewable feedstock that achieves at least a 50-percent reduction in lifecycle greenhouse gas emissions, including biomass-based diesel.

In the absence of advanced biofuels, most of the biofuel blended under the RFS to date has been conventional corn-starch ethanol, which achieves smaller greenhouse gas emission reductions compared with advanced biofuels. In addition, further reliance on ethanol to meet expanding RFS requirements is limited by incompatibility of ethanol blends above E10 with existing vehicle fleet and fueling infrastructure.

The shortfall of advanced biofuels is the result of high production costs, despite years of federal and private research and development efforts. The RFS was designed to bring about reductions in greenhouse gas emissions by blending targeted volumes of advanced and, in particular, cellulosic, biofuels, because those fuels achieve greater greenhouse gas reductions than conventional corn-starch ethanol and petroleum-based fuel. However, because advanced biofuel production is not meeting the RFS’s targets, the RFS is limited in its ability to meet its greenhouse gas reduction goals as envisioned.

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