GAO: RFS Falls Short

OMAHA (DTN) -- The Renewable Fuel Standard is unlikely to meet its goal of reducing greenhouse gas emissions, a new Government Accountability Office report concludes, pointing to a number of issues with the law and possible solutions for making it work better.

The GAO completed an audit of the program at the request of Sen. James Lankford, R-Okla., chairman of the Subcommittee on Regulatory Affairs and Federal Management. During the past year, members of Congress have been examining the RFS.

It is no secret the RFS has fallen short on sparking the production and blending of cellulosic ethanol and other advanced biofuels, which by 2022 were to account for 22 billion gallons of the total 36-billion-gallon RFS.

"For example, the cellulosic biofuel blended into the transportation fuel supply in 2015 was less than 5% of the statutory target of 3 billion gallons," the GAO said.

"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 GAO interviewed 24 experts from the National Academy of Sciences and reviewed a number of other similar reports it produced on the RFS.

The future of the RFS remains in question. Though President-elect Donald Trump pledged support for the RFS during the primary campaign, the direction of his U.S. Environmental Protection Agency remains an open question.

Oil industry interests and others have called for RFS reform or repeal. According to the GAO, however, experts say there are ways to make the RFS work more effectively.

"For example, some experts told GAO that maintaining a consistent tax credit for biofuels, rather than allowing it to periodically lapse and be reinstated, could reduce uncertainty and encourage investment in advanced biofuels," the GAO said.

In particular, the second-generation biofuel producer tax credit has been allowed to expire about every two years.

"These experts told us that investment in cellulosic biofuels could be encouraged, in part, by maintaining the second generation biofuel producer tax credit consistently, rather than allowing it to periodically lapse and be reinstated," GAO said.

One expert, the GAO said, suggested three changes to the credit. One would be to make the credit more long-term up to 10 years. A second idea is to make the credit refundable to make sure biofuel producers receive the subsidy in early years when they are sustaining financial losses. Third would be to couple the producer tax credit with an investment tax credit to decrease capital costs and improve the financial incentives for building cellulosic biofuel plants.

"The shortfall of advanced biofuels is the result of high production costs, despite years of federal and private research and development efforts," the GAO said.

"...According to several experts we interviewed, the investments and development required to make these fuels more cost-effective, even in the longer run, are unlikely in the current investment climate, in part because of the magnitude of investment and the expected long time frames required to make advanced biofuels cost-competitive with petroleum-based fuels.

"While advanced biofuels are not likely to be produced in sufficient quantities to meet the statutory targets, experts identified actions that they suggested could incrementally improve investment in advanced biofuels and may lead to greater volumes of these fuels being produced and used in the longer term."

CORN ETHANOL

Since corn ethanol's place in the RFS is capped at 15 billion gallons -- the volume implied in the 2017 numbers finalized by EPA -- the overall uncertainty about the future of the RFS weighs most heavily on cellulosic ethanol and other advanced biofuels technologies.

"Many experts told us that uncertainty about the future of the RFS is limiting investment in advanced biofuels," the GAO said.

"In particular, some experts stated that the possibility of a repeal of the RFS has caused potential investors to question whether the RFS will continue to exist until 2022 and beyond. According to these experts, however, in the current political climate little can be done to address the threat of a repeal of the RFS. EPA may be able to improve the investment climate for advanced biofuels by clarifying its plans for managing the program in upcoming years."

The EPA is required to set volume targets by statute through 2022. Then EPA will be responsible for setting volumes.

"One expert said that if EPA provided more insight into its plans for setting post-2022 volume targets, it could reduce some of this investment uncertainty," the GAO said.

GAO said several experts it interviewed said the RFS was not the most efficient way to achieve the goal of greenhouse gas emissions reductions.

"They suggested policy alternatives -- in particular, a carbon tax and a low-carbon fuel standard," GAO said.

"Some experts stated that the design of the RFS may undermine its ability to achieve the greatest greenhouse gas emissions reductions. Specifically, some experts said that the RFS does not incentivize the production of advanced biofuels, which achieve the greatest greenhouse gas emission reductions."

The GAO said cellulosic fuels that reduce greenhouse gas emissions by 80% receive "no more credit under the RFS than one that reduces greenhouse gas emissions by 60%, the baseline for the cellulosic category.

"As a result, fuels that may be slightly more costly to produce but achieve far greater greenhouse gas reductions may not be developed and brought to the market. Further, one expert stated that the RFS design creates a market rebound effect. That is, increasing the supply of biofuels tends to lower energy prices, which encourages additional fuel consumption that may actually result in increased greenhouse gas emissions."

Read the full GAO report here: http://bit.ly/…

Todd Neeley can be reached at todd.neeley@dtn.com

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