GAO Hammers EPA on RFS Waiver Methods

LINCOLN, Neb. (DTN) -- Not all small refineries are able to pass costs to comply with the Renewable Fuel Standard on to consumers at the pump, the Government Accountability Office said in a new report released on Thursday, calling into question EPA's method for determining whether refineries qualify for exemptions.

The GAO said EPA has not evaluated whether the pass-through idea is true and recommended the agency conduct further study.

The idea that small refineries recover costs to buy renewable identification numbers, or RINs, to comply with the RFS has been a hallmark of biofuel industry groups' contention that refiners don't experience disproportionate economic hardship from RFS compliance.

The RFS statute says refiners that produce 75,000 barrels per day or less qualify for exemptions if they can prove that compliance is an economic hardship.

The GAO report said exemption decisions for compliance years 2019 through 2021, for example, were based on an "EPA conclusion that small refineries do not experience disproportionate economic hardship from the RFS. This conclusion relies on a potentially flawed assumption -- that all parties pay and receive one price for the tradeable credits used to demonstrate compliance with the RFS."

The GAO said EPA has not analyzed whether the assumption is valid.

"GAO's analysis showed that small refineries have paid more on average for compliance credits than large refineries," GAO said. "Without reassessing its conclusion, EPA does not have assurance that its small-refinery exemption decisions are based on valid information."

2011 DOE STUDY

The U.S. Department of Energy in 2011 published a study that found small refineries might face challenges to comply with the RFS.

"For instance, the study states that small refineries tend to have less integration with other segments of the industry, such as oil production or blending and retail distribution," GAO said.

"Because of this, small refineries may have less access to capital needed to modify infrastructure in a way that would allow them to produce the renewable fuel needed to comply with the RFS. Overall, small refineries are less likely to have the infrastructure necessary to blend their own renewable fuel and are less likely to be associated with company-operated retail outlets, although small refineries are able to purchase RINs for compliance."

The GAO made seven recommendations including five to EPA and two to the DOE on how to improve the small-refinery exemption program.

That includes further studying the issue of whether small refineries can recover compliance costs through prices at the pump.

BIOFUELS INDUSTRY FURIOUS

The GAO's conclusions were met with stiff resistance from an SRE-weary biofuels industry.

From 2016 to 2020, the Trump administration granted 88 small-refinery exemptions totaling about 4.5 billion gallons in lost biofuels demand. Biofuels industry groups have fought and continue to fight in court regarding the EPA's handling of the SRE program.

The Renewable Fuels Association said on Thursday that not only was the report released three years after it was requested by a bipartisan group of federal lawmakers, but it was done so right ahead of the Nov. 8 election.

"You simply can't make this stuff up," RFA President and CEO Geoff Cooper said in a statement.

In the summer of 2019, a bipartisan group of renewable fuel supporters in the House and Senate asked the GAO to investigate the management of the small-refinery exemption program by former EPA administrators Scott Pruitt and Andy Wheeler.

"Now, more than three years later -- and less than one week before the midterm elections -- GAO puts out a shoddy report that is friendly to oil refiners and purports to answer questions no one ever asked," Cooper said.

"GAO's 'economic analysis' can only be described as a creative and obscure acrobatic routine," Cooper said. "And even after performing these high-flying gymnastics, GAO can only suggest that the cost of RFS compliance for small refiners might be 0.5% -- that's half of 1% -- higher than what larger refiners experience. In other words, GAO says small refiners -- who are raking in record profits -- can only pass on 99.5% of their RFS compliance costs."

Cooper said there is "mounting evidence" that refiners do not face disproportionate economic hardship caused by the RFS.

"All refiners -- large or small, merchant or integrated -- face the same compliance obligations and they all pass their RIN costs on to fuel blenders at the terminal. Period," Cooper said.

The GAO, however, agreed with biofuels producers that exemptions have caused harm to the industry.

"We have been saying this for years, and refiners have been claiming that SREs somehow had no impact on renewable fuel blending," Cooper said.

Growth Energy CEO Emily Skor said the GAO report "mischaracterizes" the history of RFS implementation.

"It confirms what we already know: Small refiners do not bear any disproportionate burden in complying with the RFS, and the RFS does not raise gas prices," she said in a statement.

"As written directly in the law, SREs may only be granted to refiners when RFS compliance causes 'disproportionate economic hardship.' It has been repeatedly shown that the RFS does no such thing, because refiners recover the costs of acquiring RINs."

While the GAO report is critical of EPA's conclusions about exemption requests, the GAO itself said its own analysis did not consider whether refiners face economic hardship from the RFS.

"In the past, SREs were improperly granted to refiners, not because of disproportionate economic hardship, but as a political tool to let the oil industry off the hook for its biofuel blending obligations," Skor said.

"This report does a disservice to the recent progress EPA has made since halting the abuse of SREs nationwide, in line with a key holding issued by the U.S. Court of Appeals for the 10th Circuit."

Read the GAO report here: https://www.gao.gov/….

Read more on DTN:

"Cooperative Relies on RFS Waivers," https://www.dtnpf.com/…

"Ethanol, Ag Intervene in RFS Lawsuit," https://www.dtnpf.com/…

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

Follow him on Twitter @DTNeeley

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