This midterm election cycle elevated a multitude of policies affecting American industries. In the Midwest, in particular, those discussions largely focus on the future of the Renewable Fuel Standard (RFS) — a program requiring corn ethanol and other domestically produced biofuels be blended into the U.S. fuel supply.
In South Dakota, we are all too aware of the ongoing debate surrounding the RFS and the constant efforts to reform the program. First, oil refiners, responsible for buying blending credits called Renewable Identification Numbers (RINs) are now struggling to comply due to increasing RIN prices. Second, biofuel stakeholders remain concerned about the industry’s ability to continue to drive demand for ethanol. To address demand concerns, the Environmental Protection Agency (EPA) recently allowed E15 blends to be sold year-round. However, this is only a small, short-term win for the ethanol community, and the Trump Administration continues to pursue changes that appease both oil and ethanol.
The latest issue to arise through those efforts regards the Administration’s recent decision to allow an increase in small refinery exemptions (SREs). These exemptions are granted to refiners that would encounter “disproportionate economic hardship” due to RFS blending requirements. Biofuel stakeholders claim the recent increase in these exemptions harm ethanol demand. However, economists examining the impact of these refinery exemptions refute that conclusion.
A recent study by University of Illinois economist Scott Irwin shows that ethanol blend rates haven’t budged despite the increase in refinery waivers. He states, “If there has been any ethanol “demand destruction” to date it was very small, perhaps a drop in the ethanol blend rate of a tenth, which equates to only about 140 million gallons of ethanol consumption on an annual basis.” Irwin goes on to say that the reason for this negligible impact is that “all but a tiny sliver of ethanol in the U.S. is consumed in the form of E10 and the price of ethanol in recent months has been very low relative to gasoline. The price competitiveness of ethanol in E10 means that the conventional ethanol mandate is non-binding up to the E10 blend wall.”
While these studies prove that SREs are not directly affecting ethanol demand in its most common form, they do highlight a larger long-term issue that impacts both ethanol and oil stakeholders as well as consumers. Unlike E10, higher ethanol blends are not price competitive without a subsidy, but RINs provide the financial backing needed to incentivize drivers to purchase E15 and E85 blends. However, a second SRE study found that these exemptions have led to a decline in the price of RINs. If SREs continue to drive down RIN prices, it could eliminate the incentive to consume higher ethanol blends above the E10 blend wall and significantly reduce demand for E15 and E85.
Put simply, SREs have not stifled ethanol demand for E10 but could contribute to a decrease in demand for E15 and E85 in the future. Still, SREs are not the real problem. The larger issue is that the RFS program is no longer driving demand for ethanol and becomes less sustainable with each new short-term fix that’s implemented. It is time for industry stakeholders to admit that the RFS is no longer the best avenue to boost domestic fuel markets and our current approach to RFS reform is failing. Instead, the oil and biofuel industries must come together and work with members of Congress to produce a viable long-term solution that improves market viability and benefits all stakeholders involved.