The RFS Mandate
The Energy Policy Act of 2005 established a renewable fuel standard (RFS), which was expanded by the Energy Independence and Security Act of 2007 (EISA). The RFS requires that transportation fuels contain a blend of biofuels. The amount increases each year. The RFS mandates that 15.2 billion gallons of renewable fuel be blended into transportation fuel in 2012.
The RFS mandate has been a major catalyst for the development of biofuels industries in the United States, especially the ethanol industry. Currently, corn is the predominant source used to meet the RFS. Corn is also the most expensive single item for animal agricultural producers. According to a Congressional Research Service Report,
In 2005, the United States produced 3.9 billion gallons of ethanol, requiring roughly 1.4 billion bushels of corn; in 2007, those numbers increased to 6.5 billion gallons and 2.3 billion bushels. In 2007, roughly one-quarter of the U.S. corn crop was directed to ethanol production. In 2009, production had increased to roughly 11 billion gallons.
While the RFS contains secondary mandates for the use of cellulosic biofuels, biomass-based diesel fuels, and other advanced biofuels, the Environmental Protection agency (EPA), citing a lack of current and expected production capacity, has waived and significantly reduced the cellulosic biofuel mandate. Therefore, corn will likely continue to be the major source for renewable fuels for the foreseeable future.
The Drought Is Decreasing Corn Production and Increasing Prices
During a July 18, 2012, press briefing, United States Department of Agriculture Secretary Tom Vilsack told reporters that drought conditions in the United States are “the most serious situation we’ve had in probably 25 years.” “Sixty-one percent of the land mass of the United States is currently being characterized as being impacted by this drought.” Seventy-eight percent of the nation’s corn crop is in drought -impacted areas. The drought will result in significant price increases. Corn prices already have jumped 38 percent since June 1st.
RFS Waiver Petition Anticipated
The severe drought and its impact on corn production have led to speculation that several states may petition the EPA this week to waive the RFS requirements. As amended by the EISA, section 211(o)(7) of the Clean Air Act grants the EPA Administrator, the authority--on the petition of a state or fuel provider, or at her own discretion--to waive the overall RFS requirement for a particular year. Before granting a waiver, the Administrator, in consultation with the Secretaries of Agriculture and Energy, must determine either: 1) that there is inadequate domestic renewable fuel supply; or 2) implementation of the requirement would severely harm the economy or environment of a state, region, or the United States.
The EPA previously interpreted the waiver provision in 2008. Then, increasing demand for corn for biofuels, the rise in energy prices, and other supply concerns in grain markets led to rapid increases in corn and other grain prices. Texas Governor Rick Perry petitioned the EPA for a 50 percent waiver from the RFS requirements on April 25, 2008. As grounds for the waiver, Governor Perry cited the negative effects of the RFS requirements on the Texas economy and global food prices. The EPA interpreted the waiver provision narrowly and denied the waiver request in August 2008, stating that “the levels of potential impacts from the RFS do not satisfy the high threshold of harm to the economy to be considered severe.”
Recent statements by the Department of Agriculture Secretary suggest that he would not support a waiver. During his press briefing he was asked about the use of corn for ethanol in light of the severe drought conditions. He responded:
There’s no need to go to the EPA at this point in time. Based on the quantity of ethanol that’s currently in storage, there’s no problem in that area at this point in time.
Secretary Vilsack’s position is consistent with the position taken by the American Coalition for Ethanol:
The evidence doesn’t support an RFS waiver. Because corn ethanol production has exceeded the RFS schedule for several years. The excess ethanol stocks (approximately 850 million gallons in storage) and surplus RINs [renewable identification numbers](between 2.5 and 3 billion RINs in the bank) provide significant cushion for refiners to meet the 2012 and 2013 RFS obligations in drought conditions without it being the cause of a run up in corn prices. The surplus storage and RINs enable ethanol producers to scale back production based on market cues without impacting obligated parties’ ability to meet the RFS requirements.
If one or more states petition for waiver of the RFS requirements, the EPA could determine that the drought and its impact on corn production do not meet the high threshold that the implementation of the RFS mandate will severely harm the economy. As the EPA stated in its denial of Governor Perry’s waiver petition in 2008, “it is not sufficient to determine that the implementation of RFS would contribute to such harm.” Further, "EPA would have to find that there is generally a high degree of confidence that the RFS is severely harming the economy.”
The EPA must act within 90 days of receipt to approve or disapprove a waiver petition, which must be put out for notice and comment. If the EPA grants a waiver, the waiver expires within one year, but may be extended by the EPA Administrator in consultation with the Secretaries of Agriculture and Energy.