Friday, April 13, 2007

Another Layer

This week the EPA issued its new rules for a nationwide Renewable Fuel Standard (RFS). It provides the details of how we will move toward President Bush's goal of reducing gasoline consumption by 20% within 10 years, on the way to 35 billion gallons per year of alternative fuels. The program adds another layer of complexity for refiners already stretched by balkanized gasoline specifications and a variety of recently enacted or pending state regulations restricting greenhouse gas emissions from their facilities. While this looks like a step towards a unified national approach to addressing our energy and environmental challenges, it is unlikely to be as effective as it should be, because it is based on a muddle of environmental, energy security, and agricultural drivers. Even more bizarrely, the EPA expects this program to reduce consumers' fuel costs, though that has never been the case for any previous fuel regulation.

The RFS program mandates a minimum level of renewable fuel blending by refiners and marketers each year, starting at a baseline of 4 billions gallons in 2006 and rising each year until it reaches the 7.5 billion gallons targeted by the Energy Policy Act of 2005. Because the ethanol blender credit and import tariff remain in place, the new rules are likely to produce a further windfall for US farmers and domestic ethanol producers, along with the railroads that transport the fuel to market. The program exempts small refiners from meeting these requirements until 2010, and they could enjoy a similar, if temporary windfall. Oddly, the RFS also exempts Alaska and Hawaii entirely--unless they opt in--thus denying efficient international ethanol producers such as Brazil a natural outlet that wouldn't compete with US producers.

The program contains a mechanism designed to give refiners some flexibility in meeting their quotas, though this adds a layer of bureaucracy to its implementation. It creates a new tradable energy attribute, the Renewable Identification Number (RIN), similar to the existing "renewable energy certificate" or "Green-e" attribute for renewable-source electricity. Refiners will have the option of blending in renewable fuel (chiefly ethanol or biodiesel) or buying an equivalent quantity of RINs from another party that has generated them in excess of its RFS quota.

Although the EPA has estimated both the energy security and greenhouse gas reduction benefits from this program, the RFS comes across as another instance of our failure to decide what our real goal is, reducing greenhouse gas emissions or backing out imported oil. Instead of providing targets with incentives for meeting them, we're again prescribing the means, regardless of their efficacy in solving the underlying problem. Any cap-and-trade system for greenhouse gas emissions, which is surely in the offing, will now have to mesh with the RFS system, unless Congress wisely decides to scrap the former when introducing the latter. In the end, consumers will pay more, but not by enough to promote meaningful conservation.

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