Are blenders really paying $6.8 million fines for fuel that doesn’t exist?

In the last couple weeks I’ve seen several claims that fuel refiners are paying $6.8 million fines for “blending nonexistent cellulosic fuel”, and even filing a lawsuit against the EPA for this!

Before I present all the details, I’ll get to the point:

Because of carryover credits from the original 2005 RFS1 legislation, blenders have NOT had to pay $6.8 million.  Current trends indicate that cellulosic biofuel will FINALLY start to be produced in quantity this year (POET, Blue Sugars (KL Energy), DuPont).  Therefore, a balance between buying SOME waiver credits and SOME biofuel will mean that large “fines” probably won’t occur in the future.

This $6.8 million is based on a simple calculation:

2011 RIN Waiver Credit cost ($0.78/gallon) x 2011 mandate of 8.65 million gallons = $6.747 million

As you will see below, just like in 2010, blenders will not buy this many waiver credits.  Because of the way the RFS1 and RFS2 were written, blenders can use “old” RFS1 credits to fulfill the cellulosic mandate of 8.65 million gallons.

At the same time that I’m reading about these “fines”, I’m reading about how the first companies have been approved to produce cellulosic biofuel and issue Renewable Identification Number (RIN) that track how that fuel is blended to fulfill the RFS requirements.

So is this true?  Is the EPA really setting unrealistic targets for production of cellulosic biofuel and then fining companies when they can’t obtain the fuel?  Well, in the process of my research, this article came out with does a pretty good job summarizing the situation (skip the intro, and scroll to the section heading “The Petroleum Refiners’ Arguments Don’t Hold Water”):

http://www.biofuelsdigest.com/bdigest/2012/08/02/petroleum-refiners-get-out-the-old-fear-mongering-playbook-for-attack-on-renewable-fuel-standard/

And it links to this article, which attempts to explain the confusing situation with the carryover of credits from RFS1 to RFS2 (the current incarnation):

http://www.biofuelsdigest.com/bdigest/2012/07/03/the-obama-plan-for-cost-competitive-military-biofuels-the-10-minute-guide/

We are not alone in being confused about this situation.  Here, a report from the CRS addresses the whole question:

http://www.fas.org/sgp/crs/misc/R41106.pdf

Specifically, from this report:

However, the design of the RFS2 transition program allowed for RFS1 cellulosic RINs to be used towards compliance under the RFS2 program. Therefore, it is possible that compliance with the 2010 standards could have been satisfied in whole or in part with the RFS1 cellulosic RINs.** Also, the statute allows companies to purchase cellulosic biofuel waiver credits in lieu of submitting RINs in years when EPA lowers the mandate. Compliance with 2010 standards could have been met with the purchase of cellulosic biofuel waiver credits. For 2010, EMTS records indicate that 12,186 cellulosic biofuel waiver credits were purchased. Total cellulosic biofuel waiver credits available for purchase are to be equal to the reduced cellulosic biofuel volume established by EPA for the compliance year.

Therefore, the 2010 waiver credits purchased are significantly below the volume established by

EPA for the 2010 cellulosic biofuel mandate.  Currently, EMTS is not depicting any cellulosic biofuel registered thus far toward the 2011 mandate of 6.6 million gallons (for the time period January through October 2011).  Compliance for 2011 may come through use of waiver credits instead of through the use of cellulosic biofuel RINs.

** CRS could find no record of RFS1 cellulosic RINs being used to meet compliance for the 2010 cellulosic biofuels mandate.

In conclusion:

• We know what refiners paid in 2010, and it was much less than the mandate.  We can only assume the difference was made up by RFS1 credits (since no cellulosic fuel was being commercially produced yet).
• We don’t know what refiners paid in 2011 yet, but we hope to see the website updated with this information soon: http://www.epa.gov/otaq/fuels/rfsdata/rfs2cellulosicwaivercredits.htm

On the subject of how much cellulosic ethanol has ACTUALLY been produced, a look at the EPA website seems to show that some (20,069) was produced in April, 2012 but that is it??  Kinda of strange that production ceased:

http://www.epa.gov/otaq/fuels/rfsdata/2012emts.htm

We are basing everything we know off the EPA website – either these credits are being made up by RFS1 credits, or the EPA is simply not enforcing the law as it should..

I should also say something about the use of the word “fine” being used to describe the cost of waiver credits.  I’m sure it was chosen carefully by those groups because of the connotations associated with that word.  In the current situation where not enough biofuel exists to fulfill the mandate that may be appropriate word.  I would think of it more as a tax.  The legislation is written to basically charge the fuel blenders (the oil companies) to buy biofuel.  It is creating a market for this fuel, and thus encouraging an industry to develop.  Since the RFS requires these fuels to have a smaller GHG footprint, this legislation is really addressing climate change by charging these companies.  This is a good thing in my view.  The point of this post is to point out that these companies aren’t being charged as much as they claim.

Since this post is a gathering of research on this topic that I hope is useful to others, you can find the full RFS final ruling here:

http://www.epa.gov/oms/fuels/renewablefuels/regulations.htm

(scroll to the bottom, or click here for the pdf)

Thanks to Sam for very useful discussions that contributed to this content!