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Renewable Fuel Standard—a Hidden Tax on Consumers and Refiners

Sept. 15, 2022, 8:45 AM

At the turn of the 21st century, US policymakers were eager to find solutions that would reduce our nation’s reliance on foreign oil. That was the primary rationale for the renewable fuel standard, a federal program created by Congress in 2005 that expanded the volume of renewable fuels blended in the US transportation sector.

It is unlikely that congressional authors of the RFS intended for this program, administered by the Environmental Protection Agency, to disrupt and diminish the US independent refining sector. But over the course of nearly two decades, that is exactly what has occurred—and consumers have paid the price. The RFS has become a hidden tax that Americans pay every time they fill up at the pump.

Under this arcane law, refiners must purchase tradeable credits called renewable identification numbers when they are unable to blend biofuel on their own. RINs are essentially serial numbers used to track biofuels. When the EPA decides that a greater volume of biofuel needs to be blended into the gasoline and diesel fuel supply, refiners have to purchase a greater number of RINs to comply with the EPA’s mandate. This may be the only example in which the US government requires a manufacturer to purchase credits to prove a third party blended a necessary ingredient into a product.

Many independent refiners have no control over blending, which must occur at a terminal because ethanol’s corrosive properties prevent it from shipping in pipelines after being blended into gasoline. As a result, the RFS all but forces smaller, usually independent refiners to purchase RINs from other entities, including their competitors.

RINs cost a penny to a nickel to cover administrative costs from 2008 to 2012. In 2013, RIN prices spiked up to $1.45 based on EPA’s unobtainable blending targets, and speculators recognizing controls were non-existent. RIN prices have been wildly volatile ever since, reaching as low as 10 cents per gallon in January 2020, to nearly $1.70 today. The RIN market has climbed to greater than $30 billion today from a $3 billion annual market in January 2020.

Independent merchant refiners are now at the mercy of Big Oil competitors with blending operations, large retail chains that blend renewables yet have no RFS obligation, and third-party speculators who trade RINs for profit. The RIN market is unregulated and manipulated, enhancing RIN sellers’ ability to make a profit at the expense of refiners and motorists.

This is how RIN markets work, and the impact on independent refiners has been devastating. RIN payments put those refiners at a deep competitive disadvantage because they are unable to recover the full RIN cost in their bulk fuel sales to blenders. However, marketers and retailers that control ethanol blending do pass the RIN value through to the consumer and pocket RIN revenue as profit—as evidenced in public financial reports of major retail chains. Independent refiners are now spending more on RINs than on all other operating costs combined—more than payroll, energy to run the plant, and all other operating costs. This is not sustainable.

Ironically, the EPA acknowledges that consumers eventually pay for elevated RIN prices, which confirms the assessments of several independent financial analysts who have said the broken regulatory structure of the RFS is contributing to higher consumer fuel costs. Energy Policy Research Foundation President Lucian Pugliaresi testified to the US Senate Environment and Public Works Committee earlier this year that “the RFS program is raising gasoline prices by approximately 30 cents a gallon.”

In recent years, small refinery exemptions provided an economic lifeline to small refiners squeezed by exorbitant RIN prices. Before the courts struck down SREs, they provided a safety valve that helped normalize RINs prices, without impacting demand for biofuels.

According to Scott Irwin, a University of Illinois agricultural economist, SREs waived billions of gallons of ethanol mandated between 2017 and 2020 without any change in the ethanol blend rate. The EIA also concluded there is a disconnect between RIN prices and ethanol demand, primarily due to the mandate. The only significant drop in the blend rate was in spring 2020 at the start of the Covid-19 pandemic, tied to fuel demand destruction caused by government lockdowns rather than RFS policy.

Over the past several years, the fog has lifted to show the dysfunctional RFS is creating a tax on American refiners, consumers, businesses, and governments that purchase fuel. SREs have nothing to do with that.

As the federal government increases RFS mandates in size and scope, the program’s harmful effects on everyday American consumers continue to worsen. Countless elected officials and business, industry, and environmental groups have shared their concerns over the broken RFS driving consumer prices higher and compounding inflation, not to mention recent research calling into question any positive environmental impact. The EPA must implement commonsense reforms to reverse these unintended consequences and get the RFS program back on track.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Christopher Brooks is a professor of history at East Stroudsburg University in East Stroudsburg, Pa.

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