Renewable Fuel Standard: Program Unlikely to Meet Its Targets for Reducing Greenhouse Gas Emissions
Published: 2016-11-28T00:00:00

Fast Facts:
The Renewable Fuel Standard program is unlikely to meet its targets for reducing greenhouse gas emissions and expanding the U.S. renewable fuels sector. Advanced biofuels—fuels that achieve the most greenhouse gas reductions—aren't being produced at the necessary levels, and they likely won't be by 2022.
Less than 5% of the 3 billion gallon cellulosic biofuel RFS target was produced in 2015, and additional investments for commercialization seem unlikely. (An earlier version of this summary used the term "advanced biofuel" instead of "cellulosic" and has been corrected.)
Experts cited multiple federal actions that could incrementally improve the investment climate for advanced biofuels, such as reducing uncertainty about the future of the RFS and tax credits.

Highlights:
section_title: Why GAO Did This Study
paragraphs: The RFS generally mandates that domestic transportation fuels be blended with increasing volumes of biofuels through 2022, with the goals of reducing greenhouse gas emissions and expanding the nation's renewable fuels sector while reducing reliance on imported oil. Annual targets for the volumes of biofuels to be blended are set by statute. EPA oversees the program and is responsible for adjusting the statutory targets through 2022 to reflect expected U.S. industry production levels, among other factors, and for setting biofuel volume targets after 2022. Biofuels included in the RFS are conventional (primarily corn-starch ethanol) as well as various advanced biofuels (including cellulosic ethanol and biomass-based diesel). Advanced biofuels emit fewer greenhouse gases than petroleum and corn-starch ethanol.
GAO was asked to review challenges to the RFS and their possible solutions. This report provides information on whether the RFS is expected to meet its goals, as well as expert views on any federal actions that could improve the RFS framework, among other things. GAO worked with the National Academy of Sciences to identify experts on issues related to the RFS. GAO interviewed these experts and analyzed their responses. This report also drew on published studies, and a companion report, GAO-17-108 , that examined federal research and development in advanced biofuels and related issues. EPA generally agreed with the report.
section_title: What GAO Found
paragraphs: It is unlikely that the goals of the Renewable Fuel Standard (RFS)—reduce greenhouse gas emissions and expand the nation's renewable fuels sector—will be met as envisioned because there is limited production of advanced biofuels to be blended into domestic transportation fuels and limited potential for expanded production by 2022. Advanced biofuels achieve greater greenhouse gas reductions than conventional (primarily corn-starch ethanol), while the latter accounts for most of the biofuel blended under the RFS. As a result, the RFS is unlikely to achieve the targeted level of greenhouse gas emissions reductions. For example, the cellulosic biofuel blended into the transportation fuel supply in 2015 was less than 5 percent of the statutory target of 3 billion gallons. In part as a result of low production, EPA has reduced the RFS targets for advanced biofuels through waivers in each of the last 4 years (see figure). According to experts GAO interviewed, the shortfall of advanced biofuels is the result of high production costs, and the investments in further research and development required to make these fuels more cost-competitive with petroleum-based fuels even in the longer run are unlikely in the current investment climate.
Experts cited multiple federal actions that they suggested could incrementally improve the investment climate for advanced biofuels. For example, some experts told GAO that maintaining a consistent tax credit for biofuels, rather than allowing it to periodically lapse and be reinstated, could reduce uncertainty and encourage investment in advanced biofuels.

section_title: Letter
paragraphs: Since 2006, the Renewable Fuel Standard (RFS) has required that  transportation fuels—typically gasoline and diesel—sold in the United  States contain annually increasing amounts of renewable fuels, such as  ethanol and biodiesel, to achieve key environmental and energy goals.  However, renewable fuels production has not grown to the statutory  targets. The Environmental Protection Agency (EPA), which is  responsible for implementing the RFS, defines the goals of the RFS as to  (1) reduce greenhouse gas emissions and (2) expand the nation’s  renewable fuel (or biofuel) sector while reducing reliance on imported oil.  In addition, many experts and industry stakeholders agree that the RFS  has an implicit purpose of supporting the domestic agricultural economy.  Each year, by November 30, EPA is required to establish via rulemaking  the volumes of biofuel that must be blended with transportation fuels  during the following calendar year (volume requirement). The statute  provides EPA with waiver authority to set volumes below the targets  specified in the statute under certain circumstances, such as when there  is “inadequate domestic supply.”
Our past work has shown that implementation of the RFS faces many  challenges. In June 2011, we found that problems with transporting,  selling, and using gasoline blended with more than 10 percent ethanol  created challenges to meeting the volumes in the statute. For example,  we found that these higher ethanol blends may require costly  infrastructure improvements, such as replacing of underground storage  tanks at filling stations. In March 2014, we found that EPA had been late  in setting most annual RFS volume requirements for 2009 through 2014,  adding to investment uncertainty for refiners and other market  participants. We recommended that EPA develop a plan to address  these delays. Subsequently, EPA set the volume requirement for 2016 on  time and is on schedule to finalize the proposed volume requirement for  2017. However, some of the volume requirements that EPA has set and  proposed have been controversial among RFS stakeholders. For  example, agricultural groups have stated in public comments that EPA  should further increase volumes of conventional corn-starch ethanol—the  biofuel predominantly used in the United States—to encourage  investment in the infrastructure needed to accommodate fuel blends with  a higher percentage of ethanol. In contrast, petroleum industry  representatives have stated that increasing these volume requirements is  unrealistic because there is insufficient demand for higher ethanol blends,  and small engine manufacturers have stated that EPA is increasing  ethanol volumes to levels dangerous to boat engines and small engines,  such as those in lawn mowers.
You asked us to provide information about the RFS, the challenges to its  implementation, and possible solutions or policy alternatives. This report  provides information on (1) whether the RFS is expected to meet its  goals, (2) expert views on any federal actions that could improve the RFS  framework, and (3) policy alternatives experts suggested to better meet  the goals of the RFS in the future.
To address our objectives, we contracted with the National Academy of  Sciences for a list of experts on issues related to the RFS. The National  Academy of Sciences identified 24 experts with whom we conducted  semistructured interviews. We analyzed the content of the experts’  responses to our questions, coding their responses into categories  pertinent to our objectives. In addition, we reviewed the public comments  from stakeholders on rules proposed by EPA in 2015 and 2016, relevant  legislation, and agency documents pertaining to annual volume  requirements (e.g., EPA’s response to public comments) and conducted a  literature search of academic articles analyzing the RFS and other policy  approaches. We also interviewed Congressional Research Service  officials who have conducted extensive work on the RFS. In addition, we  interviewed officials at EPA, the Department of Energy (DOE), and the  Department of Agriculture (USDA). Finally, this report drew from a  companion report, GAO-17-108, that examined federal research and  development in advanced biofuels and related issues.
We conducted this performance audit from June 2015 to November 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: In response to concerns about the nation’s dependence on imported oil,  Congress enacted the RFS program as part of the Energy Policy Act of  2005. This initial RFS required that a minimum of 4 billion gallons of  biofuels be used in 2006, rising to 7.5 billion gallons by 2012. Two years  later, the Energy Independence and Security Act of 2007 (EISA)  expanded the biofuel target volumes and extended the ramp-up through  2022 establishing overall target volumes for biofuels that increase from 9  billion gallons in 2008 to 36 billion gallons in 2022. The EISA volumes can  be thought of in terms of two broad categories: conventional and  advanced biofuels:  Conventional biofuel: Biofuels from new facilities must achieve at least  a 20-percent reduction in greenhouse gas emissions, relative to 2005  baseline petroleum-based fuels. The dominant biofuel produced to date is  conventional corn-starch ethanol, although recently some conventional  biodiesel has entered the fuel supply.
Advanced biofuel: Biofuels, other than ethanol derived from corn starch  must achieve at least a 50-percent reduction in life-cycle greenhouse gas  emissions, as compared with 2005 baseline petroleum-based fuels. This  is a catch-all category that may include a number of fuels, including fuels  made from any qualified renewable feedstock that achieves at least a 50- percent reduction in lifecycle greenhouse gas emissions, such as ethanol  derived from cellulose, sugar, or waste material. This category also  includes the following:
Biomass-based diesel: Advanced biomass-based diesel must have  life-cycle greenhouse gas emissions at least 50 percent lower than  traditional petroleum-based diesel fuels.
Cellulosic biofuel: Advanced biofuel derived from any cellulose,  hemicellulose, or lignin that is derived from renewable biomass must  have life-cycle greenhouse gas emissions at least 60 percent lower  than traditional petroleum-based fuels. This category of fuel may  include cellulosic ethanol, renewable gasoline, cellulosic diesel, and  renewable natural gas from landfills that can be used to generate  electricity for electric vehicles or used in vehicles designed to run on  liquefied or compressed natural gas.
The RFS required the annual use of 4 billion gallons of overall biofuels in  2006, rising to 36 billion gallons in 2022, with at least 21 billion gallons  from advanced biofuels, effectively capping the volume of biofuels  (primarily conventional, or corn-starch, ethanol) that may be counted  toward the overall 2022 target of 15 billion gallons.
EPA administers the RFS in consultation with DOE and USDA. EPA’s  responsibilities for implementing the RFS include setting annual volume  requirements and, in doing so, using its waiver authority to reduce  statutory volume targets, if warranted. As figure 1 shows, the structure of  the volume targets allowed for blending of conventional corn-starch  ethanol in the early years covered by the statute while providing lead time  for the development and commercialization of advanced, and especially  cellulosic, biofuels. However, these fuels have not been produced in  sufficient quantities to meet statutory targets through 2016. As a result,  since 2010, EPA has used its waiver authority to deviate from the  statutory target volumes and has reduced the volume requirement for  cellulosic biofuel every year, citing inadequate domestic supply, among  other things (see fig.2).
In December 2015—when EPA finalized the volume requirements for  2014, 2015, and 2016—the agency reduced the total renewable fuel  requirement for those years. Effectively, this meant that EPA reduced  the amount of conventional biofuels required under the program relative  to statutory targets for those years. Similarly, in the volume requirement  proposed in May 2016, EPA also proposed reducing the total renewable  fuel requirement for 2017 compared with the target volumes in the  statute: from 24 to 18.8 billion gallons (see fig.3). In both cases, EPA  cited constraints in the fuel market’s ability to accommodate increasing  volumes of ethanol. EPA’s use of this waiver authority has been  controversial among some RFS stakeholders, and EPA’s 2015  requirement currently faces legal challenges from multiple parties.
EPA’s responsibilities for the RFS also include determining companies’  compliance with the RFS. EPA regulates compliance with the RFS using  a credit system. Companies in the United States that refine or import  transportation fuel must submit credits—called renewable identification  numbers (RIN)—to EPA. Companies with such an obligation are known  as “obligated parties.” The number of RINs that an obligated party must  submit to EPA is proportional to the volume of gasoline and diesel fuel  that the obligated party produces or imports and depends on the total  volume requirement EPA sets for the year in question. In accordance with  EPA guidelines, a biofuel producer or importer assigns a unique RIN to a  gallon of biofuel at the point of production or importation. When biofuels  change ownership (e.g., are sold by a producer to a blender), the RINs  generally transfer with the fuels. When a gallon of biofuel is blended or  supplied for retail sale, the RIN is separated from the fuel and may be  used for compliance or traded, sold, or held for use in the following year.  Since biofuels supply and demand can vary over time and across regions,  a market has developed for trading RINs. If a supplier has already met its  required share and has supplied surplus biofuels for a particular biofuel  category, it can sell the extra RINs to another entity or it can hold onto the  RINs for future use. An obligated party that faces a RIN deficit can  purchase RINs to meet its obligation.
Since the establishment of the RFS, conventional corn-starch ethanol is  the biofuel that has most often been blended with gasoline. After  production, ethanol is blended into the gasoline either by the wholesale  distributor or at the retail pump, with both requiring specialized tanks and  pumping equipment. Retailers sell specific blends of gasoline and  ethanol: E10 (up to 10 percent ethanol); E85 (51 to 85 percent ethanol);  and, less typically, E15 (15 percent ethanol). E10 is the most widely used  blend, representing the overwhelming majority of gasoline sales in the  United States. The E85 blend is specifically used by flex fuel vehicles.  Currently, there are relatively few of these automobiles in the United  States, and E85 stations are located primarily in the Midwest. The sale  of E15 blend is even less common than that of E85. For both E85 and  E15, developing retail pump infrastructure has been a focus of USDA’s  Biofuel Infrastructure Partnership which, beginning in 2015, has made  $100 million available in matching grants in 21 states to install nearly  5,000 new retail pumps.
In the years since the RFS was established, U.S. oil imports have  decreased. Several factors contributed to the decrease in reliance on  imported oil, including the use of E10 brought about by the RFS.  However, other factors contributed more significantly to the decrease.  According to an April 2015 DOE report, at the same time that U.S. oil  production was growing, U.S. oil consumption, and particularly  consumption of gasoline, was falling. A number of factors led to the  decrease in consumption, including historic fuel economy standards for  light and heavy vehicles in recent years.
section_title: The RFS Is Expected to Fall Short of Its Targets, Because of Limited Production of Advanced Biofuels and Reliance on Conventional Corn- Starch Ethanol
paragraphs: It is unlikely that the goals of the RFS will be met as envisioned because  there is limited production of advanced biofuels to be blended into  domestic transportation fuels and limited potential for expanded  production by 2022. In the absence of advanced biofuels, most of the  biofuel blended under the RFS to date has been conventional corn-starch  ethanol, which achieves smaller greenhouse gas emission reductions  compared with advanced biofuels. In addition, further reliance on ethanol  to meet expanding RFS requirements is limited by incompatibility of  ethanol blends above E10 with existing vehicle fleet and fueling  infrastructure.
subsections: section_title: Limited Production of Advanced Biofuels Makes the RFS Unlikely to Meet Its Goals
paragraphs: It is unlikely that the goals of the RFS—to reduce greenhouse gas  emissions and expand the nation’s renewable fuels sector—will be met as  envisioned because there is limited production of advanced biofuels to be  blended into domestic transportation fuels and limited potential for  expanded production by 2022. As we report in GAO-17-108, advanced  biofuels are technologically well understood, but current production is far  below the volume needed to meet the statutory targets for these fuels.  For example, the cellulosic biofuel blended into transportation fuel in 2015  was less than 5 percent of the statutory target of 3 billion gallons. Given  current production levels, most experts we interviewed told us that  advanced biofuel production cannot achieve the statutory targets of 21  billion gallons by 2022.
The shortfall of advanced biofuels is the result of high production costs,  despite years of federal and private research and development efforts.  The RFS was designed to bring about reductions in greenhouse gas  emissions by blending targeted volumes of advanced and, in particular,  cellulosic, biofuels, because those fuels achieve greater greenhouse gas  reductions than conventional corn-starch ethanol and petroleum-based  fuel. However, because advanced biofuel production is not meeting the  RFS’s targets, the RFS is limited in its ability to meet its greenhouse gas  reduction goals as envisioned. According to several experts we  interviewed, the investments and development required to make these  fuels more cost-effective, even in the longer run, are unlikely in the  current investment climate, in part because of the magnitude of  investment and the expected long time frames required to make  advanced biofuels cost-competitive with petroleum-based fuels.
section_title: The RFS Has Relied on Corn-Starch Ethanol, Which in Higher Blends Is Incompatible with Existing Infrastructure and Offers Comparatively Small Greenhouse Gas Reductions
paragraphs: In the absence of advanced biofuels, most of the biofuel blended under  the RFS to date has been conventional corn-starch ethanol, which  achieves smaller greenhouse gas emission reductions than advanced  biofuels. As stated above, the use of corn-starch ethanol has been  effectively capped at 15 billion gallons. As a result, further expansion of  biofuels use will require increasing cellulosic biofuels and, according to  report’s companion report (GAO-17-108), the most likely cellulosic biofuel  to be commercially produced in the near- to midterm will be cellulosic  ethanol. However, reliance on adding more ethanol to the transportation  fuel market to meet expanding RFS requirements is limited by the  incompatibility of ethanol blends above E10 with the existing vehicle fleet  and fueling infrastructure. Many experts and stakeholders refer to this  infrastructure limitation as the “blend wall.” If ethanol continues to be the  primary biofuel produced to meet the RFS, these infrastructure limitations  will have to be addressed.
Specifically with regard to the existing vehicle fleet, some experts told us  that for most vehicles sold in the United States before 2015, the owner’s  manuals and warranties indicate that the vehicles should not use ethanol  blends above 10 percent because of concerns about engine performance.  Since 2011, EPA has issued waivers to the Clean Air Act allowing  automobiles and light-duty trucks from model year 2001 and after to run  on E15. However, many auto manufacturers contest this waiver, stating  that automobile owners should follow their owner’s manuals. The  possibility that using higher blends of ethanol than E10 will cause vehicle  warrantees to be void may be reducing demand for these higher blends of  ethanol. Flex fuel vehicles, which can run on ethanol blends up to E85,  have entered the vehicle fleet but, as of 2016, were less than 10 percent  of the total vehicle fleet, which may also limit the potential demand for  higher blends of ethanol. Further, several experts told us there is little  demand from the public for E85 because the fuel offers lower gas mileage  than E10 or E15 and prices of E85 do not reflect the need to refuel more  frequently. Some experts told us that the demand for E85 has not been  truly tested because the public (including owners of flex fuel vehicles) is  largely undereducated about E85.
With regard to the fueling infrastructure, some experts stated that ethanol  blends higher than E10 are largely incompatible with existing distribution  and retail fueling tanks and pumps in the United States and that there are  few incentives for fuel distributors and retailers to make the changes that  would be needed to accommodate higher blends. Retail sale of these  higher blends faces three key challenges:
Compatibility. Ethanol blends higher than E10 may degrade or  damage some materials used in existing underground storage tank  systems and dispensing equipment such as pumps, potentially  causing leaks.
Cost. Because of concerns over compatibility, new storage and  dispensing equipment may be needed to sell intermediate blends at  retail outlets. The cost of installing a single-tank underground storage  system compatible with intermediate blends is more than $100,000. In  addition, the cost of installing a single compatible fuel dispenser is  over $20,000.
Liability. Since EPA has authorized E15 for use in model year 2001  and newer automobiles—but not for pre-2001 vehicles or nonroad  engines—many fuel retailers are concerned about potential liability  issues if consumers mistakenly use e15 in their older automobiles or  nonroad engines.
Several experts raised concerns about the extent to which the RFS is  achieving its targeted greenhouse gas emissions reductions, given that  most biofuel blended under the RFS is corn-starch ethanol. More  specifically, some experts were critical of the life-cycle analysis EPA used  to determine the greenhouse gas emissions reductions for corn-starch  ethanol. This criticism focuses on whether the model accurately accounts  for all greenhouse gas emissions in the corn-starch ethanol production  process. Some experts said that EPA’s life-cycle analysis is flawed  because it does not sufficiently include indirect land use change.  Further, as previously stated in this report, corn-starch ethanol plants that  were in operation or under construction before December 19, 2007, were  not subject to the requirement to reduce greenhouse gas emissions by at  least 20 percent. According to an August 2016 EPA Inspector General  report, grandfathered production that is not subject to any greenhouse  gas reduction requirements was estimated to be at least 15 billion  gallons, or over 80 percent of today’s RFS blending volume. Moreover,  some experts noted that under the RFS, because these facilities are  grandfathered, they have no incentive to lower their greenhouse gas  emissions. Some experts told us that the RFS creates a perverse  incentive to import Brazilian sugarcane ethanol. Specifically, because  sugarcane ethanol qualifies as an advanced biofuel, it is more profitable  to import this fuel than to domestically produce advanced biofuels.  According to these experts, the import of sugarcane ethanol, which  occurs to meet RFS requirements, causes significant greenhouse gas  emissions as a result of fuel burned during shipping.
section_title: Experts Suggested Multiple Federal Actions That Could Incrementally Encourage Investment in Advanced Biofuels and Increase Compatibility of Infrastructure with Higher Ethanol Blends
paragraphs: While advanced biofuels are not likely to be produced in sufficient  quantities to meet the statutory targets, experts identified actions that they  suggested could incrementally improve investment in advanced biofuels  and may lead to greater volumes of these fuels being produced and used  in the longer term. In addition, experts identified actions to increase  compatibility of infrastructure with higher ethanol blends.
subsections: section_title: Experts Identified Actions That Could Incrementally Encourage Investment in Advanced Biofuels
paragraphs: Experts identified actions that they suggested could incrementally  improve the investment climate for advanced biofuels and possibly  encourage the large investments and rapid development required to  make these fuels more cost-effective.
Addressing uncertainty about the future of the RFS: Many experts  told us that uncertainty about the future of the RFS is limiting investment  in advanced biofuels. In particular, some experts stated that the possibility  of a repeal of the RFS has caused potential investors to question whether  the RFS will continue to exist until 2022 and beyond. According to these  experts, however, in the current political climate little can be done to  address the threat of a repeal of the RFS. EPA may be able to improve  the investment climate for advanced biofuels by clarifying its plans for  managing the program in upcoming years. Specifically, statutory volume  targets have been set through 2022. After that, EPA will be responsible  for setting these volumes. One expert said that if EPA provided more  insight into its plans for setting post-2022 volume targets, it could reduce  some of this investment uncertainty. Further, the annual requirement that  EPA finalized in 2015 triggered what is commonly referred to as the “reset  provision” of the RFS for the advanced biofuel and cellulosic biofuel  categories. The reset provision requires EPA to modify the statutory  volume targets for future years if certain conditions are met (see sidebar).  Although the statute provides factors for EPA to consider when modifying  these volumes, EPA has not specified how it will approach setting   volumes under this reset provision. As a result, several experts thought  that uncertainty about the volumes of advanced and cellulosic biofuels  affected by the reset may be limiting investments in these fuels. Some  experts thought that EPA should clarify how it will implement the reset to  reduce negative impacts on investments in advanced biofuels. EPA  officials told us that recent annual volume requirements make EPA’s  intent clear in the near term.
Providing more consistent subsidies to advanced biofuel producers.  Some experts stated that the Second Generation Biofuel Producer Tax  Credit—an incentive to accelerate commercialization of fuels in the  advanced and cellulosic biofuels categories—has expired and been  reinstated (sometimes retroactively) about every 2 years, contributing to  uncertainty among cellulosic fuel producers and investors. These experts  told us that investment in cellulosic biofuels could be encouraged, in part,  by maintaining the Second Generation Biofuel Producer Tax Credit  consistently, rather than allowing it to periodically lapse and be reinstated.  Specifically, one expert suggested three major changes to the advanced  biofuel tax credits:
Extending the tax credit long term (e.g., 10 years) to provide investors  sufficient investment return certainty for the large investment of  building a biofuel plant until a cumulative level of second generation  biofuel has been produced and costs have fallen.
Making the producer tax credit refundable to guarantee that biofuel  producers receive the subsidy in the early years when they are  carrying losses.
Coupling the producer tax credit with an investment tax credit to  decrease capital costs and improve the financial incentives for  building cellulosic biofuel plants.
Expanding the types of fuel that qualify for the RFS. The current RFS  framework specifies that qualifying biofuels must be derived from  biomass-based feedstocks. According to some experts, this excludes  some types of low carbon fuels from qualifying under the RFS. One  example provided by experts is a process that uses microbes that capture  carbon from industrial sources—such as the waste gas emitted from steel  production—to produce a biofuel with lower greenhouse gas emissions  than petroleum-based fuels. However, because this fuel is not derived  from renewable biomass, it does not qualify for any RFS category.  According to these experts, expanding the RFS to include fuel types such  as this would better incentivize investment in innovative technologies.
Reducing RIN fraud and price volatility. Some experts said that a lack  of transparency in the RIN trading market has led to an increased risk of  fraud and increased volatility of RIN prices. This has caused uncertainty  among potential investors.
RIN fraud. From the beginning of the RFS program, there have been  concerns surrounding RIN generation and the RIN market. Because  RINs are essentially numbers in a computerized account, there have  been errors and opportunities for fraud, such as double counting RINs  or generating RINs for biofuels that do not exist. To address  concerns over these issues, EPA established an in-house trading  system called the EPA Moderated Transaction System (EMTS).  However, EPA has maintained that verifying the authenticity of RINs  is the duty of obligated parties. Under this “buyer beware” system,  those purchasing or receiving RINs must verify the RINs’ validity on  their own, and they are responsible for any fraudulent RINs they sell  or submit to EPA for compliance. However, fraud cases in the last few  years have raised questions about whether this “buyer beware”  system is sufficient to deter fraud. Furthermore, obligated parties that  inadvertently purchase fraudulent RINs lose the money spent to  purchase them, must purchase additional RINs to meet their  obligations, and face additional costs. This has a disproportionate  effect on small refiners: whereas large obligated parties—in particular,  vertically integrated refiners that typically own blending operations— can generate RINs by blending fuel, small refiners do not blend fuel  and must purchase their RINs on the market to meet their obligations  and are therefore more likely to be adversely affected by fraudulent  RINs.
RIN price volatility. Further, according to some experts, price volatility  in RIN markets adversely affects small refiners in particular and leads  to uncertainty among investors. While most RINs are bought and sold  through private contracts registered with the EMTS, there are also  spot markets for RINs. Some experts told us that price volatility may  be due, in part, to nonobligated parties speculating in these spot  markets. According to one expert, the current system leaves small  refiners disproportionately exposed to RIN price fluctuations because  they must purchase their RINs on the market, as previously  discussed. Such price fluctuations introduce uncertainty for small  refiners about the costs of compliance with the RFS.
These concerns about RIN fraud and price volatility have led to  uncertainty among potential investors. Some experts told us that EPA  should make RIN market trading more open and transparent like other  commodity markets, which could reduce the potential for fraudulent RIN  activities and reduce RIN price volatility. EPA officials told us that EPA  has recently begun to publish aggregated data on RIN transactions and  biofuel volume production on its website in an effort to make the RIN  market more transparent. However, it is too early to know how effective  this will be in addressing fraud and price volatility.
section_title: Experts Identified Actions to Increase Compatibility of Infrastructure with Higher Ethanol Blends
paragraphs: Several experts suggested that expanding grants to encourage  infrastructure improvements, such as USDA’s Biofuel Infrastructure  Partnership, could increase both the availability and competitiveness of  higher blends at retail stations nationwide. Currently through this  partnership, USDA is investing $100 million to install nearly 5,000 pumps  offering high ethanol blends in 21 states. Some experts also said that  blender pumps are not being installed with the density required to test  demand. One expert suggested that, instead of installing blender pumps  at all the stations of a certain brand in a region, blender pumps should be  installed at all the stations at a specific road intersection. That way, these  stations would be forced to compete with each other, which this expert  told us would result in more competitive prices at the pump and increased  incentives to make improvements to fueling infrastructure. Further, one  expert suggested that dealers educate consumers about flex fuel vehicle  features when the vehicles are delivered, as dealers previously did when  on-board diagnostic, check engine light, and Bluetooth synchronizing  features were introduced. Under these conditions, demand for higher  ethanol blends—and E85, in particular—could be better tested. In  response to these concerns and suggestions, a USDA official told us that,  while it is not mandatory that installations meet a required geographic  density, many of the blender pumps could be installed on highway  corridors, which could encourage competition. This official also told us  that, in addition to expanding infrastructure for higher ethanol blends, the  Biofuel Infrastructure Partnership will be able to provide data associated  with testing demand for E85, including pricing, consumer education, and  next steps for the program. In addition, in October 2016, EPA proposed  an update to fuel regulations to allow expanded availability of high ethanol  fuel blends for use in flex fuel vehicles. EPA is proposing revisions to its  gasoline regulations to make it clear that E16 through E83 fuel blends are  not gasoline, and hence not fully subject to gasoline quality standards.  EPA believes these revisions will increase demand for higher ethanol  blends.
Some experts said that blenders should be the obligated parties, instead  of importers and refiners, because that would lead to more rapid  investments in infrastructure for higher ethanol blends. According to some  experts, when EPA designed the RFS, it placed the obligation for  compliance on the relatively small number of refiners and importers rather  than on the relatively large number of downstream blenders in order to  minimize the number of obligated parties to be regulated and make the  program easier to administer. However, these experts told us that  obligating refiners and importers has not worked to incentivize investors  to expand infrastructure for higher ethanol blends. Specifically, increasing  consumer demand for biofuels—and the corresponding incentives to  invest in biofuel infrastructure—requires the value of the RIN be “passed  through” to consumers. More specifically, because the RIN that  accompanies the gallon of biofuel has value for demonstrating  compliance with the RFS or when sold in the market, it can be used to  offset the higher cost of the biofuel and make it more competitive with  petroleum-based fuels. By making biofuels more competitive, retailers are  incentivized to build the infrastructure required to sell more of these fuels  (i.e., higher ethanol blends). According to some experts and industry  stakeholders, this pass-through has not been occurring as envisioned  with refiners and importers as the obligated parties. One expert stated  that, because blenders are either retailers or sell to retailers, blenders  would be better situated to pass RIN savings along to consumers. This in  turn might encourage demand for higher ethanol blends and incentivize  infrastructure expansion. EPA officials told us they have received several  petitions requesting that they consider changing the point of obligation  and are evaluating those petitions.
section_title: Experts Suggested Policy Alternatives That Could More Efficiently Reduce Greenhouse Gas Emissions
paragraphs: Several experts stated that the RFS is not the most efficient way to  achieve the program’s goal of reducing greenhouse gas emissions, and  they suggested policy alternatives—in particular, a carbon tax and a low  carbon fuel standard (LCFS). Some experts stated that the design of the  RFS may undermine its ability to achieve the greatest greenhouse gas  emissions reductions. Specifically, some experts said that the RFS does  not incentivize the production of advanced biofuels, which achieve the  greatest greenhouse gas emission reductions. For example, a cellulosic  fuel that reduces greenhouse gas emissions by 80 percent receives no  more credit under the RFS than one that reduces greenhouse gas  emissions by 60 percent, the baseline for the cellulosic category. As a  result, fuels that may be slightly more costly to produce but achieve far  greater greenhouse gas reductions may not be developed and brought to  the market. Further, one expert stated that the RFS design creates a  market rebound effect. That is, increasing the supply of biofuels tends to  lower energy prices, which encourages additional fuel consumption that  may actually result in increased greenhouse gas emissions.
Several experts suggested that a carbon tax or an LCFS would be more  efficient at reducing greenhouse gas emissions. Specifically, some  experts said that, whereas the RFS creates disincentives for the  production of cellulosic fuels that achieve the greatest greenhouse gas  emission reductions, a carbon tax or LCFS would incentivize the  technologies that achieve the greatest reductions in greenhouse gas  emissions at the lowest cost. According to one expert, a carbon tax would  eliminate the need for annual volume requirements and the  accompanying program management and oversight. Under a carbon tax,  each fossil fuel would be taxed in proportion to the amount of greenhouse  gas (carbon dioxide) released in its combustion. In addition, one expert  stated that a carbon tax is preferable to the RFS because it allows market  effects to increase the price of emission-causing activities, which  decreases demand for those activities. As a result, it could sustain  consumers’ interest in fuel-saving vehicles and would result in a wide  range of fuel-saving responses from all consumers (rather than just those  purchasing a new vehicle). However, some experts also noted that a  carbon tax would force further electrification for light-duty transportation  because the electric power sector is the cheapest sector from which to  obtain greenhouse gas reductions. According to one expert, this  electrification of the light-duty fleet might further limit research and  development of biofuels, in effect undermining the RFS goal to expand  that sector.
In light of this, several experts said that an LCFS would be more flexible  and efficient than the RFS at developing biofuels that achieve the  greatest greenhouse gas reductions.  Specifically, an LCFS compares  cost with greenhouse gas intensity (by accounting for carbon on a cost  per unit of carbon intensity), thereby supporting incremental carbon  reductions. An LCFS can be implemented in one of two ways. The first  involves switching to direct fuel substitutes (e.g., drop-in fuels) or blending  biofuels with lower greenhouse gas emissions directly into gasoline and  diesel fuel. The second involves switching from petroleum-based fuels to  other alternatives, such as natural gas, hydrogen, or electricity, because a  low carbon fuel standard would allow a wider array of fuel pathways than  the RFS. Under the first scenario, an LCFS would promote biofuel usage,  rather than incentivizing electrification of the light-duty vehicle fleet. As a  result, according to some experts, an LCFS is preferable to a carbon tax  because it more efficiently reduces greenhouse gas emissions and  promotes the expansion of the biofuel sector. However, other experts we  spoke with critiqued an LCFS as being uneconomical. Specifically, one  expert stated that, while an LCFS such as the one in California could  force technology and create greenhouse gas reductions in the fuel  market, the costs of implementing an LCFS are much higher than its  benefits.
section_title: Agency Comments and our Evaluation
paragraphs: We provided a draft of this product to EPA for comment. In its written  comments, reproduced in appendix III, EPA generally concurred. EPA  also provided technical comments, which we incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time we will send copies to the appropriate  congressional committees and to the Administrator of the EPA. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: The objectives of this report were to provide information on (1) whether  the Renewable Fuel Standard (RFS) is expected to meet its goals, (2)  expert views on any federal actions that could improve the RFS  framework, and (3) policy alternatives experts suggested to better meet  the goals of the RFS in the future.
To address our objectives, we contracted with the National Academy of  Sciences to provide us with a list of experts on issues related to the RFS,  including the current structure of the RFS; blending, distribution, and  marketing infrastructure of biofuels; automobile manufacture; and  petroleum consumption and prices. The National Academy of Sciences  identified 25 experts, including experts from academia and policy think  tanks and practitioners with relevant experience. Areas of expertise  included policy analysis of the RFS, first-hand knowledge of the  production and distribution of biofuels and flex fuel vehicles, and the  economic and environmental ramifications of the RFS. We conducted  semistructured interviews and performed a content analysis of the 24  experts’ responses to our questions. For reporting purposes, we  categorized expert responses as follows:  “nearly all” experts represents 21 to 23 experts,  “most” experts represents 16 to 20 experts,  “many” experts represents 11 to 15 experts,  “several” experts represents 6 to 10 experts, and  “some” experts represents 2 to 5 experts.
See appendix II of this report for a list of experts whose names were  provided by the National Academy of Sciences.
We also reviewed public comments from stakeholders, relevant  legislation, and agency documents pertaining to annual volume  requirements (e.g., the Environmental Protection Agency’s (EPA)  response to public comments) and conducted a literature search for  research related to the RFS. In addition, we interviewed officials at EPA,  the Department of Energy (DOE), and the Department of Agriculture  (USDA). We also interviewed Congressional Research Service officials  who have conducted extensive work on the RFS. To provide expert views  on actions needed to address these challenges and meet the goals of the  RFS in the future, we used our content analysis of the experts’  responses, which identified possible actions within the current RFS  structure, changes to the RFS structure, and through policy alternatives to  the RFS. Finally, this report drew from a companion report, GAO-17-108,  that examined federal research and development in advanced biofuels  and related issues.
We conducted this performance audit from June 2015 to November 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: List of Experts’ Names Provided by the National Academy of Sciences
paragraphs: National Corn to Ethanol Research Center  Automotive Fuels Consulting, Inc.; General Motors  Research and Development Center (retired)
University of Michigan Energy Institute  Thorntons Inc.
Ford Motor Company (retired)
section_title: Appendix III: Comments from the Environmental Protection Agency
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Frank Rusco, (202) 512-3841 or ruscof@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Karla Springer (Assistant  Director), Jessica Artis, and Jarrod West made key contributions to this  report. Luqman Abdullah, Richard Burkard, Cindy Gilbert, Robert Keane,  Scott McClinton, Cynthia Norris, and Dan Royer also made important  contributions.