Renewable Fuel Standard: Program Unlikely to Meet Production or Greenhouse Gas Reduction Targets
Published: 2016-12-01T00:00:00

Fast Facts:
The Renewable Fuel Standard aims to reduce greenhouse gas emissions and expand the nation’s renewable fuels sector through 2022. It requires that transportation fuels (such as gasoline and diesel) sold in the U.S. contain annually increasing amounts of conventional renewable fuels (such as ethanol) and advanced biofuels (such as cellulosic biofuel). Advanced biofuels can reduce greenhouse gas emissions by at least half compared to petroleum-based fuels.
However, we testified that it is unlikely that the goals of the RFS will be met because production of advanced biofuels is limited, as is the potential for expanding their production by 2022.

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 2006 the RFS has required that transportation fuels—typically gasoline and diesel—sold in the United States be blended with increasing volumes of biofuels to meet environmental and energy goals. Annual targets for the volumes of biofuels to be blended are set by statute. EPA is responsible for adjusting the statutory targets through 2022 to reflect expected U.S. industry production levels, among other factors, and for setting volume targets after 2022. Biofuels included in the RFS are either conventional (primarily corn-starch ethanol) or advanced biofuels (e.g., cellulosic ethanol and biomass-based diesel). Advanced biofuels emit fewer greenhouse gases than petroleum-based fuels and corn-starch ethanol.
In November 2016, GAO issued two reports on the RFS. This testimony is based on those two reports: GAO-17-94 and GAO-17-108 . It provides information on whether the RFS is expected to meet its production and other targets, as well as expert views on any federal actions that could improve the RFS framework, among other things.
For the reports on which this testimony is based, GAO analyzed legal requirements and EPA data. In addition, GAO worked with the National Academy of Sciences to convene a meeting of experts from industry, academia, and research organizations in May 2016. GAO also contracted with the National Academy of Sciences for a list of experts on issues related to the RFS. Further information on how GAO conducted its work is contained in the reports.
section_title: What GAO Found
paragraphs: It is unlikely that the goals of the Renewable Fuel Standard (RFS)—to reduce greenhouse gas emissions and expand the nation's renewable fuels sector while reducing reliance on imported oil—will be met as envisioned because there is limited production of advanced biofuels and limited potential for expanded production by 2022. Advanced biofuels, such as cellulosic ethanol and biomass-based diesel, achieve greater greenhouse gas reductions than conventional biofuels (primarily corn-starch ethanol), but the latter account for most of the biofuel blended into domestic transportation fuels 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. Partly as a result of low production of advanced biofuels, the Environmental Protection Agency (EPA), which administers the RFS in consultation with other agencies, has reduced the RFS targets for such fuels through waivers in each of the last 4 years (see figure). According to experts GAO interviewed, the shortfall of advanced biofuels is due to high production costs. The investments required to make these fuels more cost-competitive with petroleum-based fuels, even in the longer run, are unlikely in the current investment climate, according to experts.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our recent work on advanced  biofuels and the Renewable Fuel Standard (RFS). As you know, since  2006, the RFS has required that transportation fuels—typically gasoline  and diesel—sold in the United States contain annually increasing  amounts of renewable fuels to achieve key environmental and energy  goals. For conventional renewable fuels, primarily ethanol derived from  corn starch, the amount blended into transportation fuels has nearly  reached the maximum called for under the RFS. To count toward this  target amount, conventional renewable fuels are generally required to  reduce greenhouse gas emissions by 20 percent compared with  petroleum-based fuels. Additional  increases in the use of renewable  fuels are to come from advanced biofuels, a category that the RFS  requires to reduce life-cycle greenhouse gas emissions by at least 50  percent compared with petroleum-based fuels. However, production of  advanced biofuels, such as cellulosic biofuels, has not kept pace with  targets in the RFS.
In this context, my testimony today discusses the findings from our two  November 2016 reports on the RFS. Accordingly, it provides information  on (1) how the federal government has supported advanced biofuels  research and development (R&D) in fiscal years 2013 through 2015 and  where its efforts have been targeted, (2) expert views on the extent to  which advanced biofuels are technologically understood and the factors  that will affect the speed and volume of production, (3) whether the RFS  is expected to meet its goals, (4) expert views on any federal actions that  could improve the RFS, and (5) policy alternatives experts suggested to  better meet the goals of the RFS in the future.
To conduct this work, we worked with the National Academy of Sciences  to convene a meeting of experts from industry, academia, and research  organizations in May 2016. We also contracted with the National  Academy of Sciences for a list of experts on issues related to the RFS.  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, relevant  legislation, and agency documents pertaining to annual volume  requirements. We also interviewed officials from the Departments of  Agriculture (USDA), Defense (DOD), and Energy (DOE); the  Environmental Protection Agency (EPA); and the National Science  Foundation (NSF). Our November 2016 reports include detailed  explanations of the methods used to conduct our work. We conducted the  work on which this testimony is based 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: Congress established the RFS as part of the Energy Policy Act of 2005,  in response to concerns about the nation’s dependence on imported oil.  The RFS initially required that a minimum of 4 billion gallons of renewable  fuels be blended into transportation fuels in 2006, ramping up to 7.5  billion gallons by 2012. Two years later, the Energy Independence and  Security Act of 2007 (EISA) increased and expanded the statutory target  volumes for renewable fuels and extended the ramp-up period through  2022. More specifically, the act established overall target volumes for  renewable fuels 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.  Advanced biofuel is a catch-all category that may include a number of  fuels, including those 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.
EPA administers the RFS in consultation with DOE and USDA. EPA’s  responsibilities for implementing the RFS include setting annual volume  requirements. Each year, by November 30, EPA is required to establish  via rulemaking the volumes of biofuel that must be blended into  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. The  structure of the volume targets emphasized conventional biofuels 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.1).
Further, 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. In this case, 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.  However, in the volume requirement it finalized in November 2016, EPA  effectively set the amount of conventional biofuels required under the  program at 15 billion gallons, equal to the statutory target for 2017 (see  fig.1).
section_title: Supported through Direct Research or Grants, Federal R&D Related to Advanced Biofuels Is Shifting toward Drop-In Fuels
paragraphs: In our November 2016 report, we found that the federal government has  supported R&D related to advanced biofuels through direct research or  grants, and the target of this R&D is shifting away from cellulosic ethanol  and toward drop-in biofuels. Unlike corn-starch-based or cellulosic  ethanol, drop-in fuels, such as renewable gasoline, are fully compatible  with existing infrastructure, such as vehicle engines and distribution  pipelines. In fiscal years 2013 through 2015, the federal government  obligated more than $1.1 billion for advanced biofuels R&D. Of this  amount, DOE obligated over $890 million. For example, DOE’s Office of  Science funds three bioenergy research centers affiliated with universities  and national laboratories that conduct basic research for all stages of  biofuel production. In addition, USDA obligated over $168 million in fiscal  years 2013 through 2015 to support advanced biofuels. For example,  USDA scientists developed a novel process to increase production of  butanol, a drop-in fuel that lowered production costs by over 20 percent.  The remaining federal obligations during these years were through EPA,  DOD, and NSF, which obligated less for such R&D. According to agency  officials, agencies are shifting their focus to drop-in fuels in part because  these fuels are compatible with existing infrastructure. Officials from one  federal funding agency said this compatibility makes drop-in fuels more  desirable than cellulosic ethanol.
section_title: Experts Agreed Several Advanced Biofuels Are Technologically Well Understood but Cited Factors That Make It Challenging to Significantly Increase Production
paragraphs: As we reported in November 2016, experts told us that the technology to  produce several advanced biofuels is well understood but noted that  among those currently being produced there is limited potential for  increased production in the near term. Experts further cited multiple  factors making it challenging to significantly increase the speed and  volume of production. In addition, current advanced biofuel production is  far below overall RFS target volumes, and those volumes are increasing  every year. Consequently, it does not appear possible to meet statutory  target volumes for advanced biofuels in the RFS under current market  and regulatory conditions.
Biofuels that the experts identified as being technologically well  understood include biodiesel, renewable diesel, renewable natural gas,  cellulosic ethanol, and some drop-in fuels. A few of these fuels are being  produced in significant volumes, but the overall volume being produced  falls short of the volume target in the RFS. For example, in 2015, about  3.1 billion ethanol equivalent gallons of advanced biofuels were produced,  falling short of the statutory target of 5.5 billion gallons for that year. By  2022, the advanced biofuels target increases to 21 billion gallons, so  production would have to rapidly increase to meet this target. Even  though a few of these fuels, such as biodiesel and renewable diesel, are  being produced in significant volumes, it is unlikely that production of  these fuels can expand much in the next few years because of feedstock  limitations. Current production of cellulosic biofuels is far below the  statutory volume targets and, according to the experts, there is limited  potential for expanded production to meet future higher targets, in part  because production costs are currently too high. Experts told us that  technologies to produce other fuels, such as some drop-in fuels, are well  understood, but that those fuels are not being produced because  production is too costly.
Experts identified a number of factors that will affect the speed and  volume of advanced biofuel production, including the following.
The low price of fossil fuels relative to that of advanced biofuels.  This disparity in price is a disincentive for consumers to adopt greater  use of biofuels and also a deterrent for private investors entering the  advanced biofuels market.
Uncertainty about government policy, including whether the RFS  and federal tax credits that support advanced biofuels will  continue to be in effect. While such policies should encourage  investment, investors do not see them as reliable and thus discount  their potential benefits when considering whether to invest.
High cost of converting cellulosic feedstocks. These costs include  transporting and handling feedstocks, processing them into a fuel, and  disposing of wastes, among other things.
Time and cost to bring a new technology to commercial-scale  production. The timeline to bring a new technology from laboratory  scale to commercial scale is 12 years if everything works well, and it  can be considerably longer.
Time and cost to secure fuel certification and acceptance. Before  a fuel is brought to market, it must go through regulatory registration,  certification by ASTM International,  and other testing.
Underdeveloped feedstock supply chain. Lack of logistics for the  entire feedstock supply chain—from securing a contract to delivering  and storing a feedstock—is an economic barrier to the production of  advanced biofuels.
section_title: The RFS Is Expected to Fall Short of Its Goals Because of Limited Production of Advanced Biofuels and Reliance on Conventional Corn- Starch Ethanol
paragraphs: As we found in our November 2016 report, it is unlikely that the goals of  the 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 and limited potential for expanded  production by 2022. Advanced biofuels achieve greater greenhouse gas  reductions than conventional biofuels, although the latter account for most  of the biofuel blended into domestic transportation fuels under the RFS.  As a result, the RFS is unlikely to achieve greenhouse gas emissions  reductions as envisioned. For example, the cellulosic biofuel blended into  the domestic transportation fuel supply in 2015 was less than 5 percent of  the statutory target of 3 billion gallons. Partly as a result of low production  of advanced biofuels, EPA has reduced the RFS targets for such fuels  through waivers in each of the last 4 years. According to experts we  interviewed, the shortfall of advanced biofuels is the result of high production costs, and the investments in further R&D required to make  these fuels more cost-competitive with petroleum-based fuels, even in the  longer run, are unlikely in the current investment climate.
Given the relative scarcity 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. The use of corn-starch ethanol has been  effectively capped at 15 billion gallons. As a result, expanded use of  biofuels will require increasing use of advanced biofuels, and experts told  us the most likely advanced biofuel to be commercially produced in the  near- to mid-term will be cellulosic ethanol. However, the ability to add  ethanol to the transportation fuel market to meet expanding RFS  requirements is limited by the incompatibility of ethanol blends above E10  (up to 10 percent ethanol) 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.
Several experts raised concerns about the extent to which the RFS is  achieving its goal for reducing greenhouse gas emissions, 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. Further, corn-starch ethanol plants that were in operation or  under construction before December 19, 2007, are 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 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 Improve the RFS Framework by Incrementally Encouraging Investment in Advanced Biofuels
paragraphs: As we reported in November 2016, while advanced biofuels are not likely  to be produced in sufficient quantities to meet the statutory targets,  experts identified actions that they suggested could improve the existing  RFS framework by incrementally increasing investment in advanced  biofuels, which may lead to greater volumes of these fuels being  produced and used in the longer term. For example, 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. One expert 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.
In addition, experts identified actions to increase compatibility of  infrastructure with higher ethanol blends. For example, 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. Through this partnership, USDA is investing  $100 million to install nearly 5,000 pumps offering high-ethanol blends in  21 states. However, 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  transportation fuel 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 improve fueling infrastructure.
section_title: Experts Suggested Policy Alternatives That Could More Efficiently Reduce Greenhouse Gas Emissions
paragraphs: As we reported in November 2016, several experts stated that the RFS is  not the most efficient way to achieve the environmental goal of reducing  greenhouse gas emissions, and they suggested policy alternatives—in  particular, a carbon tax and a low carbon fuel standard (LCFS). Several  experts suggested that these alternatives 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 reductions in greenhouse gas emissions, a  carbon tax or LCFS would incentivize the technologies that achieve the  greatest such reductions at the lowest cost. 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, a carbon tax could  sustain consumers’ interest in fuel-saving vehicles and 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 of the light-duty vehicle fleet  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 biofuels R&D, in  effect undermining the RFS goal to expand that sector.
In light of these concerns, several experts said that an LCFS would be  more flexible and efficient than the RFS or a carbon tax at developing  biofuels that achieve the greatest greenhouse gas reductions.  Specifically, an LCFS accounts for carbon in a given fuel 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  an LCFS 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.
Chairman Lankford, Ranking Member Heitkamp, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to answer any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff members have any questions concerning this  testimony, please contact Frank Rusco, Director, Natural Resources and  Environment, 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 statement. Other individuals who made key  contributions to this testimony include Karla Springer, Assistant Director;  Jesse Lamarre-Vincent; Marietta Revesz; and Jarrod West.
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