Renewable Fuel Standard: Information on Likely Program Effects on Gasoline Prices and Greenhouse Gas Emissions
Released: 2019-06-03T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Congress established the RFS in 2005 and expanded it 2 years later. The RFS generally mandates that transportation fuels—typically gasoline and diesel—sold in the United States contain increasing amounts of biofuels. In addition, the RFS is designed to reduce greenhouse gas emissions by replacing petroleum-based fuels with biofuels expected to have lower associated greenhouse gas emissions. The most common biofuel currently produced in the United States is corn-starch ethanol, distilled from the sugars in corn. EPA uses RINs associated with biofuels blended with petroleum-based fuels to regulate compliance with the program.

In 2014, GAO found that refiners' costs for complying with the RFS had increased, and in 2016, GAO found that greenhouse gas emissions are unlikely to be reduced to the extent anticipated because production of advanced biofuels—which reduce greenhouse gas emissions more than corn-starch ethanol—has not kept pace with the yearly increases or the target of 21 billion gallons by 2022 called for by the statute. GAO was asked to review additional issues related to the effects of the RFS.

This report examines what is known about (1) the effect the RFS has had to date on retail gasoline prices in the United States and (2) the RFS's effect on greenhouse gas emissions and whether the RFS will meet its goals for reducing those emissions. The report also provides information about RINs.

To address the likely effects of the RFS on gasoline prices, GAO reviewed studies and interviewed experts and industry stakeholders, and conducted a statistical analysis of state ethanol mandates that were similar to the mandates of the RFS. GAO selected the experts based on their published work and recognition in the professional community. GAO selected stakeholders representing a range of perspectives, including stakeholders from the renewable fuels, petroleum, and agricultural industries, as well as from environmental groups.

Because the RFS was implemented on a nationwide basis at the same time that other factors, such as the global price of crude oil and domestic demand for retail gasoline, were affecting retail gasoline prices across the nation, it is not possible to directly isolate and measure the effect the RFS had on gasoline prices nationwide given data available to GAO. Instead GAO developed and extensively tested an econometric model that estimated the effects on retail gasoline prices of state ethanol mandates. These state mandates are similar to the RFS but were put in place voluntarily by states before the RFS led to widespread ethanol blending in every state. This model estimated how ethanol mandates affected gasoline prices in these five states. These estimates suggest the RFS likely had effects in states that did not have state-wide mandates. These states incrementally blended ethanol because of the increasing volumes of ethanol required to be blended nationally by the RFS.

Regarding the RFS's effect on greenhouse gas emissions, GAO interviewed 13 experts in government and academia. GAO selected these experts based on their published work, prior GAO work, and recommendations from other experts.

During the course of the work, GAO gathered information on the topic of RINs through interviews, a review of relevant literature, and prior GAO work.

GAO makes no recommendations in this report. In commenting on a draft of this report, USDA disagreed with GAO's finding that the RFS has had a limited effect on greenhouse gas emissions, citing research on the effects of ethanol on reducing emissions generally. GAO reported on the specific effects of the RFS on emissions. USDA also criticized GAO's methodology using experts' views. GAO employed that method to reach consensus among those with a range of perspectives. DOE and EPA did not comment on the draft report.

section_title: What GAO Found
paragraphs: Effect on prices. Evidence from studies, interviews with experts, and GAO's analysis suggest that the nationwide Renewable Fuel Standard (RFS) was likely associated with modest gasoline price increases outside of the Midwest and that these price increases may have diminished over time. Variations in these gasoline price effects likely depended, in part, on state-by-state variation in the costs to transport and store ethanol. For example, the Midwest was already producing and blending ethanol when the RFS came into effect, so that region had lower transportation costs and had already invested in necessary storage infrastructure. Other regions began blending ethanol later to meet the RFS's requirements, thereby incurring new transportation and storage infrastructure costs that resulted in gasoline prices that were several cents per gallon higher than they otherwise would have been.

In addition, experts told GAO that the RFS caused an initial increase in refining investment costs that, over the long term, reduced refining costs for gasoline. Specifically, once all locations had made the infrastructure investments and most gasoline blendstock produced was consistent with blending ethanol then there would be two continuing effects: (1) the transportation and blending costs of ethanol, which would tend to push retail prices higher and depend on the distance traveled and the modes of transport, and (2) the lower cost of producing lower octane blendstock. The former effect might dominate for locations far from the production source of ethanol and for which more costly modes of transport were used, while the lower blendstock costs might dominate for locations close to the production source of ethanol and/or those that have low transportation costs.

GAO's analysis of the effect that state ethanol mandates had on gasoline prices also showed gasoline price effects that differed in the Midwest and elsewhere. Specifically, during the period GAO studied, when the ethanol mandates in Minnesota and Missouri were in effect, all else remaining equal, retail gasoline prices were lower by about 8 and 5 cents per gallon in these states, respectively, than they would have been without the mandates. In contrast, when the ethanol mandates in Hawaii, Oregon, and Washington were in effect, GAO's model showed that retail gasoline prices were higher by about 8, 2, and 6 cents per gallon, respectively, than they would have been without the ethanol mandates. These results suggest that the RFS likely had gasoline price effects in other states that did not have state-wide ethanol mandates but that incrementally began blending ethanol as a result of increasing RFS requirements that by around 2010 had led to almost all gasoline sold in the United States being blended with 10 percent ethanol.

Effect on greenhouse gas emissions. Most of the experts GAO interviewed generally agreed that, to date, the RFS has likely had a limited effect, if any, on greenhouse gas emissions. According to the experts and GAO's prior work, the effect has likely been limited for reasons including: (1) the reliance of the RFS to date on conventional corn-starch ethanol, which has a smaller potential to reduce greenhouse gas emissions compared with advanced biofuels, and (2) that most corn-starch ethanol has been produced in plants exempt from emissions reduction requirements, likely limiting reductions early on when plants were less efficient than they are today.

Further, the RFS is unlikely to meet the greenhouse gas emissions reduction goals envisioned for the program through 2022. Specifically, GAO reported in November 2016 that advanced biofuels, which achieve greater greenhouse gas reductions than conventional corn-starch ethanol, have been uneconomical to produce at the volumes required by the RFS statute so the Environmental Protection Agency (EPA) has waived most of these requirements (see figure).

Renewable identification numbers. EPA uses renewable identification numbers (RINs) to regulate industry compliance with RFS requirements for blending biofuels into the nation's transportation fuel supply. In GAO's March 2014 report on petroleum refining, GAO noted that the RFS had increased compliance costs for the domestic petroleum refining industry or individual refiners. GAO reported that corn-based ethanol RIN prices had been low—from 1 to 5 cents per gallon from 2006 through much of 2012—but in 2013, RIN prices increased to over $1.40 per gallon in July before declining to about 20 cents per gallon as of mid-November 2013. Since the March 2014 report, corn-ethanol RIN prices have experienced more periods of volatility. Most experts and stakeholders GAO interviewed recently stated that RINs had either a small effect on prices or no effect on prices, though a few disagreed. Finally, GAO's past work, as well as EPA analysis, has identified several issues of concern with RINs, including possible fraud in the market and concerns about the effect on small refiners, price volatility, and the point of obligation.

section_title: Letter
paragraphs: As part of U.S. efforts to increase energy independence and security and  increase the production of clean, renewable fuels, Congress enacted the  Renewable Fuel Standard (RFS) as part of the Energy Policy Act of 2005  and 2 years later expanded it in the Energy Independence and Security  Act of 2007 (EISA). The RFS generally mandates that transportation  fuels—typically gasoline and diesel—sold in the United States contain  annually increasing amounts of biofuels—fuels produced from renewable  sources such as agriculture, rather than through geological processes,  such as those involved in forming petroleum. The most common biofuel  currently produced in the United States is corn-starch ethanol, which is  distilled from the sugars in corn. The Environmental Protection Agency  (EPA), which is responsible for implementing the RFS, defines the goals  of the RFS as to (1) expand the nation’s biofuel sector while reducing  reliance on imported oil and (2) reduce greenhouse gas emissions.

The initial RFS required that a minimum of 4 billion gallons of biofuels be  blended into gasoline in 2006, rising to 7.5 billion gallons by 2012. EISA  expanded both the amounts of biofuels to be blended into gasoline and  the length of time during which those amounts are to increase,  establishing target volumes that rise from 9 billion gallons in 2008 to 36  billion gallons in 2022. In March 2014, we reported that domestic  consumption of petroleum products had fallen from 2005 through 2012,  resulting in a smaller domestic market for refined petroleum products and  an increased cost of RFS compliance for some refiners. In 2016, we  reported that the reductions in greenhouse gas emissions envisioned for  the program are unlikely to occur because production of advanced  biofuels—which have a greater impact than corn-starch ethanol on  greenhouse gas emissions—has not kept pace with statutory  requirements.

EPA regulates compliance with the RFS using a tradable credit system.  Companies in the United States that refine or import transportation fuel  must submit credits—called renewable identification numbers (RINs)—to  EPA that equal the number of gallons of biofuel that the RFS requires  them to blend with the petroleum-based fuel. RINs may be used by the  company that generates them, may be sold to other companies, or  retained for future use.

You asked us to review additional issues related to the effects of the RFS.  This report examines what is known about (1) the effect that the RFS has  had to date on retail gasoline prices in the United States and (2) the effect  that the RFS has had on greenhouse gas emissions, including whether  the RFS is expected to meet its goals for reducing those emissions. In  addition, we are providing information about RINs.

To address our objectives, we reviewed relevant studies and conducted  semistructured interviews with 18 experts we identified through snowball  sampling based on expert referrals. Specifically, we identified experts  through a review of selected studies, references within the studies to  other relevant articles, prior GAO work that included discussions with a  panel convened by the National Academy of Sciences, and  recommendations from other experts identified through the studies.  Because so little empirical work has been conducted on the relationship  between prices and the RFS, especially work of a retrospective nature,  we selected some experts specifically because of the relevance of their  published work. We also selected experts who are recognized as experts  in the professional community or among their peers. In addition, we  selected individuals who have expertise or have published work relevant  to lifecycle assessment of greenhouse gas emissions of various biofuels,  or who have published work relevant to the effect of the RFS on  greenhouse gas emissions or biofuel production and use. Finally, to  obtain views from experts representing a range of perspectives, we  selected experts who represented various disciplines, including  economics, engineering, and physical sciences. Of the 18 experts we  interviewed, 7 discussed the effect that the RFS has had on retail  gasoline prices and 13 discussed the effect that the RFS has had on  greenhouse gas emissions, including 2 who also discussed the effect on  retail gasoline prices. The specific areas of expertise varied among the  experts we interviewed, so not all of the experts commented on all of our  interview topics. Appendix I includes the list of experts we interviewed  and identifies which experts we interviewed about which topics.

We also interviewed representatives from various industry stakeholders  who have been affected by the RFS to obtain their views about how the  RFS has affected gasoline prices and greenhouse gas emissions. We  reviewed much of the literature on this subject, and used the literature,  along with referrals from other experts and recommendations from the  National Academy of Sciences for prior GAO work to identify stakeholders  to interview. We also employed snowball sampling by asking the officials  we interviewed to recommend others who have knowledge about the  effect of the RFS on gasoline prices and greenhouse gas emissions.  Industry stakeholders were selected based on the relevance of their  mission to biofuels and to the RFS. In considering industry stakeholders,  we selected those that would allow us to obtain a wide range of  perspectives on these issues. For example, we selected industry  stakeholders that represent the renewable fuels industry as well as those  that represent the petroleum industry. We also selected industry  stakeholders that represent the farmers who grow the agricultural  products frequently used for biofuels, and we selected those whose  primary focus is on the environment. The views of these stakeholders are  not generalizable to those we did not interview. A list of industry  stakeholders whose representatives we interviewed can be found in  appendix II.

Because the RFS was implemented on a nationwide basis at the same  time that other factors, such as the global price of crude oil and domestic  demand for retail gasoline, were affecting retail gasoline prices across the  nation, it is not possible to directly isolate and measure the effect the RFS  had on gasoline prices nationwide given data available to us. Instead we  developed and extensively tested an econometric model that estimated  the effects on retail gasoline prices of state ethanol mandates that are  similar to the RFS but that states voluntarily put in place before the RFS  targets led to widespread ethanol blending in every state. This model  enabled us to estimate how ethanol mandates affected gasoline prices in  these five states, and these estimates allow us to infer the effects that the  RFS had in other states that did not have state-wide mandates but that  were incrementally forced to blend ethanol based on RFS requirements.  Specifically, the state-level analysis allowed us to isolate the effect of  ethanol mandates on retail gasoline prices in five states—Hawaii,  Minnesota, Missouri, Oregon, and Washington—by using other states to  control for other factors that influenced retail gasoline prices over  time. These state mandates were put into effect by 2008, at which time  the RFS was requiring relatively low levels of ethanol blending. In doing  this analysis, we used all the states identified as having met the criteria of  having state-wide ethanol blending mandates put into effect no later than  2008. Therefore, these state mandates likely accelerated ethanol  blending in those states during our study period. We conducted a  regression analysis using monthly average after-tax retail gasoline prices  from 49 states and the District of Columbia for 2001 through 2010.

Our model required data on retail gasoline prices and biofuel policies, as  well as on other factors that might have affected gasoline prices, so that  we could control for these factors and isolate the effects of the state  ethanol mandates. We obtained the gasoline price data from the Oil Price  Information Service, a leading provider of retail fuel prices. We also  collected data from government agencies, including the Department of  Energy’s Energy Information Administration, the Department of  Transportation’s Federal Highway Administration, and the Nebraska  Energy Office.

To assess the reliability of the data, we interviewed officials who maintain  the data, reviewed related academic studies, and tested the data for  missing or erroneous values. We found the data to be sufficiently reliable  for the purposes of our reporting objectives. We focused our analysis on  regular-grade gasoline, as it represented more than 80 percent of  gasoline sales in 2017. Appendix III provides a technical discussion of our  econometric model. We compared our results to expert views and related  peer-reviewed studies examining the effects of ethanol blending on fuel  prices. Also, to obtain additional information about the effect of the RFS  on gasoline prices, we interviewed officials from the Department of  Agriculture, the Department of Energy, and EPA; relevant experts as  described above; and relevant industry stakeholders as described above.

To examine the effect of the RFS on greenhouse gas emissions, we  interviewed officials from the Department of Agriculture, the Department  of Energy, and EPA and asked them about the effect of the RFS on  emissions. We also interviewed relevant experts and industry stakeholder  representatives as described above about the effect of the RFS on  greenhouse gas emissions. The expert pool included researchers who  were well equipped to speak both to the impacts of RFS on corn prices  and agricultural commodities as well as how this then impacts land use  change and greenhouse gas emissions. This is because the RFS’ effect  on gasoline prices and the effect on greenhouse gas emissions are not  distinct issues. In addition, during our interviews with experts, some  referred us to specific studies to illustrate a point, and we reference some  of these studies. We reviewed the methodology of those that we  reference and found them to be sufficiently sound.

In the course of conducting our work to examine the effect that the RFS  has had to date on retail gasoline prices in the United States and  greenhouse gas emissions, we also collected information on the topic of  RINs. We gathered this information through interviews and a review of  relevant literature, and we supplemented it with information from our  previous work. We summarized how RINs are used to show compliance  with the RFS, historical RIN prices, how RINs affect retail fuel prices, and  steps EPA has taken to improve the functioning of the RIN market.

We conducted this performance audit from January 2017 to May 2019 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
subsections: section_title: RFS Greenhouse Gas Emissions Goals and Requirements
paragraphs: EPA states that one goal of the RFS is to reduce greenhouse gas  emissions. Specifically, the RFS is designed to reduce these emissions  by increasingly replacing petroleum-based fuels with biofuels that have  lower associated greenhouse gas emissions released throughout their  lifecycle. Some of these greenhouse gas emissions are directly released  at each stage of a fuel’s lifecycle, which, for biofuels, includes the  emissions associated with growing the feedstock, transporting it,  converting it to a biofuel, distributing the biofuel, and burning it in an  engine. Other emissions are released indirectly through broad economic  changes associated with increased biofuel use, such as changes in land  use.

The lifecycle greenhouse gas emissions from biofuels cannot be directly  measured, so they are estimated using mathematical models that account  for greenhouse gas emissions at each stage of the lifecycle. These  models—in particular, Argonne National Laboratory’s Greenhouse Gases,  Regulated Emissions, and Energy Use in Transportation model—have  been used by researchers for nearly 30 years. However, the complexity of  estimating the lifecycle emissions associated with biofuels and the  sensitivity of the models to assumptions limit the precision of the modeled  results.

The RFS established statutory greenhouse gas reduction requirements  for specific types of biofuels. These types can be grouped into two broad  categories—conventional biofuels and advanced biofuels—defined by the  amount of reduction they are required by statute to achieve in lifecycle  greenhouse gas emissions relative to the 2005 emissions baseline for  gasoline or diesel.

Conventional. Conventional biofuels from new facilities must achieve  greenhouse gas emissions at least 20 percent lower than traditional  petroleum-based fuels, which include gasoline and diesel. The  dominant conventional biofuel produced to date is corn-starch  ethanol.

Advanced. Advanced biofuels must achieve lifecycle greenhouse gas  emissions at least 50 percent lower than traditional petroleum-based  fuels. Advanced biofuels may include a number of fuels, including  fuels made from algae or sugar cane, but the category excludes  ethanol derived from corn starch. This category includes the following  subcategories:

Biomass-based diesel: biodiesel or renewable diesel that has  lifecycle greenhouse gas emissions at least 50 percent lower than  traditional petroleum-based diesel fuels.

Cellulosic: renewable fuel derived from any cellulose,  hemicellulose, or lignin that is derived from renewable biomass  and has lifecycle greenhouse gas emissions at least 60 percent  lower than traditional petroleum-based fuels.

section_title: Types and Volumes of Biofuels to Be Blended under the RFS
paragraphs: The RFS established statutory requirements for the amount of biofuels  that must be blended into gasoline. These amounts increase from 9 billion  gallons in 2008 to 36 billion gallons in 2022. The RFS sets statutory  volume requirements for each type of biofuel based on the categories  described above, but EPA can waive those requirements and establish its  own, if warranted. From 2010 through 2013, EPA used its waiver  authority each year to reduce the volume requirement for cellulosic  biofuel while keeping the total volume requirement for all biofuels at the  statutory level. Starting in 2014, EPA set lower volume requirements for  all advanced biofuels and lower total biofuel blending requirements. EPA  cited, among other things, inadequate domestic supply as a reason for  the waivers. Since 2014, the gap between RFS requirements for  advanced biofuels and EPA requirements after waivers were issued has  increased. Figure 1 compares RFS statutory volumes for various types of  biofuels with volumes that EPA established using the waiver authority.

In 2018, the biofuel used most often to comply with the RFS has been  conventional ethanol derived from corn starch. As we reported in 2016,  production of cellulosic and other advanced biofuels has not progressed  as initially expected under the RFS. Although, as we reported, advanced  biofuels are technologically well understood, 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 (R&D)  efforts. The federal government has supported R&D related to advanced  biofuels through direct research and grants in recent years, with the focus  of this R&D shifting away from cellulosic ethanol, an advanced biofuel  that is not fully compatible with current vehicle engines and fuel  distribution infrastructure, and toward other biofuels that are compatible  with this infrastructure.

section_title: Ethanol as a Fuel Additive
paragraphs: Even before the establishment of the RFS, ethanol was used as an  additive in gasoline. It serves as an oxygenate, to prevent air pollution  from carbon monoxide and ozone; as an octane booster, to prevent early  ignition, or “engine knock;” and as an extender of gasoline stocks. In  purer forms, it can also be used as an alternative to gasoline in  automobiles specially designed for its use. Approximately 99 percent of  blended gasoline consumed in the United States is “E10”—a blend of  gasoline with up to 10 percent ethanol.

The use of ethanol as an oxygenate is linked to the demise of a  petroleum derivative known as methyl tertiary butyl ether, or MTBE.  MTBE had been used as an octane booster since the late 1970s, and  was used in later years to fulfill the oxygenate requirements set by  Congress in the 1990 Clean Air Act amendments. According to a report  by the Congressional Research Service, MTBE contaminated drinking  water, and about half of the states passed legislation to ban or restrict its  use. Although MTBE was not restricted by federal law, gasoline refiners  sought a substitute because of concerns over potential liability. To  replace MTBE, refiners switched to ethanol.

Congressional Research Service, MTBE in Gasoline: Clean Air and Drinking Water  Issues (updated Apr. 14, 2006).

section_title: State Ethanol Mandates
paragraphs: Five states passed and put into effect ethanol mandates similar to the  RFS—Hawaii, Minnesota, Missouri, Oregon, and Washington. In  Minnesota, Missouri, and Oregon these mandates required 10 percent of  blended gasoline to be ethanol, while Washington required 2 percent  ethanol in gasoline and Hawaii required that 85 percent of fuel sold in the  state must contain 10 percent ethanol. Minnesota was the first to put an  ethanol mandate into effect—in May 2003. Hawaii followed with an  effective date of April 2006. The Missouri, Oregon, and Washington  mandates were put into effect in 2008. Louisiana, Montana, and  Pennsylvania also passed laws requiring ethanol blending mandates, but  these mandates have not gone into effect because in-state ethanol  production volumes have not reached levels required to trigger them.

section_title: Tax Credits
paragraphs: The federal government has supported the development of a domestic  biofuels industry not only through the RFS but also through tax credits.  The Energy Tax Act of 1978, among other things, provided tax incentives  designed to stimulate the production of ethanol for blending with gasoline.  These blending incentives were restructured as part of the Volumetric  Ethanol Excise Tax Credit (VEETC) in 2004. In 2009, we found that the  VEETC and the RFS may have been duplicative with respect to their  effects on ethanol consumption. We and others found that the VEETC  was no longer stimulating additional ethanol consumption. The blending  incentives in the VEETC expired in December 2011.

There are also federal tax incentives to promote the production and use  of advanced biofuels. These include the Biodiesel Income Tax Credit,  which provides a $1 per-gallon tax credit for producers of certain forms of  biodiesel or renewable diesel. Separately, the Second Generation  Biofuel Producer Tax Credit provided advanced biofuel producers a tax  credit of up to $1.01 per gallon of advanced biofuel produced and used  domestically.

section_title: Available Evidence and Analysis Indicate That the RFS Was Likely Associated with Modest Gasoline Price Increases outside the Midwest and Modest Decreases within the Midwest
paragraphs: Evidence from studies, interviews with experts, and our analysis suggest  that the nationwide RFS was likely associated with modest price  increases outside of the Midwest. Likely variations in these gasoline price  effects depended, in part, on state-by-state variation in the costs to  transport and store ethanol. For example, the Midwest was already  producing and blending ethanol, so it had lower transportation costs and  had already built necessary storage infrastructure. Other regions began  blending ethanol later as rising volumes of ethanol required under the  RFS forced more ethanol into the system and as states began blending  ethanol. These states incurred new transportation and storage  infrastructure costs, which likely resulted in higher gasoline prices  compared to those in the Midwest states or states that had not yet begun  to blend ethanol. Overall, it is likely that as the expanded blending  requirements of the RFS caused non-Midwestern states and localities to  begin blending ethanol, these states and localities experienced increased  gasoline prices of a few cents per gallon compared to what they  otherwise would have been.
subsections: section_title: Experts, Stakeholders, and Studies Indicate that the RFS Likely Caused Changes in Retail Gasoline Prices that Varied by Region
paragraphs: According to the experts we interviewed as well as the studies we  reviewed, the RFS likely caused small changes in retail gasoline prices  that varied by region. The experts, stakeholders, and studies identified  two main ways in which the RFS may have affected prices. Specifically,  the RFS may have (1) increased transportation and storage costs in  regions outside the Midwest, and, (2) caused an initial increase in refining  investment costs that over the long term reduced refining costs for  gasoline.
subsections: section_title: Transportation and Storage Costs
paragraphs: The RFS may have affected retail gasoline prices by increasing  transportation costs in certain regions. Retail gasoline consists of two  components—ethanol and blendstock, which is the petroleum-based  gasoline that ethanol is blended with to make retail gasoline. Currently,  blendstock and ethanol are typically transported in different ways.  Blendstock can be shipped via pipeline, which is the most cost-efficient  method of transporting fuel. However, ethanol is more corrosive and  cannot be shipped in pipelines currently used for blendstock; as a result,  it must be transported using costlier methods, such as rail, barge, and  tanker truck.

Ethanol is produced primarily in the Midwest, where most corn is  produced. According to the studies we reviewed, this means that Midwest  gasoline retailers, being closer to the supply of ethanol, may have been  able to charge consumers lower prices for retail gasoline relative to non- Midwest gasoline retailers because of their lower transportation costs for  ethanol. Similarly, higher transportation costs outside of the Midwest may  have resulted in higher prices of retail gasoline in those regions. Figure 2  illustrates U.S. ethanol production in 2005, before the RFS became  effective.

In addition, the RFS may also have affected retail gasoline prices by  increasing storage costs in certain regions. Because ethanol is more  corrosive than blendstock, it must be stored differently. According to one  study we reviewed, ethanol was being blended into gasoline in many  locations in the Midwest prior to the establishment of the RFS. As a  result, the Midwest already had the infrastructure needed to store ethanol.  According to another study, in some places outside of the Midwest  ethanol was typically not being blended into gasoline prior to the  establishment of the RFS, and therefore costly infrastructure changes,  such as installing different seals and gaskets in tanks, were needed so  that retailers could store blended gasoline. For example, the California  Energy Commission estimated the costs of such infrastructure changes to  be approximately $60 million in California. Unlike transportation costs, the  costs of infrastructure changes were incurred just once, according to  industry stakeholders we interviewed; therefore the effect of such costs  on retail prices would be expected to have diminished over time.

section_title: Production Costs
paragraphs: The cost of producing retail gasoline depends in part on the costs of its  two components. The RFS may have affected the costs of blendstock and  ethanol in various ways, and according to the experts we interviewed,  past GAO work, and the studies we reviewed, these costs may have  contributed to changes in gasoline prices.

Blendstock. The RFS may have initially increased both refiners’  costs to produce blendstock compatible with ethanol blending and the  costs of shipping and storing such blendstock; however, these costs  may have decreased over time. More specifically, the RFS may have  initially increased refiners’ costs because refiners had to change their  configuration to produce a lower octane blendstock to accommodate  ethanol blending. Many experts we interviewed stated that producing  blendstock with a lower octane level required costly changes to  refinery infrastructure and processes. However, according to these  experts and stakeholders, since ethanol is relatively high in octane,  blending ethanol into retail gasoline allows refiners to produce  blendstock with a lower octane level. As a result, according to many of  the experts we interviewed, after the initial investment by refineries to  switch to the lower octane blendstock, refiners could produce that  blendstock at lower cost. This would have led to higher initial costs but  lower long-term costs once infrastructure costs had been capitalized.

The higher initial cost is consistent with our past work in which we  noted that shipping more types of blendstocks—the result of a  proliferation of blendstocks adopted by states and localities to meet  Clean Air Act standards—increases the costs of shipping and storing  blendstocks at terminals for distribution to retail sellers. As a result,  according to one expert familiar with our past work, as ethanol  blending spread further and further away from the production center in  the Midwest states, there were more types of blendstocks in the  pipeline and storage terminals, which would have increased costs.  This expert said that over the longer run and once ethanol blending  had expanded to encompass the majority of gasoline sold in the  United States, this effect would have disappeared because virtually all  the blendstock flowing through the pipeline and storage system would  be compatible with blending ethanol.

Ethanol. It is unclear whether the RFS increased or decreased the  cost of ethanol. One source we reviewed indicated that the RFS may  have increased the cost of ethanol by increasing demand for corn,  which would drive up the price of corn. On the other hand, one  expert we spoke to stated that the RFS may have decreased the cost  of ethanol in the long term by providing incentives for producers to  invest in more efficient ethanol production processes, which would  lower production costs over time.

However, it is unclear what the longer-term effects of ethanol blending on  gasoline prices have been. We believe this is because once all locations  had made the infrastructure investments and most gasoline blendstock  produced was consistent with blending ethanol then there would be two  continuing effects: (1) the transportation and blending costs of ethanol,  which would tend to push retail prices higher and depend on the distance  traveled and the modes of transport, and (2) the lower cost of producing  lower octane blendstock. The former effect might dominate for locations  far from the production source of ethanol and for which more costly  modes of transport were used while the lower blendstock costs might  dominate for locations close to the production source of ethanol, those  that have low transportation costs, or both. However, the data available to  us do not allow us to test this long-term effect.

section_title: Our Analysis of State Ethanol Mandates Also Found Gasoline Price Decreases in the Midwest and Increases Elsewhere
paragraphs: We studied the effects of ethanol blending mandates in the five states  that had such mandates prior to and including 2008; these mandates are  similar to but preceded the RFS ethanol blending mandates on retail  gasoline prices. We found that these state mandates were associated  with gasoline price decreases in the two Midwestern states we evaluated  and price increases in three non-Midwestern states. Specifically, during  the period we studied, when the ethanol mandates in Minnesota and  Missouri were in effect, our model estimates that, all else remaining  equal, retail gasoline prices were lower by approximately 8 and 5 cents  per gallon in these states, respectively, than they would have been  without the mandates. By contrast, when the ethanol mandates in Hawaii,  Oregon, and Washington were in effect, our model estimates that, all else  remaining equal, retail gasoline prices were higher by approximately 8, 2,  and 6 cents per gallon in these states, respectively, than they would have  been without the mandates. These results are consistent with what  other studies and experts found about the effects of blending ethanol with  gasoline.

Our model provides an indicator of the types of effects that the RFS likely  had on retail gasoline prices as the increasing ethanol blending targets of  the RFS began to push ethanol into more gasoline markets. Specifically,  we can infer from the model that the RFS was associated with a modest  gasoline price decrease in Midwest states. According to one expert  familiar with our analysis and with the blendstock pipeline and storage  system, expanding the volumes of lower octane feedstocks to the  Midwest states would have the effect of reducing refining production costs  because refiners serving the Midwest could do larger runs of lower octane  blendstock and therefore benefit from economies of scale in refining runs.  In addition, this would also have the effect of reducing pipeline and  storage costs for blendstocks because larger volumes of lower octane  blendstock could be shipped northward from the refining center in the  Gulf of Mexico states to the Midwest. Larger volumes of uniform blendstock during pipeline shipping reduce costs compared to smaller  shipments because different blendstocks intermix at the point they  interface in a pipeline, and these mixed blendstocks either have to be  downgraded and sold for less or pulled out entirely and re-refined to meet  existing fuel standards. Conversely, we can infer from the model that  the RFS was associated with modest gasoline price increases in states  further from the Midwest producers as increasing ethanol targets caused  those states to begin blending ethanol for the first time and for which  more refining capacity had to convert to produce lower octane feedstock  and ship it to more locations, thereby initially raising refining, pipeline, and  storage costs as discussed previously in this report.

The results of our analysis are also generally consistent with other work  that examined the effects of different state ethanol-blending requirements  on gasoline prices. For example, some states and localities started  blending ethanol before the RFS made it effectively mandatory when  these states and localities banned MTBE, an additive that increased the  oxygen content of the fuel. When MTBE was banned, ethanol was  typically added in its place. The one peer-reviewed study we identified  that estimated the effects of the MTBE ban on gasoline prices found that  in locations required to blend ethanol because of state MTBE bans, retail  gasoline prices increased by 3 to 6 cents per gallon in non-Midwestern  states, with larger price increases during times of high ethanol prices  relative to crude oil prices. This study also found that retail gasoline prices  in the Midwest may not have changed.

While our own analysis, other studies we reviewed, and experts we spoke  to cannot estimate precise price effects of the RFS on retail gasoline, we  believe that collectively the evidence points to likely effects that varied by  geographic region and that as RFS blending requirements rose and more  and more non-Midwestern states and localities adopted ethanol blending,  it is likely they saw modest increases in retail gasoline prices on the order  of several cents per gallon. Conversely, as more and more states and  localities blended ethanol and more refiners began producing larger runs  of lower octane blendstock, the costs of acquiring this blendstock likely  fell, and because Midwestern states had very low transportation costs for  ethanol, their gasoline prices likely fell.

section_title: The RFS Has Likely Had a Limited Effect on Greenhouse Gas Emissions to Date and Is Unlikely to Meet Its Future Greenhouse Gas Emissions Reduction Goals
paragraphs: Most of the experts we interviewed generally agreed that to date the RFS  has likely had a limited effect, if any, on greenhouse gas emissions.  Further, the RFS is unlikely to meet the greenhouse gas emissions  reduction goals envisioned for the program through 2022. Regarding the  RFS and greenhouse gas emissions to date, experts noted that the effect  has been difficult to assess precisely and we found disagreement among  some experts about whether the effect has been positive or negative.  However, most experts agreed that the effect—whether an increase or  decrease—has likely been limited. Regarding meeting RFS greenhouse  gas emission reduction goals through 2022, as we reported previously,  although advanced biofuels, such as cellulosic ethanol, achieve greater  greenhouse gas reductions than conventional biofuels, such as corn- starch ethanol, the latter are likely to continue to account for most of the  biofuel blended into domestic transportation fuels under the RFS because  they are economical to produce while most advanced biofuels are not.
subsections: section_title: The Experts We Spoke with Generally Believe the Effect of the RFS on Greenhouse Gas Emissions Has Likely Been Limited to Date
paragraphs: Of the 13 experts we interviewed, 10 generally agreed that the RFS has  likely had a limited effect, if any, on greenhouse gas emissions to date.  However, these experts said that the effect is difficult to assess precisely,  and they disagreed on whether the limited effect has been positive or  negative. Specifically, the experts commenting on the topic were roughly  evenly split between increases or decreases in greenhouse gas  emissions, with some saying there were negligible effects. Experts we  interviewed said that the effect that the RFS has had on greenhouse gas  emissions is difficult to assess precisely because it involves complex  factors that are challenging to quantify, including the lifecycle emissions  associated with biofuel use.

The RFS’s reliance on corn-starch ethanol to fill biofuel mandates has  limited the ability of the RFS to reduce greenhouse gas emissions.  Specifically, as we reported in November 2016, most of the biofuel  blended to date has been conventional corn-starch ethanol, which has a  smaller potential to achieve greenhouse gas reductions compared with  advanced biofuels. Because of this, several experts we interviewed for  the November 2016 report raised concerns about the extent to which the  RFS has achieved its design of reducing greenhouse gas emissions.

Furthermore, because the RFS has not been responsible for all of the  ethanol used in the United States since the program took effect, not all  greenhouse gas reductions associated with ethanol use have been the  result of the RFS. More specifically, most experts agreed that ethanol use  was historically driven, in part, by favorable market conditions and other  policies, including state biofuel mandates, ethanol tax credits, and the  phaseout of MTBE as an oxygenate for gasoline. Most experts we  interviewed said they believed that the RFS had some effect on biofuel  production by creating a guaranteed market for biofuels. Although  experts’ views differed on the amount of ethanol that would have been  produced without the RFS, most of them said that ethanol production  capacity would likely be lower today if the RFS had not helped to  establish markets. For example, four experts and one industry  stakeholder representative that we interviewed hypothesized that if the  RFS were repealed, refiners would continue to blend ethanol into fuel,  although two experts and one stakeholder representative acknowledged  that less ethanol would probably be blended without the RFS. In contrast,  one expert indicated that the RFS provides a safety net for the ethanol  industry but that this safety net may not be needed anymore.

In addition, according to EPA officials, the vast majority of the corn-starch  ethanol used to date has been produced by so-called grandfathered  plants—plants in operation or under construction before a certain date— that have been exempt from RFS emissions reductions requirements.  The grandfathered plants have likely limited the ability of the RFS to  achieve greenhouse gas emissions reductions, but this effect has likely  changed over time. Early on, when a higher percentage of grandfathered  ethanol plants used coal as an energy source and had older technologies,  EPA estimates indicated that ethanol from such plants produced more  greenhouse gas emissions than petroleum-based gasoline. However,  most of the experts we interviewed told us that over time grandfathered  plants have upgraded technology to remain economically competitive and  have converted to natural gas as an energy source, resulting in industry- wide efficiency improvements that reduce greenhouse gas emissions.  These experts indicated that such upgraded plants do not likely have  significantly different emissions than the newer plants subject to RFS  emissions reductions requirements. Little quantitative information is  available to compare the difference between greenhouse gas emissions  associated with grandfathered plants and those associated newer plants.

Finally, experts we interviewed disagreed on whether ethanol produced  today generally complies with the RFS statutory requirement to reduce  lifecycle greenhouse gas emissions by 20 percent relative to those of  petroleum-based gasoline, which affects the extent to which the RFS has  influenced greenhouse gas emissions. Of the 11 experts commenting on  the topic, approximately half said that ethanol produced today likely met  the 20 percent RFS greenhouse gas reduction requirement. Most of these  experts pointed to recent lifecycle analysis studies. Recent studies have  found that, relative to petroleum-based gasoline, corn-starch ethanol  could reduce lifecycle emissions by 19 to 48 percent. While there are  limitations and uncertainty associated with all lifecycle analyses, most  experts we interviewed said that the models used for lifecycle analyses  have improved over time and can provide reasonably accurate estimates  of certain components of direct lifecycle greenhouse gas emissions, such  as emissions associated with the energy used for farming and for  producing the biofuel in a plant.

Of the roughly half of experts who said that corn-starch ethanol likely  does not meet the RFS greenhouse gas reduction requirements, almost  all pointed to the potential for indirect emissions associated with biofuel  production and use. Indirect emissions are complex to estimate and a  source of uncertainty in lifecycle estimates, but including them could  offset emissions reductions. These indirect emissions can be produced as  the result of broad economic changes associated with increased biofuel  use, including the following:  Indirect land use change. Indirect land use change occurs when  using agricultural land to grow biofuel feedstocks causes the  conversion of previously nonagricultural lands in the United States  and elsewhere in the world to maintain world agricultural production of  food, feed, and fiber.

Fuel market effects. Though difficult to quantify, expanded biofuel  use may lead to an unintended increase in the global use of  transportation fuel and more greenhouse gas emissions, according to  most of the experts saying that corn-starch ethanol does not meet  greenhouse gas reduction requirements. For example, increasing  biofuel use in one part of the world could increase the relative supply  of petroleum in other parts of the world, thereby lowering petroleum  prices and increasing use of petroleum products there.

section_title: We Previously Reported That Limited Production of Advanced Biofuels Makes the RFS Unlikely to Meet Its Greenhouse Gas Reduction Goals
paragraphs: In November 2016 we reported that, with the exception of biomass-based  diesel, production of advanced biofuels was far below the volume needed  to meet the statutory targets for these fuels (see fig. 3). For example, we  reported that the cellulosic biofuel blended into transportation fuel in 2015  was less than 5 percent of the statutory target of 3 billion gallons. We  found in another November 2016 report that the shortfall was the result of  high production costs, despite years of federal and private R&D efforts.  With regard to future advanced biofuel production, most experts we  interviewed for the November 2016 report told us that such production  cannot achieve the statutory targets of 21 billion gallons by 2022 because  the investments and development required to make these fuels more  cost-effective, even in the longer run, were unlikely in the investment  climate at the time. Factors affecting this included the magnitude of  investment and the expected long time frames required to make  advanced biofuels cost competitive with petroleum-based fuels.  Because the bulk of greenhouse gas emissions reductions were to come  from such advanced biofuels, the expected emissions reductions have  also not occurred.

section_title: Historical Prices of RINs, Concerns regarding Their Effects on Fuel Prices, and EPA’s Actions to Mitigate These Concerns
paragraphs: As mentioned previously, EPA uses RINs to regulate compliance with the  RFS. Refiners or importers of transportation fuel in the United States are  known as “obligated parties” and must submit RINs to EPA. The number  of RINs that an obligated party must submit to EPA is proportional to the  volume of gasoline and diesel fuel that it produces or imports and  depends on the volumes of biofuel that must be blended with  transportation fuels during the following calendar year as set by EPA. 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 by the obligated party to  demonstrate compliance with the RFS or may be traded, sold, or held for  use in the following year. Some vertically integrated refiners own blending  operations, so they generate RINs that they can use to demonstrate  compliance because they also blend their own fuel. Other refiners do not  blend their own fuel and must purchase RINs to demonstrate compliance.  The latter are called merchant refiners. 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 on to the RINs for future use.  An obligated party that faces a RIN deficit can purchase RINs to meet its  obligation.
subsections: section_title: Historical RIN Prices
paragraphs: In our March 2014 report on petroleum refining, we noted that the RFS  had increased compliance costs for the domestic petroleum refining  industry or individual refiners. We reported that, according to the U.S.  Energy Information Administration, corn-based ethanol RIN prices were  low—from 1 to 5 cents per gallon from 2006 through much of 2012— because it was generally economical to blend up to or above the level  that the RFS required. However, in 2013, prices for these RINs increased  to over $1.40 per gallon in July before declining to about 20 cents per  gallon as of mid-November.

Several stakeholders told us at the time that this increase in RIN prices  was primarily due to RFS requirements exceeding the capability of the  transportation fuel infrastructure to distribute and the fleet of vehicles to  use biofuels, a situation referred to as the blend wall. EPA officials told us  at the time that high corn prices, which made ethanol more expensive  relative to gasoline, also contributed to higher RIN prices during this  period. A refiner we spoke with at the time attributed the decline in RIN  prices in the second half of 2013 to EPA’s statements expressing its  desire to address the blend wall. In our report, we noted that while the  RFS applies to all refiners in the same way, the effect of the rise in RIN  prices may depend on each refiner’s situation. Figure 4 shows historical  RIN prices for conventional, advanced, and biodiesel RINs.

Since our March 2014 report, corn-starch ethanol RIN prices have  experienced periods of volatility. One expert stated that this is because  ethanol prices have become tied with biodiesel prices since the RFS has  required levels above the 10 percent blend wall. EPA officials agreed that  once the 10 percent blend wall was reached, ethanol RIN prices have  often risen to the price of biodiesel RIN prices. More specifically, biodiesel  RIN prices are strongly affected by expectations about whether the  biodiesel tax credit will be allowed to expire, which has often happened.  In fact, EPA has at times explicitly taken the existence of the biodiesel tax  credit into account when making rulings related to the RFS. As a result,  both biodiesel RIN prices and ethanol RIN prices experience volatility. In  general, ethanol RIN prices have closely tracked biodiesel RIN prices for  the last 5 years.

As we noted in our March 2014 report on petroleum refining, prices for  RINs reflect several factors, including the cost of renewable fuels  compared with the petroleum fuels they displace and the stringency of  annual blending requirements. One expert we spoke with during the  course of the audit work for this report stated that uncertainty about the  future of the RFS has also affected RIN prices.

section_title: Effect of RINs on Retail Fuel Prices
paragraphs: Three experts and three industry stakeholders we interviewed spoke  directly about the effect of RINs on retail fuel prices. All three experts  stated that if RINs have any effect on prices it is small, while two of those  experts also asserted that it was possible that RINs had no effect on  prices at all. These experts argued that in a perfectly competitive fuel  market, the blendstock refiners increase the price of blendstock because  they know that they will need to pay for the RINs. At the same time, the  retail gasoline blenders are able to save costs related to ethanol because  of the value they receive for selling the RINs. In practice, according to  experts, the market may not be perfectly competitive, so it is possible that  RINs add from 1 to 10 cents to the retail price of gasoline in some parts of  the country. One industry stakeholder also expressed the opinion that  RINs would have little to no effect on retail gasoline prices, citing the  same argument.

Two industry stakeholders indicated that RINs would increase retail  gasoline prices, although they did not specify by how much. These  stakeholders argued that RINs represent the cost of producing retail  gasoline; because ethanol has historically had a higher cost per mile than  gasoline (though not per gallon), the RINs would represent this increased  cost and would be reflected in retail gasoline prices. An EPA analysis  found that RIN prices did not have a significant impact on retail fuel prices  and concluded that any expected impact would be very small. For retail  gasoline, EPA made the same argument as experts and stakeholders  cited above.

section_title: Problems Identified with the RIN Market and Steps Taken by EPA to Address These Problems
paragraphs: Although oil refineries and importers are the entities that are obligated to  demonstrate compliance with the RFS, not all of them produce blended  fuels. Thus, these entities cannot earn RINs themselves and need to  purchase them on the RIN market. Our past work, as well as EPA  analysis, has identified several issues of concern with RINs, including  possible fraud in the market and concerns about the effect on small  refiners, price volatility, and the point of obligation.

Fraudulent RINs. As we reported in our November 2016 report on  the RFS, some experts we spoke with at the time identified reducing  RIN fraud and price volatility as a federal action that could  incrementally encourage investment in advanced biofuels.  Specifically, these 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. Because RINs are essentially numbers in a  computerized account, there have been opportunities for fraud, such  as double counting RINs or generating RINs for biofuels that do not  exist. For example, in our March 2014 report on petroleum refining  we reported that EPA had issued several notices of violation alleging  that five companies generated invalid RINs without producing  qualifying renewable fuels. EPA officials told us that, since that time,  EPA has made additional notices of violation, although many pertain  to actions taken prior to March 2014.

Since the start of the RFS, EPA has alleged that approximately  382,524,480 RINs are invalid. 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, according to our November 2016 report.  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, must purchase their  RINs on the market to meet their obligations, and are therefore more  likely to be adversely affected by fraudulent RINs.

To address concerns over these issues, EPA established an in-house  trading system called the EPA Moderated Transaction System  (EMTS). EPA officials believe that this system provides significant  capabilities over prior reporting tools used to implement the RFS,  allowing enforcement to more quickly identify potential RFS violations  versus entry errors that were common with pre-EMTS RFS reporting.  EPA officials also informed us of a voluntary quality assurance  program intended to provide obligated parties a program to ensure  that RINs entering commerce are valid. However, EPA has  maintained that verifying the authenticity of RINs is the duty of  obligated parties.

Distribution of compliance costs. In our March 2014 report on  petroleum refining, we reported that, according to EPA, refiners  experience the same compliance costs regardless of whether they are  vertically integrated refiners or merchant refiners that purchase RINs  for compliance. However, we also reported that the views of several  stakeholders differed from EPA’s. In that regard, in a 2011 study, the  Department of Energy reported that the degree to which a small  refiner can actively blend refinery production with biofuels could  contribute greatly to the economic hardship incurred from complying  with the RFS. We noted that, while the RFS applies to all refiners in  the same way, effects of rising or falling RIN prices may vary  depending on each refiner’s situation. According to several  stakeholders we interviewed at the time, RFS compliance had been  most difficult for merchant refiners, because they did not blend their  own fuel and had to purchase RINs from others, increasing their costs  of compliance.

Price volatility. Similarly, according to the experts we interviewed for  our November 2016 report on the RFS, price volatility in RIN  markets had adversely affected small refiners in particular and led to  uncertainty among investors. While most RINs are bought and sold  through private contracts registered with the EMTS, as we mentioned  previously, RINs are also traded in markets. Some experts that we  interviewed for the November 2016 report told us that price volatility  may have been due, in part, to nonobligated parties speculating in  these markets. Such price fluctuations introduced uncertainty for small  refiners about the costs of compliance with the RFS because they had  to purchase their RINs on the market.

Placement of the point of obligation. In our November 2016 report  on the RFS, we reported that according to some experts, blenders  should be the obligated parties instead of importers and refiners.  According to some of these 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 to  accommodate higher ethanol blends. One expert we spoke with  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. Some experts told us  at the time 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 has taken some actions to address these issues. Specifically, EPA  officials we interviewed for this report told us that EPA publishes a variety  of aggregated information on its website each month to promote market  transparency, including RIN generation and use, available RINs, RIN  prices and trade volumes, RIN holdings, and small refinery exemption  information. According to these officials, EPA also requires all RIN trades  to be entered into EMTS from both the buy and sell sides, and only  finalizes a transaction in the system if the buy and sell sides match. EPA  officials said that transparency of aggregated RIN data helps the market  function more efficiently and minimizes price volatility; however, they  acknowledged that many factors contribute to RIN prices and RIN price  changes, and it is impossible to attribute such changes to any single  factor. Furthermore, according to EPA officials, the memorandum of  understanding on RIN market manipulation that EPA has entered into  with the Commodity Futures Trading Commission will also help make RIN  markets more open and transparent. Finally, EPA officials stated that in  response to a recent White House direction, EPA is currently drafting a  regulatory proposal to implement market reforms and additional  transparency measures to prevent price manipulation in the RIN market.

According to EPA officials we interviewed for this report, EPA received  several petitions requesting that it consider changing the point of  obligation from refiners and fuel importers to fuel blenders. In November  2017, EPA denied the petitioners’ request. In the denial, EPA said that it  does not expect a benefit of increased use of biofuels as a result of  changing the point of obligation. Furthermore, it is EPA’s position that  changing the point of obligation could increase the complexity of the RFS  program and would likely disrupt both the RFS program and the fuels  market.

By law, small refineries were exempted from the RFS through compliance  year 2010, and 24 small refineries were granted an exemption for  compliance years 2011 and 2012. Beginning with the 2013 compliance  year, small refineries have been able to petition EPA annually for an  exemption from their RFS obligations. EPA states on its website that EPA  may grant the extension of the exemption if EPA determines that the  small refinery has demonstrated disproportionate economic hardship.  According to EPA officials, the statute directs EPA to consult with the  Department of Energy, and to consider the department’s Small Refinery  Study and “other economic factors” in evaluating small refinery exemption  petitions. EPA conducts its review of small refinery petitions on a case-by- case basis and applies these statutory criteria to its evaluations.

According to EPA’s website, EPA’s decision to grant an exemption has  the effect of exempting the gasoline and diesel produced at a refinery  from the percentage standards, and the exempted refinery is not subject  to the requirements of an obligated party for fuel produced during the  compliance year for which the exemption has been granted. For the first  few years, EPA data show that EPA granted roughly half of petitions;  however, starting in compliance year 2016, the number of exemptions  granted increased significantly. In compliance year 2016, EPA received  20 petitions and granted 19, with the final petition still pending. In  compliance year 2017, EPA received 37 petitions and granted 29, with 1  declared ineligible or withdrawn and the remaining 7 still pending. The  data show that this increase in granted exemptions correlates to an  increase in estimated exempted volumes of gasoline and diesel, with the  exempted amounts increasing from 3.07 billion gallons in compliance  year 2015 (equivalent to an estimated 290 million RINs) to 13.62 billion  gallons in compliance year 2017 (equivalent to an estimated 1,460 million  RINs). To put these volumes into context, EPA data show that the total  renewable volume obligation for compliance year 2015 was 17.53 billion  gallons and for compliance year 2017 it was 18.91 billion gallons.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of Agriculture and  Energy, and to the Environmental Protection Agency, for review and  comment. USDA, DOE, and EPA provided technical comments, which we  incorporated where appropriate. USDA also provided written comments,  which are reproduced in appendix IV. In summary, USDA expressed  concerns in three areas.

First, USDA disagreed with GAO’s conclusion that the RFS has had a  limited effect, if any, on reducing greenhouse gas emissions. USDA  asserts that scientific research shows significant effects on greenhouse  gas emissions from blending ethanol into the nation’s fuel supply, based  on the greenhouse gas benefits of ethanol produced using current  technologies relative to gasoline. The objective of our work was to  address the effect to date on greenhouse gas emissions that has been  specifically attributable to the RFS, not whether blending ethanol into the  nation’s fuel supply has effects on greenhouse gas emissions. We report  that the RFS is not the only reason that ethanol is used in the fuel supply,  and that ethanol would have been produced and used in the United  States, even without the RFS. For example, as we noted in the report,  ethanol blended into gasoline provides benefits as an oxygenate, to  prevent air pollution from carbon monoxide and ozone; as an octane  booster, to prevent early ignition, or “engine knock;” and as an extender  of gasoline stocks. As a result, not all greenhouse gas reductions  associated with ethanol use have been the result of the RFS. Drawing  conclusions about the broader impact of ethanol on emissions generally  was not our objective and is not appropriate for a report examining the  impact of the RFS.

Second, USDA criticized our methodology, which reported experts’ views  on the effect of the RFS on greenhouse gas emissions. USDA stated that  this methodology, by design, could not arrive at a consensus and did not  synthesize the latest research. We chose our methodology, which relied  on expert views supplemented by relevant reported research, because of  its ability to yield more extensive, informative, and supportable answers to  our objective than a narrower literature review, as suggested by USDA.  More specifically, we reviewed much of the literature on this subject, and  used the literature, along with referrals from other experts and  recommendations from the National Academy of Sciences for prior GAO  work, to assist in selecting experts whose expertise included knowledge  of the relevant and most recent research on the issue. We selected  respected experts representing all perspectives to span the disciplines  required to answer our objective and to guard against drawing biased  conclusions. Those experts were aware of all research, even that with  conclusions contrary to their own. The studies that USDA cites do not  represent a wide range of perspectives; they represent the views of a few  studies focused specifically on the lifecycle emissions of ethanol. In  addition, as we indicate, the perspectives we obtained from industry  stakeholders were not used to support our findings on the effects of the  RFS on greenhouse gas emissions, as USDA implies. Rather,  stakeholders’ views were used to inform some of our examples and  corroborate some aspects of the experts’ views—we attribute information  to the stakeholders in these instances. The consensus we found among  experts representing diverse perspectives was that the RFS has likely  had a limited effect on greenhouse gas emissions to date and that the  program is unlikely to meet its future greenhouse gas emissions reduction  goals.

Third, USDA commented that our conclusion that the RFS likely had  modest impacts on gasoline prices should be augmented by a discussion  of the volatility of gasoline prices. USDA’s comments appear to imply that  the changes in prices we found are even smaller or less impactful on  consumers because overall gasoline prices are themselves volatile. This  is not an accurate interpretation of what we found. For example,  increased prices in non-Midwest states represent additional expenditures  on gasoline and consequent reductions in other household spending.  Because a discussion of historic gasoline price volatility does not have  bearing on the effect of the RFS on prices, we are not including it.

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; the Secretaries of Agriculture and Energy; the  Administrator of the Environmental Protection Agency; and other  interested parties. 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 V.

section_title: Appendix I: Lists of Experts GAO Interviewed
paragraphs: To determine what is known about the effect that the Renewable Fuel  Standard (RFS) has had to date on 1) retail gasoline prices in the United  States and 2) greenhouse gas emissions, we conducted semistructured  interviews with 18 experts with expertise on these topics. Of the 18  experts we interviewed, 7 discussed the effect that the RFS has had on  retail gasoline prices. Thirteen discussed the effect that the RFS has had  on greenhouse gas emissions, though one expert declined to be  identified. Two of the experts commented on the effect of the RFS on  both prices and emissions. The specific areas of expertise varied among  the experts we interviewed, so not all of the experts commented on all of  our interview topics. The experts we interviewed for each topic are listed  below.
subsections: section_title: Experts Interviewed about the Effect of the RFS on Retail Gasoline Prices

section_title: Experts Interviewed about the Effect of the RFS on Greenhouse Gas Emissions
paragraphs: Dr. Antonio Bento, University of Southern California  Dr. John M. DeCicco, University of Michigan  Dr. Jason Hill, University of Minnesota  Dr. Stephen Kaffka, University of California, Davis  Dr. Madhu Khanna, University of Illinois  Dr. Lee Lynd, Dartmouth College  Dr. Steve McGovern, PetroTech Consultants, LLC  Dr. John Miranowski, Iowa State University  Dr. GianCarlo Moschini, Iowa State University  Dr. Richard Plevin, University of California, Berkeley  Dr. Wallace E. Tyner, Purdue University  Dr. Michael Wang, Argonne National Laboratory  One expert we interviewed declined to be identified.

section_title: Appendix II: List of Industry Stakeholders Whose Representatives GAO Interviewed

section_title: Appendix III: Technical Discussion of Econometric Model Estimating Effects of Ethanol Mandates on Retail Gasoline Prices
paragraphs: This appendix describes the econometric model we developed to  estimate the effect of the state ethanol mandates on retail gasoline prices,  provides the results, and discusses limitations.
subsections: section_title: Econometric Model
paragraphs: In order to develop evidence of the likely effects of the Renewable Fuel  Standard (RFS) on the incremental adoption of ethanol blending by states  as RFS targets grew, we developed an econometric model to analyze the  effect state ethanol mandates on retail gasoline prices. Specifically, we  analyzed how state policies mandating certain levels of ethanol blending  in retail gasoline affected retail gasoline prices in those states.

We obtained retail gasoline price data from the Oil Price Information  Service. The data identified the simple average price across each state  for each grade of fuel—regular grade gasoline, midgrade gasoline,  premium gasoline, and diesel. There also exist local fuel specifications,  on top of state policies. Price data are only available at the state level,  and we are not able to identify directly the effect of local fuel policies on  prices. We therefore included controls that represent the percentage of  retail stations in the state that are affected by the local specifications.

To reduce distortion from dissimilar regulations and outliers, we did not  include prices (1) from the state of California and (2) for products other  than regular-grade gasoline. Therefore, the data we used for our  analysis comprised prices collected from 49 states and the District of  Columbia for the period of 2001 through 2010, for a total of 6,000  observations.

Over the period 2001 through 2010, retail gasoline prices are highly  correlated across states over time. Specifically, to illustrate, we ran a  simple regression model of retail gasoline prices on year-month (fixed- effect) controls. The results show that over 90 percent of the variation in  retail gasoline prices over time across states is explained by these simple  year-month controls. This suggests nationwide factors explain much of  the variation in retail gasoline prices across states over time. The  available data are not sufficiently rich to allow us to reliably disentangle  the separate effects on retail gasoline prices of various nationwide  factors, such as, perhaps, changes in crude oil prices, demand for  gasoline, and the roll-out of the RFS. Hence, below, we examine instead  the (incremental) effect on state-level retail gasoline prices of state  ethanol mandates that are effective at a time when the RFS was requiring  relatively low levels of ethanol blending nationwide.
subsections: section_title: Dependent Variable
paragraphs: Our dependent variable in the model was the monthly average after-tax  retail price in dollars per gallon of regular-grade gasoline.

section_title: Explanatory Variables
paragraphs: Our model included a variety of explanatory variables, including state  ethanol mandates, other state and local ethanol policies and fuel  specifications, and the Petroleum Administration for Defense District  (PADD)-level gasoline inventory-sales ratios and refinery capacity  utilization rates.

State ethanol mandates. The variables of interest in the model were  indicators for state ethanol mandates; the state ethanol mandate  indicator variables take the value of one for any month in which that  state has an effective ethanol mandate and take a value of zero  otherwise. The mandates ranged in the percentage of ethanol they  required to be blended into gasoline, from approximately 10 percent in  Minnesota, Missouri, and Oregon to 2 percent in Washington, with  Hawaii having a unique requirement that 85 percent of fuel sold in the  state must contain 10 percent ethanol.

Other state ethanol policies. We used as controls indicators for  several other state ethanol policies to shed light on how these policies  may have affected retail gasoline prices. Specifically, we controlled for  state fleet requirements to use ethanol; direct ethanol incentives that  reduce the cost of ethanol per gallon of fuel, such as tax credits or  rebates; ethanol production incentives; and ethanol consumption  incentives. Production incentives included financial incentives to  produce ethanol, such as grants or payments to build or operate an  ethanol plant or to grow ethanol feedstock. Consumption incentives  included financial incentives to sell or use ethanol, such as grants or  tax incentives to upgrade fueling infrastructure to sell ethanol or a tax  credit to stations selling ethanol. We also controlled for state methyl  tertiary butyl ether (MTBE) bans, as ethanol was the primary  substitute that could be used in place of MTBE.

Local-level fuel specification requirements. We controlled for local- level fuel specification requirements, such as the gasoline type, RVP  levels, and oxygenated fuel requirements.

Volume of inventory of gasoline relative to the volume of sales of  gasoline. We used as a control the ratio of finished motor gasoline  stocks to the sales of motor gasoline. This variable indicates when  supply is high relative to demand and vice versa.

Refinery capacity utilization rate. We controlled for refinery  operable utilization rate, which represents the utilization of crude oil  distillation units. This variable represents the balance between supply  volume and costs of production. Both this variable and the inventory- sales ratio have been found to be endogenous in past work.

State gas taxes. We control for the level of state gas taxes using data  from the Department of Transportation’s Federal Highway  Administration.

Fixed effects. We used a set of indicator variables to account for  fixed effects associated with time and individual states. Specifically,  we used a set of state fixed effects to account for persistent  differences between states, such as transportation costs of fuels to  that state. Each model also included year-month fixed effects—one  for each month in the data—to control for nationwide events, as well  as state-calendar month fixed effects to allow seasonality to vary by  state.

section_title: The Model
paragraphs: Our model can be written as follows:  𝑦𝑦𝑠𝑠𝑠𝑠𝑠𝑠= 𝛽𝛽0 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑦𝑦 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 +(𝑆𝑆𝑆𝑆𝑅𝑅𝑆𝑆𝐸𝐸𝑠𝑠×𝑒𝑒𝑅𝑅ℎ𝑎𝑎𝑎𝑎𝑒𝑒𝑎𝑎𝑎𝑎𝑎𝑎𝑅𝑅𝑎𝑎𝑎𝑎𝑅𝑅𝑒𝑒𝑠𝑠𝑠𝑠𝑠𝑠)′𝛽𝛽1  ′ 𝛽𝛽3+𝛼𝛼𝑠𝑠𝑠𝑠+ 𝛾𝛾𝑠𝑠𝑠𝑠 𝑦𝑦𝑠𝑠𝑠𝑠𝑠𝑠 is the dependent variable in our model; namely, the average  after-tax price per gallon of regular grade gasoline at state 𝑒𝑒 in month  𝑎𝑎 and year 𝑅𝑅.

𝑆𝑆𝑆𝑆𝑅𝑅𝑆𝑆𝐸𝐸𝑠𝑠×𝑒𝑒𝑅𝑅ℎ𝑎𝑎𝑎𝑎𝑒𝑒𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑅𝑅𝑒𝑒𝑠𝑠𝑠𝑠𝑠𝑠 is a vector of interaction terms, where  𝑆𝑆𝑆𝑆𝑅𝑅𝑆𝑆𝐸𝐸𝑠𝑠 is a vector of dummies for each state with a mandate—Hawaii, Minnesota, Missouri, Oregon, or Washington—and  𝑒𝑒𝑅𝑅ℎ𝑎𝑎𝑎𝑎𝑒𝑒𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑅𝑅𝑒𝑒𝑠𝑠𝑠𝑠𝑠𝑠 an indicator that is equal to 1 for all months that an ethanol mandate is effective for that state, and zero otherwise.

𝐹𝐹𝑅𝑅𝑅𝑅𝑅𝑅𝑠𝑠𝑠𝑠×𝐹𝐹𝐹𝐹𝐸𝐸𝐹𝐹𝑅𝑅𝐸𝐸𝐹𝐹𝑆𝑆𝑠𝑠𝑠𝑠𝑠𝑠 is a vector of interaction terms where 𝐹𝐹𝑅𝑅𝑅𝑅𝑅𝑅𝑠𝑠𝑠𝑠  is a measure of the proportion of gas stations in a state likely affected  by various fuel regulations in a given year, and 𝐹𝐹𝐹𝐹𝐸𝐸𝐹𝐹𝑅𝑅𝐸𝐸𝐹𝐹𝑆𝑆𝑠𝑠𝑠𝑠𝑠𝑠 is a

𝑋𝑋𝑠𝑠𝑠𝑠𝑠𝑠 is a vector of remaining control variables, including state 𝛼𝛼𝑠𝑠𝑠𝑠 is a set of state-calendar month fixed effects to account for 𝛾𝛾𝑠𝑠𝑠𝑠 is a set of month-year fixed effects to account for time-varying  vector of indicator variables equal to one in those months that a state  is subject to fuel regulations related to RVP levels, boutique fuels,  reformulated gasoline, and oxygenated fuel.  gasoline tax in cents per gallon, inventory sales-ratio, refinery  utilization rate, and indicator variables for other state ethanol policies,  including effective MTBE bans, fleet requirements, direct incentives,  production incentives, and consumption incentives.  permanent differences in a state’s average gasoline prices across  months.  factors affecting average gasoline prices for all states, such as  fluctuations in crude oil prices.  𝜀𝜀𝑠𝑠𝑠𝑠𝑠𝑠 is an error term that is clustered by state.

Our model assumes that after controlling for time-variant factors, the  timing of state ethanol mandates going into effect is not correlated with  unobserved time-variant factors that affect gasoline prices. When this  assumption is satisfied, then our model may estimate the effect of state  mandates on gasoline prices. Since ethanol mandates go into effect at  different times—in 2003 (Minnesota), 2006 (Hawaii), and 2008 (Missouri,  Oregon, Washington)—our quasi-experiment introduces variation in  ethanol mandates across time and across states. We are able to address  many concerns about omitted variable bias by including detailed state- calendar month fixed effects and month-year fixed effects.

section_title: Results
paragraphs: We estimate that all else remaining equal, when the ethanol mandates in  the Midwestern states of Minnesota and Missouri were in effect, retail  gasoline prices in those states were lower by approximately 8 and 5  cents, respectively, than they would have been without the mandates. We  also estimate that all else remaining equal, when the ethanol mandates in  Hawaii, Oregon, and Washington were in effect, retail gasoline prices in  those states were higher by approximately 8, 2, and 6, cents,  respectively, than they would have been without the mandates.

The variables used in the model to control for effects other than ethanol  mandates had the expected directional effect on price or else were not  significant (using a 5 percent significance level). Our controls for the  boutique fuel blends and the state gasoline taxes were significant and  positive, suggesting that states with more stringent fuel specifications and  higher gasoline taxes have a higher after-tax gasoline price. The  estimated effect for refinery utilization rate is negative and statistically  significant, suggesting that fuel prices decrease with refinery utilization  rates because higher supply decreases prices. Although we might expect  that fuel prices would decrease with the inventory/sales ratio because this  indicates that supply is high relative to demand, it is also possible that  when inventories are below a critical threshold, prices will rise regardless  of how high inventories are relative to sales, as has been seen in prior  work, so the positive coefficient in our model has precedent.

See Kendix and Walls, “Oil industry consolidation and refined product prices: Evidence  from US wholesale gasoline terminals” Energy Policy, vol. 38 (2010), pp. 3498-3507.

Estimated coefficient  -0.0071  (0.011)   -0.0027  (0.015)   -0.0034  (0.012)   0.0072  (0.015)   (0.0085)

Percentage of gasoline stations in the state selling fuel with less than 9 lbs.  Reid vapor pressure (RVP)

0.070  (0.11)

Percentage of gasoline stations in the state selling fuel with at least 9 lbs.  RVP  (0.040)

Percentage of gasoline stations in the state selling boutique fuel  0.14***  (0.037)

Percentage of gasoline stations in the state selling reformulated gasoline  (0.45)

Percentage of gasoline stations in the state selling oxygenated fuel  0.0029  (0.018)   0.0028  (0.092)   (0.00050)   1.87***  (0.11)

Legend:   * = parameter estimate significance less than 10 percent;   ** = parameter estimate significance less than 5 percent;   *** = parameter estimate significance less than 1 percent.

We tested alternate specifications, such as the following:  Including different subsets of the explanatory control variables in the  model.

Treating the inventory/sales ratio and the refinery utilization rate as  endogenous.

Using pre-tax prices by subtracting state gasoline taxes from after-tax  prices rather than including taxes as a control variable.

Our results, including the magnitude and directional impact of the various  state ethanol mandates, were not meaningfully affected across such  specification tests.

section_title: Limitations
paragraphs: Our analysis had a number of limitations as listed below.

We did not directly estimate the effect of the RFS on prices. The  policy was nationwide and there are no reliable state-level data with  which to measure state-level ethanol gasoline blend rates as the RFS  was implemented over time. However, there is no reason to believe  that other states that incrementally adopted the blending of ethanol as  a result of increasing RFS targets would have experienced different  effects.

There may be some endogeneity in the timing of the adoption of  the ethanol mandates. These policies are likely easier to pass  through state legislatures when corn or ethanol prices are lower than  oil or gasoline prices or when gasoline prices are high, but given that  the effective dates are usually several years after the laws are  enacted, this actual effective timing should be exogenous.

We believe the state-level ethanol regulation data are  comprehensive, but some regulations may not appear in the  data. In our analysis, we include controls for ethanol mandates as  well as several other types of ethanol incentives and fuel specification  requirements. These variables control for the effects of related ethanol  policies as well as variations in the cost of producing retail gasoline.  We are certain that all state ethanol mandates were included in the  model. However, our model may not perfectly control for all other  regulations that could affect retail gasoline prices.

Some control variables were not available at the state or monthly  level. For example, some controls, such as the refinery capacity  utilization rate, were available at the regional level only, so we had to  parse out the regionally aggregated observations accordingly.

As in any model, there is the possibility of misspecification or  bias. Inappropriate assumptions about the functional form of the  model, failure to deal with endogenous variables, or exclusion of  relevant variables could also cause our estimated effects to deviate  from the true effects. Some amount of this bias is present in almost all  regression results, although the amount may not be very large.

section_title: Appendix IV: Comments from the U.S. Department of Agriculture

section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Karla Springer (Assistant  Director), Stuart Ryba (Analyst in Charge), Luqman Abdullah, Benjamin  Adrian, Jaci Evans, Ellen Fried, William Gerard, Cindy Gilbert, Anne  Hobson, Jordan Kudrna, Joe Maher, Caroline Prado, Oliver Richard,  Rachel Rhodes, Dan Royer, Barbara Timmerman, and William D. Walls  made key contributions to this report.

Fast facts: We reviewed the effects of the Renewable Fuel Standard, which requires biofuels to be blended into U.S. transportation fuels in increasing volumes.

The standard was associated with modest gas price increases in areas outside of the Midwest. Most corn ethanol—the most common U.S. biofuel—is produced in the Midwest, so other regions had to pay for shipping and storage.

The standard was intended to reduce greenhouse gas emissions, but has had little effect to date. It will likely not meet the emissions goals set for it through 2022, largely because advanced biofuels—which reduce emissions more effectively—haven't been produced as expected.

Question-summary annotations: questions: question: To what extent is the Renewable Fuel Standard accurate nationwide?
answer: Evidence from studies, interviews with experts, and GAO's analysis suggest that the nationwide Renewable Fuel Standard (RFS) was likely associated with modest gasoline price increases outside of the Midwest and that these price increases may have diminished over time.
child_questions: question: How did local gasoline prices affect the RFS?
answer: Variations in these gasoline price effects likely depended, in part, on state-by-state variation in the costs to transport and store ethanol.

question: To what extent did existing infrastructure change how the RFS applied in different regions?
answer: For example, the Midwest was already producing and blending ethanol when the RFS came into effect, so that region had lower transportation costs and had already invested in necessary storage infrastructure.
child_questions: question: How did the process of building new infrastructure affect prices?
answer: Other regions began blending ethanol later to meet the RFS's requirements, thereby incurring new transportation and storage infrastructure costs that resulted in gasoline prices that were several cents per gallon higher than they otherwise would have been.

questions: question: How did the RFS affect refining costs in the long term?
answer: In addition, experts told GAO that the RFS caused an initial increase in refining investment costs that, over the long term, reduced refining costs for gasoline.
child_questions: question: How did the infrastructure requirements help lower the refining costs for gasoline?
answer: Specifically, once all locations had made the infrastructure investments and most gasoline blendstock produced was consistent with blending ethanol then there would be two continuing effects: (1) the transportation and blending costs of ethanol, which would tend to push retail prices higher and depend on the distance traveled and the modes of transport, and (2) the lower cost of producing lower octane blendstock.

question: How were the effects of the RFS different based on regional location?
answer: The former effect might dominate for locations far from the production source of ethanol and for which more costly modes of transport were used, while the lower blendstock costs might dominate for locations close to the production source of ethanol and/or those that have low transportation costs.

questions: question: How did state ethanol mandates affect gasoline prices?
answer: GAO's analysis of the effect that state ethanol mandates had on gasoline prices also showed gasoline price effects that differed in the Midwest and elsewhere.
child_questions: question: How did the ethanol mandates affect prices in the Midwest?
answer: Specifically, during the period GAO studied, when the ethanol mandates in Minnesota and Missouri were in effect, all else remaining equal, retail gasoline prices were lower by about 8 and 5 cents per gallon in these states, respectively, than they would have been without the mandates.

question: Were gasoline prices lower across the board as a result of ethanol mandates?
answer: In contrast, when the ethanol mandates in Hawaii, Oregon, and Washington were in effect, GAO's model showed that retail gasoline prices were higher by about 8, 2, and 6 cents per gallon, respectively, than they would have been without the ethanol mandates.

question: What do these results suggest about the effect of the RFS in states without ethanol mandates?
answer: These results suggest that the RFS likely had gasoline price effects in other states that did not have state-wide ethanol mandates but that incrementally began blending ethanol as a result of increasing RFS requirements that by around 2010 had led to almost all gasoline sold in the United States being blended with 10 percent ethanol.

questions: question: To what extent has the RFS affected greenhouse gas emissions?
answer: Most of the experts GAO interviewed generally agreed that, to date, the RFS has likely had a limited effect, if any, on greenhouse gas emissions.
child_questions: question: Why has the RFS had a limited effect on greenhouse gas emissions?
answer: According to the experts and GAO's prior work, the effect has likely been limited for reasons including: (1) the reliance of the RFS to date on conventional corn-starch ethanol, which has a smaller potential to reduce greenhouse gas emissions compared with advanced biofuels, and (2) that most corn-starch ethanol has been produced in plants exempt from emissions reduction requirements, likely limiting reductions early on when plants were less efficient than they are today.

questions: question: How does the EPA regulate compliance with RFS requirements?
answer: EPA uses renewable identification numbers (RINs) to regulate industry compliance with RFS requirements for blending biofuels into the nation's transportation fuel supply.

question: How have RFS compliance costs changed with time?
answer: In GAO's March 2014 report on petroleum refining, GAO noted that the RFS had increased compliance costs for the domestic petroleum refining industry or individual refiners.
child_questions: question: How volatile are the RFS compliance costs?
answer: GAO reported that corn-based ethanol RIN prices had been low—from 1 to 5 cents per gallon from 2006 through much of 2012—but in 2013, RIN prices increased to over $1.40 per gallon in July before declining to about 20 cents per gallon as of mid-November 2013.

question: To what extent has the volatility continued?
answer: Since the March 2014 report, corn-ethanol RIN prices have experienced more periods of volatility.

question: How does the aforementioned volatility affect market prices?
answer: Most experts and stakeholders GAO interviewed recently stated that RINs had either a small effect on prices or no effect on prices, though a few disagreed.

question: How is the implementation of RINs a cause for concern in several areas?
answer: Finally, GAO's past work, as well as EPA analysis, has identified several issues of concern with RINs, including possible fraud in the market and concerns about the effect on small refiners, price volatility, and the point of obligation.

questions: question: How was the RFS created?
answer: Congress established the RFS in 2005 and expanded it 2 years later.

question: How does the RFS affect transportation fuels?
answer: The RFS generally mandates that transportation fuels—typically gasoline and diesel—sold in the United States contain increasing amounts of biofuels.
child_questions: question: How do these changes affect greenhouse gas emissions?
answer: In addition, the RFS is designed to reduce greenhouse gas emissions by replacing petroleum-based fuels with biofuels expected to have lower associated greenhouse gas emissions.

question: How are biofuels produced?
answer: The most common biofuel currently produced in the United States is corn-starch ethanol, distilled from the sugars in corn.

question: How is compliance with the RFS checked?
answer: EPA uses RINs associated with biofuels blended with petroleum-based fuels to regulate compliance with the program.

questions: question: How did GAO examine the effect of the RFS on gasoline prices?
answer: To address the likely effects of the RFS on gasoline prices, GAO reviewed studies and interviewed experts and industry stakeholders, and conducted a statistical analysis of state ethanol mandates that were similar to the mandates of the RFS.
child_questions: question: How were the interviewed experts selected?
answer: GAO selected the experts based on their published work and recognition in the professional community.

question: To what extent did GAO interview people from varied backgrounds?
answer: GAO selected stakeholders representing a range of perspectives, including stakeholders from the renewable fuels, petroleum, and agricultural industries, as well as from environmental groups.

questions: question: To what extent can the effect of the RFS on gasoline prices be determined?
answer: Because the RFS was implemented on a nationwide basis at the same time that other factors, such as the global price of crude oil and domestic demand for retail gasoline, were affecting retail gasoline prices across the nation, it is not possible to directly isolate and measure the effect the RFS had on gasoline prices nationwide given data available to GAO.
child_questions: question: How did GAO mitigate the issue of external factors on gasoline prices?
answer: Instead GAO developed and extensively tested an econometric model that estimated the effects on retail gasoline prices of state ethanol mandates.

question: Why are state mandates a decent model for the RFS?
answer: These state mandates are similar to the RFS but were put in place voluntarily by states before the RFS led to widespread ethanol blending in every state.
child_questions: question: How did the effects of state mandates and the RFS interact?
answer: These estimates suggest the RFS likely had effects in states that did not have state-wide mandates.

question: How did these states adapt to the RFS?
answer: These states incrementally blended ethanol because of the increasing volumes of ethanol required to be blended nationally by the RFS.

questions: question: To what extent did other groups agree with GAO's findings?
answer: In commenting on a draft of this report, USDA disagreed with GAO's finding that the RFS has had a limited effect on greenhouse gas emissions, citing research on the effects of ethanol on reducing emissions generally.
child_questions: question: How did GAO report on greenhouse gas emissions?
answer: GAO reported on the specific effects of the RFS on emissions.

question: How did the USDA react concerning GAO's use of interviews?
answer: USDA also criticized GAO's methodology using experts' views.
child_questions: question: Why did GAO interview experts to help formulate their report?
answer: GAO employed that method to reach consensus among those with a range of perspectives.

question: How have other relevant federal agencies reacted to the report?
answer: DOE and EPA did not comment on the draft report.