As the New York Times recently reported, EPA Administrator Scott Pruitt has been conducting much of his work to undermine the EPA’s mission in secret. The recent proposed rule implementing the Renewable Fuels Standard (RFS) provides yet another example of the Pruitt EPA taking decisions that should be based on evidence, and substituting their political preferences instead. The RFS is a complex and controversial regulation that is currently in a rulemaking process that will put the Pruitt EPA’s first official stamp on biofuels policy. Pruitt has made no secret of his distaste for the regulation, and his inclination to reduce burdens of any type on the oil industry, and his first efforts at RFS implementation shows how he puts that distaste into effect.
One of the striking elements of this year’s proposal was that the administration proposed that the standards for cellulosic biofuels in 2018 would be lower than those for 2017. The cellulosic biofuel standards are a small part of the overall proposal, but the success of cellulosic biofuels is key to delivering better biofuels, as I described in a chapter of my recent report on Fueling a Clean Transportation Future.
Moreover, a declining standard is an odd reversal, given the clear intent of the RFS to promote the growth of cellulosic biofuels. I was puzzled at how this conclusion was justified, and together with my colleague Alyssa Tsuchiya, we looked through the drafts and other documents that EPA posted in the docket to figure it out.
Digging through the docket
What we found is that the EPA’s original proposal transmitted to OMB on May 10th called for growth of the cellulosic standard, with a proposal for 384 million gallons based on the same methodology that had been in place the previous several years. This was still the target in the June 14th draft, but a new version dated June 23rd, less than two weeks before the final proposal was signed by Administrator Pruitt, suddenly reversed course, with a new methodology and a proposal that would set the cellulosic standard for 2018 at 228 million gallons, a reduction compared to 2017. This might seem like a small change, compared to an overall renewable fuels standard of more than 19 billion gallons, but it’s very consequential to companies that have made investments in cellulosic biofuel production on the understanding that policy decisions would reflect the evidence of industry growth.
We found arguments in earlier drafts that show that EPA staff knew perfectly well that the new methodology would be inaccurate and underrepresent cellulosic production. But someone intervening in the OMB review process decided to lower the targets anyway. Key passages of the argument defending the existing methodology were deleted, without seeking public comment on the points they raised. I found no record of who gave the order to make this change, but responsibility lies with Administrator Pruitt, who signed the proposal. The key changes involve the assessment of how much cellulosic ethanol new facilities were likely to produce in 2018, and how much biogas would be used for transportation in 2018.
The slow startup of the cellulosic ethanol industry has been the subject of much discussion and press over recent years, but one part of cellulosic scale-up has been an unexpected success. The conversion of corn kernel fiber into ethanol at existing corn ethanol facilities has been successfully implemented at Quad Counties Corn Processors, which reached a million gallons of cumulative production in 2015, and five million in 2016. Now this and related technologies have been licensed and are being adopted at additional facilities across the country, for example at two Pacific Ethanol facilities in Stockton and Madera California.
However, last-minute edits to the proposed RFS rule delete references to the success of this technology, and instead cherry pick some pessimistic data about the startup of unrelated cellulosic biofuels technology as the basis for an assumption that facilities adopting the corn kernel fiber technology will almost entirely fail to deliver meaningful production (specifically that they will produce at the first percentile of a distribution for probable production volumes).
From page 30 of the redlined June 23rd draft of the proposal, the following passage has been deleted.
Additionally, when reviewing the cellulosic biofuel production data from the final three months of 2015 and all of 2016 we find that facilities that convert corn kernel fiber to cellulosic ethanol at existing ethanol production facilities have generally over performed relative to our production estimates, while large stand-alone cellulosic biofuel production facilities have generally under performed. In 2018 we anticipate that the majority of the liquid cellulosic biofuel production will be from facilities converting corn kernel fiber to cellulosic ethanol at existing ethanol production facilities. We therefore believe it is prudent to continue to use our existing projection methodology rather than to adopt a new methodology that would result in lower production estimates as doing so could result in inappropriately low production projections for a commercially successful technology (corn kernel fiber conversion) based on historic scale-up difficulties at facilities using a largely unrelated technology. We believe that it is likely that, on a relative basis, the accuracy of our projection for 2018, using the same general methodology as in previous years, will increase as the overall production of cellulosic biofuel increases, and the proportion cellulosic biofuel expected to be produced using technologies that are currently being used to successfully produce cellulosic biofuel on a commercial scale increases. [Footnote 51]
[Footnote 51] 89 percent of all expected cellulosic biofuel production in 2018 is expected to come from CNG/LNG derived from biogas and corn kernel fiber conversion technologies. Both these technologies have been successfully used to produce consistent volumes of cellulosic biofuel since 2014.
In place of this defense of the existing methodology is a new argument, that since new facilities starting up in 2016 substantially underperformed EPA’s expectations in 2015, it is logical to assume new facilities starting up in 2018 will under-perform by the same amount. The proposal assumes that new facilities with the potential to produce more than 100 million gallons in 2018 will instead produce 1 million gallons. This would be a questionable assumption for any part of the cellulosic biofuel industry, especially given ongoing industry learning between 2016 and 2018, but it is especially egregious as an assumption for the corn kernel fiber technology, which has built a very successful track record.
In the 2016 standard, which is cited as the basis for this decision, more than 80% of the liquid cellulosic biofuel from new facilities was projected to come from three large stand-alone facilities converting corn stover to ethanol, while in the 2018 proposal more than 75% of the projected cellulosic production from new facilities is coming from corn kernel fiber technology. This technology is being introduced into existing ethanol facilities, that have a track record of production, so the technical hurdles to overcome are much lower. It makes no sense to discount their potential based on the struggles of the three large standalone facilities using unrelated technologies, as is explained in another deleted passed from page 31 of the redlined June 23rd draft of the proposal.
We do not believe it would be reasonable to establish a methodology where the success or failure of a small group of companies, and in some cases a single company, would have a dramatic impact on the methodology used to project volumes from other companies the following year, especially where the methodology overall has been demonstrably successful.
The other rapidly growing part of the non-food-based cellulosic biofuel category is biogas, methane captured from landfills and other sources and used to replace fossil natural gas as a transportation fuel in heavy duty vehicles. For more on biogas, also called biomethane or renewable natural gas, see our recent fact sheet on The Promises and Limits of Biomethane as a Transportation Fuel.
The June 14th proposal projects that biogas will provide 341 million gallons in 2018, based on solid performance (93% or capacity) from consistent existing producers with capacity of 265 million gallons equivalent, and new producers operating at about 50% of production capacity of 189 million gallons equivalent. In place of this assessment, a new methodology is proposed that ignores detailed consideration of new production capacity, and instead uses growth between the first five month of 2016 and the first five months of 2017 to predict a rate of growth for the industry as a whole. This leads to a projection of 9.3% annual growth and a proposal or 221 million gallons equivalent, 35% lower than the proposal in the earlier draft based on the existing methodology.
Based on the existing methodology, EPA staff found that new production capacity would increase potential production by 40%, but the new proposal effectively assumes that this new capacity will not be required, and that actual usage will be well below what existing facilities could manage.
Assuming investment in cellulosic fuels will fail
Consistent with the New York Times story, I found no record of who instructed the EPA staff to make these changes, or their motivation, but given the clear antipathy of Administrator Pruitt and the oil industry for the Renewable Fuels Standard, it is not surprising to see the Pruitt EPA act to undermine the component of the Renewable Fuels Industry most important to future growth. It would be nice to think that time will prove this pessimistic perspective wrong, but there is a very real risk that pessimism embodied in the administration of the RFS becomes a self-fulfilling prophesy.
The RFS is often described as requiring oil companies to buy ethanol, but the actual mechanics of the policy involve tradable credits, called Renewable Identification Numbers. Unrealistically pessimistic estimates of next year’s production ensure that credit buyers (oil companies) will have the upper hand in negotiations with credit sellers (cellulosic biofuel companies).
Artificially depressed prices for these credits will make further investment in this sector less appealing. Moreover, the Administrator announced in the proposal his intention to use the reset provisions of the RFS to revise all the future standards, through at least 2022, and potentially beyond. I have argued for several years that updated targets that are ambitious but realistic are sorely needed. But if the administrator puts his thumb on the scale in favor of the oil industry, the reset could undermine the support the RFS provides for cellulosic biofuels for years to come, in clear contradiction of the stated goals of the RFS.
Important changes in policy should be explained to the public
The RFS is a complex and controversial policy that is challenging for EPA to administer under the best circumstances. The stakes are high for the oil industry, the biofuel industry and the environment. In this context, it is more important than ever to explain the rational for changes in direction, but instead Pruitt’s EPA is operating without proper transparency or even the simple expectation that you need to show your work.
In a recent radio interview in Iowa, Administrator Pruitt said that the RFS rule should be based on objective criteria, not “blue-sky thinking. ” But the proposal ignores objective criteria, and relies on distorted logic to forecast thunderstorms, despite the clear evidence of progress on cellulosic fuels.
The proposal ignores the proven track record and investment in corn kernel fiber ethanol and biogas, and relies instead on slippery math to lower the targets for cellulosic biofuels. Energy Dominance, as the Trump Administration defines it, ignores the clear progress of renewable fuels and instead doubles down on the failed fossil fuels of the last century. Administrator Pruitt often talks about following the law, but the proposal just throws out inconvenient evidence and substitutes the answer the administrator prefers. Administrator Pruitt’s job is to implement the law as Congress wrote it, regardless of his preferences or those of his friends in the oil industry.