Unwinding the Perverse Arithmetic of Scott Pruitt’s Small Refinery Exemptions to the RFS

July 25, 2018 | 10:12 am
Photo: WClarke/Wikimedia Commons
Jeremy Martin
Senior Scientist and Director of Fuels Policy

Former EPA Administrator Scott Pruitt is gone, but the messes he created will be with us for a long time. His approach to the Renewable Fuel Standard (RFS) took an already complicated policy and turned it upside down. Here, we untangle the opaque way Pruitt rigged the system for his fossil fuel friends and what this means for the ongoing RFS rulemaking.

Pruitt pulling strings for polluters

Last year Pruitt, acting on behalf of some oil refineries, tried to roll back the standard through a rulemaking process, but his efforts were blocked by the political power of the ethanol industry and its backers in the Senate. But when Pruitt was blocked through the normal administrative process, he did the administrative equivalent of slashing tires, abusing a previously obscure provision to hand out exemptions to individual oil refiners at an unprecedented pace, and claiming the details and the reasoning are confidential business information not subject to public comment or even Congressional oversight.

The specific mechanism Pruitt used to make this change is called the Small Refinery Exemption (SRE), which is a provision of the law that allows EPA to exempt a small refiner from compliance with the standard in cases of disproportionate economic hardship. Until Pruitt assumed control of EPA, this provision had been used sparingly, which makes sense because the cost of complying with the RFS applies to all refiners equally, so in general the economic impact is exactly proportionate. But with Pruitt at the helm, EPA approved most of the SRE applications it received, reducing the standard by more than 7% compared to the volumes EPA had mandated (See this excellent FarmDocDaily article for the details)

The impacts of these decisions are wide-ranging:

Free lunch for small refiners

Some refiners enjoyed windfall profits, since the waiver gives them a significant competitive advantage over other refiners, who were not exempted. The market price for gasoline and diesel includes the cost of complying with the RFS, so refiners that get a waiver still sell their product for this price, without bearing the cost of compliance, which basically amounts to free money, courtesy of Scott Pruitt. Some of the beneficiaries of this largess included Carl Icahn, friend of the President and former adviser on regulations. Others getting a break include Andeavor, one of the largest refiners, who apparently qualified based on individual refineries that are below the size cutoff. Exxon Mobil and Chevron have reportedly also filed applications to exempt some of their smaller facilities.

Cellulosic fuels and biodiesel take a hit

The immediate impact of SREs on the use of biofuels is complicated. It might seem that ethanol use would fall in line with the RFS standards, but for economic and technical reasons ethanol use is likely to remain very close to 10 percent of gasoline use, regardless of changes in the RFS, at least in the near term. Instead it is biodiesel that likely takes the biggest hit. This is because SREs includes reductions in advanced biofuels and bio-based diesel, and also because biodiesel has been filling the gap between the conventional ethanol mandate and the E10 blend wall, which would stop if the SREs push ethanol mandates below the blend wall.

The standard for non-food based cellulosic biofuels, which Pruitt had already reduced by more than 7% in 2018 compared to 2017, was effectively further reduced by about another 8% by SREs.

Long term ramifications for compliance and certainty

Much of the impact of the SREs will be felt in future years. The RFS allows refiners to save extra credits for use in future years. In EPA’s proposal they revealed that banked credits increased by 38% last year, to more than 3 billion gallons worth. These banked credits will be used to reduce refiners’ compliance obligations for years into the future.

The big loser is fact-based policy-making

In the midst of the political train wreck that the RFS has become, it’s easy to lose sight of the basic goals the policy was meant to advance: to cut oil use and promote the development of low carbon biofuels. However, Pruitt left in the middle of a rulemaking process in which stakeholders were asked to comment on a proposal that claimed to be increasing the use of biofuels, when agency actions are actually decreasing biofuel use! Here’s the math:

  • EPA proposes a 590-million-gallon increase in biofuels use, about 3 percent more than 2018
  • However, if EPA continues to grant SREs at the same pace and without reallocating the volumes, the result will be to weaken the standards by about 8 percent
  • Therefore, reductions in the RFS targets through the use of SREs is larger than the proposed increases of the targets

Despite the huge impact SRE’s have on the RFS program, EPA specifically states that any comments on accounting for SRE will be ignored (page 32057).

EPA is not soliciting comments on how small refinery exemptions are accounted for in the percentage standards formulas in 40 CFR 80.1405, and any such comments will be deemed beyond the scope of this rulemaking.

What is more frustrating is that the rulemaking docket reveals the agency almost did the right thing, which would have recognized the SREs in the rulemaking process and kept the RFS targets intact. A review of early drafts of the proposal by Reuters (here) suggests that after returning from a tour of the Midwest, Pruitt was prepared to do just that. The consequence of reallocating the SREs would be that the overall RFS standards would be unaffected by the SREs, and instead any windfalls enjoyed by individual refineries would be made up by other refiners. Of course, the refineries were unhappy with this proposal. Refiners prefer their free lunch to be paid for by the biofuels industry, and started lobbying EPA furiously, with refinery state Senators Ted Cruz of Texas and Pat Toomey of Pennsylvania calling Scott Pruitt. After these calls, the proposal to reallocate the SREs was removed, just three days after it had been written.

Cleaning up the mess

Biofuels is a complicated and politically divisive topic, and it’s not just the ethanol industry and oil refiners who have concerns about the RFS. But the starting point for legitimate policy making is to present the facts clearly and allow for public review and comment. In the case of the RFS, that means explaining the administration’s position on small refinery exemptions, and how the treatment of small refineries will affect the quantity of biofuels used in the United States. I have sent a letter to Acting Administrator Wheeler requesting that he do just that.

Acting Administrator Wheeler needs to clean up the mess left by former Administrator Pruitt. This requires not just arbitrating the disputes between the Texas and Iowa Congressional delegations, but also administering the laws as written and making policy decisions based on facts – can he rise to the challenge?