Burnt Out: An Unsustainable Regulatory Model for Sustainable Biofuels

Climate change is bad, and we should do something about it. Plenty of us would like to nod at that sentence, but there is much to unpack. This post leaves aside discussion of “how bad is climate change?” or “what can be done?” and instead focuses on “who does the doing?” In particular, this article focuses on the use of renewable biofuels as a replacement for traditional fossil fuels.

The term “biofuel” is a bit of a mischaracterization when used to distinguish newly-made ethanol from fossil fuels. Both types of fuel – the kind we make from plants and the kind we find in the ground – are biofuels in that they are biological matter now usable as a source of fuel. Fossil fuels differ only in that millions of years of time and pressure went through the trouble of turning the biological matter into a usable source of fuel for us.

However, that difference has a potentially huge impact on climate change. Much of climate change results from the amount of greenhouse gases present in the atmosphere. In becoming fossil fuels, biological matter stored vast quantities of organic molecules that, when burned, break down into greenhouse gasses like methane or carbon dioxide. By burning fossil fuels, then, we release greenhouse gases that would otherwise remain in the ground. Instead, when we create our own biofuel by processing plants such as corn or sugarcane, we recycle greenhouse gases already present in the atmosphere rather than releasing new greenhouse gases from the ground.

Unfortunately, the process of creating our own biofuel is expensive, and it might cost more energy than it yields. Currently, we can only create biofuels from the high-energy plants that we also use for food. Other plants store energy in the form of cellulose. Grazers like cows need four stomachs to process cellulose, and they go through a lot of trouble just to net a bit of energy from the molecule. As a result, creating biofuels requires a lot of land, a lot of energy, and it comes at the cost of food.

It is no wonder, then, that refineries require regulatory pressure before they incorporate biofuels into their process. In the U.S., the Energy Policy Act of 2005 (EPA) mandated that oil refineries produce a portion of renewable fuel alongside their processed fossil fuels. The government tracks the production of these renewable fuels using “Renewable Identification Numbers” (RINs). Each RIN equates to one gallon of renewable fuel. Regulations like the EPA demand that a percentage of the total motor fuel consumed in the U.S. correspond to these RINs.

Because biofuels are so expensive to make, however, it is often more economical for major refineries to allow other companies to create biofuels and subsequently purchase their RINs as separate commodities. There is an entire market for RINs, and their value can wax and wane depending on speculation towards future changes in regulatory policy. RINs come in many forms and may be exchanged through multiple markets, and the entities obliged to purchase RINs are rarely capable of mixing renewable fuels themselves. Due to the fluctuations in the RIN market against the regular demands of the EPA, refiners are faced with a dilemma: buy too soon and risk paying too much, or wait too long and risk regulatory penalties.

The expense and unpredictability of the RIN market takes a toll, and, earlier this year, the cost of purchasing RINs drove the largest refiner on the East Coast, Philadelphia Energy Solutions LLC, into bankruptcy. The bankruptcy may cost the Philadelphia area over 2000 jobs, and it called into question the efficacy of RINs as a tool for promoting the use of renewable biofuels.

The Trump administration is scheduled to consider these concerns this week, but it faces a potential conflict of interest in the administration’s former regulatory advisor, Carl Ichan, who stands to save upwards of fifty million dollars on RINs from possible changes by the administration.

If the Trump administration relaxes the requirements for renewable fuel production, then refiners will bear less of the cost of switching to renewable sources of energy, but what will take its place?

Ultimately, the regulatory system established by the EPA in 2005 encourages the production of renewable biofuels, but it places the cost of that production on refineries. Because this cost is shared by all refineries, even those refineries which do not themselves produce biofuels share in the cost. To place the burden of renewable biofuels on refiners is arbitrary. The switch from fossil fuels to renewable biofuels will benefit society, and so society should bear the cost.