I am focusing on the Renewable Fuel Standard Point of Obligation because it has been a burr under my saddle – haunting me – for at least five of the twenty-four years I worked for Wyoming Refining Company, a small, approximately 125-employee, petroleum refiner with a refinery in Newcastle, Wyoming and a marketing office in Rapid City, South Dakota. As environmental VP, I was responsible for calculating and reporting WRC’s compliance with EPA’s market-based gasoline sulfur, gasoline benzene and Renewable Fuel Standard rules.
The sulfur and benzene rules work extremely well. In fact, almost perfectly. EPA is to be congratulated. Calculating and reporting compliance was relatively easy, as was purchasing and selling over-compliance credits when WRC missed or beat the regulatory standard. Nationwide, compliance with the gasoline sulfur and benzene rules was achieved by almost all refiners with minimum complication, at the lowest possible cost for each and, thanks to the rules’ over-compliance trading provisions, often on a schedule fitting a refiner’s capital investment plans. Most important, the goal of improving gasoline to make our air safer was met right on schedule. EPA, the environmental and health community, and the nation’s refiners should be high-fiving for stepping up to the plate, albeit sometimes reluctantly, and knocking these balls out of the park. I wonder if our general citizenry realizes the enormity and significance of this accomplishment benefiting us all.
The nation’s experience with RFS, however, is diametrically opposite the sulfur and benzene situations. Until recently, EPA has been habitually late, two years late for 2014 and one year late for 2015, in issuing statutorily required annual standards. Mandatory biofuel volumes to be blended into gasoline and diesel have not been achieved, often because blending is inadequate or biofuel production volumes are low. The RFS trading program and market confidence therein have been riddled by fraudulent biodiesel credits. Above all else, I am convinced the trading scheme is a Trojan horse, passing off as a gift a rule slowing biofuel expansion and unjustly enriching Big Oil and unobligated marketing chains, all at the expense of small retail operators and independent merchant and small refiners. I am equally convinced the program’s fatal flaws will disappear once RFS is reformed to move the blending obligation from refiners, who may or may not blend, to blenders, who already do the nation’s blending but are under no legal compulsion to do so.
In practical effect, the RFS point of obligation sanctions wealth transfers from mostly smaller businesses to our country’s largest corporations while impeding biofuel industry growth. Those for whom this result passes as good government have been fooled, seduced by the simplistic and false notion that assigning end product responsibility to suppliers of but one raw material will work. The current RFS obligation is perverse and insidious, inflicting damage through a trading regime in which the exempt are granted a franchise to sell and the obligated are under legal duress to buy. The RFS point of obligation is a good example of bad government getting worse. In a larger sense, the impunity with which EPA perpetuates this mistake as law augurs poorly for the ability to control our democracy’s administrative branch.
In future posts, I will present my views on why the current RFS Point of Obligation is logically and economically unsound and patently illegal, a violation of the Clean Air Act. No economics PhD or law degree required, just old-fashioned common sense. Right now, I plan posts on the following subjects:
- a brief primer on our nation’s transportation fuel distribution structure;
- how the current structure and the point of obligation combine to competitively advantage and unjustly enrich Big Oil at the expense of merchant refiners;
- how this advantage flows downstream to all petroleum marketers, now exempt from the RFS, and severely harms small refiners and independent local retailers;
- how not obligating blenders creates a perhaps insurmountable headwind to increasing biofuel blending volumes;
- what’s missing in RFS that makes the gasoline sulfur and benzene rules so successful; and
- how the current RFS point of obligation rule creates a business practice violating specific language of the Clean Air Act and is, therefore, itself illegal.
In the near term, the survival of significant transportation fuel supply system businesses is at risk. Should these businesses fail, jobs will be lost and gasoline, diesel and jet fuel prices will increase for everyone.
I plan to conclude the RFS point of obligation discussion with some lessons learned hoping to inform subsequent conversation about regulating CO2 emissions. My plan is to post weekly or bi-weekly. This will take some time. Please hang in there, please stay tuned and please join the conversation. I look forward to your responses and suggestions.
Best regards,
Bob