EPA Mandates New Volume Requirements for Unicorns and Pixie Dust

Actually, it was for Cellulosic Ethanol, but those Projections are Equally Unrealistic

WASHINGTON — American Energy Alliance President Thomas Pyle issued the following statement on EPA’s proposed volume requirements for the 2014, 2015, and 2016 Renewable Fuel Standard:

“Once again, EPA has deluded itself into thinking it can simply mandate the commercial cellulosic biofuel industry out of thin air. EPA’s unrealistic projections for cellulosic biofuel underscore the incompetence of federal bureaucrats and the arrogance of Washington politicians who think they know what’s best for the economy and the American people.

“The RFS has been broken from the beginning. It distorts the market, raises gasoline prices, and does nothing to help the environment. Recent efforts by Senators Feinstein and Toomey to repeal only the implied corn mandate will actually make the RFS worse by focusing on cellulosic fuels that are much too expensive to produce. Congress should own up to their mistake and repeal the RFS mandate entirely.”

Click here for 7 reasons why full repeal is the only solution for the RFS.

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WOTUS Rule Infringes on Private Property Rights

WASHINGTON — American Energy Alliance President Thomas Pyle released the following statement on EPA’s finalized “Waters of the United States” rule:

“EPA’s Waters of the United States rule is an attack on individuals’ private property rights under the guise of protecting our country’s waterways. In reality, the rule isn’t about protecting waterways or wetlands. It’s about increasing the size and scope of the federal government and giving Washington bureaucrats more control over what American citizens do on their own property. The WOTUS rule goes far beyond the scope of the Clean Water Act and the Constitution as it usurps the states’ regulatory control over waters within their borders. EPA should withdraw this overreaching and unconstitutional rule.”

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Why Congress Should Fully Repeal the RFS

Introduction

The Renewable Fuel Standard (RFS) is broken. The problems with the RFS are legion— it is based on incredibly mistaken assumptions about domestic oil production, it gives EPA control over the fuels we use, and increases the cost of fuel. Congress could soon consider two types of reforms to the RFS—either a full repeal of the entire program, or a partial repeal that only would affect corn-based ethanol.[1] A partial repeal of the RFS does not fix the biggest problems caused by the law, and therefore, the entire RFS should be repealed.

Overview

The RFS was created in 2005 and then expanded in 2007. At the time, Congress and President Bush assumed that oil production would continue to decrease and that America needed to mandate the use of renewable fuel in order to reduce oil imports. Congress and the president were badly mistaken. Since 2007, oil production in the United States has increased by 82 percent. Oil imports from OPEC have declined by 60 percent since 2008.[2] One of the most important arguments for the creation of the RFS no longer applies, as domestic oil production continues to increase.

Despite these massively changed conditions, the RFS remains. The good news is that there are some efforts to reform or repeal the RFS. Merely reforming the RFS, including efforts to make corn ethanol ineligible under the mandate, may appear like a good step forward. But in reality, these reforms would not fix any of the real problems with the law. The RFS gives EPA too much discretion, and EPA has abused this discretion time and time again—even doing so illegally. Getting rid of the implied corn ethanol mandate and keeping the Advanced Biofuel mandate will allow EPA to continue to mandate unrealistic amount of expensive fuel, and would certainly lead to higher fuel prices.

EPA has shown year after year that it cannot carry out the RFS in an unbiased manner. EPA has refused to set the RFS volume requirements for 2014, even though we are currently well into 2015, and now EPA is months late setting the RFS volume requirements for 2015. EPA has already been sued—and lost—because they used the RFS to illegally promote cellulosic biofuel instead of using a neutral methodology to predict production volumes.

When EPA realized that cellulosic ethanol production remained anemic, they changed the definition of cellulosic biofuel to call certain types of compressed natural gas and liquefied natural gas “cellulosic biofuel.”

EPA cannot and should not be trusted to implement the RFS. Keeping the advanced-only portion of the RFS allows EPA to decide what constitutes “advanced biofuel.” According to the RFS, advanced biofuel must achieve lifecycle greenhouse gas emission reduction of 50 percent compared to petroleum. The problem is that EPA has to certify that a fuel, or a fuel “pathway,” achieves this reduction. Given EPA’s history of ineptitude and illegal behavior, there is no reason to think that EPA will not continue to manipulate an advanced-biofuel-only RFS.

Besides allowing EPA to retain too much authority, an advanced-biofuel-only RFS creates the absurd situation where the U.S.—in the name of reducing greenhouse gas emissions—imports sugarcane ethanol from Brazil only to export corn ethanol to Brazil. Brazilian sugarcane ethanol is one of the few certified, commercially-viable “advanced” biofuels. Sugarcane ethanol is not an advanced technology, but instead has low lifecycle GHG emissions because sugarcane is grown in a warm climate. But because sugar cane ethanol qualifies as an “advanced biofuel” it is imported to satisfy the RFS. And because Brazil has a large domestic ethanol market, corn ethanol is then exported from the U.S. to Brazil. This is a silly transfer, but more inefficient trades like this would be the direct outcome of an advanced-biofuel-only RFS.

Removing the corn-ethanol portion and retaining the advanced-biofuel mandate moves the RFS toward a Low Carbon Fuel Standard. This is because the RFS defines advanced biofuel in terms of the reduction in GHG emissions (estimated by EPA) from making the fuel—regardless of whether or not the fuel is actually an “advance” on past technology. There are real downsides to an LCFS, particularly the cost. One study found that California’s LCFS could increase gas prices by $2.50 a gallon.

Bio Cost 600 AEA

This is not a future we want to live in. It’s time for Congress and EPA to stop dictating fuel choices to Americans. Congress should take this opportunity to repeal the RFS entirely.

EPA Refuses to Finalize the 2014 RFS Volume Requirements

One of the biggest problems with the RFS is that it gives EPA a large amount of control over our transportation fuels. EPA has a history of abusing its discretion and EPA’s abuse continues today. EPA has failed to even finalize the 2014 RFS volume requirements even though we are well into 2015.

EPA was required by the RFS to finalize the RFS volumes for 2014 by November 30, 2013. While EPA proposed ethanol volumes on November 29, 2013, they have refused to finalize the 2014 volumes. Furthermore, EPA has neither proposed nor finalized RFS volumes for 2015, despite the fact that refiners need to make purchasing decisions. Consumers will be the ultimate victims under this system, since anything the EPA determines to assess refiners will inevitably be passed on to gasoline and diesel consumers.

Under a “corn ethanol free” RFS, EPA will continue to have the same discretion. EPA’s refusal to finalize RFS volume requirements shows that EPA has a disregard for the law. There is no reason to think EPA’s actions will change in the future.

EPA Has Illegally Promoted Cellulosic Biofuel in the Past

Besides failing to finalize the RFS volumes for 2014 and 2015, EPA has a history of illegally promoting cellulosic production. The law requires EPA, with a neutral methodology, to project the amounts of cellulosic biofuel that will be produced. In 2010, EPA mandated the production of 5 million gallons of cellulosic biofuel, but zero gallons were produced. Instead of learning from its mistake, in 2011 EPA mandated the production of 6.6 million gallons of cellulosic. Again, the reality of technology intruded and zero gallons were produced. Because refiners were required to blend this non-existent fuel or pay fines, they sued EPA and won.

EPA incompetence RFS

The D.C. Circuit found that EPA had violated the Clean Air Act’s requirement that the agency develop its mandates in an objective, scientific manner—rather than act as a promoter of cellulosic biofuels.[3] In the words of the D.C. Circuit, EPA’s actions were a case of “let[ting] its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.” The result was that fuel companies and inevitably, regular Americans, were hurt by the inevitable failure of biofuel producers to meet impossible projections. The Court noted that the EPA essentially said, “Do a good job, cellulosic fuel producers. If you fail, we’ll fine your customers.”

This is but one example of EPA’s failure to be a neutral observer and instead work to promote cellulosic biofuel to the detriment of refiners and consumers.

With Low Cellulosic Production, EPA Changes the Definition of Cellulosic Biofuel

Cellulosic production has remained low despite promises from the ethanol industry and government officials. In 2007, a Democratic Congress and a Republican president expanded the RFS to mandate cellulosic biofuels. Despite this mandate, and assurances that cost-effective cellulosic biofuel was just around the corner,[4] in 2010 and 2011 no cellulosic biofuel was produced. In 2012, only 20,069 RINs of cellulosic were produced and in 2013, 422,740 RINs were produced.[5] While that sounds like a lot, it pales compared to the 1.75 billion RINs mandated by the RFS. Worse, cellulosic production crashed in 2014 back to 44,168 RINs.

Note: RINs are Renewable Identification Numbers. One RIN equals one gallon of ethanol, but because some types of fuel, according to EPA, result in greater GHG reductions, one gallon of “advanced” ethanol can generate more than one RIN.

actual cellulosic production

Because the mandated cellulosic RINs failed to materialize in the marketplace, EPA decided to redefine what cellulosic biofuel is. The RFS defines cellulosic biofuel as “fuel derived from any cellulose, hemicellulose, or lignin that is derived from renewable biomass and that has lifecycle greenhouse gas emissions, as determined by the Administrator, that are at least 60 percent less than the baseline lifecycle greenhouse gas emissions.” Despite this less-than-clear language, it would appear that Congress meant to define cellulosic biofuel as a “drop-in” fuel to replace ethanol in fuel blends. But because of the anemic cellulosic production, EPA redefined cellulosic biofuel to include some types of natural gas and electricity. Specifically, EPA included compressed natural gas and liquefied natural gas from landfills, municipal wastewater treatment facility digesters, agricultural digesters, and separated MSW digesters, as well as electricity used to power electric vehicles from these sources.[6]

EPA's claimed cellulosic production

Because of EPA’s changes to the original definition, now they claim there were 33,022,061 cellulosic RINs created in 2014. Under the older definition, only 44,168 cellulosic RINs were generated. In other words, CNG, LNG, and electricity from these sources accounted for 99.9 percent of EPA’s claimed cellulosic production. This is troubling because the entire point of advanced and cellulosic ethanol in the RFS is to accelerate technology—not repurpose existing technologies for new government set-asides and credits.

EPA’s changes to the definition of cellulosic do not help refiners comply with the law. For the refiners who are required by law to blend cellulosic biofuel, this “biofuel” production is not helpful because they cannot blend CNG, LNG, or electricity into gasoline.

Advanced Ethanol is not Necessarily “Advanced”—it’s Currently Just Another Name for Sugar Cane Ethanol from Brazil

Advanced biofuels are biofuels other than ethanol derived from corn starch (ie. corn kernels) which EPA deems to have 50 percent lower lifecycle greenhouse gas emissions relative to gasoline.[7] Sugarcane ethanol is the only mass-produced product which EPA has certified to meet the definition of “advanced” (non-diesel) biofuel.[8] As a result, we have an absurd situation where the U.S. imports sugarcane ethanol from Brazil and exports corn ethanol to Brazil, as this chart from EIA shows:[9]

Untitled21

As EIA explains, “U.S. obligated parties [ie. U.S. refiners] prefer sugarcane ethanol over corn ethanol” because “sugarcane ethanol counts toward the RFS advanced requirement.”[10] Brazilian ethanol users are indifferent between corn ethanol and sugarcane ethanol.

This situation has become completely absurd. First, sugarcane ethanol is not “advanced.” Sugarcane has been used to make ethanol in Brazil since the late 1920s. The only reason sugarcane is deemed to be “advanced” is because EPA believes it has 50 percent lower lifecycle greenhouse gas emissions than gasoline. The Renewable Fuels Association (RFA), however, does not agree with EPA’s assessment of 50 percent lower lifecycle greenhouse gas emissions from sugarcane ethanol.[11] RFA argues that EPA did not properly consider the greenhouse gas emissions from land use changes in Brazil.

Second, while sugarcane ethanol may have lower lifecycle greenhouse gas emissions, any reductions are wiped out by what happens with sugarcane ethanol in the real world. The preference that the RFS sets up for sugarcane ethanol in the United States means that not only is sugarcane ethanol imported to the U.S., increasing its lifecycle greenhouse gas emissions, but corn ethanol is then exported to Brazil, further increasing the true lifecycle greenhouse gas emissions of sugarcane ethanol. When EPA deems sugarcane ethanol an advanced biofuel, they have to consider its true lifecycle greenhouse gas emissions of not only the emissions required to get the sugarcane ethanol to the U.S., but also what replaces that ethanol in Brazil. Swapping Brazilian sugarcane ethanol with U.S. corn ethanol actually results in overall higher greenhouse gas emissions—not lower emissions, which was supposed to be the point of the advanced ethanol provision in EISA.

Worse, swapping Brazilian sugarcane ethanol with U.S.-produced corn ethanol is completely wasteful. This swap does nothing, except increase costs and energy use required to swap Brazilian for U.S. ethanol.

EIA believes that this absurd trade in ethanol will continue for the next 30 years, with imported ethanol expected to play a much more important role than domestic cellulosic ethanol.

 Untitled3

Why Merely Setting Cellulosic Production under the RFS at “Actual” Production Isn’t Good Enough

Rep. Goodlatte tries to fix some of the problems with the cellulosic portion of the RFS by setting the required cellulosic volumes at the “actual” volumes from the previous year. But given EPA’s track record, it does not nearly go far enough.

The immediate issue with setting the cellulosic requires at “actual” levels is which level of cellulosic production is the “actual” level? As noted above, in 2014 EPA changed the definition of cellulosic biofuel. According to EPA’s old definition of cellulosic biofuel, in 2014 44,168 gallons of cellulosic biofuel were produced, but according to the new definition, more than 33 million gallons of cellulosic biofuel were produced. This is huge difference and calls into question why the federal government is in the business of mandating varying amounts of biofuel. The best answer is to leave it up to people to figure out what works instead of Congress trying to micromanage fuels.

Another problem with this approach is that if a cellulosic ethanol plant is actually built and then produces some cellulosic ethanol, this language would mandate that Americans buy the products of that plant. This is un-American. The government should not force citizens to buy a product.

The Specter of a Low Carbon Fuel Standard

If Congress were to repeal the implied corn-ethanol portion of the RFS, it leaves behind an advanced-biofuel-only RFS. As noted above, the RFS defines advanced biofuel by EPA’s estimate of the GHG emissions from the making of the fuel. This means that an advanced-biofuel-only RFS makes the RFS essentially a Low Carbon Fuel Standard instead of a renewable fuel standard.

Not only is an LCFS another inefficient and political mandate, but it is costly as well. According to a study by Boston Consulting Group on California’s LCFS, the program could increase the price of gasoline by more than $2.50 a gallon. SAIC looked at a possible Northeast/Mid-Atlantic LCFS and found that it would cost 147,000 jobs and reduce GDP by $27 billion. Moving from an RFS to an LCFS means that American motorists will pay more for fuel and suffer job losses and slower economic growth.

Conclusion: Just Let the Market Work

The RFS is fatally flawed.

Ending the RFS, including the advanced biofuel portion, does not mean that ethanol would no longer be used in the United States. It means that EPA would have less impact on the fuel market, that the absurd and inefficient Brazilian-U.S. ethanol swaps would be reduced, and that the American people would balance the competing uses of corn instead of the federal government dictating a certain amount of ethanol and other biofuels.

The RFS is bad policy. Both the corn ethanol portion of the RFS and the advanced biofuel portion of the RFS are bad policies. The best course of action is to let people figure out what fuels work best instead of being told by Congress and EPA bureaucrats what fuels to use—regardless of whether the fuels actually exist or not.



[1] Technically, the RFS does not mandate the use of corn ethanol. The RFS has an overall volume requirement and smaller requirements for “advanced biofuel.” Ethanol made from corn only counts toward to the overall volume requirement.

[2] Energy Information Administration, U.S. Field Production of Crude Oil, http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus2&f=m. Institute for Energy Research, Oil Imports from OPEC Down 60%; KXL Could Lower Them Even More, Jan. 20, 2015, http://instituteforenergyresearch.org/analysis/u-s-oil-imports-opec-60-percent-keystone-lower-even/

[3] Institute for Energy Research, D.C. Circuit Court Chastises EPA for Biofuel Bias, Jan. 29, 2013, http://instituteforenergyresearch.org/analysis/d-c-circuit-chastises-epa-for-biofuel-bias/

[4] Agriculture.com, Cellulosic ethanol could be just around the corner this time, Feb. 7, 2007, http://www.agriculture.com/crops/renewable-energy/ethanol/Cellulosic-ethanol-could-be-just-around-the-corner-this-time_192-ar2111.

[5] Environmental Protection Agency, RFS2 EMTS Informational Data, Feb 9, 2015, http://www.epa.gov/otaq/fuels/rfsdata/2015emts.htm.

[6] Environmental Protection Agency, RFS Renewable Identification Number (RIN) Quality Assurance Program, 79 Fed. Reg. 42,078 (July 18, 2014). See also, Environmental Protection Agency, EPA Issues Final Rule to Establish a

Voluntary Quality Assurance Program for Verifying the Validity of Renewable Identification Numbers Under the RFS Program, June 2014, http://www.epa.gov/otaq/fuels/renewablefuels/documents/420f14042.pdf.

[7] Note: Under the RFS2, advanced biofuels achieve a lifecycle GHG reduction of 50 percent from conventional fuels and cellulosic biofuel achieves a reduction of 60 percent from conventional fuels.

[8] See UNICAU.S. Biofuel Policy, http://sugarcane.org/global-policies/policies-in-the-united-states/us-biofuel-policy

[9] Tom Radich, Brazil Biofuels in the Annual Energy Outlook, Energy Information Administration, Mar. 20, 2013, http://www.eia.gov/biofuels/workshop/presentations/2013/pdf/presentation-06-032013.pdf

[10] Id.

[11] Renewable Fuel Association, RFA to EPA: “Time is Now” to Revise Lifecycle GHG Analyses of Corn and Sugarcane Ethanol, Dec. 3. 2012, http://www.ethanolrfa.org/news/entry/rfa-to-epa-time-is-now-to-revise-lifecycle-ghg-analyses-of-corn-and-sugarca/

WSJ Op-Ed: Taxing for Highways, Paying for Bike Lanes

Last week, Mac Zimmerman penned an op-ed in The Wall Street Journal lambasting Congress for considering legislation to raise the federal gasoline tax to save the broken Highway Trust Fund (HTF) from insolvency. As the Policy Director for Americans for Prosperity explains, HTF wouldn’t need saving if it hadn’t been grossly misappropriating funds for years. But most importantly, Zimmerman makes clear that America – and especially the middle class – simply can’t afford any increases in gas taxes. Below is an excerpt from the op-ed:

Hence the financial problems. According to an editorial in this newspaper, spending on non-highway projects has increased by nearly 40% since 2008, while highway-related spending has remained flat. If Congress directed the fund to spend its money only on highways and other road-related infrastructure—what it was initially created to do—it would be 98% solvent for the next decade.

Streamlining the planning process could also save taxpayers time and money. For example, a 2011 Congressional Research Service study estimated that major Federal Highway Administration projects can require up to 200 regulatory steps and take between nine and 19 years to complete—with planning, design and federal environmental reviews consuming up to half of that time. Even small projects can take between four and six years from start to finish.

Reforming these rules would reallocate tax dollars wasted on paperwork and red tape to investments in asphalt and concrete. Furthermore, it could save Americans from the pain of a gas tax hike. According to Sentier Research, the median family income is still $900—or 1.7%—lower than it was six years ago. Fortunately, falling gas prices have offset some of this difference. Average prices per gallon have dropped by more than a dollar over the past year, leading to projected annual savings of $700 per household.

Any increase in gas taxes, big or small, would cut into this relief at the pump. Those in the middle class in particular would feel the pain, as they devote the highest share of their household spending to gasoline.

Click here to see AEA’s “Top Reasons Congress Should Reject a Gas Tax”.

Click here to read the rest of the op-ed.

A Free Market Blueprint for American Energy Reform

The House and Senate energy committees are currently considering a variety of energy reform proposals. Given the poor track record of broad “energy bills” such as Energy Policy Act of 2005 (which created the Renewable Fuel Standard) or the Energy Independence and Security Act of 2007 (which expanded the RFS), it is paramount to focus on pursuing policies in a broad energy bill that promote free markets, expand domestic energy development, and reform broken regulatory schemes. Below are a list of items that would be real improvements.

Let Free Markets Work for Energy Production

Repeal the Renewable Fuel Standard: The RFS is a failed mandate that raises energy costs for American families. The RFS requires refiners to blend biofuels into gasoline, including biofuels that are not commercially viable. This distorts the market and increases fuel prices. EPA has some discretion to set the required volumes every year, but EPA has a track record of failing to finalize the volumes and unlawfully mandating non-existing amounts of cellulosic ethanol. There are some efforts in Congress to partially repeal the RFS, but this would nevertheless continue to give EPA too much discretion and authority over the fuel market. Only a full repeal of the RFS would sufficiently ameliorate its damaging effects.

Eliminate the wind Production Tax Credit: Ending the wind PTC is long overdue. A 23-year-old subsidy that was originally intended to jumpstart wind production, the PTC has become an egregious form of corporate welfare. As Warren Buffett said, “On wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.” Because the PTC is so generous, it sometimes allows wind producers to sell electricity at a loss and still make money. Click here to read 10 reasons to eliminate the wind PTC.

Liberate Domestic Energy Development and Exports

Allow states to manage leasing on federal lands: The recent energy boom has made America the top combined oil and natural gas producer in the world. These enormous gains, however, have occurred exclusively in areas not under federal control. Since 2010, oil and natural gas production on federal lands are down 10 percent and 31 percent, respectively. Meanwhile, on state and private lands, oil production has soared 89 percent while natural gas production is up 37 percent, according to the Congressional Research Service.

State regulators have more local knowledge and are better equipped to make leasing decisions than federal bureaucrats. For instance, it has taken this administration 240 days, on average, to approve permits to drill for oil and natural gas on federal lands, when some states take just 10 days to process similar permits for state lands. States have a long track record of safely regulating energy development on nonfederal lands—it’s time to empower them to also steward energy resources on federal lands within their borders.

Expand energy production on federal lands: America possesses enormous untapped energy potential on federal lands and waters. This includes 34 billion barrels of oil in Alaska’s Chukchi and Beaufort Seas and ANWR’s 1002 Area and another 900 million barrels of oil and 53 trillion cubic feet of gas—about 9 billion barrels of oil equivalency—in the National Petroleum Reserve-Alaska. Unfortunately, the federal government has less than 5 percent of federal lands and waters leased for energy development. Opening up oil and gas development on federal lands and waters would create 2 million jobs annually over the next three decades, increase wages by $115 billion per year, and boost federal revenues by $2.7 trillion, according to a study conducted by Dr. Joseph Mason at Louisiana State University.

Lift the oil export ban: The crude oil export ban is an outdated and economically damaging policy. The statute is a relic from a past era and is causing serious problems for today’s energy reality. Technological advances, specifically in hydraulic fracturing and horizontal drilling, have catalyzed a domestic oil boom. America is producing more oil than it has in almost three decades, and banning crude oil exports only prevents honest, hard-working Americans from earning a fair share in the global marketplace.

In fact, lifting the ban would reduce gasoline prices and create jobs. Allowing U.S. oil exports to compete on the global market will naturally increase supply, thereby driving down the price of oil. Numerous studies, including by the Congressional Budget Office, predict that lifting the ban would result in an oil price drop of several cents per gallon. Additionally, several studies predict significant jobs increases because of all the new investment to expand energy production right here at home.

Expand and streamline LNG export permits: The rapid expansion of domestic natural gas production on nonfederal lands has helped the U.S. become and remain the largest natural gas producer in the world. High global demand for natural gas has created a strong market for American energy, but thus far our ability to feed this market has been hamstrung by bureaucratic red tape that has slowed the approval of export facilities that are needed to get the natural gas to willing buyers. This delay also has national security implications because Russia and others have used energy access as a weapon against our European allies, including Ukraine and Poland. Congress should expedite LNG export permits by placing a 30-day deadline for the DOE to issue a final decision on construction applications of these export facilities after the National Environmental Policy Act review is complete.

Fix cross-border permitting issues: The Keystone XL situation is a perfect example of how flawed America’s laws are with respect to cross-border permits. President Obama has failed to make a decision on whether to approve or deny the pipeline from crossing our border with Canada for more than 6 and a half years. The law should be reformed so that a permit is automatically issued if not rejected for cause within a time limit, such as one year. Because President Obama cannot decide whether oil from Canada is in the national interest, in this case, Congress should approve the pipeline.

Reform NEPA: One of the ways the Keystone XL pipeline has been delayed is through the National Environmental Policy Act (NEPA). NEPA is a costly and burdensome tool used to delay projects instead of its intended goal of providing information and transparency. NEPA should be reformed by setting time limits for reviews, page limits for NEPA documents, and subject matter limits of what should be discussed in a NEPA document. Furthermore, the federal government should certify that a NEPA document is complete—and once certified, the courts cannot reopen the NEPA documents.

Reform the Clean Air Act: Air quality in the United States has improved greatly over the last 60 years. Today’s air quality issues are different than the very real pollution problems of the 1960s and 1970s. The Clean Air Act needs to be amended to focus on today’s issues.

First, states themselves should set all of the standards under the Clean Air Act, including national ambient air quality standards, instead of the federal bureaucrats. EPA’s role should be only to provide information to states. Second, all science used by EPA needs to be open, reviewable by the public, and reproducible. Studies that are not reproducible are not science-based and should not carry any weight. Third, EPA has time and time again demonstrated a poor grasp of economics, including their refusal to conduct whole-economy modeling. EPA’s cost-benefit calculations should be conducted by an outside federal agency.

Lastly, EPA and other federal agencies should be forbidden from using the social cost of carbon because it is a wholly arbitrary metric that is “close to useless” and “can fool policy-makers into thinking that the forecasts the models generate have some kind of scientific legitimacy.” The social cost of carbon is inapplicable for any serious policy analysis.

Conclusion

The United States is an energy superpower, but we still have many impediments that hold us back. Congress has an opportunity to address those impediments, but they must learn from the past. The energy bills of 2005 and 2007—which expanded the size of scope of government and created many of the problems we face today—show what can happen when lawmakers care more about burnishing their legacies than doing what’s best for the country. These are a few areas to start with for a broad energy bill that would unleash American energy development, promote free markets, and strengthen America’s standing as an energy superpower.


IMF’s Disingenuous Attempt to Tax Energy Use

The International Monetary Fund (IMF) released its estimate of global fossil fuel subsidies for 2015 at $5.3 trillion—almost ten times higher than the International Energy Agency’s (IEA) calculation of $548 billion for 2013.[i] The difference is not the change of a 2-year span, but the methodology. The IEA uses a “price-gap” methodology, which is the difference between end-use prices and supply costs that include shipping costs, margins, and value-added taxes. In other words, the agency calculates subsidies that the governments pay their own citizens to enable them to buy energy more cheaply than the market price.

The IMF, on the other hand, includes in its methodology externality costs that purportedly measure damages from emissions of carbon dioxide and local pollutants (e.g. sulfur dioxide and particular matter), traffic congestion, and accidents; plus a consumption tax that is assessed on both the supply cost and the externality cost.[ii] These externality costs are not actual costs to the consumer or the government but costs that some analysts believe will pay for their theoretical projections of perceived damage of using fossil fuels. Thus, the IMF subsidies are made artificially higher than what is actually paid for the fossil fuels. The fundamental problem with such an approach is that the average person thinks “subsidy” refers to actual government funds or other advantages given to a particular producer; the fact that firms are allowed to emit greenhouse gases is not what most people have in mind by the term “subsidy.”

Comparison of Country Subsidies

Under the IMF methodology, China is alleged to have incurred a $2.3 trillion subsidy for its fossil fuel use as it is the world’s largest energy consumer and the world’s largest coal consumer.[iii] This IMF subsidy estimate that includes externality costs is 110 times higher than the IEA calculated fossil fuel subsidy of $21 billion for China for 2013.

IMF estimates 2015 fossil fuel subsidies for the United States at $699 billion, Russia at $355 billion, the European Union at $330 billion, India at $277 billion, and Japan at $157 billion.[iv] The comparative values under the IEA methodology are $0 for the United States, $46.5 billion for Russia, $0 for the European Union, $47 billion for India, and $0 for Japan.[v] In other words, IMF’s fossil fuel subsidies for the United States, the European Union, and Japan are composed entirely of externality costs and consumption taxes—not actual financial payments from consumers or governments.

Fossil-Fuel-Subsidies-Comparison

Source: IEA, http://www.worldenergyoutlook.org/resources/energysubsidies/ and RTCC http://www.rtcc.org/2015/05/18/fossil-fuel-subsidies-to-hit-5-3-trillion-in-2015-says-imf

IMF Assessment of Fossil Fuel Subsidies

The IMF defines fossil fuel energy subsidies as the difference between what consumers pay for the energy versus its costs that include external costs imposed from fossil fuel consumption on the environment plus a country’s value added or sales tax rate. IMF adds theoretical external costs for global warming; air pollution; and the effects on traffic congestion, traffic accidents, and road damage. Some of these supposed external costs, it should be noted, would exist even if all transportation were powered by solar powered vehicles. (For example, even if all cars were electric, there would still be congestion, accidents, and road damage.) To ascribe all such external costs to fossil energy reflects more the makeup of existing transportation energy sources than it does any objective assessment.

The distributions of the various components of the $5.3 trillion that IMF estimates for 2015 is given in the chart below. Note that local pollution costs represent over half the total and global warming represents less than a quarter of the total, while the actual financial costs represent just 6 percent of the total.

Screen Shot 2015-05-22 at 9.41.11 AM

Source: IMF, http://blog-imfdirect.imf.org/2015/05/18/act-local-solve-global-the-5-3-trillion-energy-subsidy-problem/

According to IMF fossil fuel subsidies are found in both advanced and developing countries. Developing Asia accounts for about half of the total, while advanced economies account for about a quarter. (See chart below.) IMF’s subsidy estimate for 2015 is more than double its previous estimate of $1.9 trillion for 2011.  Over half of the increase is due to its “refined” calculation of externality costs.[vi] While the IMF has calculated a huge increase in the value of fossil fuel subsidies in a 4-year time span, the IEA’s calculation of fossil fuel subsidies dropped 4 percent between 2012 and 2013.

Screen Shot 2015-05-22 at 9.42.19 AM

Source: IMF, http://blog-imfdirect.imf.org/2015/05/18/act-local-solve-global-the-5-3-trillion-energy-subsidy-problem/

Conclusion

The IEA calculates fossil fuel consumption subsidies because many governments, mostly in developing countries, pay part of the cost of the country’s consumption of fossil fuels. For example, in China and India, the governments pay $11.8 billion and $36.6 billion, respectively, of the actual financial cost of the oil consumed in the country. In other words, the population in those countries pay less than the world’s market price for oil because the government offsets part of the expenditure. IEA believes the citizens of these countries should have to pay the actual costs of the fossil fuel energy that they consume.

The IMF, on the other hand, not only calculates the difference between the actual supply cost and the end-use price borne by the country’s population but also adds artificial costs for carbon emissions, air pollution, and traffic congestion, making the fossil fuel “subsidies” more than 10 times greater than actual financial cost. IMF’s intent is to make fossil fuels appear to cost so much that people will stop using them rather than pay the exorbitant costs that it calculates. Unfortunately, if the world stopped using fossil fuels, its citizens would be put back in the dark ages with little of the comforts we know today—the damages would be well in excess of $5.3 trillion and millions of people would likely starve to death.

Since the IMF is made up and funded by governments, including the United States, which are seeking to raise funds to spend from carbon pricing or trading schemes, it is easy to understand why it has adopted this methodology, which any fair observer realizes distorts the meaning of the word “subsidy” to confuse the average person. If the IMF can allege a cost is being occurred each time someone uses the energy that make our lives better, it might be able to justify a new enormous source of cash to spend on more government. From the looks of the IMF’s $5.3 trillion assessment, it is off to an audacious start to its campaign to tax energy use.

*This post originally appeared on the Institute for Energy Research.


[i] Institute for Energy Research, Developing Countries Subsidize Fossil Fuel Use, Artificially Lowering Prices, December 8, 2014, http://instituteforenergyresearch.org/analysis/developing-countries-subsidize-fossil-fuel-use-artificially-lower-prices-2/

[ii] IMF Working Paper, How Large Are Global Energy Subsidies?, May 2015, http://www.imf.org/external/pubs/ft/wp/2015/wp15105.pdf

[iii] Institute for Energy Research, China: World’s Largest Energy Consumer and Greenhouse Gas Emitter, May 20, 2015, http://instituteforenergyresearch.org/analysis/china-worlds-largest-energy-consumer-and-greenhouse-gas-emitter/

[iv] Responding to climate change, Fossil fuel subsidies to hit $5.3 trillion in 2015, says IMF study, May 19, 2015, http://www.rtcc.org/2015/05/18/fossil-fuel-subsidies-to-hit-5-3-trillion-in-2015-says-imf#sthash.PoXX2Ctz.dpuf

[v] International Energy Agency, Energy Subsidies, http://www.worldenergyoutlook.org/resources/energysubsidies/

[vi] IMF, The $5.3 Trillion Energy Subsidy Problem, May 18, 2015, http://blog-imfdirect.imf.org/2015/05/18/act-local-solve-global-the-5-3-trillion-energy-subsidy-problem/

WSJ Op-Ed: RFS Drives Up Costs at The Pump & On The Plate

This week, food industry leaders Mike Brown and Rob Green penned an op-ed in The Wall Street Journal encapsulating the numerous, costly flaws of the Renewable Fuel Standard (RFS).  Mr. Brown, president of the National Chicken Council, and Mr. Green, executive director of the National Council of Chain Restaurants, explain how this broken mandate is forcing American taxpayers to fork it over at the pump and for the food on their plate. Below is an excerpt from the piece:

Consider: Between 1973 and 2007, corn prices averaged $2.39 a bushel, according to the U.S. Agriculture Department. The average price of corn jumped more than 110% between 2008 and 2014, to $5.04 a bushel. Even though corn prices have recently declined thanks to fabulous weather that produced two consecutive bumper crops, prices are still more than 59% higher than the historical average. Prices could surge even higher if the U.S. experiences anything less than ideal weather.

The resulting increases in feed costs have also affected the American production of beef, pork and chicken, which had increased consistently over the past 30 years but has now leveled off due to the higher cost of feed. As a result, a 2012 study by Pricewaterhouse Coopers estimates that the RFS costs chain restaurants $3.2 billion every year in increased food commodity costs.

Then there are restaurants. Wholesale food prices have outpaced the consumer price index by more than a full percentage point since the implementation of the RFS. In many instances, especially in the restaurant sector, small business owners are not able to pass on higher retail prices to consumers because of market competition—a concept that the corn-ethanol industry is unfamiliar with thanks to a government quota.

As if this were not enough, ethanol production has contributed to global food scarcity and hunger. No country exports more corn than the U.S., but about 40% is ending up in gas tanks, not on the world market. So much corn has been blended into gasoline that the higher percentage levels routinely render boat engines, motorcycles, chain saws and older automobiles inoperable.

Click here to read the rest of the op-ed.

The Hidden Threat to America’s Energy Boom

In December, the Obama administration released revised Draft Guidance to examine the impacts of climate change under the National Environmental Policy Act (NEPA). NEPA requires that federal agencies look at the environmental impact of their major actions. The administration’s new greenhouse gas guidance would make an already costly and time-consuming process even more onerous without providing any new and actionable information.

No Pass 600 AEA (1)

This administration’s proposal is the latest move by the administration to make it more difficult to spend federal dollars on any infrastructure projects—including the expenditure of funds for permitting of projects—and the guidance is designed to make it more difficult to produce natural gas, oil, and coal in the United States – if those activities lead to an increase in carbon dioxide.

For example, this guidance would make it more difficult to produce, use, and export natural gas. America is the number one natural gas producer in the world, with production surging 55 percent since September 2005. We have so much natural gas that we can now export a lot of it to our allies and still keep prices affordable here at home. A study commissioned by the U.S. Energy Department found that the U.S. can expect “to gain net economic benefits from allowing LNG exports” and that “scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.”

Our ability to realize these economic benefits depends on securing timely approval of new LNG projects. Yet this new guidance adds more red tape to an already burdensome process. As the Center for Liquefied Natural Gas notes in public comments, the draft guidance would “undermine regulatory certainty by adding significant costs and delays to LNG export projects while potentially leaving the process vulnerable to unnecessary litigation.”

It is conceivable (and not clear from the guidance) that a project could be held up because opponents of all hydrocarbon use would argue that a project requiring a permit insufficiently assessed the impact of the project on global carbon dioxide emissions from direct and indirect sources. An export facility, it could be alleged, not only produces carbon dioxide or allows carbon dioxide-producing natural gas to flow through it, but also then may allow economic expansion because it provides affordable energy to enable a steel mill to operate, which might produce more steel; but also, more carbon dioxide. The list of “what ifs” becomes infinite in the hands of creative and clever lawyers, whose intent it is to slow construction of facilities that might expand the use of hydrocarbons in the U.S. or the world.

The Institute for Energy Research has exposed the numerous flaws with the administration’s draft guidance. In March, IER called for the guidance to be withdrawn, noting it “is internally inconsistent, fails to require information about climate change itself, is inconsistent with NEPA, is inconsistent with current NEPA regulations, is inconsistent with case law, and uses the arbitrary and capricious social cost of carbon.”

For example, the draft guidance requires that if cost and benefits of a proposed actions are calculated, then the social cost of carbon (SCC) should be used to “monetize” the climate change impacts. As we have explained a number of times, the social cost of carbon is wholly arbitrary. As MIT economist Robert Pindyck wrote in a peer-reviewed publication, the Integrated Assessment Models (IAMs) used to estimate the SCC…

have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g. the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models’ descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading. [emphasis added]

Pindyck continued:

When it comes to the damage function, however, we know almost nothing, so developers of IAMs [Integrated Assessment Models] can do little more than make up functional forms and corresponding parameter values. And that is pretty much what they have done.

A tool that is “close to useless” for policy analysis should not be required to be used by this guidance. This is especially true for something that is basically “made up.” But the administration wants to use the social cost of carbon because it give the illusion of large costs.

The social cost of carbon provides the illusion of large impacts from greenhouse gas emissions that have no discernable impact on the actual climate. As the House Natural Resources Committee explains, many federal agencies believe carbon dioxide emissions from their activities “will have small, if any, potential climate change effects.” Yet the administration now wants agencies to consider climate change effects for nearly everything they do.

The Natural Resources Committee held a hearing this week on the draft guidance. We hope Congress uses every tool at its disposal to shine a light on this power grab so Americans can continue to enjoy the benefits of domestic energy production without further interference from federal bureaucrats.

Pyle: Let’s Put An End to Wind Welfare

This week, AEA President Tom Pyle penned an op-ed in The Hill decrying the wind industry’s dependence on taxpayer-funded corporate welfare. Below is the text of the op-ed:

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Does wind lobby care more about keeping word or handouts?
By Thomas Pyle

As the 2016 presidential race takes shape, here’s an idea Republican and Democratic contenders alike can get behind: let’s put an end to corporate welfare.

Unfortunately, right out of the gate, many of the candidates have chosen to pander to special interests rather than stand up for American families. At the recent Iowa Agriculture Summit, for instance, none of the Republican contenders save Ted Cruz (R-Texas) called for an immediate end to the federal ethanol mandate.

On corporate welfare, the energy space is fertile ground for reform. A good place to start is with the wind Production Tax Credit (PTC), a lucrative subsidy that has bilked taxpayers for billions over decades. The most recent one-year extension is estimated to cost taxpayers $6.4 billion.

The best solution is to simply let the PTC remain expired. But in an effort to find compromise, Reps. Kenny Marchant (R-Texas) and Mike Pompeo (R-Kan.) have introduced legislation to phase out the PTC in a series of steps over the next decade. Their bill tightens eligibility requirements for new projects, ends an inflation adjustment provision—saving taxpayers about 35 percent—and repeals the underlying statute so subsidies will stop flowing no later than the end of 2025.

Two years ago, lobbyists at the American Wind Energy Association (AWEA) claimed to support a PTC phase out. As Congress teetered on the fiscal cliff, AWEA cried uncle, conceding the industry didn’t need the PTC “to become fully cost-competitive.”

The wind lobby has since changed its tune. This week, AWEA blasted out an email calling on wind supporters to “urge opposition” because the bill “threatens to create a repeat of the cycle of job losses, factory closures, and major decreases in the amount of new wind power available to our families.”

AWEA has it backwards. By pushing for repeated one-year PTC renewals, AWEA owns the wind industry’s boom and bust cycles. The Marchant-Pompeo bill, by contrast, offers reasonable reforms that provide certainty to wind producers while protecting the long-term interests of taxpayers.

The only question is whether the wind industry will meet Congress half way.

A solution couldn’t come soon enough. As history shows, wind welfare is a bad deal for taxpayers.

Consider new data from the Energy Information Administration (EIA). In 2013, wind received almost $6 billion in federal electricity-related subsidies (including the PTC). That’s almost twice as much as coal, natural gas, and nuclear received combined. The only difference: while those three sources supply 86 percent of the electricity Americans use, wind produces just 4.5 percent despite receiving twice as much largesse.

And while all energy subsidies distort markets and harm consumers, wind subsidies have come at an especially high cost. Over the last six decades, subsidies for wind and solar alone have cost taxpayers $13.77 per million British thermal units of energy produced, compared to just 39 cents for oil, 34 cents for nuclear, 12 cents for natural gas, and 10 cents for coal.

To make matters worse, Americans actually pay for subsidized wind twice: first in their taxes, then on their utility bills. Subsidies divert resources away from projects that make the most economic sense and toward those who have the best political connections. These market distortions lead to higher energy prices for all of us.

Just look at Spain and Germany. Both countries impose subsidies and mandates for wind and solar. Electric rates are three times higher in those countries than in the U.S. and carbon dioxide emissions are actually rising—defeating the supposed purpose of mandating renewables.

Europe’s failed green energy experiment should serve as a cautionary tale on the false promise of corporate welfare. Wind lobbyists often claim that the PTC is only “temporary” and that renewables will soon be cost competitive with conventional fuels. They’ve been telling this tall tale since Congress first enacted the PTC in 1992.

The American people have had enough. A recent poll found that the public believes wind subsidies have passed their expiration date. By embracing the approach advanced by Marchant and Pompeo, wind lobbyists can prove they care more about keeping their word than protecting their government handouts.

Click here to see the original op-ed. 

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Squirrelly Taxes

Squirrely Taxes 600 AEA

Congress created the Highway Trust Fund (HTF) in 1956 to fund construction of the Interstate Highway System. The HTF is funded primarily though an 18.4-cent per gallon federal excise tax on gasoline. Funding for the HTF expires May 31, and with the HTF facing a budget shortfall, some in Congress have proposed raising the federal gasoline tax.

Yet more than 25 percent of HTF revenues aren’t even spent on highways. Instead, they’re diverted to subways, streetcars, buses, nature paths, and even squirrel sanctuaries. 

The bottom line? There is never a good time to raise taxes on the American people to fund a broken system in which the federal government no longer has business being involved.