GAO: ‘No Assurance Small Refinery Exemptions Made with Valid Information’

Oil-friendly exemption allows small refineries claiming economic hardships to skip rule obligating them to add biofuels to gasoline and diesel.
November 10, 2022

In a report that could pit Big Oil against Big Ag, a federal watchdog agency said some exemptions to a Bush-era rule requiring gasoline and diesel fuel to be mixed with ethanol and other renewable fuels could be based on invalid information.

The report’s conclusions could have important ramifications for Indiana, which grows nearly half of its corn crop for use in biofuels.

The GAO report found the U.S. Environmental Protection Agency made decisions on whether to grant Renewable Fuel Standard small refinery exemptions, which allow companies to skip out on legal obligations to add renewable fuels to gasoline and other fuel blends, on “potentially flawed” economic assumptions and inconsistent policies that hurt small refineries and renewable fuel producers.

The EPA said it had “very significant concerns” about the accuracy of the report.

Renewable fuel producers, like the companies represented by the Renewable Fuels Association and Growth Energy, opposed the report’s conclusions, saying it was based on a “creative” and “obscure” economic analysis that solely benefits oil producers.

The Renewable Fuel Standard was created by Congress in 2005 and expanded in 2007. It requires fuel manufacturers to blend renewable fuels, like ethanol and biodiesel, into their fuels in increasing amounts every year or buy credits that represent the required fuel volume.

To track the fuel blends and credits, renewable fuel producers assign a unique number, called a Renewable Identification Number, to each gallon of renewable fuel. When the fuel changes ownership, the RIN transfers with the fuel. When the fuel is blended, the RIN is separated from the fuel and can be used to fulfill the refinery’s annual requirement, saved to help fulfill next year’s requirements, or sold as credits to help another refinery fulfill their own obligations.

Small refineries, defined as those that refine less than 75,000 barrels of crude oil a day in the current and previous year, can ask for an exemption to the blending or credit requirement if they would experience a “disproportionate economic hardship” by following the rule.

All the refineries have to do is submit a petition to the agency and prepare documentation to support the petition. The EPA is then supposed to make a decision on whether to grant the exemption within 90 days based on input from the Department of Energy and information submitted by the refineries seeking the exemption.

The GAO report concluded that the EPA and DoE “do not have quality information needed to evaluate exemption petitions.”

The report takes issue with the two agencies’ conclusions that small refineries do not experience economic hardships via Renewable Fuel Standard regulations because they pass the costs of the RINS, either through blending or credits, to the fuel purchasers.

The GAO said that conclusion is based on a “potentially faulty assumption” that all parties pay and receive one price for RINs.

“We found that companies that tended to trade lower quantities of RINs (likely smaller refineries) were either paying more to buy RINs or receiving less when they sell RINs, relative to larger companies from 2013 through 2021,” the report stated. “This effect is statistically significant but it is unclear the extent to which this difference materially affects individual small refineries.”

The GAO said it found a 2.4% difference, on average, in RIN prices, when there was a large difference between the size of the buyers and sellers. But the GAO admitted that, for ethanol and biomass fuel, the trends varied and even worked in the opposite direction of what the agency said.

The report also said it found the EPA has not specified what information would be useful for determining economic hardship, does not have policies and procedures in place to implement the RFS and makes determinations on a much longer time frame than it tells refineries.

In responses to the GAO’s report, the EPA said its own, more current analysis found that the difference between RIN prices were only 5 cents per RIN for ethanol and 1.7 cents per RIN for biomass fuel.

“These differences are diminishingly small and may simply reflect noise in the data rather than an actual characteristic of the RIN market,” wrote principal deputy assistant administrator Joseph Goffman. “Even if these results do not reflect actual economic conditions, given the small magnitude of the observed differences EPA does not think the differences are significant enough to impact an evaluation of potential disproportionate economic hardship for a small refinery.”

A federal appeals court overseeing a lawsuit brought by 36 refineries denied exemptions in 2018 and ordered the EPA to review its past exemption decisions. The EPA once again denied small refinery exemption petitions for all 36 refineries after it said it reviewed more than a decade of RFS market data, public comments and confidential information submitted by the refineries and found none of the petitions demonstrated a hardship caused by compliance with the RFS program.

Goffman agreed with some of the GAO report’s recommendations, but said the EPA would not reassess its small refinery exemption decisions.

The EPA said it would allow 31 of those unidentified small refineries to meet their compliance obligations for 2018 without buying or redeeming additional RINs and would defend in court any appeals to its latest decision.

The Renewable Fuels Association called the report “shoddy” and “friendly to oil refiners.”

“GAO’s ‘economic analysis’ can only be described as a creative and obscure acrobatic routine. And even after performing these high-flying gymnastics, GAO can only suggest that the cost of RFS compliance for small refiners might be 0.5% — that’s half of 1 percent — higher than what larger refiners experience. In other words, GAO says small refiners — who are raking in record profits — can only pass on 99.5% of their RFS compliance costs,” said RFA president and CEO Geoff Cooper.

“The bottom line is there is no such thing as ‘disproportionate economic hardship’ under the RFS. All refiners — large or small, merchant or integrated — face the same compliance obligations and they all pass their RIN costs on to fuel blenders at the terminal. Period. There is a mountain of evidence confirming this fact, and GAO’s new report will just be thrown on the growing scrap heap of refiner disinformation meant to undermine the success of the RFS.”

If the Renewable Fuel Standard was fully enforced with no exemptions, it would require a minimum of 15 billion gallons of conventional biofuels to be produced and blended with fuels every year.

Nearly half of Indiana’s total corn crop, more than 461 million bushels according to the Indiana Corn Marketing Council, goes to ethanol production. Biofuel facilities in Indiana produce about 1.4 billion gallons of ethanol, or 8.1% of the nation’s total ethanol, every year.

A U.S. Department of Agriculture study determined in 2017 that greenhouse gas emissions from corn-based ethanol are about 43% lower than gasoline and would increase to 50% by 2022. The agency found that number could increase if other conservation practices and efficiency improvements were used.

The fuel was touted as a more climate-friendly replacement to fossil fuels by the EPA and trade groups, but a recent study has found that it may currently be worse for the climate overall than gasoline.

A study published in the Proceeding of the National Academy of Sciences found that the full lifespan of ethanol production has led to the release of carbon through the conversion of grasslands and forests into croplands in the U.S. and abroad, making the carbon intensity of corn ethanol production at least 24% higher than gasoline. The RFS has also led to an increase in the amount of fertilizer used, increasing water quality degradants by at least 3%.

The Inflation Reduction Act passed by Congress earlier this year included various tax credits and funding for biofuel production, including $500 million for biofuel infrastructure through 2031 and $300 million for grants to increase domestic production and deployment of sustainable aviation fuel credits.

The Center for Biological Diversity filed a lawsuit in federal court this July seeking to review the Renewable Fuel Standard requirements for biofuels for 2020, 2021 and 2022. The organization claims the EPA failed to properly assess the impacts of land conversion and additional pesticide and fertilizer use that result from the program requirements on endangered animals.

“The ever-increasing amounts of corn grown to burn as fuel only exacerbate dead zones in the ocean, worsen water pollution, and drive endangered species closer to extinction,” said Brett Hartl, government affairs director at the Center for Biological Diversity. “The renewable fuel program is a colossal boondoggle that gobbles up millions of acres of land. It’s a false solution to the climate crisis, delaying the urgent need to transition to electric vehicles.”

GAO: ‘No Assurance Small Refinery Exemptions Made with Valid Information’