[Federal Register: August 13, 2008 (Volume 73, Number 157)]
[Notices]
[Page 47168-47184]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13au08-73]
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ENVIRONMENTAL PROTECTION AGENCY
[FRL-8703-5]
Notice of Decision Regarding the State of Texas Request for a
Waiver of a Portion of the Renewable Fuel Standard
AGENCY: Environmental Protection Agency (EPA).
ACTION: Notice.
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SUMMARY: The Governor of the State of Texas requested a waiver of 50
percent of the renewable fuel standard (RFS or RFS mandate) for the
time period from September 1, 2008 through August 31, 2009, pursuant to
section 211(o)(7) of the Clean Air Act (the Act), 42 U.S.C. 7545(o)(7).
Based on a thorough review of the record in this case, EPA finds that
the evidence does not support a determination that implementation of
the RFS mandate during the time period at issue would severely harm the
economy of a State, a region, or the United States. EPA is therefore
denying the request for a waiver. In this Notice EPA is also providing
guidance on the Agency's general expectations for future waiver
requests.
DATES: Petitions for review must be filed by October 14, 2008.
ADDRESSES: EPA has established a docket for this action under Docket ID
No. EPA-HQ-OAR-2008-0380. All documents and public comment in the
docket are listed on the www.regulations.gov Web site. Publicly
available docket materials are available either electronically through
www.regulations.gov or in hard copy at the Air and Radiation Docket in
EPA Headquarters Library, EPA West Building, Room 3334, 1301
Constitution Ave., NW., Washington, DC. The Public Reading Room is open
from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal
holidays. The telephone number for the Reading Room is (202) 566-1744.
The Air and Radiation Docket and Information Center's Web site is
http://www.epa.gov/oar/docket.html. The electronic mail (e-mail)
address for the Air and Radiation Docket is: a-and-r-Docket@epa.gov,
the telephone number is (202) 566-1742, and the Fax number is (202)
566-9744.
FOR FURTHER INFORMATION CONTACT: James W. Caldwell, Office of
Transportation and Air Quality, Mailcode: 6406J, Environmental
Protection Agency, 1200 Pennsylvania Ave., NW., Washington, DC 20460;
telephone number: (202) 343-2802; e-mail address: Caldwell.jim@epa.gov.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The RFS program, which requires the use of renewable fuels in the
U.S. transportation sector, was originally adopted by Congress in the
Energy Policy Act of 2005 (EPAct). This program was recently modified
by Congress in the Energy Independence and Security Act of 2007 (EISA).
The RFS program provides that the Administrator, in consultation with
the Secretaries of Agriculture and Energy, may waive the national
renewable fuel volume requirements, in whole or in part, if the
Administrator determines that implementation of the requirement would
severely harm the economy or environment of a State, region, or the
United States (see Clean Air Act section 211(o)(7)(A)).
On April 25, 2008, the Governor of the State of Texas requested a
fifty percent waiver of the national volume requirements for the
renewable fuel standard (RFS or RFS mandate). Texas
[[Page 47169]]
based its request on the assertion that the RFS mandate is
unnecessarily having a negative impact on the economy of Texas,
specifically that increased ethanol production is contributing to
increased corn prices which are negatively affecting its livestock
industry and food prices. EPA published in the Federal Register a
notice of receipt of this request and invited public comment on all
issues relevant to making a decision on Texas's request.
After considering all of the public comments, and consulting with
the Secretaries of Agriculture and Energy, EPA has determined that the
waiver request should be denied. In making this decision, EPA has
interpreted the statutory provisions to require: a determination based
on the expected impact of the RFS program itself, a generally high
degree of confidence that implementation of the RFS program would
severely harm the economy of a State, region, or the United States, and
a high threshold for the nature and degree of harm by requiring a
determination of severe harm. EPA and almost all commenters recognize
that there are many factors that affect the use of biofuels in the U.S.
and the overall impact of such use. However, the RFS waiver provision
calls for EPA to evaluate a much narrower set of issues, focusing on
just the impact of the RFS mandate.
With this framework in mind, EPA evaluated all of the evidence
concerning the issues that are relevant under the waiver provision. In
its supplemental comments, Texas requested that the waiver request
focus on the 2008/2009 corn marketing year. EPA agrees that looking at
the impact with and without a waiver over this time frame is an
important way to identify the impact of implementation of the RFS
program. Several commenters submitted modeling analyses that looked at
the impact of a waiver of the RFS mandate on ethanol production, corn
prices, fuel prices, and other related impacts. In addition to
evaluating the information submitted by Texas and other commenters, the
Agency conducted its own analysis. In consultation with the United
States Department of Agriculture (USDA) and the United States
Department of Energy (DOE), EPA reviewed several economic models and
chose a model created by researchers at Iowa State University (ISU
model) to analyze the impact of the RFS on corn, ethanol, and gasoline
prices based on uncertainty in key variables such as crop yields and
crude oil prices. As part of our analysis, EPA reviewed the underlying
data and assumptions in the ISU model for their appropriateness. In
this context, EPA believes the ISU modeling reflects the most recent
data available, is well designed and documented, and provides a number
of advantages over other approaches to analyzing the issues relevant
for this decision. EPA also considered current market conditions
influencing the production of ethanol in the U.S. such as high oil
prices and the large existing production capacity of the U.S. ethanol
industry, as well as other empirical data including historical and
current Renewable Identification Number (RIN) credit prices.
First, after weighing all of the evidence before it, EPA determined
that the evidence does not support a finding that implementation of the
RFS ``would'' harm the economy of a State, region, or the United
States, because the evidence does not reach the generally high degree
of confidence required for issuance of a waiver under CAA section
211(o)(7)(A). On this issue, EPA believes that this body of information
supports the determination that the most likely result is that the RFS
would have no impact on ethanol production volumes in the relevant time
frame, and therefore no impact on corn, food, or fuel prices.\1\
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\1\ As discussed later, EPA believes that this body of
information also supports, the determination that implementation of
the RFS would have no significant impact in the relevant time frame.
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Second, on the issue of the severity of any harm, the weight of all
of the evidence also indicates that were the RFS mandate to have an
impact on the economy during the 2008/2009 corn marketing year, it
would not be of a nature or magnitude that could be characterized as
severe. Even in the modeled scenarios where a waiver of the RFS mandate
might reduce the production of ethanol, the resulting decrease in corn
prices is anticipated to be small (on average $0.30 per bushel of
corn), and there would be an accompanying small increase in the price
of fuel (on average $0.01 per gallon in fuel costs). Such levels of
potential impacts from the RFS program do not satisfy the high
threshold of harm to the economy to be considered severe. We also
conducted a sensitivity analysis on a low probability scenario with
larger potential impacts, the results of which are presented below.
EPA also received comment on several issues not associated with the
economic impacts of RFS. These include comments on the general economic
and environmental impacts of the recent increase in biofuels, and the
effect of the use of biofuels on commodity markets. EPA recognizes that
Texas and many parties, both those supporting the waiver and those
opposing the waiver, have raised issues of great concern to them and to
others in the nation concerning the role of biofuels in our country.
However, the issue before the Agency in this case is much more limited,
as described below in our discussion of EPA's authority under section
211(o)(7)(A) of the Act. Based on a thorough review of the record in
this case and by applying the evidence to the statutory criteria, EPA
finds that the evidence does not support making a determination that
implementation of the mandate would severely harm the economy of a
State, region, or the United States.
This decision on the Texas waiver request is based on current
circumstances and market conditions. However, we recognize that
significant changes could occur in the future with respect to the
multiple factors related to the production and use of renewable fuels
in the U.S. transportation sector. EPA is committed to monitoring the
implementation of the renewable fuels program and its impact on the
economy and environment.
This is the first RFS waiver request to be submitted to EPA and
many important issues were raised and discussed in the public comment
process. In addition to announcing and explaining EPA's decision on the
Texas waiver request, in this Notice the Agency is also providing
guidance to interested parties on its expectations concerning future
requests for a waiver.
II. Overview of RFS Program
The Energy Policy Act of 2005 (EPAct) amended the Clean Air Act to
establish a Renewable Fuel Standard (RFS) Program and gave EPA
responsibility for implementing it. EPAct required EPA to issue
regulations ensuring that gasoline sold in the U.S., on an annual
average basis, contained a specified volume of ``renewable fuel.'' The
mandate schedule began at 4.0 billion gallons of renewable fuel in
2006, and increased to 4.7 in 2007, 5.4 in 2008, 6.1 in 2009, 6.8 in
2010, 7.4 in 2011, and 7.5 billion gallons in 2012. The Energy
Independence and Security Act of 2007 (EISA) amended the RFS program by
extending the years in which Congress specified the required volume of
renewable fuels by ten years, increasing the required volumes for the
renewable fuel mandate, and adding new, separate mandates starting in
2009 for advanced biofuels, including cellulosic biofuel and biomass-
based diesel. EPAct set the 2007 mandate for renewable fuel at 4.7
billion gallons and the 2008 mandate at 5.4 billion gallons.
[[Page 47170]]
EISA increases the 2008 and 2009 RFS renewable fuel mandates to 9.0
billion and 11.1 billion gallons. EISA also imposed additional
requirements for the use of advanced biofuel and biomass-based diesel
in 2009, included within the overall mandate for 11.1 billion gallons
of renewable fuel in 2009.\2\ EPAct had the statutory goal of
increasing the volume of renewable fuels that are required to be used
in the transportation sector and Congress furthered that goal with the
passage of EISA. In this context, implementation of EISA is aimed at
reducing dependence on foreign sources of energy, increasing the
domestic supply of energy, and diversifying the nation's energy
portfolio by requiring the transition from petroleum-based fuels to
bio-based alternatives in the transportation sector. In addition, as
part of EISA, Congress is requiring EPA to perform a life-cycle
analysis of emissions of greenhouse gases associated with the full
lifecycle of renewable fuels, and is requiring a minimum level of
greenhouse gas reduction to qualify for advanced biofuel, cellullosic
biofuel and biomass-based diesel. This will be further discussed in
EPA's upcoming second phase renewable fuel standard rulemaking (RFS2),
which will implement the renewable fuels provisions of EISA.
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\2\ A more detailed discussion of the requirements for different
types of biofuels is included in Section V.
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III. EPA's Administrative Process
On April 25, 2008, the Governor of Texas submitted a request to the
Administrator under section 211(o)(7) of the Act for a waiver of 50
percent of the RFS ``mandate for the production of ethanol derived from
grain.'' The request claims that the mandate is unnecessarily having a
negative impact on the economy of Texas and driving up global food
prices. In its request Texas specifically identified increased corn
prices as having a negative effect on its livestock industry and that a
waiver would also provide needed relief to consumers at the grocery
store. This initial request did not include substantive supporting data
or analyses.\3\
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\3\ Texas subsequently submitted comments during the public
comment period, including a recent briefing paper from the
Agriculture and Food Policy Center at the Texas A&M University along
with an economic analysis on the implications of a RFS waiver on the
price of corn and impacts on the livestock industry as well as
impacts on the petroleum markets and the broader economy. Texas also
clarified that it was asking for a ``50-percent reduction in the
corn-derived, volumetric ethanol mandates, * * * effectively
requesting that EPA, for the foreseeable future, return the RFS
system to the status quo prior to enactment of EISA i.e., to the
much more moderate trajectory that prevailed under the Energy Policy
Act of 2005.'' Texas states its preference that this be accomplished
through a waiver that corresponds to the 2008-2009 crop year (i.e.,
September 1, 2008 through August 31, 2009). The initial Texas waiver
request of April 25, 2008 (Texas waiver request) can be found at
EPA-HQ-OAR-2008-0380-0058. The Texas supplemental comments of June
23, 2008 (Texas supplemental comments) can be found at EPA-HQ-OAR-
2008-0380-0526. In addition, Texas submitted additional comments
after the close of the comment period, on August 6, 2008. These
comments can be found at EPA-HQ-OAR-2008-0380. Given the date on
which the additional comments were received, EPA's response to them
can be found in a Memorandum to the Docket dated August 7, 2008.
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On May 22, 2008, EPA published a notice requesting comment on the
petition submitted by Texas as well as any matter that might be
relevant to EPA's action on the petition, specifically including (but
not limited to) information that would enable EPA to: (a) Evaluate
whether compliance with the RFS is causing severe harm to the economy
of the State of Texas; (b) evaluate whether the relief requested will
remedy the harm; (c) determine to what extent, if any, a waiver
approval would change demand for ethanol and affect corn or feed
prices; and (d) determine the date on which a waiver should commence
and end if it were granted.\4\ As stated in EPA's notice for comment,
granting a waiver would reduce the national volume requirements under
section 211(o)(2) of the Act, which would have effects in areas of the
country other than Texas. Therefore, EPA invited comment on all issues
relevant to whether and how the Administrator might exercise his
discretion under this waiver provision of the Act, including but not
limited to the impact of a waiver on other regions or parts of the
economy, on the environment, on the goals of the renewable fuel
program, on appropriate mechanisms to implement a waiver if a waiver
were determined to be appropriate, and any other matters considered
relevant.
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\4\ 73 FR 29753.
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EPA's public comment period closed on June 23, 2008. EPA received
in excess of 15,000 comments during the comment period; the majority of
the comments were short statements generally in support of the Texas
request. EPA also received numerous comments from various trade
organizations and businesses, Governors and other elected officials,
and environmental organizations supporting or opposing the waiver, many
of which included references to various studies and reports which are
addressed below.
IV. Key Interpretive Issues
As noted above, Section 211(o)(7) of the CAA provides, in part,
that EPA ``may waive the [mandated national RFS volume requirements] in
whole or in part on petition by one or more States * * * (i) based on a
determination by the Administrator * * * that implementation of the
requirement would severely harm the economy or environment of a State,
a region, or the United States, or (ii) based on a determination by the
Administrator * * * that there is an inadequate domestic supply.''
This is the first EPA action in response to a petition under this
provision, and as a result EPA is addressing a number of questions
regarding the scope of this authority. This section discusses EPA's
position on the meaning of various key parts of this provision,
including EPA's views on the interpretations advanced by Texas and
other commenters. Because Texas argues that a waiver is justified under
the claim that ``implementation of the RFS program would severely harm
the economy * * * of a State, a region or the United States,'' we have
focused our review on this provision.
1. Implementation of the RFS Itself Must Severely Harm the Economy
The statute authorizes a waiver where ``implementation of the
requirement would severely harm the economy.'' Texas and several
commenters argue that high corn prices are causing severe harm to the
Texas and U.S. livestock industry as well as to low-income individuals
faced with increasing food costs. They acknowledge that high corn
prices are caused by a number of factors, but argue that the RFS
program is one of the factors leading to these high prices, that it is
a significant or material factor, and that this kind of impact from the
RFS program is sufficient to justify a waiver of the RFS
requirements.\5\ Texas recognizes that the waiver provision ``speaks in
terms of a singular causal link between the mandate and the harm (i.e.
`implementation of the requirement would severely harm')'', but that
``Congress could not have intended to predicate a waiver on such a link
because such a situation is never found in the real world. In the
context of an economy at the scale of a state, region or nation,
outcomes are determined by multiple factors. Congress must have meant
to pivot a waiver on whether the mandates would
[[Page 47171]]
contribute significantly to causing severe harm, as part of a mix of
forces.'' \6\
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\5\ See Texas supplemental comments, National Cattlemen's Beef
Association at EPA-HQ-OAR-2008-0380-0418 at 1, and Texas Cattle
Feeders Association at EPA-HQ-OAR-2008-0380 at 1.
\6\ Texas supplemental comments at 14.
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We do not agree with the interpretation Texas offers. The statute
provides that a waiver of the program is authorized where
``implementation of the program would severely harm the economy * * *''
As recognized by Texas, the straightforward meaning of this provision
is that implementation of the RFS program itself must be the cause of
the severe harm.\7\ Texas would instead treat the waiver provision as
if Congress had authorized a waiver where implementation of the program
would significantly contribute to severe harm. The provision adopted by
Congress does not support the interpretation by Texas.
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\7\ Texas supplemental comments at 14.
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There are numerous examples in section 211 and other sections of
the Clean Air Act where Congress authorized EPA action based on the
contribution made by a factor or activity, and worded the statute to
clearly indicate this intention. For example, section 211(c)(1) of the
Act authorizes EPA to control or prohibit a fuel or fuel additive where
it ``causes or contributes'' to air or water pollution that may
reasonably be anticipated to endanger public health or welfare.\8\
There are also various waiver provisions where Congress clearly used
language indicating that a waiver could be based on a determination
that there is a contribution to an adverse result or a similar lesser
degree of casual link to the adverse result. Section 211(f)(4), for
example, allows EPA to waive a certain prohibition on fuels and fuel
additives upon a determination that they will not ``cause or
contribute'' to a specified harm. Likewise section 211(h)(5)(A) allows
EPA to remove a federal Reid vapor pressure (RVP) waiver if a state has
supporting documentation to show that the RVP waiver will increase
emissions that ``contribute to air pollution.'' Under section
211(m)(3)(A), EPA may waive the requirement for a wintertime oxygenated
gasoline program where a State demonstrates that mobile sources ``do
not contribute significantly'' to carbon monoxide levels in the area.
Similar language was used by Congress when it referred to lesser
degrees of adverse impact on attainment, such as the provision for a
waiver of the oxygenated gasoline requirement for reformulated gasoline
under section 211(k)(2)(B) (``prevent or interfere with * * *
attainment'') \9\ and section 211(m)(3)(A) (``prevent or interfere with
* * * attainment''). However Congress did not use such language in this
waiver provision, and the omission of any reference to contribution or
similar terms in section 211(o)(7)(A) indicates Congressional intent to
limit the availability of a waiver to situations where implementation
of the RFS program itself would severely harm the economy.\10\
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\8\ Also see section 202(a)(1) (``cause or contribute'');
section 213(a)(3), (4) (``cause or contribute'' and ``significant
contributor''); and section 231(a)(2) (``cause or contribute'').
\9\ This provision of the Clean Air Act was deleted by the
Energy Policy Act of 2005, ending the requirement that reformulated
gasoline (RFG) contain 2% oxygen content by weight. During the time
that the statutory provision was in effect, EPA considered and
responded to requests to waive the 2% mandate. See Davis v. EPA, 348
F.3d 772 (9th Cir. 2003).
\10\ Even the sentence structure used by Congress indicates that
the harm is to come from the RFS mandate itself. Adding the idea of
significant contribution would call for changing the way ``harm'' is
used from a verb (would * * * harm) to a noun (would contribute
significantly to harm), and changing the kind of harm from the
adverb severely to the adjective severe. Congress however did not
write it that way.
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Texas essentially asks EPA to interpret this provision as if it was
written to authorize a waiver where implementation of the RFS program
would ``significantly contribute'' to severely harming the economy.
However, Texas offers no explanation of why a ``significant''
contribution would justify such action, as opposed to some other level
of contribution such as a non-de minimis, marginal, moderate, or some
much more substantial contribution. In addition, Texas argues that this
is called for because it would otherwise be impossible to ever
demonstrate that the criteria of a waiver have been met and Congress
could not have intended this result. Texas asserts this conclusion of
impossibility, but fails to even attempt to show that this is the case.
Even if the statute was less clear on its face EPA would still
reject the approach suggested by Texas. Many circumstances other than
RFS could lead to impacts on an economic factor such as increased corn
prices. Other circumstances could be the substantial or the overriding
contributor to such an economic factor. Under Texas' interpretation, a
waiver could be authorized where implementation of the RFS contributed
in any significant manner to such a situation, as long as the economic
factor, overall, was causing severe harm. This approach could apply
even if the economic harm was based on this economic factor in
combination with another economic factor or factors. The degree of harm
actually attributable to implementation of the RFS would not matter. As
long as the RFS would have some significant effect on some economic
factor or combination of factors that was causing severe harm from an
overall perspective, then the degree of harm actually attributable to
the RFS would be irrelevant to EPA's authority to issue a waiver. Given
the logic of Texas' approach and recognizing the many varied and
complex interrelationships in our modern economy, Texas' interpretation
would amount to a very open-ended and wide ranging waiver provision;
EPA does not believe this is what Congress intended. EPA believes that
rejecting Texas' approach, and implementing a more limited waiver
provision that requires a showing that the RFS program itself would
severely harm the economy of a State, region or the U.S., will better
implement Congress' overall desire to promote the use of renewable
fuels, reflected in enacting the expanded RFS program and mandating the
increased utilization of renewable fuels over a number of years.\11\
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\11\ Indeed, Congress provided for a 9 year schedule in EPAct
and a 14 year schedule in EISA, specifying the total amounts of
renewable fuel that would be required during those years. Under both
EPAct and EISA the required level of the RFS is to increase in each
year after the end of the statutory schedule. EPA is to set the
required level based on consideration of various statutory factors,
with Congress specifying a minimum level of growth in the RFS each
year.
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2. There Must Be a Generally High Degree of Confidence That There Will
Be Severe Harm as a Result of the Implementation of RFS
The waiver provision indicates that EPA must find that
implementation of the RFS ``would'' harm the economy. We interpret this
as indicating that there must be a generally high degree of confidence
that severe harm would occur from implementation of the RFS. Congress
specifically provided for a lesser degree of confidence in a related
waiver provision, section 211(o)(8). That provision applies for just
the first year of the RFS program, and provides for a waiver of the
2006 mandate based on a study by the Secretary of Energy of whether the
program ``will likely result in significant adverse impacts on
consumers in 2006.'' (Emphasis supplied). The term ``likely'' generally
means that something is at least probable, and EPA believes that the
term ``would'' in section 211(o)(7)(A) means Congress intended to
require a greater degree of confidence under the waiver provision at
issue here.
EPA believes that generally requiring a high degree of confidence
that implementation of the RFS would
[[Page 47172]]
severely harm an economy would appropriately implement Congress' intent
for yearly growth in the use of renewable fuels, evidenced by the 2005
and 2007 mandates for such growth. In addition, it would limit waivers
to circumstances where a waiver would be expected to provide effective
relief from harm. If there is generally high confidence that
implementation of the mandate would cause harm, then a waiver should
provide effective relief from that harm. However in situations where
there is not such a high degree of confidence, a waiver might disrupt
the expected growth in use of renewable fuels but there would be no
clear expectation that a waiver would provide a benefit by reducing any
harm. As discussed below, EPA does not need to interpret this provision
in any greater detail for purposes of acting on Texas' petition, as the
circumstances in this case clearly do not demonstrate the required
degree of confidence that severe harm would occur.
Support for EPA's interpretation of this waiver provision is found
in an analogous approach taken by EPA in applying former section
211(k)(2)(B), the provision for waiver of the oxygen content
requirement for RFG. In that provision, Congress provided that EPA
``may'' waive the oxygen content requirement upon a determination that
compliance with this requirement ``would'' prevent or interfere with
attainment of a NAAQS. EPA interpreted this as calling for the waiver
applicant to ``clearly demonstrate'' interference before a waiver would
be granted. This interpretation was upheld in Davis v. EPA, 348 F.3d
772, 779-780 (9th Cir. 2003).
3. ``Severely Harm'' Indicates That Congress Set a High Threshold for
Grant of a Waiver
While the statute does not define the term ``severely harm,'' the
straightforward meaning of this phrase indicates that Congress set a
high threshold for issuance of a waiver. This is also indicated by the
difference between the criteria for a waiver under section 211(o)(7)(A)
and the criteria for a waiver during the first year of the RFS program.
In section 211(o)(8)(A) Congress provided for a waiver based on an
assessment of whether implementation of the RFS in 2006 would result in
``significant adverse impacts'' on consumers. A waiver under section
211(o)(7)(A), however, requires that implementation ``severely harm''
the economy, which is clearly a much higher threshold than
``significant adverse impacts.'' It is also instructive to consider the
use of the term ``severe'' in CAA section 181(a). Ozone nonattainment
areas are classified according to their degree of impairment, along a
continuum of marginal, moderate, serious, severe or extreme ozone
nonattainment areas. Thus, in section 181, ``severe'' indicates a level
of harm that is greater than marginal, moderate, or serious, though
less than extreme. We believe that the term ``severe'' should be
similarly interpreted for purposes of section 211(o)(7)(A), as
indicating a point that is quite far along a continuum of harm, though
short of extreme. EPA does not need to interpret this provision in any
greater detail for purposes of acting on Texas' petition, as the
circumstances in this case clearly do not demonstrate the kind of harm
that would be characterized as severe.
4. Harm to the Economy
EPA must also consider the meaning of the term ``economy'' in
section 211(o)(7)(A)(2). Texas has argued that the term should be
interpreted such that a showing of severe harm to one sector of the
economy, e.g. the livestock industry, is sufficient under the statute.
Others argue that there must be a showing of severe harm to the entire
economy of a State, region or the United States, including all
sectors.\12\ EPA believes that it would be unreasonable to base a
waiver determination solely on consideration of impacts of the RFS
program to one sector of an economy, without also considering the
impacts of the RFS program on other sectors of the economy or on other
kinds of impact. It is possible that one sector of the economy could be
severely harmed, and another greatly benefited from the RFS program; or
the sector that is harmed may make up a quite small part of the overall
economy. Based on the waiver request received and, where appropriate,
public comments, EPA should responsibly review and analyze the economic
information that is reasonably available regarding the full impacts of
the RFS program and a possible waiver, including detrimental and
beneficial impacts, before determining that a waiver of the program is
warranted.\13\
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\12\ Commenters include the Renewable Fuels Association (EPA-HQ-
OAR-2008-0380-0479 at 1) and American Coalition for Ethanol (EPA-HQ-
OAR-2008-0380-0454 at 1-2).
\13\ This is of course limited by the 90 day time frame called
for in the waiver provision.
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The statute provides that EPA ``may'' waive the RFS volume
requirement after finding that implementation of the RFS program would
severely harm the economy. Therefore, a broad consideration of economic
and other impacts could be undertaken whether or not EPA adopted Texas'
more limited interpretation of the term ``economy.'' For example, if
EPA rejected Texas' interpretation, EPA would determine whether RFS
implementation would severely harm the overall economy of a State,
region, or the U.S. However, if EPA adopted Texas' interpretation, and
then found severe harm to a sector of the economy, EPA would still
evaluate the overall impacts on the economy and other factors before
exercising its discretion under the ``may'' clause to grant or deny the
waiver request. EPA does not need to resolve this issue of
interpretation in this specific waiver decision. As discussed below the
circumstances here do not warrant a waiver under either interpretation.
5. EPA Has Broad Discretion in Determining Whether To Grant a Waiver
Even If Implementation Would Severely Harm the Economy
As noted above, Congress stated that EPA ``may'' grant a waiver if
certain criteria are met, and the term ``may'' typically denotes
discretionary action. Where Congress intends non-discretionary action,
it typically employs a term like ``shall.'' Thus, EPA believes Congress
intentionally gave EPA discretion in determining whether to grant or
deny a waiver request, even in instances where EPA finds that
implementation of the program would severely harm the economy or
environment of a State, region or the United States, or where there is
inadequate domestic supply. As noted above, this interpretation allows
EPA to look broadly at all of the impacts of implementation of the
program, and all of the impacts of a waiver, and does not limit EPA to
looking only at impacts to the economy, a sector of the economy, the
environment, or domestic supply. The relief requested by a waiver
applicant will always, under this provision, be national in character,
hence we expect that EPA will always want to examine the nationwide
effects of the requested relief, and give appropriate weight to the
range of anticipated effects. This interpretation allows EPA to weigh
all of the impacts before deciding to grant or deny a waiver of the
statutory requirements designed to require the expanded use of
renewable fuels.
V. Technical Analysis of RFS Mandate
In this section, we first examine the likelihood that
implementation of the RFS will impact the amount of ethanol produced
and consumed over the 2008/2009 corn marketing year (September 1, 2008
through August 31, 2009), and thereby impact factors such as the price
[[Page 47173]]
of corn during that time period.\14\ Second, we evaluate the impacts
and potential degree of harm from implementation of the RFS on key food
and fuel parameters, such as U.S. corn prices, livestock feed costs,
and fuel prices. As part of this section, we will discuss various
comments and our response to them as appropriate.
---------------------------------------------------------------------------
\14\ We use the corn marketing year partially because it is the
time period over which Governor Perry requested the waiver, and
partially because it is the time period over which it is most
straightforward to estimate the impact on corn prices due to a
change in ethanol demand.
---------------------------------------------------------------------------
1. Likelihood of Impact of Implementation of the Renewable Fuels
Standard
To analyze the impact of implementation of the RFS, EPA evaluated
the impact of a waiver of the standard. This comparison of
circumstances with and without a waiver identifies the impact properly
associated with implementation of the RFS program for the 2008/2009
marketing year. To make this comparison, the EPA first determined the
most appropriate economic modeling tool to employ for this purpose. EPA
evaluated several models, including the model developed by researchers
at Texas A&M University (TAMU model) \15\ and the model used by Dr.
Elam of FarmEcon, LLC.\16\ We chose a model developed by researchers at
Iowa State University (ISU model) for a number of reasons. First, we
felt it was critical to use a stochastic model to capture a range of
potential outcomes, rather than a point estimate, given potential
variation in a number of critical variables associated with ethanol
production. Second, the ISU model captures the interaction between the
agriculture markets and the energy markets, and is able to look at
uncertainty in variables in both sectors. Given the volatility in both
crude oil and corn prices over the last few years, the ability of the
ISU model to account for this variability gives the model an advantage
over other models that are locked into a single projected crude oil
price or corn crop estimate. Third, while the model has not gone
through formal peer review, the documentation is straightforward and
transparent, and allows all interested parties to understand the
assumptions that drive the results. Finally, the ISU model was designed
to be constantly and quickly updated with the most recently available
data, such as the World Agricultural Supply and Demand Estimate (WASDE)
reports.\17\ This design feature allows the model to be policy
relevant, given the fact that a model is only as reliable as the data
contained within it.
---------------------------------------------------------------------------
\15\ The March TAMU modeling results were referenced in Texas'
initial waiver request and cited by several commenters (EPA-HQ-OAR-
2008-0380-0058). A June update to the March report was provided in
Texas' supplemental comments (EPA-HQ-OAR-2008-0380-0526).
\16\ Several commenters cited the March report by Dr. Elam (EPA-
HQ-OAR-2008-0380-0574). The Balanced Food and Fuel Coalition also
submitted a June version of the report (EPA-HQ-OAR-2008-0380-0465).
\17\ The WASDE is USDA's forecast of supply and demand for major
U.S. and international crops and livestock. The information can be
found at http://www.usda.gov/oce/commodity/wasde/.
---------------------------------------------------------------------------
The ISU model is a stochastic equilibrium model that attempts to
capture the most probable prices of corn, ethanol and fuel given
uncertainty in six variables: Corn acres planted, corn acres harvested,
corn yields, U.S. corn export demand, crude oil prices, and the
capacity of the U.S. corn ethanol industry. For each of the
approximately 1000 simulated scenarios, the model picks a value for a
factor like crude oil price by randomly selecting from a probability
distribution curve \18\ for that factor.\19\ Since the probability of
the specific value of a future crude oil price is built into the
distribution curve for crude oil prices, the greater the probability of
a certain crude oil price the more likely the model will pick that
value for any scenario. The result is that the distribution of the
results from the random draws fairly reflects the probability of the
various uncertain variables. The central tendency of the random draws
represents the most likely estimate of the future circumstances. The
model is run with and without a waiver to determine the impact of a
waiver. Details about the model are included in the June 2008
paper,\20\ although for the results described below, several additional
modifications have been made since June. At EPA's request, ISU
researchers updated their model with the July 11, 2008 WASDE report. In
addition, ISU researchers also modified the assumption that ethanol
will have to be priced on an energy equivalent basis for volumes
greater than 10 billion gallons.\21\ As described in the June paper,
the ISU model had previously assumed ethanol must be priced on an
energy equivalent basis for volumes over 7.7 billion gallons of
ethanol. Additional details on the model changes are included in the
docket.\22\
---------------------------------------------------------------------------
\18\ The distribution curves for the stochastic variables are
based on historical information, where available. Where reliable
data is not available, simplifying assumptions are used. Details are
included in the June 2008 paper (EPA-HQ-OAR-2008-0380-0548).
\19\ The model also accounts for the impact of the blenders' tax
credit and the tariff on imported ethanol. In the scenarios that
were modeled these factors did not change, hence their impact on
demand for ethanol did not change with and without a waiver of the
RFS.
\20\ EPA-HQ-OAR-2008-0380-0548.
\21\ Despite the fact that ethanol contains only 2/3 the energy
value of gasoline, it has historically and continues to be priced to
retail consumers the same as if it is gasoline when it is sold in a
gasoline blend with up to 10 volume percent ethanol (E10). Consumers
are not able to detect the small decrease in fuel economy that
results from a 10 percent blend, therefore ethanol can be priced
based on its volume, not on its energy equivalent basis with
gasoline. The wholesale price for ethanol has likewise followed the
price of gasoline, on average being priced over time roughly 8 c/gal
less than that of gasoline, reflecting its octane value, other
blending costs, and distribution costs. In the last year or so, as
ethanol use has continued to increase, the wholesale price of
ethanol has begun to separate slightly more from that of gasoline
as: (1) The octane value has declined, (2) the distribution costs
have increased to get ethanol to more distant markets, (3) gasoline
prices have increased, and (4) ethanol is having to compete in
markets where gasoline is priced lower than in past ethanol markets.
In recent months, the wholesale price of ethanol may also have been
influenced by some temporary limitations in terminal blending
capabilities to blend all the ethanol being produced. In the long
term, as ethanol volumes increase above about 15 billion gallons,
ethanol will saturate the gasoline market as an E10 blend and
additional volumes of ethanol will have to be consumed in the form
of E85 (a fuel that consists of up to 85 volume percent ethanol).
When sold as E85, consumers will recognize a reduction in their
mileage as compared to the use of an E10 blend due to the reduced
energy content of ethanol. Therefore, retail pricing would be
expected to take this fuel economy impact into account and wholesale
prices for ethanol will have to be below that of gasoline to reflect
its lower energy content. While this change in valuation will not
occur until we reach about 15 billion gallons of ethanol, for our
analysis we have conservatively assumed that this change in
valuation will occur at 10 billion gallons to reflect potential
short term limitations in the distribution system. If we had used 15
billion gallons as the point at which ethanol must be priced on an
energy equivalent basis, the likelihood that the mandate would be
binding would be lower and the magnitude of the impacts smaller in
the scenarios where the mandate was binding.
\22\ See Memorandum to Docket, entitled ``Iowa State University
Modeling Results.''
---------------------------------------------------------------------------
As a result of these updates, the ISU model projects the average
expected amount of ethanol demanded in the United States during the
2008/2009 corn crop year without a waiver will be 11.05 billion
gallons, which consists of approximately 10.67 billion gallons of
domestic production and 380 million gallons (MG) of imports. ISU's
model predicts that for 76 percent of the simulated scenarios, waiving
the RFS mandate would not change the overall level of corn ethanol
production or overall U.S. ethanol consumption in 2008/2009 because
more ethanol would be demanded than the RFS requires. For those 76
percent of the scenarios, waiving the RFS mandate would therefore have
no impact on ethanol
[[Page 47174]]
use, corn prices, ethanol prices, or fuel prices. We refer to that
model result as a 76 percent probability that the RFS will not be
``binding'' in the 2008/2009 marketing year. Conversely, in 24 percent
of the simulated ISU model runs the RFS would be binding. In this case,
binding means that in 24 percent of the random draws of potential corn
production, crude oil prices, and corn demand, the resulting market
demand for ethanol would be below the RFS mandate and, therefore, the
RFS would require greater use of ethanol than the market would
otherwise demand. The binding scenarios are generally those in which
crude oil prices and corn production are relatively low. In those
cases, the RFS would have an impact on ethanol use and the food and
fuel markets in the United States.
For the primary analysis, the ISU model assumes corn ethanol would
account for ten billion gallons of the RFS mandate during the 2008/2009
corn crop year. Because the corn crop year is split over two RFS
compliance years, the 10 billion gallons is based on the fraction of
the corn crop year that would occur in the 2008 compliance year (one-
third) and the 2009 compliance year (two-thirds). EISA requires 9
billion gallons of renewable fuels in 2008 and 11.1 billion gallons in
2009; however, 600 million gallons of the 2009 volume must be advanced
biofuels (including 500 million gallons of biomass-based biofuels).
This advanced biofuel volume is not included in the calculation of the
2008/2009 marketing year mandate, since the ISU model does not include
cellulosic or biodiesel renewable fuels.\23\ As a sensitivity analysis,
ISU researchers also evaluated different scenarios in which some of the
2008/2009 mandate was also met with additional biodiesel production and
renewable identification number (RIN) credits earned from excess
ethanol production in the 2007 and 2008 compliance years.\24\ Both of
these changes essentially make the RFS mandate less binding. We also
conducted a sensitivity analysis that used a distribution curve for
crude oil prices based on a mean crude oil price of $146/barrel. For
that model run, the probability that the mandate would be binding
decreased to 12%. Clearly, this assumption makes a difference in the
modeling results. We believe the $125/barrel mean crude oil price
scenario incorporates the best information available at this time, but
we recognize that conditions may change in the future. For purposes of
simplicity, only the results of the primary analysis using $125/barrel
mean crude oil ISU scenario are presented in this document. However,
the results from the full range of scenarios are included in the
docket.\25\
---------------------------------------------------------------------------
\23\ Although Iowa State analyzed the impact of waiving 100% of
the mandate, the model predicted no difference between waiving 100%
of the mandate and 50% of the mandate, as the amount of ethanol
demanded under all the scenarios without the mandate was more than
five billion gallons of ethanol (50% of the mandate).
\24\ RINs are generated by producers of renewable fuels, and are
used by refiners and importers to show compliance with the RFS.
Excess RINs may be used as credits for the year following their
generation, e.g., 2007 RINs may be used to show compliance with the
2008 RFS standard, and 2008 RINs may be used to show compliance with
the 2009 RFS standard.
\25\ See Memorandum to Docket entitled, ``Iowa State University
Modeling Results.''
---------------------------------------------------------------------------
We believe the results provided by the ISU model are more robust
than Elam's and TAMU's estimates for a number of reasons. Many of the
assumptions used by Elam's model do not appear to accurately reflect
market forces. According to Elam's March paper,\26\ U.S. gasoline and
diesel prices impact the prices of corn and soybeans, but do not
influence the demand for biofuels. In other words, the agricultural
sector portion of the model does not appear to be directly linked to a
fuel market module. Since higher crude oil prices are one of the major
reasons for the increase in biofuel production, we believe this
assumption is a major short coming of the model. Furthermore, the model
used by Elam appears to value ethanol on an energy equivalent
basis.\27\ We believe that ethanol will continue to be priced on a
volumetric basis as long as most of the ethanol is being blended as
E10.
---------------------------------------------------------------------------
\26\ EPA-HQ-OAR-2008-0380-057.
\27\ The lack of model documentation submitted to the docket
with regard to the model limited our ability to fully compare the
results.
---------------------------------------------------------------------------
In his June paper, Elam estimated the impact of waiving the RFS
under two different scenarios: One based on the June WASDE projections
and one based on a ``severe weather'' scenario with a lower corn crop.
Under both scenarios, Elam predicts ethanol production will decrease by
2.1 billion gallons with a 50% waiver of the mandate. However, under
both scenarios Elam estimates that ethanol production will exceed the
mandated levels when the mandate is in place. We do not find this
analysis plausible, since waiving the mandate should have little to no
effect on ethanol production if the projected levels of ethanol demand
exceed the mandate. In addition, we would not expect the same change in
ethanol production to occur as a result of the waiver when corn prices
are $8.00/bushel and when they are $5.80/bushel. When corn costs $8.00/
bushel, we would expect more ethanol producers would not be able to
cover their operating costs and would choose to reduce production.
Therefore there would be a larger potential change in ethanol
production at $8.00/bushel than at $5.80/bushel, which in turn would
lead to a larger impact from waiving the mandate. Finally, we believe
the severe weather scenario presented by Elam overstates the impact of
the recent floods in the Midwest. This scenario assumes a significant
reduction in corn acres harvested and corn yields relative to the WASDE
estimates. Under this severe weather scenario, Elam's projected corn
crop would be 10.85 billion bushels, compared to the higher July WASDE
estimate that 11.7 billion bushels will be produced in 2008/2009.
Similar to the ISU model, the TAMU model is a hybrid stochastic
simulation model that estimates the probabilistic price of corn and
production levels of ethanol with and without various government
biofuel policies over the next few years. However, we believe some of
the inputs used in the model are not as current as the inputs used by
the ISU model. In addition, the TAMU model likely overstates the
probability that the mandate will be binding for two reasons. First,
the projected corn prices are significantly higher than either the June
or July WASDE reports. Whereas the July WASDE report (which assumes the
mandate is still in place) predicts corn prices will be between $5.50-
$6.50/bushel, the TAMU model predicts that corn prices with the mandate
in place will be between $6.70-$7.96/bushel depending on the size of
the corn crop. If the TAMU model was re-run with the July WASDE data,
we believe the results would be closer to the estimates provided by the
ISU model. Second, we believe that the TAMU model undervalues ethanol,
since it assumes ethanol must compete with gasoline on an energy
equivalent basis for all volumes over the quantity projected to be used
to meet reformulated gasoline (RFG) requirements (approximately 3
billion gallons). As discussed in more detail in the following section,
ethanol continues to be priced in the market at a premium over its
energy content since it is primarily used as a gasoline extender. We
expect this trend to continue until significant quantities of ethanol
can no longer be blended as E10 and must be sold as E85. If the TAMU
valued ethanol on a volumetric basis, we would expect the model would
predict higher production levels of ethanol, both with and without the
waiver.
TAMU provides information for three different scenarios: a ``mean
corn crop'',
[[Page 47175]]
a ``95% of mean corn crop'', and a ``90% of mean corn crop''. Using
historical information, TAMU estimates that 79 million acres of corn
will be harvested in 2008/2009 and corn yields will be 153.9 bushels/
acre, resulting in a ``mean corn crop'' production of 12.1 billion
bushels. The ``95% of mean corn crop'' scenario evaluates the effects
of a 5% shortfall in corn production (relative to the mean corn crop
scenario), which corresponds to a crop of 11.5 billion bushels. The
``90% of mean corn crop'' scenario evaluates the effects of a 10%
shortfall relative to the mean corn crop, which corresponds to a corn
crop of 10.9 billion bushels. In the mean corn crop scenario, the TAMU
estimates that the probability that the mandate will be binding is 42%.
In the 95% of mean corn crop scenario, the TAMU model predicts that the
probability that the mandate will be binding is 67%, and in the 90% of
mean corn crop scenario, the probability that the mandate will be
binding is 88%.
Although this mean corn crop scenario production level is higher
than the July WASDE estimates, the impacts of this scenario are
directionally consistent with the ISU results. For example, the TAMU
model predicts that the average expected amount of ethanol that will be
produced in 2008/2009 will be 10.8 billion gallons, which is higher
than the RFS mandate. In their comments, however, Texas asserts that a
shortfall in the range of the 5% or 10% of production ``now appears
highly likely.'' Therefore, Texas concludes that the mandate will
``most likely contribute significantly to causing corn price
increases.'' In light of the July WASDE data, which predicts a corn
crop that is larger than both the 90% mean corn crop and the 95% mean
corn crop scenarios, we believe the 90% mean corn crop scenario
significantly overestimates the potential impact of the flooding. We
believe the mean corn crop and the 95% of mean corn crop scenarios are
more credible than the 90% mean corn crop scenario.
Table 1--Comparison of Key Studies Estimating Corn and Ethanol Prices and Production Levels
----------------------------------------------------------------------------------------------------------------
Elam scenario TAMU mean corn Iowa state mean
based on WASDE crop estimate USDA benchmark*
----------------------------------------------------------------------------------------------------------------
Mean Corn Prices with Mandate ($/bushel).... $5.80 $6.70 $6.00 $5.50-$6.50
Mean Corn Prices with Waiver ($/bushel)..... $4.75 $6.36 $5.93 ...............
Change in Corn Prices with Waiver........... -$1.05 -$0.34 -$0.07 ...............
Mean Corn Production (Billion bushels)...... 11.74 12.14 11.70 11.70
Mean Ethanol Price with Mandate ($/gal)..... $2.76 $2.89 $2.59 ...............
Mean Ethanol Price with Waiver ($/gal)...... $2.76 $2.76 $2.57 ...............
Mean Domestic Ethanol Demand w/Mandate 11.00 10.78 11.05 ...............
(Billion gallons)..........................
Mean Domestic Ethanol Production w/Waiver 8.94 10.05 10.90 ...............
(Billion gallons)..........................
Probability that Mandate is Binding......... N/A 42% 24% ...............
----------------------------------------------------------------------------------------------------------------
Since Congress enacted the Energy Policy Act in 2005, biofuel
production has consistently been higher than the RFS mandated levels,
which is an indication that factors other than the RFS requirements
have been the primary drivers of biofuel growth. In addition, in its
2007 Annual Energy Outlook (AEO), the Energy Information Administration
(EIA) projected that even without the recent renewable fuels
requirement in EISA, ethanol use would increase to 12 billion gallons
in 2010. This dramatic increase in ethanol use was estimated to occur
despite assuming crude oil prices in the $50 to $60 dollar per barrel
range. Assuming other factors remain constant, the higher oil prices
that we are experiencing now would provide an even greater incentive to
produce and use additional ethanol from corn.
ISU's estimate for the maximum ethanol capacity in 2008/2009 is
13.5 billion gallons, which is similar to EPA's estimate that over 13
billion gallons of plant capacity was on-line or under construction as
of December 19, 2007 when EISA was passed.\28\ Once ethanol production
capacity is built, we expect ethanol producers will continue making
ethanol to the extent that they can cover their operating costs.
Therefore, ethanol production in the short term is highly dependent on
the built capacity of the ethanol industry rather than the mandate.
---------------------------------------------------------------------------
\28\ These estimates are for the ethanol production capacity and
are higher than the volumes of ethanol that are projected to be
produced. See Memorandum to Docket entitled, ``Ethanol Capacity
Estimates.''
---------------------------------------------------------------------------
Certain empirical data also supports the projection that the RFS is
unlikely to be binding in the 2008/2009 timeframe. For example, the
price of tradable renewable identification number (RIN) credits remains
relatively low: Below five cents per gallon as of July 1, 2008.
Refiners and importers verify their compliance with the RFS by
collecting and expending RINs, which are assigned to volumes of
renewable fuel by their producers. Refiners and importers use RINs for
an appropriate volume of renewable fuel to demonstrate compliance with
their RFS volume requirement. Parties that exceed their RFS obligations
for a compliance period can trade excess RINs to other parties that
need them for compliance. When the mandate is expected to be binding,
we would expect the demand for RINs would increase and the supply of
excess RINs to decrease, leading to an increase in price for RINs.
The RIN banking and rollover provisions of the RFS also allow
obligated parties to use or trade current RINs in the next compliance
period. Therefore, we would expect the current RIN price to reflect the
market's current and near-term expectations about how binding the RFS
is likely to be. The most recent available data shows that the RIN
price was below 3 cents per gallon of ethanol on July 18, 2008. This
RIN price represents a very small share of the price of a gallon of
ethanol, suggesting that refiners and blenders expect the RFS is not
likely to be binding in 2008 or 2009. It is possible that RIN prices
have been depressed by market uncertainty generated by Texas' waiver
request. However, the record high RIN price before the Texas waiver
request was only approximately 6.5 cents per gallon. Unlike the
previous discussion in this section which involved different
agricultural sector models that seek to evaluate the impacts of the
RFS, the RIN price is the result of actual market outcomes, as opposed
to a modeled result. EPA believes the RIN price information is one
additional way to evaluate the likelihood of an impact from
implementation of the RFS. In this case, the RIN price information
corroborates the modeled impacts of the RFS.
[[Page 47176]]
2. Severity of Impact
(a) Corn Price Impacts
When evaluating the economic impacts of waiving the mandate, our
analysis centered on four major areas: U.S. corn prices, food prices,
feed prices, and fuel prices. While there may be other areas of
potential impact, we focused on these areas because they are expected
to have the largest potential economic impacts in the U.S. Given the
limited time available for this analysis, we have not looked at the
interaction of these impacts in an integrated modeling system. However,
we believe that looking at these indicators individually provide a
useful framework for determining the potential severity of the impact
of the RFS mandate.
As described in the previous section, we believe that
implementation of the RFS would not have a significant impact on
expected ethanol production in 2008/2009, with the most likely result
being no impact on ethanol production. We have analyzed the impacts of
waiving the mandate under a wide variety of scenarios, ranging from
worst case scenarios to the more likely situations. Based on the ISU
modeling results, the average expected impact of waiving the mandate
over all the potential outcomes, both those binding and those non-
binding, would be a decrease in the price of corn by $0.07/bushel. In
the limited subset of potential outcomes in which the mandate is
binding (24% of the results), waiving the mandate would result in an
average expected decrease in the price of corn of $0.30/bushel.
However small the probability, we also recognize it is possible
that all the market outcomes could converge to result in a worst case
scenario, therefore, we also provide this example to help bracket the
range of potential outcomes. The ``Worst Case'' example demonstrates
the largest potential change in corn price predicted by the ISU model
as a result of the waiver, which is a decrease in corn prices of $1.38/
bushel. Table 2 presents the three ISU scenarios.
Table 2--Range of Estimated Corn Prices and Production Levels
----------------------------------------------------------------------------------------------------------------
Iowa state
Iowa state mean Iowa state when ``worst case''
estimate mandate binds example
----------------------------------------------------------------------------------------------------------------
Mean Corn Prices with Mandate ($/bushel)................... $6.00 $6.40 $6.85
Mean Corn Prices with Waiver ($/bushel).................... $5.93 $6.10 $5.47
Change in Corn Prices with Waiver ($/bushel)............... -$0.07 -$0.30 -$1.38
Mean Corn Production (Billion bushels)..................... 11.70 11.22 10.57
Percentage of Times Mandate is Binding..................... 24% 100% N/A
----------------------------------------------------------------------------------------------------------------
(b) Food Price Impacts
In consultation with USDA, EPA estimated how the changes in corn
prices influence U.S. food prices. The results of the modeled corn
price impacts discussed above appear to be quite modest for both the
mean estimate and the subset of scenarios in which the mandate is
binding. A $0.07/bushel decrease in corn prices would result in a 0.07%
decrease in Food CPI \29\ and a 0.03% decrease in All Item CPI.\30\ A
$0.30/bushel decrease in corn prices would result in a 0.28% change in
Food CPI and a 0.04% change in All Item CPI. For the average household,
a $0.07/bushel decrease in corn prices would result in a reduction of
household expenditures on food equal to $4.01 in 2008/2009, while a
$0.30/bushel decrease in corn prices would result in a savings of
$17.13. In the scenario with the largest change in corn price, a $1.38/
bushel decrease in corn prices would decrease the Food CPI by 1.29% and
All Item CPI by 0.19%. The average household would in turn save $78.57
in 2008/2009 on food expenditures.
---------------------------------------------------------------------------
\29\ The Food CPI as measured by the Bureau of Labor Statistics
(BLS) consists of two components--the ``CPI for food at home'' and
the ``CPI for food away from home'' with the ``CPI for food away
from home'' having a weight of 0.45 and the ``CPI for food at home''
having a weight of 0.55.
\30\ The Food CPI has a weight of 0.14 in the All Item CPI. This
implies that for every 1 percent increase in the Food CPI the All
Item CPI would increase by 0.14 percent.
---------------------------------------------------------------------------
Since people in the lowest income groups are more sensitive to
changes in food prices, we also analyzed the impact of changes in food
expenditures as a percentage of total consumer expenditures and as a
percentage of income. The changes in food expenditures are relatively
small compared to total consumer expenditures for both average and low
income households.\31\ When comparing the changes in food expenditures
relative to income, the impact on low income households is larger than
the impact on average households. Additional details on the methodology
used to calculate the CPI and household expenditures are included in
the docket.\32\
---------------------------------------------------------------------------
\31\ The lowest quintile (20%) of households, as described in
the Bureau of Labor Statistics' 2006 Consumer Expenditure Survey,
has an average income after taxes of $9,969. The average annual
household income after taxes for all households is $58,101.
\32\ See Memorandum to Docket entitled, ``USDA Food CPI and Feed
Cost Methodology''.
Table 3--Impacts on Food Prices, CPI Indicators, and Household Expenditures
----------------------------------------------------------------------------------------------------------------
Iowa state Iowa state Iowa state
Units mean estimate mandate binds worse case
----------------------------------------------------------------------------------------------------------------
Change in Corn Price with Waiver... $/bushel................ -$0.07 -$0.30 -$1.38
Change in Food CPI with Waiver..... percent................. -0.07% -0.28% -1.29%
Change in All Item CPI with Waiver. percent................. -0.01% -0.04% -0.19%
Change in Annual Food Expenditures $....................... -$4.01 -$17.13 -$78.57
for Average Households with Waiver.
Change in Annual Food Expenditures $....................... -$2.09 -$8.95 -$41.05
for Lowest Quintile Households
with Waiver.
Change in Food Expenditures as a percent................. -0.01% -0.04% -0.16%
Percentage of Consumer
Expenditures for Average
Households with Waiver.
[[Page 47177]]
Change in Food Expenditures as a percent................. -0.01% -0.44% -0.20%
Percentage of Consumer
Expenditures for Lowest Quintile
with Waiver.
Change in Food Expenditures as a percent................. -0.01% -0.03% -0.14%
Percentage of Income for Average
Households with Waiver.
Change in Food Expenditures as a percent................. -0.02% -0.09% -0.41%
Percentage of Income for Lowest
Quintile with Waiver.
----------------------------------------------------------------------------------------------------------------
(c) Feed Price Impacts
Using WASDE projections (which assume the mandate is in place) for
feed costs in 2008/2009, we estimated that U.S. feed prices are
projected to be $233.13/ton, using a weighted average use of corn,
sorghum, barley, oats, and soybean meal. In estimating the impact of a
change in corn prices on feed costs, we used a simplifying assumption
that the percentage change in corn prices is applied to all components
of the feed grains components used in this analysis. Since the price of
other feed grains tend to track the price of corn, we believe this
simplifying assumption is a realistic estimate of how feed grains will
track each other with changes in corn prices. We estimated the
potential impact of granting the waiver on feed costs for the three
change in corn price scenarios described in the previous sections: The
ISU mean estimate of a $0.07/bushel decrease in corn price, the subset
of ISU scenarios in which the mandate is binding ($0.30/bushel decrease
in corn price), and the ISU worst case scenario ($1.38/bushel decrease
in corn prices).\33\
---------------------------------------------------------------------------
\33\ In the subset of scenarios in which the mandate is binding,
corn prices are generally higher than for the mean estimate. We
would therefore expect average feed costs to be higher than the
WASDE estimates.
Table 4--U.S. Feed Prices
----------------------------------------------------------------------------------------------------------------
2005/06 2006/07 2007/08 2008/09
----------------------------------------------------------------------------------------------------------------
Feed Cost *:
Cost ($/ton) without waiver................................. $87.75 $125.72 $152.71 $233.13
Decrease in Feed Costs, $/ton ($0.07/bushel corn price .......... .......... .......... -2.72
change scenario)...........................................
Decrease in Feed Costs, $/ton ($0.30/bushel corn price .......... .......... .......... -10.56
change scenario)...........................................
Decrease in Feed Costs, $/ton ($1.38/bushel corn price .......... .......... .......... -46.97
change scenario)...........................................
----------------------------------------------------------------------------------------------------------------
Source: July 11, 2008 WASDE.
* Feed is equal to the weighted average sum of feed use of corn, sorghum, barley, and oats plus domestic use of
soybean meal.
Based on USDA's estimates for U.S. livestock feed costs and
returns, we estimated the impact of a percentage change in feed costs
per unit for poultry, pigs, fed cattle, cow-calfs, and milk production.
Details on the methodology used to calculate feed impacts are included
in the docket.\34\ Using USDA's production and slaughter estimates, we
aggregated the potential feed cost impacts of a waiver for the U.S. and
Texas.\35\ In dollar terms, the single largest sector of the livestock
industry that benefits from the waiver is the fed cattle industry. As
Texas points out in its comments, Texas has the largest cattle industry
in the U.S., and accounts for approximately 25% of the U.S. herd. A
$0.07/bushel change in corn prices would decrease total livestock feed
costs in Texas by $53 million (1.2% change). A $0.30/bushel change in
corn prices would decrease total livestock feed costs in Texas by $207
million (4.7% change), while a change of $1.38/bushel would decrease
total feed costs in Texas by $19 million (20% change). Compared to
Texas's $1 trillion dollar economy, these impacts appear to be
relatively small. Even looking at the cattle and poultry industry in
Texas specifically, we believe $53-$207 million is a small impact
compared to the over $10 billion livestock industry.\36\
---------------------------------------------------------------------------
\34\ See Memorandum to Docket entitled, ``USDA Food CPI and Feed
Cost Methodology''.
\35\ These estimates assume there are no changes in quantities
(e.g., early slaughter) based on higher feed costs.
\36\ The $919 million change is from a worst case scenario that
EPA considers highly unlikely.
Table 5--Total Feed Costs and Estimated Decrease With RFS Waiver for
Cattle, Poultry, Pigs, and Dairy Production
------------------------------------------------------------------------
US Texas
------------------------------------------------------------------------
Cow Slaughter:
Feed cost without waiver, $ million..... $842.8 $40.1
Decrease in Feed Costs, $ million ($0.07/ 9.8 0.5
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($0.30/ 38.2 1.8
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($1.38/ 169.8 8.1
bushel corn price change scenario).....
Fed Cattle:
Feed cost without waiver, $ million..... 9,923.4 2,491.1
Decrease in Feed Costs, $ million ($0.07/ 115.8 29.1
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($0.30/ 449.7 112.9
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($1.38/ 1,999.2 501.9
bushel corn price change scenario).....
Poultry:
[[Page 47178]]
Feed cost without waiver, $ million..... 7,571.6 586.7
Decrease in Feed Costs, $ million ($0.07/ 88.3 6.8
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($0.30/ 343.1 26.6
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($1.38/ 1,525.4 118.2
bushel corn price change scenario).....
Pork:
Feed cost without waiver, $ million..... 10,874.8 134.1
Decrease in Feed Costs, $ million ($0.07/ 126.9 1.6
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($0.30/ 492.8 6.1
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($1.38/ 2,190.8 27.0
bushel corn price change scenario).....
Dairy:
Feed cost without waiver, $ million..... 37,028.8 1,307.2
Decrease in Feed Costs, $ million ($0.07/ 432.0 15.3
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($0.30/ 1,677.9 59.2
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($1.38/ 7,459.8 263.3
bushel corn price change scenario).....
Total Feed Costs (cattle, poultry, pigs,
dairy):
Without waiver, $ million............... 66,241.4 4,559.2
Decrease in Feed Costs, $ million ($0.07/ 772.8 53.2
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($0.30/ 3,001.6 206.6
bushel corn price change scenario).....
Decrease in Feed Costs, $ million ($1.38/ 13,345.0 918.5
bushel corn price change scenario).....
------------------------------------------------------------------------
To produce a pound of poultry live weight, about 1.5 pounds of feed
required.
The State of Texas did not attempt to quantify the impact of
waiving the RFS on the livestock industry, although they did submit
reports by the Agricultural and Food Policy Center (AFPC), the Texas
Department of Agriculture, and McVean Trading & Investments (a company
that specializes in monitoring the health of the livestock industry),
which conclude that the livestock industries, including poultry, are
experiencing financial losses due to increases in the cost of
production due to higher corn prices.
While most of these impacts are outside the scope of our analysis
since they do not focus on the impacts directly related to the RFS, we
have attempted to compare our methodology with the methodology used by
Texas. The Texas Department of Agriculture report cites the March study
by Elam in which he estimates that the increase in biofuels will result
in an increase in cost to the Texas livestock and poultry industries of
approximately $2.4 billion in calendar year 2008. This impact was based
on an estimated increase of $2.04/bushel in corn prices due to the
increase in biofuels policies as a whole. Although the increase in corn
price cited by Elam is higher than the modeling results by ISU and TAMU
discussed in the previous section, the methodology for estimating the
impact on feed costs employed by Elam appears to be generally
consistent with our analysis. When the cost increases for cattle,
poultry, pork, and dairy production are separated out, Elam estimates a
$1.3 billion dollar increase in feed costs in 2008. If Elam had used a
change in corn price that was approximately two thirds of his $2.04/
bushel estimate ($1.36/bushel), his methodology would have estimated an
increase in feed costs in Texas of approximately $867 million dollars.
This figure is similar to our estimate of a $919 million increase in
feed costs in Texas, which corresponds to our worst case scenario of a
$1.38/bushel increase in corn prices.
As described in the previous sections, the corn price increase
attributable to the RFS is likely to be much smaller. Texas's own ``95%
of mean corn crop'' scenario predicts a change of only $0.73/bushel as
a result of the RFS waiver, which would make the impact on the
livestock industry even less than the $918 million calculated here.
(d) Fuel Price Impacts
The ISU model also predicts the change in U.S. ethanol, gasoline,
and blended fuel prices based on changes in ethanol production volumes.
The ISU model assumes that both the demand and supply of gasoline are
relatively inelastic. Therefore, reducing the ethanol production levels
will increase gasoline demand and increase gasoline prices.\37\
Although the decrease in ethanol demand is associated with a decrease
in ethanol prices, the total blended fuel price is dominated by the
change in gasoline price since it is a much larger portion of the fuel
pool. The ISU model predicts that the most likely outcome is that
waiving the RFS mandate would have no impact on fuel prices. The ISU
modeling predicts that the average impact across all modeled scenarios
is that waiving the RFS mandate would increase blended fuel prices by
3/10 of one cent. When looking at the smaller subset of instances in
which the mandate is binding, the average impact of granting the waiver
would be to increase blended fuel prices by $0.01/gallon. Even in the
case where ethanol production volumes change the most, the impact on
blended fuel prices would be no more than an increase of $0.03/gallon.
---------------------------------------------------------------------------
\37\ In the subset of scenarios in which the mandate is binding,
when the mandate is in place it artificially increases demand for
ethanol (and artificially decreases the demand for gasoline).
Therefore, removing the mandate in those scenarios allows for lower
demand of ethanol which results in an increase in demand for
gasoline Over the one year period for which this model addresses
fuel price impacts, the model assumes gasoline production is
relatively inelastic and import supplies are fixed. As a result, the
increase in gasoline demand is associated with a slight increase in
blended fuel prices. In a longer time frame, if the supply of
gasoline were more elastic, it is possible that we could get a
different impact on blended fuel prices as a result of the waiver.
[[Page 47179]]
Table 6--Range of Estimated Ethanol and Blended Fuel Prices
----------------------------------------------------------------------------------------------------------------
Iowa state
Iowa state Iowa state when ``worst case''
mean estimate mandate binds example
----------------------------------------------------------------------------------------------------------------
Mean Ethanol Price with Mandate ($/gal)................... $2.59 $2.52 $2.62
Mean Ethanol Price with Waiver ($/gal).................... $2.57 $2.43 $2.22
Mean Domestic Ethanol Demand w/Mandate (Billion Gallons).. 11.05 10.00 10.00
Mean Domestic Ethanol Production w/Waiver (Billion 10.90 9.40 7.27
Gallons).................................................
Blended Fuel Price with Mandate ($/gal)................... $3.021 $2.692 $1.987
Blended Fuel Price with Waiver ($/gal).................... $3.024 $2.704 $2.017
Change in Blended Fuel Price ($/gal)...................... $0.003 $0.012 $0.030
----------------------------------------------------------------------------------------------------------------
Based on these small predicted changes in blended fuel prices, the
overall impacts on the economy are also expected to be modest, and in
the opposite direction from any impact on the livestock industry and
food prices in general.
Our analysis shows that a $0.003/gallon increase in blended fuel
price for the Iowa State mean scenario would be expected to change the
Energy CPI by 0.049%. For the subset of scenarios in which the mandate
is binding, a $0.01/gallon increase in blended fuel price would be
expected to change Energy CPI by 0.219%. A $0.03/gallon increase in
blended fuel price in the worst case scenario would be expected to
change Energy CPI by 0.739%. Details on the methodology for determining
these impacts are included in the docket.\38\
---------------------------------------------------------------------------
\38\ See docket for the memorandum from U.S. DOE to U.S. EPA.
Table 7--Impacts on Energy CPI and Gasoline Expenditures for Average and Low Income Households
----------------------------------------------------------------------------------------------------------------
Iowa state
Units Iowa state Iowa state ``worst case''
mean estimate mandate binds example
----------------------------------------------------------------------------------------------------------------
Change in Blended Fuel Price with $/gallon................ $0.003 $0.012 $0.030
Waiver.
Change in Energy CPI with Waiver... percent................. 0.49% 0.219% 0.739%
Change in Annual Expenditures on $....................... $3.43 $13.72 $34.29
Gasoline for Average Household
with Vehicles.
Change in Annual Expenditures on $....................... $2.02 $8.07 $20.18
Gasoline For Lowest Quintile
Households with Vehicles.
Change in Gasoline Expenditures as percent................. 0.007% 0.028% 0.071%
a Percentage of Consumer
Expenditures for Average Household
with Vehicles.
Change in Gasoline Expenditures as percent................. 0.010% 0.040% 0.099%
a Percentage of Consumer
Expenditures for Lowest Quintile
of Vehicle Owners.
Change in Gasoline Expenditures as percent................. 0.006% 0.024% 0.059%
a Percentage of Income After Taxes
for Average Household with
Vehicles.
Change in Gasoline Expenditures as percent................. 0.020% 0.081% 0.202%
a Percentage of Income After Taxes
for Lowest Quintile with Vehicles.
----------------------------------------------------------------------------------------------------------------
For the average household that owns a vehicle, the $0.003/gallon
change in fuel prices would result in a $3.43 increase in annual
gasoline expenditures in 2008/2009. A $0.01 gallon increase in fuel
prices translates to a $13.72 increase in household expenditures on
gasoline. Finally, a $0.03/gallon increase in fuel prices translates to
a $34.29 increase in household expenditures on gasoline. When analyzing
the impact of these changes on the lowest income groups, the absolute
expenditures on gasoline are lower than for the average household, due
to the fact that this segment of the population tends to drive fewer
miles on average. Since people in the lowest income groups are least
able to absorb changes in fuel prices, we also analyzed these changes
in expenditures as a percentage of consumer expenditures. Our analysis
shows a slightly larger impact on lower income households as a
percentage of consumer expenditures. When calculating the change in
gasoline expenditures as a percentage of income, the impact on low
income households is noticeably larger than the corresponding impact on
the average household, although the magnitude of the change is still
small (less than a 1% change for all scenarios).
Some commenters argued to the contrary, claiming that waiving the
RFS would significantly impact the price of fuel. These commenters rely
on papers by Urbanchuk \39\ and Verleger and Chodorow \40\, which both
estimate large changes in gasoline prices as a result of waiving the
mandate, although the estimated impacts are opposite in sign. The
fundamental assumption in both the Urbanchuk and Verleger and Chodorow
papers is that granting the waiver would lead to a relatively large
change in U.S. ethanol production. We disagree. As described in the
previous sections, our analysis suggests that other market factors such
as high crude oil prices are driving the current increase in ethanol
production, not the RFS mandate.
---------------------------------------------------------------------------
\39\ EPA-HQ-OAR-2008-0380-0479.
\40\ EPA-HQ-OAR-2008-0380-0526.
---------------------------------------------------------------------------
Urbanchuk estimates the impact of removing 4.5 billion gallons of
ethanol from the fuel pool over a short time frame, which would have to
be made up by approximately 3.1 billion gallons of gasoline on an
energy equivalent basis. Assuming the demand and supply for gasoline is
largely inelastic, Urbanchuk estimates this increase in gasoline demand
would lead to an increase in gasoline price of about $1.14/gallon.
While we agree in principle that increasing the demand for gasoline by
approximately three billion gallons would significantly increase short
term gasoline prices, EPA does not believe
[[Page 47180]]
granting the waiver would result in an increase in gasoline demand by
over three billion gallons. Furthermore, Urbanchuk estimates the
percent change in price relative to a percent change in the quantity of
U.S. gasoline supply. We believe this assumption overstates the price
impact, because it would be more appropriate to estimate the price
change relative to a percent change in the world gasoline supply.
Verleger and Chodorow use a very different analytical approach to
predict that an increase in U.S. gasoline production would lead to
lower U.S. gasoline prices. Their paper assumes that an RFS waiver
would reduce demand for ethanol by between 4.5 and 5.55 billion gallons
in 2008 and 2009 respectively, and that the increased demand for motor
fuel would be made up entirely by gasoline on an energy equivalent
basis. This would increase crude oil demand so that gasoline would
replace ethanol. The increased crude refining would produce more diesel
fuel, which would reduce diesel fuel prices by approximately $0.70/
gallon (15 percent). In turn, Verleger and Chodorow assert that
decreased diesel prices would cause prices for light sweet crude to
decline by approximately $16/barrel (12 percent), and that the decrease
in crude prices would lower finished motor gasoline prices by
approximately $0.15/gallon (4 percent).
This analysis depends on several assumptions that we believe are
likely to be incorrect (or at least overstate the potential impact of
granting the waiver). Verleger and Chodorow assume that ethanol is
priced in the market based on its energy content in comparison to
gasoline; therefore on an energy equivalent basis ethanol is currently
more expensive than gasoline. In reality, ethanol has historically been
priced based on volume displacement of gasoline and will be until it
has to be sold as E85 in large quantities and E10 has saturated the
U.S. gasoline market. At that time, any additional ethanol will be sold
as an E85 blend. Today, we are not at the point of E10 saturation,
therefore, on a volumetric basis, ethanol is still cheaper than
gasoline. We believe that the market will continue to demand a higher
quantity of ethanol than the mandate under most future market
conditions. Thus, even if the Verleger and Chodorow paper were
directionally correct, the magnitude of the impact would be
significantly overstated.
The second major assumption in the Verleger and Chodorow paper that
we believe is not accurate is the proposition that current high crude
oil prices are caused by high diesel fuel prices. While there appears
to be evidence that tight distillate markets are contributing to higher
world crude oil demand and crude oil prices,\41\ crude oil prices are a
function of supply and demand for crude oil and specifically the demand
of all the products made from it, not just diesel fuel. Without this
questionable assumption by Verleger and Chodorow, their projected
increase in demand for crude oil would likely increase crude oil prices
and prices for both gasoline and diesel fuel, thus reversing the
conclusion of their study that increasing diesel production would
decrease crude oil prices.
---------------------------------------------------------------------------
\41\ http://www.iea.org/w/bookshop/add.aspx?id=402.
---------------------------------------------------------------------------
Empirically, diesel prices have risen along with diesel consumption
over the last few years. Verleger and Chodorow attempt to quantify this
effect through the use of regression analysis over a limited time
period for one market. Such a regression cannot determine the
causation, and its use may have numerous other technical problems. We
therefore believe this relationship is unsupported.
3. Summary of Technical Analysis
For the 2008/2009 corn crop marketing year, our analysis shows that
the likelihood that the RFS will determine ethanol demand in the U.S.
is low, and that the most likely result is that the RFS would have no
impact on ethanol demand. Furthermore, our analysis shows that
potential changes in U.S. corn and fuel prices resulting from a waiver
would have at most a limited impact on the food, feed, and fuel
markets.
VI. Other Issues
EPA received comment on several areas of concern, in addition to
the economic impact of the RFS mandate. Comments were received on the
general impacts of biofuels, the environmental impacts of RFS, the
effect that granting or denying the waiver request would have on
commodity markets, and the impact of granting a waiver on the future of
ethanol production in the U.S. Although this section summarizes and
provides general responses to the comments concerning these issues, EPA
notes that several of the issues are either not relevant to EPA's
consideration of the current waiver request or do not provide a full
record by which to analyze the issue.
1. General Impacts of Recent Increase in Biofuels
Many commenters focused on the recent increase in corn prices from
approximately $2.00 in 2005 to almost $8.00 this spring. Most of the
commenters stated that biofuels have contributed to the recent increase
in U.S. corn prices, although estimates of the magnitude of this impact
varied. Commenters referencing Dr. Joe Glauber, Chief Economist at the
USDA, in testimony presented before the Committee on Energy and Natural
Resources in the U.S. Senate, noted estimates that increased ethanol
production in the U.S. has raised U.S. corn prices by approximately
$0.24/bushel in the 2006/2007 time frame (9 percent) and approximately
$0.65/bushel in the 2007/2008 (18 percent) timeframe. Alternatively, in
a report prepared for Kraft Foods Global Inc., Dr. Keith Collins
suggests that the increase in U.S. biofuels since 2006/7 has increased
U.S. corn prices by a larger amount, with a range of 29% to 60% (EPA-
HQ-OAR-2008-0380-0514.2). While EPA recognizes that there has been a
large increase in corn prices that has coincided with the recent
expansion of biofuels, the individual contribution of the RFS mandate
has been much smaller. A number of factors have contributed to the
recent increase in corn prices, such as foreign demand for coarse
grains, sustained drought in major international crop producing
regions, and historically high energy prices.
In a similar vein, comments and supporting analyses generally
agreed that the recent increase in U.S. biofuels production has
increased food prices in the U.S., although the magnitude of this
impact varied throughout the comments. Collins suggested that if
biofuels accounted for 60% of the increase in corn and soybean prices
between the 2006/2007 marketing year and expected 2008/2009 levels,
food ingredient costs would be approximately $20.5 billion higher. In
turn, ingredient costs will be passed on in higher meat and food prices
to U.S. consumers. In total, Collins predicts that increased biofuels
will increase U.S. food prices by approximately 1.8%. The 1.8% increase
is a 23-25% increase in the normal rate of food price inflation in a
two to three year period. Alternatively, Purdue University Extension
suggests that for the year 2007, the increased use of biofuels have
increase food costs by approximately $15 billion compared to the 2005
crop year.\42\ At the low end of
[[Page 47181]]
the spectrum, several commenters cited a report prepared by Dr. Richard
Perrin of University of Nebraska-Lincoln, that estimated ethanol is
responsible for no more than 15-20 percent of overall grain price
increases over the last two years and that increases from ethanol have
had a negligible impact on U.S. consumer prices.
---------------------------------------------------------------------------
\42\ EPA-HQ-OAR-2008-0380-0574.
---------------------------------------------------------------------------
EPA also received many comments discussing how the recent increase
in corn price has had a negative impact on the livestock industry. The
State of Texas provides several reports that conclude that the
livestock industries, including poultry, are experiencing financial
losses due to increases in the cost of production due to higher corn
prices. Several other commenters provide detailed descriptions of the
financial impact on cattle, poultry or broiler companies from rising
feed costs.
EPA is aware of the overall impact that biofuels have had in recent
years on the food and feed markets, and we are also cognizant of the
current macroeconomic conditions in the U.S. that have exacerbated some
of these impacts. While we generally agree that the issues raised by
commenters are important considerations, we think that some commenters
may have overstated the magnitude of the impacts. In addition, as
discussed previously, the issue before EPA is a narrower one--what
impact if any the RFS mandate itself would have over the time period at
issue, not the impact of the overall production and use of biofuels in
the U.S.
2. Environmental Concerns
A number of commenters expressed concerns that the RFS mandate
severely harms the environment. As discussed below, EPA believes that
the RFS mandate is not expected to lead to an increased use of ethanol
during the time period at issue. In addition, EPA has considered and
evaluated the environmental impact of an increased use of renewable
fuels in the RFS1 rulemaking.\43\ In addition, EISA also made several
important changes to the RFS program, many of which directly address
some of the environmental concerns raised below. EPA is preparing a
proposed rulemaking to update the RFS program to reflect the EISA
changes, and in this rulemaking EPA will further evaluate the
environmental concerns raised below.
---------------------------------------------------------------------------
\43\ 72 FR 23899 (May 1, 2007).
---------------------------------------------------------------------------
Specifically, commenters outlined four major environmental harms
related to the expansion of the RFS mandate. First, a few commenters
expressed concern about increased emissions of volatile organic
compounds (VOCs) and oxides of nitrogen (NOX ) associated
with increased use of ethanol. They claimed that when an area that
currently blends little or no ethanol into gasoline starts to use such
blends, significant increases in the amounts of VOCs and NOX
occurs.
The agency has evaluated the impact of increased use of ethanol a
number of times (See 66 Federal Register 37256-37161). Most recently,
we conducted a thorough analysis of the impact of increased ethanol
usage in the final rule for implementation of the Renewable Fuel
Standard Program, for levels up to approximately 10 billion gallons of
renewable fuel use a year.\44\ We have shown through the use of the
ozone Response Surface Model that changes in ambient ozone levels are
small when moving to these volumes of ethanol-blended gasoline and
those slight increases would be smaller when factoring carbon monoxide
reductions from increased ethanol use.\45\
---------------------------------------------------------------------------
\44\ See 72 FR 23900, 23969-978.
\45\ In our RFS ozone modeling, we found that the CO decreases
would likely offset the potential ozone air-quality impacts of a two
percentage point adjustment to VOCs. We found that reduced CO
emissions ranged from 0.9% to 2.5% depending on the volume of
renewable fuels increased. Concerning VOCs and NOX , we
expected to see increases of 4 to 5 percent and 5 to 7 percent
respectively in some areas. Overall, we found that the average
impact on summer ambient ozone levels for all areas is a 0.057 ppb
increase or about 0.06 percent of the ozone NAAQS (80.0 ppb).
Additionally, in areas with significant increases (greater than 50
percent) in ethanol use between now and 2015, the increase on summer
ambient ozone levels is 0.153 ppb (72 FR 23977).
---------------------------------------------------------------------------
Second, some commenters stated that ethanol's lifecycle greenhouse
gases (GHGs) substantially increase once greenhouse gases released from
indirect land use are considered in ethanol's GHG lifecycle. These
comments rely on evidence from Searchinger, et al. which utilized the
GREET and the Food and Agricultural Policy Research Institute (FAPRI)
models to show a manifold increase in lifecycle GHGs as marginal
cropland, forests, and native grasslands are converted to agricultural
lands as a result of ethanol production.\46\ This is an important
issue. EPA has analyzed the greenhouse impacts of various renewable
fuels, most recently in the RFS1 rulemaking.\47\ EPA will further
address this issue with an updated analysis in its upcoming proposed
rulemaking to implement the RFS changes called for by EISA 2007. These
RFS changes include GHG thresholds for certain fuels, based on
lifecycle emissions of GHG gases, including significant indirect
emissions resulting from land use changes.
---------------------------------------------------------------------------
\46\ Searchinger, Timothy; Heimlich, Ralph; Houghton, R. A.;
Dong, Fengxia; Elobeid, Amani; Fabiosa, Jacinto; Tokgaz, Simla;
Hayes, Dermot; et al., ``Use of U.S. Croplands for Biofuels
Increases Greenhouse Gases Through Emissions from Land-Use Change'',
Science, No. 319 (Feb 29, 2008): 1238-1240.
\47\ See 72 FR 23978-984.
---------------------------------------------------------------------------
Third, others argue that current agricultural production will put
around 100 million tons of soil and 300,000 tons of nitrogen-based
fertilizers in Midwestern waters. The soil erosion and fertilizer
runoff are major contributors to the Gulf of Mexico's ``Dead Zone.''
These commenters argue that the RFS mandate, at a minimum, prevents the
implementation of solutions to issues in the Gulf and would ultimately
exacerbate the situation as farmers grow more crops for energy
production in the future. We acknowledge that impacts to water quality
may result from increased biofuel crop production, and we intend to
provide information about this issue as part of the upcoming RFS
rulemaking.
Fourth, commenters expressed concern over the effect on natural
habitats and biodiversity from clearing critical habitats like forests,
wetlands, and grasslands for biofuels production. They argue that these
habitats are necessary to preserve biodiversity, and the RFS provides
an incentive to use these lands and other lands in conservation
programs for use to produce energy crops.
Other commenters noted the environmental benefits from blending
ethanol into gasoline. Most notably, commenters point to the reductions
in carbon monoxide emissions from using ethanol blends, decreased
emissions of greenhouse gases, and the use of ethanol as an oxygenate
that helps to break down harmful chemicals before being released into
the atmosphere.
For these comments, as with the prior comments, EPA notes that the
Agency will be evaluating these and other environmental issues in the
upcoming proposed rulemaking to implement the changes to the RFS
program required by EISA. EPA is conducting a significant amount of
analyses for this upcoming rulemaking to implement EISA, and we will
further investigate both the positive and negative environmental
impacts and costs of increased renewable fuel production and
consumption. In addition, EISA changes the definitions of renewable
fuel, and precludes use of renewable fuel in the RFS program if it was
produced from feedstocks from certain lands. EPA will address these
changes in the upcoming RFS2 rulemaking.
[[Page 47182]]
3. Potential Impacts on Commodities Markets
We received comments that supported and opposed granting the waiver
request on the grounds that the RFS mandate contributes to investment
speculation in the commodities markets. The State of Texas argues that
the RFS mandate is causing and will continue to cause unnecessary harm
to the economy by facilitating speculative investment in corn futures.
EPA recognizes that the RFS requirements may be influencing the U.S.
corn futures market in years beyond the 2008/2009 time period, which
may in turn influence prices today. However, research to date has not
been able to link future corn prices from the larger RFS required
volumes to current 2008/2009 corn prices.\48\ We intend to continue to
review and monitor this issue as appropriate.
---------------------------------------------------------------------------
\48\ Abbot, Hurt, and Tyner, July 2008, What's Driving Food
Prices? http://www.farmfoundation.org/news/articlefiles/404-
FINAL%20WDFP%20REPORT%207-21-08.pdf; http://www.cftc.gov/stellent/
groups/public/@newsroom/documents/file/
itfinterimreportoncrudeoil0708.pdf
---------------------------------------------------------------------------
Conversely, one commenter argued that granting the waiver would
introduce a level of uncertainty in the biofuels markets that could
adversely impact investment decisions, research and development
initiatives for advanced biofuels, and/or how future RFS requirements
are enforced. Furthermore, other commenters point out that expanded
ethanol production increases available livestock feeds and may lead to
corn price stabilization through the use of distiller's grains.
Some economists note that speculation provides a vital role in the
price discovery process with a chance of ``overshooting'' the
equilibrium because the balance between supply and demand is never
precisely known. The prices are corrected as new information becomes
available. This appears to be the case with corn futures as prices have
fallen as the recent flooding in the Midwest has shown to have marginal
national impact, as discussed above. Many commenters noted corn futures
prices surpassing $8.00/bushel peaks during the uncertainty of the
effect of the flood, compared with the current $5.25/bushel futures
price.\49\
---------------------------------------------------------------------------
\49\ ``Electronic Corn Quotes.'' 08 July 2008. Chicago Board of
Trading. 05 Aug 2008 www.cbot.com/.
---------------------------------------------------------------------------
As discussed above, the RFS mandate is not expected to cause any
increase in the use of ethanol during the time period at issue, and
therefore is not expected to have any impact on corn prices.
4. Future of Renewable Fuels
A number of commenters raised concerns over the impact that
granting the waiver would have on the future of ethanol production.
Many commenters, especially those related to the ethanol industry,
stated that granting the waiver would send a signal to ethanol and
other biofuels producers that investments in production and
distribution of renewable fuels were uncertain. Additionally, these
commenters note that granting a waiver this soon after raising the
standard raises questions concerning future investments in advanced
biofuels mandated by EISA beginning in 2009.
On the other hand, some commenters raise questions about whether
the current production capacity of ethanol would be able to meet the
revised standards and whether distribution facilities would be able to
accommodate the increased amount of renewable fuels required. These
commenters argue that granting the waiver request would allow a
smoother transition to biofuels in terms of production capacity and
distribution by allowing more realistic development of infrastructure
to support the renewable fuels industry. Additionally, they argue that
granting the waiver request might create an incentive to develop more
advanced biofuels more quickly and move away from grain-based ethanol.
Many commenters point out that a significant amount of production
capabilities are scheduled for completion during 2009 with over 13
billion gallons of production capacity scheduled to come online.
EPA will be considering these and other issues in a comprehensive
fashion in the upcoming rulemaking to implement the changes called for
by EISA. However they are not relevant to the threshold issue in this
waiver proceeding--whether implementation of the RFS mandate, during
the time period at issue, would severely harm the economy. Given the
basis for the decision described below in Section VII, the issues
raised in this section VI are more appropriately considered in the
upcoming rulemaking to implement the changes called for by EISA.
VII. Decision
EPA is authorized to grant Texas's waiver request if EPA determines
that implementation of the RFS mandate would severely harm the economy
of a State, region, or the United States. As discussed in section IV,
this calls for a determination that implementation of the mandate
itself would severely harm the economy; it is not enough to determine
that implementation would contribute to such harm. The required
determination has two basic parts. The first criterion is that there
must be a generally high degree of confidence that severe harm would
occur from implementation of the RFS. The second criterion is a high
threshold for the nature and degree of harm that would support issuance
of a waiver, indicating a point that is quite far along a continuum of
harm, though short of extreme. EPA recognizes that Texas and many
parties, both those supporting the waiver and those opposing the
waiver, have raised issues of great concern to them and to others in
the nation concerning the role of the increased use of biofuels.
However the issue before the Agency in this case is a much more limited
one, as described above. Based on a thorough review of the record in
this case, and applying the evidence to the statutory criteria, EPA
finds that the evidence does not support granting a waiver.
First, regarding the degree of confidence that implementation of
the mandate during the time period at issue would harm the economy, EPA
notes that the overall weight of the evidence indicates that
implementation of the mandate itself would have no significant impact
on the economy during this time period, and the most likely result is
that implementation of the mandate itself would have no effect on the
economy of a State, region, or the United States. All parties agree
that any claimed economic harm would derive from the increased use of
ethanol, and any associated increase in the price of corn. However the
weight of evidence strongly indicates that waiving the mandate would
not be expected to change the amount of ethanol that would be used. The
ISU modeling projects that waiving the mandate would have no impact at
all on the use of ethanol in 76% of the scenarios modeled. The ISU
results are also generally supported by the modeling performed by TAMU,
which indicates that under scenarios similar to the ISU modeling, a
waiver of the mandate would have less than a 50% chance of impacting
the use of ethanol. Current market conditions that foster ethanol
production and the low price currently in the market for renewable fuel
RINs also supports the conclusion that waiving the mandate would not be
expected to have a significant effect on the use of ethanol. As
discussed in section V, the evidence submitted to support the view that
a waiver would have a large effect on ethanol use is less credible
because of concerns about the
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validity of key assumptions in the analyses and models. After
considering all of the evidence and weighing it appropriately, EPA
believes that waiving the RFS mandate would not significantly affect
the use of ethanol during the time period at issue, and the most likely
result is that implementation would have no effect. Therefore it is
unlikely that implementation of the mandate would cause harm to the
economy. There is insufficient evidence before the agency to support a
finding that implementation of the RFS would likely or even probably
cause harm to the economy for that time period--and certainly the
evidence does not reach the generally high degree of confidence
required for issuance of a waiver under section 211(o)(7)(A).
With respect to the second criterion, the Agency examined the
evidence to evaluate the potential impact of implementation of the RFS
mandate on corn prices and the impacts of such corn prices on various
sectors of the economy and the overall economy, both within Texas and
for the entire United States. In the ISU modeling a range of scenarios
were modeled, with the model projecting ethanol use, corn price and
fuel price. The modeling indicates that for 76% of the scenarios there
would be no change in ethanol use or corn price from a waiver of the
mandate, with only 24% of the scenarios indicating a change in ethanol
use and a corresponding change in corn price. EPA determined that the
average change in corn price over all of the scenarios was $0.07 per
bushel of corn. The average change in corn price over the 24% of
scenarios where a waiver would have an effect was $0.30 per bushel of
corn. As discussed in section V, a price change in corn of this
magnitude would have only a limited impact on livestock costs and food
prices. It would also be accompanied by a small change in fuel costs.
For the reasons discussed above, EPA believes the weight of the
evidence supports the view that there is most likely no impact on
ethanol use or corn prices from implementation of the RFS mandate over
the time period at issue, and if an impact were to occur, it would
likely be on average $0.30 per bushel of corn. EPA believes this range
of price increases for corn, even without considering the accompanying
impact on fuel prices, would not support a finding of severe harm to
the economy, whether considering the livestock industry of Texas, the
livestock industry of the nation, the economy of Texas, or the economy
of the United States. In this case, EPA does not need to determine
exactly what nature or degree of harm would amount to severe harm, as
the evidence in this case clearly does not meet the criterion of a high
threshold for severe economic harm.
In conclusion, EPA finds that the evidence in this case does not
support a determination that implementation of the RFS mandate during
the time period at issue would severely harm the economy of a State, a
region, or the United States.
VIII. Guidance on Future Requests for Waivers
In considering waiver requests, EPA takes seriously its
responsibility to evaluate whether circumstances warranting a waiver
have arisen, while providing the necessary level of stability for this
program that Congress intended. In order to meet these objectives, the
Agency is providing guidance on its expectations for future waiver
requests.
Section 211(o)(7)(A) of the Act requires notice and comment before
the Administrator may grant a waiver of the RFS volume requirements.
For 2008, only a state governor may request a waiver, however beginning
in 2009 ``any person subject to the requirements'' of the RFS may also
request a waiver. Thus, refiners and importers of gasoline, as well as
producers and importers of renewable fuels such as ethanol and
biodiesel, may request a waiver.
The statute provides that EPA ``may waive [the RFS requirements] *
* * based on a determination by the Administrator, after public notice
and opportunity for comment,'' that certain circumstances exist. It
does not, however, specify that notice and an opportunity for comment
are required for EPA denial of a petition. While EPA always has the
discretion to proceed through public notice and comment prior to acting
on a waiver request, we believe that there could well be circumstances
where it is appropriate for EPA to deny a petition without notice and
opportunity for comment. For example, petitions that clearly do not
contain information and analysis of a type and quality sufficient to
support a grant of a waiver may not justify public consideration prior
to issuance of a denial by EPA. EPA is concerned that time and
resources of both the Agency and stakeholders should not be
unnecessarily devoted to a public notice and comment process if a
clearly meritless petition is filed, including a petition that is not
supported by an appropriate level of information and analysis. In such
a case, EPA can make an appropriate decision without public input. In
addition in those circumstances a public notice and comment process
would detract from the time and resources of all stakeholders,
including the resources that may be available to address petitions that
are adequately supported by an appropriate level of information and
analysis. To assist future petitioners, EPA offers the following
guidance on the types of information and analysis that we expect would
accompany a waiver request. EPA notes that this guidance is not a rule,
and therefore is not binding on the public or EPA. Any final decision
on the sufficiency and merit of a petition will be made upon review of
a petition by EPA in consultation with the Secretaries of Agriculture
and Energy.
By example, in section IV of this decision EPA provides its
interpretation of the criteria for deciding a waiver request based on a
claim that implementation of the RFS would severely harm the economy of
a State, a region, or the United States. In section V EPA explains how
it weighs the body of evidence on the issues that are relevant for this
waiver request. Based on this, EPA expects that future applicants for a
waiver will provide information and analyses that address what is the
impact of implementation of the RFS, and what is the nature and degree
of harm associated with the impact of the RFS. The information and
analyses discussed in section V, such as appropriate modeling, provides
guidance on the kind of information and analyses that EPA expects would
be provided by an applicant. EPA expects that it will evaluate a waiver
request by weighing all of the evidence; hence no one specific kind or
form of evidence or analyses is necessarily dispositive. At the same
time, EPA expects that applicants would provide a comprehensive and
robust analytical basis for any claim that the RFS itself is causing
harm, and the nature and degree of that harm.
In the future, EPA will review a request for a waiver and first
determine whether to proceed with public notice and comment. EPA will
not grant a waiver without such notice and comment, but in appropriate
circumstances EPA reserves the right to deny a waiver request without
going through that process. Where an applicant does not address the
relevant issues or does not provide adequate evidence to support their
claims, EPA may decide to deny the request without notice and comment.
In this case the initial submission by the State of Texas provided
little analytical or evidentiary basis for their request. EPA proceeded
through a notice and comment process as this was
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the first such request and EPA had provided no prior guidance on these
issues. EPA believed all parties to the process would benefit from a
complete public airing of the issues involved in the first waiver
request. Texas properly submitted substantive and detailed comments
during the comment period to support its request. However during the
public comment period other commenters were necessarily focused on
addressing just the limited information provided in the initial request
submitted by Texas. They did not have the opportunity to respond to
Texas' more substantive submission until after the comment period had
closed. This is not the most efficient use of EPA's or the public's
resources, especially given the short time specified in the Act for EPA
to make a decision. The guidance in this section is designed in part to
avoid this kind of situation in the future and better allow the Agency
to meet the statutory deadlines provided in EISA.
EPA may grant a waiver for no more than one year unless renewed by
the Administrator. EPA expects that applicants would state the
requested start date and duration of the waiver, with waiver
applications received generally at least six months before the
requested start date, and to the extent that applications cannot be
submitted in such timeframe an application should include an
explanation why such expectation could not be met. EPA expects that
applicants would notify the Administrator approximately three months
before the termination of a waiver period if renewal of the waiver is
desired. The request for an extension would include an update of the
information and rationale submitted with the original waiver request.
The Administrator may also grant a waiver based on severe harm to
the environment of a State, a region, or the United States, or
inadequate domestic supply. At this time the Agency is not providing
any more specific guidance for these types of waiver requests, but
anticipates that the guidance discussed in this section would apply in
general terms to these requests as well.
My decision will affect not only refiners, importers and other
regulated parties in Texas but also refiners, importers, and other
regulated parties throughout the nation who must comply with the
renewable fuel standards and other requirements in order to produce
gasoline and renewable fuel for use in the United States. A waiver
would affect the national volume of renewable fuel that is required,
and would therefore affect parties all across the nation who produce
gasoline or renewable fuel, as well as other regulated parties who are
involved in the distribution of such fuels. For this reason, I hereby
determine and find that this is a final action of national
applicability.
This action is not a rule as defined by Executive Order 12866.
Therefore, it is exempt from review by the Office of Management and
Budget as required for rules and regulations by Executive Order 12866.
Dated: August 7, 2008.
Stephen L. Johnson,
Administrator.
[FR Doc. E8-18738 Filed 8-12-08; 8:45 am]
BILLING CODE 6560-50-P