It is no secret that many federal regulations in the United States are ineffective and burdensome to the economy.  However, the current Environmental Protection Agency (EPA) requirement for oil producers to purchase non-existent cellulosic biofuels may be the most absurd.

The Energy Independence and Security Act (EISA) of 2007 contained an EPA mandate requiring that, starting in 2010, oil companies either purchase a specific volume of cellulosic biofuels or purchase waiver credits to avoid penalty.  When the mandate was created, commercially viable cellulosic biofuels did not exist, so the required production levels that the government established were based completely on bureaucratic prediction.  According to a January 9, 2011 article in The New York Times, “The goal set by the law for vehicle fuel from cellulose was 250 million gallons for 2011 and 500 million gallons for 2012.”  While these are small numbers relative to the overall fuel supply, these production requirements were quite lofty for a phantom fuel.

In 2010, in response to the fact that cellulosic biofuels still were not being commercially produced, the EPA reduced its mandate to 6.5 million gallons for 2011 and 8.65 gallons for 2012.  While these numbers represented a large reduction from the levels established by EISA, energy producers still could not purchase nonexistent biofuels and were left with no other option but to spend millions of dollars to purchase the “waiver credits” directly from the EPA in order to avoid paying hefty fines.  By February 2013, oil companies will have paid more than $14 million to the EPA for waiver credits.

According to a January 13, 2011 report from the Congressional Research Service, “The USDA [United States Department of Agriculture] Office of Energy and New Uses projects that cellulosic biofuels are not expected to be commercially viable on a large scale until at least 2015.  However, the cellulosic biofuel portion of the RFS [Renewable Fuel Standard] mandate is set at 3 billion gallons by 2015, a substantial amount.”  

Further complicating the development of a viable production system for cellulosic biofuels is the current proliferation in the biofuel credit marketplace of fraudulent fuel credits.  The EPA uses Renewable Identification Numbers (RINs), unique numbers that are issued by the biofuel producer or importer at the point of production, to track the sales of biofuel credits.  However, lax oversight by the EPA of the sellers of the credits has led to refiners and importers purchasing invalid credits, resulting in refiners spending money in attempts to comply with the mandate, only to still end up being fined by the EPA for failing to do so.

The effects of this mandate are being felt by taxpayers as well.  According to a December 14, 2011 Wall Street Journal article, “the feds under Mr. Bush and President Obama have pumped at least $1.5 billion of grants and loan subsidies to fledgling producers.”  A January 12, 2012 article from The Institute for Energy Research notes that much of this industry’s subsidization has occurred within the last year: “…in August 2011, the Obama Administration funded a $510 million program in partnership with the Navy to produce advanced biofuels for the military.  In September 2011, the federal government loaned $134 million to Abengoa Bioenergy to build a cellulosic plant in Kansas and the Department of Energy provided POET, which advertises itself as the ‘world’s largest ethanol producer,’ a $105 million loan guarantee for cellulosic biofuels.’”

As things stand today, there is no indication that the Obama Administration has any plans to terminate or change the structure of the mandate.  Accordingly, the oil industry is taking matters into its own hands.  The American Petroleum Institute (API), in lawsuits filed on July 24, 2012 and in March 2011 (one for the 2011 standard and one for the 2012 standard), is seeking to overturn the EPA’s mandate.  API’s position, as quoted in a July 25, 2012 Bloomberg article, is that “EPA’s unattainable and absurd mandate forces refiners to pay a penalty for failing to use biofuels that don’t even exist.  The mandate is effectively an added tax on gasoline manufacturers that could ultimately burden consumers.”

On June 28, 2012, Rep. Jeff Flake (R-Ariz.) introduced H.R. 6047, the Phantom Fuel Reform Act, which is among the potential legislative solutions to this problem.  H.R. 6047 would amend the renewable fuel program of the Clean Air Act to require the EPA to rely on actual industry production levels as opposed to arbitrary predictions.  Essentially, oil companies would no longer be required to purchase cellulosic biofuels if none are being produced.

As the post-recession economy struggles to regain its footing and taxpayers continue to face high unemployment and rising prices, the government should do everything in its power to eliminate senseless red tape and regulations.  Passing Rep. Flake’s legislation would be a step in the right direction toward accomplishing this goal.

  -- PJ Austin