Like most ideas in Congress, the Renewable Fuel Standard was rooted in good intention. Enacted in 2005 by President George W. Bush and with strong bipartisan support, the RFS was designed to improve energy security and the environment by requiring that the transportation fuels Americans use include a minimum amount of renewable fuels. Administered by the Environmental Protection Agency, the RFS sets a schedule for increasing the amount of renewable fuel used each year, regardless of demand.
The good news is that each gallon of gasoline now includes a 10% ethanol blend. The bad news is that despite technological limits and a lack of consumer demand for greater concentrations of ethanol, the EPA is now mandating that refiners use more than a 10% ethanol blend. That's something refiners simply cannot do.
The Renewable Fuel Standard created a market-based compliance system in which refiners must submit credits to prove that the required amount of renewable fuel is used or paid for by them each year. These credits, known as Renewable Identification Numbers, can be bought or sold like commodities. Both refiners and blenders acquire RINs by either blending the renewable fuel or buying credits in lieu of blending.
As a display of regulatory failure at its finest, current regulations place the compliance obligation on refiners rather than on renewable-fuel blenders—allowing blenders to sell RINs to anyone, including Wall Street speculators—and fail to require any transparency in the RIN market. One result: a shortage of RINs for purchase by refiners, and a lack of clarity about who is acquiring them.
There's somewhat less mystery about the price explosion in RIN credits. Historically, they have traded at a relatively low price—typically four cents per RIN. But higher blend quotas have become increasingly unrealistic to meet—required by law for a commodity that is not reliably available commercially. Another drawback: Ethanol blends beyond 10% can ravage older car engines. No wonder the limited number of RINs are becoming more valuable. Starting in early 2013, prices exploded from four cents per gallon to over $1.45 per RIN, a 3,625% increase since the end of 2012.
The skyrocketing price of RINs is creating a huge threat to refineries like Monroe Energy in Trainer, Pa., near Philadelphia. Monroe purchased the Trainer refinery in June 2012 for a reported $150 million. At current RIN prices, Monroe Energy's annual cost to buy RINs will be almost twice the price it paid to buy the refinery itself.
Like Monroe Energy, refineries across the country are facing unsustainable compliance costs. We need a solution for refineries struggling to comply with burdensome and mismanaged RIN credits, while balancing the intent of the Renewable Fuel Standard.
The Environmental Protection Agency's Aug. 6 announcement that it will consider reducing the renewable fuel volume mandate next year—while refusing to take action this year—is a far too tepid response to this crisis. Next year may be too late. The federal government owes it to the thousands of refinery workers across the nation not to imperil their jobs with ruinous regulations.
Rep. Meehan, a Republican, represents the Seventh District of Pennsylvania in the U.S. House of Representatives. Mr. Eiding is president of the Philadelphia Council of the AFL-CIO.