Researchers say fuel market rebound effect can result in increased GHG emissions under RFS2; suggest taxes over mandates
The US Renewable Fuel Standard (RFS2) is intended to reduce greenhouse gas emissions from transportation. However, argues a team from the University of Minnesota in an open-access paper published in the journal Energy Policy, once the “fuel market rebound effect” is factored in, RFS2 actually increases GHG emissions when all fuel GHG intensity targets specified under the act are met.
Increasing the supply of low-carbon alternative fuels is a basic strategy to reduce greenhouse gas emissions. However, the Minnesota team notes, increasing the supply of fuels tends to lower energy prices, which encourages in turn encourages additional fuel consumption. This “fuel market rebound effect” can undermine climate change mitigation strategies, even to the point where efforts to reduce GHG emissions by increasing the supply of low-carbon fuels may actually result in increased GHG emissions.
A growing number of studies on the effects of biofuel production on domestic and international fuel markets have concluded that biofuel production results in only a partial displacement of gasoline on an energy-equivalent basis—thereby increasing global energy use. Estimates of the amount of gasoline displaced globally by production of an energy-equivalent gallon of biofuel under a mandate vary. The Minnesota team, which found that a majority of the estimates fell below 0.50 gallons, selected a conservative gasoline displacement rate of 0.50 for its analysis.
RFS2 requires up to 36 billion gallons of biofuel annually by 2022, comprising four categories: conventional biofuel (e.g., ethanol), advanced biofuel, cellulosic biofuel, and biomass-based diesel, each of which must have a GHG emission intensity of no more than 80, 50, 40, and 50%, respectively, compared to that of the petroleum-based fuel for which it may substitute.
The Minnesota team only considered the gasoline substitues, which total 35 billion gallons, or 23 billion gasoline-equivalent gallons on an energy basis, in 2022.
Assuming that each gasoline-equivalent gallon of biofuel produced meets the GHG emissions intensity standard and reduces the production of gasoline by one gallon (that is, no fuel market rebound effect), RFS2 would reduce GHG emissions by 110 million metric tons (CO2 equivalent) in 2022, and by 749 million metric tons cumulatively from 2006 to 2022. This is the interpretation taken by EPA in its final rule, which estimates a reduction in GHG emissions of 133 million metric tons in 2022, due in part to projections that some fuels will exceed minimum GHG reduction standards, with a statutory provision exempting biofuel produced at certain older facilities from RFS2’s GHG emissions reduction requirements.
In reality, substantially less than 23 billion gallons of gasoline will be displaced from biofuel production in 2022 due to the fuel market rebound effect. As previously described, a conservative assumption from our survey of recent literature is that only 0.5 gallons of gasoline are displaced per gasoline-equivalent gallon of biofuel produced. Taking this fuel market rebound effect into account and assuming the biofuels in RFS2 achieve their targeted GHG emissions reductions in all years, RFS2 actually leads to a net increase in GHG emissions of 22 million metric tons in 2022, and of 431 million metric tons cumulatively from 2006 to 2022. In sum, this mandate for the production of less GHG intense fuels actually increases net GHG emissions to the atmosphere relative to no action due to the low amounts of gasoline being displaced. In other words, RFS2 increases GHG emissions instead of reducing them when individual fuel GHG reduction targets are met.—Hill et al.
|Cumulative change in GHG emissions by biofuels qualifying for the Renewable Fuels Standard (RFS2). Hill et al. Click to enlarge.|
The use of conventional biofuel—mostly corn ethanol—increases net GHG emissions even with a 20% lower carbon footprint than gasoline. Advanced biofuels with 50% CI generates no net change in GHGs. Only cellulosic biofuels with a carbon intensity 60% lower than gasoline reduces net GHG emissions.
Our results reinforce what has been long known by economists: the best way to reduce pollution is by imposing a tax on pollution-causing activities. Taxes on pollution are preferable to mandates for additional fuel, even low-carbon fuels, because this allows market effects to work in the right direction, namely by increasing the price of pollution-causing activities, which decreases demand, rather than the wrong direction by lowering fuel prices and increasing demand. However, politics often stands in the way of good policy. Mandates are more politically palatable than taxes because mandates offer concentrated benefits to a small group of low-carbon fuel suppliers in the short term, while taxes require concentrated costs and offer diffuse benefits to society over the long term. In the case of biofuels, mandates are unlikely to reduce GHG emissions unless there is a radical breakthrough in technology that greatly lowers their carbon intensity. Until then, carbon taxes or a carbon cap-and-trade scheme present a more immediate option for reducing GHG emissions.—Hill et al.
Jason Hill, Liaila Tajibaeva, Stephen Polasky (2016) “Climate consequences of low-carbon fuels: The United States Renewable Fuel Standard,” Energy Policy, Volume 97, Pages 351-353 doi: 10.1016/j.enpol.2016.07.035