Can changes in refinery production defeat GHG emissions “savings” from biofuels policies?1 W. Michael Griffin Engineering and Public Policy CEDM Annual Meeting May 24, 2017 1Posen, I. D.; Plevin, R. J.; Azevedo, I. L.; Jaramillo P.; Griffin, W. M., Flexibility in Petroleum Product Mix Undermines Greenhouse Gas Benefits from Biofuel Policies. In Prep.

The Question How do biofuel policies influence the product mix from the petroleum industry, and what are the resulting GHG implications if this occurs?

Why do we care? EPA’s RIA of the RFS2 says “corn ethanol has 21% less emissions than gasoline.” Although legislatively required, it’s a false comparison. It implicitly assumes 1gge of EtOH always displaces 1gal of gasoline. Any additional GHG impacts (excluded at this point) would disqualify corn ethanol from the RFS. This in my view is a false comparison. It assumes that the metric is 1 gge of Ethanol will displace a gallon of gasoline

The 1:1 displacement means that nothing changes except: Basis is a 42 gallon barrel Numbers represent gals of the barrel produced in the US in 2016 Gasoline – 45% Distillates – 31% Other – 24% This is assumed to be constant. Small changes can lead to large energy use changes and overall carbon intensities of the fuels and other products. Most of the time its doesn’t matter. A decrease here https://www.eia.gov/energyexplained/index.cfm/%20data/index.cfm?page=oil_home

Refineries are beautiful for a “pipe junky” like me! Refineries are very flexible. There summer/winter gasoline; Home heating oil for winter.

Large flexibility in the petroleum industry (historic data) Gasoline Yield (%) Distillate Yield (%) Other Yield (%) There are configurations where the yields can each range from below 10% to around 50% Country year 2007 (base year for the model) Circles represent country-year data

Refiners do have levers to pull in response to the market: Refineries profit maximize and produce an optimal product mix depending on market conditions and predictions: Blend different crude oils Not use a unit operation (I only know this happening as an emergency response) The refinery can be reconfigure totally (but this is long term) Change “cut” throughput (change the temperature on the distillation tower) Mix the final products differently (gasoline and diesel are defined by ASTM specs) Distillation oil comes in a about 400C

Why do we care? (2) Some market responses of biofuel use have been considered: iLUC (included in CA-LCFS, EPA’s RIA) Others are known but not considered policy-wise, like iFUE (Rajagopal 2013), And to this point, the iFUE analyses the oil industry is assumed static. This in my view is a false comparison. It assumes that the metric is 1 gge of Ethanol will displace a gallon of gasoline

Regression Analysis of EIA data Partial Equilibrium Model What we did Regression Analysis of EIA data Elasticity of gasoline and diesel yields Shifts within other products yields Relative yields wrt to gasoline and distillate prices Partial Equilibrium Model Predict Product Slate for each policy evaluated 2 Case [US and Global flexible refinery] System GHG emissions Life Cycle System Emissions factors

Petroleum product mix change (PPMC) Policy induced emissions decrease Policy induced emissions increase Share mandate (15%) Legend Max Min 25% Median 75% Flexible refinery yields Fixed refinery yields Red vs Green (50% share, 25% for emissions) Carbon tax vs all else SCALE Emission Standard (10%) Carbon Tax ($20/tonne) No Policy Change in Global GHG Emissions (Mt CO2e per year)

Market mediated effects overturn greenhouse gas benefits from biofuel policies Why with the emissions standard do you get muck lower mandate (simply fuel use?) but a far higher emissions Even if biofuels were carbon neutral (zero emissions) the result would still be positve. US 50% for share and

Conclusions Results Refiners increase diesel production You dump biofuels into the market to displace gasoline Refiners increase diesel production Increase refining emissions Heavier oil use/ Complex refineries (70%) Increasing yield comes from originally non-combusted products (30%) Any policies that apply equally across petroleum products are less vulnerable to this effect Policies that induce a price wedge between producers and consumers (e.g. carbon tax) are more likely to result in emission reductions Consumers and producers don’t see the same price (consumer pays more that the refiners see).

A caution These results, while compelling, should only be taken as an indication of the potential impact of refinery flexibility on the success of different fuel policies.

Refiner flexibility increases GHG emissions from biofuel policies: U.S. only

Responsiveness of the refining sector to product prices: regression model Elasticity with respect to distillate price Gasoline yield log⁡(𝛽 𝑔 )= 𝑎 0 + 𝑎 1 ∗ log 𝑝 𝑔 + 𝑎 2 ∗ log 𝑝 𝑑 + 𝑎 3 ∗𝑡+ 𝑎 4 ∗𝑀 log⁡(𝛽 𝑑 )= 𝑏 0 + 𝑏 1 ∗ log 𝑝 𝑔 + 𝑏 2 ∗ log 𝑝 𝑑 + 𝑏 3 ∗𝑡+ 𝑏 4 ∗𝑀 Distillate yield Gasoline price Time trend and month dummies Distillate price Elasticity with respect to gasoline price

How do other products respond to gasoline and distillate yields?

Responsiveness of the refining sector to product prices: results   Distillate yield Gasoline yield Model Elasticity with respect to distillate price Elasticity with respect to gasoline price Lagged prices (3 lags) 0.401*** (0.0315) -0.341*** (0.0230) -0.218*** (0.0178) 0.170*** (0.0130) Partial adjustment 0.485*** (0.0614) -0.404*** (0.0471) -0.243*** (0.0305) 0.201*** (0.0233) Adaptive Expectations 0.459*** (0.0403) -0.410*** (0.0344) -0.222*** (0.0185) 0.179*** (0.0143) Lagged prices AR(1) 0.420*** (0.0561) -0.345*** (0.0438) -0.229*** (0.0307) 0.176*** (0.0236) Partial adjustment AR(1) 0.500*** (0.0649) -0.418*** (0.0504) -0.245*** (0.0316) 0.203*** (0.0246) Adaptive Expectations AR(1) 0.467*** (0.0647) -0.387*** (0.0514) -0.226*** (0.0319) 0.192*** (0.0255) SKIP? ≈ 0.4-0.5 ≈ –0.4 ≈ –0.2 ≈ 0.2 ***p<0.001

Biofuel policies induce non-trivial yield changes Globally flexible yields

Biofuel policies induce non-trivial price changes