Monday, November 18, 2013

EPA's Ethanol Adjustment Falls Short of Reform

  • As the ethanol blend wall arrives, the EPA has proposed adjusting downward the federally mandated level of corn ethanol to be blended into gasoline.
  • This would relieve pressure on fuel blenders and retailers, but doesn't solve a problem widely expected to require bigger adjustments each year.
Last Friday the US Environmental Protection Agency proposed significant adjustments to the 2014 Renewable Fuel Standard, the federal biofuel mandate that the EPA administers. The headline change was a nearly 3 billion gallon reduction in the required biofuel volume for next year. However, as various observers, including the editors of the Washington Post, failed to differentiate, less than half of that reduction was truly discretionary. The remainder was a necessary acknowledgement of the persistently slow pace of cellulosic biofuel development and entirely in keeping with precedent.

I've written extensively about the ethanol blend wall and the need to reform the RFS and what that might look like. I don't intend to rehash those issues today. Rather, I'd like to focus on the specifics of the EPA's announcement, and why as the Post stated, "it doesn't go far enough."  Because of the way the RFS targets roll up, it's not easy to see exactly what the Agency has proposed doing with each category of biofuel under the mandate.

The first aspect requiring clarification is that the roughly 99% cut in the most restrictive category of the RFS, the target for cellulosic biofuel, is nothing new. It's at least the fourth consecutive annual reduction by my count, reflecting that the substantial volumes of cellulosic biofuel projected back in 2007 were more than merely ambitious. Several new cellulosic facilities, including plants belonging to DuPont and POET, are scheduled to start up within the next year. I hesitate to call them commercial-scale, not just but their output will be less than that of typical corn-ethanol plants, but because their commerciality can't truly be known until they're started up, de-bugged and running smoothly.

Together with another plant that has already started up, these facilities will still not come close to producing the 1.75 billion gallons of cellulosic biofuel originally mandated for 2014. For the first time, though, EPA's newly revised range of 8-30 million gallons might prove realistic.

Because the RFS's "cellulosic" category rolls up within the larger, less-restrictive "advanced" biofuel category, it wasn't obvious that the effective new 2014 target for non-cellulosic advanced biofuel, which includes biodiesel, as well as ethanol from sugar cane, actually represents a modest increase from 2013 and essentially no change from its original level of 2 billion gallons.

The only truly discretionary change in the EPA's proposal falls on the least-restrictive RFS category of "renewable biofuel." As a result, the 2014 mandate for ethanol produced from corn and other grains would be cut from 14.4 billion gallons to 13.01 billion gallons--the most important figure in the entire proposal and one you won't find in the EPA's press release. 2014 US gasoline sales are expected to be just sufficient to absorb that quantity of ethanol without exceeding the 10% blending limit in place for most US gasoline, other than E85 and the literal handful of stations selling E15, the EPA's approved 15% blend. This reduction represents a milestone and should be welcomed by consumers worried about the cost and quality of the fuel they buy.

The corn ethanol industry is understandably displeased with this proposal, which makes it clear that when push comes to shove, the EPA's preference is for more advanced biofuels over corn ethanol. But the bigger issue is the one to which the Washington Post's editorial alludes: a one-year fix cannot address the structural problems of a rule that is on a trajectory to diverge farther from its planned version of the future with each passing year.

The outcome is far from settled. The EPA's 60-day comment period is just beginning, and numerous legislators, trade associations, and companies will want to have their say about it. They should hear from ordinary consumers, too.

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