EPA's New CO2 Rules Create Opportunities for Natural Gas, for Now

• EPA's proposed rule for reducing CO2 emissions from power plants could increase natural gas demand in the utility sector by as much as 50%, at the expense of coal.
• Cutting emissions by regulation rather than legislation entails legal and political uncertainties that could hamper the investment necessary to meet EPA's targets.

Earlier this month the Environmental Protection Agency announced its proposal for regulating the greenhouse gas emissions from all currently operating US power plants. Unsurprisingly, initial assessments suggested it favors the renewable energy, energy efficiency and nuclear power industries--and especially natural gas--all at the expense of coal. However, the longer-term outcome is subject to significant uncertainties, because of the way this policy is being implemented.

EPA's proposed "Clean Power Plan" regulation would reduce CO2 emissions from the US electric power sector by 25% by 2020 and 30% by 2030, compared to 2005. Although it does not specify that the annual reduction of over 700 million metric tons of CO2--half of which had already been achieved by 2012--must all come from coal-burning power plants, such plants accounted for 75% of 2012 emissions from power generation.

It's worth recalling how we got here. In the last decade the US Congress made several attempts to enact comprehensive climate legislation, based on an economy-wide cap on CO2 and a system of trading emissions allowances: "cap and trade." In 2009 the House of Representatives passed the Waxman-Markey bill, with its rather distorted version of cap and trade. It died in the US Senate, where the President's party briefly held a filibuster-proof supermajority.

The Clean Power Plan is the culmination of the administration's efforts to regulate the major CO2 sources in the US economy, in the absence of comprehensive climate legislation. Although Administrator McCarthy touted the flexibility of the plan in her enthusiastic rollout speech and suggested that its implementation might include state or regional cap and trade markets for emissions, the net result will look very different than an economy-wide approach.

For starters, there won't be a cap on overall emissions, but rather a set of state-level performance targets for emissions per megawatt-hour generated in 2020 and 2030. If electricity demand grew 29% by 2040, as recently forecast by the Energy Information Administration of the US Department of Energy, the CO2 savings in the EPA plan might even be largely negated. EPA is banking on the widespread adoption of energy efficiency measures to avoid such an outcome.

Since we have many technologies for generating electricity, with varying emissions all the way down to nearly zero, many different future generating mixes could achieve the plan's goals, though not at equal cost or reliability. Ironically, since coal's share of power generation has declined from 50%  in 2005 to 39% as of last year, it could be done by replacing all the older coal-fired power plants in the US with state of the art plants using either ultra-supercritical pulverized coal combustion (USC ) or integrated gasification combined cycle (IGCC). 

That won't happen for a variety of reasons, not least of which is EPA's "New Source Performance Standards" published last November. That rule effectively requires new coal-fired power plants to emit around a third less CO2 than today's most efficient coal plant designs. That's only possibly if they capture and sequester (CCS) at least some of their emissions, a feature found in only a couple of power plants now under construction globally.

It's also questionable how the capital required to upgrade the entire US coal generating fleet could be raised. Returns on such facilities have fallen, due to competition from shale gas and from renewables like wind power with very low marginal costs--sometimes negative after factoring in tax credits. Some are interpreting EPA's aggressive CO2 target for 2020 and relatively milder 2030 step as an indication that the latter target could be made much more stringent, later.

So while coal is likely to remain an important  part of the US power mix in 2030, as the EPA's administrator noted, meeting these goals in the real world will likely entail a significant shift from coal to gas and renewable energy sources, while preserving roughly the current nuclear generating fleet, including those units now under construction.

If the entire burden of the shift fell to gas, it would entail increasing the utilization of existing natural gas combined cycle power plants (NGCC) and likely building new units in some states. In the documentation of its draft rules, EPA cited average 2012 NGCC utilization of 46%. Increasing utilization up to 75% would deliver over 600 million additional MWh from gas annually--a 56% increase over total 2013 gas-fired generation, exceeding the output of all US renewables last year--at an emissions reduction of around 340 million metric tons vs. coal. That would be just sufficient to meet the 30% emissions reduction target for the electricity demand and generating mix we had in 2013.

The incremental natural gas required to produce this extra power works out to about 4.4 trillion cubic feet (TCF) per year. That would increase gas consumption in the power sector by just over half, compared to 2013, and boost total US gas demand by 17%. To put that in perspective, US dry natural gas production has grown by 4.1 TCF/y since 2008.

EPA apparently anticipates power sector gas consumption increasing by just 1.2 TCF/y by 2020, and falling thereafter as end-use efficiency improves.  Fuel-switching is only one of the four Best System of Emission Reduction "building blocks" EPA envisions states using, including efficiency improvements at existing power plants, increased penetration of renewable generation, and demand-side efficiency measures. The ultimate mix will vary by state and be influenced by changes in gas, coal and power prices.

I mentioned uncertainties at the beginning of this post. Aside from the inevitable legal challenges to EPA's regulation of power plant CO2 under the 1990 Clean Air Act, its imposition by executive authority, rather than legislation, leaves future administrations free to strengthen, weaken, or even abandon this approach.

Since EPA's planned emission reductions from the power sector are large on a national scale (10% of total US 2005 emissions) but still small on a global scale (2% of 2013 world emissions) their long-term political sustainability may depend on the extent to which they succeed in prompting the large developing countries to follow suit in reducing their growing emissions.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

Congress Defers to EPA on Climate Policy

The confrontation over climate policy that was teed up by the results of last November's mid-term election culminated with the House of Representatives voting overwhelmingly yesterday to strip the Environmental Protection Agency of its power to regulate greenhouse gases under the Clean Air Act. However, the more crucial votes took place on Wednesday, when the Senate defeated a string of amendments that would have similarly blocked EPA's powers to regulate CO2 and other greenhouse gases (GHGs), whether entirely, only for specific sectors, or for a period of two years. This is a worrying outcome, because it means that the Congress has effectively yielded responsibility for managing these emissions to an approach that nearly everyone, including this administration's EPA Administrator, previously saw as much less desirable, for good reasons. It will impose another layer of intrusive regulations on US industry and businesses, even though it's not clear that it will achieve much in terms of reducing US greenhouse gas emissions, let alone reducing the pace of global warming.

It's worth recalling how we got to this point. A long succession of cap and trade bills, several with bi-partisan sponsorship, ultimately failed to attract enough support to become law. The most recent such legislation, the egregious Waxman-Markey bill, may have looked more like a pork-barrel bonanza than a serious attempt to get our emissions under control, but even it was based on the principle of putting a price on emissions, and harnessing the power of the market and innovation to reduce emissions at a lower cost than through classic tailpipe and smokestack regulations. The former strategy takes advantage of the fact that greenhouse gases behave very differently than the substances associated with smog and other lung-irritating air pollution. Unfortunately, the way that EPA is approaching GHGs ignores that opportunity.

With essentially no adverse local effects, it makes sense to deal with GHGs as flexibly as possible. I can think of several adjectives to describe the path on which the EPA has embarked, but flexible isn't one of them. I suspect that many of the states whose Clean Air Act implementation plans were entirely satisfactory for their originally intended purposes but now find themselves out of compliance would agree. It's ironic that during the debate over Waxman-Markey, EPA regulation was held up as the dreaded alternative to enacting a climate bill, yet now we see a majority of the Senate treating it as something worth defending.

The net result of this week's votes is a House bill that will likely be dead on arrival in the Senate, where the leadership has demonstrated sufficient support for the EPA greenhouse gas regulations that went into effect at the beginning of this year to sustain a Presidential veto of any similar measure that might squeak past the Senate later. At the same time, 17 Democratic Senators voted for some degree of constraint on EPA's powers regarding GHGs. Even if many of those individual votes were focused on blue-state or swing-state electorates going into next year's election, that at least suggests that a bi-partisan majority of Congress does not view EPA regulation as the best strategy for reducing emissions, particularly in a weak economy. And that majority could expand next year. For those of us who are concerned about climate change but also worried that EPA's command-and-control approach to emissions will cost the US economy far more than the modest emissions reductions this will yield are worth, that provides a ray of hope that the current EPA regulations aren't the last word on the subject.

EPA's New Biofuel Rules

Yesterday the administration issued an important set of new rules and proposals relating to energy, mainly dealing with expanded biofuel production and the biomass supply chains that must be developed to sustain it, as well as addressing carbon capture and storage (CCS.) There's far more here than I could cover in one posting, so I've chosen to focus on the EPA's finalized Renewable Fuels Standard (RFS) rules, which were first proposed last May and have been the subject of intense study and considerable controversy ever since. While the print edition of the Washington Post characterized these as "A boost for corn-based ethanol" I'm not so sure. In the process of laying out a roadmap for how new corn-based ethanol facilities can contribute to the expansion of biofuel in the US, the EPA effectively froze the output of a large number of older facilities, unless they invest in significant upgrades. It also raised big questions about the future of E85, a blend of 85% ethanol and 15% gasoline that has so far failed to attract much interest from consumers, while suggesting that ethanol might have to share the ultimate 36 billion gallon per year biofuel target for 2022 with large volumes of other, more advanced biofuels.

At the heart of the new biofuel rules, which are designed to implement the goals established by the Energy Independence and Security Act of 2007, is the assessment of lifecycle greenhouse gas emissions from biofuels, including the highly-controversial "indirect land-use impacts" first highlighted in a landmark paper published in Science two years ago and confirmed by subsequent research. Although the EPA's final interpretation of the science has not turned out to be quite the catastrophe that the corn ethanol industry feared--and based on the quote in the Post from the lead author of the relevant research, Dr. Tim Searchinger, might have gone easy on them--it nevertheless constrains the future role of ethanol produced from this source. While clearly stating that facilities producing ethanol from corn starch using natural gas or biofuel for process heat and employing other efficient technologies would qualify for the least-stringent category of renewable fuel, many existing facilities would qualify only under grandfathering that restricts their output to historical levels. That includes newer facilities that started construction by 12/19/07, and essentially all that use coal for heat or dry all their distillers grains byproduct.

In contrast the biodiesel industry, which has been suffering recently, got a shot in the arm with a ruling that qualifies most biodiesel produced from soy oil or waste cooking oil or grease
for the tougher "biomass-based diesel" category, consistent with a 50% reduction in emissions. And the specific RFS quota for 2010 carves out a healthy 1.15 billion gallon target for biodiesel--including retroactive volumes from 2009 that could cause no end of confusion.

Perhaps the most urgent aspect of the requirements for 2010 was the EPA's concession to reality on its cellulosic ethanol quota. The original targets set by Congress called for the use of 100 million gallons of biofuel produced from cellulosic sources this year, but as I've pointed out frequently, bleeding edge technology doesn't just appear on command. The EPA's estimate of how much cellulosic biofuel will actually be available in 2010--and thus mandated for use--is just 6.5 million gallons. And if fuel blenders aren't able to acquire even that much, EPA has provided the alternative of paying $1.56/gallon in penalties, instead. That sounds cheap until you realize that this only pays for an attribute; they still have to buy the gasoline or conventional ethanol on which to apply this Renewable Identification Number, or RIN. Based on current prices, the total cost for such virtual cellulosic ethanol could thus exceed $3.50/gal., compared to around $2.00 for wholesale (untaxed) gasoline.

I confess I didn't make it through the entire 418 page "preamble" to the regulation, but what I found there was a fascinating picture of how much the official view of biofuels has evolved since the Congress set us on this path at the end of 2007. Then, hopes for E85 powering many millions of "flexible fuel vehicles" (FFVs) ran high. Today, reading between the lines, there are hints that EPA might regard E85 as a failed product that may no longer be necessary for pushing biofuel into the market. Their statistics on E85 paint a bleak picture. According to EPA, out of a total retail gasoline market of 138 billion gallons in 2008, E85 accounted for just 12 million gallons. Such low volumes are partially attributable to the fact that there are still only 2,100 retail facilities in the US with an E85 pump, and only 8 million FFVs on the road, out of a US vehicle fleet of 240 million or so. Yet after taking these constraints into account, the EPA calculated that FFV owners bought E85 just 4% of the time. They offer a variety of reasons for this, including concerns about reduced range on the lower-energy fuel, but mainly point to the much higher average price of E85 compared to unleaded regular on an energy-equivalent basis. In other words, consumers are choosing value and maximizing their miles per dollar. So it wouldn't just require a big increase in the number of E85 pumps and FFVs to make E85 successful; the product must be priced a heck of a lot cheaper than it has been, reducing the incentive for dealers to sell what today is a very low-volume product. Catch-22?

How much of a problem this poses for ethanol producers depends on whether the EPA relaxes the 10% limit on ethanol blended into normal gasoline, as the ethanol industry has petitioned them to do, against most auto industry advice. It also depends on how quickly non-ethanol biofuels such as biobutanol and biomass-derived hydrocarbons--gasoline or diesel from algae, bacteria, or gasification--that would be fully compatible with current cars and infrastructure take off. It's worth noting that the new rules explicitly qualify biobutanol from corn starch in the same category of renewable fuel as the best corn ethanol pathways, and leave the door open to qualify these other fuels if they satisfy EPA's emissions framework. The preamble includes one scenario in which such fuels account for nearly as much of the 2022 biofuel target as corn ethanol.

Needless to say, I haven't had time to go through all the intricate details of the EPA's new RFS regulations. Their ultimate impact may depend as much on some of those nuances as on the big-picture elements I spotted in my cursory review, and I can easily picture a host of law firm, trade association, and energy company personnel poring over them for the next couple of weeks. Still, although what I saw was hardly the death-knell for the existing corn ethanol industry that some might have expected or hoped for, in the process of codifying the means for implementing the intent of Congress in its 2007 legislation the agency has laid out a vision of a much more diverse and competitive biofuel industry than the architects of that bill could have guessed just a couple of years ago.

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.

The Regulatory-Ethanol Complex

The US Environmental Protection Agency has a problem, and that problem is ethanol. Last Friday the EPA expanded its previous waiver on ethanol in gasoline to allow blends of up to 15% to be used in cars built in model year 2001 and later, compared to the earlier threshold of model year 2007. Because it did this just three months after granting the initial waiver, it's not clear how much additional testing was actually done, despite the agency's obligatory reference to "sound science". This step is a further indication that EPA is presiding over a failed biofuel mandate created by Congress in the expectation that a massive cellulosic biofuel industry would spring forth at their command, in parallel with a massive upsurge in sales of the 85% ethanol/15% gasoline blend, E85. None of that has happened, and for now the corn ethanol industry is the only horse that EPA has left to ride in this race. Until these waivers were issued, that horse was rapidly running out of track on which to run.

It's not that EPA loves corn ethanol. In fact, the first draft of its RFS2 renewable fuel standard incorporated an emissions-measurement basis that was distinctly unfavorable to older conventional ethanol facilities. That was subsequently toned down, after reinterpreting the science relating to "indirect land use impacts". Unfortunately for EPA, however, corn ethanol is the only avenue for continuing to comply with the annually escalating biofuel mandate set in the Energy Independence and Security Act of 2007, unless they want to flood the US with Brazilian cane ethanol. Oilseed-based biodiesel remains a niche product, and the US biodiesel industry is half-dead after the EU imposed anti-dumping tariffs as punishment for biodiesel exports to Europe that were subsidized by a $1.00 per gallon US biodiesel tax credit--a credit that lapsed at the end of 2009 but was reinstated retroactively as part of the Lame Duck Congress's tax deal.

The central problem relates to the so-called blend wall, the annual quantity of ethanol that can be accommodated in gasoline under the previous 10% blending limit. With US gasoline sales having dropped in 2008, rather than continuing on their path of 1-2% annual increases, and still not recovered to their former level, the entire US gasoline pool can only absorb 13.9 billion gallons per year of ethanol. As a practical matter, the blend wall is probably a billion gallons lower than that, given the challenges of getting ethanol to the remotest corners of the country. By coincidence, the RFS target for 2011 after backing out the renewable diesel requirement is roughly 13 billion gallons. The production capacity of the US corn ethanol industry already stands at 14 billion gallons per year, with more ethanol plants under construction or expansion.

Accommodating all that extra ethanol would have been easy if E85 had taken off as planned. However, if Minnesota's E85 statistics are any indication, E85 sales appear to have declined since 2008. In the absence of E85 demand, the EPA's waivers have the effect of moving the blend wall and giving the ethanol industry more headroom to grow. In theory, this would also have been needed to make room for cellulosic ethanol, but so little of that is being produced that EPA has had to scale back its quota for that category two years in a row, with a further adjustment in 2012 a virtual certainty.

Expanding the waiver to cover earlier car model years was crucial to making it useful. The first round didn't encompass enough cars--and thus enough annual fuel volume-to make it likely that refiners, distributors and retailers would incur the cost and risks of introducing it into the market. Going back to 2001 adds roughly another 90 million cars and light trucks and includes some of the highest car-sales years in US history. As a result, the broader waiver now probably covers about half of the 240 million light-duty vehicles on the road in the US.

The consequence for consumers will be higher taxes, in several forms. First, there's the tax associated with paying for fuel that has less value, due to ethanol's lower energy content, yet carries the same pump price. At current gasoline prices a gallon of E15 is worth about 5.5 ¢ less than the E10 blend most of us are buying today. Then there's the indirect tax associated with the higher maintenance and repair expenses that some motorists are likely to experience. Despite the EPA's reassurances about having tested E15, the focus of their testing was explicitly on emissions, not on performance and longevity. And finally there's the tax or debt we'll incur for the ethanol blenders credit that will be paid out on the incremental ethanol volumes facilitated by the waiver. That could eventually amount to an extra $3.2 billion per year, unless the current Congress finally ends this redundant subsidy that has been in place for more than thirty years.

Although it is probably best viewed as a marriage of convenience, for now the EPA and the corn ethanol industry are joined at the hip, forming a sort of regulatory-industrial complex. For political reasons EPA can't afford to abandon its partner, because the administration is fully committed to the RFS2 biofuel targets as part of its broader approach to energy security and emissions--even though corn ethanol does little or nothing to reduce the latter. Until and unless E85 takes off, the only real alternative to the E15 waivers would be to admit that the 2007 biofuel standards were unrealistically ambitious and must be suspended pending the arrival of so-called drop-in fuels--synthetic hydrocarbons derived from biomass sources such as algae, cellulose or sugar cane. Drop-ins could provide the same renewables energy benefits as ethanol, but without the latter's blending, fuel economy and logistical disadvantages. In the meantime, I will not knowingly fuel either of my family's 2004 model cars with E15, as long as I have a choice.

EPA Unwavering in Support for Ethanol, Despite Drought

Last Friday the US Environmental Protection Agency (EPA) rejected the petitions of a bi-partisan group of state governors for a waiver of the federal ethanol mandate, resolving one of several energy-related issues that had been deferred beyond the presidential election.  The waiver requests filed in August cited the harm that the Renewable Fuel Standard (RFS) is causing to the poultry, dairy and livestock sectors and related businesses--and by extension to consumers--by increasing competition for corn during a severe drought that has sharply constrained supply.  The EPA's detailed response made frequent references to the "high statutory threshold of severe harm to the economy" required for a waiver of the RFS, and to the output of a model simulating the market for corn and ethanol. It also included the extraordinary assertion that, "the RFS volume requirements will have no impact on ethanol production volumes in the relevant time frame, and therefore will have no impact on corn, food, or fuel prices."  If that were true, then it's not obvious why the mandate should exist at all.

In rejecting pleas for relaxation of the ethanol standard, the EPA appears to be relying on two key facts.  First, wholesale ethanol prices remain lower than wholesale gasoline prices, despite corn prices that are high enough to force many ethanol producers to cut back output.  I'd attribute that mainly to weak US gasoline demand and the much-discussed impact of the "blend wall" in limiting ethanol to 10% of the gasoline pool, rather than as a sign of an unaffected market.  The agency is also relying on the availability of "paper ethanol" in the form of Renewable Identification Number (RIN) credits from past over-blending of ethanol by refiners and other gasoline blenders.  The EPA's estimate puts the number of available RINs at the equivalent of 2-3 billion gallons, or around 20% of this year's 13.2 billion gallon conventional ethanol requirement. As a result of these factors, EPA can claim with some justification that ethanol prices are not harming motorists at the gas pump at this time.  That's small consolation to the petitioners.

EPA's assurances to those in the poultry, dairy and livestock value chains are based on much thinner evidence--in fact, on none at all, unless you count as evidence a model that predicts corn prices would only fall by $0.58 per bushel if the ethanol mandate were eliminated entirely.  Simulations are useful but still aren't reality. The output of a model is only as good as its assumptions and algorithms, and when that output defies logic, it calls for the application of good judgment, particularly when the result happens to align so neatly with the internal concerns about the long-term implications of a waiver that are evident in the agency's response.  I can't help concluding that an agency whose management possessed greater depth and breadth of experience outside of government--especially in the business sector--would have given more weight to the struggles of the dairies, ranchers, meat-packers and others who are being squeezed by a mandate that is projected to consume 42% of this year's corn crop and is very likely inflating the cost of the Thanksgiving meal that many of my US readers will eat on Thursday.   This administration's lack of outside experience has been a glaring shortcoming that the President could easily remedy as turnover creates openings at the start of his second term. 

I can't say that I'm surprised by the EPA's ruling on the waiver requests.  I also can't help wondering whether it provides any indication of how the administration is likely to deal with the other issues that were deferred until after the election.  Yet even if we can't read anything else into this decision, it's clear that the Renewable Fuel Standard enacted in 2007--before the financial crisis and recession--is in serious need of reform.  If its language doesn't require the EPA to adjust the ethanol mandate in light of a drought that will result in the smallest corn crop since 2006, when US ethanol production was 65% lower than last year, then the law simply didn't incorporate sufficient foresight about possible future events.  Together with its unrealistically ambitious cellulosic biofuel standard, the provisions of the RFS increasingly seem to relate to some other, parallel universe, rather than the one in which we live.  

The "Four-Gallon Rule": Another Unintended Consequence of Ethanol Policy

The energy field is replete with unintended consequences, and US policy promoting ethanol fuels has had more than its share.  The growing competition  between food and fuel uses of corn, amplified by the current drought, is a prime example, along with the so-called "dead zone" in the Gulf of Mexico that has been exacerbated by the extra fertilizer used to boost corn yields enough to meet the rising demands of the federal Renewable Fuel Standard (RFS).  Most of these effects occur out of the sight of average consumers, but here's a new one that could start showing up at a gas station near you, very soon: the EPA's "four-gallon" rule.  As a result of EPA's decision to allow gasoline blenders to sell fuel containing up to 15% ethanol, and in recognition of the adverse consequences of high-ethanol blends for small engines, gas stations will be required to post signs enforcing a minimum purchase of four gallons from certain pumps.  This is yet another indication that the EPA has put expediency above prudence in giving its approval to a fuel that is not ready for mass-market distribution. 

A little background is necessary to understand how we reached this point.  In 2007 the Congress passed the Energy Independence and Security Act that included the RFS, mandating dramatic increases in the quantity of ethanol blended into gasoline.  Unfortunately, its passage coincided with a sea change in the gasoline market. Prior to the financial crisis and recession, US gasoline demand had been growing by 1-2% per year for decades, and on that pace there should have been ample future gasoline demand growth to accommodate all the additional ethanol that Congress was instructing the EPA to require refiners and gasoline blenders to add, by means of the standard blend of 90% gasoline and 10% ethanol.  Instead, gasoline sales fell by more than 3% in 2008 and still haven't recovered their 2007 peak, running about on par with 2002 this year.  When you do the arithmetic, that means that instead of being able to absorb over 15 billion gallons of ethanol this year, the market can only handle around 13 billion gallons--barely enough to satisfy the 2012 mandate level and 2 billion short of the amount required in just three years.  (This ignores cellulosic ethanol requirements, which have been revised downward each year as commercial production fails to appear.)

With sales of 85% ethanol E85 trickling along at levels too low to stave off the approaching "blend wall", the ethanol industry applied in 2009 to be allowed to increase the ethanol dosage in gasoline from 10% to 15%, requiring an EPA waiver of existing regulations.  That waiver was granted in 2010 for cars made after model-year 2006 and later extended for cars made after model year 2000, in spite of continuing concerns about its impact on the engines and fuel systems of all cars not labeled as "flexible fuel vehicles", as well as testing by UL indicating that some existing gasoline dispensers failed in dangerous ways when ethanol blends above 10% were introduced. 

The four-gallon rule is part of the EPA's ongoing contortions, in the form of gas pump labeling and "misfueling mitigation plans", to make sure that E15 doesn't get into the wrong vehicles, or worse yet, into small engines--lawn mowers, string trimmers, boats, etc.--where it has been found to cause potentially serious problems.  So in addition to labels indicating that E15 is only approved for 2001 and later automobiles, the EPA is instituting a minimum sales quantity rule to prevent someone from filling a gas can for use in a small engine with E10 from a "blender pump"--one that can dispense either E10 or E15 on demand.  That's because even after the pump is switched to E10, enough higher-ethanol fuel could remain in the hose to skew the ethanol content of the first few gallons delivered. (I'd suggest that this ought to be of concern to motorists, as well.)

I'm sure the EPA sees its new four-gallon rule as a sensible measure to protect the owners of small consumer or industrial engines from damaging their equipment. Yet from my perspective outside the bureaucracy it looks like another symptom of an E15 policy that falls short of the prudence necessary when dealing with the retail distribution of motor fuels and borders on regulatory malpractice.  At some point in the process someone in EPA should have held up his or her hand and pointed out that the obvious solution was not layering increasingly impractical and downright weird regulations onto already overburdened gas station operators, but to call for a fundamental reexamination of a Renewable Fuel Standard that has been overtaken by unforeseen events.  And that's without even considering that the lower energy content of the extra ethanol equates to a new $0.07 per gallon tax on gasoline at current prices. The publicity surrounding this issue provides an ideal opportunity for one or both presidential candidates to commit to suspending the E15 program, pending a thorough review of the RFS and its implementation. 

EPA's Blown Call on Ethanol

• EPA's proposed revision to renewable fuel quotas achieves the appearance of compromise by cutting non-existent volumes, while still attempting to force more ethanol into the market than consumers seem to want.

Last Friday the US Environmental Protection Agency released its long-awaited proposal for untangling a broken federal Renewable Fuels Standard (RFS). Although it provides all parties with greater certainty, it fails to resolve the regulation's fundamental flaws. This is all the more disappointing for the duration of the wait involved, finalizing 2014's quotas 18 months late and leaving refiners and fuel blenders to operate for the first five months of this year on hints and guesswork about how much ethanol and biodiesel they would be required to sell in 2015.

The proposal meets at least one definition of a compromise, with most affected constituencies apparently disappointed or irate about the result. To someone unfamiliar with the situation, it might even seem that, as ethanol groups claim, the agency has leaned far in the direction of assuaging the concerns of the petroleum refining industry by cutting a total of 11 billion gallons from the 2014-16 quotas for ethanol and other biofuels. However, as EPA's accompanying analysis makes clear, the omitted volumes were unlikely ever to be purchased by end-users, given the decline in US motor fuels consumption since the statutes imposing the RFS were passed in 2005 and 2007. Nor do the facilities yet exist to produce the quantities of cellulosic biofuels that account for the lion's share of the proposed cuts.

EPA's documentation repeatedly cites the "intent of Congress." This seems to refer to the Congressional sessions that bequeathed us this policy, rather than to the current Congress, which is waking up to the fact that the program has largely been superseded by reality. The RFS was designed to address two problems: US fuel scarcity and transportation-sector emissions of greenhouse gases. The former has been overcome mainly thanks to the shale revolution, transforming the US from a net importer of refined petroleum products to the world's largest exporter.

As for automobile-related emissions, they are being managed more effectively by fuel economy improvements and new vehicle technology. The RFS may even be counterproductive in its overall emissions impacts, as noted in a press release from the Environmental Working Group. Nor are emissions the only issue for which crop-based ethanol may be doing more harm than good. Evidence points to periodic impacts on global food prices. It's hard to conclude we could divert 38% of the US corn crop without causing unintended consequences somewhere.

EPA's analysis of the snarl at the core of the existing RFS is perplexing. First it describes how ethanol has effectively reached its maximum possible penetration of the US market for ordinary gasoline containing up to 10% ethanol (E10)--the so-called "blend wall." It goes on to acknowledge that sales of gasoline blends containing up to 15% or 85% ethanol, respectively, remain minuscule relative to total gasoline sales. However, it then ignores these facts and persists in the hope that by continuing to increase its ethanol quota, albeit more slowly, it can convince consumers to embrace fuels for which they had little appetite even when gasoline cost $1 more per gallon than it does today.

As the Washington Post noted, most car manufacturers still warn automobile owners that using gasoline containing more than 10% ethanol could result in engine damage not covered by their warranties. Although I was pleased to see that the car I recently purchased is warranted up to 15% ethanol, I cannot envision buying a single gallon of E15 unless it was priced at a discount to E10 gasoline, reflecting its inherently lower fuel economy and range. As for E85, in only a handful of states does the market discount meet or exceed the fuel's 27% calculated deficit in delivered energy, compared to E10. Is it any wonder that for a decade E85 has failed to take off as envisioned by the EPA and previous Congresses?

The EPA does not have a free hand to rewrite this regulation in any manner it would like, to fit the greatly altered circumstances in which the US now finds itself. The agency may well believe it has gone as far in that direction as it could, although I suspect it could have justified freezing ethanol from all sources at current levels, and allowing cellulosic ethanol gradually to displace corn-based fuel as new facilities come online. However, no adjustments that EPA seems prepared to make can repair a biofuels policy that was fundamentally broken at its inception, due to its inherent contradictions with other policies and consumer preferences.

We have reached the point at which conflicting federal biofuel quotas, emissions regulations, and  chronically weak GDP growth have rendered the original goals of the RFS not just ambitious but unattainable. The EPA has taken its best shot at addressing this and come up short. It is now up to the US Congress and the Administration to work together to fix this mess, before the consequences of inaction put a damper on one of the few bright spots of the current economy.

UL Study Raises New Questions About E15

One of the energy stories I've followed with great interest all year concerns efforts to increase the proportion of ethanol blended into ordinary US gasoline. This began last year when Growth Energy, an ethanol trade association, asked the Environmental Protection Agency for a waiver to increase the allowed percentage of ethanol in gasoline from 10% to 15%. In October EPA issued a partial approval of the request, but only for vehicles built in model year 2007 or later. However, a new report from Underwriters Laboratories (UL) indirectly casts doubt, not only EPA's ruling, but on whether the agency was assessing all the relevant issues.

I ran across the UL report on the compatibility of mid-level ethanol/gasoline blends in gasoline dispensing equipment--the pumps, hoses and tanks in gas stations--in a posting on API's EnergyTomorrow blog. It cited the UL study, which had been commissioned by the Department of Energy, as evidence that E15, the 15% blend of ethanol and gasoline that the EPA just approved for use in newer cars, could result in serious failures of gas pumps. Yet when I read the report, I immediately encountered its innocuous-sounding conclusion stating, "The overall results of the program were not conclusive insofar as no clear trends in the overall performance of all equipment could be established." It went on to say that the equipment "generally performed well." If I had stopped reading there, I'd have concluded that API was blowing the whole story out of proportion.

When I read the data included in the report, however, a different story emerged. Of the new and used gasoline dispensers and associated equipment tested, very few exhibited no problems on the 17% ethanol test fuel used. In fact, in UL's long-term exposure test, many hoses, nozzles and swivels leaked. 100% of the meter, manifold and valve assemblies tested leaked or failed to shut off. Perhaps most worryingly, two-thirds of the breakaway couplings tested leaked, failed their pressure tests, or required more than the recommended pull to separate. (A breakaway is designed to pop the hose off the dispenser when a customer forgets to remove the nozzle from his car's gas intake and attempts to drive off. This happens a surprising number of times a year, and before the deployment of breakaways such incidents imposed significant repair costs on dealers, even when the resulting spills didn't cause fires.)

The common denominator in these failures was what the report refers to as "nonmetals", gaskets, seals and parts made from various polymers. From that I would draw two conclusions: First, it ought to be possible to design new dispensers and retrofit existing dispensers with new gaskets, seals and plastic parts designed to withstand higher concentrations of ethanol, just as the fuel systems in flexible fuel vehicles are designed to tolerate blends of up to 85% ethanol. However, considering that the US has between 90,000 and 160,000 gas stations, depending how you count them, the number of dispensers that would have to be modified is at least in the high tens of thousands, if not well into the hundreds of thousands. To my knowledge the ethanol industry has not offered to defray the cost of these conversions for a retail fuel industry that operates with extremely lean margins. Nor is it obvious that dealers would qualify for federal assistance, as they do when they add E85 capability.

My second conclusion--really more of a suspicion--has nothing to do with gas pumps or gas stations, and everything to do with cars. After reading the UL report I went back and reread portions of the EPA's official waiver response, which ran to 58 pages in the Federal Register. From what I can tell, EPA wasn't really looking at whether cars would suffer damage from operating on a higher percentage of ethanol than the fuel for which they were designed. The waiver was granted on the basis of those cars not emitting more pollutants than on the fuel for which they were designed. Quoting from the EPA document:

"For MY 2007 and newer light-duty motor vehicles, the DOE Catalyst Study and other information before EPA adequately demonstrates that the impact of E15 on overall emissions, including both immediate and durability related emissions, will not cause or contribute to violations of the emissions standards for these motor vehicles. Likewise, the data and information adequately show that E15 will not lead to violations of the evaporative emissions standards, so long as the fuel does not exceed a Reid Vapor Pressure (RVP) of 9.0 psi in the summertime control season. The information on materials compatibility and drivability also supports this conclusion."

That's good as far as it goes, but from my perspective this finding reflects a necessary but hardly sufficient standard for putting a new fuel into the marketplace, particularly when the failures of the dispensers in the UL study point to the possibility of similar failures of "nonmetals" in the fuel systems of cars or other devices not designed to run on more than 10% ethanol. Even if the leaks found in the testing of product dispensers didn't result in safety hazards, they would at a minimum increase the evaporative emissions from infrastructure, aside from the automotive impact on which EPA apparently focused. I also find it interesting that a bill was introduced in Congress this summer, as EPA was considering the waiver request, that would appear to make it more difficult for consumers to recover the cost of damages resulting from compatibility problems in approved vehicles or misfueling of non-approved vehicles.

As I've noted in my previous postings on this topic, I'm sympathetic to the box into which altered circumstances have placed both the ethanol industry and the federal government with regard to ethanol blending. US gasoline sales, which stagnated after the financial crisis and are only growing by a historically modest 0.7% this year (through November) according to API's latest statistics, are not expanding fast enough to accommodate the output of all the ethanol plants that have been built or are under now construction. When the Renewable Fuels Standard was enacted as part of the Energy Independence and Security Act of 2007, the bill's architects presumably expected that E85 sales would take up any slack. The fact that that hasn't happened does not justify creating a new outlet for additional ethanol in automobiles not designed to accommodate it, any more than it would justify running a new fuel through infrastructure that has been shown not to be up to the challenge. If EPA doesn't revisit the more comprehensive aspects of this question as part of its deferred decision on allowing E15 for cars made before 2007, then perhaps it's time for another government agency with a broader charter to take over this issue.

Splitting the Baby on E15

I've been going over the EPA's ruling yesterday partially granting the waiver request from Growth Energy, an ethanol trade association, to allow gasoline with up to 15% ethanol to be used in cars not specifically designed as flexible fuel vehicles. The request had created a serious dilemma for the EPA, because granting it could jeopardize the integrity of millions of consumers' car engines and fuel systems, but turning it down would call the entire national renewable fuels strategy into question. What looks like the agency's attempt to find a middle ground that could satisfy all parties might turn out to have little practical impact on the ethanol market for some time, while still unleashing a potentially very disruptive shock wave on the entire motor fuels industry in this country.

If that sounds contradictory, you have to look at the specifics of what the EPA has agreed to here, and overlay them on the highly-competitive, relatively low-return network of gasoline blending, distribution and sales infrastructure through which it must eventually feed. Instead of approving E15, a blend of 15% ethanol and 85% gasoline for all vehicles, or even just for vehicles produced since 2001--as many had speculated they would--the agency has only given the green light for putting this fuel into cars made in the last four years. I might note that this interval includes some of the lowest US car sales rates in recent memory, so yesterday's ruling affects just a fifth or so of the total US light-duty vehicle fleet. The decision for another tranche of cars built between 2001-2006 is to be made after further study, perhaps by the end of the year.

In essence this means that no fuel producer can afford to stop supplying the E10 (or less) fuel that is compatible with all those pre-2007 cars, and precious few retailers are likely to take a bet on switching one of their tanks to a new fuel that only a fraction of their customers can take advantage of, once all the other legalities of introducing E15 into the market have been satisfied. So while this decision might seem to be about promoting the use of more home-grown, renewable fuel in preference to petroleum products that depend on deepwater wells and foreign suppliers, its implementation hinges on a very lopsided business decision for a group of mainly independent fuel retailers and distributors, rather than the major oil companies whose brands we see on filling station polesigns.

A retail gas station has a finite number of product dispensers drawing on an even smaller number of underground storage tanks. In order for a retailer to introduce a new fuel without ripping up the forecourt (which entails being out of business for several months and possibly longer, should he have the misfortune to discover a leak in the process) then he must do the math on how many gallons per month of the new product he might sell, and at what margin, against how many gallons and how much margin he'd lose from the discontinued product. This is the dynamic that has contributed to the excruciatingly slow lift-off of E85, which is at the heart of why E15 even became an issue. It was never supposed to be necessary, because the extra ethanol mandated under the federal Renewable Fuel Standard (RFS) was intended to be sold in big, 85% at-a-time chunks, not little 10-15% slices, and into a gasoline market that was still growing at its historical 1-2% per year clip.

So as a retailer--a small and not very lucrative business--do you give up premium unleaded? Seems an obvious choice, since it's probably your lowest-volume offering. But unless you have a dedicated mid-grade tank, you need premium to blend in the pump to make mid-grade, which accounts for more of your sales. Worse yet, your margin per gallon on premium is your best, followed by your margin on mid-grade. Or you could give up diesel, though if you do, you'll never see those customers again: not on the forecourt, and not in your store, where you make much of your monthly profit. The alternative is an expensive investment in a new tank and dispenser, against a highly questionable return. By now it should be obvious this is a losing game for retailers, who as far as I can see would choose to continue to sell E10 to everyone, including post-2006 cars affected by the E15 ruling, and just ignore the EPA.

The folks who won't be able to ignore the EPA will be the refiners and major fuel blenders. That's because they continue to fall under the authority of the steadily increasing RFS mandates, requiring them to sell a higher percentage of biofuel every year until 2022, or pay large penalties. And while the EPA was kind enough to reduce the mandate for cellulosic ethanol last year and this year--for the very good reason that it isn't yet available in the expected quantities--the chances of getting a waiver in the future because a company has run out of room to blend ethanol into E10 look pretty low, when the EPA can just insist that you make E15 or E85, both now legal. This sets up a situation in which suppliers will shortly need to induce their retailers to take on one or both of these products and make it worth their while, further depressing the margins in this part of the business and making an exit strategy even more attractive.

It's hard to gauge exactly what this could mean for consumers. At a minimum, it might lead to drivers of older cars pulling into some gas stations only to find that the unleaded fuel advertised on the sign is actually not compatible with their particular car. (The EPA as part of yesterday's ruling has promised pump labeling sufficiently clear that no one will fill up with E15 by mistake.) Or in a bigger station, all the E10 pumps might be over on one side of the convenience store, and all the E15 pumps on the other. And of course this raises the awkward question of why consumers would ever consciously choose to fill up with a fuel containing at least 2% fewer BTUs and thus offering 2% lower mpg and range, unless it's going to be cheaper for them--which is inconsistent with E15 carrying sufficiently higher margins to make it worth the retailer's effort to sell.

The result looks like a dog's breakfast, although I can't honestly say I'd have ruled much differently if I were running the EPA and only charged with upholding the RFS and making this ruling on the basis of whether it would increase the overall pollution from the affected vehicles, rather than on whether its policy and ostensible environmental benefits outweigh its costs and risks for vehicle longevity and consumer value. The EPA's supporting documents included evidence that a significant proportion of E10 already approaches 11% ethanol, so E15 means routinely exposing engines and fuel systems to a mix of 16% or more ethanol, even if they were only designed with 10% in mind. Who will bear the liability for the expensive repairs that some cars will require? There are few aspects of this situation that offer consumers any upside, but I see ample downside, if only from having to bear the additional costs that will be passed on by retailers who are in no position to absorb them.

Half a Loaf

When I wrote Monday's posting mentioning the impending conflict between the government's requirement to increase the volume of biofuels blended into gasoline and the current approved maximum ethanol blending limit of 10%, I was unaware that the EPA was about to issue a response to the industry group that had requested a waiver to increase that limit to 15%. But while the letter the agency sent to Growth Energy yesterday deferred any ruling until mid-2010, it gave a clear indication that the EPA is considering splitting the baby, in the form of an increase for part of the fleet: those cars built in 2001 or later. Sometimes such a quasi-Solomonic decision reflects wisdom and flexibility; at other times it elevates compromise above common sense. I'm sure you won't be surprised to learn that I suspect this case falls into the latter category.

First, we should applaud the EPA for declining to be stampeded by an interest group into making a decision before its own test results are all in, particularly concerning the impact of blends containing higher proportions of ethanol on the durability and emissions (air pollutants, not CO2) of a representative cross-section of the US vehicle fleet, which numbers roughly 240 million passenger cars and light trucks/SUVs. The agency is right to insist that the science should be clear before the blending limit is increased. Unfortunately, there's more than science involved.

If any group outside the energy industry ought to have a clear understanding of the consequences of fragmenting the marketplace through the creation of Balkanized environmental specifications for fuels, it ought to be the EPA, since they and their state regulatory counterparts have presided over just such a system in the last couple of decades. This is why gasoline blended for use in Oregon or Washington can't be sold in California, and gasoline blended for rural areas can't be sold in metropolitan areas that have been designated as "non-attainment" areas for ozone and other pollutants. This has a direct impact on consumers by raising the cost of suppliers' inventories and deliveries to areas with divergent specifications, and more significantly by delaying the response to local supply outages. If the EPA is seriously considering establishing two blending standards for ethanol, it would further fragment the fuels market, not along geographic lines, but down to individual service stations, because the likelihood of them all carrying Unleaded Regular (E10), Unleaded Regular (E15), Mid-grade (E10), Mid-grade (E15), and so on, in addition to diesel and eventually E85 and whatever else they dream up is essentially zero.

Let's rewind the tape for a moment to recall how the situation the EPA is attempting to address arose in the first place. When the Congress set the new Renewable Fuel Standard as part of the Energy Independence and Security Act of 2007, it was obvious to all involved that even if US gasoline sales had continued to grow at 1-2% per year, as they consistently had prior to the Great Recession, we would rapidly reach the point at which the quantity of ethanol mandated for use would exceed 10% of our annual motor fuel use--long before the mandate reached its 36 billion gallons per year (gpy) target in 2022, including a billion gpy for biodiesel. That wasn't deemed to be a problem, since E85 sales were expected to take off in a big way, soaking up all that extra ethanol. In fact, before it started to shrink the gasoline pool looked like it could accommodate the entire 35 billion gpy of ethanol with an E85 sales percentage as low as around 18%. Today you'd probably have to bump that up to nearly 25%. Unfortunately for this scenario, E85 sales are not on any kind of trajectory to reach that threshold.

One E85 website reports that 2,211 gas stations around the US sell E85. Finding reliable statistics on actual E85 sales is time-consuming, but if all these stations sold at the current Minnesota average of around 4,000 gallons per month, then total US E85 sales are just over 100 million gpy. That's less than 0.1% of US gasoline sales, or just about enough to absorb the output of one typical ethanol plant. These figures also suggest that the roughly 6 million "flexible fuel vehicles" apparently on the road today are consuming E85 less than 10% of the time, either because of availability, or because the average discount between E85 and gasoline is typically much less than the 25% or so necessary to compensate for its lower energy content. And availability is a function of the significant expenses involved for service stations in either converting an existing tank and pumps for a higher-volume product to E85, or investing in additional tanks and pumps--including the downtime involved in such a project.

In other words, the ethanol industry (and the EPA) are in a bind now because the strategy for increasing ethanol use hinged on the expansion of sales for a new blend of ethanol and gasoline that is incompatible with existing service station infrastructure and with most vehicles on the road, and their best solution to the breakdown of that strategy appears to involve introducing yet another new blend of ethanol and gasoline that is incompatible with existing service station infrastructure and many cars on the road. Using this logic, the answer to the financial crisis would have been to launch another wave of new financial derivatives and sub-prime loans. Perhaps it's time for a simpler answer: If the tests by the EPA and DOE indicate that a significant number of vehicles could be harmed by a 15% blend of ethanol in gasoline, or that such a blend would increase local air pollution, then surely it is time to call a halt to the annual increases in mandated ethanol use until a more practical solution can be found.

Calling Solomon

Since the passage of California's AB 32 legislation establishing a cap on greenhouse gas emissions, the state has been locked in a struggle with the federal Environmental Protection Agency over the implementation of its provisions on tailpipe emissions. The Supreme Court ruling in Massachusetts v. EPA was expected to pave the way for California to obtain the Clean Air Act waiver it sought, to regulate automotive CO2 emissions--and effectively fuel economy--at the state level. Yesterday, however, the EPA denied California's petition, setting up a court fight that could well find its way back to the Supreme Court, unless the 2008 Presidential Election resolves the matter, first. Both sides are at least half-right, and I don't envy those who will be called to discern where the greatest service to the national interest lies. In the end, I believe California will prevail.

California's argument for the waiver is straightforward. The Supreme Court has ruled that CO2 is a pollutant, and California has been granted waivers in the past to regulate pollutants more stringently than the country as a whole. Moreover, California's greenhouse gas emissions are large enough to matter on a global scale, and the state's elected representatives believe they have a mandate from their constituents to address those emissions aggressively and comprehensively. Failure to do so would contribute to the risk of adverse outcomes from climate change in California, with some pointing to reduced precipitation and coastal erosion as early indicators of such damage.

But while my heart is with California in this matter, my head is with the EPA. Even if we accept that CO2 is now recognized as a pollutant--the logic of this escapes me, but I concede my minority status--it still does not result in the kind of direct local impacts that provided the self-evident justification for granting the state's past waiver requests concerning regulation of the "criteria pollutants" that affect air quality and produce smog. Climate change is a global problem, the local ramifications of which cannot yet be predicted reliably. With the US struggling to maintain its competitive edge in a global marketplace for goods and services, should we really desire the further Balkanization of auto and fuel standards?

Both sets of arguments are legitimate and compelling. Where I believe the EPA's case fails is in the implied responsibility of turning down California's request. If there were a similarly comprehensive set of federal greenhouse gas regulations in place or waiting in the wings--even if it was not as stringent--the EPA would be right to ask California to follow the federal government's lead. Yet the energy bill provisions cited by the Administrator in defense of his decision don't constitute such a plan. Unless and until something like the Lieberman-Warner Bill, S.2191, passes, the closest thing we have to a national greenhouse gas regulation is an array of voluntary programs. And as the Washington Post pointed out, a list of states accounting for nearly half the nation's cars has lined up behind California, rather than the EPA.

There's an old saying, "Lead, follow, or get out of the way." The last year has seen the publication of an impressive collection of reports on the science of climate change and on the economic consequences of ignoring the problem or tackling it head-on. These reports, including three from the same Intergovernmental Panel on Climate Change (IPCC) that shared this year's Nobel Peace Prize with Mr. Gore, underline the urgency of the issue and provide the real underpinnings of California's waiver request. On these grounds and with the precedent of Mass. v. EPA, I believe the high court will ultimately find in California's favor, but time is wasting in the interim.

Grading Cars on the Curve

By now you may have seen some prototypes of the new-car fuel economy stickers on which the EPA is seeking public comment. The versions that prominently display letter grades for overall fuel economy performance are certainly eye-catching, rising above the potentially confusing mix of numbers and graphics in the body of the sticker. Yet although the current stickers are clearly inadequate to illuminate the choices and consequences associated with buying vehicles powered by an increasingly diverse array of fuels, devising a similarly simple summary page may be beyond the skills of even the cleverest engineers and graphic designers. And in the hyper-connected world in which we now live, the necessity of presenting all this information in one place deserves at least as much thought as the proposed new stickers themselves.


I don't envy the EPA its assigned task of coming up with a useful replacement for the venerable fuel economy stickers that adorn the windows of all new cars at every dealership in America. It should be obvious that the current stickers, displaying city, highway and assumed average fuel economy--a subject for discussion in itself--along with estimated annual fuel expenditures, are not up to the task of informing consumers faced with a choice of vehicles running on gasoline, diesel, natural gas, ethanol, electricity, or a mix of several of these. Whether you consider it necessary to attempt to do so probably depends as much on your personal philosophy as on the inherent complexity of the situation, so for the purposes of this posting, I will accept it as a given and focus on evaluating the range of sticker options furnished by the EPA.

Start with the prototype shown above, for a plug-in hybrid car (PHEV) capable of running on both gasoline and electricity. A larger image of this sticker is available on page 4 of the PDF file on EPA's site. The two features that stand out in this design are the letter grade, which compares the fuel economy of the stickered vehicle to all others on a scale running from A+ to D (further conveyed in a green to amber color range) and the estimated 5-year fuel cost savings compared to the average new car. I've seen comments elsewhere suggesting that the graded comparison should be based only on comparable vehicles, rather than all cars, and there's some merit to that. There might be a few folks out there looking to replace a Chevy Suburban with a Nissan Leaf, but I'll bet they're in the minority. At the same time, the goal of the program is to reduce fuel consumption and emissions, and people are generally smart enough to figure out that if the vehicles that meet their needs only range from B- to a D, the B- choice will probably cost less to run and be better for the environment.

Of course that raises questions about whether the letter-grade system dumbs-down the whole process and diverts attention from details that actually matter a great deal, including the assumptions underlying the system, many of which are displayed in the fine print. One of the biggest of those is that only emissions from the tailpipe count. That sounds like a technicality, but when the result is that vehicles powered directly by electricity are guaranteed to get most of the A's in the class, it has serious consequences. For example, it would skew the comparison between an only-moderately efficient PHEV and an extremely efficient conventional hybrid (non-plug-in.) The latter might produce fewer lifecycle GHG emissions than a plug-in running on the electricity mix of the applicable regional grid, but because its emissions mainly come out of the tailpipe, it would be at a disadvantage. This kind of comparison is only one aspect of the emerging transportation energy market for which any static, national-level representation such as a sticker plastered on a car window seems likely to be wrong more than right.

The new stickers also introduce several new concepts to motorists, including the MPGe, or mile per gallon equivalent--a worthy evolution of mpg. This provides a handy way to compare the energy content of different fuels, including electricity, to the standard energy content of a gallon of petroleum gasoline, approximately 115,000 BTUs. The problem is that in the case of electricity, the stated conversion rate of 33.7 kWh per gallon-equivalent ("eGallons in the stickers' parlance) grossly understates the energy required to produce most of the kWhs on the grid. It's only accurate for the 31% of our national electricity mix attributable to nuclear, hydro or other renewables. In the case of electricity from natural gas turbines, it can understate the fuel requirement by much more than half--and thus overstate electricity-based fuel efficiency by more than double. In other words, an accurate comparison of the equivalent fuel economy of an electric vehicle requires more information about the source of electricity for each consumer than any sticker could conceivably collect. I'd prefer to see a more conservative conversion rate for electricity, such as 14.4 kWh/gallon (based on a typical gas turbine heat rate), but at a minimum the CO2 grams per mile figure on all such stickers should be asterisked along the lines of, "Your emissions will vary depending on your local electricity source."

Another new concept incorporated in the sticker for PHEVs is the notion of "Blended Electric + Gas" fuel economy. Unfortunately, while it provides a basis of comparison among similar vehicles, its accuracy is limited to the precise combination of electric and non-electric miles that went into the EPA's calculation, accentuated by the kWh/eGallon problem described above. Drive mostly electric miles and just a few on gasoline, and you'll get a result like what I saw when I drove the Chevrolet Volt last winter. I much prefer the alternative sticker shown on page 12 of the PDF, in which consumers are given the fuel economy on gas only and electricity only and allowed to work out the likely result for their specific circumstances. I also like the range graphic on this PHEV sticker and the electric vehicle sticker on page 11, allowing an easy comparison between those two vehicle types.

Yet while the EPA is clearly working hard to provide consumers with more information about the performance of vehicles that can use combinations of electricity and liquid fuels, I find it inexplicable that their proposed sticker (page 15) for flexible fuel vehicles (FFVs) would display the fuel economy only for gasoline, rather than for both gasoline and E85 ethanol, since the latter tends to be a quarter to a third less, based on the EPA's own results for actual FFVs.

The last issue I want to raise relates to the assumptions underlying the annual fuel costs and savings shown on all the stickers. When the first stickers were introduced in the 1970s, there was no easy way to convey to consumers up-to-date information on current and expected future fuel prices. That's certainly no longer true, and posting cost estimates relying on the assumption that we all pay the same price for gasoline and electricity and will do so for the life of a car makes little sense. Why not omit this information and replace it with a link to an interactive website that, with the input of just a zip code, could determine local fuel and electricity prices and calculate future savings based on those and the latest forecasts from the Department of Energy?

While I commend the EPA for its effort to make alternative fuel vehicle characteristics more understandable and for making these proposed stickers public now, I believe the agency is attempting to over-simplify a truly complex set of parameters and relationships, at the risk of inadvertently misleading a significant number of purchasers. Consumers would get more reliable value from stickers that provided them with just a few clear metrics, plus access to the information needed to work out how the vehicles among which they are choosing would be likely to perform in their circumstances of where and how they drive. And unless the basis of the letter grades can be expanded to include lifecycle emissions, rather than just those from the tailpipe, they should be jettisoned as fundamentally flawed. It will be very interesting to see what emerges from the next 60 days of public comment, and I encourage my readers to put in their two-cents worth.

The Year of Regulation?

Some new years seem newer than others, bringing major changes rather than just the turning of a calendar page. 2011 is shaping up that way, with a return to divided government in the US and the beginning of national greenhouse gas regulation by the EPA based on that agency's interpretation of the Clean Air Act, rather than as a result of explicit new Congressional legislation. As the ongoing legal battle over this between the EPA and the state of Texas demonstrates, there's a lot at stake, and the final outcome has not yet been determined.

When the US Supreme Court ruled in 2007 that CO2 and other greenhouse gases constituted pollution that was subject to regulation under the Clean Air Act, it set in motion the process that is now culminating with the EPA's proposed rules for regulating these gases. Initially this will take the form of what the agency calls New Source Performance Standards, applying only to new facilities and modifications within existing facilitates, and only for sources emitting more than 50,000 tons per year of greenhouse gases (GHGs). That exempts residential and most business activities using less than the energy equivalent of about two gasoline tank-trucks per day. The first phase of these regulations is specifically targeted at power plants and oil refineries, and over time it could significantly alter the way that electricity is produced and oil refined in this country.

I've argued for years that this is entirely the wrong way to go about reducing emissions, because greenhouse gases are global, rather than local in effect, and a command and control approach applied to point sources of CO2 and other GHGs will miss many of the least expensive emission reduction opportunities while forcing businesses to focus their efforts on some of the most expensive. Cap and trade or some other means of establishing a price on emissions would have been much more efficient, although the version of cap and trade passed by the House of Representatives in 2009 was a miserable excuse for such a system, distorted as it was by preferential treatment for favored groups and sectors.

But this isn't just a question of economic efficiency; it's also a question of effectiveness. Regulating power plant emissions addresses 34% of total gross US GHG emissions, including roughly 92% of the emissions from the coal value chain, while regulating refineries tackles less than 10% of the emissions from the petroleum value chain--and some of the hardest ones to cut, at that. Refineries are already about 90% efficient. Squeezing even more efficiency from them--which would be the net effect of capping their GHG emissions, since most of those are associated with the combustion of fossil fuels--is likely to cost a lot more than the value of any energy savings such changes would yield. That could have a significant impact on states like Texas, which is home to more than a quarter of the country's refining capacity. The result would also increase national energy costs in either of two ways, with higher operating costs at US refineries being passed on to consumers in the price of fuels, or by reducing US refining throughput and capacity and increasing our reliance on product imports. The latter works directly against the widely-held notion that anything that reduces emissions must automatically be good for our energy security.

None of this is set in stone, although I certainly wouldn't bet against some version of it coming into effect. The incoming Republican chairman of the House Energy and Commerce Committee has already indicated his determination to restrain the regulation of GHGs by the EPA, and even without a majority in the Senate the House, which controls the government's purse strings, could make it much harder for EPA to pursue this course. At the same time, several previous sponsors of Senate energy and climate legislation have expressed interest in a new, bi-partisan approach to energy, and it's not inconceivable that watering down the proposed EPA regs could become part of a deal to establish a national low-emission energy standard that would include not just renewables, but also nuclear energy and possibly even natural gas. I will be watching these developments with great interest in the weeks and months ahead.