The Fuse

EPA Releases New Biofuel Targets, Frustrates All Sides in the Process

by Matt Piotrowski | December 01, 2015

Although the Environmental Protection Agency (EPA) is simply conforming to the reality of the marketplace with its new biofuel blending targets, it is getting blasted by a number of industry groups.

On Monday, the government agency released its blending targets for 2016, mandating higher levels of cellulosic biofuel, biomass-based diesel, advanced biofuels, and renewable fuels to be included in the country’s transportation fuels. The new target for total renewable fuels is 18.11 billion gallons for next year, up by 1.18 billion gallons versus 2015 and 1.83 billion gallons versus 2014. With the advanced biofuel target at 3.61 billion gallons, the implied mandate for corn-based ethanol is 14.5 billion gallons. Based on the expectation that U.S. consumers will use 140 billion gallons of gasoline next year, corn-based ethanol will be blended in 10.4 percent of total gasoline supply. This target is in line with the 10 percent “blend wall,” or the maximum percentage of ethanol that can be blended with gasoline, but below the original goal of 15 billion gallons set in 2007.

RFS2

The corn-based ethanol target is in line with the 10 percent “blend wall,” or the maximum percentage of ethanol that can be blended with gasoline, but below the original goal of 15 billion gallons set in 2007.

The EPA touted its final targets, saying it calculated them after careful consideration. “The final requirements will boost renewable fuel production and provide for robust, achievable growth of the biofuels industry,” the EPA said Monday. “The final rule considered the many public comments EPA received on the proposal, and incorporates updated information and data.”

The EPA has acknowledged the limitation of how much renewables the market needs and is altering the targets annually based on this reality.

EPA gets blasted by both sides

The increased targets have angered opponents of the biofuels mandate, while the main biofuel advocacy group blasted the EPA for not going far enough.

The main lobbyist outfit for refiners, American Fuel & Petrochemical Manufacturers (AFPM), blasted the EPA’s targets and called for full repeal of the Renewable Fuels Standard (RFS), which requires a certain level of biofuels to be blended in the country’s transportation fuels.

“[Monday’s] rule is further proof that the RFS program is irreparably broken and that the only solution is for Congress to repeal it outright,” the AFPM said in a release. It further stated: “The simple truth is that 10 years after promulgation of the program, the advanced biofuels industry still has not delivered on its promise of commercially viable fuels, and only the corn ethanol and biodiesel industries benefit from the RFS.”

Under the RFS, refiners are required to blend biofuels or buy compliance credits. This requirement can increase costs for the refining industry since the price of credits are prone to volatility and not all refiners have blending capacity.

The Renewable Fuels Association (RFA), meanwhile, believes the EPA targets reflect the agency kowtowing to the oil industry. The EPA’s new targets “will deepen uncertainty in the marketplace and thus chill investment in second-generation biofuels,” the RFA asserts. “Unlike Big Oil, the ethanol industry does not receive billions in tax subsidies and the RFS is our only means of accessing a marketplace that is overwhelmingly and unfairly dominated by the petroleum industry. Today’s decision will severely cripple the program’s ability to incentivize infrastructure investments that are crucial to break through the so-called blend wall and create a larger market for all biofuels.”

The RFA goes on to say that the decision increases “Big Oil’s ability to thwart consumer choice at the pump.”

Adjusting to market realities

Although the levels for next year are well above what the oil industry wants to see, they are considerably below what was originally envisaged in the Energy Independence and Security Act of 2007 (EISA), when lawmakers mandated some 22.25 billion gallons of total renewable fuels to be blended in 2016.

The RFA is worried that low targets will undermine second-generation biofuels, but what the association fails to point out is that advanced technology in second-generation biofuels has not taken off even with the strong support from 2007 mandate.

Although the levels for next year are well above what the oil industry wants to see, they are considerably below what was originally envisaged in the Energy Independence and Security Act of 2007, when lawmakers mandated some 22.25 billion gallons of total renewable fuels to be blended in 2016.

Corn-based ethanol has also taken a large number of hits. There have been huge changes in the U.S. gasoline market and global oil prices since the law was passed. These events have been bad news for the ethanol industry. It has not only had to deal with the oil industry lobbying hard against the RFS; it has had to deal with declining gasoline demand, infrastructure constraints, and studies suggesting that ethanol is not as environmentally friendly as originally thought.

Although gasoline demand has rebounded since 2012, it is still below peak 2007 levels (see graphic below).

gasolinedemand

Lower gasoline demand means that the amount of ethanol needed for blending is lower than original expectations. As a result, the EPA has continually had to revise downward the mandated ethanol volumes. At the same time, flex-fuel vehicles that run on 85 percent ethanol have not taken off and there are worries about liability from ethanol ruining motors of older automobiles. These factors have made a significant increase in biofuel targets unrealistic.

The controversy over the RFS will not go away anytime soon. It’s unlikely it will be repealed, despite the oil industry’s vocal opposition, but biofuels groups will not see the targets any higher than what the market will allow

Lower gasoline prices at the pump and rising consumer demand have been huge lifesavers for the ethanol industry, however. The fact that gasoline demand has soared this year allowed the EPA to significantly boost the amount of renewables mandated by 1.8 billion gallons from 2014 to 2016. From 2010 to 2014, U.S. ethanol production has fluctuated between 13.3 billion to 14.3 billion gallons.

The controversy over the RFS will not go away anytime soon. It’s unlikely it will be repealed, despite the oil industry’s vocal opposition, but biofuels groups will not see the targets any higher than what the market will allow. In the meantime, the EPA will remain caught in middle of the fight.

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