EPA Slashes Biofuels Targets for 2014, 2015, 2016 under Renewable Fuel Standard

May 29, 2015

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by Jim Lane (Biofuels Digest) “EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure,” says BIO. “This is a point that will have to be litigated. It goes against Congressional intent.”

In Washington, the EPA released its proposed standards for 2014, 2015, and 2016 and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original 2007 Energy Independence & Security Act. The EPA also released a 2017 proposed standard for biomass-based diesel.

Yet, while attracting significant industry criticism on volumes, the EPA won some cautious praise for cautiously advancing renewable fuels targets for 2014-16.

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The EPA says:

EPA writes: “EPA has evaluated the availability of qualifying renewable fuels and factors that in some cases constrain the supply of those fuels to the vehicles that can consume them. EPA has also considered the ability of the market to respond to the applicable standards by producing changes in production, infrastructure, and relative pricing to boost the use of renewable fuels.

“Based on these and other considerations, EPA is proposing volumes which, while be low the volumes originally set by Congress, would increase renewable fuel use in the U.S. above historical levels and provide for steady growth over time. In particular, the proposed volumes would ensure continued growth in advanced biofuels, which have a lower greenhouse gas emissions profile than conventional biofuels. EPA is also proposing to increase the required volume of biomass-based diesel in 2015, 2016, and 2017 while maintaining the opportunity for growth in other advanced biofuels that is needed over the long term.

“Due to constraints in the fuel market to accommodate increasing volumes of ethanol, along with limits on the availability of non-ethanol renewable fuels, the volume targets specified by Congress in the Clean Air Act for 2014, 2015 and 2016 cannot be achieved. However, EPA recognizes that the statutory volume targets were intended to be ambitious; Congress set targets that envisioned growth at a pace that far exceeded historical growth rates. Congress clearly intended the RFS program to incentivize changes that would be unlikely to occur absent the RFS program. Thus while EPA is proposing to use the tools provided by Congress to waive the annual volumes below the statutory levels, we are proposing standards that are directionally consistent with Congress’ clear goal of increasing renewable fuel production and use over time. The proposed volumes would require significant growth in renewable fuel production and use over historical levels. EPA believes the proposed standards to be ambitious but within reach of a responsive marketplace.”

The new EPA view, summarized

The EPA’s line of thinking is essentially this: they are considering that supply exists where that supply can find a market given existing infrastructure. So, if the market can only tolerate, say, 14 billion gallons of E10 ethanol, they do not consider capacity or production as “supply” rather, they look to alternative fuels (such as drop-ins) and, in that case, don’t see the production.

The practical goal for the EPA is not to use the RFS2 renewable fuels schedules as a driver to produce investment in capacity-building or infrastructure for distribution. Rather, the EPA opts for a more passive role of providing a market for those capacities that are built based on incremental, if any, changes in infrastructure.

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In its own way, the EPA is signaling that it believes that the original mandates were set, as volumetric rather than percentage standards, at a time when it was believed that the overall gasoline market would be much larger. Lower gasoline volumes — which in their own way reduce emissions – in the EPA’s view bring on issues such as blend walls faster and more intensively, and require regulatory relief.

Options in the courts: Suing to enforce the 2015 statutory numbers

It’s going to be tough for the biofuels industry to sue to enforce the overall statutory volumes, given the shortfall in cellulosic biofuels — even though the EPA is wading into regions of doubtful legislative intent in using blendwall issues as a reason to cut the corn ethanol target. The authority of EPA to waive down cellulosic mandates in unquestioned, in the absence of production capacity — but their authority to waive down renewable fuel standard obligations in the absence of infrastructure being deployed is bound to suggest to incumbents that the best way to prevent renewable fuels is to ensure that there is no investment in distribution.

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RFS2 is based in production targeting, but it is ultimately about requiring distribution. The renewable fuels industry is taking the view that the E10 blendwall issue was well understood, at a technical level, by Congress when they passed the EISA Act — and that the law places the onus on the conventional fuel industry to develop distribution solutions, so long as the production is there.

Well, the production is there. The conventional fuels industry did not develop the distribution solutions, and the EPA is waiving the obligation. To the renewable fuels industry, it looks like rewarding the oil industry for doing nothing. And stranding renewable fuels capacity that was built in reliance on Congress and RFS2 to provide a market.

So, it’s a distribution war. Renewable fuels distributors haven’t built much to speak of — a few thousand outlets feature options for consumers to purchase high-blend renewable fuels. Congress gave every indication that they would expect rising RIN prices would compel obligated parties to find distribution solutions.

When RIN costs rose, the oil industry correctly foresaw that by waving the flag of “exploding prices at the pump,” they could count on the White House and Congress to cave in.

Expert reaction ...

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Once the proposal is published in the Federal Register, it will be open to a 60 day public comment period through July 27.

What can industry do to change these outcomes?

The industry has two options, in general.

1. Demonstrate a stronger market for higher ethanol blends such as E15 or E85. This would contribute to restoring gallons lost in the overall renewable fuels pool — and, essentially, benefit corn ethanol producers.

2. Demonstrate a stronger biomass-based diesel production capacity, which should be a no-brainer, but also convince EPA that production capacity can and would translate into actual production.

Where can growth occur, outside of RFS2 rules and targets?

The RFS2 targets should incentivize all parties in renewable fuels to shift strategies more towards driving consumer demand over compliance-driven demand.

This means:

1. Build the higher-blend ethanol market based on price and positive community attributes as perceived by the consumer.

2. Build the biomass-based diesel market based on corporate demand for B5 blends based on social, and price-hedging opportunities — while limiting the practical impact of any differential in street prices of diesel vs biomass-based diesel by having low-level blends (that is, a $1.00 per gallon cent cost differential translates into a nickel a gallon at B5 blend levels).

3. Building markets in diesel and jet fuel based on overall price parity. That is, building a case that fuel price should include a) the cost of volatility and risk with fossil commodity fuels; b) the social costs, such as disappointing end-use customers who prefer renewable fuels, and c) differential in maintenance costs and engine replacement cycles.

4. Rely on the EPA to support long-term capacity building in cellulosic biofuels with appropriate market mandates. READ MORE and MORE (Roll Call) and MORE (Spokesman Review/Associated Press) and MORE (UPI) and MORE (North Platte Telegraph) and MORE (The Hill) and MORE (New York Times) and MORE / MORE (Environmental Protection Agency) and MORE (Renewable Fuels Association/Advanced Ethanol Council) and MORE (Energy Outlook) and MORE (NY City Today) and MORE (WBAA Radio; includes audio interview) and MORE (Brownfields Ag News) and MORE (SeekingAlpha) and MORE (NGT News) and MORE (Biodiesel Magazine) and MORE (Star Tribune) and MORE (AgWired/DomesticFuel.com) and MORE (DomesticFuel.com; includes audio)

Excerpt from Advanced Ethanol Council, Brooke Coleman: “There is a reason that oil champions in Congress tried and failed to get renewable fuel distribution-related waivers written into the law in 2005. Oil companies control distribution and would therefore control the RFS. While this is just a proposal, we still have to convince the Obama Administration to put the backbone back into the law. We do not believe that President Obama wants to be remembered as the president who made a landmark Clean Air Act climate change program voluntary.” READ MORE

Excerpt from Star Tribune: (Advanced Ethanol Council"s Brooke) Coleman said the emerging cellulosic ethanol is hurt the most because, under the proposed blending levels, it would displace corn ethanol in the U.S. fuel market. “That is a cannibalistic business model that nobody is going to sign up for,” Coleman said. “If you have to eat your own to innovate, you are not going to innovate. What the Obama administration has really been wrong about is hoping that that’s OK.” READ MORE