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Options and consequences for RFS alternatives

Tuesday, March 3, 2015

In its proposal for 2014 Renewable Fuel Standard (RFS) requirements, the U.S. Environmental Protection Agency (EPA) significantly reduced the proposed levels from those contained in the original legislation (Table 1).  

The RFS is divided into categories for cellulosic, biodiesel, other advanced, and conventional (corn ethanol). EPA cited the lack of progress in commercializing cellulosic biofuels and the ethanol blend wall as significant barriers causing it to depart from the original numbers. (Most ethanol in the United States is sold as a 10% blend. Since consumption totals 133 billion gallons of gasoline- type fuel per year, the maximum that can be ethanol is 13.3 billion gallons, i.e. the blend wall.)  

But what other options exist, and what are the consequences of each?

In its proposal for 2014 Renewable Fuel Standard (RFS) requirements, the U.S. Environmental Protection Agency (EPA) significantly reduced the proposed levels from those contained in the original legislation (Table 1). The RFS is divided into categories for cellulosic, biodiesel, other advanced, and conventional (corn ethanol). EPA cited the lack of progress in commercializing cellulosic biofuels and the ethanol blend wall as significant barriers causing it to depart from the original numbers. The blend wall is the amount of ethanol gasoline companies are allowed to blend with petroleum-based fuels; for corn ethanol that limit is 13.8 billion gallons (BG) in 2013, growing to 15 BG by 2015. 

But what other options exist, and what are the consequences of each? 

Table 1. 2014 RFS Alternatives (billion gallons) 

Category

Original 2014 RFS

New 2014 EPA Proposal

Alternative Option

Cellulosic

1.75

0.017

0.03

Biodiesel

1

1.28

1.5

Advanced

3.75

2.2

2.5

Other advanced

0.5

0.263

0.22

Corn ethanol

14.4

13.01

13.9

Total

18.15

15.21

16.4

The first option would be to eliminate the RFS completely. Eliminating the RFS would kill the biodiesel and cellulosic biofuels industries immediately because these categories have a low likelihood of being economic without the mandate. Sugarcane ethanol imports also likely would be eliminated or substantially reduced.

In the near term, corn ethanol likely would retain a market up to the blend wall as it is currently less expensive than gasoline and provides added octane and oxygen. Over the longer term, it is possible the petroleum industry would develop other octane enhancers to use in lieu of ethanol. To the extent that happened, corn prices could fall substantially. 

The second option would be simply to reduce the overall total RFS whenever part of the advanced category was waived. This option would go a long way towards having a viable RFS. It would lower the overall and advanced mandates by the amount of the cellulose waiver. It would require some increased biodiesel production, but these volumes probably would be manageable without substantial distortion of vegetable oil markets. However, it would not solve the blend wall problem long term.

The third option would be to waive the overall total when cellulose is waived and to accommodate the blend wall. This is the approach EPA took in its proposal for 2014. This option deals with both the cellulosic biofuel and the blend wall problems, but it is difficult to determine exactly where the blend wall is or will be given dynamic market adjustments and RIN pricing. For example, in November 2013 the wholesale ethanol price was about $0.85/gal. lower than wholesale gasoline. That price gap and RIN values could provide a strong economic incentive to produce and sell more E85. However, if the EPA-proposed ethanol level were maintained, there would be no incentive to produce and sell more E85.

There is a fourth in-between option that could be considered, and that is shown in the last column in Table 1. It reduces the 2014 RFS by the amount of the 2014 cellulosic level of 1.75 BG. It reduces the category permitting corn ethanol by 0.5 BG, recognizing the blend wall but also recognizing the potential to pull more E85 into the market. It also increases biodiesel to 1.5 BG in recognition of the much higher level it has already achieved in the market. While there is no magic in these precise numbers, we believe they represent a possible viable option for the future that keeps renewable fuels growing as intended by Congress while at the same time recognizing market reality.

In the current issues of Choices magazine, Tyner discusses the RFS in more detail in the article, “The Renewable Fuel Standard—Where Do We Go From Here?” That issue of Choices also includes a special section on risk management.


Wallace E. Tyner Wallace E. Tyner (wtyner@purdue.edu)
James and Lois Ackerman Professor, Purdue University Co-Director, Purdue Center for Research on Energy Systems and Policy

View more posts by Wallace E. Tyner

The views and opinions expressed in AgChllenge2050 blog posts are solely the opinions of the authors, and not those of Farm Foundation, NFP.