What the RFS Means

Friday’s EPA announcement of proposed ethanol blending mandates for three years was worse than the industry and the marketplace expected and, in spite of what the Obama Administration says, is a step backward.

On the surface, it looks like a modest improvement over an unpopular proposal made in November 2013, then abandoned after more than 300,000 people sent mostly unfavorable comments to the EPA.

In 2013, the implied mandate for 2014 ethanol blending was 13.01 billion gallons. Friday, the EPA retroactively set the mandate, known as the Renewable Volume Obligation (RVO) at 13.25 billion gallons for last year, 13.4 billion gallons for this year, and 14 billion gallons for 2014. With those numbers and the ones for advanced biofuels, EPA officials say they’re getting the Renewable Fuel Standard back on track to require more usage of biofuels.

It's not just the ethanol industry that disagrees. So does University of Illinois economist Scott Irwin. 

“I find the EPA’s renewable RVOs shockingly low,” Irwin told Agriculture.com Friday. Irwin was referring to the levels for conventional renewable fuels, which is mostly corn ethanol. (If you visit the EPA website and look at the agency’s table of proposed blending volumes, you won’t see anything for corn ethanol. That number comes from subtracting advanced biofuels — biodiesel and cellulosic ethanol — from total renewable fuels.)

Irwin said the EPA is setting the bar very low, below what the U.S. market actually blended last year, about 3.5 billion gallons of ethanol, according to Irwin. This year it seems to be on track to blend about 14 billion gallons and next year, more than that.

“The EPA and Obama administration are trying to sell this as ‘we have adjusted our proposal in response to the biofuels industry,’ ” Irwin said. “The truth is that they went even further in the direction they started with in their preliminary proposal (in 2013). It’s worse.”

And, he said, the EPA used the argument of a blend wall stopping ethanol sales beyond 10% ethanol to justify its low mandate, just as it did in 2013.  

When asked if the corn ethanol industry is essentially operating without an RFS, Irwin agreed.

“They are now completely a market-driven industry, but with a federal safety net that has been moved lower than what it was before,” Irwin said.

Because it’s profitable for oil companies to blend ethanol at current prices and because the EPA’s proposal won’t be final until November, Irwin expects to see healthy ethanol sales continue. Besides blending about 14 billion gallons this year, the industry is likely to export about 800 million gallons.

“That in itself is a pretty healthy industry,” he said. With current corn prices, ethanol producers are making about 30 cents a gallon in profits, he said.

Biodiesel and cellulosic ethanol seem to fare better in EPA’s proposal.

In 2013, EPA proposed a blending mandate of 1.28 billion gallons of biodiesel for 2014. The latest EPA proposal puts the biodiesel mandate at 1.63 billion gallons, ramping up to 1.8 billion gallons by 2016 and 1.9 billion gallons by 2017. (The proposal goes out an extra, fourth year for biodiesel).

Cellulosic ethanol blending will jump even more dramatically, from 33 billion gallons last year to 206 million gallons by 2016, although it will still be a tiny 0.114% share of transportation fuel used.

Because the corn ethanol industry is currently profitable, Irwin doesn’t expect an immediate effect of the EPA proposal on its usage of corn. He thinks the USDA estimate of 5.2 billion bushels of new-crop corn being purchased by ethanol plants in the 2015-16 marketing year will remain accurate.

The USDA has announced that it will offer incentives for the installation of blender pumps that sell gasoline with more than 10% ethanol, which is one way to break through the 10% blend wall. Irwin is skeptical of that as well.

“The $100 million for blender pumps is a booby prize,” he said. “That’s never going to happen without pressure from the RFS, which clearly was Congress’s intent.” 

Under the RFS, oil companies that don’t use ethanol and other biofuels can buy credits from those who do. The credits, called Renewable Identification Numbers, or RINs, operate something like a futures market that also signals how much the industry expects to be blending.

The market for RINs used for corn ethanol seems to be crashing. They were selling for 75 cents a gallon last week, 62 cents Thursday, and in the high 40-cent range on Friday, Irwin said. 

“Now we’re back to exactly where we were a year and a half ago,” he said.

Bob Dinneen, CEO of the Renewable Fuels Association, told Agriculture.com that those low RIN prices are more proof that the RFS isn’t working for ethanol.

RIN trading was supposed to be the mechanism to drive investment in biofuels, Dinneen said. As RIN prices rise, oil companies have more incentive to sell higher levels of biofuels and to invest in infrastructure like blender pumps, he said.

With the uncertainty over the RFS and now its low blending mandate, “the EPA has ripped the heart out of that mechanism” to drive investment, Dinneen said. 

“The EPA is ignoring the fact that they have created a giant surplus of RINs that can be used (instead of blending),” he said. The effect for oil companies is that “we’ll just go get a cheap RIN rather than put in a blender pump.”

“I give [Agriculture] Secretary [Tom] Vilsack great credit. He at least recognizes the issue: You’ve got to have infrastructure out there,” Dinneen said.

The EPA and the Obama administration, by abandoning the original goals of the 2007 energy law that set up the RFS, has taken the pressure off the oil industry to build that infrastructure, Dinneen said.

“The fact of the matter is, they have adopted the oil company narrative that suggests we can’t blend anything more than 10% ethanol,” he said. “This administration is kowtowing to oil companies that are anathema to everything else this administration is trying to do.” 

Ethanol industry leaders believe the EPA’s use of the blend wall to lower its mandates is illegal under the 2007 Energy Independence and Security Act that set up an RFS mandate that was supposed to have corn ethanol blending at 15 billion gallons this year and total biofuel use at 36 billion gallons by 2022. 

Any litigation against EPA is months away.

“There will probably be some saber rattling on all sides on litigation,” said Brian Jennings, executive vice president for the American Coalition for Ethanol (ACE).

But no lawsuit could be filed before the EPA brings out its final rule next November, Jennings said.

Meanwhile, Jennings and other ethanol leaders will be marshaling support for more favorable blending levels.

EPA plans to hold a public hearing in Kansas City, Kansas, on June 25, and it will accept written comments after the proposal is published in the Federal Register, until July 27.

“Let’s see what the EPA comes up with in the final rule,” Jennings said.   

 

 

 

 

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