Tuesday Talks With Dr. Patterson

September 16, 2014

HITTING A WALL
With just three and one-half months left in 2014, the Environmental Protection Agency has yet to finalize the levels of renewable fuels that must be blended into transportation fuels as required under the Energy Independence and Security Act of 2007 (EISA). Not only has this agency not finalized the levels for 2014, it has yet to propose the levels for 2015. It would appear the agency has hit a wall in administering this legislation.

EISA was established in 2007 as a way of promoting the development of a viable biofuels industry in the United States. The key objectives of the legislation were to (1) reduce dependence on foreign oil, (2) reduce greenhouse gas emissions, and (3) enhance rural incomes (Tyner). A key element of the legislation was mandates on the levels of renewable fuels to be blended into transportation fuels, the renewable fuel standard (RFS). The establishment of mandated levels represented a departure from past legislation that provided subsidies for the use of biofuels, primarily ethanol. EISA set mandated levels for use of alternative types of biofuels, including biomass-based diesel, other advanced biofuels (e.g. sugarcane-based ethanol), cellulosic biofuels (e.g. fuels from crop residue, grass, or trees), and conventional biofuels (corn-based ethanol), through 2022 (Tyner). The EPA has authority to annually reset or adjust the legislated levels. During 2013 and 2014, the EPA was challenged in setting levels near the statutory levels set by Congress.

The first factor limiting the ability of the EPA to meet the EISA mandate levels is the so-called blend wall. The blend wall refers to the amount of ethanol the market can absorb as a fuel. Most gasoline fuels sold in the United States contain at most 10 percent ethanol (E10). Although blends of gasoline containing 85 percent ethanol (E85) are available on the market, only newer model automobiles are built to use this type of fuel and consumer adoption has been slow. Thus, the market for E85 remains relatively small. Furthermore, the amount of ethanol that can be absorbed by the market under the traditional blending practice (E10) has shrunk as the total amount of gasoline used in the United States has decreased due to improved automobile fuel efficiency. U.S. consumption of gasoline in 2013 was 133 billion gallons. At a 10 percent blend, only 13.3 billion gallons of ethanol could be used (Tyner). EISA called for 13.8 billion gallons of ethanol in 2013 and 15 billion gallons in 2015 (Tyner). Thus, the mandate surpasses market capacity-hence, the blend wall.

The other factor limiting the EPA’s ability to meet the legislated EISA mandate levels is the slow development of the cellulosic biofuels industry. Cellulosic biofuels are viewed as an attractive biofuel, since they use other types of biomass materials (grasses, crop residue, and trees) instead of food and feed crops (corn) to make fuel. Thus, cellulosic biofuels are not subject to the popular food versus fuel debate that raged when corn cost $6.50 per bushel. Unfortunately, the technology to make cellulosic biofuels commercially profitable has been slow to develop, particularly at the lower oil prices seen today ($91 per barrel) following growth in North American oil production. Currently, cellulosic biofuel production falls grossly short of the EISA mandate.

These two market developments have given the EPA pause in setting the RFS for 2014. The agency released a proposal for 2014 in November 2013, which did cut the mandates for corn-based ethanol and cellulosic biofuels. Notably, the mandate for cellulosic biofuels was set at only 17 million gallons, compared to the legislative mandate of 1.75 billion gallons (U.S. EPA). The agency called for comments on this proposal. At the same time, the EPA issued a call for comments on a proposed waiver in part or full of the RFS for 2014 based on petitions from the American Petroleum Institute (API) and other petroleum industry members. The EPA promised to offer a response on these petitions at the same time that it finalized the 2014 RFS levels. Last week, API renewed its call to limit RFS levels by launching an ad campaign on September 11. The renewable fuels industry, through the association FuelsAmerica, responded with its own ad campaign over the weekend calling for continued support of the RFS (Harsch). Proponents of cellulosic biofuels have said that delays in setting the 2014 RFS has introduced uncertainty and stymied investments in this technology. Both sides are waiting for the EPA’s final ruling for 2014 and rules for 2015.

Much has changed since 2007 when the EISA was passed. Notably, natural gas and oil production has expanded in North America and oil prices have dropped. Also, corn prices are down and projected to stay in the $4 per bushel range for several years to come. Some are concerned that these changes could lead to a repeal of the EISA and its RFS. This action would likely end developments in the nascent cellulosic biofuel industry at a time when new plants are just coming on line. For some, this outcome is all too reminiscent of experiences following the U.S. energy crises in 1973 and 1979 when interest in biofuels waned once oil prices dropped. However, it is important to remember that government regulation is sometimes used to affect market outcomes that would not develop otherwise that may be in the country’s best interest in the long run. Should biofuel development be hitting a wall again?

References

Harsch, Jonathan (2014). “Oil Industry vs Renewable Fuels Takes to the Air and Gets Political.” Agri-Pulse (September 12). Available online: http://agri-pulse.com/Oil-industry-renewable-fuels-battle-takes-9-12-2014.doc.asp

Tyner, Wallace E. (2013). “The Renewable Fuel Standard – Where Do We Go From Here?” Choices 28(4).

U.S. Environmental Protection Agency (2013). EPA Proposes 2014 Renewable Fuel Standards, 2015 Biomass-based Diesel Volume. (November). Washington, D.C. Available online: http://www.epa.gov/otaq/fuels/renewablefuels/documents/420f13048.pdf

 

Dr. Paul Patterson is associate dean for instruction for the College of Agriculture and Professor of Agricultural Economics.