Economists: Proposed RVO could result in 15 B gallon mandate

Source: By Susanne Retka Schill, Ethanol Producer Magazine • Posted: Thursday, June 2, 2016

The U.S. EPA is continuing to provide a substantial push above the E10 blend for conventional biofuels is the conclusion of two University of Illinois economists, Scott Irwin and Darrel Good. A recent FarmDocDaily post, “The EPA’s Proposed 2017 RFS Standards: Is a Push Still a Push?”builds on the pair’s ongoing analysis of the renewable fuels standard.

“After updating projections for gasoline and diesel consumption, we estimate the conventional ethanol mandate gap to be 275 million gallons in 2014, 371 million gallons in 2015, 453 million gallons in 2016, and 510 million gallons in 2017,” the economists conclude.  “Since the estimates of the conventional mandate gap are relatively large, particularly for 2016 and 2017, this suggests the EPA is continuing to provide a substantial push above the E10 blend wall for conventional biofuels. A key question going forward is how long this push can last in the face of rising gasoline consumption.”

Calculating the size of the impact in EPA rule making requires a number of projections and assumption, they write, including links to previous articles where they outline their methodology. A key part of their analysis is projections of gasoline and diesel fuel consumption, as the biofuel blending requirement is expressed as a fraction.

“For 2017, for example, the fractional mandate for conventional biofuel is proposed at 8.22 percent of projected petroleum and diesel use,” the authors write. “If that use equals the projection of 180.07 billion gallons, the mandate will equal the volumetric mandate of 14.8 billion gallons. Since the fractional mandates have already been finalized for 2015 and 2016 and gasoline consumption projections have risen, we project the enforced mandates for 2015 and 2016 to be 14.102 and 14.933 billion gallons, respectively, instead of the volumetric standards in the final 2014-2016 rulemaking of 14.05 and 14.5 billion gallons.”

Projections for domestic gasoline consumption are calling for 2016 use to be 2.5 percent larger than 2015, rather than the plus 1.4 percent assumed by the EPA, and consumption in 2017 now is projected to increase by 1.5 percent rather than decline. “It is interesting to observe that the projected increase in gasoline consumption would allow the EPA to nudge the fractional conventional ethanol mandate down to 8.13 percent but still increase the effective conventional ethanol mandate for 2016 to the statutory level of 15.0 billion gallons,” they conclude.

They also analyzed the RINs market reaction to the proposed rulemaking, since the price of renewable identification number (RINs) represents the marginal cost of complying with the RFS. D6 ethanol RINS and D4 biodiesel RINs had a more muted reaction to the preliminary 2017 rulemaking that for the 2014-16 final rulemaking announced last November. “Since the May 18 release of the latest rulemaking, D4 RINs have increased 2.75 cents per gallon, or 3.5 percent, and D6 RINs have increased 4 cents per gallon, or 5.5 percent. This suggests that the market largely anticipated the level of the standards in the 2017 proposal.”

To read the entire article and access previous articles analyzing the RFS on FarmDocDaily click here.