Governors' Biofuels Coalition

Fuel-Efficient Vehicles Pose Challenge to Consumption Targets

WASHINGTON—U.S. regulators said they would propose for the first time lowering the mandated consumption of alternative motor fuels, a reversal in policy that puts the powerful ethanol industry on the defense.

The move could shrink demand for alternative fuels whose use is required by the U.S. mandate. It also could make it easier for oil refiners to meet the rules, depending on how the Environmental Protection Agency handles the change.

Because Americans are continuing to drive more fuel-efficient cars, U.S. gasoline consumption is expected to fall this year. At the same time, a 2007 law calls for rising use of ethanol, which makes up about 10% of the U.S. gasoline supply, and other fuels defined as renewable. That means the U.S. is heading toward the “blend wall,” the point at which fuel marketers can’t absorb any more ethanol into the gasoline supply without using higher-percentage ethanol blends that aren’t widely sold.

As a result, on Tuesday the agency said that next year it would take the unprecedented step of seeking to reduce the amount of renewable fuel that the oil industry must use, saying it “does not currently foresee a scenario in which the market could consume enough ethanol.”

“It’s a significant development for the EPA to overtly state that it intends to be flexible,” said Jason Bordoff, director of Columbia University’s Center on Global Energy Policy. Mr. Bordoff has called for the agency to reduce the renewable-fuel requirement, saying the mandate could lead to higher gasoline prices.

Still to be determined is how big the cuts might be and who might suffer the largest hit. Ethanol has long enjoyed backing from lawmakers in Iowa and other Midwestern states, and Sen. Chuck Grassley (R., Iowa) said Tuesday he would fight any effort to substantially overhaul the fuel mandates.

The EPA announcement came as part of the rollout of its 2013 fuel requirements, which mandated use of 16.55 billion gallons of ethanol and other fuels, up more than a billion gallons from the previous year.

The lion’s share of that mandate—about 13.8 billion gallons—is expected to be met with ethanol from Midwestern corn. That would put government-required ethanol consumption at close to 10% of the U.S. gasoline supply. In future years, the effective annual ethanol requirement was supposed to jump above 14 billion gallons and beyond, under the 2007 law.

“The administration now acknowledges the blend wall as real and unavoidable,” said Stephen Brown, vice president for federal-government affairs at refiner Tesoro Corp. “A clear signal is also being sent to Congress that additional authority to address the blend wall may be needed via legislation.”

Reps. Fred Upton and Henry Waxman, the top Republican and Democrat, respectively, on the House Energy and Commerce Committee, have been discussing possible changes to the renewable-fuel law but haven’t proposed consensus legislation yet. The ethanol industry has said legislative changes aren’t necessary because refiners can switch to higher ethanol blends, which so far aren’t being sold widely, even though the EPA says they are safe for new vehicles.

Having the EPA tweak the requirements “is exactly how the program was designed to work,” said Brooke Coleman, executive director of the Advanced Ethanol Council, which represents developers of alternative fuels. “There are no problems…that can’t be fixed administratively.”

Any change proposed by the EPA could create winners and losers in the fuel industry.

Some oil refiners blend ethanol into gasoline themselves, meaning they can generate credits that count toward compliance with the EPA rules. Others don’t and could have to buy those credits at high prices unless the EPA eases its requirements.

For U.S. ethanol producers, an EPA change could even turn out to be beneficial if the agency chooses to reduce the mandate in a way that shrinks demand for Brazilian ethanol, which competes with the U.S. product.

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