RFS Cuts Would Stymie Biofuels Growth, Purdue Ag Economist Says

Source: Hoosier Ag Today • Posted: Thursday, November 21, 2013

The U.S. Environmental Protection Agency’s new plan to reduce the required amount of biofuels to be produced in 2014 by 2.94 billion gallons would reduce incentive for biofuels growth, Purdue University energy policy specialist Wally Tyner says. Tyner, the James and Lois Ackerman Professor of Agricultural Economics, commented on the EPA’s proposal to trim total production of biofuels from the current mandate of 18.15 billion gallons to 15.21 billion. Tyner recommends the total be set at 16.4 billion. ”I think something in that area does a better job of fulfilling the original intent of Congress in the RFS, but adjusted for current market and technology realities,” Tyner wrote in a blog posting titled “The Biofuels Renewable Fuel Standard at a Crossroads” at http://www.pennenergy.com/index/blogs/energy-and-environmental-economics.html.

Congress enacted the Renewable Fuel Standard in 2005 and expanded it in 2007, setting required production goals for various biofuels to stimulate production of alternative fuels and reduce U.S. dependency on foreign oil. The EPA had been considering revising its 2014 mandate in part because declining demand for gasoline has led to a corn ethanol “blend wall,” the point at which the market cannot consume as much ethanol as the EPA requires to be produced.

The EPA has proposed lowering its mandate for corn ethanol production from the current 14.4 billion gallons to 13.01 billion. ”I think it is a mistake to put the RFS that low,” said Tyner, who recommended that the corn ethanol requirement be set at 13.9 billion gallons to provide inventive for refiners to blend and sell more E85 fuel, a mixture of 85 percent ethanol and gasoline that can be used only in “flex fuel” cars. Other cars use gasoline that contains 10 percent ethanol. That level also would not put undue pressure on corn prices.

Refiners have incentive to produce more E85 because the ethanol price is falling compared with gasoline and they may be able to get added revenue from their blending credits called RINs, short for renewable fuel identification numbers. The consequence of setting the RFS at 13.01 billion gallons for corn ethanol would be to “destroy that incentive,” Tyner said. In passing a fuel standard, Congress intended to provide a strong incentive to bring more renewables into the market. The proposed level of 13 billion is even less than the blend wall at 13.3 billion gallons. Tyner also said the EPA’s target of 1.28 billion gallons of biodiesel fuel next year could be increased to 1.5 billion gallons because production this year likely will exceed 1.6 billion.

Further, Tyner recommended that the EPA increase its 2014 proposal for production of cellulosic biofuels, which come from such sources as corn stover and switchgrass, from 17 million gallons to 30 million gallons, closer to his expectation of actual production. The legislated level of the mandate for next year is 1.75 billion. Tyner noted that there is little cellulosic biofuel today because of lack of technical progress in producing it and investment in it. ”Thus, essentially all the cellulosic category must be waived because the product simply does not exist,” he said.

Tyner is suggesting that the 2014 RFS level be decreased only by 1.75 billion gallons, the amount of the current cellulosic mandate for next year. ”The basic change since the RFS was passed is that we have not achieved the cellulosic biofuels production desired,” he noted. “Thus, it makes sense to reduce the RFS by no more than the level of the cellulosic category.” The EPA’s proposal, announced Nov. 15, will go to a public comment period of 60 days before becoming final.