Sugar, soybeans strive for 816M gallons in renewable fuel standard

Source: Tiffany Stecker, E&E reporter • Posted: Thursday, February 14, 2013

The makeup of advanced biofuels in 2013’s federal renewable fuel standard (RFS) will be an interesting ride to follow, said an economist, as international policies, federal subsidies and crop conditions could tip a delicate balance.

The RFS sets annual targets for the United States to make 36 billion gallons of biofuels by 2022. U.S. EPA announced late last month that oil refiners must blend 2.75 billion gallons of advanced biofuels — fuels that emit at least 50 percent less greenhouse gases than fossil fuels over their life cycle — into their fossil fuel supply.

Most of that 2.75 billion amount — 1.28 billion gallons — is reserved for biodiesel, more than half of which comes from soybean oil, as well as animal fats, used cooking grease, and other feedstocks. A relatively insignificant amount — 14 million gallons — is for cellulosic biofuels made from agricultural waste, trash or low-impact sources.

Once adjusted for ethanol equivalencies (1 gallon of biodiesel is worth 1.5 gallons of ethanol), what’s left is 816 million gallons of “undifferentiated fuels.” Given the lack of availability of cellulosic fuels to date, the choices for advanced, undifferentiated fuels will be in the form of either more biodiesel or sugar-cane ethanol imported from Brazil.

“This is setting up to be a very interesting year,” said Scott Irwin, a professor of agricultural marketing at the University of Illinois, Urbana-Champaign, as economists “watch how the market plays out the mixture of biodiesel and Brazilian ethanol for the 2013 [renewable volume obligations].”

As last year drew to a close, it seemed pretty clear that Brazilian ethanol would satisfy most of the differential biofuels gap, said Irwin. On Dec. 10, 2012, the price of sugar-cane ethanol was $2.65 per gallon, and the price of biodiesel was $4.40 per gallon. Oil companies obligated to blend biodiesel into their fuel supply would have lost 91 cents per gallon by blending biodiesel, said Irwin.

But the $1-per-gallon biodiesel tax credit, tucked into the “fiscal cliff” deal passed at the end of last year, changed that

“Late in the night on Dec. 31 … one would have confidently forecast that the remainder would have been filled with Brazilian ethanol,” said Irwin. “The reinstatement of the biodiesel blenders tax credit in the fiscal cliff negotiations flipped the economics.”

An ‘advanced fuel’ advances

Although sugar-cane ethanol, like ethanol made from corn, is a first-generation fuel that comes from a food source, it is considered an advanced biofuel because of its highly efficient refining process. Brazilian ethanol refineries run on power from bagasse, the leftover cane pulp from sugar extraction.

Keeping Brazilian ethanol in its native country may be in the best interest of Brazilian drivers this year. The government will also push the minimum ethanol blend increase from 20 percent to 25 percent. These factors increase the demand for ethanol in Brazil. Brazil’s state-owned oil company Petrobras raised the price of gasoline by 6.6 percent recently, a move that has already raised prices of Brazilian sugar as investors expect more ethanol production. In addition, a bad harvest in 2012 led to a nearly 20 percent drop in ethanol from the previous year.

Nevertheless, there’s still an enormous market in the Northern Hemisphere. Much of the Brazilian ethanol imported to the United States goes straight to California, the largest ethanol fuel market in the country, where the state’s low-carbon fuel standard prohibits corn ethanol blends because of their low greenhouse gas reduction levels — 20 percent, compared to sugar-cane ethanol’s 60 percent.

“The only ethanol that can fulfill that quota is cane ethanol,” said Adhemar Altieri, corporate communications director for the Brazilian Sugarcane Industry Association. “It has no impact on the much larger, major portion under the RFS, which is fulfilled by corn ethanol.”

Altieri is confident that exports of Brazilian ethanol will continue. “There’s a pretty good harvest on the way,” he said. “We don’t see a problem for exports; we don’t see a problem for domestic markets.”

Meanwhile, biomass-based diesel production in recent years has quickened to an impressive pace. Last year, the industry surpassed its RFS mandate by nearly 53 million gallons, and the momentum — sweetened by the tax credit — could easily fill the undifferentiated void.

“We certainly feel there is the capacity to exceed the requirement by several hundred million gallons,” said Ben Evans, director of federal communications for the National Biodiesel Board. “We think that the industry could do that in a seamless and sustainable way.”

Food pressures

Biodiesel, unlike sugar-cane ethanol, also benefits from earning 1.5 credits — called Renewable Identification Numbers, or RINs — per gallon instead of just one credit. Refiners can reach their renewable fuel obligations with fewer gallons.

Higher soybean biodiesel and sugar-cane ethanol output could affect food prices and stifle the growth of the low-carbon cellulosic market, said Jeremy Martin, a senior scientist in the Clean Vehicles program at the Union of Concerned Scientists. While several large, commercial cellulosic plants are expected to break ground this year, the industry has yet to produce significant amounts of the fuel.

“EPA should be a little more sophisticated when they think about what levels they should set,” Martin said.

Both in 2011 and 2012, EPA revised the requirements for cellulosic biofuels when it became clear that the country did not have the capacity to produce the fuel commercially. The agency should use that same flexibility to revise the advanced mandate, as cellulosic fuels become available and satisfy the 14 million target for 2013.

“I think it’s an important point that EPA has discretion here,” said Martin. “EPA should demonstrate that the underlying sugar and vegetable oil resources are adequate to justify the expansion, given competing uses, and that expanding these mandates will deliver the climate benefits the policy promises.”

But like many rules of economics, there’s a downside to growing too quickly, said Irwin, the economist at the University of Illinois. If the industry ramps up biodiesel production too quickly, the industry runs the risk of driving up prices and eliminating the blender credit advantage.

“Right now, the market signals are very clear that today’s price relation predict zero Brazilian imports and all for biodiesel, because of the tax credit,” said Irwin. “But I don’t believe that will ever happen.”