Although the Environmental Protection Agency (EPA) was charged with letting the public know what the mandates would be for the Renewable Fuel Standard (RFS) for 2014 last November, it still has not announced its final decision even though we are three-quarters through the year. The final rule could impact the cost of refined transportation fuels at the pump. This is particularly true if EPA reverses, as some have hinted, its initial ruling that dropped the mandated targets to be more consistent with actual transportation fuel demand.
The issue is that the 10-percent “blend wall” has been reached for gasoline blended with a 10 percent volume of ethanol. Thus, keeping the higher target for the RFS would mean either a move to 15 percent ethanol blended in gasoline or more E85 production (85% ethanol and 15% gasoline) used in flex-fuel vehicles (only 6 percent of the vehicles on the road are flex-fuel vehicles). Unfortunately, there is limited demand from the American public for either E15 or E85.
Currently, E85 is sold, particularly in the Midwest, but demand for it is just at 0.15 percent of total motor fuel demand because the lower efficiency of ethanol means more frequent fill-ups and higher real costs per mile. In contrast, demand for gasoline with no ethanol content is 5 percent because some boats, lawn equipment and small motors cannot or will not use an ethanol-blended transportation fuel.[i]
While E15 has yet to be produced in bulk, automobile manufacturers have indicated that they will not honor warranties for vehicles that use E15. Ninety percent of vehicles today, including most 2001 to 2013 models, cannot handle higher ethanol blends without risking problems such as corrosion and damage to parts such as rubber swelling. Also, motorcycles, of which there are 11 million in this country, cannot use ethanol blends higher than E10 because of engine and fuel system failures and federal law prohibits motorcyclists from using higher blends of ethanol.[ii]
Further, transportation fuel retailers also risk damaging their equipment because most underground storage tanks are incompatible with midlevel ethanol blends. If the RFS continues to mandate more ethanol, retailers would be forced to sell higher blends of ethanol and would have to prematurely replace equipment that generally lasts 30 years to avoid potential damages. Each upgrade would cost an average of $180,000 or more. This would place a huge financial burden on fueling stations that are mainly owned by small businesses and potentially raise prices at the pump for consumers. Retailers also worry about liability because under the Clean Air Act, EPA can fine station owners upwards of $37,500 per day if their customers use higher ethanol blends inappropriately.[iii]
EPA’s Proposed Rule
EPA’s proposed rule called for a cut to the RFS mandate for 2014 from 18.15 billion gallons to 15.21 billion gallons (a 16 percent reduction) and lower than the 2013 mandate of 16.55 billion gallons (an 8 percent reduction from 2013 mandated levels). The 2014 EPA proposal included a corn ethanol mandate of 13.01 billion gallons (down from 14.4 billion gallons in the original rule) and an advanced biofuels level of 2.2 billion gallons (down from a mandated level of 3.75 billion gallons, which includes cellulosic biofuel).[iv]
Keeping the 18.15 billion gallon target would make refiners buy billions of gallons more ethanol than can be sold as E10 in a declining market for transportation fuels. (Since 2007, U.S. gasoline consumption declined by 6 percent.) Thus, refiners would either have to buy and produce what they cannot sell or pay heavy fines and exorbitant prices for blender credits, called Renewable Identification Numbers (RINs)–costs that will be passed on to consumers at the gas pump. The Congressional Budget Office recently concluded that these costs will raise gasoline prices by up to 26 cents per gallon by 2017. For more on the CBO analysis, click here.
Cellulosic Ethanol Debacle
Cellulosic ethanol is a transportation biofuel made from non-edible forms of biomass. Despite no cellulosic biomass industry existing in 2007, Congress codified legislation mandating its production at increasing levels through 2022 when it is supposed to account for 44 percent of the total biofuel market. As of July, the biofuel industry produced only 50,000 gallons of cellulosic ethanol in 2014 while the Energy Independence and Security Act of 2007 mandated 1.75 billion gallons be produced this year—that is .003 percent of the original requirement. It is also just 0.3 percent of EPA’s lower, 17-million gallon target for this year.[v]
EPA has been revising Congress’s cellulosic biofuel targets each year but has still required impossible targets for an industry that is barely off the ground. In 2011, EPA revised the Congress’s 250 million gallon target to 6 million gallons, but zero gallons were produced. In 2012, EPA reduced Congress’s target of 500 million gallons down to 10.45 million gallons, but only 20,000 gallons were produced.
Because cellulosic ethanol volumes are essentially miniscule, in July, EPA revised its definition of what qualifies as a cellulosic biofuel. EPA’s new regulation allows fuel that is 75 percent cellulosic to count as 100 percent cellulosic. As such, EPA can now classify fuels, such as compressed natural gas and liquefied natural gas that is produced using biogas from landfills, as entirely cellulosic.[vi] In fact, EPA is reporting that in August, 3.5 million gallons of cellulosic biofuel was produced from these two fuels. EPA’s redefinition of what qualifies means that the agency may get much closer to its revised levels for cellulosic biofuel.
If the RFS mandates are reduced, the biofuels industry will look to export more ethanol. Last year, the United States exported 622 million gallons of ethanol, about half of it to Canada.[vii] Between January and June 2014, ethanol exports totaled 416 million gallons, 56 percent higher than the same period last year. Some predict that exports of U.S. ethanol could top 1 billion gallons if EPA’s proposed revisions to the RFS are maintained.
While the United States has been exporting corn-based ethanol, we have also been importing ethanol from Brazil made from sugar cane because it counts as a higher level ethanol product under EPA’s definitions. But, U.S. imports of ethanol fell by 40 percent to 242 million gallons last year due to a poor production season in Brazil and an increase in domestically made biodiesel that meets the advanced biofuel standard.[viii]
EPA proposed lower ethanol requirements for 2014 because the fuel market with its lower than expected demand is unable to sustain ethanol increases without harming motorists, retailers and refiners. However, it is believed that EPA will increase the ethanol levels for 2014 from its initial RFS proposal because EPA Administrator Gina McCarthy recently stated that the agency will raise ethanol requirements based on the latest gasoline demand figures for 2014. Unfortunately, it will be at least 9 months into the year when refiners are told the final numbers thus making it difficult to comply since compliance must be retroactive.
EPA was right in believing that higher RFS levels would harm motorists, retailers, and refiners because consumers do not want either E15 or E85. Engines and motors are not made to use E15 and the infrastructure requirements would make retailers replace perfectly good storage facilities that cannot handle the corrosive properties of ethanol. Further, while about 6 percent of our vehicles on the road can use E85, its demand is miniscule because of its lower efficiency requiring more frequent fill-ups. If EPA raises the ethanol requirement from its initial proposal, it would most likely be for political reasons rather than what is most beneficial for consumers because under higher mandated ethanol volumes, consumers will be paying more at the pump. The RFS program is becoming an unworkable government-created mess that is costing consumers and the nation more and more each year.
[i] Oil and Gas Journal, Keep partisan politics out of biofuels mandates, API tells White House, September 11, 2014, http://www.ogj.com/articles/2014/09/keep-partisan-politics-out-of-biofuel-mandates-api-tells-white-house.html
[ii] The Hill, EPA ruling could make or break the bank for millions of Americans, September 16, 2014, http://thehill.com/blogs/congress-blog/energy-environment/217886-epa-ruling-could-make-or-break-the-bank-for-millions
[iv] Energy Independence and Security Act of 2007, http://www.gpo.gov/fdsys/pkg/BILLS-110hr6enr/pdf/BILLS-110hr6enr.pdf
[v]Platts Energy Week: Cellulosic Industry’s Implosion Demonstrates Government’s Inability To Plan Economy, August 3, 2014, http://www.globalwarming.org/2014/08/03/platts-energy-week-cellulosic-industrys-implosion-exposes-silliness-of-government-backed-breakthroughs/
[vi] Environmental Protection Agency, 40 C.F.R. Part 80, Regulation of Fuels and Fuel Additives: RFS Pathways II, and Technical Amendments to the RFS Standards and E15 Misfueling Mitigation Requirements, July 2, 2014, http://www.epa.gov/otaq/fuels/renewablefuels/documents/rfs-path-II-fr-07-02-14.pdf
[vii] The Des Moines Register, Ethanol exports could soar if EPA keeps cut to mandate, September 2, 2014, http://www.desmoinesregister.com/story/money/agriculture/2014/09/02/ethanol-exports/14984105/
[viii] Washington Examiner, Changes to EPA gasoline rules may shake U.S. ethanol industry, September 8, 2014, http://washingtonexaminer.com/changes-to-epa-gasoline-rules-may-shake-u.s.-ethanol-industry/article/2552807