Renewable Fuels Proposal: “Complete Capitulation to Big Oil”

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Jim Lane

Obama, in trouble on healthcare, sounds the retreat on renewable fuels; industry groups aghast as EPA targets next-generation, non-food biofuels for biggest cuts; slashes corn ethanol also.

Major push-back expected following “complete capitulation to Big Oil”.

What are the political, economic drivers? What’s the impact, and how will industry respond?

In Washington, the EPA released its 2014 proposed standards and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original Energy Independence & Security Act.

The announced proposed volumes met with united outcry from biofuels trade associations, and sniping criticism over the continued existence of the Renewable Fuel Standard from food and oil industry groups. Oil refiners were remarkably silent on a day which handed them a significant regulatory victory.

As analysts began to pore over the detail, the EPA’s proposal won support from Jason Bordoff, former Special Assistant to President Obama and Senior Director for Energy and Climate Change at the National Security Council and senior Piper Jaffray equities analyst Mike Ritzenthaler wrote that producers would find work-arounds or alternative markets to maintain revenues and cash-flow.

In today’s Digest, we have a complete wrap-up of reaction, plus as look at the proposed rule, the EPA’s rationale, the advanced biofuels vs corn ethanol dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed.

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The proposed rule

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2014
Cellulosic 0.017 1.750
Biomass-based diesel 1.280 1.000
Advanced biofuel 2.200 3.750
Renewable Fuel 15.210 18.150

* The EISA Act did not set volumes past 2012 and 1.0 billion
gallons for biomass-based diesel, but required EPA to set a
volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US
gallons
):

Corn ethanol 13.010 14.400

Overall, the reductions from statutory volumes are:

Advanced biofuels vs statute: -41.33%
Corn ethanol vs statute: -9.7%

Comparing the advanced portion to the overall proposed rule

Gallons of advanced biofuels above the biodiesel mandate: 280
million gallons (ethanol equivalent)
Translated into gallons of renewable diesel: 164 million gallons
Current US renewable diesel capacity at Diamond Green Diesel and
Dynamic Fuels: 210 million gallons.

The EPA’s rationale

EPA writes: “The proposal seeks to put the RFS program on a
steady path forward – ensuring the continued growth of renewable
fuels while recognizing the practical limits on ethanol blending,
called the ethanol blend wall.”

The blend wall refers to the difficulty in incorporating
increasing amounts of ethanol into the transportation fuel supply
at volumes exceeding those achieved by the sale of nearly all
gasoline as E10 (gasoline containing 10 percent ethanol by
volume).

How does the proposed rule compare to the previously leaked EPA
document that contained three options ?

Statutory Option 1 Option 2 Option 3 Proposed
Cellulosic 0.023 0.017 0.023 0.023 0.017
Biomass-based diesel 1 1.28 1.28 1.28 1.28
Advanced biofuel 3.75 2.84 2.02 2.21 2.2
Renewable Fuel 18.15 15.21 15.21 15.21 15.21
Corn ethanol 14.4 12.36 13.18 12.99 13.01

Bottom line: it’s virtually the Option 3 as
previously leaked, except for a reduction in the cellulosic
volumes towards the bottom end of the expected 13-36 million
gallons production range, and a cosmetic adjustment to bring corn
ethanol above the 13 billion gallons range with an adjustment of
10 million gallons.

Beyond the blendwall, the hidden issues

EPA writes: “Although the production of renewable fuels has been
increasing, overall gasoline consumption in the United States is
less than anticipated when Congress established the program by law
in 2007.”

In its own way, the EPA is signaling that it believes that the
original mandates were set, as volumetric rather than percentage
standards, at a time when it was believed that the overall
gasoline market would be much larger. Lower gasoline volumes
which in their own way reduce emissions – in the EPA’s view bring
on issues such as blend walls faster and more intensively, and
require regulatory relief.

On a more speculative basis, we see here an Obama Administration
very much on the defensive over its legislative program. In deep
trouble on Obamacare, the White House appears to have opted to
capitulate on energy policy, so as to preserve political capital.

Options in the courts: Suing to enforce the 2014 statutory
numbers

It’s going to be tough for the biofuels industry to sue to
enforce the overall statutory volumes, given the shortfall in
cellulosic biofuels even though the EPA is wading into regions
of doubtful legislative intent in using blendwall issues as a
reason to cut the corn ethanol target. It will be interesting to
see if the RFA sues to maintain the corn ethanol mandate and
potentially leaves advanced biofuels facing an even stronger set
of cuts in order to make room for more corn ethanol.

By their statutory authority on cellulosic fuels (not in any way
subject to a challenge on their powers under RFS2, but could have
been open to challenge based on the gallonage), they could have
waived down the celuloisic portion to 17 million gallons based on
available fuel, and waived the rest of the standard accordingly
down.

The advanced biofuels pool would have been reduced to 2.013
billion gallons, and corn ethanol would have stood at something
like 14.387 billion gallons. The agency too steps to decrease the
corn ethanol pool and to increase the advanced biofuels pool
slightly.

Why not balance less corn ethanol with more advanced biofuels?

The fear rightly or wrongly is that the advanced pool will be
drowned in low-cost, imported ethanol that qualifies for the
advanced biofuels pool and exacerbates the blendwall issue that
it sees in the marketplace. So, they have increased the advanced
pool, but kept it quite close to the biobased diesel rule.

At the end of the day, there’s not much production out there,
outside of the biomass-based diesel capacity (representing
renewable diesel and biodiesel) and the cellulosic fuels capacity.
At scale, there are some providers such as Aemetis that can
produce qualifying advanced ethanol at scale using the milo-biogas
pathway, and there’s sugarcane ethanol.

The major producers, potentially, in the non-cellulosic,
non-diesel market are the biobutanol producers, and there are not
indications of major capacity expansions here in 2014.

Why is industry freaking out?

RFS2 is based in production targeting, but it is ultimately about
requiring distribution. The renewable fuels industry is taking the
view that the E10 blendwall issue was well understood, at a
technical level, by Congress when they passed the EISA Act and
that the law places the onus on the conventional fuel industry to
develop distribution solutions, so long as the production is
there.

Well, the production is there. The conventional fuels industry
did not develop the distribution solutions, and the EPA is waiving
the obligation. To the renewable fuels industry, it looks like
rewarding the oil industry for doing nothing. And stranding
renewable fuels capacity that was built in reliance on Congress
and RFS2 to provide a market.

So, it’s a distribution war. Conventional fuels are protecting
their production by protecting their distribution. Renewable fuels
haven’t built any, hardly, to speak of. Congress gave every
indication that they would force conventional fuels, via mandate,
to find distribution solutions are face exploding RIN costs as
certain RINs became attractive to predatory trading and perhaps
even self-serving trading.

When RIN costs exploded, the oil industry correctly foresaw that
by waving the flag of “exploding prices at the pump,” they could
count on the White House and Congress to cave in.

Industry reaction

Economic Analysis

Mike Ritzenthaler & Michael Cox, senior energy
analysts, Piper Jaffray

“The EPA released the highly
anticipated proposal for the 2014 RFS mandates this afternoon that
was largely in line with the leaked proposal in early October. For
2014, the EPA proposes a 1.28 bil gal biodiesel mandate, which is
flat to the 2013 renewable volume obligation (RVO), intends to
manage the corn ethanol mandate to the blendwall, proposing a ~13
billion gallon RVO, and proposed a 17 million gal cellulosic
mandate.

We expect that ethanol RINs will
decline to more historical levels in the single-digit cent range,
while the 1.28 bil gal biodiesel mandate will hold a floor for
biodiesel RINs in order to subsidize the marginal independent
soybean oil producer. Although we expect an initial negative
reaction by investors for the entire space, we believe our
estimates for REGI and
GPRE
are intact despite the lower potential mandates and that GEVO and
KIOR are
less impacted than first generation biofuels.

Do not expect large impact to first
generation producers or grain market. We do not believe a flat
biodiesel mandate or lower ethanol RINs will negatively impact
REGI since the biodiesel RIN will adjust in order for the marginal
independent soybean oil producer to breakeven. Out of the 1.28 bil
gal, we expect more than 200 mil gal will be made up by
independent soybean oil refiners and so REGI’s low cost position
allows them to continue operating at normal capacity.

Additionally, we believe fluctuations
in RINs prices will largely be offset by adjustments in feedstock
costs, as we have discussed in previous research. Current
favorable fundamentals in ethanol, where forward curves suggest a
strong discount between ethanol and gasoline through 2014, will
support higher discretionary blending and strong ethanol margins
despite the lower mandate.

For the grain markets, we expect that
the lower corn ethanol mandate will initially weigh on corn prices
to reflect less corn consumption (the difference between the
proposed 13 bil gal and 10% of the expected gasoline consumption
according to the EIA represents approximately 115 mil bu of corn),
but lower grain prices will likely drive higher production for the
export market, ultimately resulting in comparable levels of
ethanol production and corn consumption.

As it pertains to Gevo and KiOR, the
impact is less dramatic than for the first generation producers.
For Gevo, we have long viewed fuels as secondary to specialty
chemicals in terms of relative importance. Fuels can provide
market/volume stability as capacity ramps and quality improves –
but the more attractive margin pools clearly fall within chemicals
and butene derivatives, both of which have no RIN sensitivity. As
a result, we do not see lower RIN prices as a material negative
for Gevo from that perspective.

Since KiOR blendstock does not face
blendwall complications (generally KiOR’s fuels support the EPA’s
policy objectives), we view the 8-30 million gallon range (17
million gallons proposed) for cellulosic fuels as more than
adequate to support KiOR’s objectives for 2014.

We do not see any material effect on
either AMRS
or SZYM
stock, since those companies are focused on specialty
ingredients, the production assets are located in Brazil, and the
proposed mandates are not favorable to advanced fuel imports from
Brazil.

Policy analysis

Jason Bordoff, Director of Columbia University’s Center
on Global Energy Policy and former Special Assistant to
President Obama and Senior Director for Energy and Climate
Change at the National Security Council.

“The EPA’s announcement today that it
is lowering the volume of ethanol that the fuel industry must
blend into the U.S. gasoline supply marks a notable shift in the
Administration’s biofuel policy. This is the right move as it
acknowledges a drastic change in the U.S. energy outlook since the
renewable fuels mandate was put in place.

“The proposal would lower the ethanol
mandate to around 10 percent of the fuel supply, which is in line
with a policy judgment that the costs of building out a fuel
infrastructure capable of handling more than 10 percent ethanol
are not worth the benefits if the ethanol in question will largely
come from corn, or be imported from Brazil, as most advanced
biofuel mandated by the RFS has been in recent years.

“The proposed rule included an
aggressive target for cellulosic ethanol, reflecting a judgment
that if there is a breakthrough there, it would be a game changer
for ethanol both economically and environmentally that could
justify expanding our ethanol fueling infrastructure. Moreover, if
the EPA hadn’t acted to ease the mandate, it is possible that
Congress would have gotten rid of the mandate altogether, which
would have eliminated the possibility that such a breakthrough
might actually happen one day.”

Biofuels Trade Associations

Brent Erickson, executive vice president of BIO’s
Industrial & Environmental Section

“The proposed rule released today
turns the logic of the RFS on its head and could significantly
chill investments in advanced biofuels projects. We will focus
over the immediate comment period on convincing the administration
to right the course on this policy.

“The cost of complying with the RFS
rose for some parties this year because they dug their heels in
against allowing renewable fuels into the market. Other
participants in the program have pursued a balanced strategy
toward compliance. Attempting to lower the cost of compliance for
those who made bad business decisions simply guts the program and
renders it ineffective. If the rule is not modified, it is certain
to reverse the advanced biofuel industry’s progress. We cannot
strangle the advanced biofuels baby in the cradle.”

Mike McAdams, President, Advanced Biofuels Association

“If EPA sticks with 2.2 billion
gallons in the final rule, the agency will pull the rug out from
underneath the growing advanced biofuels industry. ABFA
conservatively estimates that our industry will generate at least
3.5 billion RINs in 2013 that qualify as advanced biofuels,
exceeding this year’s target of 2.75 billion advanced RINs by at
least 750 million gallons. To continue to support new advanced
biofuel production, EPA should set the 2014 advanced biofuel
target at 3.75 billion gallons as contemplated by statute. This
target can be met and exceeded by current production plus
carry-over RINs.

“Now more than ever, all our options
remain open – including in the courts and on Capitol Hill – as we
pursue that goal.”

Mary Rosenthal, Executive Director of the Algae Biomass
Organization

“The way to move the country forward
is not to roll back requirements and goals for renewable fuels.
There’s no doubt that America’s biofuels industry has been moving
the country forward – creating jobs in rural communities,
providing choice at the pump and reducing our dangerous dependence
on imported oil. The EPA’s decision to require fewer gallons of
renewable fuels than last year is a clear step back and sends a
chilling signal to investors who are looking to finance the future
of the American biofuel industry, putting our economic and
environmental security at risk.”

Bob Dinneen, CEO, Renewable Fuels Association

“The Environmental Protection Agency
(EPA) today released the proposed 2014 Renewable Fuel Standard
(RFS) volumetric requirements. For 2014, EPA is proposing to lower
the conventional renewable fuel requirement from the statutory
level of 14.4 billion gallons (BG) to 13 billion gallons, and
slash the total RFS volumetric requirement from 18.15 BG to 15.21
BG. However, the EPA does not have the statutory authority to
lower the total requirement by more than the total reduction in
advanced and cellulosic. In addition, the so-called “blend wall”
does not qualify under the law as grounds for a “general waiver”
of the RFS volumes. The specific conditions needed to effectuate a
“general waiver”severe economic harm or inadequate domestic
supply of renewable fuelare not present.

“By re-writing the statute and
re-defining the conditions upon which a waiver from the RFS can be
granted, EPA is proposing to place the nation’s renewable energy
policy in the hands of the oil companies. That would be the death
of innovation and evolution in our motor fuel markets, thus
increasing consumer costs at the pump and the environmental cost
of energy production. This proposal cannot stand.

Brooke Coleman, Executive Director, Advanced Ethanol
Council

“While only a proposed rule at this
point, this is the first time that the Obama Administration has
shown any sign of wavering when it comes to implementing the RFS.
EPA is in the right ballpark for cellulosic biofuels, and we are
confident that the final number will be the right one for the
industry in 2014. But bigger picture issues must be resolved in
the final rule because advanced biofuel investors also pay
attention to the big picture.”

“What we’re seeing is the oil
industry taking one last run at trying to convince administrators
of the RFS to relieve the legal obligation on them to blend more
biofuel based on clever arguments meant to disguise the fact that
oil companies just don’t want to blend more biofuel. The RFS is
designed to bust the oil monopoly. It’s not going to be easy.”

“We hope that the Obama
Administration will realize that reasonably higher RIN prices are
a good thing instead of a bad thing. Higher RIN prices are a sign
that the oil companies are predictably refusing to blend actual
liquid gallons of fuel to comply with the RFS. But higher RIN
prices are encouraging those unwilling to obstruct on RFS
compliance to actually blend more renewable fuels. Investors are
starting to see the RIN program drive more demand for renewable
fuels with consumer savings at the pump. Now is not the time to
depressurize the program.”

Tom Buis CEO of Growth Energy

“Clearly we are disappointed in the
initial proposal that was released today. This proposed rule goes
directly against the best interests of our nation and American
consumers. We are only five years into a 15 year policy that is
working and has saved Americans billions of dollars at the pump.
Now is not the time to turn back on the progress we have made and
ask Americans to pad big oil’s already record profits. In its
current form, this rule would freeze innovation or investment in
next generation biofuels; reduce production of conventional
biofuels; harm our environment and jeopardize savings to
consumers. For over 40 years our nation has been held captive by
our addiction to foreign oil, the proposed rule if finalized in
its current form is a victory for OPEC and Big Oil and a loss for
America.”

Leticia Phillips, the Brazilian Sugarcane Industry
Association North American Representative

Slashing the 2014 target for advanced
biofuels would be a huge step backwards from the Obama
administration’s goal of decreasing greenhouse gases and improving
energy security. Advanced biofuels, including Brazilian sugarcane
ethanol, reduce carbon dioxide emissions by at least 50 percent
compared to gasoline, and EPA has traditionally promoted these
clean renewable fuels. That is why we are surprised and
disappointed that EPA’s proposal minimizes the 650-800 million
gallons of sugarcane ethanol Brazil is poised to supply to the
United States in 2014.

Brian Jennings, Executive Vice President for the American
Coalition for Ethanol

“There is nothing positive that can
be said about EPA’s proposal to unnecessarily restrict sales of
ethanol-blended fuel in 2014. This proposed rule will increase
pump prices, drain billions of dollars from consumer pocketbooks,
and transfer billions more to oil company profit statements. EPA’s
proposal fundamentally betrays this Administration’s commitment to
clean renewable fuels and caves to Big Oil demands to put a
ceiling on ethanol use. Using the E10 “blend wall” as an excuse to
reduce ethanol use rewards oil companies for doing nothing to
comply with the RFS or inevitability of higher ethanol blends, and
sets a dangerous precedent by taking the teeth out of the most
consequential policy Congress has ever enacted to reduce
greenhouse gas emissions of transportation fuel.”

Anne Steckel, NBB’s vice president of federal affairs,
National Biodiesel Board

“The growth in domestic biodiesel
production dovetails exactly with President Obama’s statement in
July of this year that ‘biofuels are already reducing our
dependence on oil, cutting pollution and creating jobs around the
country. This is why EPA’s action today is so surprising and
disappointing. This proposal, if it becomes final, would create a
shrinking market, eliminate thousands of jobs and likely cause
biodiesel plants to close across the country. It also sends a
terrible signal to investors and entrepreneurs that jeopardizes
the future development of biodiesel and other Advanced Biofuels in
the United States.”

Monte Shaw, Iowa Renewable Fuels Association Executive
Director

“Today’s RFS announcement represents
the biggest policy reversal of the entire Obama Administration.
The EPA proposal turns the RFS on its head, runs counter to the
law and is a complete capitulation to Big Oil. The Obama
Administration needs to conduct a thorough soul-searching and
decide whether they are serious about cleaner fuels, consumer
choice, and cutting petroleum dependence, or whether they truly
want to adopt the Big Oil status quo. There is still time to
restore Congressional intent and common sense before the rule is
finalized.”

“It’s not just the absurdity of
lowering the 2014 numbers below the 2013 level, with the new
waiver framework, in essence, the Administration would be ceding
power to the petroleum industry to dictate the level of each
year’s RVO based on the amount of infrastructure the petroleum
industry was willing to install. That is the exact opposite of how
the RFS was intended to work. The RFS is supposed to be a tool for
market access, not market restriction.”

Noted producers, suppliers and policymakers

US Agriculture Secretary Tom Vilsack

“The Obama Administration remains
committed to the production of clean, renewable energy from
homegrown sources, and to the businesses that are hard at work to
create the next generation of biofuels.

“It’s important to take a long-term
approach to the RFS. Clearly, as Governor of Iowa and as U.S.
Secretary of Agriculture, my support for the RFS has been steady
and strong. But I also believe that improved distribution and
increased consumer use of renewable fuels are critical to the
future of this industry.

“I am pleased that EPA is requesting
comments on how we can help the biofuels industry expand the
availability of high-ethanol blends, and I hope the industry uses
the comment period to provide constructive suggestions. Together,
we will be able to chart a path forward that maintains President
Obama’s strong commitment to an “All of the Above” energy strategy
for our nation.”

REG CEO Daniel J. Oh

“We are disappointed by the proposed
numbers that are not consistent with the goals of the EPA, the
White House, nor Congress when it created RFS2. Nevertheless,
REG’s lower cost multi-feedstock business model, network of
biorefineries and terminals, and strong position within the
industry should allow us to continue to succeed as the markets
inevitably adjust to reach a new equilibrium. The proposed numbers
do not reflect the positive results the biodiesel industry has
provided in terms of record production levels of advanced
biofuels, job creation, rural economic development, energy and
food security, and environmental benefits. We will continue to
advocate with our industry partners for logical increases in the
biomass-based diesel and overall advanced biofuel RVOs through the
public comment period.. Without such increases in the RVO our
Nation will be deprived of present and obvious benefits.”

POET CEO Jeff Lautt

“The EPA’s proposed renewable fuel
volumes are well below what the ethanol industry is capable of
supplying for American drivers in 2014, and POET plans to address
the issue in detailed comments to the agency. America is looking
at a possible record corn crop, and the opportunity to offer more
affordable fuel options to consumers has never been better. At the
same time, cellulosic ethanol capacity is coming online in a large
part thanks to significant investment from grain ethanol producers
such as POET. The proposed reduction from EPA is troubling, as it
not only cuts grain ethanol use below the levels set by Congress,
it cuts them to a level below the 13.8 billion that was met in
2013. The Renewable Fuel Standard was created to provide a choice
to consumers outside of oil-based fuel.”

Adam Monroe, Novozymes President Americas

“The Renewable Fuel Standard was
signed into law to break OPEC’s effects on the nation: high oil
and gasoline prices, American dollars going offshore and
environmental consequences. The only way to break foreign control
on oil prices and the nation is to introduce a competitive
alternative. The RFS was designed as a two-part strategy:
Companies like ours would bring breakthrough renewable fuel
technology to market, which we’ve done. Oil companies were then
required to blend it into the nation’s fuel mix – which they’ve
naturally fought at every turn.”

James Moe, Chairman of the Board, POET-DSM Advanced
Biofuels

“Next year, for the first time in
history, the U.S. will produce meaningful volumes of cellulosic
ethanol. With a number of new plants coming online including
POET-DSM’s Project LIBERTY, we can finally say that commercial
cellulosic ethanol production has arrived. Unfortunately, the
latest Renewable Volume Obligations from the EPA underestimate the
volume of cellulosic ethanol that will be produced next year. We
understand the intention to not overestimate capacity, but the
proposed numbers released today hurt efforts to expand this
cutting-edge technology and deny Americans new alternatives to
fossil fuels. We ask the EPA to continue to engage closely with
the cellulosic biofuels industry during the comment period so that
we can demonstrate our confidence in our ability to scale up these
processes so that the Final Rule uses the best information
possible to support the growth of this new and important
industry.”

Industry opponents

Robb MacKie, President & CEO, American Bakers
Association

“The baking industry recognizes EPA’s
proposal lowering the corn-based ethanol mandate. However, this
does not go far enough. Corn-based ethanol is a factor that has
led to decreased wheat acreage in the US over the past 30 years
and tighter food supplies around the world.”

Mark Dopp, SVP of Regulatory Affairs and General Counsel,
American Meat Institute

“The EPA decision to reduce the corn
ethanol mandate is long overdue. While this is a positive step,
the fact remains the RFS is a flawed policy that requires
Congressional action. Even with a record corn crop expected this
year, the damaging ripple effect of this defective policy has been
moving through the meat and poultry complex for the past several
years. The time for Congressional action is now.”

Mark Allen, President, International Foodservice
Distributors Association

“Why must restaurant operators and
their customers, the American consumer, continue to pay higher
food prices due to the corn ethanol mandate in the Renewable Fuel
Standard? It is time to end the misguided policy of using corn for
fuel.”

Michael J. Brown, President, National Chicken Council

“While we are thankful and support
the action EPA is taking today, its timid adjustment reconfirms
the program is broken beyond repair. This is a good first step,
but ultimately, Congress must act. Congressional action to repeal
the RFS remains the most viable pathway to allowing all users of
corn to have equal standing in the marketplace.”

Rob Green, Executive Director, National Council of Chain
Restaurants

“The Renewable Fuel Standard has
wrought havoc on food retailers, restaurants, franchisees and
operators, as well as food producers, and suppliers. However, the
ultimate losers are consumers. Study after study has shown that
the corn ethanol mandate has artificially driven up commodity
costs by billions of dollars annually, and with it, consumer
prices. Today’s proposal by the EPA reaffirms our steadfast belief
that Congress needs to repeal the RFS mandate once and for all.”

American Energy Alliance President Thomas Pyle

“The American Energy Alliance
welcomes today’s better-late-than-never announcement that the EPA
will scale back the ethanol mandate for next year. With this
ruling, even the EPA now recognizes that this program is flawed
and fails to take into account existing market realities. Today’s
action by the EPA, however, does not take away the need for
Congress to act quickly to repeal the law. With this ruling, the
“blend wall” may not immediately be hit, but the real problems for
consumers have not gone away.

“With this RPS ruling, the EPA is
still requiring the production of millions of gallons of phantom
cellulosic biofuel, an 800 percent increase from the 2013 levels
that were actually produced. Further, the 2.2 billion gallon
mandate for “advanced biofuel” is especially absurd considering
the practical result is we are merely swapping Brazilian sugarcane
ethanol with U.S corn based ethanol in the marketplace.

Alex Rindler, Environmental Working Group Policy
Associate, said:

“EPA’s proposal recognizes that the
RFS is on a collision course with reality. In order to bring
alternative biofuels to the market, Congress must permanently
reform the program to eliminate the costly and environmentally
destructive corn ethanol mandate. Corn ethanol has clearly failed
to produce the benefits it once promised, and has proven to be
disastrous for consumers and the environment.”

Comment period

Once the proposal is published in the Federal Register, it will
be open to a 60 day public comment period.

What can industry do to change these outcomes?

The industry has two options, in general.

1. Demonstrate a stronger market for higher
ethanol blends such as E15 or E85. This would contribute to
restoring gallons lost in the overall renewable fuels pool and,
essentially, benefit corn ethanol producers.

2. Demonstrate a stronger biomass-based diesel production
capacity
, which should be a no-brainer, but also
convince EPA that production capacity can and would translate into
actual production especially given that the $1 biodiesel tax
credit, which helps drive biodiesel sales expires at the end of
the year.

The new EPA view, summarized

The practical goal for the EPA is not to use the RFS2 renewable
fuels schedules as a driver to produce investment in
capacity-building or infrastructure for distribution. Rather, the
EPA opts for a more passive role of providing a market for those
capacities that are, in fact, built – based on incremental, if
any, changes in infrastructure.

Where can growth occur, outside of RFS2 rules and targets?

The RFS2 targets should incentivize all parties in renewable
fuels to shift strategies more towards driving consumer demand
over compliance-driven demand.

This means:

1. Build the E85 market based on price and
positive community attributes as perceived by the consumer.

2. Build the biomass-based diesel market based
on corporate demand for B5 blends based on social, and
price-hedging opportunities while limiting the practical impact
of any differential in street prices of diesel vs biomass-based
diesel by having low-level blends (that is, a $1.00 per gallon
cent cost differential translates into a nickel a gallon at B5
blend levels).

3. Building markets in diesel and jet fuel based
on overall price parity. That is, building a case that fuel price
should include ta) the cost of volatility and risk with fossil
commodity fuels; b) the social costs, such as disappointing
end-use customers who prefer renewable fuels, and c) differential
in maintenance costs and engine replacement cycles.

4. Rely on the EPA to support long-term capacity building
in cellulosic biofuels with appropriate market mandates.

The bottom line

Clearly the industry is apoplectic over the waive-down and the
strategic shift at EPA.

For advanced biofuels, EPA could very well have simply waived
down the pool to 2 billion gallons and industry will have to
step gingerly around arguments for higher volumes presenting
virtually iron-clad production forecasts in biomass-based diesel.
Clearly, building capacity and advocating “don’t mess with the
RFS” has not been persuasive.

For corn ethanol, there is going to be a strong push back based
on hopes that persuading EPA to stick with a tough mandated number
will prompt the conventional fuels industry to push through wider
adoption of E15, which would be good not only for corn ethanol,
but ultimately for advanced ethanol fuels when they are available
in higher numbers.

Jim Lane is editor and
publisher  of 
Biofuels Digest where this
article
was originally published
.
Biofuels Digest is the most widely read  Biofuels daily read
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