Implications of EPA's Proposed 2014 through 2017 Biofuels Mandates

AgMRC Renewable Energy Monthly Report
June 2015

Robert Wisner
University Professor Emeritus and Biofuels Economist
Ag Marketing Resource Center
Iowa State University
rwwisner@iastate.edu

 On May 29, 2015 the U.S. Environmental Protection Agency (EPA) released its proposed mandates for various biofuels[i].  Proposed mandates for all types of biofuels were issued through 2016.   For biomass-based diesel, the proposed mandates were extended to 2017. The mandates call for increased domestic use of all four types of biofuels, with the largest increases being in biomass-based diesel, which does not have a “Blend Wall”. The ethanol industry expressed disappointment at much smaller increases in ethanol mandates than called for in the Energy Independence and Security Act of December 2007[ii] (EISA), which provides the statuary authority for EPA’s proposed mandates. U.S. ethanol use has been constrained by the Blend Wall, which represents market saturation at slightly less than a 10% average ethanol blend in the nation’s gasoline supply.  

Ten percent has been the traditional ethanol-gasoline blend used by the U.S. fuel industry for many years. However, there is a mechanism that could allow the industry to move above this blend wall. EPA has approved the use of E-15 in cars and light trucks from 2001 to current model years, but not for model years earlier than 2001. Gasoline retailers have been reluctant to invest in pumps and other equipment for E-15 sales because of liability concerns, added investment costs, and lack of approval of the Reed Vapor Waiver for E-15 that has been granted for E-10. E-85 is approved, but for use only in flex-fuel vehicles. Motorist use of E-85 has been very limited because it usually has been uneconomical when its much lower fuel mileage per gallon than gasoline is considered. Also, only a small percentage of the total U.S. cars and light trucks fleet is flex-fuel vehicles, although the number is increasing rapidly. Blender pumps also are available and a few retail stations have them.  Blender pumps would allow motorists with flex fuel vehicles to use more economical blends of less than 85% ethanol for flex vehicles.

In this article, we look at details of EPA’s proposed mandates, implications for domestic biofuels production and use, and implications for feedstock producers and feedstock markets.

Mechanism for responding to the proposed mandates

EPA indicates it plans to finalize the mandates for 2014, 2015, and 2016 by November of this year. It scheduled a meeting in Kansas City, Kansas on June 25, 2015 to discuss the proposals. EPA also will receive written comments on the proposed mandates until July 27, 2015. Comments can be sent to the Federal Rulemaking Portal: http://www.regulations.gov and identified by Docket ID No. EPA-HQ-OAR-2015-0111. Once submitted, EPA indicates the comments cannot be edited or withdrawn and it may publish any comment received to its public docket. It also cautions against sending any confidential business Information with the comments.

Proposed mandates

Table 1 below shows EPA proposed mandates for 2014, 2015, 2016, and 2017, in million and billion gallons. Biomass-based diesel has two lines in the table, one showing actual gallons of biodiesel.   For mandate purposes, each actual gallon of biodiesel counts as 1.5 ethanol-equivalent gallons because it has a higher energy content than ethanol. Mandates for 2014, by law, should have been issued in November 2013.  Because of the late announcement, they are actual 2014 utilization levels. Their only significance in being announced at this time is that (1) they provide a base for comparing proposed 2015 and 2016 mandates and (2) they help clear up some uncertainty about the amount of outstanding RINs that could be substituted for future production in later years.

Table 1. May 28 Proposed biofuel volumes for 2014-2017 by fuel type, billion gallons

	2014	2015	2016	2017
Cellulosic biofuel	0.033 bil. gal.	0.106 bil. gal.	0.206 bil. gal.	n/a
Biomass-based diesel, actual gallons	1.63 bil. gal.	1.70 bil. gal.	1.80 bil. gal.	1.90 bil. gal.
Biomass-based diesel, ethanol gallons	2.445 bil. gal.	2.55 bil. gal.	2.70 bil. gal.	2.85 bil. gal.
Advanced biofuel	2.68 bil. gal.	2.90 bil. gal.	3.40 bil. gal.	n/a
Conventional (corn starch) biofuel	13.25 gil. gal.	13.4 bil. gal.	14.0 bil. gal.	n/a
total renewable fuels	15.93 bil. gal.	16.30 bil. gal.	17.40 bil. gal.	n/a
Implied other advanced biofuels	0.202 bil. gal.	0.244 bil. gal.	0.494	n/a

n/a = not available    Source of data: http://www.epa.gov/otaq/fuels/renewablefuels/documents/420f15028.pdf

All fuels except biomass-based diesel are in actual gallons since those gallons also are ethanol equivalent gallons.

Proposed cellulosic biofuel mandates increase progressively from 2014 to 2016 as indicated in Table 1. Biomass-based diesel is an advanced biofuel because it reduces greenhouse gasses by at least 50% from the gasoline standard. It is one of several possible advanced biofuels.  Other advanced biofuels can include sugar beet ethanol, imported or domestically produced sugar cane ethanol, biobutanol, ethanol produced from waste material, biogas produced from landfills or similar sources, cellulosic ethanol, ethanol from grain sorghum if greenhouse gas requirements are met, and other alternatives, some of which are in the development stage.   The various advanced biofuels, including cellulosic biofuel, are “nested” in the advanced biofuel mandate and are in ethanol-equivalent gallons.  In other words, they are a part of the total advanced biofuel mandates.

Lack of production capacity is the reason for the low volumes of cellulosic biofuel when compared to other biofuels. At least four U.S. cellulosic ethanol plants are expected to be in operation by the end of this year. Three plants produce or soon will produce ethanol from corn stover, with another producing a small volume of ethanol from fiber in distillers grain. Additional cellulosic ethanol production is anticipated in the next two years, although the volume is expected to be small relative to corn starch ethanol.  Subtracting cellulosic biofuel and biomass-based diesel in ethanol-equivalent gallons from the advanced biofuel mandate shows the implied volume of other advanced biofuels.  These could include imported sugar cane ethanol, which in a “Blend Wall” saturated market would reduce the potential market share available for corn starch ethanol.  Imported sugar cane ethanol, if imported in large volumes, could also substitute for part of the proposed biomass-based diesel production since it is an advanced biofuel.

Table 2 shows the statuary volumes of the various biofuels prescribed by December 2007 energy legislation[iii]. This is the legal basis from which EPA has authority to set annual mandates.   EPA is authorized to deviate from the mandates if supplies are not available or in case of certain other conditions that might create economic hardships. The ethanol industry was disappointed that the mandates were not held at the statuary level to incentivize marketing of E-15 and and E-85, and thus expand the market for both cellulosic ethanol and corn starch ethanol.  University of Illinois, Urbana, economists discuss the appropriateness of EPA proposed mandates that derive the volumes shown in Table 2 by establishing required percentages of the nation’s combined gasoline and diesel fuel consumption to come from biofuels.  EISA mandates are in volumes and were intended to create incentives to “push” the use of biofuels.  Focusing on percentages of biofuels in the motor fuel supply causes actual volumes to potentially vary from the proposed volume mandates if motor fuel consumption is above or below early expectations.  For that reason, under some market conditions, mandates expressed as percentages of the nation’s motor fuel consumption can have less “push” effect than emphasis on volume mandates[iv].

Table 2. Statuary biofuel volumes for 2014-2017 from EISA by fuel type, billion gallons

	2014	2015	2016	2017
Cellulosic biofuel	1.75 bil. gal.	3.00 bil. gal.	4.25 bil. gal.	5.50 bil. gal.
Biomass-based diesel, actual gal.	>1.00 bil. gal.	>1.00 bil. gal.	>1.00 bil gal.	1.00 bil. gal.
Biomass-based diesel, ethanol gal.	>1.50 bil. gal.	>1.50 bil. gal.	>1.50 bil. gal.	1.50 bil. gal.
Advanced biofuel	3.75 bil. gal.	5.50 bil. gal.	7.25 bil. gal.	9.00 bil. gal.
Conventional (corn starch) biofuel	14.40 bil. gal.	15.00 bil. gal.	15.00 bil. gal.	15.00 bil. gal.
Total renewable fuels	18.15 bil. gal.	20.50 bil gal.	22.25 bil. gal.	24.00 bil. gal.

Figure 1 shows deviations of the proposed mandates indicated in Table I from statuary levels called for in the EISA. For biodmass-based diesel, the deviations are from the minimum 1.0 billion gallons specified in the EISA. EPA has authority to raise the mandate above that level. As Figure 1 shows, Biomass-based diesel mandates are well above this minimum level and trend upward for each year. For all other classes of biofuels, the mandates are well below the statuary level from EISA and except for corn starch ethanol, the size of the negative deviation increases each year. For 2016, the proposed total renewable fuels mandate is 4.85 billion gallons below the statuary level. Data sources: EPA June 29, 2015 proposed mandates and EISA

Impacts on gasoline prices if mandates were higher

While the renewable fuels industry is disappointed that the mandates for non- diesel biofuels are far below EISA mandates, petroleum refiners express concern that the cost of RINs is an extra expense to their operations that provides no benefit or return to refiners[v]. The cost would likely increase with higher ethanol mandates and the extra cost would be expected to be passed on to motorists in gasoline prices, but would tend to be partially offset by ethanol’s lower cost of increasing gasoline’s octane content compared with other alternatives, as well as other ways that ethanol influences motor fuel markets. Research at CARD at Iowa State University, as well as comments by James Stock, Chief Economist for the Council of Economic Advisors, indicate higher RIN prices from larger ethanol mandates likely would have a negligible impact on prices motorists pay for fuel.[vi] The higher cost of the RINs and its impact on gasoline prices would tend to be offset by lower ethanol prices and a shift to more use of E-85, thus tending to reduce the price of E-10 that is used by most motorists and also tending to lower the cost of E-85 to make it more affordable.

Implications for ethanol feedstocks

Actual U.S. biofuels production in the next two years will depend not only on domestic demand which will be strongly influenced by the mandates and the trend in gasoline consumption, but also by export demand.  The proposed mandate for 2015 is only 1.1% larger than 2014 production, thus pointing to only a very small potential increase in domestic demand for ethanol from corn and corn stover feedstocks. If cellulosic biofuel increases as EPA indicates in its mandates, part of any domestic market growth would be filled by cellulosic ethanol. Thus, any substantial 2015 growth in U.S. corn starch ethanol demand would likely need to come from ethanol exports. For 2016, the proposed corn starch (conventional biofuel) mandate is 4.5% larger than in 2015, thus creating the potential for slightly accelerated domestic demand for that type of biofuel next year. Actual 2016 demand would depend on (1) whether the recent upward trend in gasoline use continues, (2) the expansion rate in retail availability of E-15 and blender pumps, and (3) export demand growth.  Ethanol exports have been slightly above a year earlier for the last several months and imports have been very small, thus allowing the U.S. to continue its long-term position as a net ethanol exporter. We will examine export trends by country and other factors influencing foreign demand for U.S. ethanol in a later report.  

Current indicators of continuing export demand include Brazil’s government-controlled petroleum fuels industry that has recently altered gasoline-ethanol price relationships in a way favoring ethanol consumption, foreign refinery recognition of cost benefits from using ethanol for octane enhancement, and relatively low corn prices that help make ethanol competitive in foreign markets. Monthly U.S. ethanol exports from November 2014 through March 2015 (most recent data available) were at an annual rate of 971 million gallons, up 3.5% from a year earlier[vii]. After adjusting for imports, net exports at an annual rate during this period were 937 million gallons, up 1.9% from a year earlier. Recent export patterns thus suggest a small growth in U.S. ethanol exports may occur this year.

Implications of increased biomass diesel mandates for feedstocks

Table 1 shows that, in actual gallons rather than ethanol-equivalent gallons, proposed biomass-based biodiesel mandates in 20015, 2016, and 2017 are 70, 170, and 270 million gallons larger than in 2014. In percentage terms, they are 4.3%, 10.4%, and 16.6% larger, respectively than in 2014.  If the mandates are finalized at the proposed levels, a significant growth potential would be indicated for biodiesel. Whether it would be realized would depend on cost and availability of feedstocks, possible new production technology, the number of outstanding unexpired RINs and other factors. If the indicated growth in production fully materializes and is filled primarily by vegetable oils, it would create a need for approximately the additional million pounds of vegetable oil and percentages of total use and U.S. soybean oil carryover stocks shown in Table 3 below. The numbers are based on 7.6 pounds of soybean oil needed to produce a gallon of biodiesel.[vii]

Table 3. Potential increases from the 2014 level in millions of pounds of vegetable oil needed for proposed biodiesel mandates & comparisons with current uses & stocks

	2015	2016	2017
Vegetable oil increase	532	1292	2052
% of projected 2014-15 total U.S. soybean oil use	2.6%	6.2%	9.8%
% of projected 2014-15 soybean oil carryover stocks	43.4%	105.5%	167.5%
% of projected 2014-15 soybean oil exports	28.0%	68.0%	108.0%

The percentages of total soybean oil use look modest if that is the base for considering the impact on feedstock markets. However, potential implications look much more substantial when viewed from impacts on carryover stocks (the supply remaining at the end of the soybean and soybean oil marketing years) or soybean oil exports. These numbers indicate the mandates, if translated into actual increases in biodiesel production, would require either a substantial increase in vegetable oil supplies from imports or domestic production, reduced use of soybean oil for domestic food and other industrial uses, or development of additional feedstocks beyond soybean oil. Another alternative would be to increase U.S. imports of biomass-based diesel.

Soybean oil has been the dominant feedstock for U.S. biomass-based diesel production, but other current feedstocks include animal fats, recycled cooking oils, corn oil, and smaller amounts of other vegetable oils. Palm oil is not permitted for use in U.S. biodiesel production, but increased imports could be used to replace food uses of soybean oil.  The long-term trend in world palm oil production is upward.  

If front-end fractionation of corn would become a common practice at ethanol plants, additional corn oil might be produced for use as a biodiesel feedstock.   It is uncertain how much additional use of animal fats and recycled cooking oil might be shifted to biodiesel production in response to likely increases in vegetable oils. Some of these products are used in the feed industry.  Also, higher feedstock prices would create increased incentives over time to generate biomass-based diesel from other sources such as cellulose and urban wastes. Potentially increased demand for soybean oil might create incentives for U.S. and South American farmers to produce more soybeans, depending on whether increased processing of soybeans for oil would be offset by lower soybean meal prices as meal supplies increase.

Concluding Comments

The proposed conventional biofuel (corn starch ethanol) and non-biodiesel advanced biofuels mandates offer only a very slight incentive to expand the retail market for ethanol. Without an expansion in domestic use, a gradual increase in cellulosic ethanol production carries the risk of shrinking the market for corn starch ethanol unless export demand expands. For biodiesel, the proposed mandates create a sizeable potential for an expanded market and increased demand for feedstocks.  If final mandates are similar to the proposal, significant adjustments in vegetable oil use and probably also in vegetable oil production can be expected as well as creation of incentives to accelerate other methods of producing biomass-based diesel or synthetic diesel from non-vegetable oil feedstocks. For additional perspectives on the proposed biofuels mandates, see Farmdocdaily from the University of Illinois, Urbana: http://farmdocdaily.illinois.edu/

References

[i] EPA,  Renewable Fuel Standard Program: Standards for 2014, 2015, and 2016 and Biomass- Based Diesel Volume for 2017, http://www.epa.gov/otaq/fuels/renewablefuels/documents/420f15028.pdf