EPA's Proposed Biofuels Mandates for 2013 - Challenges for the Biofuels Industry

AgMRC Renewable Energy & Climate Change Newsletter
March 2013

Dr. Robert Wisner, University Professor Emeritus,
Department of Economics,
Iowa State University
rwwisner@iastate.edu


The 2007 Energy Independence and Security Act (EISA) requires the U.S. Environmental Protection Agency (EPA) to establish mandated volumes of the various types of biofuels to be blended in U.S. transportation fuels each year (1).  In this process, EPA is required to use mandated volumes of biofuels from the 2007 legislation as a guide, with adjustments if needed due to limited availability of certain biofuels.  The 2007 mandates represent minimum quantities required for fuel blending. Thus, EPA can exceed those mandates if conditions warrant it.  In this article, we briefly review the original mandates in the 2007 legislation and describe the mandates EPA is proposing for 2013.   Key issues relating to this year’s proposals are outlined and discussed here.   The most controversial of these are the cellulosic biofuels and advanced biofuels mandates.  Emergence of commercial cellulosic ethanol and other cellulosic biofuel production has been much slower than envisioned by legislators when they passed the 2007 legislation.  Its slow emergence has required EPA to mandate a much lower volume for the last three years than called for by the EISA. Since the other mandates are the same as called for in the EISA, these proposed mandates create a large potential increase in demand for bio-diesel and/or imported sugar cane ethanol.  Another important issue is whether EPA’s total ethanol mandate (including corn-starch, sugar cane, and cellulosic ethanol) will exceed the likely total U.S. market for ethanol.

2007 EISA Mandates

Mandates from the 2007 legislation are for four different types of biofuels: biomass-based diesel, cellulosic biofuels, advanced biofuels, and total biofuels.  While there is no direct mandate for corn starch ethanol, its mandate is calculated as a residual by subtracting the gallons of advanced biofuels mandates from the total biofuels mandate.   The mandates for 2013 from EISA are as shown below in billions of gallons in the middle column (2).  Advanced biofuels are converted to corn-starch equivalent gallons through an adjustment process.  Each gallon of biomass-based biodiesel is considered to be equivalent to 1.5 gallons of corn-starch ethanol.  Thus, the 1.0 billion gallon EISA mandate can be achieved by blending of approximately 0.667 actual gallons of biomass-based diesel in conventional diesel fuel. 
 

Similarly, EPA considers a gallon of cellulosic ethanol of other   cellulosic biofuel to be equivalent to 1.2 gallons of corn-starch ethanol.  Thus, 0.833 million gallons of actual cellulosic ethanol (if it was commercially available in that quantity) would meet the original EISA mandate. These mandates represent the minimum quantities of advanced biofuels Congress mandated to have blended into U.S. motor fuels in 2013.  Advanced biofuels can include cellulosic ethanol, synthetic gasoline, heating oil, and diesel fuel made from cellulosic feedstocks, biomass-based diesel, sugar cane ethanol, or any other biofuels that have been approved for advanced status. 

The cellulosic biofuel and biodiesel mandates are embedded in the advanced biofuels mandate along with other possible advanced biofuels such as sugar cane ethanol, rather than being counted separately in the total renewable fuels. 

To be an advanced biofuel, the product must be made from a feedstock other than corn starch and must reduce lifecycle greenhouse gas emissions by at least 50% from EPA’s baseline (3).  A recent EPA decision now allows grain-sorghum ethanol to qualify as an advanced biofuel if it meets the 50% greenhouse gas reduction requirement (4).  At this writing, the two main advanced biofuels that are commercially available are biodiesel and sugar cane ethanol. Sugar cane ethanol is imported mostly from Brazil and the Caribbean Basin.  In the EISA, biodiesel minimum mandates increased to 1.0 billion gallons in 2012 and were scheduled to remain at that level through 2022.  However, EPA was given authority to increase this mandate in years after 2012. . It did set the 2012 mandate above the EISA level and is proposing to increase it again in 2013.

EPA also was given authority in the EISA to reduce the cellulosic ethanol mandate from that mandated in the statutes if the mandated volume was not being produced.  I that mandate was reduced, it also was given the authority to reduce the total advanced biofuel and total biofuel mandates if advanced biofuel supplies were inadequate to meet the mandates.

EPA Proposed 2013 Mandates (5)

For 2013, EPA is leaving the total advanced biofuels mandate and the total biofuel mandate unchanged from the levels specified in EISA.  The one area where it is proposing to deviate from EISA mandates is in cellulosic biofuel production.  Because of the much slower emergence of cellulosic biofuel production technology than anticipated by the framers of the EISA, it is obviously necessary to sharply reduce the mandated volume of this biofuel.  At this writing, EPA has not finalized its cellulosic biofuels mandate or its total advanced and total biofuels mandates for 2013 but is seeking input on the proposed mandates from interested parties.   Comments on the proposed cellulosic mandate can be sent to EPA until March 25, 2013.   Information on how and where to send comments is available at http://www.regulations.gov/#!documentDetail;D=EPA-HQ-OAR-2012-0546-0001.

EPA’s proposed mandates for 2013 are shown below:
           
EPA Proposed U.S. Biofuels Mandates for 2013

The only categories where the proposed mandates deviate from the EISA mandates are (1) a much lower cellulosic biofuel mandate than called for in the 2007 legislation and (2) a substantially higher biomass-based diesel mandate than the minimum required by the EISA.  Thus, biodiesel is projected to offset a substantial part of the shortfall from the low cellulosic biofuel production.

EPA Projections of 2013 Cellulosic Biofuel

In the analysis supporting EPA’s 14 million gallon blending mandate for cellulosic biofuels, the agency consulted the U.S. Energy Information Agency (EIA) for its projection of that class of fuel for 2013 and also contacted potential cellulosic biofuel producers.   The table below shows EPA’s expected cellulosic biofuel production for 2013.

EPA Projections of 2013 U.S. Cellulosic Biofuel Production

EPA stresses that this publication is not an official version of the rule for compliance purposes but has been submitted in the Federal Register for public comment. 

KiOR uses a process that converts cellulosic feedstocks to a type of biocrude oil and then converts the resulting biocrude into drop-in gasoline, diesel, and fuel oil blend stocks that are very similar to those produced from petroleum (6).  For the past two years, cellulosic ethanol has not been available commercially in the volumes mandated by EPA.  When a production short-fall from the mandated volume occurs that cannot be met by excess cellulosic RINs, affected blenders have been required to purchase cellulosic biofuel waiver credits.   Those credits will be available in late 2013 if needed for compliance, at a cost which EPA currently estimates to be $0.42 per gallon (7).

In setting the proposed cellulosic mandate for 2013, EPA also examined the Energy Information Agency (EIA) projections for 2013 production of this type of biofuel.  Those projections are shown in the table below.   The EIA’s projected cellulosic biofuels production is quite close to EPA’s projections, although there are differences among the company projections.  The differences are due to different assumptions about production ramp-up schedules.   The KiOR company web site has a release dated October 31, 2012 indicating cellulosic ethanol production will begin in the fourth quarter of 2012 and that its plant is expected to produce 8 million gallons of cellulosic ethanol annually (8).  EPA has assumed the Columbus, Georgia facility will operate at 30% of plant capacity for the first 9 months of 2013 and at 100% of its name plate capacity in the last quarter of the year (9).

Energy Information Agency Projections of 2013 U.S. Cellulosic Biofuel Production

With either of these projections, cellulosic biofuel production is indicated to fall far below the EISA 1.0 billion gallon mandate for 2013.   However, in its report on proposed mandates for 2013, EPA presents a detailed examination of technological progress in cellulosic biofuel technology and longer-term production goals for some companies.   For example, it indicates Poet has a goal of producing 3.5 billion gallons of cellulosic ethanol per year by 2022.  Thus, EPA expects a much more adequate cellulosic biofuel supply to be available in the future.

Implications of Advanced Biofuel Mandate

EPA has authority to reduce both the advanced biofuels mandate and the total biofuels mandate by up to the amount cellulosic biofuels mandate falls short of the EISA mandate. For 2013, that could be a reduction of up to 986 million gallons (corn-starch equivalent).   However, EPA is proposing to leave mandates for these biofuel categories at the EISA levels rather than reducing them.  Advanced biofuels anticipated to be available in commercial quantities in 2013 are primarily from three sources: cellulosic ethanol, bio-based diesel, and imported sugar cane ethanol. 

The proposed total advanced biofuel mandate for 2013 is 2.75 billion corn-starch equivalent gallons.   That is an increase of 750 million gallons from last year.  The proposed biodiesel mandate of 1.28 billion gallons times 1.5 creates 1.92 billion gallons of corn-starch ethanol equivalent gallons of biodiesel (1 gal. biodiesel is equivalent to 1.5 gal. corn starch ethanol for policy purposes).   Thus, the basic bio-based diesel mandate accounts for 69.8% of the total advanced biofuels mandate.   This basic bio-mass diesel mandate is a minimum to be blended in diesel fuel.   EPA, by not reducing the total biofuels mandate, provides a mechanism through which bio-based diesel fuel can help fill the short-fall from cellulosic ethanol.  After accounting for proposed cellulosic biofuel and the basic bio-based diesel mandates for 2013, an additional 816 million corn-starch equivalent gallons of biofuel will be needed to reach the 2.75 billion gallon total advanced biofuel mandate. 

How much of the advanced biofuel gap could be filled by biodiesel?

The calculations here show one possible increased bio-based diesel production level to help readers understand possible impacts on biodiesel feedstocks and the industry’s production capacity.  If 50% of the gap in advanced biofuels would be filled by bio-based diesel, that would push total bio-based diesel production to 2.328 billion ethanol-equivalent gallons (1.92 +[0.816x.50]. For comparison, monthly EIA biodiesel consumption data from January through November 2012 and the preceding 3-month average consumption as a proxy for December data give an annual total use of 1.263 billion ethanol-equivalent gallons (842 million gallons x 1.5). (10)   Thus, biodiesel production needed to fill 50% of the advanced biofuel gap would be about 84% larger than 2012 production.  That would put actual biodiesel production at 1.552 billion gallons or an increase of 712 million gallons from 2012.

Late last year, EPA determined that the U.S. bio-diesel production capacity from its 107 plants is 2.1 billion gallons.   It indicates, effective capacity would be slightly less because of a time lag needed to restart idle plants (11).  It is not clear whether EPA’s capacity number is actual biodiesel gallons or corn-starch ethanol equivalent gallons.   If it is actual biodiesel gallons, the industry would probably have adequate capacity to meet additional demand at this level.  If it is in corn-starch equivalent gallons, capacity would be inadequate to supply enough biodiesel to fill 50% of the 2013 advanced biofuels gap that would result from the EPA proposed mandates. 

EPA indicates one to two months would probably be needed to move up to full capacity (12).  The industry’s time-lag in moving up to full production would also reflect the fact that two months (16.7% of the 2013 calendar year) have already occurred.  Infrastructure and the ability of the petroleum industry to market more biodiesel than called for in the basic mandate are additional uncertainties.   Because of these and other uncertainties, EPA is requesting comments from industry before finalizing its proposals.

Possible feedstock impacts if biodiesel fills a large part of the advanced biofuels gap

If 50% of the advanced biofuels mandate would be filled by increased biodiesel output, production of actual diesel fuel would increase to1.552 billion gallons, up from approximately 842 million gallons in 2012.  The increase would require about 5.33 billion additional pounds of vegetable oil and/or animal fats than were used in 2012.  That would be equivalent to the oil from about 463 million bushels of soybeans.  Soybean oil in the last two years accounted for about 68% of the feedstock for U.S. biodiesel production.   Assuming soybean oil continued to account for 68% of the biodiesel feedstock, soybean oil’s total increase in use for biodiesel would be equivalent to the oil from about 315 million bushels of soybeans.  Current supplies of U.S. soybeans and soybean oil are extremely tight and almost certainly will remain so until at least mid-September. USDA’s February 8, 2012 World Agricultural Supply and Demand (WASDE) Report projected U.S. soybean oil use for biodiesel in the 2012-13 marketing year to increase by only 30 million pounds from last year.  That projection includes the last four months of 2012 and eight months of 2013.  The WASDE report also projected both U.S. soybean and soybean oil ending carryover stocks to be at or very close to bare minimum levels.   From this information, we conclude that if a large part of the gap created by an increased mandate for advanced biofuels is to be filled by biodiesel, substantially increased U.S. vegetable oil imports would almost certainly be needed or other U.S. uses of vegetable oils would need to be reduced substantially.  The resulting additional tightness in vegetable and animal fat supplies would almost certainly increase feedstock prices and also affect prices of fats and oils used for animal feeds as well as consumer prices for foods containing vegetable oils.   This situation makes it doubtful that a major part of the gap in advanced biofuels this year will be filled by biodiesel (13).

Other potential sources of advanced biofuels

EPA has identified a number of other potential domestic sources of advanced biofuels production for 2013.  It projects 2013 production from these sources at 150 million corn-starch equivalent ethanol gallons, which could modestly reduce the pressure on the biodiesel industry and other industries using fats and oils (14).  

The largest other potential source of advanced biofuel is imports of sugar cane ethanol, most of which comes from Brazil.   EPA estimates that if biodiesel production is unable to exceed the basic biodiesel mandate of 1.28 billion ethanol-equivalent gallons, importing 666 million gallons of sugar cane ethanol would adequately meet the advanced biofuel and total biofuel mandates.  Monthly ethanol import data through November from EIA and weekly December import data indicate the U.S. imported approximately 492 million gallons of ethanol in calendar year 2012 (15).  Thus, ethanol imports would need to be increased by about 35% from last year to meet the gap in advanced biofuels supplies if biodiesel production is unable to exceed its basic biodiesel mandate.  The annual equivalent rate of U.S. ethanol imports from July through December was 842 million gallons as the domestic ethanol industry reduced production in response to limited corn supplies and very tight profit margins.

Whether the U.S. can continue importing in 2013 at or near the last-half 2012 ethanol import rate will depend partly on the size of Brazil’s 2013 sugar crop to be harvested in late March and April.  U.S. ethanol imports also will be affected by a recent Brazil decision to increase its mandated ethanol percentage in gasoline from 20% in 2012 to 25% (16).  

Implications for corn starch ethanol

Two key questions for the U.S. corn starch ethanol industry are (1) how much ethanol will be imported and (2) how much ethanol can be sold in the domestic gasoline market?   The domestic ethanol market has reached the blend wall, which is a national average ethanol-gasoline blend of 10% ethanol and 90% gasoline.  Using monthly EIA gasoline supplied data through November (the latest available at this writing), 2012 U.S. gasoline use was about 133.9 billion gallons.   That translates into a potential domestic ethanol market of about 13.4 billion gallons, 400 million gallons below the EPA proposed mandate for 2013.  If ethanol imports were to fill the entire gap between the basic bio-based diesel mandate and the advanced biofuel mandate, the share of the domestic ethanol market available for corn-starch ethanol would be reduced by approximately 800 million gallons (17).  That in turn would create a need for excess unused RINs totaling about 1.2 billion gallons, and would limit potential processing of corn for ethanol.  An analysis by Nick Paulsen at the University of Illinois indicates that enough unused RINs may be available to allow a reduction in corn-equivalent biofuels production of about 900 million bushels (18).  

Concluding Comments

The EPA proposed biofuels mandates may create challenges for most sectors of the domestic biofuels industry.   The challenges come partly because of the huge short-fall in cellulosic biofuel production vs. mandates specified in the 2007 EISA.   EPA projects cellulosic ethanol production for2013 at 14 million corn-starch ethanol equivalent gallons, far below the 1.0 billion gallons called for in the EISA.  That creates a large potential shortfall in advanced biofuels that needs to be filled from a non-cellulosic fuel.  Biodiesel is the one domestic advanced biofuel that is produced in large volumes and could theoretically have a substantial role in filling this gap.  However, very tight U.S. soybean and soybean oil supplies through the end of summer appear likely to limit the ability of the biodiesel industry to fill the resulting gap between the biodiesel mandate and the total advanced biofuels mandate. Resumption of the $1 per gallon biodiesel tax credit and the possibility of more plentiful soybean supplies in the last three months of the year may allow biodiesel to fill a small portion of the gap in late 2013. 

The other advanced biofuel that is potentially available in large volumes is sugar cane ethanol.
If a major part of this gap is filled through imported sugar cane ethanol, these imports shrink the available market for corn-starch ethanol.  That situation occurs because of the 10% blend wall for ethanol that limits the size of the total U.S. ethanol market.  Enough excess RINs may be available to help the ethanol industry cope with the blend-wall challenge in 2013.   However, the challenges will increase further in 2014, when the EISA mandates increase by the following amounts in billions of gallons:

• total biofuels- +1.6
• total advanced biofuels- +1.0 billion gallons
• cellulosic biofuels- + 0.75
• conventional (corn-starch ethanol) biofuel - +0.60.  

As a result, ethanol blenders are faced with the challenge of choosing among the following alternatives: (1) using most of the excess RINs in 2013 and assuming EPA will mandate less 2014 total biofuel and advanced biofuel blending than specified in the EISA, (2) retain many of the RINs for use in 2014 when mandates will far exceed the 10% blend wall market, and at the same time (3) bid up 2013 ethanol prices in an effort to obtain adequate supplies to fill the 2013 ethanol market that is allowed by the blend wall.   With these challenges, raising the blend wall will become increasingly important for both the corn-starch and cellulosic ethanol industries in the immediate future.