EPA Proposes Additional Cuts to 2018-2019 RFS Levels

By Sampath Jayasinghe
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322
http://www.decision-innovation.com/
October 2017

On July 5, 2017, the Environmental Protection Agency (EPA) published its proposed rule for 2018’s renewable volume obligations (RVOs) for cellulosic biofuel, advanced biofuel, and total renewable fuel under the Renewable Fuel Standard (RFS). This also contained the EPA proposed rule for biomass-based diesel (BBD) volume standards for calendar year 2019. The EPA is required by law to issue a final rule setting for 2018’s RVOs by November 30. 

Table 1: Renewable Fuel Volume Standards Proposed for 2018; Biomass-Based Diesel Volume for 2019(1)

(1) All values are ethanol-equivalent on an energy content basis, except Biomass-based diesel.
(a)EPA finalized volume requirements; bEPA proposed volume requirements; n/a = not available
 

Table 1 summarizes the proposed volumetric requirement for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2018 and the proposal for BBD for 2019. The 2018 BBD volume requirement of 2.1 billion gallons was established in the 2017 final rule, released December 2016. The 2018 conventional ethanol fuel volume is set at 15 billion gallons, which is equal to the statutory volume proposal in the original 2007 RFS. Total advanced biofuel volume is at 4.24 billion gallons, a 40 million gallons reduction from the 2017 final rule volume of 4.28 billion gallons. The statutory volume requirement for total advanced biofuel in 2018 was 11 billion gallons, according to the 2007 RFS amended in March 2010. 

The proposed total renewable fuel volume for 2018 is 19.24 billion gallons, compared to the final 2017 rule of 19.28 billion gallons. The total renewable fuel statutory volume requirement for 2018 was 26 billion gallons. This is a 26 percent reduction in the proposed volume of total renewable fuels in 2018, compared to the statutory volume set by RFS in 2010. 

While market participants were expecting an EPA final rule-making before the end of November, the EPA released a proposal September 26 that could reduce the 2018 and 2019 RVOs that were originally proposed July 5, 2017. The possible reductions largely target BBD volumes, but could result in corresponding decreases in RVOs for advanced biofuels and total renewable fuel.

On October 4, 2017, the Federal Register officially published the EPA’s Notice of Data Availability (NODA) proposal. This proposal provided notice the EPA would accept public comments on likely scenarios to decrease 2019 BBD volume under the RFS program. It also proposed to reduce the volume requirement for advanced biofuel for 2018. 

Under RFS, the four renewable fuel standards (Cellulosic, BBD, Advanced, and Conventional) are nested together. The fuel with a higher greenhouse gas (GHG) reduction capability can be used to meet the standards for the EPAs lower GHG reduction threshold requirements (EPA, 2017). Figure 1 shows each of the four renewable fuels’ GHG reduction thresholds and fuel nesting scheme for RFS.

Figure 1: Fuel nesting scheme for RFS. (Source: https://www.epa.gov/renewable-fuel-standard-program/renewable-fuel-annual-standards)

Cellulosic biofuels/BBD as an advanced biofuel can be used to meet the total renewable fuel standards or supplement conventional corn ethanol fuel standard if required. The predominant source of advanced biofuels is BBD. Therefore, any proposal to reduce advanced biofuel in 2018 also will lead to a reduction in the 2018 BBD volume requirements. 

The NODA proposal of EPA to reduce BBD volumetric standards is based on the assumption the effective price of biodiesel sold to biodiesel blenders and consumers has increased due to the expiration of biodiesel tax credits at the end of 2016. EPA also expects the price of biodiesel in the United States to increase in response to imposing countervailing duties on U.S. biodiesel imports from Argentina and Indonesia. EPA noted its concerned about the high cost of advanced biofuels due to these reasons. 

As described above, EPA stated the U.S. domestic price of biodiesel has been impacted by the expiration of the $1 blender tax credit at the end of 2016. Also, EPA expects the biodiesel price to be affected by the proposed tariff increase on U.S. imports. To understand the individual impact of the above two policy scenarios on domestic biodiesel price, scientific studies in relation to economic price analysis grounded on economic theory are warranted. 

The EPA final rule in the 2016 RFS shows the 2018 BBD volume standard to be 2.1 billion gallons as shown in Table 1. If EPA is to reduce the 2018 BBD RVOs in its final rule for the 2017 RFS, the BBD volume can be reduced up to a maximum of 15 percent of 2.1 billion gallons, which is equivalent to 315 million gallons. Note the main form of advanced biofuel is BBD. If the BBD volume requirement were to be reduced by 315 million gallons, an equivalent reduction in the 2018 advanced biofuel volume should be 473 million ethanol equivalent gallons (EPA, 2017). This is calculated assuming one BBD’s RIN (Renewable Identification Number) is equivalent to one-and-a-half ethanol RINs. As a result, the total renewable fuel volume requirement for 2018 may come down to 18.767 billion gallons at the maximum, compared to 19.24 billion gallons. If EPA determines it is appropriate to reduce the 2018 BBD volume standards, it’s likely to use similar reasoning to cut the 2019 BBD volume requirements. 

The EPA’s NODA proposal needs an extensive economic analysis grounded on data. But having very short historical time series data on biodiesel imports is an apparent limitation. Also, ad hoc blenders tax credit policy implemented by the federal government during the past few years will create significant limitations in the future economic analysis. According to Energy Information Administration (EIA) data, U.S. biodiesel production was 1.568 billion gallons in 2016. During the first seven months (Jan-July) in 2017, the total production is at 0.854 billion gallons, compared to 0.860 billion gallons during the same period in 2016. 

According to an AgMRC September 2017 report, U.S. biodiesel imports increased 6.4 percent to 201.8 million gallons during the first six months of 2017, compared with the same period in 2016 (189.8 million gallons). Imports of 171.2 million gallons from Argentina made up 84.8% of U.S. total biodiesel imports from January to June 2017. Despite the absence of the blender’s tax credit for biodiesel this year, Argentina’s biodiesel exports to the United States increased 77.1 percent from January to June 2017, with exports in May and June particularly high compared with the same months last year.

Assuming EPA does not reduce the 2018 mandate, the U.S. biodiesel producers will be forced to increase their production in order to meet the mandated volume of 2.1 billion gallons in 2018 as we anticipate significant decline in imports from Argentina and Indonesia. Current domestic capacity utilization in the U.S. biodiesel industry is approximately 70 percent. This should have been a primetime to rejuvenate U.S. biodiesel production by activating current abandoned excess capacity. However, the most recent proposal from the EPA further discourages the very basic motive of RFS and pushes the U.S. biodiesel industry backward.