The Biofuels Renewable Fuel Standard – EPA to the Rescue
The Renewable Fuel Standard (RFS) has become controversial this year because for the first time it will be difficult to meet the required RFS levels. The oil industry and other lobby groups have argued that the RFS should be scrapped, while the pro-biofuels lobby has argued that it is working and can be made to function as it was intended. The RFS is administered through Renewable Fuel Identification Numbers (RINs), which all obligated parties are required to submit to EPA at the end of each year. All biofuels produced domestically or imported come with a RIN. Obligated parties just accumulate RINs as they blend during the year, and turn in their requirement at the end of the year. RINs are tradable, so if a company has too few or too many RINs, it can go to the market and buy or sell RINs. In addition, RINs can be carried forward from one year to the next if there are excess RINs. For corn ethanol, the RIN price prior to 2013 has generally been less than 5 cents per gallon. This low price indicated that the RFS really was not binding. However, in the first quarter of 2013, corn ethanol RINs shot up to over $1 per gallon signaling that the RFS together with the blend wall are now binding.
On August 6 the Environmental Protection Agency issued their final ruling for the 2013 RFS [1, 2]. In addition to providing all the final RFS levels for 2013, it also provided an indication that for 2014 and perhaps beyond, EPA intends to accept the reality that it will be difficult to meet the RFS levels that increase each year through 2022:
Given these challenges, EPA anticipates that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements, including to both the advanced biofuel and total renewable fuel categories. We expect that in preparing the 2014 proposed rule, we will estimate the available supply of cellulosic and advanced biofuel, assess the E10 blend wall and current infrastructure and market-based limitations to the consumption of ethanol in gasoline-ethanol blends above E10, and then propose to establish volume requirements that are reasonably attainable in light of these considerations and others as appropriate. 
Essentially what this implies is that EPA intends to reduce the overall RFS and the advanced RFS by the amount of reduction in the cellulosic component. So far, EPA has been forced to reduce the cellulosic mandate every year because the biofuel was not available. However, in reducing the cellulosic mandate, they have maintained the overall mandate at its original level. What this means is that the shortfall in cellulosic biofuels must be made up from other advance biofuels such as sugarcane ethanol or biodiesel. However, today with the ethanol blend wall, biodiesel RINs are needed to meet the shortfall in ethanol, so it became pretty clear that moving forward, the RFS was not workable. The above paragraph also signals that EPA will take into account the ethanol blend wall in setting the RFS levels for 2014 and beyond. The RFS problem is illustrated in Table 1. The table provides numbers for 2014-16. The first row provides the overall RFS, which in the past EPA has maintained even when it reduced the cellulosic mandate. Rows 2 and 3 provide the conventional total and the level of the blend wall (13.3 bil. gal.). The next row provides my assumption on the amount of carry-forward RINs that will be available for 2014. If prior practice were maintained, all the carry-forward RINs would be needed in 2014, and none would be available for 2015 and beyond. The sugarcane row provides my assumptions on sugarcane ethanol imports, and these levels are much higher than recent history. The corn ethanol row is the blend wall minus sugarcane ethanol imports. The next two rows provide biodiesel RINs and assumed biodiesel production. The assumed biodiesel production is much higher than current, which is about 1.3 bil. gal. Biodiesel has 1.5 times the energy content of ethanol so each gallon gets 1.5 RINs. Next are the advanced RFS mandate and the advanced supplied (sugarcane ethanol plus biodiesel RINs). The final row provides the total RINs generated under these assumptions. For 2014, with pretty extreme assumptions on sugarcane ethanol imports plus biodiesel production and using all carryforward RINs, it is barely possible to meet the RFS. In 2015 and 2016, we cannot even come close to meeting the RFS (row 1). Table 1 illustrates the problem and the reasons EPA was compelled to act.
Table 2 contains numbers assuming that EPA reduces the overall mandate in two ways. First, they reduce it by the amount of reduction in the cellulosic mandate. Second, they reduce it taking into account the blend wall. The structure of Table 2 is similar to Table 1, but with four added rows. The first added row is labeled revised conventional, which represents an assumption of what EPA might view as a realistic assumption on the blend wall. I have set the level higher than the current blend wall assuming EPA would want to encourage more blending of E85, which is quite limited at present. The next added row is actual cellulose, which represents assumptions on what EPA might deem to be the cellulosic biofuels available in 2014-16. The values given are just assumptions, but are probably pretty close to what will transpire. The third added row is revised overall total. It is equal to the original RFS total minus the cellulose mandate plus the actual cellulose minus the difference between the conventional RFS and the revised conventional. Using this approach, the revised total in 2016 is almost 5 bil. gal. lower than the original total. The last row added is revised advanced, which is equal to the advanced RFS minus the cellulosic mandate plus the actual cellulose. The bottom line is that with these changes in the RFS, the targets can be met with reasonable assumptions on the corn ethanol blend wall, sugarcane ethanol, and biodiesel production.
All we have from EPA on what they intend to do for 2014 and beyond is in the text quoted above. The devil is in the details. However, it is clear that if EPA does what is implied in the text, the RFS moves from being unworkable to quite manageable. Thus, EPA has taken a preemptive strike to make the RFS continue to work in promoting renewable fuels without imposing undue costs on producers or consumers.
1. Environmental Protection Agency, EPA Finalizes 2013 Renewable Fuel Standards. August 6, 2013: Washington, D.C.
2. Environmental Protection Agency, 40 CFR Part 80, Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards. August 6, 2013: Washington, D.C.