US President Barack Obama’s administration on Wednesday last week tried to strike a cautious compromise in setting quotas for a controversial renewable fuels program that pits “Big Oil” against “Corn Belt” interests.
The US Environmental Protection Agency (EPA) proposed compelling refiners to blend 71.17 billion liters of biofuel into the US gasoline and diesel supply next year, with no more than 56 billion liters of that coming from conventional corn-based ethanol.
The overall number — which is higher than oil companies wanted, but lower than what biofuel producers sought — represents a modest increase over the 68.5 billion liters of total renewable fuels the agency required for this year.
Illustration: Yusha
However, it is still far below a 91-billion-liter biofuel target that lawmakers established in a 2007 statute and it dips below the law’s 56.7 billion cap on conventional renewable fuel, limiting the potential for ethanol producers such as Archer-Daniels-Midland Co, Green Plains and Pacific Ethanol.
The EPA’s proposal — like last year’s version — reflects oil companies’ concerns that the Renewable Fuel Standard is pushing them beyond a “blend wall” where the targets force them to mix a higher proportion of ethanol into fuel than the 10 percent level approved for use in all cars and trucks.
“It’s a very cautious proposal,” said Pavel Molchanov, a senior vice president and analyst at Raymond James Financial Inc in a telephone interview. “That’s really a reflection, particularly for corn-ethanol, that blending is very close to that 10 percent threshold.”
Biofuel backers blasted the EPA’s plan, saying the agency was kowtowing to oil companies.
“The agency continues to cater to the oil industry by relying upon an illegal interpretation of its waiver authority and concern over a blend wall that the oil industry itself is creating,” Renewable Fuels Association president and chief executive officer Bob Dinneen said in an e-mailed statement. “As a consequence, consumers are being denied higher-octane, lower-cost renewable fuels. Investments in new technology and advanced biofuels will continue to languish and greenhouse gas emissions from automobiles will be unnecessarily higher.”
Advanced Biofuels Business Council executive director Brooke Coleman said the proposed targets do not live up to the goals of the Renewable Fuel Standard: To drive the commercialization and use of low-carbon alternatives on US roads.
“If the administration wants our industry to be aggressive when it comes to financing and commercializing low-carbon fuels in the United States, as they have asked us to do, they need to hold up their end of the bargain and make some critical adjustments to the RFS [Renewable Fuel Standard] final rule,” Coleman said in an e-mailed statement.
Oil industry trade groups had lobbied the EPA to cap the total ethanol mandate at 9.7 percent of gasoline demand — an amount that would provide a buffer below the 10 percent blend while simultaneously accommodating sales of ethanol-free gasoline.
The EPA’s proposal instead would require ethanol to be about 10.3 percent to 11 percent of gasoline demand — about the same as the 10.4 percent to 10.9 percent volume estimated for this year’s quotas — according to calculations from the American Petroleum Institute.
“From our standpoint, it continues the threat of breaching the blend wall,” said Frank Macchiarola, group director of downstream and industry operations at the institute. “EPA is pushing consumers to use high ethanol blends they don’t want and that are not compatible with most cars on the road today. The administration is potentially putting the safety of American consumers, their vehicles and our economy at risk.”
Although modest, the EPA’s proposed 2.1 percent increase in required renewable fuel that could be derived from corn starch is a benefit for ethanol producers and represents a continuing headwind for oil refiners, FBR Capital Markets & Co senior energy policy analyst Benjamin Salisbury said.
“The EPA continues to very slowly edge the market above the 10 percent blend wall, which we view as part of a concerted effort to incentivize consumption of higher blends over time without risking market disruption,” Salisbury said in a note to clients.
Rob Barnett, a senior energy policy analyst at Bloomberg Intelligence in Washington, said that the EPA was doing its best “to hit the ball straight down the middle” and to be respectful of the blend wall.
Still, he said the “higher targets will probably put some cost pressure on some refiners. Refiners are going to have to blend more.”
Under the EPA’s proposal, refiners would be forced to blend 15 billion liters of advanced biofuels next year, including 1.2 billion liters of cellulosic ethanol and 7.6 billion liters of biomass-based diesel.
That target “significantly understates” potential biodiesel production, National Biodiesel Board vice president of federal affairs Anne Steckel said.
Similarly, DuPont, the chemical and agribusiness company, said in a statement it was “disappointed” with the proposal, because the numbers reflect infrastructure constraints — such as too few E15 and E85 filling stations — instead of producers’ ability to supply biofuels.
The EPA is likely to boost its proposed 56 billion ceiling for conventional corn-based ethanol to the 56.8 billion cap in federal law when the quotas are finalized, said Tim Cheung, vice president of the Washington-based policy analysis firm ClearView Energy.
Denatured ethanol for next month delivery climbed to US$0.44 per liter on the Chicago Board of Trade, the highest since July last year. Renewable identification numbers, the tradeable credits that EPA and refiners use to show compliance with the law, jumped 12 percent to US$0.83, according to Florida-based brokerage StarFuels.
Biofuel producer shares also moved higher on Wednesday. Green Plains, the fourth-biggest US ethanol maker, rose 4.4 percent to US$15.70 in New York. Renewable Energy Group Inc, an Ames, Iowa-based biodiesel producer, jumped 0.9 percent to US$9.31. Pacific Ethanol, a company with plants along the West Coast and in the Midwest, climbed 5.1 percent to US$4.33. Rex American Resources Corp, an ethanol company in Dayton, Ohio, advanced 1.5 percent to US$52.85, the highest in more than two weeks.
The EPA is partly relying on climbing gasoline use to support the higher overall quotas. Americans are to consume a record 541 billion liters of gasoline this year, according to a May 10 forecast from the US Energy Information Administration.
The proposal is now subject to public comment through July 11, with a public hearing scheduled June 9 in Kansas City, Missouri. The EPA has until Nov. 30 to finalize the quotas for the following year — a deadline it has repeatedly missed.
However, under a court order last year, the EPA rolled out three years’ worth of biofuel targets, and agency officials stress that they are back on schedule.
“This administration is committed to keeping the RFS program on track, spurring continued growth in biofuel production and use, and achieving the climate and energy independence benefits that Congress envisioned from this program,” said Janet McCabe, acting assistant administrator of the EPA Office of Air and Radiation.
When US Congress expanded the Renewable Fuel Standard nine years ago, it required steadily escalating volumes of biofuels to be blended into the country’s gasoline and diesel fuels. The program lays out a target of 90.85 billion liters of renewable fuels next year, with no more than 56.8 billion of them coming from traditional corn starch-derived ethanol.
The law also empowers the EPA to lower the numbers in some cases. The agency did that for the first time for overall renewable fuels last year, sparking a legal challenge from biofuel producers. The litigation challenging this year’s targets is not likely to be resolved before the EPA’s November deadline to finalize next year’s quotas.
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