EPA lowers target for cellulosic biofuels in gasoline

The Obama administration on Tuesday formally told refiners to blend 16.55 billion gallons of renewable fuels into the nation’s gasoline supply this year, while paring a specialized ethanol requirement that the oil industry had criticized as too ambitious and promising further reductions in the future.

The Environmental Protection Agency’s approach seemed designed to quell market fears surrounding the eight-year-old law that mandates steadily increasing use of corn-based ethanol, biodiesel, advanced biofuels and cellulosic supplies made from non-edible plant parts. Lawmakers are preparing for a major rewrite of the statute, as refiners warn they are hitting a “blend wall” where they can no longer mix in enough ethanol to meet the mandate’s volumetric targets without exceeding a 10 percent threshold acceptable for use in all cars and trucks.

Overall, the EPA told refiners that renewable fuels should make up 9.74 percent of the nation’s fuel supply and is requiring 1.28 billion gallons of biomass-based diesel and 2.75 billion gallons of advanced biofuels required this year — the same quotas the agency first proposed in February.

But the EPA slashed its initial proposal to require 14 million gallons of cellulosic biofuel, dropping the final 2013 quota to less than half that, 6 million gallons. Although cellulosic production facilities are coming online now, the biofuel generally has not been commercially available in the United States. And the oil industry has gone to court to battle the cellulosic requirement it derides as mandating a “phantom fuel.”

The EPA also promised to make other reductions when it proposes 2014 targets later this year. Specifically, the agency said it would pare both the advanced biofuel and total renewable volumes for 2014 by taking advantage of “flexibilities” in the renewable fuel standard:

“We expect that in preparing the 2014 proposed rule, we will estimate the available supply of cellulosic and advanced biofuel, assess the (10 percent ethanol) 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,” the EPA said in its final rule.

Although the EPA did not specify its exact path forward for 2014, the agency said it was “currently evaluating a variety of options and approaches” that are available under the law mandating the renewable fuels. The goal, EPA said, is “a reasonable path forward that appropriately addresses the blend wall and other constraints.”

The agency also said it would extend the deadline to comply with the 2013 volume requirements by four months, to June 30, 2014. That responds to industry’s concerns about the relatively late announcement of final renewable requirements, coming eight months into the year.

Related story: Oil companies break with trade groups on renewable fuel mandate

But the EPA did not go far enough to satisfy oil industry critics. American Petroleum Institute President Jack Gerard said the EPA should have made major changes to the program this year.

“While the administration acknowledges that higher ethanol mandates are unworkable by suggesting a new approach for the 2014 standards, EPA missed an opportunity to fix the problem this year,” Gerard said. “Now it’s up to Congress to exercise leadership and move quickly to end this dangerous mandate before it hurts consumers, damages vehicles, and harms our economy.”

Charles Drevna, president of the American Fuels and Petrochemical Manufacturers, said EPA “failed to provide refiners and consumers immediate and necessary relief against the E10 blendwall and skyrocketing costs of our nation’s biofuel mandate.”

And Sen. David Vitter, R-La., said that while “the EPA has finally realized that there is a major problem with the RFS,” the agency “punted on fixing the problem this year.”

Still, oil industry representatives said they were encouraged by EPA’s promise to address blend wall concerns when the agency sets 2014 targets.

“The administration now agrees that the blend wall is real and that they do not intend to sit by idly to see what the consequences of that would be on gasoline markets,” said Stephen Brown, a lobbyist for the San Antonio-based refiner Tesoro Corp. At the same time, Brown said, the EPA was sending Congress “a clear signal” to tackle the renewable fuels mandate legislatively.

Biofuels backers said the EPA’s decision to reduce the required amount of cellulosic fuels shows the agency already has enough flexibility under the renewable fuels law to adapt to marketplace realities without changes from Congress.

In slashing the cellulosic requirement, “the EPA has totally obliterated Big Oil’s myth that the RFS is inflexible and unworkable,” said Bob Dinneen, president of the renewable Fuels Association. “The finalized annual requirements are a testament to the inherent flexibility that is the backbone of the RFS.”

Renewable fuel advocates have argued that if Congress dismantles the RFS or the EPA dramatically reduces required volumes, it could jeopardize planned new biofuels production facilities and costly research into promising new technologies. Some segments of the industry are hoping that administrative adjustments to the program by EPA could stave off a larger legislative rewrite on Capitol Hill.

“We are at a critical juncture in the implementation of the RFS, with advanced biofuels just beginning to come online,” said Brooke Coleman, executive director of the Advanced Ethanol Council. “Careful administration of the program is absolutely critical right now to get the right balance between the legislative intent of the program and the market response to the program.”

To comply with the RFS, refiners must buy biofuel credits. The price of those so-called RINs climbed to over $1 per gallon earlier this year, partly on blend wall fears, but prices dropped recently in anticipation the EPA might tweak requirements.

Analysts at FBR Capital Markets said that even with the EPA’s reduction to the cellulosic target, U.S. biofuel production could fall short of what is needed, potentially forcing refiners to tap most of a 2.5 billion RIN stockpile.

Some oil industry representatives say a runup in RIN prices could cause gasoline prices to climb. Valero CEO Bill Klesse told senators last month that the RFS and the underlying RIN market is out of control.

“RINs have become a market all to themselves, which was never the intention of the law, and that continues to cost consumers money and increase the cost of gasoline,” Klesse said in a statement Tuesday. “Today’s announcement by the EPA looks good on paper, but we will have to wait and see what the effects will be on current RIN prices.”

But some analysts say RINs have little affect on pump prices. Adam Sieminski, the head of the government’s Energy Information Administration, told lawmakers in June that RIN prices were not having a significant impact on the cost of gasoline.

First enacted as part of a 2005 energy law, the renewable fuel standard was envisioned as a way to help wean the U.S. off foreign oil and encourage the development of cleaner-burning biofuels as American gasoline demand climbed. But eight years later, more fuel-efficient cars are on American roads, causing U.S. gasoline demand to stay flat, even as the law’s renewable fuel requirements rise annually.

Another challenge is market acceptance of higher ethanol blends, including an 85 percent version for flex-fuel vehicles. Although the EPA approved a 15 percent ethanol blend known as E15 for cars and trucks made since 2001, it is not widely available at filling stations, and some automakers say they will not honor vehicle warranties if it is used.

Leaders of the House Energy and Commerce Committee issued a series of five white papers on the mandate and asked stakeholders to weigh in ahead of two days of hearings last month. Chairman Fred Upton, R-Mich., and the panel’s top Democrat, Rep. Henry Waxman of California, said they will use the August congressional recess “to discuss bipartisan solutions that take into account the broad range of concerns we have heard.”

Upton and Waxman may assemble a task force of lawmakers, including possibly Rep. Gene Green, D-Houston, and Rep. John Shimkus, R-Ill., to develop a compromise approach to the renewable fuel mandate.

Separately, Sen. Barbara Boxer, D-Calif., said her Environment and Public Works Committee will hold a hearing on the renewable fuel standard this fall.

Refiners and state leaders could petition the EPA for additional relief. The agency has twice rejected such waiver requests, both led by Texas Gov. Rick Perry.