We have had a number of previous farmdoc daily posts discussing the potential problems in implementing the Renewable Fuels Standards (RFS) due to the expanding gap between the implied mandate for renewable biofuels (ethanol) and the E10 blend wall (see here, here, here, and here). We argued that the EPA faced several constraints as it considered potentially momentous decisions about the RFS rules for 2014 and 2015. The EPA announced preliminary rulemaking for 2014 on November 15, 2013, and the proposal did indeed signal a significant shift in EPA policy. The most surprising and controversial aspect of the proposal was the write down of the renewable mandate from 14.4 to 13 billion gallons. This was much larger than anticipated by most analysts (at least prior to the leak of the proposed rulemaking earlier this year) and more aggressive in dealing with blend wall constraints than our own "Freeze It" proposal. The purpose of today's post is to trace through the likely implications of the proposed EPA rulemaking in the same manner that we analyzed alternative implementation options in our earlier posts. Specifically, we investigate two scenarios: 1) implementation of 2014 and 2015 rules as proposed by the EPA, and 2) implementation of 2014 and 2015 rules identical to the EPA proposal with the exception that the renewable mandate is not written down.
2014 Proposed Rules
There should be no doubt that E10 blendwall constraints drove the shift in EPA policy regarding implementation of the RFS mandates. The change is summarized in the following statement from the Fact Sheet for the proposal:
The proposal seeks to put the RFS program on a steady path forward - ensuring the continued growth of renewable fuels while recognizing the practical limits on ethanol blending, called the ethanol "blend wall."
This new implementation framework basically takes the E10 blend wall as a starting point and builds the mandated volumes up from this starting point. EPA rulemaking in previous years worked in essentially the opposite fashion by taking the total RFS volume in the statute as the starting point and then reducing the cellulosic sub-mandate as needed. Based on the new framework, the EPA preliminary rule making for 2014 proposed a write down of the cellulosic mandate, the advanced mandate, and the total mandate. The proposed volume requirements, by fuel category, along with the 2013 volume requirements and the statutory requirements for 2014 are presented in Table 1. These volumes are in ethanol equivalents, except for biomass-based diesel which is stated in actual "wet" gallon terms. Further details on the proposed 2014 volumes can be found in this farmdoc daily post by Seth Meyer and Rob Johansson.
The proposed cellulosic volume reflects EPA judgment about production potential in 2014 and represents a 1.733 billion gallon write down of the 1.75 billion gallon cellulosic mandate for 2014. This continues the very large write downs of the cellulosic mandate in recent years in view of the slower than expected ramp up in cellulosic production volumes. The proposed biomass-based biodiesel volume of 1.28 billion gallons is equal to that of 2013 and above the minimum of one billion gallons required by the RFS. Interestingly, the EPA also proposed holding the biomass-based diesel mandate constant at 1.28 billion gallons in 2015. The proposed total advanced biofuel volume of 2.2 billion gallons is 0.55 billion gallons less than the 2013 requirement and 1.55 billion gallons less than the RFS for 2014. The write down of 1.55 billion gallons for the total advanced mandate is smaller than allowed based on the 1.733 billion gallon write down in the cellulosic requirement. The implied volume requirement for renewable fuels (difference between the total and the advanced) is 0.79 billion less than the 2013 requirement and 1.39 billion less than the RFS for 2014. We use the term implied mandate for renewable biofuel because that category can also be satisfied with additional blending of advanced biofuels.