Corn Ethanol Faces Its Limits Under EPA Fuel Mandate

Jun 08, 2017
By John Siciliano
 
Corn ethanol has reached its official limit under the Environmental Protection Agency’s renewable fuel program, which means other less-developed, low-carbon fuels will have to step up to fill a 21 billion-gallon gap by 2022.
 
Depending on where you stand on the future of the Renewable Fuel Standard, the cap on corn can be a blessing, a challenge or a curse.
 
Under the Renewable Fuel Standard, which was passed by Congress in 2007, refiners must blend 36 billion gallons of biofuels in the nation’s gasoline and diesel fuel supply by 2022. Corn ethanol, the biggest component of the program, and other conventional biofuels are capped at 15 billion gallons beginning in 2017.
 
That means the remaining 21 billion gallons must be met by advanced biofuels derived from everything from municipal waste to switch grass cellulose and even algae. But those fuels are falling short of the amount required to be blended as of this year, raising serious questions about the future of the program after 2022.
 
Gasoline and diesel refiners say the gap will create a situation in which differing biofuel factions spar against one another over their share of the market.
 
The RFS program has three buckets to fill or requirements to meet, including the conventional bucket met primarily by corn ethanol and, to a lesser extent, soybean biodiesel. Advanced biofuels are second and cellulosic biofuels third. Advanced and cellulosic biofuels are separated by the amount of carbon dioxide the fuels displace to fight climate change. Cellulosic is considered the most climate-friendly of the fuels.
 
The corn ethanol and biodiesel producers want “to fill the advanced bucket as much as possible,” while the advanced biofuel industry sees that strategy “as a threat to that nascent industry,” said Stephen Brown, federal affairs vice president for the large refiner Tesoro.
 
Refiners’ opinion on the future of the program is “dependent upon whether they have conventional production capabilities or making investments in the advanced sector,” Brown said. But the “fear factor facing all sides to this debate is what happens after 2022, when EPA assumes control of the RFS program without any legislative guidance to speak of,” he said.
 
The 2007 energy bill sets the requirements only through 2022. Nobody knows what happens after that, officials say. Without Congress stepping in, the EPA is free to interpret the goals of the program, which in the past has landed the agency in court. The oil industry wants Congress to reform or repeal the program, which lawmakers are expected to address at some point in the legislative session.
 
It is also not clear what EPA will do under the leadership of Administrator Scott Pruitt, who has authority in implementing the program beginning in 2018. Large ethanol producers met at the White House last week to discuss the requirements for 2018 that were sent to the Office of Management and Budget. Some ethanol industry sources want Pruitt to at least keep the limit on conventional biofuels at 15 billion gallons and not alter that in favor of the oil industry, which wants less ethanol in gasoline.
 
“That can’t be good for anyone, so perhaps all stakeholders now have enough risk to want to [finally] engage in serious negotiations,” Brown said.
 
But the biofuel and ethanol camps don’t buy the scenario that Brown and the oil industry are pushing.
 
“The narrative from the oil industry about conflict and competition between biofuel producers is a fake one,” said Paul Winters, spokesman for the Biotechnology Industry Organization, representing advanced biofuel producers. The oil industry is “trying to prolong the atmosphere of uncertainty with the RFS, because they know that uncertainty kills investment [in a competitor’s product],” Winters said.
 
Others such as Monte Shaw, the executive director of the Iowa Renewable Fuels Association, said the RFS gives some wiggle room even with the limit on corn ethanol.
 
Shaw said that because refiners are still using a big chunk of renewable fuel credits held over the last few years, it provides more room for ethanol to be blended once the credits are used up.
 
The credits are given for each gallon of ethanol that is blended into the gasoline supply. The credits can be bought, sold and traded according to the need of oil refiners to comply with the RFS. The credits are given to the EPA by refiners to show that renewable fuels have been blended. A refiner also can save up credits and use them to show the EPA that it is abiding by the standard each year in lieu of actually blending ethanol and other biofuels into the fuel supply.
 
“This is important because some folks might assume a 15 [billion gallon] conventional [requirement] equates to 15 BG of domestic corn ethanol use. It does not,” Shaw said. “This year a good ballpark guess might be 14.3 BG of corn ethanol, 0.3 BG of palm oil biodiesel, and 0.4 billion [credits] from the carryover ‘[renewable fuel credit] piggybank'” will be used in meeting the conventional standard, Shaw said.
 
As the credits diminish, the credit prices rise, which provides a greater incentive for blending higher blends of ethanol in gasoline, which is how the standard was envisioned to work, Shaw said.
 
“Therefore, even with the conventional [requirements] ‘flat-lined’ at 15 BG, there is still growth potential for corn ethanol in the U.S. within the confines of the RFS for the next couple of years,” he said in an email.
 
Another ethanol industry official said there is enough room for all the biofuel groups, even with the corn ethanol limit coming into effect.
 
But the ethanol industry and corn growers will be looking for new markets. That means more ethanol exports to Asia, with growth markets being eyed in India. China is another huge market for corn ethanol, but it has imposed protectionist tariffs to push the U.S. out, which the ethanol industry wants the Trump administration to fight.
 
The confirmation of former Iowa Gov. Terry Branstad to be ambassador to China is seen by the ethanol industry as one assurance that the administration will take the U.S. corn ethanol industry’s case to Beijing. Branstad is a longtime supporter of ethanol and the fuel standard as former governor of the nation’s leading biofuel and corn producer.
 
Shaw said the future for corn ethanol includes some growth under the RFS, increased focus on exports, and the expanded use of higher blends of ethanol that includes 15 percent ethanol-to-gasoline fuel blends, which the gasoline industry has fought tooth and nail.
 
“Different conventional producers may follow different strategies, but they all need to develop new markets and new products that maximize their capital investment,” Winters added.
 
Some will choose to produce corn oil to meet the biodiesel target under the EPA program, while others will produce more advanced ethanol from waste grasses and corn byproducts, Winters said.
 
Higher ethanol blends would be used to capture the market that can still be opened up with the use of cellulosic ethanol, which is supposed to nearly fulfill all the growth required by 2022, according to biofuel industry officials.
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