USDA economists dig into details of the EPA proposed RFS rule

By Holly Jessen | November 21, 2013

A recent FarmDoc Daily post features an analysis of the recent U.S. EPA proposal for the renewable fuel standard written by two economists of the USDA, Seth Meyer, senior economist in the office of the chief economist, and Rob Johansson, deputy chief economist.

The proposed rule for the 2014 renewable volume obligations (RVO) significantly reduces the required cellulosic volumes from 1.75 billion gallons to 17 million gallons. Lowering the required cellulosic gallons has happened previously. This time, however, the EPA also proposed a more than 3 billion gallon reduction in the overall required volumes. “Under the proposed volumes, biofuel prices and the blend wall will largely determine a fairly narrow range of about 460 million gallons—about a day and a half worth of U.S. motor fuel consumption—where much of the action in the biofuels market is likely to occur,” the authors wrote. “It is this volume which will intersect the blend wall, influencing RIN (renewable identification number) prices and where biodiesel, corn ethanol and sugarcane ethanol imports will face off.”

In summary, the authors said the proposal could reduce the potential for imports of sugarcane ethanol from Brazil, reduce the blending of corn-ethanol and/or increase biodiesel blending. “Blending margins in 2014, which will determine the profitability or economic cost of physically blending biofuels, will be other major factor next year given the potential use of accumulated RIN stocks towards mandate compliance,” they concluded.

The EPA’s proposal is based off 13.021 billion gallons, what it has calculated as the maximum absorption of ethanol likely to occur in 2014, also known as the blend wall. That consists of 12.841 billion gallons of E10, zero gallons of E15 and 180 million gallons of E85. “Taking the difference between the 15.21 billion gallon total mandate and the 13.021 billion gallon blend wall and the 1.92 billion EV (ethanol equivalent) gallons of biodiesel leaves approximately 280 million gallons of other non-ethanol advanced fuels which will be needed for compliance in 2014,” the authors said.

Three possible scenarios were outlined, if the proposal becomes a final rule. With a 13.021 billion gallon blend wall, Brazilian ethanol imports could decrease, depending on pricing. However, imports could be higher than estimated, depending on the draw of California's low carbon fuel standard (LCFS) and other state policies. The remainder of the advanced fuels category would likely be satisfied by biodiesel and other non-ethanol fuels, the authors said.

If, however, the EPA has miscalculated and the blend wall is actually higher than 13.021 billion gallons, corn ethanol may not directly benefit since the proposed RVO caps corn ethanol’s share at 13.01 billion gallons. In that scenario, imported sugarcane ethanol could increase. “That is, an expansion of the blend wall from EPA's assumed level will likely benefit ethanol importers and displace biodiesel in the market place in 2014, but could potentially result in a higher total mandate calculation in the following year,” the authors wrote. “Note that market conditions could promote corn ethanol production beyond the RFS needs, but the excess production would need to be exported due to the blend wall.”

In the third and final scenario, the authors considered what would happen if the EPA’s blend wall calculation was too high. This would also reduce the potential use of domestic corn ethanol. “Furthermore, any RFS-related incentives to import sugarcane ethanol would be reduced unless it was priced below domestic ethanol, which would further crowd out demand for domestic corn-based ethanol,” the paper said. “Biodiesel of all types and other non-ethanol fuels would be required to 'backfill' this additional need for mandate compliance driven by the tighter blend wall level.”