In the face of a small corn crop and high prices, there has been a great deal of debate about a partial temporary waiver of the Renewable Fuels Standards (RFS) mandate for ethanol in 2013. Our analysis of the likely impacts of such a waiver can be found here. While the headlines have focused on the short-term implications of waiving the ethanol mandate in 2013, a potentially much larger issue looms on the horizon.

Beyond 2013, there are real questions about the feasibility of meeting the ever-increasing requirements of the RFS, and this concern goes beyond the well-known difficulties with meeting the mandate for cellulosic biofuels. The purpose of this post is to show why the RFS is likely to collide with market realities in the near future.

We begin by reviewing the RFS requirements for minimum domestic biofuels consumption in the U.S. as summarized in Table 1. There are three categories in the RFS and each has its own minimum volumetric mandate: renewable, advanced, and total. Renewable biofuels is generally assumed to be corn-based ethanol but this is actually not explicitly required by the RFS legislation. Instead, corn-based ethanol has been the cheapest alternative for this category that also meets the environmental requirements of the RFS. Advanced biofuels has three sub-categories: cellulosic, biodiesel, and undifferentiated. Cellulosic biofuels have been in very limited supply, so the Environmental Protection Agency (EPA), the government agency charged with enforcing the RFS mandates, has written down the cellulosic mandate to near zero (8.65 million gallons in 2012). The biodiesel mandate was established as a minimum of one billion gallons per year from 2012 through 2022, with larger amounts subject to EPA approval. That mandate has been set at 1.28 billion gallons for 2013. A key point is that to date the EPA has not written down the total mandate for the RFS at the same time as it has reduced the mandate for cellulosic biofuels to near zero. This means that the burden of fulfilling the total advanced component of the mandate has fallen almost entirely on the biodiesel and undifferentiated categories.

There are two separate but related issues surrounding the implementation of the RFS in the near future. One is the so-called blend wall for renewable biofuels (almost entirely ethanol) and the second is the availability of advanced biofuels feedstocks. We illustrate the effect of these issues using a baseline scenario for RFS implementation. Table 2 presents the RFS baseline for the next three years (2013-2015) under the simplifying assumptions that (1) cellulosic mandates will continue to be written down to a level near zero, (2) the biodiesel mandate remains at 1.28 billion gallons, and (3) the total RFS is not changed.

Before proceeding with the analysis it is important to note two further considerations. First, fuels qualifying as biodiesel can be applied toward the biodiesel, undifferentiated advanced, or the renewable mandate. This reflects the nested structure of the RFS mandates based on the contribution of different biofuels in reducing greenhouse gas emissions. (See this recent post by Nick Paulson and Seth Meyers for further details on the nested structure of the mandates.) Second, biodiesel has an ethanol equivalent of 1.5 for the purposes of RFS compliance so that a physical gallon of biodiesel counts as 1.5 gallons towards the advanced and total mandates, effectively reducing the physical gallons needed to meet the undifferentiated advanced biofuels mandate. In 2013, for example, 1.28 billion gallons of biodiesel would count as 1.92 billion gallons for meeting the advanced biofuels mandate, reducing the effective mandate for undifferentiated biofuels from 2.47 billion gallons to 830 million gallons. That mandate then could be met with an additional 553 million gallons of biodiesel (830/1.5), 830 million gallons of other advanced biofuels, or some combination of the two.

Blend Wall Issues for Renewable Biofuels

We have discussed the issue of the blend wall for renewable biofuels in a previous post. The blend wall is reached when the ability to physically blend renewable biofuels in the domestic motor gasoline supply is reached. With renewable biofuels (ethanol) currently blended at mostly the 10 percent level (E-10) with small quantities of E-15 and E-85, the blend wall is just over 10 percent of domestic motor gasoline consumption. Estimates of the blend wall for 2008-2015 in volumetric terms are presented in Figure 1. The estimates are computed as 10 percent of the Energy Information Administration (EIA) figures for actual (2008-2011) or forecast (2012-2013) total finished motor gasoline consumption for the U.S. We assumed for this analysis the same forecast for 2014 and 2015 as currently forecast for 2013. This chart highlights the drop in motor gasoline consumption in the U.S. after 2010. For 2013, gasoline consumption is forecast at about 133 billion gallons, meaning that a maximum of just over 13.3 billion gallons of renewable biofuels can be blended if the vast majority of the blending is at the 10 percent level.

The impact of the blend wall and the RFS mandates will be evident starting in 2013. The mandate for 2013 is 13.8 billion gallons, which when compared to a blend wall of 13.3 billion gallons leaves a shortfall of about 500 million gallons in the consumption of renewable biofuels. There are three possible remedies for that shortfall. First, the blend wall can be expanded by more rapid implementation of E-15 and E-85 or by increasing domestic motor gasoline consumption. Second, discretionary blending of biodiesel (blending in quantities in excess of the 1.28 billion gallon mandate) could fill the gap. In 2013, for example, an additional 333 million gallons of biodiesel would be required to make up the entire 500 million gallon shortfall in renewable biofuel blending. Third, RIN credits from previous discretionary blending of renewable biofuels (estimated at 2.5 billion gallons) could be used to make up the difference between the mandate and the blend wall.

These alternatives provide a relatively straightforward solution to the blend wall in 2013, but the blend wall becomes much more problematic in 2014 and beyond. Without an increase in gasoline consumption or an increase in consumption of E-15 and E-85, the difference between the mandate and the physical ability to blend grows from 500 million gallons in 2013 to 1.1 billion gallons in 2014 and 1.7 billion gallons in 2015. RINS credits from previous discretionary blending would likely be exhausted sometime in 2014. If the blend wall could not be sufficiently expanded to blend 15 billion gallons of renewable biofuels by 2015, the mandate would have to be met with discretionary blending of biodiesel since the blend wall effectively caps the amount of ethanol that can be blended and qualify as advanced biofuel. The possibility that renewable mandates would have to be met with biodiesel leads directly to the second issue of the availability of feedstocks for biodiesel production.