EPA add-up RFS and the biodiesel blenders tax credit
The Environmental Protection Agency (EPA) proposed method to reset biofuel requirements annually based on expected use implies different mechanics for the Renewable Fuel Standard (RFS) in the future. The new mandate setting could be described as 'adding-up' the market potential for E10 and E85 ethanol, biodiesel and other non-ethanol fuels. The proposed "Add-Up" method implies that our understanding of how a blender's tax credit affects markets must change, for example. A tax credit, such as the biodiesel blender's credit, that encourages biofuel use would mean higher expected use, so the requirement would be raised in current or subsequent years. Instead of making the RFS easier to meet, a blender's tax credit might just increase the size of the Add-Up RFS.
EPA proposes new mandates and a new method
In its proposed rule for the 2014 RFS, EPA announced a plan to waive a portion of the RFS from 2014 on, a notable break from previous proposals. The Energy Independence and Security Act (EISA) set out fixed minimum volumes of biofuel use in each year. The EISA had four mandates, with the overall including all types of qualifying biofuels, the advanced requirement for biofuels with higher GHG emission reductions, and the biomass-based diesel and cellulosic mandates targeting types of advanced biofuels. In this hierarchy, extra biomass-based diesel can help to meet the advanced or overall requirement, displacing ethanol, but other advanced or conventional biofuels cannot help to meet the biomass-based diesel requirement.
click image to zoom The EPA proposal maintains the hierarchy, but replaces the set targets of the EISA with annual estimates of how much renewable fuel use is 'expected' (Figure 1). The Add-Up method sets the biomass-based diesel requirement at the higher of a base level of 1.28 billion gallons or expected use. The cellulosic requirement is set at anticipated production or use. Advanced is the sum biomass-based diesel and cellulosic requirements, plus any non-ethanol advanced biofuels. The overall requirement is the sum of advanced requirement and whatever amount of ethanol use is expected in E10 and higher level blends. One implication of the proposed Add-Up method is that the volume that could have been met with advanced and conventional ethanol under EISA (14.48 billion gallons) is replaced with a lower value based on expected use (13.34 billion gallons). Higher expectations of E85 use would appear to lead directly to a larger mandate. Higher RIN prices would appear to lead to additional E85 consumption would then potentially lead to greater future mandates.
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