The Soviet-style production quota for ethanol, pompously titled the Renewable Fuel Standard (RFS), is in trouble. The RFS requires more ethanol to be sold than can actually be blended into the nation’s motor fuel supply. This “blend wall” problem will get worse as RFS production quota and federal fuel economy standards ratchet up, forcing refiners to blend more and more ethanol into a shrinking motor fuel market.

Here’s the math. Total domestic U.S. motor fuel sales in 2011 stood at 134 billion gallons. Although the U.S. population is increasing, overall motor gasoline consumption is projected to decline by 14% as fuel economy standards tighten between now and 2025. Already, the 2013 blending target for “conventional” (corn-based) biofuel – 13.8 billion gallons — exceeds the 13.4 billion gallons that can be blended as E10 (a fuel mixture containing 10% ethanol).

By 2022, the RFS requires that 36 billion gallons of biofuel be sold in the domestic market, including 21 billion gallons of “advanced” (low-carbon) biofuel, of which 16 billion gallons are to be “cellulosic” (ethanol derived from non-edible plant material such as corn stover, wood chips, and prairie grasses). Because commercial-scale cellulosic plants still do not exist, the EPA repeatedly has had to dumb down the cellulosic blending targets.

Eventually, though, the EPA will have to mandate the sale of at least a few billion gallons of advanced biofuel, just to keep up the pretense that the RFS is something more than corporate welfare for corn farmers. In any event, by 2015, refiners will have to sell 15 billion gallons of corn-ethanol — roughly 1.6 billion gallons more than can be blended as E10.

A side effect of the blend wall is the recent “RINsanity” of skyrocketing biofuel credit prices. The EPA assigns a unique Renewable Identification Number (RIN) to every gallon of ethanol produced and a credit for each gallon sold as motor fuel. Refiners who cannot blend enough ethanol to meet their quota can use surplus credits accumulated during previous years or purchased from other refiners.

Because the blend wall makes the annually increasing quota more and more difficult to meet, RIN credits are suddenly in high demand. Credits that cost only 2-3 cents a gallon last year now sell for about 70 cents. Consumers ultimately pay the cost — an extra 7 cents for each gallon of E10 sold, or an additional $11.7 billion in motor fuel spending in 2013, according to commodity analysts Bill Lapp and Dave Juday. Ouch! Ethanol was supposed to reduce pain at the pump, not increase it.

The ethanol lobby offers two fixes for the blend wall. Neither is workable. The EPA thinks it has another card up its sleeve.

One option long advocated by the biofuel industry is for Congress to “incentivize” sales of E85 (motor fuel blended with up to 85% ethanol). Every gallon of ethanol sold as E85 represents up to 8.5 gallons of ethanol the refiner does not have to sell as E10. In theory, a robust market for E85 would enable refiners to meet the rest of their quota obligation within the E10 blend wall.

However, the chief obstacle to market penetration of E85 is not, as the ethanol lobby contends, the absence of political support such as flex-fuel vehicle mandates and tax breaks to install E85-capable storage tanks and blender pumps. The main barrier is simply that E85, due to its inferior energy density and poor fuel economy, is a money loser for consumers.

FuelEconomy.Gov, a Web site jointly administered by the EPA and the Department of Energy, makes this painfully clear. At today’s prices, the typical owner of a flex-fuel vehicle would spend up to $750 a year more to drive with E85 instead of regular gasoline.

The ethanol lobby’s other solution is for the EPA to approve the sale of E15 by conventional retail outlets. Approving E15 would allow refiners to increase by 50% the quantity of ethanol blended in each gallon of motor fuel sold. In October 2011, the EPA authorized the sale of E15 for newer automobiles (model years 2001 and later). But so far only a handful of retail outlets offer the fuel. As Platts explains, “Liability issues related to misfueling, the cost of outfitting a retail station to carry the fuel, and concerns raised by some auto manufacturers who won’t honor warranties if E15 is used, have dampened the market for the fuel.”

So what is the EPA’s clever new idea? Double down on E15 — literally. The EPA’s recently proposed Tier 3 Vehicle Emission and Fuel Standards Rule contains what New York Times reporter Matthew Wald calls an “audacious suggestion.” A major objective of the rule is to reduce the sulfur content of gasoline, and ethanol contains no sulfur. Under the proposed rule, automakers could “request” the EPA to certify vehicles “optimized” to run on high-octane fuels such as E30. The agency envisions a triple play, in which E30 lowers sulfur emissions, improves fuel economy, and pushes ethanol sales beyond the E10 blend wall (p. 28):

This could help manufacturers that wish to raise compression ratios to improve vehicle efficiency, as a step toward complying with the 2017 and later light-duty greenhouse gas and CAFE standards (2017 LD GHG). This in turn could help provide a market incentive to increase ethanol use beyond E10 by overcoming the disincentive of lower fuel economy associated with increasing ethanol concentrations in fuel, and enhance the environmental performance of ethanol as a transportation fuel by using it to enable more fuel efficient engines.

Ethanol contains less energy than gasoline by volume but, according to the EPA, a vehicle “optimized” to run on E30 could get better mileage than today’s vehicles. Wald explains:

Using high-octane premium-grade gas in an engine that does not require it offers no benefit. But in engines designed to squeeze the fuel-air mixture to very high pressures before igniting it with the spark plug, high-octane fuel burns predictably and can produce more horsepower. . . .Ethanol contains only about two-thirds as much energy as gasoline, gallon for gallon. But if it is burned in engines designed for high cylinder pressures, it will produce competitive horsepower.

Are E30-optimized vehicles commercially viable? The proposed Tier 3 rule provides no data on either the consumer cost of such vehicles or the fuel economy gains. Even if the lifetime fuel savings outweigh the increase in vehicle cost, that is not usually the decisive factor for most consumers, otherwise hybrid sales would be larger than 4% of the vehicle market.

One thing is clear. E30 would face an even bigger infrastructure challenge than E15 does. A March 2012 API study found that “very few” service stations would be able to sell E15 with existing equipment: “Equipment modifications could be as little as new hanging hardware (i.e., hose, nozzle, etc.) or as much as an entirely new fuel dispensing system.” More extensive modifications, such as new dispensers and a new storage tank, would likely be required to sell E30.

That’s a major expense for most service stations, which typically are small businesses with razor thin profit margins on the fuel they sell. According to the National Association of Convenience Stores (NACS):

The cost of a new fuel dispenser is approximately $20,000. An average store has four dispensers, so the cost could be as much as $80,000 to upgrade the dispensers alone. If underground equipment is also replaced, permitting and other related costs would increase expenses significantly.

In April 2012, NACS estimated that the nation’s 120,000 convenience stores would have to spend $22 billion on retrofits if they had to sell blends in the range of E30 and higher.

What would it take to mobilize that much capital? Consumer demand for E30-optimized vehicles is unlikely to surge to the point where the industry on its own would make the requisite investments. Given the debt crisis, Congress is unlikely to pony up billions in tax breaks to subsidize construction of a national E30 infrastructure.

Yet the EPA seems determined to shatter the E10 blend wall. The EPA’s “audacious suggestion” is thus most likely a beachhead for more aggressive moves down the line. Don’t be surprised if future Ethanol Protection Agency rules effectively mandate that new vehicles be designed to run on E30.

“U.S. EPA has altered its cellulosic biofuel requirements for 2012 — from 8.65 million gallons to zero,” today’s Climatewire reports. In January, the D.C. Circuit Court of Appeals vacated EPA’s 2012 cellulosic biofuels standard. “As a result,” Climatewire explains, ”obligated parties — oil companies required to show EPA that they blend biofuels in their fuel supply — won’t need to provide information on their compliance. The agency will submit refunds to companies that have submitted payments for 2012 cellulosic waiver credits.”

Who says there’s no justice in this world! For several years the EPA has fined refiners for not purchasing and blending ethanol made from switchgrass, wood chips, and other fibrous, non-edible plants. Refiners protested that there was no commercial cellulosic fuel to buy. The EPA argued that didn’t matter because the Renewable Fuel Standard (RFS) is meant to be “technology forcing.” The agency thus based each year’s cellulosic target on aspirational (rather than realistic) projections of how much cellulosic fuel would be produced. It then cheerfully collected fines for all the gallons of phantom fuel refiners did not blend.

The Court held that punishing refiners for what the ethanol industry failed to do is not “technology forcing”:

EPA applies the pressure to one industry (the refiners) [citation omitted], yet it is another (the producers of cellulosic biofuel) that enjoys the requisite expertise, plant, capital and ultimate opportunity for profit. Apart from their role as captive consumers, the refiners are in no position to ensure, or even contribute to, growth in the cellulosic biofuel industry. “Do a good job, cellulosic fuel producers. If you fail, we’ll fine your customers.” Given this asymmetry in incentives, EPA’s projection is not “technology-forcing” in the same sense as other innovation-minded regulations that we have upheld.

Zeroing out the RFS cellulosic blending targets established by the Energy Independence and Security Act (EISA) is long overdue. EISA (p. 32) required refiners to sell 100 million gallons of cellulosic ethanol in 2010, 250 million gallons in 2011, and 500 million gallons in 2012. Because hoped-for breakthroughs did not occur, the EPA dumbed down the mandated quantities to 6.5 million gallons in 2010, 6.0 million in 2011, and 8.65 million in 2012. However, even those symbolic targets were unattainable. In 2012, the U.S. biofuel industry produced only 20,069 gallons of cellulosic ethanol, according to Climatewire. As of early 2013, no commercial-scale cellulosic ethanol plants exist.

How come? The ethanol industry is quick to blame others. Supposedly, the E10 blend wall — the EPA policy that, until June 2012, limited to 10% the amount of ethanol permitted in a gallon of gasoline – allowed corn ethanol to saturate the market and crowd out demand for cellulosic fuel. Supposedly also, political attacks on the RFS have created uncertainty about the future of government policy, scaring away investors. Whether or not these factors play some role, the chief barrier to commercialization is cost.

In an article about BP’s recent cancelation of a $350 million cellulosic plant in Highlands County, Florida, MIT Technology Review editor Kevin Bullis observes:

Economists have recently done field studies to determine just how much the feedstocks—the grasses, wood chips, straw, or corn stover—actually cost to grow, harvest, and get to a biofuels plant. Whereas early estimates—the ones that helped spur the cellulosic ethanol mandates—put the cost at $30 a ton, the actual costs are more like $80 to $130 a ton. That means the grass and wood chips required to make a gallon of ethanol will cost $1.30 to $1.48—even before anything is done to process them. (For context, the price of a gallon of processed ethanol made from corn is now $2.40 a gallon.)

Based on the cost for plants like the one BP proposed in Florida, the cost could be 10 times higher for a cellulosic plant than a corn ethanol one, at least for the first plants, says Wallace Tyner, a professor of agricultural economics at Purdue University.

Yesterday The Hill‘s Energy Blog reported on a brief filed by the EPA in the U.S. Court of Appeals for the District of Columbia:

The documents filed Monday with the U.S. Court of Appeals for the District of Columbia reveal the reasoning behind EPA’s move to shoot down the American Petroleum Institute’s (API) challenge of the renewable fuel standard (RFS). EPA determined that enough advanced biofuels — generally understood to be made from non-food products — existed to meet that portion of the RFS for 2012.

“EPA reasonably considered the production capacity likely to be developed throughout the year, while API would have EPA rely narrowly and solely on proven past cellulosic biofuel production,” EPA said in its brief. “EPA reasoned that lowering the advanced biofuel volume in these circumstances would be inconsistent with EISA’s [the Energy Independence and Security Act of 2007] energy security and greenhouse gas reduction goals, and decided to leave the statutory advanced biofuel volume unchanged.”

The (main) question here is what the 2012 cellulosic biofuel requirements should be set at. The EPA is arguing that they took a reasonable look at capacity production and put out what they thought could be developed, while the American Petroleum Institute is only looking at historic cellulosic biofuel production. So who is being reasonable?

Bob Greco over at the Energy Tomorrow blog produced this graph:

The large blue bars indicate the original blending requirements under the Energy Independence and Security Act. To the EPA’s credit, they had nothing to do with the original blending requirements. The lighter turquiose-ish are the finalized numbers requested by the EPA, as they are allowed to adjust requirements to fit reality. The red number represents actual commercial cellulosic ethanol production, according to the EPA’s own numbers.

Until this April there was zero commercial production of cellulosic ethanol, when 20,000 gallons were produced.

So, again, we ask: who is being unreasonable? The EPA who somehow still maintains that 8.65 million gallons will be produced in 2012? Or the American Petroleum Institute? Even if the API requested that the blending requirement be reduced to zero, their final guess will be much closer to reality than the estimate of the EPA.

In his 2006 State of the Union message, President G.W. Bush famously (and falsely) declared that America is “addicted to oil.” As a solution, Bush proposed to “fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips and stalks or switch grass.” He set a “goal” to ”make this new kind of ethanol [a.k.a. cellulosic] practical and competitive within six years.”

Congress heeded the call, and in late 2007 passed the Energy Independence and Security Act. EISA mandated the sale of 36 gallons of biofuel by 2022, with 21 billion gallons to come from ”advanced” (lower-carbon) biofuels, of which 16 billion gallons must be cellulosic.

Well, it’s now six years later, and cellulosic ethanol is still a taxpayer-subsidized science project. EISA (p. 32) required refiners to sell 100 million gallons of cellulosic ethanol in 2010, 250 million gallons in 2011, and 500 million gallons in 2012. Reality repeatedly forced the EPA to dumb down the mandated quantities (to 6.5 million gallons in 2010, 6.0 million in 2011, and 8.65 million in 2012). Even those symbolic targets proved to be too ambitious, because, as a commercial commodity, cellulosic biofuel still does not exist.

Nonetheless, the EPA fines refiners millions of dollars for failure to sell this non-existent fuel. Arizona Rep. Jeff Flake has a commonsense solution, H.R. 6047, the Phantom Fuel Reform Act.

Rep. Flake’s one-pager explains the bill’s rationale and how the reform would work. In a nutshell, next year’s cellulosic target would have to be based on this year’s actual production, as estimated by the U.S. Energy Information Administration. From the one-pager:

The Problem

• [C]ommercially available cellulosic biofuel does not exist.  In fact, the Congressional Research Service reported this year that the federal government projects that this phantom fuel is “not expected to be commercially viable on a large scale until at least 2015.”
• Even though commercially available cellulosic biofuel does not exist, U.S. energy producers are faced with a vexing ultimatum: buy millions of dollars of EPA paper “credits” or face hefty fines.
• By February 2013, U.S. energy producers will have paid more than $14 million to the EPA for these phantom fuel credits.

The Commonsense Fix

• Under current law, the independent Energy Information Administration (EIA) must submit to the EPA by October 31st of each year an estimate of projected volume of cellulosic biofuel to be produced in the upcoming calendar year.
• The Phantom Fuel Reform Act would simply require that:
  (1) The EIA base that projection on the actual volume of cellulosic biofuel produced between January 1st and October 31st, and
  (2) The EPA’s annual cellulosic biofuel mandate reflects the EIA’s more realistic production-based projection.

The Benefits

• Passage of H.R. 6047, the Phantom Fuel Reform Act, would prevent millions of dollars in needless and unnecessary energy costs from being placed on U.S. energy producers and passed onto American consumers.
• It would stop the EPA from forcing U.S. energy producers to choose between buying meaningless compliance or paying hefty federal fines.
• H.R. 6047 would maintain the existence of the cellulosic biofuel mandate while ensuring that it reflects actual industry production rather than unrealistic bureaucratic prediction.

Last week the EPA dismissed a petition by the American Petroleum Institute seeking relief from the cellulosic ethanol mandate, which requires that oil refiners blend 8.65 million gallons of ethanol into the fuel supply by the end of 2012:

“In all cases, the objections raised in the petition either were or could have been raised during the comment period on the proposed rule, or are not of central relevance to the outcome of the rule because they do not provide substantial support for the argument that the Renewable Fuel Standard program should be revised as suggested by petitioners,” EPA told API, American Fuel & Petrochemical Manufacturers, Western States Petroleum Association, and Coffeyville (Kan.) Resources Refining & Marketing on May 22.

“EPA’s mandate is out of touch with reality and forces refiners to pay a penalty for not using imaginary biofuels,” Bob Greco, API’s downstream and industry operations director, said on May 25. “EPA’s unrealistic mandate is effectively an added tax on making gasoline.”

Greco said the Clean Air Act requires EPA to determine the mandated volume of cellulosic biofuels each year at “the projected volume available.” However, in 2011 EPA required refineries to use 6.6 million gal of cellulosic biofuels even though, according to EPA’s own records, none were commercially available, Greco said.

EPA has denied API’s 2011 petition to reconsider the mandate and continues to require these nonexistent biofuels this year, he indicated. Greco called the action “regulatory absurdity and bad public policy.”

As regular readers of this blog will know, the whole problem with the EPA’s non-flexible mandate is that there is no commercially available cellulosic ethanol, thus making it impossible to meet the mandate. The EPA’s justification for this policy is that they need to maintain an incentive for companies to begin producing cellulosic ethanol, despite many past failures. The oil refiners are also required to purchase these cellulosic ethanol waivers, effectively giving the government money instead of purchasing the non-existent fuel.

How much progress have we made on cellulosic ethanol? Robert Rapier points out that the companies promising the “first commercial cellulosic plant” are about a century too late:

But believe it or not, commercialization also took place in the U.S. in 1910. The Standard Alcohol Company built a cellulosic ethanol plant in Georgetown, South Carolina to process waste wood from a lumber mill (PDA 1910). Standard Alcohol later built a second plant in Fullteron, Louisiana. Each plant produced 5,000 to 7,000 gallons of ethanol per day from wood waste, and both were in production for several years (Sherrard 1945).

To put that in perspective, Iogen claimed in 2004 that they were producing the world’s first cellulose ethanol fuel from their 1,500 gallon per day plant. (While 1,500 gal/day is their announced capacity, if you look at their production statistics they have never sustained more than 500 gallons per day over the course of a year; 2008 production averaged 150 gal/day).

Many companies are in a mad rush to be the “first” to commercialize cellulosic ethanol. The next time you hear someone say that they will be the first, ask them if they plan to invent the telephone next.

When reading about the potentials of cellulosic ethanol, I find very few optimists who are not financially tied to the industry and the government support that the industry relies on. The timing of government’s attempt to create both supply and demand for a new product was unfortunate, as the mandate began to ramp up significantly during the recession. However, we only have about 10 years until the Renewable Fuel Standard ceases increasing, and we have yet to produce any cellulosic ethanol at all. If you allow for some successes in the next 2-3 years, these will still be a drop in the bucket compared to the amount the government had “mandated” be produced. At the same time, the mandate continues to direct capital towards projects that aren’t competing on the merits of the technology, but are competing for guaranteed returns promised by our government.

It seems that there is little chance that cellulosic ethanol will have a significant effect on our nation’s fuel supply absent unforeseen breakthroughs in their effectiveness. It will still take massive amounts of land to produce the inputs necessary to create cellulosic ethanol, and these inputs must be cheap enough such that they make it into the market place. Check out the rest of Robert Rapier’s post for a back of the envelope calculation on land use with cellulosic ethanol production:

But then Jerry Taylor, who is the co-founder of MFA Oil Biomass provided a follow-up answer: “It takes 1,000 acres even at 12 tons an acre that we produce to produce 1 million gallons of cellulosic ethanol based on the known conversion rates today.”

Taking his biomass yield assumptions of 12 tons an acre at face value (I doubt you can consistently get 12 dry tons per acre at large scale; commercial hay production is only around half that), we can do an interesting calculation. One million gallons of cellulosic ethanol has the same energy content as half a million gallons of crude oil. (Ethanol contains 2/3rds the energy of gasoline, but a barrel of crude also produces diesel, jet fuel, and fuel oil). U.S. oil production is presently 6.1 million barrels per day. That is 256 million gallons per day, 10.7 million gallons per hour, or 1 million gallons every 5.6 minutes.

Therefore, taking his yield assumptions at face value, 1,000 acres of land planted in Miscanthus giganteus over the course of a year could produce the energy equivalent of under 3 minutes of U.S. oil production. Of course U.S. oil production does not come close to meeting our needs, so to put it in terms of total U.S. oil demand of 18.7 million bpd, 1,000 acres of Miscanthus would cover 55 seconds of U.S. oil consumption. Since that doesn’t take into account the petroleum that will be required to produce the cellulosic ethanol (e.g., running trucks and tractors), the net number would be even lower.

“Ethanol ventures backed by billionaire entrepreneur Vinod Khosla — including Range Fuels, which built a failed factory in Georgia — were given the green light for an estimated $600 million in federal and state subsidies,” reports The Atlanta Journal- Constitution,

Yet,” the AJC article continues, ”none of the dozen or so companies financed or controlled by Khosla over the last decade has produced commercially viable [cellulosic] ethanol. Some failed or, hamstrung by unproven technology and insufficient capital, remain behind schedule.”

The cost to taxpayers? “To date, the companies have tapped about $250 million of the $600 million. Even though they are now unlikely to ever receive the full amounts, tens of millions have been lost.”

Ken Green of the American Enterprise Institute had some choice words:

“These, quote, venture capitalists are basically venture socialists,” said Kenneth Green, a resident scholar at the American Enterprise Institute, a conservative think tank in Washington. “They’re getting large amounts of research money and loan guarantees to build pilot plants and other projects. They’re looking to socialize the costs of their efforts, but keep private the profits.”

To read the full AJC article, click here.

A topic CEI has written about frequently gets covered in The New York Times, the bizarre requirement by the EPA that refiners spend up to $7 million on ghost “credits” from the EPA in lieu of purchasing cellulosic ethanol, which doesn’t exist:

When the companies that supply motor fuel close the books on 2011, they will pay about $6.8 million in penalties to the Treasury because they failed to mix a special type of biofuel into their gasoline and diesel as required by law.

But there was none to be had. Outside a handful of laboratories and workshops, the ingredient, cellulosic biofuel, does not exist.

In 2012, the oil companies expect to pay even higher penalties for failing to blend in the fuel, which is made from wood chips or the inedible parts of plants like corncobs. Refiners were required to blend 6.6 million gallons into gasoline and diesel in 2011 and face a quota of 8.65 million gallons this year.

That’s a good summary. Let’s look at one specific paragraph, where the coverage borders on editorializing in support of an agency under attack by the right:

Penalizing the fuel suppliers demonstrates what happens when the federal government really, really wants something that technology is not ready to provide. In fact, while it may seem harsh that the Environmental Protection Agency is penalizing them for failing to do the impossible, the agency is being lenient by the standards of the law, the 2007 Energy Independence and Security Act.

Alternatively, it demonstrates an absurd outcome all too common within large bureaucratic agencies, where the EPA apparently lacks either the authority or willpower to do-away with what is clearly a punitive, industry specific tax.

And yes, the law as written is worse, technically the EPA could require the entire 500 million gallons in 2012 and solicit enormous daily fines to companies that are unable to comply (the legislation allows for something similar) — I’m sure that would do wonders for the economy. You foolish laypeople may think this is harsh, but really you should admire their leniency in only administering small fines for companies who are unable to purchase a product which doesn’t exist, rather than bankrupting them.

Back in reality, there is absolutely no justification for the requirements. If the EPA truly lacks the ability to make continual adjustments to the “requirements” to reflect their availability (or lack thereof), they should make this clear (they have never done so) and ask Congress to extend them that decision making power via legislation.

The rest of the NYT article is here.

Just a few days after our previous post outlining the ethanol industry’s brave, unprecedented, legendary, and 100% voluntary decision to give up the ethanol tax credit, we see that there are still other subsidies that they are interested in keeping:

But the head of the Renewable Fuels Association—Bob Dinneen—says the industry will work to ensure that tax credits for cellulosic ethanol will continue past the end of 2012.

“We think that the production tax credit and the depreciation that is now allowed for cellulose needs to continue,” Dinneen says.

Extension of the cellulosic tax credits will send an important signal to the marketplace and encourage investment in the next generation of ethanol technology, Dinneen says.

And to those who consider it just another federal subsidy for ethanol…

“They need only look at the tax incentive for grain-based ethanol that has just expired–that demonstrates you don’t need a tax incentive forever,” Dinneen says.

“You need to encourage investment—convince the marketplace that there is going to be consistent government support that will allow the industry to get on its feet.”

Cellulosic ethanol has not yet been produced commercially, but according to the U.S. Department of Energy web site, several commercial cellulosic plants are under construction.

Not including the federal mandate for their product or various state-level incentives, the ethanol industry has been federally subsidized in some form for over 3 decades. Just think, at this pace, after another 2-3 decades of timely, critical subsidies for the cellulosic ethanol industry they might be able to make a tiny dent in our oil consumption. What a bargain!

Yesterday the EPA finalized the 2012 mandate for blending biofuels into our nation’s transportation fuel supply:

The U.S. Environmental Protection Agency (EPA) today finalized the 2012 percentage standards for four fuel categories that are part of the agency’s Renewable Fuel Standard program (RFS2). EPA continues to support greater use of renewable fuels within the transportation sector every year through the RFS2 program, which encourages innovation, strengthens American energy security, and decreases greenhouse gas pollution.

The Energy Independence and Security Act of 2007 (EISA) established the RFS2 program and the annual renewable fuel volume targets, which steadily increase to an overall level of 36 billion gallons in 2022. To achieve these volumes, EPA calculates a percentage-based standard for the following year. Based on the standard, each refiner and importer determines the minimum volume of renewable fuel that it must ensure is used in its transportation fuel.

The final 2012 overall volumes and standards are:

Biomass-based diesel (1.0 billion gallons; 0.91 percent)
Advanced biofuels (2.0 billion gallons; 1.21 percent)
Cellulosic biofuels (8.65 million gallons; 0.006 percent)
Total renewable fuels (15.2 billion gallons; 9.23 percent)

In a nod to how hard it is to predict the future, the EPA has lowered the cellulosic biofuel mandate from 500 billion gallons to a less ambitious 8.65 million gallons, which is 1.7% of the original planned requirement. Of course, they have done the same in previous years and as of October no qualifying cellulosic ethanol had been sold to refiners. Naturally, refiners are not pleased that in 2012 they will possibly be spending up to $8 million in credits depending upon actual production levels of cellulosic ethanol:

Although the EPA set the requirement well below Congress’s goal, its decision still irked refiners. Companies will have to buy credits from the EPA if they can’t find enough cellulosic ethanol to purchase—even though the fuel may not be available. “The [EPA's] cellulosic number is still conjecture-based fantasy,” said Stephen Brown, vice president for government affairs for refiner Tesoro Corp.

The credits cost about $1.20 per gallon, according to Charles Drevna, president of the National Petrochemicals and Refiners Association. “Once again, refiners are being ordered to use a substance that is not being produced in commercial quantities—cellulosic ethanol—and are being required to pay millions of dollars for failing to use this nonexistent substance. This makes no sense,” he said.

Brooke Coleman, executive director of the Advanced Ethanol Council, which represents advanced-biofuel companies, said Congress built flexibility into the mandate because “there was always a chance” the industry wouldn’t meet the schedule.

“It shouldn’t surprise anyone with the state of the economy, the state of the financial world, the state of the banks…that there are delays in implementation of new technologies,” Mr. Coleman said. He argued that financing for more cellulosic-biofuel capacity would come as long as the renewable-fuels standard remains in place.

There was always a “chance” they’d miss the mark by 99%! And despite the flexibility to lower the “mandate” the EPA does not seem to have the same flexibility (or perhaps, desire) in waiving the requirement that refiners spend millions of dollars to purchase fake cellulosic ethanol credits.

An interesting aspect of 2012 will be the extent to which the lifting of the tariff on ethanol imports will effect the “advanced biofuels” market. 2012 marks the end of the decades long tariff on ethanol imports, opening up the United States to increased imports from Brazil. Brazil is currently importing corn-ethanol from the United States, as well as exporting small amounts of ethanol to the United States.

Though imports to the United States might not increase dramatically in 2012 as Brazil does not appear capable of increasing production in the short term, given current policies Brazilian exports to the United States are likely to increase substantially in the years to come.

For more of CEI’s writing on ethanol, go here.

The Wall Street Journal ran an editorial commenting on the cellulosic ethanol mandate, which CEI has written extensively about in the past. They write:

Most important, the Nancy Pelosi Congress passed and Mr. Bush signed a law imposing mandates on oil companies to blend cellulosic fuel into conventional gasoline. This guaranteed producers a market. In 2010 the mandate was 100 million barrels, rising to 250 million in 2011 and 500 million in 2012. By the end of this decade the requirements leap to 10.5 billion gallons a year.

When these mandates were established, no companies produced commercially viable cellulosic fuel. But the dream was: If you mandate and subsidize it, someone will build it.

Guess what? Nobody has. Despite the taxpayer enticements, this year cellulosic fuel production won’t be 250 million or even 25 million gallons. Last year the Environmental Protection Agency, which has the authority to revise the mandates, quietly reduced the 2011 requirement by 243.4 million gallons to a mere 6.6 million. Some critics suggest that even much of that 6.6 million isn’t true cellulosic fuel.

The WSJ notes that 6.6 million gallons have been produced this year, though I do not think that this is correct. As far as I can tell, from EPA’s own data, no qualifying cellulosic ethanol has been produced through the end of October, 2011. They do note that some do not believe that the 6.6 million gallons is true cellulosic fuel.

They also cover the bizarre tax that the EPA has forced refiners to pay: $1 per gallon of cellulosic ethanol requirement in the form of a waiver or renewable fuel credit:

It gets worse. Because there was no cellulosic fuel available, oil companies have had to purchase “waiver credits”—for failing to comply with a mandate to buy a product that doesn’t exist. In 2010 and this year, the EPA has forced oil companies to pay about $10 million for these credits. Since these costs are eventually passed on to consumers, the biofuels mandate is an invisible tax paid at the gas pump.

Read the whole editorial here.

In related ethanol news, a recent cellulosic ethanol project, Range Fuels, declared bankruptcy after failing to produce cellulosic ethanol:

The plant was closed after a technical defect limited it to run at half rates and it produced cellulosic methanol, a fuel the Environmental Protection Agency doesn’t consider eligible for use to meet federal biofuel targets.

Range Fuels had also received millions of dollars in government loans (or loan guarantees) from the Department of Energy and the Department of Agriculture. The Range Fuels bankruptcy did not receive nearly as much traction as Solyndra, perhaps because Republicans are often as bad on ethanol as Democrats have been in the past. Hopefully, events like this will shift attitudes away from supporting projects like this.

Finally, in yet another fiasco caused by the ethanol mandates, over $9 million was spent by industrial refiners on the purchases of fake renewable identification numbers (RINs). Essentially, someone set up a fraudulent company and sold these RINs (which refiners are required to purchase in order to show EPA that they are meeting the mandate), which are supposed to be tied to individual gallons of ethanol. However, this individual didn’t actually produce any of the ethanol, and refiners are now being held liable for huge fines. As I understand it, the RIN market is often separate from the actual market for the fuel, which allowed for scams like this to take place.

Keep your eye out on a subsequent letter to the editor from some ethanol proponent who promises that a decade from now it will save the U.S. from its addiction to oil.