U.S. and EU Biofuel Mandates Tighten Grip on Energy Producers

This is Part 2 of a three part series comparing biofuel mandates in the United States and European Union. Part 1, which focused on rising food prices, appeared yesterday. Part 3 will be published tomorrow.

Despite what the ethanol industry would have you believe, biofuel mandates place unrealistic and ever-rising burdens on energy producers. In America, for example, the Renewable Fuel Standard (RFS) will soon require oil refiners to blend more ethanol into gasoline than the nation’s fuel supply can safely sustain. The European Union also mandates rising biofuel volumes in gasoline. Unsurprisingly, they are also finding compliance more difficult.

Unfortunately, America and Europe have both experienced the negative effects of energy central planning, including higher food prices, increasingly unattainable mandates, and the unintended consequence of fuels that produce more pollution, not less.

Part 1 of this three part series examined the impact of U.S. and EU biofuel policies on food prices. Part 2 highlights the unrealistic burdens that U.S. and EU biofuel mandates place on obligated parties.

Biofuel Mandates Are Increasingly Unattainable

U.S. and EU biofuel policies are similar and provide for useful comparisons. America’s Renewable Fuel Standard (RFS) requires oil refiners to blend increasing amounts of biofuel, mostly corn-based ethanol, into gasoline, with the goal of blending 36 billion gallons by 2020. In contrast, Europe’s Renewable Energy Directive (RED) mandates that 10 percent of the EU’s transportation fuels come from renewable sources by 2020. However, the European Parliament voted last week to slash the biofuel mandate by 40 percent amid concerns about rising food prices and environmental damages.

In another area of similarity between America and Europe, refiners are having increasing difficulty complying with government biofuel mandates. Obligated parties in both America and Europe are echoing concerns that mandated biofuel levels are outstripping biofuel production and that many vehicles are not equipped to run on higher ethanol blends that would be necessary to achieve compliance. Both concerns, in both cases, are warranted.

In America, the RFS has mandated unrealistic volumes of cellulosic ethanol for years. In 2010, the RFS required refiners to blend 5 million gallons of cellulosic ethanol into gasoline, yet not a drop of cellulosic ethanol was produced for commercial use. The Environmental Protection Agency (EPA) raised the mandate the next year to 6.6 million gallons, but still no cellulosic ethanol was produced. In 2012, EPA raised the mandate yet again to 8.65 million gallons of cellulosic ethanol, but just 20,069 gallons were produced.

The cellulosic ethanol mandate may seem insignificant given that the RFS requires blending 36 billion gallons of biofuel by 2022. Indeed, the cellulosic mandate for 2013 represents less than 1 percent of the overall biofuel mandate. But as the law is currently written, obligated parties will be forced to rely increasingly on cellulosic ethanol and other so-called “second generation” biofuels to comply with the RFS. The RFS caps corn-based ethanol at 15 billion gallons in 2015 and requires at least 16 billion gallons of cellulosic biofuels in 2022. But as explained above, cellulosic ethanol remains essentially nonexistent; the ethanol industry is nowhere close to being on track to achieve this lofty target.

Source: Institute for Energy Research

Unfortunately for refiners, who face penalties for failing to blend fuels that essentially do not exist, the future of cellulosic ethanol does not look bright. EPA based its cellulosic ethanol mandate for 2013 on two particular plants, one of which is a KiOR plant based in Columbus, Mississippi. Last month, KiOR announced that it missed its second-quarter production forecast by an astounding 75 percent. Now KiOR faces legal action from an investor who alleges that the company made false and misleading statements about projected production levels at the Columbus facility.

In addition to unrealistic cellulosic ethanol projections, it is becoming difficult to find a place to use all of the mandated ethanol.  Ninety-five percent of vehicles on the road in America are certified to run on E10, gasoline that contains no more than 10 percent ethanol. As AAA explains, using gasoline blended with more than 10 percent ethanol in vehicles not certified to run on it can accelerate engine failure and void manufacturer warranties. This practical barrier to adding more ethanol into gasoline is known as the blend wall.

The 2013 RFS nearly breaches the blend wall, requiring 9.74 percent of the nation’s transportation fuel to come from renewable sources. With U.S. gasoline consumption flat in recent years, ethanol advocates are banking on widespread adoption of higher ethanol blends, namely E15 for most cars and E85 for flexible-fuel vehicles, to meet the rising federal mandate.

Broad adoption of E15 and E85 is unlikely. Most automakers have said their warranties will not cover claims related to improper E15 use, leaving only about 12 million out of the more than 240 million vehicles on the road that are approved for E15, according to AAA. The problem is that as of June, only about 24 out of the nation’s more than 180,000 gas stations are currently offering E15, an infinitesimal figure that reflects the fact that there isn’t much of a market for a fuel that could damage the majority of car engines on the road.

A similar story is playing out in Europe. The European Commission’s Joint Research Centre (JRC) organized a workshop in 2012 on the future of EU agricultural markets. According to JRC’s report summarizing the workshop, participants identified biofuel production as a “key source of uncertainty.” Specifically, workshop participants contend that EU Member States are being “overly optimistic” that RED, the EU’s biofuel mandate, will be met in 2020. Participants also explained that “second generation” biofuels, such as cellulosic ethanol, are “still expected to stay at a low level” of production.

The European auto industry, like the U.S. auto industry, is not prepared to accommodate the higher ethanol blends that are necessary for future compliance. As the JRC explains, compliance with the EU’s ethanol mandate is dependent on 18.3 percent ethanol blends in gasoline by 2020. This implies broad adoption of E15 and the spread of flexible-fuel vehicles that can run on E85 beyond Sweden and France, where most of these vehicles are currently found. Given these unrealistic assumptions, JRC contends that “reaching such a level of ethanol use by 2020 is not very likely.”

Conclusion

America’s and EU’s troubles with cellulosic ethanol and higher ethanol blends reflect the reality that ethanol mandates are economically untenable. If it made economic sense to blend greater and greater amounts of ethanol into gasoline, refiners would simply purchase more ethanol. The reality is that even with government mandates that give ethanol producers repeat customers and guaranteed demand, cellulosic ethanol production remains weak in Europe and almost nonexistent in America, while the auto industries in the U.S. and the EU show little interest in accommodating higher ethanol blends. The inescapable conclusion is that energy central planning does not work.

IER Policy Associate Alex Fitzsimmons authored this post.