A recent editorial in the Wall Street Journal, co-signed by Rep. Patrick Meehan (R-Pa.), argues that growing renewable fuel obligations under the federal Renewable Fuel Standard (RFS) have come into direct conflict with declining U.S. demand for transportation fuel. The editorial asserts that current fuel distribution infrastructure and automobile engine guidelines limit the amount of ethanol that can be blended into gasoline to 10 percent, creating a “blend wall” beyond which further blending of ethanol becomes economically unreasonable. Meanwhile, in response to high fuel prices, consumers have radically curbed their driving habits and sought out new cars that meet more stringent fuel efficiency (CAFE) standards, setting demand for gasoline on a long-term downward trend. This trend means we’ve arrived at the 10 percent ethanol “blend wall” faster than anticipated. And, because the RFS mandates an increasing volume (rather than percentage) of renewable fuels in the U.S. transportation mix, biofuels will have to represent a percentage of total fuel mix, above this 10 percent “blend wall”.
The House Energy & Commerce Committee and the Senate Environment & Public Works Committee have been examining this potential conflict since April this year. The Environmental Protection Agency (EPA) also indicated in its 2013 rule that it may lower the statutory volumes obligation when it issues the proposed 2014 rules, in order to “alleviate current market conditions.” And two petroleum industry trade groups have formally requested that EPA waive significant portions of the 2014 volume obligations.
However, in our attempts to resolve the ethanol blend wall issue, there are other trends and solutions – some already in action – that should be considered. While market demand for gasoline has declined, demand for diesel fuel – also obligated under the RFS – continues to hold steady or increase slightly. Advanced biofuel commercialization continues, offering additional options – such as biobutanol, green gasoline, renewable diesel and jet fuels – for meeting the RFS volume obligations. Cellulosic biofuels, within the advanced category, have reached the tipping point for commercial deployment, with the first two large-scale biorefineries beginning to produce fuel (and RINs) and several additional biorefineries set to complete construction in the coming years. And, as biofuels groups and some economists have recently suggested, the best way to overcome the ethanol blend could well be to simply leave the RFS alone.
What market-based solutions exist to reconcile the blend wall? Should EPA use its statutory authority to adjust the RFS obligations for 2014 and beyond? What impact would a change to the RFS obligations have on investment and commercialization of new advanced biofuels?
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How does EPA’s announcement of the proposed Renewable Volume Obligations (RVO) for 2014 impact the market for biofuels?
What do you think of the proposed RVO?