Renewable Fuels: Issues for 2014 and Beyond

June 28th, 2014
in econ_news

by Congressional Budget Office

The Renewable Fuel Standard (RFS) establishes minimum volumes of various types of renewable fuels that must be included in the United States’ supply of fuel for transportation. Those volumes—as defined by the Energy Independence and Security Act of 2007 (EISA)—are intended to grow each year through 2022 (see the figure below). In recent years, the requirements of the RFS have been met largely by blending gasoline with ethanol made from cornstarch. In the future, EISA requires the use of increasingly large amounts of “advanced biofuels,” which include diesel made from biomass (such as soybean oil or animal fat), ethanol made from sugarcane, and cellulosic biofuels (made from converting the cellulose in plant materials into fuel).

Follow up:

Past Use of Renewable Fuels and Future Requirements of the Renewable Fuel Standard

One of the main goals of the Renewable Fuel Standard is to reduce U.S. emissions of greenhouse gases, which contribute to climate change. EISA requires that the emissions associated with a gallon of renewable fuel be at least a certain percentage lower than the emissions associated with the gasoline or diesel that the renewable fuel replaces. Advanced biofuels and the subcategory of cellulosic biofuels are required to meet more stringent emission standards than those that apply to corn ethanol.

Policymakers and analysts have raised concerns about the RFS, particularly about the feasibility of complying with the standard, whether it will increase prices for food and transportation fuels, and whether it will lead to the intended reductions in greenhouse gas emissions. Because of those concerns, some policymakers have proposed repealing or revising the Renewable Fuel Standard.

In this analysis, CBO evaluates how much the supply of various types of renewable fuels would have to increase over the next several years to comply with the RFS. CBO also examines how food prices, fuel prices, and emissions would vary in an illustrative year, 2017, under three scenarios for the Renewable Fuel Standard:

  • The EISA volumes scenario, in which fuel suppliers would have to meet the total requirement for renewable fuels, the requirement for advanced biofuels, and the cap on corn ethanol that are stated in EISA for 2017—but not the requirement for cellulosic biofuels, because the capacity to produce enough of those fuels is unlikely to exist by 2017;
  • The 2014 volumes scenario, in which the Environmental Protection Agency (EPA)—which has some discretion to modify the mandates of EISA—would keep the RFS requirements for the next several years at the same amounts it has proposed for 2014; and
  • The repeal scenario, in which lawmakers would immediately abolish the RFS.

The repeal scenario would require Congressional action. In the absence of such action (or of legal restrictions), CBO considers the 2014 volumes scenario much more likely than the EISA volumes scenario, which would require a large and rapid increase in the use of advanced biofuels and would cause the total percentage of ethanol in the nation’s gasoline supply to rise to levels that would require significant changes in the infrastructure of fueling stations.

Full Compliance With the Mandates in EISA Poses Significant Challenges

The rising requirements in EISA would be very hard to meet in future years because of two main obstacles, which relate to the supply of cellulosic biofuels and the amount of ethanol that older vehicles are said to be able to tolerate. Fuel suppliers have had trouble meeting the annual requirements for cellulosic biofuels because making such fuels is complex, capital-intensive, and costly. Although production capacity is expanding, only a few production facilities are currently operating. The industry’s capacity in coming years is projected to fall far short of what would be necessary to achieve the very rapid growth in the use of cellulosic biofuels required by EISA (see the figure below).

Projected Use of Cellulosic Biofuels, Compared With the Use Mandated by the Renewable Fuel Standard

Ethanol is the most common form of renewable fuel; however, adding increasing volumes of it to the U.S. fuel supply could be difficult. Currently, most gasoline sold in the United States is actually a blend (referred to as E10) that contains up to 10 percent ethanol—the maximum concentration that is feasible to avoid corrosion damage to the fuel systems of older vehicles. EISA’s growing requirements for the total gallons of renewable fuels to be used each year, combined with a projected decline in gasoline use, suggest that the average concentration of ethanol in gasoline would have to rise to well above that 10 percent “blend wall,” potentially increasing to about 25 percent by 2022. More ethanol could be accommodated in the fuel supply if motorists who drive “flex-fuel” vehicles, which can run on blends that contain as much as 85 percent ethanol (referred to as E85), bought larger amounts of such fuel. But at present, fewer than 2 percent of filling stations in the United States sell high-ethanol blends. Given the design of the RFS, the cost of encouraging additional sales of high-ethanol fuel falls on the producers and consumers of gasoline and diesel.

Because of the challenges described above, EPA has eliminated or greatly reduced the annual requirements for cellulosic biofuels in the RFS in past years. For 2014, EPA has also proposed regulations that would reduce the requirements for advanced biofuels and for total renewable fuels, in recognition of the difficulties posed by the blend wall. Although scaling back those standards addresses existing compliance problems and decreases compliance costs in the short run, it also reduces incentives for companies to invest in production capacity for cellulosic and other advanced biofuels and to expand the availability of high-ethanol blends.

Meeting the Total Volumes of Advanced Biofuels Specified in EISA Would Require Extremely Large Increases in the Production of Those Fuels

For the scenario in which fuel suppliers would have to comply with the total volumes of advanced biofuels and of renewable fuels as a whole stated in EISA, CBO assumed that EPA would allow suppliers to substitute other forms of advanced biofuels for cellulosic biofuels, as it has done in the past. Fuel suppliers would most likely do so using two types of advanced biofuels: biomass-based diesel (mostly produced in the United States) and sugarcane ethanol (nearly all imported from Brazil). However, relying on that strategy for 2017 would necessitate extremely large increases in the production of those fuels: for example, more than a 100 percent rise in U.S. production of biomass-based diesel and more than a 45 percent increase in Brazil’s production of sugarcane ethanol.

Food Prices Would Be Similar Whether the RFS Was Continued or Repealed

Roughly 40 percent of the U.S. corn supply is used to make ethanol. To the extent that the Renewable Fuel Standard increases the demand for corn ethanol, it will raise corn prices and put upward pressure on the prices of foods that are made with corn—ranging from corn-syrup sweeteners to meat, poultry, and dairy products. CBO expects that roughly the same amount of corn ethanol would be used in 2017 if fuel suppliers had to meet requirements equal to EPA’s proposed 2014 volumes or if lawmakers repealed the RFS, because suppliers would probably find it cost-effective to use a roughly 10 percent blend of corn ethanol in gasoline in 2017 even in the absence of the RFS. Therefore, food prices would also be about the same under the 2014 volumes scenario and the repeal scenario.

By contrast, corn ethanol use in 2017 would be about 15 percent (or 2 billion gallons) higher under the EISA volumes scenario. CBO estimates that the resulting increase in the demand for corn would raise the average price of corn by about 6 percent. However, because corn and food made with corn account for only a small fraction of total U.S. spending on food, that total spending would increase by about one-quarter of one percent.

Meeting the Total Volumes of Advanced Biofuels Specified in EISA Would Have Significant Effects on Prices of Transportation Fuels

Because fuel suppliers would be likely to use roughly a 10 percent blend of corn ethanol in gasoline in 2017 even without the RFS, the overall use of renewable fuels in that year would be very similar under the 2014 volumes scenario and under the repeal scenario, CBO estimates. Consequently, prices of transportation fuels would probably be roughly the same in those two cases.

Under the EISA volumes scenario, however, fuel suppliers would have to use more than three times as many gallons of advanced biofuels, and they would have to add much more ethanol to the gasoline supply than could be accommodated by selling only a 10 percent blend. (Under all of the scenarios, CBO anticipates that EPA would sharply reduce the requirement for cellulosic biofuels, given the limited production capacity for those fuels expected to exist in 2017.) Using a range of estimates of the price premium necessary to encourage sufficient additional supplies of advanced biofuels and the price subsidy necessary to motivate sufficient sales of E85, CBO estimates that complying with the EISA volumes scenario would have the following effects on the prices of three key types of transportation fuels in 2017:

  • The price of petroleum-based diesel would rise by 30 cents to 51 cents per gallon, or 9 percent to 14 percent (because the RFS requires fuel suppliers to bear the cost of ensuring that certain amounts of renewable fuels are used for each gallon of petroleum-based fuel that they sell);
  • The price of E10—which is currently the most commonly used transportation fuel in the United States—would increase by 13 cents to 26 cents per gallon, or 4 percent to 9 percent; and,
  • The price of E85 would decline by 91 cents to $1.27 per gallon, or 37 percent to 51 percent.

Because the changes in the production and use of renewable fuels required under the EISA volumes scenario are so large—and because little information is available about how the supply of and demand for renewable fuels respond to changes in their price—those estimates are highly uncertain. Actual price changes could fall outside the ranges described above.

Reductions in Greenhouse Gas Emissions Because of the RFS Would Be Small in the Near Term but Could Be Larger Over the Long Term

The production and use of different types of renewable fuels involve different amounts of greenhouse gas emissions. Estimates of those emissions are uncertain, and researchers’ predictions vary considerably. However, available evidence suggests that replacing gasoline with corn ethanol has only limited potential for reducing emissions (and some studies indicate that it could increase emissions). The success of the RFS in reducing the emissions from transportation fuels will depend mainly on the extent to which it causes people to substitute advanced biofuels—particularly cellulosic biofuels—for gasoline or diesel over the long run. However, a trade-off exists between the goal of limiting the cost of complying with the RFS (for example, by reducing the requirements for cellulosic biofuels) and the goal of providing a strong incentive for the development of better technologies for advanced biofuels.


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