By Seth Meyer, USDA Senior Economist in the Office of the Chief Economist, and Rob Johansson, USDA Deputy Chief Economist
The EPA's 2014 proposed rule for the RFS sets large volumes of biofuel use across several broad categories of fuel types but represents a significant reduction in mandated volumes from legislated levels.
The EPA has once again proposed to significantly reduce the cellulosic mandate (from 1.75 billion gallons to just 17 million gallons) but, in contrast to previous years, has also proposed to reduce the overall mandate by more than 3 billion gallons.
Under the proposed volumes, biofuel prices and the blend wall will largely determine a fairly narrow range of about 460 million gallons - about a day and a half worth of U.S. motorfuel consumption - where much of the action in the biofuels market is likely to occur. It is this volume which will intersect the blend wall, influencing RIN prices and where biodiesel, corn ethanol and sugarcane ethanol imports will face off.
The proposed rule puts forth a complex calculation of alternative probabilities in order to set the mandate levels. The complexity of the EPA's calculations may give rise to a sense of precision in the various volumes outlined, however significant uncertainty remains with different potential mandate volume outcomes highly interdependent.
Despite this, the method the EPA has come up with in determining the mandate levels for the various biofuel categories can be boiled down to what is a fairly simple rule which takes into account their assumptions about the industry's underlying ability to produce and blend each type of biofuel and the public's ability to utilize those fuels.
Proposed mandate levels for 2014 are summarized in table 1. The EPA has set the proposed biofuel mandate for 2014 at the current year's level of 1.28 billion volumetric gallons (1.92 billion EV gallons). The EPA then included additional non-ethanol fuels which they feel are likely to be produced. Finally, the assumed amount of ethanol that can be consumed under the blend wall via E10 and E85 consumption is included to arrive at the total proposed mandate level of 15.21 billion gallons for 2014.
The proposed cellulosic mandate has been set at anticipated domestic production of 17 million gallons and is, in essence, so small as to not significantly impact the process of setting other or overall mandate volumes. The split between advanced and non-advanced biofuels, which determines the maximum potential share of corn-based ethanol, appears to have been set by adding the estimated non-ethanol advanced biofuel available to the biodiesel mandate, resulting in a total advanced component of 2.2 billion gallons. The remainder - 13.01 billion gallons - is corn ethanol's maximum potential contribution toward the RFS (table 1).
The EPA calculates what they anticipate to be the blend wall, or the maximum absorption of ethanol likely to occur in 2014 of 13.021 billion gallons of ethanol. That includes 12.841 billion gallons consumed in E10 blends, 0 gallons consumed as E15, and 0.180 billion gallons consumed as E85.