Additional Perspectives on EPA Rejection of Ethanol Mandate Waiver Requests

November 16, 2012 06:52 AM

The Environmental Protection Agency (EPA) decision announced today to reject requests for waivers of the ethanol mandates under the Renewable Fuels Standard (RFS) considered a host of inputs in the form of analysis from within and outside the government.

Here are some additional perspectives gleaned from a review of EPA documentation provided on the decision:

EPA received in excess of 29,000 comments during the comment period; the majority of the comments were short statements generally in support of the requests for a waiver.

EPA received a number of petitions seeking the same or similar EPA action from a number of state Governors, including the Governors of Arkansas, North Carolina, New Mexico, Georgia, Texas, Virginia, Maryland, Delaware, Utah, and Wyoming. The Governor of Florida wrote in support of a waiver in an October 16, 2012 letter to the EPA.

EPA only focused their review on the 2012-13 corn marketing year as that would cover portions of both the 2012 and 2013 ethanol blending years.

EPA used a model compiled by Iowa State University (ISU), a model which EPA said "has been subjected to external scrutiny independent of our own analysis." EPA also noted, "By way of example, many commenters cited a non-EPA study that used the ISU model and same basic approach we adopt here to analyze potential impacts of a waiver in 2012. EPA is not aware of any significant technical criticism of the ISU model itself."

The ISU model assumes corn ethanol would account for at most 13.6 billion gallons of the RFS volume requirement during the 2012/2013 corn marketing year. Because the corn marketing year is split over two RFS compliance years, the 13.6 billion gallons is based on the fraction of the marketing year that would occur in the 2012 compliance year (one-third) and the 2013 compliance year (two-thirds).

EPA reviewed outside analysis too: These include studies from: Hart Energy, Irwin and Good (University of Illinois), Carter, Smith, and Abu-Sneneh (University of California-Davis), Purdue University and the Farm Foundation (Purdue/Farm Foundation), FAPRI-University of Missouri (FAPRI-Missouri), Babcock-Iowa State, Edgeworth Economics, the Energy Policy Research Foundation, Inc. (EPRINC), Cardno-ENTRIX, Dr. Thomas Elam of FarmEcon LLC, and the Department of Environment, Food, and Rural Affairs of the United Kingdom government (DEFRA).

EPA made modifications to the model "in preparation for the current analysis. At EPA’s request, ISU researchers updated their model with data from the October WASDE and STEO (Short-Term Energy Outlook) reports. After consultation with DOE (Dept. of Energy), we also modified the demand curve for ethanol to reflect our understanding of flexibility in refinery markets."

EPA analysis concluded that there would be roughly 2.0 billion gallons in Renewable Identification Numbers (RINs) available for rollover into the 2012/13 marketing year. "If monthly RIN generation holds constant at October levels for the rest of 2012, rollover of 2012 vintage RINs to 2013 would likely exceed 2.6 billion. If RIN generation increases in November and December of 2012, as it did in both 2010 and 2011, rollover RIN availability would likely exceed 2.7 billion and could potentially be even higher. Thus in all of these scenarios, it is expected that at least 2.0 billion rollover RINs will be available for the 2013 compliance year." They labeled this 2.0 billion gallon figure as being "a conservative analytical assumption."

Private analyses backed up EPA’s assessment that "refiners would be limited in their ability to reduce ethanol blending if a one year waiver of the RFS requirements is granted under current economic circumstances."

Impact on food prices: "In consultation with USDA, EPA estimated how these projected changes in corn prices would influence U.S. food prices. It is highly likely that the RFS volume requirements are not binding and there will be no impact on food prices. The results of the modeled corn price impacts discussed above appear to be modest for both the mean estimate and the subset of scenarios in which the RFS requirements are binding. A $0.07/bushel decrease in corn prices would result in a 0.04% decrease in Food consumer price index (CPI) and a 0.006% decrease in All Item CPI. A $0.58/bushel decrease in corn prices would result in a 0.35% change in Food CPI and a 0.049% change in All Item CPI. For the average household, a $0.07/bushel decrease in corn prices would result in a reduction of household expenditures on food equal to $2.59 in 2012/2013, while a $0.58/bushel decrease in corn prices would result in a savings of $22.68."

Feed price impact: The following table shows EPA’s analysis of 2011 Livestock Revenue, and Projected Total Feed Costs and Estimated Decrease with RFS Waiver for Combined Cattle, Poultry, Pork, and Dairy Production in the U.S. and States Requesting a Waiver.

Feed Price Impact

Impact on fuel prices: The ISU modeling projects that the average impact across all modeled scenarios is that waiving the RFS mandate would decrease blended gasoline prices by 2/10 of one cent.

History not a guide in the decision: "We fully recognize the toll this year’s drought has taken on multiple sectors of the economy, and we have reviewed comments submitted to us in detail. While we generally agree that the issues raised by commenters are important considerations, as discussed previously, the issue before EPA is a narrow one – whether implementation of the RFS volume requirements over the time period at issue would severely harm the economy. The historical impacts of overall production and use of biofuels in the U.S. is not the relevant issue for purposes of determining whether implementing the RFS would severely harm the economy of a State, region or the U.S. over the time period of concern."

What about the blend wall? EPA said that also did not factor into their decision as the requests received by the agency did not request that they consider this. However, EPA said the following in a discussion of the issue: "As pointed out by commenters, E10 is approaching the point at which it saturates the gasoline market. As a result, if obligated parties choose to achieve their required RFS volumes using ethanol they should work with their partners in the vehicle and fuel market to overcome any market limitations on increasing the volume of ethanol that is used. Stakeholders in the refining sector have been aware of the E10 blendwall since passage of EISA in December of 2007."

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