So, the EPA hands down cruel cutbacks in renewable fuel targets as the Administration reels under Obamacare pressure.
What exactly happened, and what’s the response going to be?
Here are answers to many of the questions readers have been expressing.
Q. What happened?
A. In a nutshell, the best way to think of this is that the Obama Administration has thrown in the towel, based on the intensity and breadth of opposition to increasing or holding to RFS targets.
With Obamacare taking their eyes off a lot of issues — they’re bound to be seeking ways to de-pressurize the intense scrutiny that the RFS has been receiving in Congress. In short, they are seeking a structural approach from which a more stable policy environment can emerge, in the hopes that stable policy will lead to stable investment and future growth.
Q. Is that a fair way for the Obama camp to look at the situation?
A. Fair, no, Practical in the face of circumstances, perhaps.
Q. Why didn’t anyone see this coming?
A. For sure, now one saw the Obamacare debacle coming in the way that it did. There’s been a debate over whether the scheme is right, or fair, or whatever.
But they are rolling out a website which, at the end of the day, gathers data from applicants and transmits a form to a provider. It has to be the most spectacular execution screw-up of a routine activity with huge political risks since the White House Plumbers moseyed over to the Watergate Hotel.
Q. What exactly is Lewinsky’s Dress Syndrome?
A: A political blindside that alters the calculus of an entire political season. In the case of Obamacare, there’s been nothing to match it for avoidable self-inflicted political wounds since Monica Lewinsky revealed that she kept and did not dry-clean “the dress”.
Q. So, you can point the finger at the White House as the chief villain? What about EPA?
A. If you need a villain, look no further than the Office of Management & Budget. Perhaps the most under-resourced, overly-stretched unit in the US government. Given that the biodiesel mandate this year is at 1.28 billion gallons, a jump to 1.7 billion gallons, since biodiesel costs more than regular diesel, triggers an OMB review.
With the complexity of regulatory oversight – one day, it’s the impact of a new free trade policy, the next day, the impact of a seat-belt law, the third day, the biodiesel mandate, think Tarzan as far as how complex the insight into RFS and RINs has to be over there.
A calculation of “it costs $1 per gallon more for biodiesel, so 450 million more gallons equals $450 million more in cost, and that’s too much impact”, is just about the size of it.
Q. But letting biodiesel shoulder a heavy lift worked this year – industry is producing 1.7 billion gallons of biodiesel, right?
A. Right. But keep in mind that they have long since blown through the biomass-based diesel target and are producing for the big gap between that overall number and the advanced biofuels overall volume.
Q. Why don’t they just set a 1.28 billion gallon mandate for biomass-based diesel and then a huge advanced biofuels pool volume, as they have in past years — and let sectors compete to fill that pool?
A. Ah, because Brazilian sugarcane ethanol fits in there — and they want to depressurize the ethanol debate more than they want to put a backstop behind biodiesel.
So, indeed they have set the 1.28 billion gallons biodiesel floor, coupled with a teency-weency incremental amount for the overall advanced biofuels pool. So that there’s no rush of Brazilian sugarcane ethanol arriving at a port near you.
Q. Has anyone been in to see the EPA or the White House?
A. Oh, yes. There were separate briefing/meetings at the White House and EPA this week.
Q. How would you spell the Administration’s rationale, if you had to do it in five letters?
Q. Will the corn ethanol producers sue the EPA?
A. Good chance they will.
A. They are being waived down not because there is a shortage of renewable fuels, but because, in the Administration’s view, there is a shortage of gasoline to blend the ethanol into.
The ethanol industry is bound to point to the EISA Act and say “Congress did not intend to waive the RFS down in case of declining gasoline numbers, in fact it was expressly designed to reduce the gasoline numbers, and Congress knew about the blendwall back in 2007 and designed the RFS to force obligated parties to find ways around it, not stonewall the issue.”
Q. What ways around the blendwall are there?
A. Expanding access for E15, E85 and other high-percentage blends. Biobutanol, which blends at a higher percentage. Just to name two options.
Q. Was E15, in retrospective, a huge mistake?
A. Building an E85 market would have, in retrospect, done more to avoid this result than the multi-year effort to gain E15 adoption — but it is fair to invoke the “Lewinsky’s Dress” factor here. Who really could have foreseen all the negative pressure-building forces here?
And, it also it is not entirely clear that OMB officials have the resources to gain enough of a nuanced understanding of the impact of high-priced RINs have in opening up an E85 market, to make E85 a stable strategy, either.
Q. Why isn’t industry opening up massive “change this outcome” efforts right now?
A. They will. But all the effort, right now, is about identifying the resources, and defining the strategy.
Q. So, when will we see the industry all-out effort begin?
A. The actual effort won’t go public until the EPA publishes the proposal in the Federal Register, which is when the comments window opens, and the 60-day clock starts ticking. No point in getting people to take action when there’s nowhere to take that action.
Q. Will the effort be successful?
A. If it is aimed at reversing the entire decision and massively restoring lost ethanol and advanced biofuels volumes, probably not. After all, the EPA got an earful from industry from the time their original proposal was leaked — along those same argument lines — and the industry got nowhere.
Q. Would a concerted “all hands to braces” industry effort to redress the biodiesel and advanced biofuels pool numbers be successful?
A. It just might. After all, there’s no blend wall or infrastructure issue, the biodiesel and advanced biofuels sector is already producing at a 2.75 billion RIN rate in 2013 without the world crashing to a halt.
Q. Would a move to massively increase the advanced biofuels pool simply advantage Brazilian sugarcane ethanol, as try Administration fears, of more benefit to Brazil than the US and exacerbating the ethanol blend wall issue?
A. Not really. The biomass-based diesel target, which is nested within the advanced biofuels pool, could be constructed around the available production capacity of biodiesel and renewable diesel, and the overall advanced biofuels pool could be just a fraction above that target to include any production from advanced biofuels on the gasoline-replacement side, such as Aemetis’ 60 Mgy of capacity producing in California.
So think of it this way. The Administration doesn’t want more Brazilian ethanol because they fear that obligated parties will simply export gasoline to reduce their required volumes of ethanol blending, rather than build infrastructure to distribute the increased volume of renewable fuels. Thereby raising prices at the pump.
Conversely, the Administration does want more biodiesel because biodiesel costs more. Thereby raising prices at the pump.
Q. So, it’s a case of “we like the jobs, the emission benefits, and the energy security, so long as it doesn’t cost anything”?
A. That’s about the size of it.
Q. So, nothing has changed since that 2010 US poll that revealed that 58 percent of Americans believe that US energy policy needs to “fundamentally” change, but 51 percent say that they would oppose a tax to pay for the development of renewable energy?
A. Yep, nothing changed. The same poll revealed that 59 percent of Americans believed that the US would have an alternative energy platform to oil by 2035. Apparently, financed by some mysterious, interstellar dark matter. Citizens as well as strategic investors sincerely believe that someone else is going to pay for it. It’s a case of “Not In My Backyard, and Not Using My Bucks, Either, Ever”. As we outlined in “NIMBY, NUMBEE and Nod” a few years back. Sigh.
Q. Is an all-hands-to-braces effort by all sectors of the biofuels industry, pulling together unselfishly towards a goal in which they share a common interest – well, is it really all that likely?
A. No. Our experience, as an industry observer, is that the corn ethanol producers are absolutely not going to join in such an industry-wide effort unless the benefit is there in lifting the corn ethanol target, too.
Q. Hasn’t the corn ethanol lobby pressured the advanced pool to support the corn ethanol numbers, and unite behind a common strategy for the common good, in the past?
Q. Wouldn’t that simply be a case of “you were there for us, now we’re there for you”?
A. It’s a good way to put it, but expectations of such a view taking hold broadly amongst ethanol producers should be generally kept very low. Some think this way, not all.
Q. What steps are likely to be involved in responding to the EPA proposal?
A. Various versions of “Tell Your Story to Washington”. Think legislative fly-ins, rallies, and letter-writing campaigns.
Q. What’s the most effective thing that industry could come up with right now?
A. Since a 1.7 billion gallon biodiesel target works out to around a B3 mandate (based on roughly 60 billion gallons of diesel consumption for 2014) — a $1.00 difference per gallon between diesel and biodiesel, even if it turned out that the spread reached those levels (and with soybean prices dropping, not a sure thing), it works out to a $0.03 premium per gallon.
A consumer survey that determined that consumers were willing to invest that $0.03 per gallon for the benefits of energy security, emissions reduction, jobs, putting lubricity back into diesel to replace that lost with the move to ultra low-sulfur diesel to reduce engine wear-and-tear — such a survey would go a long, long ways to addressing the political ramifications of boosting the diesel-side targets.
Q. Is industry working on such a survey yet?
A. Not that we know of. Maybe something will turn up.
Q. Why is it essential that consumer support — difficult to muster — be gained? Why not simply convince the government that three cents a gallon is worth it for all those benefits?
A. I wouldn’t bet on the government. Think of it this way. In 2010, the state of Massachusetts canceled enforcement of its own Clean Energy Biofuels Act because of what it termed a finding of “unreasonable cost”. The cost in question was three cents a gallon.
Q. But that was for some unreasonable mandate for some fantasy fuel, right?
A. Nope, it was a 2 percent biodiesel mandate. Three cents a gallon. Really happened.
Q. Absent a demonstration of consumer support, what will the diesel-side response focus on?
Q. How many jobs in the biodiesel business?
A. Directly and indirectly, around 60,000.
Q. How many are at risk with cuts that would slash biodiesel output by as much as 30 percent?
A. Could be a third of the direct jobs.
Q. Losing lots of jobs – could that be enough to sway OMB on a biodiesel mandate?
A. Lot of tax revenue associated directly, and indirectly, with those jobs. Plus the prosperity of those rural communities. Might be. Tough sell