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US EPA Denies Texas Waiver Request; Biofuel Mandates Remain 9B Gallons for 2008, 11.1B for 2009

US Environmental Protection Agency (EPA) Administrator Stephen L. Johnson has denied the waiver request submitted by the state of Texas temporarily to halve the levels of biofuels required by the  Renewable Fuels Standard (RFS). (Earlier post.) As a result, the required total volume of renewable fuels, such as ethanol and biodiesel, mandated by law to be blended into the fuel supply will remain at 9 billion gallons in 2008 and 11.1 billion gallons in 2009.

In his request for the waiver, Texas Governor Rick Perry said that the “artificial demand for grain-derived ethanol is devastating the livestock industry in Texas and needlessly creating a negative impact on our state’s otherwise strong economy while driving up food prices around the world.

Current law authorizes EPA to waive the national RFS if the agency determines that the mandated biofuel volumes would cause “severe harm” to the economy or the environment. The EPA said that it recognizes that high commodity prices are having economic impacts, but that its analysis of Texas’ request found no compelling evidence that the RFS mandate is causing severe economic harm.

EPA examined a wide variety of evidence, including modeling of the impact that a waiver would have on ethanol use, corn prices, food prices, and fuel prices. EPA also looked at empirical evidence, such as the current price for renewable fuel credits, called RINs, which are used to demonstrate compliance with the RFS mandate.

After an evaluation of available economic modeling tools, the EPA chose a model developed by researchers at Iowa State University (ISU model). The ISU model is a stochastic equilibrium model that attempts to capture the most probable prices of corn, ethanol and fuel given uncertainty in six variables: corn acres planted, corn acres harvested, corn yields, US corn export demand, crude oil prices, and the capacity of the US corn ethanol industry. For each of the approximately 1,000 simulated scenarios, the model picks a value for a factor like crude oil price by randomly selecting from a probability distribution curve for that factor.

At EPA’s request, ISU researchers updated their model with the recent USDA data on the corn crop. In addition, ISU researchers also modified the threshold point at which ethanol will have to be priced on an energy equivalent basis to 10 billion gallons.

Despite its lower energy value, ethanol has historically and continues to be prices equivalent to gasoline when used in blends of up to E10. In the last year or so, as ethanol use has continued to increase, the wholesale price of ethanol has begun to separate slightly more from that of gasoline as: 1) the octane value has declined, 2) the distribution costs have increased to get ethanol to more distant markets, 3) gasoline prices have increased, and 4) ethanol is having to complete in markets where gasoline is priced lower than in past ethanol markets.

In the long term, says the EPA, as ethanol volumes increase above about 15 billion gallons, ethanol will saturate the gasoline market as an E10 blend and additional volumes of ethanol will have to be consumed in the form of E85.  When sold as E85, consumers will recognize a reduction in their mileage as compared to the use of an E10 blend due to the reduced energy content of ethanol. Therefore, retail pricing would be expected to take this fuel economy impact into account and wholesale prices for ethanol will have to be below that of gasoline to reflect its lower energy content. This change in valuation will not occur until we reach about 15 billion gallons of ethanol. For the waiver analysis, EPA conservatively assumed that this change in valuation will occur at 10 billion gallons to reflect potential short term limitations in the distribution system.

Had the EPA used 15 billion gallons instead of 10 billion, the likelihood that the mandate would be binding would be lower and the magnitude of the impacts smaller in the scenarios where the mandate was binding, it said.

As a result of these updates, the ISU model projects the average expected amount of ethanol demanded in the United States during the 2008/2009 corn crop year without a waiver will be 11.05 billion gallons, which consists of approximately 10.67 billion gallons of domestic production and 380 million gallons (MG) of imports. ISU’s model predicts that for 76 percent of the simulated scenarios, waiving the RFS mandate would not change the overall level of corn ethanol production or overall US ethanol consumption in 2008/2009 because more ethanol would be demanded than the RFS requires. For those 76 percent of the scenarios, waiving the RFS mandate would therefore have no impact on ethanol use, corn prices, ethanol prices, or fuel prices. We refer to that model result as a 76 percent probability that the RFS will not be “binding” in the 2008/2009 marketing year.

—Notice of Decision, p. 21

EPA also concluded that even if the RFS mandate were to have an impact on the economy during the 2008/2009 corn marketing year, it would not be of a nature or magnitude that could be characterized as severe. Even in the modeled scenarios where a waiver of the RFS mandate might reduce the production of ethanol, the resulting decrease in corn prices was anticipated to be small (on average $0.30 per bushel of corn), and there would be an accompanying small increase in the price of fuel (on average $0.01 per gallon in fuel costs).

The average increase in corn prices in all modeled scenarios, including scenarios where the RFS mandate would and would not have an impact, was $0.07 per bushel of corn. Such levels of potential impacts from the RFS program do not satisfy the high threshold of harm to the economy to be considered severe, according to the EPA.

In addition to its own analysis, EPA consulted closely with the Departments of Energy and Agriculture, and considered more than 15,000 public comments in response to the Texas request.

This is the first RFS-related waiver request. In a Federal Register notice, EPA is publishing a detailed rationale that will also serve as a framework for any future waiver considerations. EPA established a docket for this action under Docket ID No. EPA-HQ-OAR-2008-0380. All documents and public comment in the docket are listed on the www.regulations.gov website.

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Comments

ToppaTom

I guess the beef farmers don't like the increase in grain prices.
But their waiver only applied to fuel used in Texas?
Sounds like a good answer from the EPA, but it apparently took lot of research effort.
I'm not sure I feel reassured or not - to much re-study.
Of course the ISU study was probably gratis, and surprise, the farmers in Iowa support ethanol.
I think ISU called the model, STOICHASIC, just to irritate the cow-punchers.

ejj

Texas needs to chill out at this point. Gas prices have come down significantly - if Israel bombs Iran's nuke sites & goes to war with them, a waiver might be needed from high gas prices.

Joseph


"Gas prices have come down significantly"

What...where do you live. .25 on 4.60 is NOT significant, it's a mere 5%. The price of grain and food is nearly out of site worldwide. And its really stupid. There was an segment on BBC about the amount of farmland that has been left dormant since the fall of the USSR. There ar over 10 million acres in southern Russia just sitting there. Rich black soil farmland the size of Arizona. Look at GoogleEarth south of the border, Mexico has and area the size of the US mid-west just sitting there doing nothing but collecting dust.

Rikiki

Joseph,

Just because satellite photos show green areas on the planet anywhere does not mean that the verdant areas do have abundant water or rainfall in the growing season. Eastern Washington is very green until mid summer and then throughout the late summer, fall and winter (sans snow fall),satelllite photos would show a vast brown belt. Only irrigated areas would show up as tiny green circles scattered about near water sources. The availability of irrigation in CA central valley, the colorado river in southern CA and AZ, the Rio Grande in NM and TX all provide for a green revolution in a technical desert. There are crops that can be put in over winter which will use accumulated snow water to provide for a early year crop.. "spring wheat". After the wheat is harvested no water for anything else.

Water availability is the main problem. Every place that water has been made available for ag, there has been great sucess. From CA NM, TX, Israel, Qatar, Saudi, etc etc. ANd, of course certain areas of land in Mexico...
Look for the little green squares and round green patches surrounded by brown (desert=< 12"/year)

BTW, Look what happened in the "Dust bowl" when rain was scarce for years. All is quite green now. May not always be so in future.

Rikiki

Joseph


Rikiki how come the 'pac-mans' stop at the border.

Corruption and Government failure. Sanora and Chihuahua have a great deal of water, more than the US desert southwest, but to say it is mismanaged is a colossal understatement. Central and Northern Mexico could easily do 10X what it is currently doing.

TruthHunter

Maybe a democratic administration would be more sympathetic to the issues of rising food price. The current administration does not care about food prices. That is easy to see.

rob

On a positive note... 11.1 billion gallons/year is roughly equivalent to 1.5 million barrels of oil a day (figuring roughly 20 gallons of finished gasoline / bbl.)

Numbers like that start to make a real dent in US petroleum demand. I'd rather it were cellulosic/algal, but the back end of the plants are roughly the same, so lets get 'em build and we'll convert them to cellulosic once corn becomes uneconomic (we may already be there).

TXnative

Its not about gas prices it about feed costs, as corn has been diverted to ethanol livestock feed has tripled in price.Looks like it might be time for Texas to think about giving the Union the boot. Texas has everything we need to survive just fine with out the union, in fact most of us think we would be better off with out the drain of the rest of the states on our resources. 60% of the US natural gas comes from The Texas Gulf Coast, and a large part of the domestic oil too. Texas has Uranium, Lignite,and higher rank coals too. enough for our in Republic consumption for decades if we didn't have to sell it to the rest of the union.The Texas reserves, state guard, and National Guard have 250000+ members, we have the only nuclear weapons production facility in the whole country located at Pantex, as well as shipyards, fighter jets, and bomber bases with the factories located in Dallas and Ingals to build more of such items as well. The US would probably want all the warheads stored at Pantex back but the people and equipment would stay so a crash arms program would be easy to start. Given the amount of spent fuel at the STNP and Commanche peak PU239 would not be an issue to get at. No country cough Mexico would think about trying to invade us once Texas had homegrown nukes. Mexico still views Texas as a rouge province like Tiawan.

ejj

@ TXNative:

Go ahead & try & secede again...your state will get the same result as before!

Come to think about it, having Texas go its own way is a good idea. That will put the best part of the US in the dem column. There will also be an end to the war monger Wacos nut cases like LBJ and GWB coming north to DC. They are so arrogant and obnocous there that someone will fumigate that pest hole in short order.

Engineer-Poet

Let's see.  It was ADM and the SUV set vs. American taxpayers and world food-consumers.  The Bush EPA threw the taxpayers and food-eaters under the bus.

Quelle surprise.

Engineer-Poet

Let's see.  It was ADM and the SUV set vs. American taxpayers and world food-consumers.  The Bush EPA threw the taxpayers and food-eaters under the bus.

Quelle surprise.

Engineer-Poet

Dang it, I refreshed and that comment wasn't there.

richard schumacher

Now it's time to work on eliminating the $0.54 per gallon duty on imported fuel ethanol. Call or write your Senators and Representative:
http://www.congress.org/congressorg/home/

Joseph


For all those under 40 years of age. The Democrats being in control is no different than the Republicans being in control.

Bernard

An impact of $0.30 per bushel of corn, at worse.

Given that a bushel of corn is 58lbs, how much corn do you have to consume to even notice the price hike?

I know that most corn ends-up as animal feed and high fructose corn syrup, but it's still an almost insignificant impact on US consumers.

If your diet is so heavily dependant on cheeseburgers and corn syrup that a eight of a penny average increase in the price of a pound of corn is noticeable, you have much bigger issues to deal with...

Kit P.

I suppose an E-P rant would not be completed without a reference ADM and SUV.

How much of the new ethanol production is coming from small COOPs in places like Iowa and how much is ADM? BTW when did farmers in the Midwest stop growing rice causing the price of rice to increase?

Mick

@Kit, The reason that American rice growers stopped growing rice is interesting. Under a little known (outside of rice growing areas of the U.S.) federal program, the U.S. government started paying rice farmers NOT to grow rice. The result is that the rice farms have been divided up into little farmettes and marketed to urbanites. The sales pitch, accurate so far, is that if you buy one of these 5 acre farmettes the fed will pay you not to grow rice on it. Now, even if the U.S. govt. abandons this stupid policy it will be too late. The rice farms won't exist anymore; they will be housing developments. I should look up the URL link to this story. It's very interesting, and sad. It's more than sad; it's a moral outrage. :-( mc

Kit P.

Interesting info Mick. Generally speaking when people are against something the do not bother to check their facts. The sad thing here is that some here who have based their opposition on political reason do not realize that their leaders have changed their position.

Dems have seen the light and have uped the Bush RPS. It is very interesting that Texas Governor Bush and President Bush have different positions. I think a ethanol RPS is good national policy. I do not think that present Texas governor made a good case that ethanol was hurting Texas because the price of cattle feed is not just a Texas issue.

Mick

@Kit,

Here's the answer to your rice question.

http://www.pbs.org/wnet/expose/2008/04/producers-notes.html

bud

Some thoughts regarding Texas and the RE mandate that the gov objects to:

A quick look at the Texas economy shows that they have a cattle industry worth about $17 billion per year, crude oil $36 billion (value of all TX crude oil in '08), natural gas about $38 billion. $91 B = total value of cows and fossil fuel.

Texas currently has 6 million acres of dense mesquite which they consider a weed-tree to be eradicated. Mesquite will grow in arid regions with no input and yet the seed pods alone will produce 4.5 tons per acre of low cellulose biomass, the soft fiber and wood trimmings will produce another 3 tons per acre sustainably and energy crops grown under the mesquite would produce another 5.5 tons per acre with little input...e.g. H-133 sorghum or some other suitable perennial.

My suggestion would be to chuck the entire cattle industry and while you're at it the entire oil and gas industry. By increasing the mesquite acreage to 70 million acres the entire state of Texas and parts of Oklahoma and NM could be remediated into a much more pleasant and better smelling place...with greatly improved soils (mesquite fixes nitrogen and has 100 foot root systems.

The 70 million acres of mesquite would produce 11 quads of renewable end use energy such as bio-methane or even ethanol and could be marketed for $10 per million BTUs, retailed for $25 per MBTUs. This industry would then be worth between $100 and $275 billion. More than the cattle, gas and oil industries combined while the state would be upgraded from a desert to productive land.

gr

A very interesting idea bud. But Texans and the world's formerly poor, want meat in their diet (unless your plan includes mass reeducation to the contrary.) So, while the idea of "chucking" cattle ;)is wildly funny, it will not fly. Secondly, biofuel will not command the money you calculate with as the entire energy field is changing. With the introduction of low cost H2, higher efficiency PV, solar thermal and heat storage - energy is beginning a long needed decline in cost.

The one part of your plan that is most attractive is the idea of a better smelling Texas. Having worked near feed lots in the past - that would be an olfactory bonanza for those in cattle country!

"@ TXNative:

Go ahead & try & secede again...your state will get the same result as before!"

Ha I think not, the last time we being the south were an agricultural economy lacking the industrial base to field a war machine like the north who just barely won the war i might add only by starving the south from resources did the north win. This time we have a huge industrial base, and a lot more citizens too. We already have a 250000 man army on tap and could field a million man army in 6 months we have the industries to make warships, fighter jets and nuclear weapons. Texas is large than France and better armed too. There are more firearms here per capita than anywhere else in the union. No sir the results would be very very different This time Texas could starve the union from natural gas right in the middle of winter, and we are a significant food exporter as well. Its only a matter of time before the union breaks down and when that time comes Texans are ready to go our own way again.

Kit

@Mick

Thanks for the link, it was worth the time. I spoke with a friend who told me that they were able to meet their operating loan by selling at market price rather than depending on subsidies.

igore spence

"Texas is large than France and better armed too."

Right. The Texas National Guard Howitzer can totally annihilate an Exocet missile! Not to mention our nukes!

"We already have a 250000 man army on tap and could field a million man army in 6 months."

When utterly out of original ideas, try to foment civil war.
Trotsky School of Outdated Propaganda

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