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.