This is the first of several blog entries where I’ll describe the U.S. Renewable Fuel Standard (RFS), how the program works, its importance to the biofuels industry, and the significant ongoing debates and controversies it has engendered. (In these entries, I’ll use the terms “biofuels” and “renewable fuels” somewhat interchangeably, although the latter term also includes a broader range of fuels, including those produced by physical or chemical processes, that meet the definitions in the law).
The RFS is a nationwide program, first enacted in 2005 (amended in 2007) to require increasing use of renewable fuels by 2022. The RFS is administered by the U.S. EPA under statutory authority of the Energy Policy Act of 2005, as amended by the Energy Independence and Security Act (EISA) of 2007 (because of this amended legislative authority, the current version of the law is sometimes referred to as RFS2). EPA has issued regulations to implement this law, which can be found at 40 CFR Part 80 (first published in the March 26, 2010 Federal Register).
The goal of the RFS is to directly support U.S. renewable fuels production by providing a mandatory market for qualifying fuels—fuel blenders must incorporate minimum volumes of renewable fuels in their annual transportation fuel sales. By guaranteeing a market for biofuels that is largely independent of pricing and fuel costs, RFS2 was intended to reduce the risk associated with biofuels production, and to provide an indirect subsidy for capital investment in the construction of biofuels plants.
RFS2 establishes four categories of renewable fuels and sets yearly minimum volumes for each category. Certain fuels were placed into specific categories, while fuels produced through production pathways not specified in the original law or regulations will generally need to go through a petition process in order to be qualified into one of the four categories. I’ll discuss the approved pathways and discuss how the petition process works in a subsequent blog entry. Producers of fuels qualifying for any of the four categories can issue Renewable Identification Numbers (RINs) for the fuels they produce. RINs are tradable on open markets and thus provide tangible economic value to fuel manufacturers.
Mandated fuel volumes.
The four categories of renewable fuels under the RFS2 are defined in the law and regulations based on their feedstock and method of production, as well as the threshold levels of reduction of greenhouse gas (GHG) emissions that a fuel must meet to qualify (GHG emission reductions are measured relative to the “baseline” emissions of the applicable conventional fuel – gasoline or diesel – that the renewable fuel would replace). In addition, there is certain overlap between the categories, with some categories nested within others. The four categories are: “renewable fuels,” “advanced biofuel,” “cellulosic biofuel,” and “biomass-based diesel.”
“Renewable fuels”, the broadest category, requires the fuel to be produced from a renewable feedstock and to reduce GHG emissions by at least 20%. Corn-starch ethanol falls into this category. “Advanced biofuels” is a subset of “renewable fuels”, where the GHG emission reduction must be at least 50%, but where corn-starch ethanol is explicitly excluded. The most common fuel falling into this category is ethanol produced from sugar cane. “Cellulosic biofuel” must be produced from a cellulosic feedstock and reduce GHG emissions by at least 60%. The fourth category is “biomass-based biodiesel” which includes diesel fuel made from any renewable feedstock where the GHG reductions are at least 50%. (Note that the regulation includes several definitions important for determining which fuels and feedstocks qualify – the most important of these is the definition of “renewable biomass”, since all “renewable fuels” must be derived from feedstocks qualifying as renewable biomass). The regulations assumed that certain fuels, known and assessed during promulgation of the regulations, would meet the specified GHG reduction levels, but fuels produced by new pathways would need to establish their GHG reduction levels through life cycle assessments (LCAs) conducted by EPA based on data provided by the company proposing the fuel. I’ll describe the petition process for establishment of new fuel pathways in a subsequent post.
The figure below summarizes the annual volume obligations under the RFS. The 2011 volume mandate under the RFS was 12.6 billion gallons of corn starch-derived ethanol, and about 1.5 billion gallons of ethanol or other biofuels derived from sources other than corn starch. The 2012 mandate was 13.2 billion gallons of corn starch ethanol and 2 billion of other biofuels. The corn-starch ethanol mandate will level out at 15 billion in a few years while the non-corn-starch mandates will increase year-by-year (e.g. 2 billion gallons in 2012, 2.75 billion in 2013, etc.). The latter mandates will need to be met by a combination of cellulosic ethanol, photosynthetic ethanol, butanol, biodiesel, algal diesel, and other advanced biofuels. However, delays in commercial development of cellulosic ethanol, unforeseen in 2007 prior to the economic downturn which began in 2008, have left the industry far short of meeting the aggressive volume mandates for cellulosic fuels (in fact, prior to 2012 there were no fuels produced in the U.S. that qualified as cellulosic biofuels under the RFS), and so EPA has continually downgraded the mandated levels for cellulosic biofuels on a year-by-year basis. In addition, the law requires EPA to establish the mandates for biodiesel on an annual basis via the rulemaking process. In September 2012, EPA issued its final rule establishing the 2013 biodiesel mandate at 1.28 billion gallons, up from 1.0 billion for 2011. This level had previously been announced in a proposed rule, and is already reflected in the figure.
The yearly minimum volume mandates for the individual fuel categories are passed along to “obligated parties” (i.e., sellers or blenders of fuels) on a pro-rated basis dependent upon each party’s sales of fuel, (described below) and parties that fail to meet their “renewable volume obligation” (RVO) are subject to penalties. In spite of EPA’s ability, in some cases, to revise the minimum volumes on an annual basis, critics have increasingly attacked the RFS in recent years. Some critics feel that, even with EPA’s annual revisions, the cellulosic volume mandates remain too high, since no commercial cellulosic fuels have yet been available; and further criticism has come due to the impact of the 2012 U.S. drought on corn availability and prices. These concerns have led to court challenges, formal petitions to EPA, and considerable public debate. I’ll describe these ongoing controversies in a later blog entry.
Renewable Identification Numbers
Compliance with the RFS by fuel producers and sellers is tracked using a system wherein each gallon of fuel that qualifies as a renewable fuel is assigned a unique identification number. This number is called a Renewable Identification Number (RIN), and it is generated by the company that manufactures or imports the fuel. Each RIN is a unique 38-character number that follows a format specified in the regulations. The 38 characters include several different sections (blocks of characters) which are used to designate different characteristics of the fuel, including the renewable fuel category, the year the fuel is produced, a unique ID for the company generating the RIN, the company’s batch number, etc. Each gallon of fuel within a batch is assigned its own RIN. When a company creates RINs, they must be reported to EPA, generally on a quarterly basis. When the producer sells the fuel to another party such as a blender or distributer, the RINs are also transferred along with the fuel, although when the fuel is blended for retail sale or readied for export, the RINs are considered to be “separated” from the fuel, and at this point the RIN gains economic value on the open market.
Companies that produce fuels qualifying as “renewable” under the RFS (whether fuels initially covered in the regulation or ones added at a later date following approval of a petition) must register with EPA. The registration process includes a third party engineering review of the company’s facility(ies) to ensure that the manufacturing process is in compliance with the regulations and is expected to yield the required reductions of greenhouse gas emissions. Each fuel producer has reporting requirements to EPA as well.
Renewable Volume Obligations
The yearly mandates are passed down to entities that are known as “Obligated Parties”. Obligated parties are defined as the refiners that produce gasoline or diesel, along with companies that import gasoline or diesel, only in the lower 48 states and Hawaii (i.e., excluding Alaska and the territories). Each year, EPA determines how much renewable fuel each obligated party is required to sell in order for the overall RFS volume mandates to be met. This is essentially done by pro-rating to determine what percentage of an obligated party’s total fuel sales for the year must consist of RINs for qualified renewable fuels. To do this, EPA estimates the total volume of transportation fuels projected to be used in the coming year, and then calculates the percentage of that total that must be met by each of the four categories of renewable fuel in order for total fuel sales to achieve the volume mandates. EPA then applies these percentages to each obligated party, requiring each party to own RINs accounting for these percentages of each of the four fuel types. The resulting volumes are called renewable volume obligations (RVOs). Each provider can acquire these RINs either by producing biofuels itself or by purchasing RINs on the open market. Because most obligated parties are not biofuel producers, they would be expected to meet their obligation through the purchase of RINs. Some of the required RINs would be acquired with the purchase of fuels (since RINs travel with fuels), but others would be acquired on the open market.
RINs are traded on the open market, but price fluctuations are common. RINs commanding the highest price are those for fuel categories associated with the highest levels of GHG emission reductions, such as cellulosic RINs, while the lowest price RINs are for the “renewable fuel” category under the RFS, which includes fuels with less favorable GHG emission reductions such as corn starch ethanol. By way of example, the value of a Renewable Fuel RIN for ethanol in early December 2012 was only about $0.05 per gallon and earlier in 2012 the price was as low as $0.0185/gallon. In contrast, the price of a RIN for an “advanced biofuel”, currently met largely by Brazilian sugarcane ethanol, is higher – these RINs were valued at about $0.45-0.50 per gallon in December 2012 but were priced at $0.70-0.80 per gallon earlier in 2012. Biodiesel RIN prices have probably been more stable, and were in the range of $0.50-0.55 per gallon in December. Cellulosic RINs are currently the most valuable, due to the scarcity of cellulosic fuels that qualify under the RFS: RINs for cellulosic fuel produced in 2011 were priced at $1.14 per gallon in December, and 2012 cellulosic RINs were priced at $0.79 per gallon.
In the years since it first went into effect, the RFS is credited by most observers with providing a useful and needed stimulus for the biofuel and renewable fuels industry. However, the law has not been popular with everyone, and has engendered significant controversies, particularly in recent years. Many observers expect the RFS to come under increased Congressional scrutiny and attack in 2013, with many calling for its outright repeal. I’ll discuss these controversies and public policy debates in the next entry of the blog.
D. Glass Associates, Inc. is a consulting company specializing in government and regulatory support for renewable fuels and industrial biotechnology. David Glass, Ph.D. is a veteran of over thirty years in the biotechnology industry, with expertise in industrial biotechnology regulatory affairs, U.S. and international renewable fuels regulation, patents, technology licensing, and market and technology assessments. Dr. Glass also serves as director of regulatory affairs for Joule Unlimited Technologies, Inc. More information on D. Glass Associates’ regulatory affairs consulting capabilities, and copies of some of Dr. Glass’s prior presentations on biofuels and biotechnology regulation, are available at www.slideshare.net/djglass99 and at www.dglassassociates.com. The views expressed in this blog are those of Dr. Glass and D. Glass Associates and do not represent the views of Joule Unlimited Technologies, Inc. or any other organization with which Dr. Glass is affiliated. Please visit our other blog, Biofuel Policy Watch.