CBO Examines RFS

Food Prices Would See Little Change

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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A CBO report expresses skepticism about meeting biofuels production and usage targets. (DTN file photo)

OMAHA (DTN) -- Barring a significant explosion of cellulosic ethanol production in the next eight years, a new Congressional Budget Office report outlines what even those in the biofuels industry likely already knew -- chances are slim that the biofuels industry will get anywhere near the 36-billion-gallon mark mandated by the Renewable Fuel Standard by 2022.

The report was completed as part of an ongoing examination of the RFS by the House Energy and Commerce Committee. The committee issued a series of so-called white papers, http://tinyurl.com/…, looking at the RFS last year as part of an effort to consider potential reform.

One of the more interesting conclusions reached by the CBO is that regardless of whether the RFS was repealed or left in place, food prices "would be similar."

"To the extent that the Renewable Fuel Standard increases the demand for corn ethanol, it will raise corn prices and put upward pressure on the prices of foods that are made with corn -- ranging from corn-syrup sweeteners to meat, poultry, and dairy products," the report said. "CBO expects that roughly the same amount of corn ethanol would be used in 2017 if fuel suppliers had to meet requirements equal to EPA's proposed 2014 volumes or if lawmakers repealed the RFS, because suppliers would probably find it cost-effective to use a roughly 10% blend of corn ethanol in gasoline in 2017 even in the absence of the RFS. Therefore, food prices would also be about the same under the 2014 volumes scenario and the repeal scenario."

By contrast, the use of corn ethanol in 2017 would be about 15%, or roughly 2 billion gallons, higher under the RFS volumes scenario, CBO said. "CBO estimates that the resulting increase in the demand for corn would raise the average price of corn by about 6%," the report said. "However, because corn and food made with corn account for only a small fraction of total U.S. spending on food, that total spending would increase by about one-quarter of 1%."

CELLULOSIC RFS BLEAK

The CBO paints a bleak picture of the budding cellulosic ethanol industry's chances to meet the RFS in the coming years.

"The rising requirements in EISA (Energy Independence and Security Act of 2007) would be very hard to meet in future years because of two main obstacles, which relate to the supply of cellulosic biofuels and the amount of ethanol that older vehicles are said to be able to tolerate," the report said. "Fuel suppliers have had trouble meeting the annual requirements for cellulosic biofuels because making such fuels is complex, capital-intensive, and costly. Although production capacity is expanding, only a few production facilities are currently operating."

CBO said meeting the RFS becomes even more difficult in light of declining gasoline demand in the U.S.; projected by the Energy Information Administration to fall from about 135 billion gallons today to 125 billion gallons by 2022. As a result, CBO said meeting the RFS for advanced biofuels including cellulosic ethanol would become increasingly difficult.

Brooke Coleman, executive director of the Advanced Ethanol Council, said in a statement on behalf of his organization which represents more than 30 advanced biofuels companies, that the CBO report was "not worth reading."

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"You cannot assess the impacts of the RFS without looking at the benefits of reducing consumer demand for gasoline and diesel fuel," he said. "That's the entire point of the RFS and the CBO simply states that 'it did not account for that effect in this analysis.' To put that omission in perspective, an oil economist recently concluded that the RFS saved motorists at least hundreds of billions of dollars in 2013 by adding the equivalent of an additional OPEC country to U.S. gasoline supplies during times of extreme tightness between supply and demand."

CORN-BASED ETHANOL

When it comes to corn-based ethanol, the CBO said even if the RFS was repealed ethanol would continue to account for 10% of the U.S. fuel supply. "Currently, most gasoline sold in the United States is actually a blend (referred to as E10) that contains up to 10% ethanol -- the maximum concentration that is feasible to avoid corrosion damage to the fuel systems of older vehicles," CBO said.

"EISA's growing requirements for the total gallons of renewable fuels to be used each year, combined with a projected decline in gasoline use, suggest that the average concentration of ethanol in gasoline would have to rise to well above that 10% 'blend wall,' potentially increasing to about 25% by 2022."

The CBO said the expansion of E85 pumps has not kept up with mandated volumes in the RFS. "But at present, fewer than 2% of filling stations in the United States sell high-ethanol blends," the report said. The CBO said meeting the RFS requirements by 2017 would lead to higher diesel and E10 prices, and a drop in the price of E85.

E15 EXPANSION

The CBO report said there is some room for E15 expansion, as EPA has certified some 60% of vehicles now on the road to use the fuel. While many automakers have discouraged the use of E15, manufacturers including Ford and General Motors "have stated that their models from 2012 or 2013 and later can use E15 without risk."

Though USDA grants are available for E15 pump installation, the CBO report said filling stations are shying away because of the cost to acquire new pumps and underground storage tanks.

"The growth of E15 sales is expected to be slow," CBO said. "In addition, some station owners may be concerned about potential liability claims arising from drivers who inadvertently refuel a pre-2001 vehicle with E15."

BIODIESEL PUSH

A group of 52 members of Congress on Thursday asked President Barack Obama in a letter, to leave the biomass-based diesel or biodiesel volume alone in the RFS. In its proposed 2014 volumes EPA had set that part of the RFS at 1.28 billion gallons, although the industry is on track to eclipse 2 billion gallons this year.

"Should the EPA choose not to raise biodiesel's volume above 1.28 billion gallons, we believe it will have a terrible impact on the domestic biodiesel industry, and could lead to the closure of numerous biodiesel plants, with smaller producers taking the largest impact," the letter said.

"We are also concerned the administration may raise the advanced biofuels levels under the RFS with the intention of allowing biodiesel to fill that requirement. Our understanding of such a move is that it would lead to no additional domestic production of biodiesel, and would in fact lead to increased imports of foreign fuels to supplement the advanced biofuels level."

The letter is signed by several biofuels proponents including Rep. Jeff Fortenberry, R-Neb., Rep. Collin Peterson, D-Minn., and Rep. Steve King, R-Iowa.

Read the letter here, http://tinyurl.com/….

Read the CBO report here, http://tinyurl.com/….

Todd Neeley can be reached at todd.neeley@dtn.com.

Follow Todd on Twitter @toddneeleyDTN.

(CC/CZ)

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Todd Neeley

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