Navigant Research Blog

Obstacles Grow to Biofuels Mandates

Mackinnon Lawrence — March 6, 2013

The U.S. EPA’s Renewable Fuel Standard (RFS) – a complex rule that mandates petroleum refiners purchase specified volumes of alternative fuel or pay fines – faced a setback in January when a federal appeals court ruled that the agency had overstepped its statutory authority in forcing refiners to buy fuel that did not yet exist.  According to the suit brought by the American Petroleum Institute (API), petroleum refiners were required to purchase 20 million gallons of cellulosic biofuels between 2010 and 2012.  Only 20,000 gallons were produced last year, the first such fuels ever produced at commercial scale.

Cellulosic biofuels – a class of alternative fuels produced using sugars extracted from the woody, inedible casings of plant materials and other organic waste – represent less than 1% of the volume of biofuels mandated under RFS today.  By 2022, that share will rise to 44% if the rule remains intact.

While the EPA upped its annual cellulosic biofuels target to 14 million gallons this year in spite of the ruling (and anemic production to date), many critics are using cellulosic biofuels’ slog toward commercial viability as a beachhead for broader attacks on the biofuels industry.  Combined with the persistent backlash against first-generation biofuels produced from corn starch, sugarcane, and other commodity crops, the fallout could precipitate a repeal of biofuel mandates and targets abroad as well.

Fallout Abroad

The global biofuels industry currently finds itself stuck in a dilemma: it faces the problem of too much production of conventional biofuels that potentially contribute to increasing global food prices on one hand, and too little production of advanced biofuels, leading to the erosion of confidence in commercial viability for emerging technologies, on the other.   Many developing countries, looking at exploding demand for fuel, are unwilling to proceed with mandatory biofuel blending mandates despite having hinted at efforts to do so in recent years.  Cellulosic biofuels woes in the United States would likely hasten this retreat.

According to Pike Research estimates, just 12 billion gallons worth of ethanol and biodiesel is required to be blended in gasoline and diesel consumed worldwide in 2013, representing under 2% of global fuel consumption.  Combined with voluntary blending policies, the total volume of ethanol and biodiesel consumed would rise to 51 billion gallons by 2020.  That’s less than 4% of fuel consumption, but it would require a significant acceleration in industry investment.

Production-focused mandates like the RFS in the United States go even further.  Targeting the supply of biofuels rather than actual consumption, policies in effect today would require an 75 billion gallon global alternative fuel market by 2020 ‑ roughly 5% of total fuel production.

China, which represents the biggest prize for biofuels producers in the developing world, has shown the greatest reluctance to jump on the biofuels train despite surging fuel demand.  While it has rolled out trial blending mandates in nine provinces, policies aimed at shoring up food security have generally won out, resulting in the country satisfying its thirst for biofuels by importing from neighboring countries like Thailand and Indonesia.

The EU, which has set a 2020 target of supplying 10% of the transportation sector’s energy use from renewable sources, has begun to impose strict sustainability standards that restrict access for biodiesel produced for export in countries like Indonesia, Malaysia, and Argentina.

In the United States, meanwhile, any repeal of the RFS – in part or whole – would remove a key anchor in the already shaky global biofuels policy foundation.  Although the United States does not impose federal mandates on consumption per se, RFS accounts for over half of the mandated biofuels production volume worldwide.  With or without policies in place, our forecasts point to restrained biofuels growth over the next decade.

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