2010: The Year of the RFS

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As I thought of the topic for this month's "NBB In Sight" column, I couldn't help but think about how different things may-or may not-be by the time you are actually reading it. This is the February issue, which will be distributed at our annual conference. But now, at Christmas time, watching Congress adjourn before extending the tax credit, and watching EPA delay its RFS2 notice once again, it occurs to me that Nostradamus would have had a tough time writing an insightful and timely biodiesel article for February. I am tempted to do what Nostradamus did, and write the article in spooky-sounding, ambiguous quatrains that could apply to almost anything after the fact.

Because the annual conference is such a central event for the biodiesel industry to come together to network, plan, learn and do business, the February magazine article is especially important. In retrospect, it would have been a more impressive demonstration of clairvoyance if, at last year's conference in San Francisco, we would have distributed 2009 Calendars from Gary Larson's Far Side "Trouble Brewing" series. My favorite was the one of Ed's Dingo Farm located next door to Doreen's Nursery-and the one of the depiction of cavemen tying a brave volunteer to a round boulder atop a hill, with the caption, "Early experiments in transportation."

At the conference in San Francisco last year, I laid out the case for why I believed that the RFS2, specifically the treatment of indirect land use change (ILUC) analysis, would be one of the most important factors impacting the biodiesel market moving forward. At that time and continuing today, most of the "research" being published on ILUC was about as scientific as interpreting Nostradamus' quatrains. Based on the assumptions you use, you can make it say whatever you want. And biofuel opponents were shamelessly using the most unreasonable and unscientific assumptions to deliberately disadvantage biodiesel.

NBB invested significant resources to develop the real science and data necessary to introduce reason into the discussion. Based on that effort, 2010 will see an implementation of RFS2. It is our hope and expectation that this will translate to a program that is reasonable and workable for the biodiesel industry, one that results in the required volumes without requiring overly burdensome and costly compliance measures. If it does, I will make this bold prediction: implementation of RFS2 will have the single most significant market impact for calendar year 2010.

A longer term federal incentive and restructuring of the biodiesel tax credit will remain NBB's top legislative priority, and it will be a cornerstone of our public policy platform for years to come. The tax credit is, and must remain, the primary market driver for the biodiesel industry. RFS2 is intended to provide a backstop or safety net, to offer stability to this fragile, emerging industry from what is otherwise violent volatility. 2008, with its 700 million gallons of production, was a good example of how the tax credit was highly effective as a demand driver for the industry-without an RFS2 in place. The year 2009, however, with crude prices dropping by half and biodiesel volumes dropping below 500 million gallons, was a good example of why we need both the tax credit and RFS2. The tax credit is the market driver and the RFS2 is the safety net. This platform worked well for the ethanol industry under the first RFS.

My prediction that RFS2 will be the biggest market influencer in 2010 is based on the fact that we can expect 2010 market conditions in the energy sector to be similar to those in 2009. Many of the same economic fundamentals still exist. Therefore, the RFS2 will be necessary to stabilize those conditions in 2010. The transition rules call for 2009 and 2010 volumes to be combined for a total obligation of 1.15 billion renewable identification number (RIN) credits to be acquired by December. When estimating valid RINs already generated and available in 2009, carry-over allowances, and other variables, this creates a requirement for 2010 somewhere between 700 and 800 million gallons. This estimate would put the industry back in the range of or above 2008 production levels.

While NBB continues to work on behalf of its members to see that RFS2 is more meaningful and less burdensome, the program is complicated. For those wishing to participate in opportunities arising from RFS2, it is imperative that they understand the details of the program and how the markets will respond to it. That is why we have placed an emphasis on the RFS2 at our conference in Grapevine, Texas. We will have experts from the petroleum industry discussing their plans to implement the standard, including infrastructure investments, intake, offtake, and RIN management. We'll hear from the U.S. EPA directly on specific elements of the program. And we'll hear from other leading experts in different areas of the biodiesel spectrum.
These observations are based on my best judgment and analysis of how 2010 is likely to play out. However, I must say that I claim no powers of clairvoyance, and virtually anything can happen. So just for fun, I thought I would turn to Nostradamus himself, who, of course, did claim such powers. What I found was inspiring. In Century X, Quatrain 15, Nostradamus made the following shocking prediction:


"Father duke old in years and choked by thirst,
On his last day his don denying him the jug:
Into the well plunged alive he will come up dead,
Senate to the thread death long and light."

Clearly Nostradamus was describing the state of the biodiesel industry in 2009, having been "choked" by a series of challenges only to see Congress deny the tax credit or the "jug." In line three, he describes how this event will cause many to go out of business, before predicting a breakthrough of "light" in the Senate for those hanging on by a thread. Any reasonable reader would see how Nostradamus was calling to us through the centuries with razor-sharp accuracy. On the other hand, this quatrain was also used to assert that Nostradamus predicted McCain over Obama in the 2008 elections.