Posted Dec. 2, 2010

It wasn't a shock that the U.S. EPA finalized cellulosic biofuel volume requirements for the 2011 renewable fuel standard (RFS) were much lower than what was originally mandated by law. The final rule set the requirement for cellulosic biofuel at 6.6 million gallons and left the overall target at 13.95 billion gallons.
"EPA's recent announcement that they are waiving the cellulosic requirements under RFS2 is not a surprise," said Wes Bolsen, chief marketing officer and vice president of government affairs for Coskata Inc. "In fact, given the long construction schedules for cellulosic ethanol facilities, this shortfall could have been predicted months ago."

The way he looks at it, the EPA is making sure that the cellulosic ethanol produced will be blended into the fuel chain by obligated parties. It's good for the industry because it mandates a market and allows cellulosic ethanol producers to sell their product. "But now the industry needs enduring government support that not only gives investors certainty in the long-term market value of cellulosic biofuels, but perhaps more importantly, helps motivate investment in the short-term around the construction of commercial scale facilities," he said.

The final volume requirements merely represent the facts about what supplies are available, said John McCarthy, CEO of Qteros Inc. "It's hard for me to fault or take exception with the EPA because the EPA is doing their job," he said. Currently, the EPA isn't required to do anything but match demand with the existing supply. In addition, it's not the EPA's job to establish policy—nor is it the job of the U.S. DOE or USDA. "I think it's an extremely narrow-minded policy, or lack of policy, coming from the White House," he said.

As it is, the RFS2 doesn't have any teeth because it's not actually a mandate, he said. McCarthy suggested taxing oil companies and refiners as a way to incentivize supply catching up with demand. For example, if last year's cellulosic biofuel requirement had been held at 100 million gallons the oil companies could have been taxed $150 million for not hitting the mark. That would hardly make a dent in their profits. If the oil industry were held to blending 250 million gallons for 2011 they'd be taxed $250 million. That would be the incentive needed to get oil companies involved in the cellulosic biofuels industry. As it is, oil companies are getting involved in renewable fuels, but in other countries, not the U.S. While countries like China, India and Africa don't have a RFS they do have aggressive biofuels policies, something the U.S. is missing. There's no doubt it's possible to expand the cellulosic biofuels industry in this country. "It's just a question of commitment," McCarthy said.

Reducing the requirement for cellulosic biofuels accurately reflects the problem cellulosic developers have had obtaining funding needed for commercialization, said Bob Dinneen, president and CEO of the Renewable Fuels Association. "However, being aware of this fact, EPA should have been and must be careful to keep cellulosic biofuel targets ambitious so as to stimulate the kind of investment these technologies need to finish commercialization."

There's no doubt the cellulosic ethanol industry is moving steadily ahead to commercialization, said Chris Thorne, public affairs director for Growth Energy. Some pilot-scale projects are very close to producing commercial-scale volumes at competitive prices. "That is why it is so important to have real targets to give confidence that there will be a market for those who are investing in the industry," he said.

On the other hand, some cellulosic developers are still a long way off from commercial success. That's due to arbitrary regulations that limit the market for ethanol. "What's preventing the growth of cellulosic ethanol in the transportation fuels market is the lack of access to the market - and without that market, we're not drawing the necessary investment," Thorne said.

The Union of Concerned Scientists also chimed in on the lowered requirement for cellulosic ethanol. "This is a clear sign that current federal policies don't work, and won't deliver the environmental, economic and energy security benefits cellulosic biofuels could provide," said Jeremy Martin, a senior scientist in the Union of Concerned Scientists' Clean Vehicles Program.

The group has been calling for reform on biofuel policies, including the Volumetric Ethanol Excise Tax Credit, which is set to expire at the end of the year. The Union of Concerned Scientists claims it is wasteful. "A better option would be to invest in the next generation of clean cellulosic biofuels, and to support all biofuel producers that act to make their fuels cleaner," Martin says. "If we reformed biofuel policy, we could get the first billion gallons of cellulosic biofuels online quickly and at a quarter of the cost of current tax credits." The group prefers a performance-based tax credit to reward companies based on how much gasoline the fuel displaces and the percentage of emissions reduction. The tax credit would shift support to the cleanest biofuels and also allow the most efficient and clean corn-based ethanol producers to receive tax credits.

The ethanol industry, on the other hand, has pointed to the fact that the oil industry receives billions of dollars in subsidies annually, and has for decades. RFA, Growth Energy, the National Corn Growers and the American Coalition for Ethanol worked out a draft policy long-term roadmap, in which they agreed an immediate extension of VEETC was needed in the short term. In the long term, however, the groups agreed to look at reforms to VEETC, including increasing the number of flex fuel vehicles and blender pumps for market access and establishing a loan guarantee program for ethanol pipeline projects, all elements of Growth Energy's Fueling Freedom plan.