Cellulosic Ethanol Targets: Mandating the Nonexistent

Another Year, Another Chapter

In what is becoming an annual ritual, the EPA is once more scaling back the cellulosic ethanol mandate for 2012. The 2007 Energy Independence and Security Act mandated that we would use 100 million gallons of cellulosic ethanol in 2010, 250 million gallons in 2011, and 500 million gallons in 2012. I said quite explicitly from the start that this was wishful thinking, and that there was practically zero chance of meeting these mandates. In one article, I wrote:

The next few years will see a record amount of back-pedaling from most of the companies trying to establish a foothold in this space – and overpromising on their technology to do so. There will be the normal litany of excuses – such as ‘the oil companies are suppressing the technology’ – but in the end the chemistry, physics, and most importantly the capital costs and logistical challenges will catch up with them. Yes, excuses will be made, but those who know a little about the technology will know what really happened.

OK, so the industry is falling short. But how much of the 350 million total gallons of cellulosic ethanol that was originally scheduled to be produced by the end of 2011 has actually been produced? Actual qualifying production of cellulosic ethanol through June 2011 is zero gallons. ZERO.

Punishing Peter to Pay for Paul’s Failure to Deliver

So, what difference does it make? They got a bit too aggressive with their projections, but was anyone really hurt? Funny you should ask. First, I would argue that out of desperation the government has listened to several groups selling the equivalent of magic beans, didn’t properly assess the technologies, and proceeded to throw tax dollars down a black hole. In fact, this is an ongoing problem.

But the other thing that might be a bit hard to believe is that even though there is no cellulosic ethanol available for purchase, refiners are subject to penalties for not buying it. Ethanol Producer Magazine recently weighed in on this topic. After first noting that the EPA is proposing to reduce the mandate for next year from 500 million gallons to as little as 3.5 million gallons, they summed up both sides of the issue:

In comments delivered to EPA officials at the hearing, ethanol representatives admitted that the proposed cellulosic production volumes were likely accurate, but stressed the need for continued optimism on the part of the EPA. Brooke Coleman, executive director of the Advanced Ethanol Council, urged the EPA to continue its aggressive goals regarding cellulosic biofuels, stating that the agency’s mandated volume directly affects the industry’s ability to produce fuel. “There is this funny thing going here where you guys have to go out and measure capacity, but the numbers you come out with and the amount of capacity that you put into the Federal Register will have a giant effect on how much capacity we actually create,” he said.  The EPA’s volume mandates send signals to the investment community, he said, indicating that investors may be unwilling to put up the desperately needed cash to build the first few commercial-scale plants if the EPA does not provide consistent production volume targets. “What is keeping us out of the marketplace and slowing us down is risk,” he said. “As a subset of that, uncertainty exacerbates risk.”

So advocates of the mandate insist that keeping the mandated volumes high is a fair deal. Bear in mind that the reason that the mandate is where it is in the first place is that would-be cellulosic ethanol producers have been over-promising on what they could deliver for many years now. Thus they promised a product, got a mandate, and now the people who they have failed to deliver to are the ones about to be penalized for the inability to purchase product the advocates can’t make. That’s a perfect example of dysfunctional energy policy.

The refiners, unsurprisingly, are crying foul:

Meanwhile spokesmen from the petroleum industry said optimistic production goals create financial hardships for their industry. Greg Scott, executive vice president and general counsel for the National Petrochemical & Refiners Association, pointed to this year’s 6 million gallon volume requirement for cellulosic biofuels as proof that optimistic expectations lead to real-world implications for refiners obligated to comply with the mandate. “If the EPA is wrong or if a biodiesel trade group representative or a cellulosic ethanol spokesperson is wrong in his or her rosy predictions for production, it is our members that will experience the economic and regulatory pain,” he stated. No cellulosic biofuel RINs (renewable identification numbers) were generated between July 2010 and May 2011 and the only facility registered to generate cellulosic biofuel RINs—Range Fuels Inc.—is not operating, he said, adding that the EPA should take that into consideration when determining next year’s cellulosic volume. “Obligated parties will be required to buy up to 6 million cellulosic biofuel waiver credits at a $1.13 per gallon RIN in 2011. This is, in essence, a $6.78 million tax that NPRA’s members must pay to EPA due to the agency’s misguided optimism regarding production this year.”

But I think I have the perfect solution. Since one side is advocating for mandates that threaten to penalize the other side, just switch the penalties to those advocating for the mandates. If the Advanced Ethanol Council thinks it is a good idea to mandate unrealistic production volumes, then they should pay the penalties when their industry doesn’t deliver. That should give them much more incentive to deliver than having someone pay the penalties who has zero control over what is produced.

Corn ethanol producers — in another move that I have long predicted —  have a different solution. They want an end to “corn-discrimination.” They would like to step into that void and supply the missing ethanol, thus raising the 15 billion gallon corn ethanol mandate that they currently enjoy to potentially 36 billion gallons by 2022. There are a number of problems with that approach, the biggest of which is the 10% blend wall the industry is currently facing. One way to resolve that would be to grow the E85 market, but the way it looks like they will try to handle it is by lobbying for more E15 — and after that E20 — into cars that weren’t designed for it.