The oil and corn lobbies have been fighting for years over how much biofuel should be mixed in with our gasoline and diesel. There is a hashtag: #RFSwars.

Today's Reuters and OPIS reported that EPA planned to reduce biofuel mandates for 2020, 2021, and 2022, which seems like a win for the oil industry. To these reports in context, I thought I would explain biofuels policy.

LOL. It would take a lot more than a few hundred words to explain this morass. 

But, the mechanics are straightforward and should help us understand these reports (which are based on leaked information and may not be true).

Biofuel.

Biofuel is mostly ethanol, which is made from corn and mixed into gasoline, and biomass-based diesel, which is made from vegetable oil or animal fat and mixed into diesel. There's also a little methane captured from landfills or cow manure and used in natural gas powered vehicles.

The Law.

In 2007, Congress passed the Renewable Fuel Standard (RFS), which stipulates the quantities of biofuels to be used in transportation each year. It delineates three biofuel categories: corn ethanol (highest greenhouse gas emissions), cellulosic (lowest greenhouse gas emissions; made from the inedible parts of plants), and other advanced (mostly biomass-based diesel; greenhouse gas emissions between the other two categories).

Total biofuel use was intended to reach 36 billion gallons by 2022, of which at least 16 billion gallons would be cellulosic. 

EPA implements the law. 

Each year, EPA is supposed to assess whether next year's RFS volumes are achievable and, if necessary, revise the target. The revised target is the renewable volume obligation (RVO). In 2014-15, the corn ethanol RVO was revised downward for reasons we'll get to soon. Cellulosic biofuel production has been negligible, so EPA has set the cellulosic RVO close to zero every year. The RVO for the middle category has exceeded the statutory volumes as biomass-based diesel production has grown.

The leaked RVOs reported by Reuters and OPIS are substantially below the statute for corn ethanol and in line with history for the other categories.

How EPA implements the law.

Each year, EPA projects next year's gasoline and diesel consumption and says "to reach the RVO, we need biofuels to be X% of petroleum fuels." For compliance, the fuel industry as a whole needs to demonstrate that it blended biofuels at rate X. For 2020, EPA specified that biofuels should be 11.56% of petroleum gasoline and diesel, to be made up of at most 8.6% corn ethanol and at least 0.3% cellulosic. 

Projected vs Actual

If actual fuel consumption is below projections, then blending biofuels at X% will cause actual biofuel use to be below the RVO. In 2020, the covid pandemic caused substantial drops in fuel consumption as people stayed home more and the economy slowed. Actual gasoline consumption exceeded the projection from 2013 to 2017 and was very accurate in 2018 and 2019. Actual diesel consumption exceeded projections each year from 2011 to 2019. 

Based on higher-than-projected gasoline consumption in 2013-17, we should have seen ethanol exceed the RVO in those years.  It did not. Based on higher-than-projected diesel consumption in 2011-19, we should have seen biomass-based diesel exceed the RVO in those years.  It did in 2013, 2016, and 2017, but not in the other years. 

What's going on?  Answer: the "blend wall".

The Blend Wall

Regular gasoline can contain up to 10% ethanol without affecting engines, fueling infrastructure, or air quality regulations. However, since 2013 the corn ethanol component of the RFS has required more ethanol than can fit in 10% of gasoline. This creates a dilemma for the EPA. 

In 2014-15, EPA failed to issue an RVO as it tried to find a way around the blend wall. It later set an RVO retroactively. This is why the corn ethanol RVO was below the statute in those years. Since 2016, EPA has evaded the blend wall by allowing small refineries to be exempt from RFS compliance, which it is allowed to do under the law.  However, it is supposed to shift the exempted volumes to other refiners, which it did not do. EPA's blend-wall strategies have been and will continue to be challenged in the courts. 

Viewed through the lens of the blend wall, we see that the leaked RVOs are consistent with corn ethanol use since 2013.

To summarize, the leaked biofuel mandates are low because gasoline consumption was low in 2020 and is not expected to recover in 2021 or 2022. Ethanol is easily blended into gasoline at a 10% rate and EPA is not going to force higher blends. 

EPA is treating ethanol the same way it has since 2013.

I made the figures in this article using this R code.