Cellulosic Ethanol – A Challenge Not Met

Federal District Court: USEPA exceeded its authority

The Energy Independence and Security Act of 2007 (EISA) mandated the use of ever-increasing amounts of cellulosic ethanol through 2022. The problem has been, and continues to be, that sufficient commercially available supplies of this advanced biofuel have never been produced. Simply stated, the EISA mandates use of a fuel which does not yet exist. The complete failure of the federal government’s cellulosic ethanol mandate may sound like an esoteric issue to most, but the plain truth is that it is costing Americans real money at the gasoline pump.

Despite high hopes for the cellulosic industry and a $1.5 billion loan and grant commitment from the federal government, cellulosic production has fallen short of the required annual volumes. In fact, last year the USEPA reduced its 2012 cellulosic ethanol production target from 500 million gallons to 8.65 million gallons, but even that much smaller figure proved to be unachievable. In 2012, just 20,000 gallons of cellulosic were actually produced and all of that was exported to Brazil. The cellulosic ethanol industry has not demonstrated that it can produce this fuel at a commercial scale as required by law. Yet, domestic refiners paid $17 million for waiver credits and fines to the USEPA in 2012 for a product that does not exist. That figure pencils out to approximately $1.20 per gallon of this phantom fuel. If that sounds ludicrous even by Washington DC standards, just add it to the growing list of unfortunate and illogical consequences of the federal government’s Renewable Fuels Mandate (RFS).

The result of this impossible RFS mandate and the resulting fines is higher fuel prices for all Americans. Unavoidable fines paid to the federal government are usually called taxes. Unless there is a viable means to comply with USEPA’s mandate, the Agency’s cellulosic blending mandate effectively becomes an unavoidable tax levied on all American drivers. With US cellulosic production at a fraction of the mandated total, USEPA is effectively exercising potentially unlimited taxing authority over gasoline.

The Agency was unmoved by last year’s unprecedented escalation of corn prices, which hurt farmers, ranchers, drivers and consumers. Shortly after the November elections, USEPA flatly rejected calls by the agricultural sector to moderate its related (non-cellulosic) position on corn ethanol mandates for fuels. The corn ethanol mandate increased corn prices by 30 to 50 percent between 2006 and 2010. Since then, those costs have soared higher still, exacerbating consumer impacts. Between 2005 and 2011, $20 billion in tax subsidies have gone to the ethanol industry. Despite these costly negative effects, USEPA has steadily sheltered both corn and cellulosic ethanol from the rigors of market forces and objective analysis. The inherent fallacy of mandating the purchase of a product that cannot be purchased because it does not exist speaks for itself.

Recently (January 25), the U.S. Court of Appeals for the District of Columbia ruled that USEPA exceeded its authority by requiring refiners in 2012 to purchase 8.65 million gallons of cellulosic biofuel despite the fact that the fuel is not commercially available and asked the Agency to re-visit their projection. In its decision, the Court noted:

Apart from their role as captive consumers, the refiners are in no position to ensure, or even contribute to, growth in the cellulosic biofuel industry. “Do a good job, cellulosic fuel producers. If you fail, we’ll fine your customers.” Given this asymmetry in incentives, EPA’s projection is not “technology-forcing” in the same sense as other innovation-minded regulations that we have upheld. (emphasis added)

In essence, the Court found that while the USEPA has some discretion is setting a requirement for cellulosic blending each year, that discretion is not unlimited and must be premised on some realistic assessment of actual production capabilities within that industry. Despite this ruling, USEPA issued a proposed rule on January 31 that would require refiners to use 14 million gallons of cellulosic biofuel in 2013 or face similar fines. Coming so soon after the federal court ruling declaring the 2012 requirement invalid, it is hard to see the logic in the Agency’s continued fanciful projections. In a related development, the same Court is scheduled to hear oral argument later this year on litigation challenging the 2011 cellulosic requirement. Completing the picture of activities on this issue, bipartisan and bicameral legislation was introduced the week of February 4th requiring that USEPA’s cellulosic blending requirements be based on prior production from the year before.