WASHINGTON, June 26 (Reuters) - U.S. gasoline prices could rise by up to 26 cents a gallon by 2017 if the Environmental Protection Agency does not lower the ambitious targets in a federal biofuel use mandate, the Congressional Budget Office said on Thursday.
The non-partisan CBO said meeting the targets, set at a time when gasoline use was expected to rise, would be a significant challenge in the years ahead.
Stagnant gasoline demand has also put the United States on a crash course with the "blend wall," the point at which the law would require ethanol to be blended into gasoline at levels higher than the 10-percent-per-gallon mixture (E10) that dominates U.S. gas stations.
The Renewable Fuel Standard (RFS) requires increasing amounts of ethanol and biodiesel to be blended into U.S. fuel supplies each year through 2022, peaking at 36 billion gallons.
Breaching the blend wall would raise costs for the credits that oil refiners must acquire to comply with the renewable fuel program. If the mandate is not revised, compliance costs would raise E10 gasoline prices by 13 to 26 cents per gallon, and diesel by 30 to 51 cents a gallon by 2017, the report said.
Higher costs would also create an incentive for fuel suppliers to sell higher ethanol blends such as 85-percent ethanol fuel (E85), the CBO said.
The report comes as the EPA weighs a controversial proposal to cut the 2014 requirements for biofuel use to 15.21 billion gallons, reflecting the looming fuel crunch. Federal law originally mandated the use of 18.15 billion gallons of biofuel this year.
Biofuel producers are lobbying the EPA to roll back at least part of the proposed cuts, saying the blend wall could be averted if refiners would embrace the 15-percent ethanol fuel, E15, approved for newer U.S. vehicles.
Keeping the targets intact would also push the oil industry to do more to promote the use of biofuels, supporters of the mandate have argued.
CBO acknowledged that slashing the RFS targets could harm support for biofuels:
"Although scaling back those standards addresses existing compliance problems and decreases compliance costs in the short run, it also reduces incentives for companies to invest in production capacity for cellulosic and other advanced biofuels and to expand the availability of high-ethanol blends."
Oil companies that oppose the biofuel mandate have been reluctant to blend more than 10 percent ethanol, citing potential harm to older vehicles' engines. They have also warned of possible fuel shortages and crippling costs for their industry if the targets are not lowered.
Critics have blamed the RFS for higher food prices, as about 40 percent of U.S. corn is now diverted to fuel production. But the CBO concluded that U.S. food prices would be relatively unaffected whether the mandate was continued or repealed.
To read the full report: 1.usa.gov/1nN2BWK (Reporting by Ayesha Rascoe, Editing by Ros Krasny and Ken Wills)