U.S. renewable fuels move forward

NEW YORK (Reuters) - On Friday, the U.S. Environmental Protection Agency announced its long-delayed rules for the amount of renewable fuels to be required in the on-road fuel supply in 2014, 2015, and 2016.

A gas pump selling E15, a gasoline with 15 percent of ethanol, is seen in Mason City, Iowa, United States, May 18, 2015. REUTERS/Jim Young

The press focus so far has been on whether the petroleum industry or the renewable fuels industry wins or loses.

But the real news is that this is an opportunity to achieve the original program goals of promoting the development of advanced, low greenhouse-gas domestic biofuels that improve energy security and reduce our carbon footprint while keeping costs under control.

After being heavily criticized for backing away from the intent of the law authorizing the Renewable Fuel Standard, EPA has taken a clear stand toward expanding the amount of biofuels used in transportation fuels.

At the same time, it recognized the short-term practical constraints associated with getting more ethanol into the fuel supply because of the predominance of E10, traditional gasoline blended with 10 percent ethanol.

As I stressed in a paper I wrote for Columbia University’s Center on Global Energy Policy, the most promising path for achieving the long-term goals of the RFS is through cellulosic ethanol, with the first commercial-scale plants now coming on line.

For this reason, it is important that the RFS makes a commitment to increasing the amount of higher ethanol blends sold, that is, to move through the so-called E10 blend wall. The proposed rule does this, in a measured way, and that is a good thing.

The Administration has wisely partnered this expansion of ethanol with a USDA program to help industry install new “blender” pumps at service stations, which can dispense gasoline with a higher blend of ethanol.

Yes, this is a government subsidy, but one that is warranted as support for the most promising short-term path toward reducing carbon emissions from the transportation sector and matches money from states and the private sector.

Industry and states could go further and piggyback on this program by developing transparent pricing for higher ethanol blends.

It is time for the renewable fuels industry to step up to the plate, constructively, and partner with states and the USDA to prove what they have long said: that given enough pumps there is large consumer appetite for higher blends.

Many in the oil industry would like to repeal the RFS. But repeal would be a mistake. Our climate challenges are real, and we remain net importers of oil – a situation likely to worsen with low oil prices as shale oil production declines and gasoline demand increases.

Second generation biofuels made from non-food feed stocks remain the most plausible way to tackle these carbon emissions and energy security challenges over the next decade, and the RFS is the only meaningful policy tool we have to support those fuels.

On the other side, the first-generation biofuels industry opposes EPA’s measured approach to expanding biofuels more slowly than the statutory path.

But the evidence suggests that sticking to the statutory volumes as the ethanol industry wants would likely increase the program’s economic costs substantially – in turn playing into the hands of those who want repeal.

The Administration and EPA still need to do more to make the RFS work. The private sector needs to know not just what 2016 will look like, but where the program will be going in 2017 and beyond. The combination of EPA’s announcement and the USDA grants suggests a longer term commitment to making room for advanced ethanol.

There is time over the coming months for the Administration to provide forward guidance so that industry has the confidence to install more blender pumps and build the next generation of cellulosic ethanol plants.

EPA’s path, if clarified for the future, might just work if both the oil and first-generation biofuels industries recognize that modest expansion is the plan, that the goal is to support second generation biofuels, and that it is time to get to work achieving the RFS program’s original environmental and energy security goals.

(James H. Stock is Professor in the Harvard Economics Department and a Fellow at Columbia University’s Center on Global Energy Policy. He served as a Member of the President’s Council of Economic Advisers from 2013-2014.)

Editing by Alden Bentley