“Adding up the RFS: Implications of EPA’s 2014 RFS Proposal” Jarrett Whistance FAPRI-MU 2 May 2014 This material is based upon work supported by the U.S. Department of Agriculture, under Agreement No Any opinion, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the view of the U.S. Department of Agriculture nor the University of Missouri.

Agenda What is the “Add-Up”? Why does it matter? – New policy interactions… – Role of starting points… Example using tax credit extension scenario

The 2014 “Add-Up” proposal Requirements determined by “adding up” potential ethanol use, biodiesel use, non- ethanol advanced use, and cellulosic biofuels. Total requirement ~ E10 use + small amount of E85/E15 + biodiesel*1.5 Advanced+ cellulosic requirement+ Non-ethanol advanced

2014 EPA proposal – “Add-up” Cellulosic ~ 0.01% (17 million gallons) – anticipated production Biomass-based diesel ~ 1.16% (1.28 billion gallons) – Base level (anticipated use could be higher)

2014 EPA proposal – “Add-up” Advanced ~ 1.33% (2.20 billion gallons) – Biodiesel(Base + additional use)*1.5 + non-ethanol advanced Renewable ~ 9.20% (15.21 billion gallons) – Advanced + anticipated ethanol use

The requirement for biomass-based diesel is unchanged in the 2014 proposal. The advanced and overall requirements are much smaller under the proposal due to the waived cellulosic mandate. The “Add-up” method essentially removes the other advanced “gap” and reduces the conventional gap. Figure 1. EISA versus Add-Up Note: The left column in each cluster represents EISA values; the right column represents the Add-Up values Sources: EISA, EPA, and FarmDocDaily

Implications of “Add-Up” New policy interactions – Previously, policies might be expected to affect use and, ultimately, consumer costs – Under “Add-up” method, anticipated changes in use could be built in to the requirements – Mandates respond to market pressures more than RIN prices

Starting points matter – Binding vs. Non-binding regimes – Available RIN stocks and RIN “demotion” can influence how obligated parties behave in response to a policy shock – “Add-Up” proposal takes a “RIN-neutral” approach

In practice… Biomass-based Diesel Policy Options: Larger RFS Requirements and Tax Credit Extension – 4/FAPRI_MU_Report_01_14.pdf 4/FAPRI_MU_Report_01_14.pdf The EPA Add-Up RFS and the Biodiesel Blenders Tax Credit – rfs-and-biodiesel-blenders-tax-credit.html rfs-and-biodiesel-blenders-tax-credit.html What sort of market effects might we see if these options are implemented under 2014 EPA proposal?

Blenders tax credit extension Blenders credit expired on December 31, 2013 – No guarantee that it will be extended, although proposals have been made For this scenario, extend the $1.00/gallon credit through 2016

Under the old method: – Tax credit encourages biodiesel use – No change to broader mandates – Potential for biodiesel to displace ethanol Under “Add-Up” proposal – Tax credit encourages biodiesel use – More anticipated biodiesel use  Increase in broader mandates – Potential for biodiesel to displace ethanol Depends on starting point…

Tax credit extension, average impacts, non- binding biodiesel requirement in the first year Price or quantityChangeReason Biomass-based diesel (D4) RIN price -$0.04/RINSmall effects if extra biodiesel already used to meet broader mandates Biomass-based diesel production billion gallonsBlenders tax credit encourages more biodiesel production and use Conventional RIN (D6) price -$0.01/RINMinimal effect as additional biodiesel use is offset by an increase in broader requirements under “Add-Up” Conventional ethanol production billion gallonsThe increase in biodiesel use and higher overall requirement cancel each other out with only limited effects on conventional ethanol production Source: FAPRI-MU Report #01-14

Tax credit extension, average impacts, binding biodiesel requirement in first year Price or quantityChangeReason Biomass-based diesel (D4) RIN price -$0.15/RINTax credit makes it easier to meet the mandate Biomass-based diesel production billion gallonsBlenders tax credit encourages more biodiesel production and use Conventional RIN (D6) price -0.06/RINIncrease in broader mandates is less than 1:1 (relative to increase in biodiesel use) if D4 RIN stocks being drawn down initially; Higher overall requirement still easier to meet because of ethanol displacement Conventional ethanol production billion gallonsIncrease in biodiesel use displaces more conventional ethanol Source: FAPRI-MU Report #01-14

The increase in broader mandates is less than 1:1 relative to the increase in biodiesel use. The EPA’s stock-neutral approach only counts the increase in use that occurs above 1.92 billion ethanol- equivalent gallons. RIN stocks help meet the biomass-based diesel mandate when the mandate is initially binding. An extension of the tax credit increases the physical blending of biodiesel and reduces the need to draw down RIN stocks. The broader mandates are somewhat easier to meet, and their associated RIN prices fall in the scenario. Figure 2. Effect of biodiesel tax credit extension; Biomass-based diesel requirement initially binding Note: The left column in each cluster represents baseline biofuel use plus the actual increase in biodiesel use taking RIN stocks into account; the right column represents the Add-Up values that might occur under the stock-neutral approach. Source: FAPRI-MU Report #01-14, and FarmDocDaily

Key uncertainties Proposed rules Timing issues Blend wall representation Role of LCFS (ethanol imports) Ethanol exports

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