Cellulosic Ethanol: The Dream Doesn’t Match Reality

Requiring the citizens of the kingdom to purchase something that doesn’t exist, and then fining them for not doing it sounds more like the behavior of a tinhorn dictator than the actions of a global superpower—but then, maybe the “superpower” status has led the US government to believe that it can “let the wish be father to the thought.”

Perhaps Congress, the authors of the Clean Air Act, and, more specifically, the Environmental Protection Agency (EPA)—and even biofuel lobbyists—have attended too many motivational seminars in which they were taught: “If you can dream it, then you can achieve it.”

The dream to “achieve” is cellulosic biofuel or ethanol—which has an admirable goal of producing a renewable transportation fuel without impacting the world’s food supply. Different from corn- or sugar-based ethanol—which is technologically achievable (with questionable benefits)—cellulosic ethanol is made from wood chips, switchgrass, and agricultural waste, such as corn cobs.

The problem is the dream doesn’t match reality.

Through the Clean Air Act, the EPA can mandate a set volume of cellulosic biofuels that refiners must blend into gasoline based on “the projected volume available.” In 2007, the Energy Independence and Security Act (EISA) established annual renewable fuel volume targets. The “targets” increase each year to reach 36 billion gallons by 2022. The EISA’s original cellulosic biofuel expectation for 2013 was 1 billion gallons.

The targets gave birth to a new cellulosic ethanol industry. Thanks to the government mandates, start-ups such as Range Fuels and Cello Energy were born. They cranked out press releases touting a potential for millions of gallons of the biofuel. Based on optimistic projections aimed at attracting investors, the EPA set its targets.

In 2006, President Bush pledged government funding for the nascent industry—declaring that cellulosic ethanol would be “practical and competitive within six years.” In March 2007, Range Fuels received a $76 million grant from the Department of Energy and another $80 million from the Obama administration in 2009. According to the Wall Street Journal, in May 2009, “Range’s former CEO, Mitch Mandich, explained that the problem was that nobody had figured out how to produce cellulosic ethanol in commercial quantities.” Despite the approximately $300 million in a combination of private, state, and federal funding, Range Fuels never produced cellulosic ethanol. The company filed for bankruptcy in December 2011. Cello Energy filed Bankruptcy in October 2010.

So much for “If you can dream it, then you can achieve it.”

But, the lack of cellulosic ethanol didn’t deter the EPA. While they did dial back a 100 million gallon 2010 mandate, to 6.5 million, the EPA didn’t give up on its “dream.” It has continued to predict fantastical production volumes: approximately 5 million gallons in 2010, 6.6 in 2011 and 8.7 in 2012. These predictions establish the volumes that refiners must use to blend into our gasoline—regardless of whether or not the cellulosic ethanol is available. These mandates are called the Renewable Fuel Standards (RFS). If refiners fail to meet the mandate, industry has to purchase waiver credits—essentially a fine that serves as a hidden tax on consumers. The startups that failed to meet their projections and, therefore, didn’t provide the fuel stock to the blenders, weren’t penalized, but the refiners, who are generally in no position to ensure the fuels’ availability, are. Addressing the fines, Stephen Brown, VP for Federal Government Affairs at Tesoro, operating seven refineries in the western United States, says: “An unavoidable fine levied by the government sounds an awful lot like a tax.”

To date, virtually no cellulosic ethanol has been produced. Despite the demise of Range and Cello, there are still a few other companies, which have received taxpayer funding, that claim to be near commercial production. Bill Day, Executive Director of Media Relations for Valero—which had made some investments in cellulosic ethanol (though there are none currently active) and is the world’s largest independent petroleum refiner and marketer, told me cellulosic ethanol was five years away five years ago, and is still five years away today. Companies like Tesoro and Valero still have to pay the fines, even though the product doesn’t exist. Those costs are passed on to us, the consumers, in the form of higher gasoline prices.

It is the absurdity of these credit purchases that prompted the American Petroleum Institute (API) to file a lawsuit last year challenging the EPA’s rulemaking. API petitioned the court to review the EPA’s January 2012 RFS—which API’s Group Down Stream Director Bob Greco claims would have cost more than $8 million in credit purchases.

On January 25, the US Court of Appeals for the District of Columbia, in a unanimous decision. rejected the 8.65 million gallon cellulosic ethanol target—finding that the EPA was projecting far too much production of cellulosic ethanol for 2012.

API’s Greco was optimistic about the decision: “The court has provided yet another confirmation that EPA’s renewable fuels program is unworkable and must be scrapped.” He said: “This decision relieves refiners of complying with the unachievable 2012 mandate and forces EPA to adopt a more realistic approach for setting future cellulosic biofuel mandates.” But Valero’s Day is more cautious: “It is too early to say what the result will be. This issue is likely to continue beyond this one decision. Valero will be watching closely.”

US Senator David Vitter (R-LA), top Republican of the Environment and Public Works Committee, is also enthusiastic: “The EPA has been playing games with made-up standards on renewable fuels, but the recent appellate court decision should be their first clue that it needs to stop. I applaud the DC Circuit Court of Appeals for recognizing how ludicrous the situation is to force refiners to either purchase amounts of a product that doesn’t even exist or pay a hefty fine.”

Likewise, Charles T. Drevna, President of the American Fuel & Petrochemical Manufacturers (AFPM), believes: “The court’s decision provides welcome relief and puts the EPA on notice that it must act as a neutral arbiter rather than as a promoter of cellulosic fuel.” AFPM has a pending petition for a waiver of the 2012 mandate. A similar 2011 waiver was denied.

While the court vacated the 2012 mandate, it was not a total win for industry. The court rejected API’s argument that the EPA had to follow the US Energy Information Administration’s cellulosic biofuel volume projections in setting its own and, also, that the EPA was not entitled to consider information from cellulosic biofuel producers in setting its projection. Biofuel lobbying groups didn’t see the court’s ruling as a total setback: “Today’s decision, once again, rejects broad-brushed attempts to effectively roll back the federal Renewable Fuel Standard.”

A January 29 Bloomberg report predicts: “Tossing out the 2012 standard for those cellulosic fuels, … leaves the 2013 standard in doubt, as well. The EPA is overdue to issue its mandate for 2013, and this decision may further complicate that process.” On January 30, Vitter said: “The EPA has been getting away with mandating exaggerated fuel standards based on a pie-in-the-sky wish, but now they’ll actually have to use some cold, hard facts.”

Apparently the EPA didn’t allow the decision to “complicate” their 2013 standards. On January 31, the EPA released its 2013 requirements: 14 million gallons of cellulosic biofuels—60% more than 2012. The Fuels America Coalition continues to dream. It reports: “Cellulosic biofuels are being produced now and millions of gallons of cellulosic fuel are expected to come online in the next two years.”

“If you can dream it, then you can achieve it” hasn’t worked so far.

In response to the EPA’s 2013 proposed mandate, Greco suggests that the EPA needs to “provide a more realistic assessment of potential future production rather than simply relying on the assertions of companies whose self-interest is to advertise lofty projections of their ability to produce the cellulosic biofuel.” API recommends basing predictions on the previous year of actual production.

Once again, it looks like the consumers will be paying the price for the EPA’s incompetence in mandating something that doesn’t exist—and for more lawsuits.

Maybe if we dream about a reasonable EPA Administrator to replace the ideologically blinded Lisa Jackson, we can achieve it.


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