The Obama administration on Tuesday told refiners to blend 16.55 billion gallons of renewable fuels into the nation's gasoline supply this year, while paring a specialized ethanol requirement that the oil industry had criticized as too ambitious.
The Environmental Protection Agency's approach -- including a promise to make bigger changes next year -- seemed designed to quell market fears surrounding the 8-year-old law that mandates steadily increasing use of corn-based ethanol, biodiesel, advanced biofuels and cellulosic supplies made from non-edible plant parts.
Lawmakers are preparing for a major rewrite of the statute, as refiners warn they are hitting a "blend wall" where they no longer can mix in enough ethanol to meet the mandate's volume targets without exceeding a 10 percent threshold acceptable for use in all cars and trucks.
The EPA told refiners that renewable fuels should make up 9.74 percent of the nation's fuel supply -- including 1.28 billion gallons of biodiesel and 2.75 billion gallons of advanced biofuels, the same quotas the agency first proposed for those fuels in February.
But the EPA slashed its initial cellulosic biofuel requirement by more than half, from 14 million gallons to 6 million. Although cellulosic production facilities are coming online now, such fuel generally has not been commercially available in the United States. And the oil industry has gone to court to battle the cellulosic requirement it derides as mandating a "phantom fuel."
The EPA promised to make other reductions when it proposes 2014 targets later this year. Specifically, the agency said it would pare both the advanced biofuel and corn-based ethanol volume targets.
"We expect that in preparing the 2014 proposed rule, we will estimate the available supply of cellulosic and advanced biofuel, assess the blend wall and current infrastructure and market-based limitations to the consumption of ethanol in gasoline-ethanol blends above (10 percent), and then propose to establish volume requirements that are reasonably attainable in light of these considerations and others as appropriate," the EPA said.
The agency also said it would extend the deadline to comply with the 2013 quotas by four months, to June 30, 2014. That responds to industry concerns on the announcement of final requirements eight months into the year.
But the EPA did not go far enough to satisfy oil industry critics. American Petroleum Institute President Jack Gerard said the agency should have made major changes to the program this year.
"While the administration acknowledges that higher ethanol mandates are unworkable by suggesting a new approach for the 2014 standards, EPA missed an opportunity to fix the problem this year," Gerard said. "Now it's up to Congress to exercise leadership and move quickly to end this dangerous mandate before it hurts consumers, damages vehicles, and harms our economy."
Still, oil industry representatives said they were encouraged by EPA's promise to address blend wall concerns when the agency sets 2014 targets.
"The administration now agrees that the blend wall is real and that they do not intend to sit by idly to see what the consequences of that would be on gasoline markets," said Stephen Brown, a lobbyist for the San Antonio-based refiner Tesoro Corp. At the same time, Brown said, the EPA was sending Congress "a clear signal" to tackle the renewable fuels mandate legislatively.
Biofuels backers said the decision to cut the required amount of cellulosic fuels shows the agency already has enough flexibility under the existing renewable fuel standard law to adapt to the marketplace without changes from Congress.
"The EPA has totally obliterated Big Oil's myth that the RFS is inflexible and unworkable," said Bob Dinneen, president of the Renewable Fuels Association.
Renewable fuel advocates have argued that if Congress dismantles the renewable fuel standard or the EPA dramatically reduces required volumes, it could jeopardize planned new biofuels production facilities and costly research into promising new technologies.
Advanced biofuels are just starting to come online, said Brooke Coleman, executive director of the Advanced Ethanol Council.
"Careful administration of the program is absolutely critical right now to get the right balance between the legislative intent of the program and the market response to the program," Coleman said.
Refiners can buy market-traded biofuel credits to comply with the mandates. The prices of those credits rose over $1 per gallon earlier this year, and analysts with FBR Capital Markets said that if U.S. biofuel production falls short of the mandated volumes, refiners may have to tap most of a stockpile of 2.5 billion credits.
Bill Klesse, CEO of San Antonio-based refiner Valero, said the renewable fuel mandate wasn't intended to create a separate market for biofuels.
"That continues to cost consumers money and increase the cost of gasoline," Klesse said in a statement Tuesday.
But Adam Sieminski, head of the government's Energy Information Administration, told lawmakers in June that biofuel credit prices weren't significantly affecting prices at the pump.
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