Renewable Fuel Standard: Incentivizing Biofuel Innovation
This paper demonstrates that the federal Renewable Fuel Standard (RFS) established under the Energy Policy Act of 2005, enhanced pursuant to the Energy Independence and Security Act of 2007 (EISA), and enforced by the Environmental Protection Agency (EPA) provides considerable market motivation to drive investment in cellulosic and advanced biofuels.
The RFS forms the basis for U.S. low carbon fuels policy at the federal level, requiring the blending of up to 36 billion gallons of biofuels by 2022– more than twice current biofuel use. Recognizing that deployment of cellulosic and other advanced biofuels is essential to meeting the nation’s energy security, economic development, and greenhouse gas reduction objectives, the RFS provides a transparent program to speed the deployment of these innovative products into U.S. fuel markets.
Renewable volume obligations (RVOs) under the RFS ensure that all renewable fuels produced up to annually prescribed volumes will have a market. EPA has demonstrated in its 2010 and 2011 rulemaking its intention to fully enforce both advanced and overall volumes under the RFS. For cellulosic biofuels, EPA has adjusted cellulosic RVOs annually, as required, to reflect current market supply realities. In so doing, EPA does not dilute RFS obligations, but simply provides notice of the projected achievable volume of cellulosic biofuels – all of which must be blended into the fuel supply. This mechanism ensures that there will be a market for all cellulosic biofuel produced up to the volumes prescribed in statute.
To accommodate uncertainty in the timeline of deployment for cellulosic biofuels, the RFS provided obligated parties with flexibility in complying with cellulosic volume requirements. To satisfy their compliance obligations, obligated parties can either buy a gallon of cellulosic biofuel or purchase some combination of fuels—including advanced biofuels— and EPA waiver credits. The cellulosic waiver credit mechanism establishes a counter-cyclical compliance value for cellulosic biofuels that increases as petroleum price decreases, providing a significant degree of price certainty and, thus, considerable market motivation for investment in cellulosic biofuels. To the extent each option is dependent on the other, or can draw upon long-term pricing models for commercial fuels markets and supplies, the relative value and return on investment of physical gallons of cellulosic biofuels over the life of the RFS can be reasonably quantified.
This paper finds the RFS to be an effective mechanism in providing market motivation for investment in advanced and cellulosic biofuels. Continued federal investment in the construction of first-of-a-kind commercial advanced and cellulosic biorefineries is needed to overcome initial scale-up risk. Thereafter, the RFS will rapidly accelerate deployment of advanced and cellulosic volumes, significantly reducing U.S. dependence on imported petroleum.