Renewable Fuel Standard: The Stable Policy Investors Are Looking For

A new policy paper from BIO, "The Value Proposition for Cellulosic and Advanced Biofuels Under the Federal Renewable Fuel Standard," argues that the federal Renewable Fuel Standard, implemented by the Environmental Protection Agency, provides the stable market support and pricing system necessary to attract private investment to the development of advanced biofuels. The paper is forthcoming in the April 2011 Industrial Biotechnology Journal and was officially launched at the April 19 Advanced Biofuels Leadership Conference.

The paper demonstrates that because biotechnology applications for cellulosic and other advanced biofuels are so new and expensive, the federal RFS and the way EPA has implemented it ensures that if the industry can produce these biofuels, there will be a market and calculable price support for them.

The technology for cellulosic and advanced biofuels is ready for further development and commercialization. There are, in fact, already over 70 pilot and demonstration biorefineries across North America testing and further improving the technology. But, commercialization of cellulosic and advanced biofuels has been slowed by the economic downturn. By continuing to implement the RFS in the way it has done, the EPA is showing its commitment to developing the emerging cellulosic and advanced biofuels industry.

EPA has demonstrated this commitment by maintaining the annual levels that obligated parties must use in all four categories of biofuels: conventional, biodiesel, other advanced and cellulosic.  EPA has also provided federal market incentives for the highest achievable cellulosic and advanced volume production.

These market incentives are provided, in part, through the cellulosic waiver credit option provided under the RFS rules.  To meet their cellulosic volume usage requirement, obligated parties may choose to purchase this cellulosic waiver credit. This waiver serves to incentivize and ensure there is and will be a market for the highest achievable production of cellulosic and advanced biofuels. 

Every year in November, the EPA sets the waiver credit price value through a clear and calculable formula, providing certainty to investors.  This calculable formula means that cellulosic and advanced biofuels have value both as fuels and in meeting RFS usage requirements. It provides assurance to obligated parties that they will be buying a product that is cost competitive.

The RFS provides obligated parties several ways to calculate how to meet and comply with the law.  In keeping with market realities, obligated parties can calculate the lowest cost for meeting their obligations.  The waiver credit allows producers and investors to plan in the long term.  They will know prior to the current calendar year the price point cellulosic biofuels will have to meet to be competitive.

The fact that cellulosic biofuels producers and investors can calculate this price point makes cellulosic biofuels attractive to obligated parties when they make their choices on how to comply under the RFS.

Also, EPA’s implementation of the RFS ensures that there is a demand driven market for cellulosic and advanced biofuels.  Everyone can calculate the price premiums for those biofuels, which will fall somewhere between the high cost of oil and the relatively low cost of conventional biofuels.

The value of the waiver credit will always be somewhere between 25 cents and $3, never below or above.  For this reason, cellulosic and advanced biofuels producers have a value proposition to present to investors.  If they can produce advanced biofuels at a competitive price, they can count on this additional price premium.

Maintaining the RFS is important to U.S. energy security. As BIO’s Brent Erickson wrote in a cogent article in Environmental Leader,

Continued reliance on petroleum threatens our economic, energy and national security. We need to follow through on the national goal of reducing reliance on oil – particularly in transportation – and for that we need biofuels. In short, the United States must remain committed to the Renewable Fuel Standard (RFS) because it provides the guiding policy and necessary support for the industry to begin bringing innovative new technologies for advanced and cellulosic biofuels to the marketplace.

Advanced biofuels can protect us from future oil price shocks, which promise to get worse over time. Enduring federal commitment to the RFS is vital to driving private investment toward research, development and deployment of innovative new technologies. Congress and the Obama administration must maintain the RFS to help turn innovation into solid economic and energy achievements.