Abstract
The Renewable Fuel Standard (RFS2), as implemented, has introduced uncertainty into US ethanol producers and the supporting commodity market. First, the fixed mandate for what is mainly cornstarch-based ethanol has increased feedstock price volatility and exerts a general effect across the agricultural sector. Second, the large discrepancy between the original Energy Independence and Security Act (EISA) intentions and the actual RFS2 implementation for some fuel classes has increased the investment uncertainty facing investors in biofuel production, distribution, and consumption. Here we discuss and analyze the sources of uncertainty and evaluate the effect of potential RFS2 adjustments as they influence these uncertainties. This includes the use of a flexible, production dependent mandate on corn starch ethanol. We find that a flexible mandate on cornstarch ethanol relaxed during drought could significantly reduce commodity price spikes and alleviate the decline of livestock production in cases of feedstock production shortfalls, but it would increase the risk for ethanol investors.
Highlights
The Energy Independence and Security Act (EISA) of 2007 mandated 136 billion liters of biofuel blending by 2022, including a 56.78 billion liter maximum on conventional ethanol, as well as a 60.56 billion liter minimum on cellulosic ethanol
Two major uncertainties evolved with the EISA renewable fuel standard (RFS2) mandate situation
On the cornstarch ethanol side, the mandate has been maintained at a constant level during a given year, even in the face of major shortfalls like the 2012 Midwest drought
Summary
The Energy Independence and Security Act (EISA) of 2007 mandated 136 billion liters (or 36 billion gallons) of biofuel blending by 2022, including a 56.78 billion liter maximum on conventional ethanol, as well as a 60.56 billion liter minimum on cellulosic ethanol. EISA originally indicated that about 16 billion liters of cellulosic ethanol would be mandated by 2016, but the final RFS2 mandate was only 0.87 billion liters This increased the uncertainty faced by those investing in ethanol production and distribution, as they are left unsure as to whether they can sell what they manufacture. This will not allow EPA to use the ethanol blend wall as a waiver excuse, which is a positive policy signal for the US ethanol industry. This has led to significantly decreased cellulosic mandates, compared with the EISA targets (see Table 1). We find that increasing the flexibility of ethanol mandates reduces uncertainty for agricultural stakeholders, shifting this uncertainty to the ethanol production sector
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