This publication examines the impact of the federal biofuel policy and market structure on the growth potential of the cellulosic ethanol industry in the Pacific Northwest (PNW). A multi-sectoral model is used to demonstrate how changes in the policies related to the federal Renewable Fuel Standards (RFS) and market power affect cellulosic ethanol production and consumption. The results fill a gap in our understanding of the effect of economic incentives from the federal RFS in promoting cellulosic ethanol production in the PNW.
This publication is a non-technical and abbreviated version of the study by Skolrud et al. (2016), which provides a detailed description of a market model of potential regional cellulosic ethanol production and presents simulated estimates of the effects of changes in the federal biofuel policy and market structure of the industry. The full study focuses only on Washington State, while this publication extends the analysis to cover the three PNW states of Idaho, Oregon, and Washington.
- Due to a small projected domestic supply of cellulosic biofuel, the EPA has reduced the mandated volume of cellulosic biofuel production. It has also allowed the purchase of waiver credits to substitute for production and use of cellulosic biofuels. The current waiver price is $0.25 per gallon of cellulosic biofuel, and it increases only if the average annual wholesale gasoline price exceeds $3.00 per gallon.
- The low waiver price is largely responsible for the failure of the current biofuel policy to stimulate cellulosic ethanol market development.
- Raising the waiver price will result in a significant increase in the quantity of cellulosic ethanol over the long run.
- When more firms enter the market, the effect of an increase in the waiver price on the quantity of cellulosic ethanol decreases and the growth of the sector accelerates.
Cellulosic Ethanol Policy and Industry Development
Cellulosic Ethanol as a Renewable Fuel
Most liquid fuel ethanol is produced with starch feedstock sources, such as corn, or sugar feedstock sources, such as sugarcane or sugar beets. Cellulosic materials, such as field crop residues, energy crops (e.g., switchgrass, hybrid poplar), woody waste in landfills, and forestry residues from logging, tree thinning, mills, and land clearing, can also be used to produce biofuels such as ethanol.
The Energy Independence and Security Act of 2007 (EISA) includes an RFS that mandates use of renewable fuel. The mandate increases renewable fuel use from 13.95 billion gallons in 2011 to 36 billion gallons by 2022. In 2022, 16 billion gallons of renewable fuels must come from cellulosic feedstocks.
Renewable Fuel Policy and Implementation
The mandate is enforced by the Environmental Protection Agency (EPA) via requirements that a minimum proportion of the fuel sold by fuel refiners, importers, and blenders is renewable fuel (EPA 2007). The mandate for most fuel types can be met either through firms’ own renewable fuel refining, blending, or importing activities or by purchasing obligations from other firms in a market for Renewable Identification Numbers (RINs). Types of fuel produced include ethanol, gasoline, diesel, compressed or liquefied natural gas, and heating oil.
To implement the EISA, the EPA created the RIN as a mechanism for RFS compliance accounting and it has continued under the reduced RFS mandates. A RIN is a unique, 38character number assigned to each gallon of renewable fuel produced in the US or imported. When renewable fuel is blended into motor vehicle fuel, the RIN attached to the renewable fuel can be separated, and then the RIN can be used for current or future compliance or it can be sold.