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11/02/2014

Biofuels: how the United States became the world's largest producer?

With a production of 547.9 kBep/j1 in 2012, the United States is by far the largest producer of biofuels and represents 45.4% of the global2 production. While Brazil dominated the industry until 2006, the United States has implemented a proactive legislation that promoted the growth of this sector.
The US is the world largest consumer of fuels with 503.5 billion liters in 20123 - in comparison, France only consumed 50 billion litres4 - and over the years tried to reduce their dependence on foreign oil imports and greenhouse gas emissions. To this end, the U.S. Congress passed the 2005 Energy Policy Act5 updating the 1992 legislation starting a period of exceptional growth for biofuels.

 

The Renewable Fuel Standard has created a market for biofuels

While tax credits and other direct and indirect subsidies were the main incentives for biofuels, the Energy Policy Act of 2005 imposed the Renewable Fuel Standard (RFS1) as the central tool of American biofuel policy in favor of biofuels (see "Biocarburants: une proposition d'amendement fait peser le doute sur l'avenir des filières" Energy & Environment blog of Sia Partners for further information on EU policy on biofuels). The RFS1 is a legal obligation requiring the inclusion of a minimum volume of biofuels in fuels sold in the United States. When adopted in 2005, the goal was to incorporate 15.1 billion liters in 2006 (about 3% of the anticipated total consumption) and 28.4 billion liters in 2012 (about 5 %). According to the legal constraints based on market principles, the RFS is linked to the production, trading and use of certificates, the Renewable Identification Numbers (RINs). From the supply side, a RIN is created when a gallon6 of biofuel is produced or imported on American soil. During this operation, the Environmental Protection Agency (EPA) awards it a unique identification number to trace it to its consumption. From the demand side, fuel distributors are required to purchase RINs in proportion to their sales volumes. To meet their obligations, distributors have two options: either buy the volumes of biofuels required to incorporate and then resell to the pump or buy RINs directly on the market. With this system the production of biofuels is subsidized until the RIN market value. In case of non -compliance with their obligations, distributors face heavy penalties: $ 32,500 / day plus gains on non-compliance with their commitments. Under the effect of this legislation, biofuel production has increased by 75 % between 2005 and 2007.

The RFS2 carries the aspirations of the U.S. government

While the RFS1 started producing its first effects, the RFS2 associated with the Energy Independence and Security ACT7 2007 increased targets in the foreground, extended the time horizon of the device in 2022 and introduced different obligations depending on the types of biofuels. Indeed, the U.S. biofuels are almost exclusively derived from ethanol produced from corn and the regulator has sought to promote the emergence and development of three other types of biofuels: (1) cellulosic biofuels, (2) the biodiesel and (3) the others "advanced biofuels"8. Primarly, the aim of the government is to support primarily the development of cellulosic biofuels that should benefit from higher prices RINs (see "Biocarburants : la France vers la seconde génération" Energy & Environment blog of Sia Partners for more details on cellulosic biofuels). Since 2010 fuel distributors are thus obliged to incorporate a certain amount of these different types of biofuels. These amounts are fixed or revised annually by the EPA in order to take into account market developments and the development of production units. In addition, these biofuels must now meet requirements in terms of reducing greenhouse gas emissions (GHG). The price of RINs associated with each category may fluctuate during the year depending on the comparison between supply and demand. Additionally, this system is used for allocating investments to the types of biofuels which production is still far from reaching their targets.

Sources: United States Environmental Protection Agency, United States Energy Information Administration, California Energy Commission

Successful despite persistent criticism

Thanks to RFS, between 2005 and 2012 the United States were able to triple their production of biofuels saving more than a billion barrels of imported oil - about 2% of annual consumption. With this production, almost 10% of the gasoline consumed in the United States now comes from renewable resources. In addition, the development of biofuels has a positive effect on the U.S. economy. The Renewable Fuel Association estimates that only ethanol industry has helped to increase of nearly $ 45 billion U.S. GDP in 2012, mainly in the agricole9 sector. More than 380,000 jobs have also been created last year and up to 2 million could be in 15 years if the objectives of the EPA in 2022 are maintened10. The increased production of biofuels is still almost exclusively driven by the ethanol from corn while the government's objective is to foster foremost the development of cellulosic biofuels. With 0.08 million liters produced in 2012, these are far from the initial target of 1,893 million liters and the EPA has consistently lowered the obligations of distributors in this category since 201011. Although the first commercial production units entered service in 201312, the long term objectives of the EPA are still far from being achieved.

However the development of biofuels in the United States has not only positive effects. Between 2005 and 2012, driven by strong demand induced by the RFS, the price of corn has almost quadrupled13. This increase of price associated with greater volatility, impacted the ability of vulnerable households to supply themselves and partly contributed to the global food crisis and riots of 200814. In addition, to meet the demand for corn, American farmers have sought to increase their productivity through reduced crop rotations and greater use of pesticides. Consequently, the development of ethanol involves risks both in terms of soil fertility as the pollution of groundwater. Finally, biofuels induce a non- negligible cost to the taxpayer - more than $6 billion in 2011 to $16 billion in 202215 horizon - and they always need to be subsidized to be economically rentables16. Defeating the purpose, these subsidies diverted investments that could have gone to more appropriate17 alternatives.

For the first time since 2000, the production of biofuels in the United States could tighten in 2013. Due to falling energy prices in the United States, reduced fuel consumption, difficult to industrialize the production of cellulosic biofuels and divestment policy, the sector is facing its first crisis. Despite this, the United States still enjoy their surplus of production, and is planning actively the future thanks to a dynamic research in the field of next-generation biofuels.

Sia Partners

Notes:

(1) Thousand barrels of oil equivalent per day

(2) BP - Statistical review of world energy 2013

(3) Source : United States Department of Transportation

(4) Union Française des Industries Pétrolières(2013)« Ventes de carburants automobile et structure du réseau de distribution »

(5) Energy Policy Act (2005)

(6) 1 gallon = 3,7854 litres

(7) Energy Independence and Security Act (2007)

(8) The long-term targets of EPA are set for two categories: ethanol from corn and other biofuels. Within this second category, EPA determines the long-term goal of producing cellulosic biofuels, in the short-term the biodiesel, and attributed to the other advanced biofuels the balance.

(9) Urbanchuck J.A. (2013), « Contribution of the Ethanol industry to the Economy of the United States », Renewable Fuel Association

(10) U.S. Department of Energy (2013), « Bioindustrycreates green jobs »

(11) The targets set by the EPA were originally 379 ML in 2010, 946 ML in 2011, 1,893 in 2012 and 3785 ML in 2013. Faced with the lack of production, the EPA has successively revised its targets decreasing to 24.5 ML 2010, ML 22.7 in 2011, 32.7 in 2012 and 53.0 ML 2013.

(12) MIT TechnologyReview (2013), « The cellulosicethanolindustry faces big challenges »

(13) Schnepf R. &Yacobucci B.D. (2013), « Renewable Fuel Standard (RFS) : Overview and issues », CongressionalResearch Service

(14) FAO (2013) « Biofuels and foodsecurity », Rapport du groupe d'experts de haut niveau sur la sécurité alimentaire et la nutrition

(15) Center for Global Development (17.01.2012) « Ethanol Subsidy Win for Taxpayers-What About Developing Countries? » / Schnepf R. &Yacobucci B.D. (2013) « Renewable Fuel Standard (RFS): Overview and issues », CongressionalResearch Service

(16) Reuters (27.11.2013) « Analysis: High-ethanolgas - Not coming to a pumpnearyou »

(17) Hahn R. &Cecot C. (2009) « The benefits and costs of ethanol: an evaluation of the government'sanalysis », Journal of RegulatoryEconomics

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