THE BEGINNING

In 2005, a mandate was set to blend 7.5 billion gallons of renewable fuel into gasoline by 2012. It was the logical amount... at the time.

"The first RFS created market opportunities and financial certainty for a growing industry," adds Rob Skjonsberg, Senior Vice President of Public Policy & Corporate Affairs at POET.

Before the mandate, ethanol had a small primary niche market of adding oxygen to fuel with the purpose of cleaning up polluted cities.

"It was an important development as it set out a vision for ethanol to play out a bigger, broader role in our nation's efforts to reduce our dependence on foreign oil, benefit the environment and to create jobs in rural America, in fact the whole world," says Tom Buis, CEO of Growth Energy. "That challenge was easily met by the nation's ethanol producers."

RECOGNIZING A NEED

In December of 2007, the Environmental Independence and Security Act (EISA) revised and extended the RFS rule.

"EISA's changes were intended to provide a major step toward expanding the production of renewable fuels, reducing our dependence on oil, and confronting global climate change," explains Margo Oge, Director of the EPA's Office of Transportation and Air Quality. "One of the key changes in the Act was greatly expanding the RFS, requiring fuel producers to use at least 36 billion gallons of biofuel in 2022."

Another first, the EISA included competing mandates for advanced and cellulosic ethanol. Incentives were provided for the development of cellulosic commercialization, complementing POET's Project Liberty, a commercial scale cellulosic facility that will produce ethanol from corn cobs. But, RFS2 also capped corn ethanol production at 15 billion gallons.

Additional key changes in the Act included:

• EISA expanded the RFS program to include diesel, in addition to gasoline.
• EISA established new categories of renewable fuel, and set separate volume requirements for each one.
• EISA required EPA to apply lifecycle greenhouse gas performance threshold standards to ensure that each category of renewable fuel emits fewer greenhouse gases than the petroleum fuel it replaces.

REVISION NUMBER 2

On February 3, 2010, the U.S. Environmental Protection Agency (EPA) released its final rule for the expanded RFS.

Known as the RFS2, the rule took effect July 1, 2010, and lays the foundation for achieving significant reductions of greenhouse gas (GHG) emissions from the use of renewable fuels. All conventional biofuels must reduce GHGs by at least 20 percent in order to qualify for these new volume categories. (see sidebar "Fuel Categories," pg. 44)

The good news is that the final rule clarified that that corn grain ethanol meets this requirement and qualifies as a conventional biofuel. This includes all ethanol using corn as a feedstock, existing grandfathered capacity as well as new production.

This is to due to the EPA acknowledging some key points:

• Crop yields are continuing to improve, meaning less land is needed for increased ethanol production.
• Distillers grains are an efficient, high-nutrient animal feed, allowing the same corn to be used for both feed and fuel.
• Agriculture does not have the impact on deforestation that was originally assumed.

FLAWS

But Buis is concerned that it still "contains a couple of troubling barriers for this industry to move forward." Specifically a component called the International Indirect Land Use Change (ILUC) (see "Indirect & Inconclusive", Vital, Spring 2009). And an underwritten clause Skjonsberg has nicknamed the "discrimination clause" which prevents corn ethanol from competing with other feedstocks despite greenhouse gas reduction efforts.

INDIRECT LAND USE CHALLENGE

A relatively new topic of study, Harry Baumes, Acting Director of the Office of Energy and Policy New Uses Office of the Chief Economist, points out the importance of research in this area.

"Many factors affect land use change around the world including economic growth, economic development policies, population and technological developments," says Baumes. "We must be careful that we understand the complexities of market adjustments and that we are as confident as we can be in identifying and quantifying net GHG emission from indirect land use change brought about by biofuels production."

"The only way we can overcome these types of governmental challenges is if we move away from mandates and towards a fairer open market for fuel."
-Rob Skjonsberg, Senior VP of Public Policy & Corporate Affairs at POET "There's been this debate about indirect land use change -- about what the impact is and how you really measure it," says Buis. "There's no scientific consensus out there that A, it's happening. And B, to what extent it's happening. Then if it is determined that it is...who do you blame for it? Land use changes in other countries occur for a variety of reasons. It's a lot of macro reasons such as domestic purposes for their own consumption or export for economic activity. It's not specifically for the production of biofuels or the result of the production of biofuels. In fact, we tell everyone that in the United States we lose about one or two acres per minute of tillable farmland to suburban sprawl."

But the U.S. farmers and ethanol producers do continue to be blamed for issues beyond their control -- like Brazilian deforestation.

Buis says, "In reality, in Brazil where they are most concerned about deforestation, over the last five years deforestation rates have been cut in half. At the same time, the U.S. ethanol industry nearly tripled its capacity, so there's no real connection there, between what we're doing here in the United States and what is occurring in Brazil."

The EPA rule mentions five categories of feedstock that are expected to result in less or no indirect land use change including:

• Crop residues such as corn stover, wheat straw, rice straw, citrus residues;
• Forest material including eligible forest thinning and solid residue remaining from forest product production;
• Secondary annual crops planted on existing crop land such as winter cover crops;
• Separated food and yard waste including biogenic waste from food; and
• Perennial grasses including switchgrass and miscanthus.

Currently, corn based ethanol falls into the conventional biofuels category with a 20 percent reduction of GHG, but without indirect land use change, the production of ethanol is approximately 52 percent less GHG omissions than gasoline.

So realistically, if this flawed theory were not considered, corn could be a feedstock used to fill the advanced biofuel space of the mandate by all other standards -- except for the discrimination clause.

DISCRIMINATION CLAUSE

In the definitions section of the RFS2, advanced biofuels is defined as "renewable fuel -- other than ethanol derived from corn starch." It goes on to list the types of fuels eligible for consideration: ethanol derived from cellulose, hemicelluloses, lignin, sugar or starch (other than corn starch), waste material, etc., etc., etc.

"The statute specifically prevents corn ethanol from participating in the 'advanced biofuel' category, regardless of the GHG reduction efforts," says Skjonsberg. "It's completely arbitrary and discriminatory."

With corn starch receiving unfair 42 vital || THE ESSENTIAL PERSPECTIVE treatment, it gives other biofuels an advantage.

"There's no carve out in the RFS2 for corn based ethanol," says Skjonsberg. "A host of competing feedstocks -- including Brazilian cane ethanol -- can actually displace corn's participation in the first 15 bg portion of the RFS2."

It's a tough hand to be dealt. With a government push towards diversity in the way renewable fuels are made, tried and true corn ethanol gets the short end.

"The only way we can overcome these types of governmental challenges is if we move away from mandates and towards a fairer, open market for fuel," Skjonsberg adds. "Ethanol can compete with gasoline -- we simply need market access and a movement away from government caps and parameters. This industry's potential has outpaced the government. RFS2 made that very clear."

MEETING THE MANDATE

In an interview with ClearSkies TV, Buis remarks, "Can we produce it? Yes. In fact, it's going to take a combination of efforts. It's going to take efforts like corn based ethanol and cellulosic ethanol. We are not going to back off again. We know we can do it, just make sure the public policy corresponds to it¬--to unleash the entrepreneurial spirit in America."

In April, POET CEO Jeff Broin announced POET's cellulosic ethanol plan at the National Press Club in Washington, D.C. The plan sets a goal of 3.5 billion gallons of cellulosic ethanol production by 2022.

POET plans to achieve this goal "by adding the technology to our existing facilities, licensing our technology to other producers and finally, transferring our technology to other forms of biomass such as wheat straw, switchgrass and municipal waste," Broin said. "To put this in perspective, 3.5 billion gallons is over 20 percent of the cellulosic ethanol mandated in the Renewable Fuel Standard."

THE END RESULT

"The expanded use of renewable fuels is expected to reduce greenhouse gas emissions by 138 million metric tons when the program is fully implemented in 2022. The reductions would be equivalent to taking about 27 million vehicles off the road," concludes Oge.

"From a consumer perspective, increasing biofuels production and use in the U.S. will create green jobs and generate income and economic gains associated with the industry's development," Baumes summarizes. "Increasing the supply of home grown energy will help to keep energy costs to the consumer (and business) down -- for both transportation fuels and heat/power. In addition, renewable energy provides environmental benefits which all will benefit from."

In hard numbers, Oge explains how the RFS2 will benefit the American consumer. "The increased use of renewable fuels is expected to expand the market for agricultural products such as corn and soybeans and open new markets for advanced biofuels. We estimate that the RFS2 program would increase net farm income by $13 billion dollars in 2022."

She adds, "Further, by 2022, the increased use of renewable fuels is expected to decrease gasoline costs by 2.4 cents per gallon and to decrease diesel costs by 12.1 cents per gallon."

Increased use of biofuels will provide the solution our country is looking for. The RFS2 will aid in breaking oil's 90 percent monopoly and give consumers the choice of fuel.

"Even if you disagree on the threat posed by climate change, investing in clean energy jobs and businesses is still the right thing to do for our economy. Reducing our dependence on foreign oil is still the right thing to do for our security. We can't afford to spin our wheels while the rest of the world speeds ahead," said U.S. President Barack Obama to a group of governors in early February.

FUEL CATEGORIES

The RFS2 provisions specify four separate categories of fuels, each with their own feedstock and minimum GHG reduction thresholds. Each category has its own annual volumetric use and a corresponding schedule for increases.

If advanced biofuel (50 percent GHG reduction) and cellulosic biofuel (60 percent GHG reduction) meet their volume, additional gallons produced in these categories will eat into what is allowed for corn-based ethanol (renewable biofuel - 20 percent GHG reduction).

BIOMASS-BASED DIESEL

1 billion gallons (bg) by 2012 and beyond; e.g., Biodiesel, "renewable diesel" if fats and oils are not co-processed with petroleum. Must meet a 50 percent lifecycle GHG reduction threshold relative to 2005 diesel baseline.

CELLULOSIC BIOFUEL

16 bg by 2022; renewable fuel produced from cellulose, hemicellulose, or lignin; e.g., cellulosic ethanol, biomass to liquids (BTL) diesel, green gasoline, etc.; Must meet a 60 percent lifecycle GHG reduction threshold.

ADVANCED BIOFUEL

Total of 21 bg by 2022 (Minimum of 4 bg additional); essentially anything but corn starch ethanol; Must meet a 50 percent lifecycle GHG reduction threshold reduction relative to 2005 baseline gasoline.

RENEWABLE BIOFUEL

Total of 36 bg by 2022 (Minimum of 15 bg additional); ethanol derived from corn starch -- or any other qualifying renewable fuel; Must meet a 20 percent lifecycle GHG reduction threshold -- Only applies to fuel produced in new facilities.