INSIGHT: US refiners balk at paying $6m for phantom fuel

21 July 2011 17:15  [Source: ICIS news]

By Joe Kamalick

Refiners challenge cellulosic ethanol waiver feeWASHINGTON (ICIS)--US refiners are facing federal fines in excess of $6m (€4.25m) for failing to buy cellulosic ethanol this year - even though commercial volumes of that biofuel simply are not available.

In order to create demand for cellulosic ethanol and stimulate non-food biofuel production, the Environmental Protection Agency (EPA) has set a cellulosic ethanol consumption mandate of 6.6m gallons for this year, meaning that US refiners must blend that volume of the biofuel into the nation’s gasolines supply.

In November this year EPA is expected to announce a new cellulosic ethanol mandate for 2012 of between 3m and 15m gallons.

If refiners do not purchase the mandated volumes of cellulosic ethanol, they have the option to buy EPA waivers at $1.13/gal for the cellulosic fuel they should have been using.

The problem for refiners is that no US company is producing commercial volumes of cellulosic ethanol, and no such large-scale production of the biofuel is expected before 2013, if then.

At a recent EPA public hearing on the cellulosic mandate, National Petrochemical & Refiners Association (NPRA) general counsel Gregg Scott argued that the country’s gasoline producers should not have to pay a fine for failing to meet a consumption mandate for a biofuel that doesn’t exist.

“In 2011, EPA’s unrealistic cellulosic biofuels mandate will in effect be no more than a tax on American manufacturers and, ultimately, consumers,” Scott said.

Scott contends that the $1.13/gal waiver that refiners would have to pay for not using the non-existent cellulosic ethanol amounts to “a $6.7m tax that NPRA’s members must pay due to EPA’s misguided optimism regarding cellulosic biofuels production this year”.

“Refiners should not have to pay millions of dollars in compliance taxes because of EPA’s gross miscalculation,” he added, “and EPA must not repeat this miscalculation” when it decides in November the cellulosic ethanol mandate level for 2012.

EPA will not assess the $1.13/gal non-use penalty on refiners for 2011 until February 2012, a policy meant to encourage refiners to buy the mandated volumes of cellulosic ethanol this year and thus avoid paying the fine in February.

But with no cellulosic ethanol available, refiners will just have to wait for the fine assessment.

Matt Hartwig, spokesman for the Renewable Fuels Association (RFA), a major ethanol trade group, says that EPA “has every right to set a goal [for cellulosic ethanol use] they believe is ambitious but achievable”.

“Six million gallons is not a severe stretch for this year and is not solely restricted to ethanol,” he added, noting that under the EPA cellulosic ethanol mandate, refiners may substitute quantities of biodiesel.

Tim Hogan, NPRA’s director of fuels, argues that the EPA’s $1.13/gal cellulosic ethanol waiver (or tax) would actually discourage refiners from buying the alternative fuel even if it were available.

US corn-based ethanol currently sells for about $2.60/gal. Cellulosic ethanol, if it were available, likely would cost considerably more. Current US prices for biodiesel are in the range of $5/gal and higher.

At those prices, Hogan says, “why would refiners pay for cellulosic ethanol - even if it were available - when they could just buy the waiver for $1.13?”

That’s not to say that refiners see the EPA waiver fee as an acceptable option.

NPRA and the American Petroleum Institute (API) have filed a petition with EPA, asking that the 2011 cellulosic ethanol mandate be rolled back and that the agency should not require a 2012 cellulosic use level beyond the ethanol industry’s capacity to produce it.

EPA has not ruled on the NPRA/API petition, and Hogan said a ruling was not expected until November.

If in November EPA denies the refiners’ reconsideration petition, the matter is likely to head to federal court.

The cellulosic ethanol mandate is set by EPA under the Energy Independence and Security Act (EISA) of 2007 and its renewable fuel standard (RFS).

Jim Nussle, president of Growth Energy, another biofuels trade group, argues that in the 2007 EISA, “Congress directed EPA to write policy that grows the domestic renewable biofuels industry, so we could make an even bigger difference in reducing our dependence on imported petroleum”.

“Maintaining RFS targets is one important way to do that,” he added.

But the EPA waiver fee (penalty or tax) for non-use of a non-existent biofuel illustrates the disconnection between what policymakers in their wisdom dictate and what science and industry can actually produce in the real world.

“If wishes were horses, beggars would be kings,” the proverb notes.

In the New Year, federal courts likely will be asked to decide whether industry should have to pay for congressional dreams.

 ($1 = €0.71)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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