Under the Renewable Fuel Standard, the Environmental Protection Agency must set annual biofuel blending levels for gasoline and diesel supplies. As part of that process, EPA releases a proposal and receives feedback from stakeholders. The past few years, EPA has acted slowly, setting blending levels after the relevant year had passed or retroactively changing the levels. This uncertainty made for operational difficulty within the industry. A consent decree—or settlement agreement approved by the court—with Growth Energy forced EPA to release the proposed 2023 blending obligations on Dec. 1, 2022.
EPA attempted to provide more certainty to the industry by setting the volumes for three years instead of the usual one. However, the agency failed to account for growth in the soybean industry when setting the levels, which significantly threatens the investment in the sector to lower carbon emissions from fuels. EPA justified this decision by utilizing a baseline that assumed no growth in the blending obligations to claim the industry could not meet increased obligations. While the soybean industry has been experiencing tremendous growth and it is expected to continue, the EPA announcement potentially grinds that growth to a halt.
The past couple of years have been awash in announcements to construct renewable diesel plants. This biofuel is distinct from biodiesel and meets the same standards as diesel produced from petroleum. More about renewable diesel and the announcements can be found here. The soybean industry has been investing in crushing plants to meet the need for renewable diesel feedstocks, with well over 20 announcements for increased capacity over the next few years. State and federal policies encouraged transitions to low carbon fuels, and the soybean industry has been investing billions of dollars to help that transition. Biofuels provide an unpriced benefit to the public in that they help reduce carbon emissions. Given the higher cost of producing BBD than petroleum, the blending obligations help correct the classic market failure. However, EPA’s proposed rule allows almost no growth for biomass-based diesel (BBD) over the next few years (Figure 1).
BBD includes most renewable diesel, biodiesel and sustainable jet fuel. EPA’s proposed Renewable Volume Obligation has only 60 to 70 million gallons of growth per year for the next three years, which is a total increase of about 190 million gallons from the 2022 level. In contrast, announcements for renewable diesel total about 3.8 billion gallons over that period. Further, as of Sept. 2022, biodiesel, renewable diesel and other biofuel [1] capacity totaled 4.2 billion gallons [2] compared to an RVO of 2.82 million gallons of BBD in 2023. BBD sector expansion means the current capacity already exceeds the RVO volumes proposed by EPA. With growth in BBD RVOs of only 60 to 70 million gallons per year under the EPA proposed rule, the industry’s capacity far exceeds the EPA levels. While it was always unlikely that all the proposed renewable diesel plants would be built, even a partial buildout quickly adds to overcapacity in the industry given the low volumes proposed by EPA. This RVO will essentially freeze the BBD industry at current levels for at least the next three years.
