In 2011, more Brazilian drivers used U.S. ethanol than ever before, as U.S. ethanol exports soared.
At the same time, Brazilian ethanol was making its way into the U.S. market, despite the fact that Brazil suffered from a shortage of ethanol at home.
This peculiar international trading phenomenon was the result of regulations that have forced ethanol producers to ship their products long distances. Additionally, proposed regulations have the potential to exacerbate this phenomenon; however legal action by the ethanol industry – which has had some success in recent months – seeks to keep the situation from becoming even more complicated.
A Complicated Trading Scenario
In 2011, we experienced a situation where two diesel-engine-powered supertankers could literally pass one another on the open seas – a 6,000-mile, energy intensive journey from U.S. ports on the Gulf Coast to Brazil and from Brazilian ports to the West Coast of the United States.
Indeed, Brazil imported a record 291 million gallons of ethanol from the United States in 2011, compared with 20 million gallons in 2010, according to official Brazilian government data. Of that amount, 96.7 percent of Brazilian ethanol imports came from the United States in 2011.
Conversely, U.S. ethanol imports were up from 83 million gallons in 2010 to 175 million gallons in 2011 and could increase further as the result of Renewable Fuels Standard targets.
That doesn’t sit at all well with U.S. ethanol producers, who say the regulatory-driven phenomenon defies all logic – and will only end up hurting American consumers in the long-term.
“It’s ridiculous to ship significant amounts of U.S.-produced ethanol down to Brazil and for Brazil to ship significant amounts of their ethanol to the United States, based on regulation,” says Bob Casper, President of POET Ethanol Products. “That’s a better, more environmentally sound solution?”
“Advanced” Biofuels
The first issue at work, Casper says, is a revision to the U.S. Environmental Protection Agency’s Renewable Fuel Standard, or RFS2, which took effect on July 1, 2010.
As part of RFS2, the mandated volumes in the original RFS program were substantially increased and specific volumes were assigned for each year through 2022. The total volume increases gradually, reaching 36 billion ethanol equivalent gallons by 2022.
Under RFS2, “renewable fuel” is fuel produced from one of seven categories of biomass feedstocks that is used to replace or reduce fossil fuel use and reduce greenhouse gas, or GHG, emissions by at least 20 percent. Many of the categories of “renewable fuels,” according to the EPA rules, have additional restrictions relating to when the land on which such crops are grown was cleared for agricultural use based on a theory called Indirect Land Use Change, or ILUC, which is described below. Of the 36 billion gallons of renewable fuels required by RFS2 in 2022, 21 billion ethanol equivalent gallons are required to be advanced biofuels.
Corn starch-based ethanol does not qualify as an “advanced biofuel;” however, Brazilian sugarcane-based ethanol, biomass-based diesel and cellulosic ethanol do. Currently, sugarcane-based ethanol and biomass-based biodiesel are the only advanced biofuels commercially available in significant amounts.
“RFS2 basically says that since there’s a requirement for advanced biofuels of 2 billion gallons in 2012, of which 1.5 billion gallons is supposed to be satisfied by cellulosic ethanol and biodiesel, then the United States is going to need approximately 500 million gallons of sugarcane ethanol – the reason being corn starch-based ethanol doesn’t qualify as an advanced biofuel,” Casper says.
Because the U.S. ethanol industry is challenged by the so-called “blend wall,” that’s a problem, since corn starch-based ethanol is now competing with sugarcane-based ethanol for a market limited by regulation, he says. The blend wall is the maximum amount of ethanol that can be blended into the U.S. fuel supply due to vehicle limits on ethanol: essentially 10 percent. Recent EPA rulings that allow 15 percent ethanol blends have not been fully implemented yet, so for now the industry has hit the ceiling for the domestic market.
“If we didn’t have a blend wall and Brazilian ethanol was imported to the United States to meet regulatory requirements, we believe that U.S. produced ethanol could just replace even more gasoline because currently U.S. produced ethanol is so competitive with gasoline on cost and other bases,” Casper says. “But with the blend wall, every gallon of sugarcane-based ethanol that comes in to meet the advanced biofuels requirement replaces a gallon of corn starch-based ethanol. And given the demand for ethanol in Brazil, a large portion of the U.S. produced, corn starch-based ethanol exported in 2011 wound up going to Brazil to replace the sugar cane ethanol that was shipped here.”
California’s Low Carbon Fuel Standard
This strange, regulation-driven trading phenomenon could be exacerbated by the California Air Resources Board’s attempted implementation of the state’s first-in-the-nation standard for low-carbon vehicle fuels, known as the Low Carbon Fuel Standard, or LCFS, that is also based on the ILUC theory.
The LCFS would have required petroleum refiners, oil distributors and companies that blend fuels to gradually make their fuels meet a lower GHG life-cycle analysis if they want to sell in California.
The standard, CARB officials say, will cut the state’s dependence on petroleum and reduce GHG emissions to 1990 standards by 2020. The LCFS rule was expected to account for 10 percent of the emission reductions – or about 16 million metric tons. The law could have prevented a large amount of ethanol from the Midwest from being sold in California, primarily because of a “carbon penalty” assessed on corn starch-based ethanol due to presumed changes in land use associated with its production. Sugar cane-based ethanol, on the other hand, meets the LCFS standards.
A number of ethanol industry participants, including Growth Energy, challenged the law, and in December, Fresno, California-based U.S. District Court Judge Lawrence O’Neill held that LCFS violated the U.S. Constitution’s Commerce Clause by discriminating against crude oil and biofuels producers located outside California.
In his ruling, O’Neill wrote that the LCFS “… impermissibly treads into the province and powers of our federal government, reaches beyond its boundaries to regulate activity wholly outside of its borders.”
CARB officials immediately appealed the lower court’s decision to the U.S. 9th Circuit Court of Appeals and asked for a stay to the lower court’s injunction so that LCFS could be implemented. Both actions were pending in the appeals court at press time.
California Air Resources Board spokesman Dave Clegern says the rule is fair.
“The Low Carbon Fuel Standard is an even-handed standard that encourages the use of cleaner low carbon fuels by regulating fuel-providers in California,” Clegern says. “It does not discriminate against any fuels on the basis of geography.
“We expect to prevail on appeal.”
In early March, Growth Energy and the Renewable Fuels Association filed a brief with the U.S. 9th Circuit Court of Appeals in support Judge O’Neill’s injunction against the implementation of LCFS.
Growth Energy Chief Executive Officer Tom Buis and RFA Chief Executive Officer Bob Dinneen issued a joint statement after filing the brief.
“We are hopeful that the 9th Circuit Court will see the merits of our argument to uphold Judge O’Neill’s injunction,” the pair says. “Ultimately, we believe California’s Low Carbon Fuel Standard should be designed and implemented in a fair and legal manner. If we are going to have a low-carbon society, we need to have a low-carbon fuel. Ethanol is the only commercially-viable, low-carbon fuel we have today.”
CARB’s spokesman Clegern disputes the ethanol industry’s arguments that the LCFS is harmful to the industry.
“A number of Midwestern ethanols do quite well under the LCFS,” he says.
But regulation continue to hamper a home-grown, clean energy alternative to gasoline, Buis says.
“They certainly do,” he says. “What they’re doing in California with the Low Carbon Fuels Standard and what they tried to do in the 2007 energy act that became known as the RFS2, as it relates to renewables, is to regulate our industry based on a theory that’s never been proven – and that’s the Indirect Land Use Change.”
Indirect Land Use Change
The RFS and LCFS both include a theory called Indirect Land Use Change, or ILUC, which states that the production of crops for ethanol displaces other crops – say soybeans – which must then be grown in other parts of the world. This would require new land to come into crop production at the expense of rainforest largely in the Amazon. And that conversion causes a large release of stored carbon, creating a carbon debt that biofuels must repay.
That theory was first publicized in 2008 paper by an environmental attorney, in which the author claimed that when carbon emissions from ILUC were accounted for, corn ethanol was worse than gasoline production.
But “to regulate an industry on something you can’t prove – well that doesn’t make common sense or business sense, for that matter,” Buis says. “And we have data that it’s not occurring.”
According to the National Institute of Space Research, deforestation in the Amazon has declined sharply just as American biofuels production doubled, Buis says. In 2004, 10,722 square miles of the Amazon was deforested, while in 2011, that number dropped to 2,408 square miles. Meanwhile, U.S. ethanol production has increased from approximately 3 billion gallons in 2004 to more than 13 billion gallons in 2010.
“The scientific community is not behind it, there’s a bunch of people all over the map on that, not just here in the United States but worldwide, as Europe has been dealing with this as well,” Buis says. “What we’ve proposed they do is wait, do some exact studies, get the exact modeling, determine if it’s happening and if it’s happening, then what is causing Indirect Land Use Change around the world.
“And I think they’ll find that it’s not biofuels, but bigger macro-economic issues out there.”
Indirect Land Use Change’s inclusion in regulations likely means more Brazilian ethanol will find its way to the U.S. to fulfill the requirements of the RFS as well as trying to meet California’s LCFS, if it is allowed to go forward.
Ongoing Issue
Industry officials say U.S.-produced ethanol can meet the country’s demand for clean, renewable fuels. Swapping ethanol with Brazil solves no problems, Buis says, considering the end product is exactly the same.
“It doesn’t make any sense for us to ship our ethanol 6,000 miles and for them to ship their ethanol 6,000 miles back,” Buis says. “At the end of the day, ethanol is ethanol – regardless of the feedstock. It’s bizarre that we’ve come to this situation.”
