How policy can stimulate the biofuel market

While the outlook for U.S. agriculture and many commodity markets has deteriorated over the past two years, there is hope on the horizon among some market watchers that biofuels will spur a new surge in agricultural demand.

Greater use and better prospects for renewable fuels, especially renewable diesel and sustainable jet fuel, could drive the agricultural economy forward.

Recent agricultural baseline projections from the Food and Agricultural Policy Research Institute (FAPRI) document the growth of biofuels over the past 20 years to a point where the use of corn for ethanol rivals the use of feed, and the use of soybean oil for biodiesel or renewable diesel exceeds use of food.

Projections for the next decade indicate further growth in renewable diesel use, and therefore soybean oil use, and could increase for renewable diesel or ethanol if further markets for low-carbon fuel or sustainable jet fuel are fully realised.

Complex market

However, before counting the market returns, it is worth remembering that the biofuels market in general is largely determined by policy decisions, making the outlook even more complex than just the basics of supply and demand.

Although the ethanol and biodiesel biofuel market has existed for decades and has had varying levels of support and tax incentives, it was largely influenced by the renewable fuel mandates passed by Congress in 2005 and 2007.

These policy decisions established minimum usage requirements for conventional biofuels (primarily corn-based ethanol) and advanced biofuels (including biodiesel and cellulosic ethanol). The original legislative mandates ran through 2022, giving way to annual rulemaking by the Environmental Protection Agency in subsequent years.

There have been numerous policy battles over time over the mandates and related uses of biofuels, including adjustments to the mandates and exemptions for small refineries or waivers from the requirements in recent years.

There have also been battles over the use of ethanol in connection with the so-called 10% blend wall and the use or availability of higher blends, including the ongoing efforts to gain permanent approval of E15, the 15% blend rate, for the whole year through. usage.

Now that EPA is responsible for setting annual usage mandates, there is a near-constant debate about mandates and usage. Will mandates allow biofuels to capture an increasing share of the motor vehicle fuel market, or will future mandates reflect a flattened share of a mature motor vehicle fuel market?

The latter would actually indicate a decline in usage over time if trends toward higher mileage standards and the use of electric vehicles reduce overall fuel consumption in the future.

As ongoing market and policy developments continue, it is the potential growth of low-carbon fuel standards and sustainable aviation fuel that has some observers excited about future demand. Like the previous generation of demand for biofuels, these potential markets are also heavily influenced by policy.

New markets

Demand for renewable diesel is growing with low-carbon fuel mandates, especially for heavy-duty trucks in regulated markets like California, which Oregon and Washington are joining. Substantial further growth may depend on more states adopting similar requirements, or on the ability of U.S. renewable diesel production to serve Canadian consumers facing similar mandates.

The increased adoption of sustainable aviation fuel could stem from mandates or commitments by companies to reduce CO2 emissions from aviation. There are options for processing both renewable diesel and ethanol into SAF, but here too policy can show the way.

The Biden administration is using the greenhouse gases, regulated emissions, and transportation energy use model to score emissions from different sources and processes when calculating emissions reductions and qualifications for low-carbon markets and tax credits.

Agriculture groups were largely relieved to see the government choose the GREET model over an alternative model due to perceived differences in accounting for agricultural emissions from indirect land use, but there are still important elements that need to be worked out.

Carbon emissions in the biofuel sector can be assessed at every step of the production and marketing process, but the largest contribution is made at the raw material production stage, the processing stage and the calculation of indirect land use change, which implies that carbon emissions come from land being supplied. in agricultural production due to the diversion of crops to fuel production.

Where practices come in

At the feedstock production stage, reducing emissions may require the adoption of emission reduction practices such as conservation tillage, cover crops or nutrient management. In the processing phase, greater efficiency in terms of gallons of ethanol per bushel of feedstock helps reduce emissions, but there is still the unavoidable production of carbon dioxide.

For ethanol production, basic chemistry says that almost a third of total production will be in the form of carbon dioxide. To further reduce emissions at the processing stage, it is necessary to capture and use or sequester that carbon – hence the proposals for carbon pipelines to transport it to locations with suitable underground formations for storage.

Regulated production practices or the development of a carbon pipeline network may be controversial enough, but the calculation of indirect land use change may be the most complex and least understood.

Although the concept of indirect land use change follows a sound economic intuition that increasing use of agricultural raw materials for biofuels stimulates agricultural production elsewhere, and thus emissions from converting grassland or forest to agricultural land, the calculation can be extremely difficult and subject to question are. .

At one time, the indirect land use calculation adopted by California regulators implied that Brazilian ethanol exported to California was more environmentally friendly than Midwestern US ethanol shipped to California.

As a result, two (or more) ships actually passed through in the night, both loaded with ethanol – one going from Brazil to California and one going from the US to Brazil to replace the ethanol supplies being shipped to California – certainly denying whatever environmental benefits might exist. How the indirect land use factor is calculated and how it is used in the regulatory process is an important policy question.

The big picture for biofuel demand and agriculture appears to be a potential growth market with opportunities for biofuel production and supply to develop markets for low-carbon motor vehicles and sustainable aviation fuels.

However, it is also a complex market with numerous policies, from tax credits and usage mandates to carbon intensity modeling and scoring to access potential markets and credits. Manufacturers will have to monitor not only supply and demand in the market, but also supply and demand of policies from Washington, DC and beyond.

Lubben is an extension policy specialist at the University of Nebraska-Lincoln.