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MEMORANDUM

Subject: Illustrative Costs Impact of the Proposed Annual RFS2 Standards, 2014-2017

From: Michael Shelby and Michael Shell, U.S. EPA, Office of Transportation and Air 

Quality

To: EPA Air Docket EPA-HQ-OAR-2015-0111

In this memo we provide further description of our assessment of the illustrative costs of 

the proposed advanced biofuel and total renewable fuel standards for 2015 and 2016. We start 

with an overview of considerations of a baseline from which to assess the impacts, followed by 

descriptions of the specific costs assessed. We provide cost estimates for three illustrative 

scenarios – one, if the entire change in the proposed advanced standards is met with soybean oil 

biodiesel; two, if the entire change in the proposed advanced standards is met with Brazilian 

sugarcane ethanol; and three, if the entire change in the volume of the non-advanced renewable 

fuel required by the proposed standards is met with corn ethanol. While a variety of biofuels 

could help fulfill the advanced standard beyond soybean oil BBD and sugarcane ethanol from 

Brazil, these two biofuels have been most widely used in the past. We believe these scenarios 

provide a range of possible costs of meeting the proposed standards. 

For this analysis, we estimate the per gallon costs of producing biodiesel, sugarcane 

ethanol and corn ethanol relative to the petroleum fuel they replace at the wholesale level, then 

multiply these per gallon costs by the applicable volumes established in this rule for the 

advanced and total renewable fuel categories. Because we are focusing on the wholesale level in 

each of the three scenarios, these comparisons do not consider taxes, retail margins, and any 

other costs or transfers that occur at or after the point of blending (i.e., transfers are payments 

within society and not additional costs). In addition, because more ethanol gallons must be 

consumed to go the same distance as gasoline and more biomass-based diesel must be consumed

to go the same distance as petroleum diesel due to each of the biofuels’ lesser energy content, we 

consider the costs of ethanol and biomass-based diesel on an energy equivalent basis to their 

petroleum replacements (i.e., per energy equivalent gallon (EEG)).

1. Baseline Consideration

A number of different scenarios could be considered the “baseline” for the assessment of 

the costs of this rule. For the purposes of showing illustrative overall costs of this rulemaking, 

we are proposing to use the preceding year’s standard as the baseline (e.g., the baseline for the 

2016 advanced standard is the proposed applicable 2015 advanced standard, etc), an approach 

consistent with past practices. Arguments could be made for using a variety of alternative 

baselines such as the statutory renewable fuel volumes (e.g., the required volumes in the Clean 

Air Act for 2013, 2014, and 2015) or the volumes of renewable fuels that would be produced in 

the complete absence of the RFS program (e.g., “no RFS”). However, we believe the difference 
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between each year’s standards provides information that is illustrative of the magnitude of the 

potential overall costs of the standards being proposed today without adding the complexity of 

trying to project a hypothetical future baseline that would only call into question the 

meaningfulness of the cost comparison. 

Use of alternative baselines from the 2013, 2014 and 2015 standards is problematic from 

a practical standpoint. For example, using the 2013, 2014, and 2015 statutory volumes would 

require estimating a hypothetical set of cellulosic fuel costs as part of the baseline. Since the 

cellulosic fuels are not currently being produced in significant quantities, estimating their 

average costs of production would be highly speculative on EPA’s part. Furthermore, trying to 

estimate the hypothetical mix of fuels that could meet the annual EISA volumes would introduce 

a level of complexity that would not necessarily provide a more robust estimate of costs. 

There are similar complexities with trying to project what volumes of renewable fuels 

would be consumed in the U.S. in the absence of any RFS program, a hypothetical “no RFS” 

baseline. One option would be to try to estimate the amount and types of biofuels that would 

have penetrated the market without the RFS program from its inception in the relevant years of 

consideration 2013, 2014 and 2015. Estimating the quantities of renewable fuels that would 

have been used by market participants absent any RFS requirements from the inception of the 

program would be an uncertain exercise. A combination of economic and policy factors, such as 

the value of ethanol as an octane enhancer and individual state renewable fuel mandates, would 

have to be assessed to determine this baseline. Thus, we believe that estimating the quantities of 

renewable fuels that would be used in the absence of the RFS program, as well as their 

associated costs, would be highly speculative.

The choice of a baseline will have a directional implication for the costs assessed. For 

example, reducing the standards from a high renewable fuel volume baseline (e.g., the CAA 

2013, 2014, or 2015 volumes) would show cost savings (assuming a gallon of renewable fuel is 

more costly than its petroleum-based fuel equivalent). Conversely, increasing the volumes from 

a low renewable fuel volume baseline (e.g., the “no RFS” volumes) would show cost increases as 

a result of the 2014, 2015, and 2016 standards (assuming a gallon of renewable fuel is more 

costly than its petroleum-based fuel equivalent). For the purpose of providing illustrative costs, 

we have opted for a more straightforward and real world baseline assumption of the applicable 

standard for the previous year as a baseline to assess the costs. In evaluating the costs for 2014, 

we would use the actual applicable standards for 2013 as the baseline. In evaluating the costs for 

2015 and 2016, we would use the proposed applicable standards for 2014 and 2015, respectively, 

as the baseline. 

The 2014 standards were not finalized in 2014 so it is difficult to estimate what their 

costs may have been. Market participants may have anticipated a final 2014 standard would 

require higher levels of biofuels than the market would provide in the absence of the standard, 

which would contribute to the positive RIN prices witnessed in 2014. In contrast, the 2014 

standards being proposed in this rulemaking represent reductions in both the advanced and 

conventional volumes compared to the 2013 standards, suggesting cost savings for this proposed 

2014 rule. Finally, the 2014 standards being proposed in this rulemaking are based on actual 

production levels in 2014, suggesting that the 2014 standards we are proposing have no costs. 
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Given the complexity of this issue, we have not attempted to estimate the costs of the 2014 

standards. Therefore, we only evaluate costs for the 2015 and 2016 advanced standards and total 

(i.e., non-advanced) standards.

2. Cost of Displacing Petroleum-Based Diesel with Soybean-Based Biodiesel

Consistent with our previous work in this area, EPA’s estimate is a “bottom-up” 

engineering cost analysis that quantifies the costs of producing a gallon of soybean-based 

biodiesel and then compares that cost to the energy-equivalent gallon of petroleum-based diesel.1 

Similar to the analysis EPA undertook for the 2013 annual standard, we have made the 

simplifying assumption that the marginal biodiesel feedstock used to meet the higher total 

advanced biofuel standard will come from soybean oil. EPA recognizes that a variety of 

different feedstocks in addition to soybean oil could be used to make biodiesel. These include 

other oils (e.g., canola oil) as well as waste oils, fats, and greases. However, projecting the 

proportions of different feedstocks that may be used to make extra biodiesel as a result of the 

standard and the different feedstocks’ costs would be speculative. Based on historical data, 43 

percent of the biodiesel that generated RINs in 2014 was from soybean oil, the largest source of 

feedstock used to make biodiesel.2 Other feedstocks such as oils derived from wastes are 

generally less costly so they will be preferentially used regardless of the volume set. However, 

there are not enough oils derived from wastes to fully supply the advanced standards we are 

proposing. Thus, we believe it is appropriate to make the simplifying assumption that the 

marginal feedstock used to produce biodiesel to meet the total advanced biofuel standard will be 

from soybean oil. 

We base our estimates of soybean oil feedstock costs in 2015 and 2016 on the latest 

United States Department of Agriculture/World Agricultural Supply and Demand Estimate 

(USDA-WASDE) forecasts.3 Soybean oil feedstock costs represent the majority of the overall 

costs of biodiesel, usually somewhere between 70 and 90 percent of overall costs. In addition to 

soybean oil feedstock cost, we assume variable production costs to estimate the total per gallon 

cost. We use two sources to represent a range of potential variable costs. For the higher cost 

estimate, we used per gallon cost estimates from the University of Missouri, Food and 

Agricultural Policy Research Institute (FAPRI-Missouri) March 2015 U.S. Baseline Briefing 

Book. They estimate variable biomass-based biodiesel production costs of $0.47/gallon, net of 

 

1 Notice Department of Energy, Alternative Fuels Data Center. Fuel Properties Comparison. 

http://www.afdc.energy.gov/fuels/fuel_comparison_chart.pdf

2 By way of comparison, the next largest source of feedstock for biodiesel was biogenic waste oils/fats/greases (30 

percent), followed by canola oil (17 percent) and non-food grade corn oil (10 percent). EPA, EPA Moderated 

Transaction System (EMTS). Accessed, March 27, 2015

32014/2015: 32.0 cents/lb, 2015/2015: 29.5-32.5 cents/lb USDA, World Agricultural Supply and Demand Estimates 

(May 2015). We use WASDE’s 2014/2015 estimates as a base for 2015, and the 2015/2016 estimates as a base for 

2016. http://www.usda.gov/oce/commodity/wasde/latest.pdf
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the coproduct (i.e., glycerin) value for both 2015 and 2016.4 FAPRI-Missouri also include an 

average net operating return to produce biodiesel of $0.10 per gallon in 2015 and $0.39 per 

gallon in 2016.5 For our lower cost estimate, we used a forecast of 2014 average biodiesel 

variable cost projections of $0.50/gallon from the National Biodiesel Board.6 We then compare 

these ranges to estimates of the average price of wholesale petroleum-based diesel in 2015 and 

2016. We assume that the wholesale price of petroleum-based diesel represents its costs. EPA 

obtained the projected average wholesale petroleum-based diesel 2015, and 2016 cost estimates 

from Energy Information Administration (EIA’s) Short Term Energy Outlook (STEO) Report.7 

The STEO price is $1.90 in 2015 and $2.17 in 2016.

The proposed 2014 standard is being set at the actual level of advanced biofuels produced 

in 2014, 2.68 billion gallons. The total advanced biofuel volumes are being proposed for 2015 at 

2.90 billion gallons and 3.40 billion gallons in 2016. 

Consistent with the approach we used for the 2013 BBD standard, EPA estimates that 

increasing volumes of soybean oil for biodiesel will create upward pressure on the price of 

soybean oil. Based on work from Iowa State University, we assume each additional 200 million 

gallons of soybean oil used to produce extra biodiesel results in an increase in soybean oil costs 

of 3.2 cents per pound.8 Applying this cost increase to the projected range of USDA-WASDE 

soybean oil prices results in an estimate of the cost of soybean oil 34.3 cents per pound for 2015, 

and 37.2 to 40.2 cents per pound for 2016. Considering non-feedstock variable production cost 

estimates from FAPRI-Missouri and the National Biodiesel Board, and low and high WASDE 

soybean oil estimates, the resulting biodiesel costs range from $3.39 to $3.46 per gallon in 2015 

and $3.62 to $4.26 per gallon in 2016 (on a diesel gallon equivalent basis). 

Comparing the petroleum-based diesel price estimate and multiplying by the volume of 

fuel displaced on an energy equivalent basis, results in an overall annual cost of $218 to $229

million in 2015 and $483 to $697 million in 2016. Table 1 below shows estimates of per gallon 

increases on an energy equivalent basis as well as total annual costs for 2015 and 2016 of using 

greater amounts of biodiesel to meet the total advanced biofuel standard. 

These cost estimates assume that the increase in the total advanced biofuel standard is 

met with soybean-based biodiesel, which is a simplifying assumption used for illustrative 

purposes. In all likelihood a variety of different sources of feedstocks and renewable fuels (e.g., 

biodiesel from other feedstocks, sugarcane ethanol, sorghum ethanol, CNG/LNG from biogas) 

 

4 University of Missouri, Food and Agricultural Policy Research Institute. U.S. Baseline Briefing Book (March 

2015). http://www.fapri.missouri.edu/wp-content/uploads/2015/03/FAPRI-MU-Report-01-15.pdf

5 We are comparing the cost of producing a gallon of soybean oil biodiesel to a projected petroleum diesel cost (i.e., 

price) at the wholesale level which would include upstream operating returns. Therefore, we think it is appropriate 

to include operating returns into our soybean cost estimates.

6 Presentation to EPA: Analysis of Cost of Carbon Reduction January 27, 2014. Although processing costs for 

soybean biodiesel may be lower than industry average costs (which include a heterogeneous mix of feedstocks that 

may have higher processing costs), we do not have sufficient data to incorporate potentially lower soybean oil 

processing costs at this time.

7 Energy Information Administration (EIA), Short Term Energy Outlook (STEO). May 2015

http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf

8 Babcock, Bruce, et. al. Biofuel Taxes, Subsidies, and Mandates: Impacts on US and Brazilian Markets (May 

2013) http://www.card.iastate.edu/publications/dbs/pdffiles/13sr108.pdf
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are expected to be produced to meet the 2015 and 2016 total advanced biofuel standard. It 

should be noted that soybean oil costs and petroleum-based diesel costs could vary depending 

upon evolving supply and demand factors in their respective markets that are not reflected in 

current USDA/EIA price estimates.

Table 1

Illustrative Per Energy Equivalent Gallon Cost Difference and Total Cost Estimates of Meeting 

the Advanced Standard in 2015 and 2016 Using Biomass-Based Diesel to Displace Diesel

2015 2016

Low High Low High

Per Gallon 

Differences in 

Cost ($/gallon)

1.48 1.56 1.45 2.09

Total Annual 

Costs (millions 

of dollars)

218 229 483 697

3. Cost of Displacing Petroleum-Based Gasoline with Sugarcane Ethanol

While BBD can be used to meet the total advanced biofuel standard, other advanced 

renewable fuels can also be used to comply. One possible option is the use of sugarcane ethanol, 

the majority of which is imported to the U.S., principally from Brazil. In this section, we provide 

illustrative estimates of what the potential costs might be for a scenario in which we assume that 

all additional volumes used to meet the 2015 and 2016 total advanced biofuel standards above 

the previous year’s total advanced biofuel standard are met with imported Brazilian sugarcane 

ethanol. We compare the cost of sugarcane ethanol and gasoline at the wholesale stage, since 

that is when the two are blended together and represents the approximate costs to society absent 

transfer payments. On this basis, EPA estimates the costs of producing and transporting a gallon 

of sugarcane ethanol to the blender in the U.S. 

We use the sugarcane ethanol free on board (FOB) price at Santos, the port of San Paulo, 

Brazil, from which sugarcane ethanol is typically shipped to the U.S. Using daily price data 

from the Oil Price Information Service (OPIS) from January 1, 2014 to present, we estimate a 

range of prices for Brazilian ethanol exported to the U.S. Since OPIS does not project future 

sugarcane ethanol prices from Brazil, and a bottom-up approach to estimate sugarcane ethanol 

prices from sugar futures prices is uncertain, we make the simplifying assumption that the 

observed high and low estimates from January 1, 2014 to the present are reasonable high and low 

price estimates for 2015 and 2016 as well. We assume that the reported price of sugarcane 

ethanol represents both the production and transportation costs of delivering sugarcane ethanol to 

the port at Santos. Using data collected by the International Trade Commission (ITC), we assume 

that it costs an additional $0.14/gallon to transport the sugarcane ethanol from Santos to the U.S. 
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where the ethanol can be blended with gasoline.9 Based on the range of OPIS prices, the 

delivered price of sugarcane ethanol to the U.S. ranges from $1.85 to $3.02 per gallon. For 

comparison purposes, we used the average wholesale price of gasoline for 2015 and 2016 from 

the STEO, which is $1.73 per gallon and $1.92 per gallon, respectively.10 

Taking the difference between the sugarcane ethanol and the wholesale gasoline price 

estimates, and multiplying that by the volume of petroleum displaced on an energy equivalent 

basis, results in an overall estimated annual cost of $228 to $615 million for 2015 and $424 to 

$1,303 million for 2016. Table II.G.3-12 below shows estimates of per gallon increases on an 

energy equivalent basis as well as total annual costs for 2015 and 2016 of using greater amounts 

of sugarcane ethanol to meet the total advanced biofuel standard. These cost estimates assume 

that the increase in the advanced biofuel standard is met with sugarcane ethanol, which is a 

simplifying assumption used for illustrative purposes. In all likelihood a variety of different 

sources of feedstocks and renewable fuels (e.g., biodiesel, sorghum ethanol, CNG/LNG from 

biogas) are expected to be produced to meet the increase in the 2014, 2015, and 2016 advanced 

biofuel standards. It should be noted that sugarcane ethanol costs and wholesale gasoline costs 

could vary depending upon evolving supply and demand factors in their respective markets that 

are not reflected in current OPIS/EIA price estimates.

Table II.G.3-12

Illustrative Per Energy Equivalent Gallon Cost Difference and Total Cost Estimates of Meeting 

the Advanced Standard in 2015 and 2016 Using Sugarcane Ethanol to Displace Gasoline

2015 2016

Low High Low High

Per Gallon 

Difference in 

Cost ($/gallon)

1.04 2.80 0.85 2.61

Total Annual 

Costs (millions 

of dollars)

228 615 424 1,303

4. Cost of Displacing Petroleum-Based Gasoline with Corn Ethanol 

 

9Calculated as the volume weighted difference between the reported Cost of Insurance and Freight (CIF) value and 

the Custom Value for 2014 U.S. imports of Brazilian fuel ethanol. Provided by Douglas Newman from ITC on 

March 2, 2015. Spreadsheet with this calculation is available in the docket.EPA-HQ-OAR-2015-0111

Data from:U.S. International Trade Commission, Interactive Tariff and Trade DataWeb. http://dataweb.usitc.gov/. 

10 Energy Information Administration (EIA), Short Term Energy Outlook (STEO). May 2015

http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf
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In this section, we assess the difference in cost associated with a change in the implied 

volumes available for conventional (i.e., non-advanced) biofuels for 2015 and 2016. We provide 

illustrative estimates of what the potential costs might be in a scenario where corn ethanol is used 

to meet the entire conventional renewable fuel volumes.

The implied 2014 volume allowance for conventional renewable fuel is 13.25 billion 

gallons, 13.40 billion gallons in 2015, and 14.00 billion gallons in 2016. If corn ethanol is used 

to meet the difference between the implied 2014 to 2015 and 2015 to 2016 conventional 

renewable fuel volumes, an increase in 150 million gallons of corn ethanol would be required in 

2015 and 600 million gallons in 2016. In Table 3, we show estimates of differences in costs on a 

per gallon energy equivalent basis between corn ethanol and wholesale gasoline as well as total 

annual costs of the conventional biofuel standard for 2015 and 2016. 

To calculate the cost of corn ethanol, we use a bottom-up engineering cost framework 

starting with USDA-WASDE estimated corn prices for 2015 and 2016.11 We then estimate the 

2015 and 2016 marginal production costs of corn ethanol using data from the University of 

Missouri, FAPRI March 2015 U.S. Baseline Briefing Book.12 There are many factors that 

influence the price of corn ethanol besides the RFS program. The price of corn is one of the 

primary drivers of the corn ethanol price, and corn is a commodity demanded for other end uses 

in addition to ethanol including food and livestock feed. Changes in demand for these other end 

uses will impact corn prices which will in turn affect corn ethanol prices. Also, corn ethanol is 

demanded internationally so changes in international demand will have impacts on domestic 

prices independent of the RFS program. 

Using historical relationships developed by Iowa State, we assume each increase of one 

billion gallons of corn ethanol results in an increase in corn costs of $0.21/bushel.13 Using this 

relationship, we estimate that corn prices will increase by roughly $0.03 bushel in 2015 and 

$0.13 per bushel in 2016 (approximately $0.01 and $0.05 per gallon of corn ethanol for 2015 and 

2016, respectively). Based upon this methodology, EPA estimates that a gallon of corn ethanol 

will cost between $1.70 and $1.77 per gallon ($2.55 and $2.65 per gallon on a gasoline gallon 

equivalent basis (GGE)) in 2015 and $1.67 and $1.88 per gallon ($2.50 and $2.82 per GGE) in 

2016. To estimate the premium per gallon against wholesale gasoline, we estimated the price of 

a gallon of wholesale gasoline using the latest EIA STEO estimates. As mentioned previously, 

STEO estimates an average wholesale gasoline price of $1.73 per gallon for 2015 and $1.92 per 

gallon for 2016. We assume that the wholesale price of gasoline represents the costs of 

producing gasoline. It is worth noting that corn ethanol costs and wholesale gasoline costs could 

 

11 2014/2015: 3.55-3.75 $/bu, 2015/2015: 3.20-3.80 $/bu USDA, World Agricultural Supply and Demand Estimates 

(May 2015). We use WASDE’s 2014/2015 estimates as a base for 2015, and the 2015/2016 estimates as a base for 

2016. http://www.usda.gov/oce/commodity/wasde/latest.pdf

12 University of Missouri, Food and Agricultural Policy Research Institute. U.S. Baseline Briefing Book. (March 

2015) http://www.fapri.missouri.edu/wp-content/uploads/2015/03/FAPRI-MU-Report-01-15.pdf

13 Babcock, Bruce, et. al., Impact on Corn Prices from Reduce Biofuel Mandates, November, 2013 

http://www.card.iastate.edu/publications/dbs/pdffiles/13wp543.pdf
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vary depending on evolving supply and demand factors not reflected in current USDA/EIA price 

estimates.14

Table 3

Illustrative Per Energy Equivalent Gallon Cost Difference and Total Cost Estimates of 

Meeting the Change in the Total Standard for 2015 and 2016 Using Corn Ethanol to Displace 

Gasoline

2015 2016

Low High Low High

Per Gallon 

Difference in 

Cost ($/gallon)

0.81 0.92 0.58 0.90

Total Annual 

Costs (millions 

of dollars)

122 138 348 541

The short time frame provided for the annual renewable fuel rule process does not allow 

sufficient time for EPA to conduct a comprehensive analysis of the benefits of the 2015 and 2016 

standards and the statute does not require it. Moreover, as discussed in the proposed rule 

establishing the 1.28 billion gallon requirement for BBD in 2013, the costs and benefits of the 

RFS program as a whole are best assessed when the program is fully mature in 2022.15 We 

continue to believe that this is the case, as the annual standard-setting process encourages 

consideration of the program on a piecemeal (i.e., year to year) basis, which may not reflect the 

long-term economic and environmental effects of the program. Therefore, for the purpose of this 

annual rulemaking, we have not quantified benefits for the 2015 and 2016 proposed standards. 

We do not have a quantified estimate of the GHG impacts for the single year (e.g., 2015, 2016). 

When the RFS is fully phased in, the program will result in considerable volumes of advanced 

and cellulosic biofuels that will reduce GHG emissions in comparison to the fossil fuels which 

they will replace. EPA estimated greenhouse gas, energy security and air quality impacts and 

benefits for the 2010 Proposed RFS Rule for 2022. 

 

14 For example, in the winter of 2013/2014 a combination of rail car shortages and harsh winter weather in the 

Midwest contributed to an increase in the crush spread. Alternatively, due to dampened global demand prospects 

and sustained levels of crude oil supply, current gasoline and diesel prices are lower than they were projected to be.

15 77 FR 59477, September 27, 2012.