1 August 1 3 , 2013

The Hon. Gina McCarthy Administrator United States Environmental Protection Agency 1200 Pennsylvania Avenue, NW Washington, D.C. 20460

Re: Petition for Partial RFS Mandate Waiver

Dear Administrator McCarthy :

The American Petroleum Institute (“API”) and the American Fuel & Petrochemical Manufacturers (“AFPM”) ( collectively the “Petitioners”) respectfully submit this petition to the U.S. Environmental Protection Agency (“EPA” or “the Agency”) for a partial waiver of the 2014 applicable volumes of the Renewable Fuel Standard (“RFS”) pursuant to section 211(o)(7)(A) of the Clean Air Act. 1 Petitioners represent numerous refiners and importers of transportation fuel and, in that capacity, are “ person[s] subject to the requirements” of section 211(o)(2) and entitled to petition for a waiver

. Petitioners are trade associations that appear on behalf of their members before Congress, administrative agencies, and the courts on a wide range of issues, including the U.S. supply of transportation fuels

. 2 Unless this petition for waiver is granted, the RFS will result in inadequate domestic supplies of gasoline and diesel fuel and severe economic harm to consumers and the economy. EPA must take action to avoid the disastrous consequences of the RFS blendwall.

Introduction

a. The Blendwall Will Limit Domestic Supplies of Gasoline and Diesel Fuel Causing Severe Economic Harm.
Fundamentally, this Petition seeks to avoid the critical threats that the RFS presents to consumers and the entire U.S. economy

. This year, the United States hit the “blendwall”

— the point at which the RFS attempts to force the use of more renewable fuels than can be consumed in the United States, due to

1 See 42 U.S.C. § 7545(o)(7)(A).
2 The RFS directly implicates the interests of the Petitioners and their members, threatening

— as discussed herein

— “certainly impending” injuries that are “fairly traceable” to agency action. Clapper v. Amnesty Int’l USA , 133 S. Ct. 1138, 1143 (2013).2

fundamental constraints imposed by fueling infrastructure and problems of gasoline engine incompatibility. Unles s EPA exercises its authority to waive the mandates, the ultimate and unavoidable outcome of the RFS

- imposed “blendwall” will be significant increases in the cost of fuel and substantial fuel supply shortages in the United States

— resulting in undeniably severe economic harm to consumers and the economy.

Because of the blendwall, the RFS limits the supply of gasoline and diesel fuel for U.S. consumption

. Compliance with the RFS is demonstrated through R enewable Identification Numbers ( “ RINs ”)

. In effect, RINs operate like permits to sell specific quanti t ies of gasoline and diesel for U

. S

. consu mption. The number of RINs available for compliance depends on the consumption of renewable fuels in U.S. transportation fuels. Therefore, as the RFS mandates exceed the ability of the underlying fuel supply and vehicle and infrastructure compatibility to accommodate additional amounts of renewable fuels, there will be a shortage of RINs for compliance. This will in turn limit supplies of gasolin e and diesel for U

. S

. consumption, resulting in severe economic harm to consumers and the overall economy.

b. E15, E85 , and Biodiese l C an not S upply E nough of the N eeded RINs.
As explained in more detail below, there are no options beyond EPA’s waiving of the requirements that

c an avert the potentially disast rous implications of the blendwall. There is no opti on that can realistically supply the necessary RINs to enable the continued adequate supply of gasoline and diesel fuel for U

. S

. consumption. Both E85 and E15 are only compatible with approximately 5 percent of the existing vehicle fleet , and the vast maj ority of retail infrastructure is not compatible with ethanol above 10 percent volume . In addition, over 95 percent of all retail gasoline stations are independently owned and operated

— i.e. , they are not owned and operated by the RFS obligated parties. Moreover, biodiesel cannot fill the gap because of limitations on biodiesel supply resulting from feedstock constraints

. Quite simply, there is no option other than an EPA waiver to avoid the adverse impacts that the RFS will have on domestic supplies of gasoline and diesel fuel.

c. The Shortage of RINs W ill Cause an Inadequate Domestic Supply of Gasoline and Diesel Fuel

.
Because the number of RINs available for compliance depends on the consumption of renewable fuels in U.S. transportation fuels, constra ined consumption will result in a shortage of RINs. Indeed, th e volumes of renewable fuels currently required by the RFS in 2013 are unachievable

— the “blendwall”

— and can be satisfied only through the use of previously banked RINs. Th e problem becomes mor e acute in 2014. Although the RFS requires industry to blend 14.4 billion gallons of corn

- based ethanol, and hundreds of millions of gallons of imported sugarcane

- based ethanol in 2014, the effective, practical limit imposed by the existing domestic distr ibution infrastructure and vehicle fleet will cap the amount of ethanol that can actually be blended into our gasoline supply at roughly 13 billion gallons. 3

“ Therefore, after exhausting all other available options for compliance, individual obligated parties, each acting independently, ” will have no practical option but “ to reduc e their RIN obligation by decreasing the volume of transportation fuel su pplied to the domestic market

— either by reducing production , ” reducing imports, or increasing exports

. 4 Obligated parties can legally supply only as much gasoline and diesel as they have permits ( i.e. , RINs) to supply.

3 U.S

. E NERGY I NFORMATION A DMINISTRATION , S HORT T ERM E NERGY O UTLOOK Table 4a (July 2013). 4 NERA E CONOMIC C ONSULTING , E CONOMIC I MPACTS R ESULTING F ROM I MPLEMENTATION OF THE RFS2 P ROGRAM 2 (2012) (hereinafter NERA S TUDY ) (Attachment 1).3

d. An Inadequate Domestic Supply of Gasoline and Diesel Fuel W ill Severely Harm Consumers and the Economy

. As domestic fuel supplies decrease, large increases in transportation fuel costs would impose significant costs on society. 5 As the RFS mandate is ratcheted up every year, the annual increase in the mandates will further exacerbate the decreased fuel availability and increased fue l costs to society. 6 These increased fuel costs will have a broad impact across the economy and will increase over time as this process repeats itself yearly. 7 “ As domestic supply continues to decline, the blending percentage obligation becomes increasingly untenable

. ” 8

The severe economic impact is seen most acutely first in the diesel fuel market. “ The tightening of the diesel supply (up to 15% decline in 2015) ” likely will cause “ large fuel cost increases to ripple through the economy, adve rsely affecting employment, income, consumption, and GDP. ” 9 This disruption in fuel supply will result in severe economic harm to consumers and to the overall economy of the United States. 10 “ By 2015, the adverse macroeconomic impacts ” are estimated to “ i nclude a $770 billion decline in GDP and a corresponding reduction in consumption per household of $2,700. ” 11 EPA can avert this outcome by exercising its authority to grant the partial waiver requested in this Petition.

e. EPA’s I ssuance of a W aiver W ill P rovide R elief B ecause I t W ill R emove the L imitation on G asoline and D iesel S upplies R esulting F rom the RIN S hortage.

EPA has previously considered two other requests for waivers of the RFS standards. In both cases, the Agency denied the waivers primarily because issuance of the waiver would not likely have impacted the amount of ethanol blended during the waiver period and therefore would not have had any real world impact. Now that the blendwall has been reached, that underlying reason no longer applies

. Here, a waiver would have a very clear and necessary practical impact

— it would lift the limitations on gasoline and diesel supplies that arise due to the blendwall.

f

. Specific Relief Requested

To avoid the inevitable severe economic harm described herein, Petitioners respectfully request that EPA partially waive the RFS 2014 applicable volumes. Due to the nested nature of the four renewable fuel categories, this waiver request comprises the following elements:

 Biomass

- Based Diesel : Biodiesel production is expected to meet the 1 billion gallon statutory minimum volumetric requirement , and EPA need not waive this obligation at this time provided other renewable requirements are waived in accordance with this Petition. 12

5 Id. 6 Id.
7 Id. 8 Id. at 3. 9 Id. 10 Id.
11 Id. 12 For purposes of this waiver request, Petitioners assume that EPA’s mandate for 1.28 billion gallons of biomass

based diesel will be fulfilled. This amount of biomass

- based diesel would create 1.92 billion RINs. Petitioners file d for reconsideration of the 2013 biomass

- based diesel mandate, in addition to filing for review with the U.S. Court4

 Cellulosic Biofuels : Because actual production of cellulosic biofuels remains minimal (less than 75,000 gallons have been produced in 2013 as of this petition), the 2014 cellulosic biofuel mandate of 1.75 billion gallons is impossible to meet and therefore EPA should use its a uthority to reduce the cellulosic mandates to reflect actual production

.

 Advanced Biofuels : EPA is on record before Congress as identifying a 2013 advanced biofuels domestic supply shortfall of 666 million gallons. This shortfall will increase in 2014 a s the advanced biofuel statutory mandate increases. Because t he domestic supplies of advanced biofuels ( e.g. , biomass

- based diesel ) and cellulosic biofuels are inadequate , a waiver of at least 1.83 billion gallons from 3.75 billion gallons to 1.92 billion gallons is necessary in 2014. This number represents the actual supply of biomass

- based diesel and cellulosic biofuels expected to be produced in 2014

. As EPA reduces the cellulosic mandate, EPA must reduce the advanced category by the commensurate amount.

 Total Renewables : Waiving the cellulosic and advanced nested biofuel mandate s , along with a corresponding downward adjustment to the total renewable fuel mandate , would be insufficient to overcome the severe economic harm caused by the E10 blendwall and thus EPA must reduce further the 2014 total renewable requirement. Based on the EIA 2014 gasoline consumption estimate of 132.8 billion gallons, the maximum amount of ethanol that can be blended into the gasoline supply at levels tha t are safe, effective, and practical given the existing vehicle fleet and distribution systems , is 13.28 billion gallons ( i.e. , 10 percent ethanol levels, or E10). To avoid severe economic harm resulting from a breach of the E10 blendwall, the total

renew able fuel volume must be reduced by 3.35 billion gallons

– from 18.15 billion gallons to 14.8 billion gallons. This number represents the total amount of ethanol, drop

- in cellulosic gasoline, cellulosic diesel, and biomass

- based diesel that can be safely blended into U.S. transportation fuels in 2014. Given the variability of approximately 3 percent in EIA’s projections, t otal ethanol usage ( i.e. , the sum of corn, advanced, and cellulosic) should not exceed 9.7% of EIA’s projected gasoline demand. 13

Congress e xplicitly authorized EPA to waive the RFS mandates , under Section 211(o)(7) of the Clean Air Act, in whole or in part, where there would be either (1) an inadequate domestic supply or (2) severe adverse consequences to the U.S. economy. As this P etition demonstrates below, the inadequate supply and severe economic consequences projected to occur in 2014 independently establish both grounds for a waiver. In 2014, there will be an inadequate supply of R INs

— as already definitively recognized by EP A

— to satisfy the various mandates of the RFS, forcing the overall reduction of supplies of gasoline and diesel for U

. S

. consumption. This will result in an inadequate domestic supply of

of Appeals for the D.C. Circuit. Petitioners maintain their arguments that the Agency failed (a) to apply properly the statutory criteria set forth at section 211(o) (2) (B)(ii) when promulgating the 2013 biomass

- based diesel mandate and (b) to take into account the fraudulent RINs that affected the biomass

- based diesel industry

. 13 The E10 blendwall reflects the technological limitations of existing gasoline engines and fuel dispensing equipment. To avoid the harmful economic effects described herein, however, the maximum amount of ethanol mandated should be no more than 9.7 percent ( i.e. , 12.88 billion gallons) . This level reflects the normal variability in gasoline consumption forecasted by EIA, as well as the need to accommodate some continuing sales of E0, account for geographic areas where it is not practical to blend ethanol, and provide a small cushion to ensure RIN liquidity.5

gasoline and diesel fuel. The impact of this fuel shortage will crea te severe harm across the economy, establishing the second ground for granting a waiver.

As set forth more fully below, the RFS will result in inadequate domestic supplies and severe economic harm. Moreover, and also more fully set forth below, no option other than EPA’s granting of a partial waiver can avoid the potentially disastrous implications of the blendwall. G ranting a waiver will alleviate the adverse impacts of the RFS on gasoline and diesel supplies and the severe adverse eco nomic impacts of t he blendwall.

I. Enforcement of Existing R enewable V olume O bligation s Will Result in Inadequate Domestic Supplies of Gasoline and Diesel in 2014

. Section 211(o)(7)(A)(ii) authorizes the Administrator to issue a waiver of the RFS upon a determination “that there is an inadequate domestic supply.” 14 T he blend wall will result in an inadequate domestic supply of gasoline and diesel fuel

. T he domestic supply of fuels will be dramatically curtailed under the current RFS because of various factors out side the control of the obligated parties. Put simply, domestic demand for fuels has dropped in a way that no one anticipated when Congress passed the E nergy Independence and Security Act (“E ISA ”) in 2007

. This drop in demand is reflected globally and has been predicted to peak at a level of less than 92 million barrels per day in the next few years

. 15 Furthermore, the consumption of higher blends of ethanol ( i.e. , E15 and E85 ) depends on a m ultitude of factors beyond the control of obligated parties : (1) only 5 percent of vehicles on the road are compatible with such fuels ; (2) the majority of retail infrastructure is not compatible with ethanol blends above 10 percent volume ; and (3) obliga ted parties do not own the vast majority of retail stations and, therefore, cannot make the necessary infrastructure upgrades

. As the GAO noted in 2011, federal safety standards do not allow ethanol blends over E10 to be dispensed with existing equipment at most retail fueling loc ations. 16 Because of that drop in demand, and vehicle and infrastructure compatibility issues, there will be insufficient RINs to maintain adequate domestic supplie s of gasoline and diesel fuel.
“Inadequate domestic supply” can t ake the form of (1) an insufficient supply of RINs, (2) an insufficient supply of transportation fuel such as gasoline and diesel, or (3) an insufficient supply of certain renewable fuels required by the RFS. All three supply impacts are “certainly impend ing”

— indeed, they

are actually present

.

A. The Inability To Consume the Statutory Amounts of Renewable Fuels Leads to an Inadequate Domestic Supply of RINs, and Therefore an Inadequate Domestic Supply of Gasoline and Diesel Fuel.

EPA has already determined that insufficient RINs can be the basis for a finding of an inadequate domestic supply. Former Administrator Jackson plainly stated that “[f]or most biofuels EPA believes that a demonstration by a petitioner that there were insu fficient RINs available from the previous year ( subject to the 20% carryover limitation) and the current year’s production to allow for compliance with

14 42 U.S.C. § 7545(o)(7)(A)(ii).
15 See Yesterday’s Fuel , T HE E CONOMIST , Aug

. 3, 2013, at 12. (citing studies by Citi)

. 16 U.S. G OV ’ T A CCOUNTABILITY O FFICE , GAO

- 11

- 513, B IOFUELS

- C HALLENGES TO THE T RANSPORTATION , S ALE , AND U SE OF I NT ERMEDIATE E THANOL B LENDS 23 (2011)

.6

the standard could be a basis for finding that there was an ‘inadequate domestic supply.’” 17 This situat ion is precisely what we face today.

Obligated p arties must report (retire) RINs to demonstrate compliance with their respective Renewable Volume Obligations (“ RVOs ”) in any given year. As long as RVOs are realistic, obligated parties can meet them by using the requisite quantity of renewable fuel

— detaching and reporting RINs as the fuel is used. Surplus RINs generated by the fuel can be banked for later use by the o bligated party, or put on the RINs trading market where they can be purchased by other obligated parties who require additional RINs to meet their own RVOs.
The number of RINs available for compliance with the RFS depends on the consumption (not productio n) of renewable fuels in the U

. S

. transportation system. 18 As the mandates in the law exceed the ability of the transportation system to consume the mandated levels of renewable fuel, the number of RINs available for compliance falls short of the mandated levels. Basic law of supply and demand, not surprisingly , anticipates this scarcity of RINs will be reflected in the market price of RINs. Indeed, the recent volatility in RIN prices suggests that the blendwall has arrived.

The system becomes more complex when the renewable fuel requirements exceed what is realistic ( e.g. , requiring 1.75B gallons of cellulosic biofuel in 2014 when virtually none physically exists) or what can be accommodated by banked RINs and the RINs tradin g market. For example, although EPA’s final RFS for 2013 require s ethanol use that will exceed the E10 blendwall, EPA has stated that it believes a sufficient number of banked or traded RINs from 2012 are available for obligated parties to ensure complian ce with the RFS for 2013. In other words, rather than exceed the E10 blendwall in 2013, manufacturers can continue to produce gasoline with a 10 percent ethanol blend and fulfill their higher RVO mandates by drawing down on banked or market

- traded RINs.

But this complexity devolves into near impossibility as RVOs continue to increase in 2014 and beyond. With overall demand for gasoline falling, the number of RINs being generated and made available in the RINs trading market is in sufficient to fulfill the mandates under the RFS

. The 2013 Annual Energy Outlook (“ AEO 2013 ”) projects a continuing decline in motor gasoline consumption, due to a combination of a sluggish economy in the short term, more stringent CAFE standards, increased use of diesel, and an increasing number of natural gas

- powered vehicles. 19 Motor vehicle gasoline consumption is projected to decline by approximately 1.6 million barrels per day from 2011 to 2040 in AEO 2013’s Reference Case. 20 EIA projects gasoline consumption in 2014 to reach only 132.8 billion gallons. 21 Assuming that E10 represents the primary means of RFS compliance for 2014, the maximum amount of ethanol that refiners could practically blend is 13.28 billion gallons. The RFS conventional biofuel ( i.e. , corn

- based ethanol) implied statutory requirement is 14.4 billion gallons,

17 Letter from Lisa P. Jackson, U.S. EPA, to Robert Greco III, API Group Director of Downstream and Industry Operations, and Letter from Lisa P. Jackson, U.S. EPA, to Charles Drevna, AFPM President, denying petitions for reconsideration of portions of the December 9, 2010 RFS Rule and requests to waive the 2011 RFS cellulosic biofuel standard, at 17 ( May 22, 2012 ). 18 See 40 CFR § 80.1401. Under the RFS, U.S. transportation fuels generally exclude jet fuel, heating oil , a nd fuel consumed in the State of Alaska. 19 U.S. E NERGY I NFORMATION A DMINISTRATION , DOE/EIA

- 0383 (2013), A NNUAL E NERGY O UTLOOK 2013 2

. 20 Id. at 80. 21 U.S. E NERGY I NFORMATION A DMINISTRATION , S HORT

- T ERM E NERGY O UTLOOK Table 4a (July 2013).7

which in and of itself i s beyond the 10 percent ethanol saturation point. 22 Add a small amount of cellulosic ethanol and hundreds of millions of gal lons of sugarcane ethanol needed to meet the advanced biofuel requirement , and obligated parties are faced with too much ethanol to fit into the gasoline suppl y.
Tellingly, t he AEO 2013 reveals fundamental inaccuracies in earlier projections of energy dem and on which the RFS was initially based and subsequently amended. Estimates available at the time EISA was enacted in 2007 projected gasoline demands for 2013 and 2022 that are 12 percent and 28 percent higher than what is projected today. 23 AEO 2013’s u pdated data highlight the incorrect assumptions underl ying the renewable volumes mandated for 2013, 2014 , and 2015. AEO 2013 now projects that this downward trend will continue for years, with projected gasoline demand falling by approximately 625,000 barrels per day from 2011 to 20 22 :
Drastic Unanticipated Drop in Gasoline Demand

Because of this demand drop illustrated above, refiners cannot physically meet the 2014 RFS total renewable fuel volume of 18.15 billion gallons. 24 While some have argue d that refiners can simply blend either E15 or E85 in order to avoid the blendwall (at least for a year or two), neither offers a viable

22 The implied corn

- based ethanol mandate is calculated by subtracting the advanced biofuel mandate from the total RFS mandate. In 2014, the implied corn

- based ethanol mandate is 14.4 billion gallons (18.15

– 3.75). 23 See U.S. E NERGY I NFORMATION A DMINISTRAT ION , A NNUAL E NERGY O UTLOOK 2013 84 Figure 102

. 24 Even if one assumes that there will be 2 billion biomass

- based diesel RINs, the 2014 total RFS volume of 18.15 billion gallons would require more than 16 billion gallons of ethanol, which cannot be practically folded into the nation’s existing gasoline po ol. 110 120 130 140 150 160 170 180

2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Gasoline Demand (Billions of Gallons per year)

AEO 07

AEO 2012

AEO 2013

Source: EIA/AEO Reference Case Tables, Table 11

- Liquid Fuels Supply and Distribution (converted to billion gallons per year), Editions 2007, 2012 & 2013. - 12% in 2013 - 28% in 20228

solution as discussed further below. T he availability of surplus RINs in 2014 will be extremely limited. In fact, EPA already has expressed concerns that the RIN supply in 2014 will not be sufficient to avoid the blendwall, and NERA also projects that surplus RINs may be d epleted in 2014. As the number of available RINs for compliance is depleted, one would expect their price to rise with their growing scarcity

. This will in turn likely result in increased exports, reduced imports, and reduced production for domestic consumption, as supplying transportation fuels for U

. S

. consumption becomes less economic and increasingly infeasible

. 25 Then, as the RIN supply becomes even tighter as the mandates continue to escalate in disproportion to vehicle use and infrastructure, refiners and importers will be left with no practical option but to reduce their RFS oblig ation by reducing supplies of gasoline and diesel for U

. S

. consumption. 26

This year, conventional biofuel RIN prices have increased by as much as 2, 7 00 percent

. 27

The chart referenced above from the Oil Price Information Service (“OPIS”) illustrate s this dramatic rise in conventional biofuel D6 RIN prices. 28 Recent drastic increases in the price of RINs serve as objective market

- derived evidence that there is an inadequate domestic RIN supply relative to demand ( i.e. , when expected supply is lower t han ex pected demand, RIN prices increase )

. 29

In light of the projected demand decline, there will simply not be enough RINS and not be enough fuel sold to meet the RFS mandates in the Clean Air Act. 30 The conditions described above more than meet

25 NERA S TUDY , supra note 4, at 36

- 37. 26 Id. 27 See Robert Wagner, Ethanol RIN Prices Up 2740% Year To Date , S EEKING A LPHA (July 19, 2013) , http://seekingalpha.com/article/1558892

- ethanol

- rin

- prices

- up

- 2740

- year

- to

- date?sourc e=bloomberg

. 28 Oil Price Information Service, “Biofuels Update” (Aug. 1 2 , 2013). 29 USDA E CONOMIC R ESEARCH S ERVICE , FDS

- 13d

- SA, H IGH RIN P RICES S IGNAL C ONSTRAINTS TO U.S. E THANOL E XPANSION 1 (Apr. 12, 2013) (stating that “a s for any product, prices for RINs reflect underlying suppl y and demand factors.”).
30 See University of Illinois, Exploding Ethanol RINs Prices: What’s the Story? http://farmdocdaily.illinois.edu/2013/03/exploding

- ethanol

- rins

- prices.html (Mar. 8, 2013) (stating that “T he9

the statutory test for an “inadequate domestic supply.” Indeed, RINs need only be “insufficient” in number and availability to authorize the exertion of the EPA’s waiver authority under section 211(o)(7) of the Clean Air Act. Moreover, EPA’s authority for th e current RIN system is based on section 211(o)(5), which provides for the generation of an appropriate number of credits for (1) persons that refine, blend , or import gasoline , (2) biomass

- based diesel , and (3) small refiners. 31 This section authorizes EP A to issue regulations providing for the generation, use , and transfer of credits for the purpose of complying with RFS volume requirements. RINs are , therefore , inextricably linked to the production, use , and supply of renewable fuel , in addition to the need to have a fungible supply of RINs allowing for compliance in all geographical areas of the United States. 32 Where this supply is challenged or threatened

— as here

— the exercise of EPA’s waiver authority is necessary to avoid severe economic harm resulti ng from obligated parties’ continued compliance with the RFS.

B. The Scarcity of RINs Leads to an Inadequate Domestic Supply of Diesel and Gasoline.

As discussed above, o bligated parties can only supply as much gasoline and diesel fuel as they have RINs to meet the obligations that supplying such fuel incurs. Each gallon of gasoline and each gallon of diesel fuel supplied for U

. S

. consumption incurs an obligation under each of the four RFS mandate categories

— biomass based diesel, cellulosic, advanced , and general renewable. The number of RINs available for compliance depends on the consumption of the renewable fuels in the U

. S

. transportation system. As the mandated levels of renewable fuel exceed the ability of the vehicles and infrastructure to c onsume the renewable fuel, a shortage of RINs relative to the mandated levels occurs , which in turn limits the amount of gasoline and diesel fuel that can be legally supplied for U

. S

. consumption.
The blendwall problem likely will be seen most acutely in the d iesel market. 33 This is because ethanol comprises the vast majority of current U

. S

. biofuels and ethanol cannot be blended into diesel. An obligated party’s total RVO is derived from its production of both gasoline and diesel fuel. F or each gallon of die sel fuel produced or imported , however , a RIN deficit is incurred . For example, to meet the 2012 RFS, each gallon of gasoline and each gallon of diesel fuel produced or imported incurred a 9.23 percent RIN obligation. 34 Diesel fuel can only be blended with biomass

- based diesel to meet the RFS, but the RFS biomass

- based diesel requirement was only 0.91 percent or roughly 10 percent of the 9.23 percent overall requirement, leaving a deficit of 8.32 percent

. 35

This diesel deficit requires diesel manufacturers to purchase excess ethanol RIN s . When the renewable mandate was less than the blendwall, excess ethanol RINs were available from gasoline blending of ethanol, but as the mandate approaches and exceeds the blendwall, t he RINs surplus shrinks. With surplus RINs disappearing and RINs prices increasing rapidly , that compliance option is becoming costly and increasingly infeasible , which results in a significant incentive to reduce diesel fuel supplied to the

prospect of not being able to meet ethanol blending mandates with physical blending and prospects for a rapid decline in the stock or RIN credits in the very near future has substantially increased the value of D6 RINs. ”). 31 42 U.S.C. § 7545(o)( 5). 32 See 42 U.S.C. § 7545(o)(2)(A)(ii). 33 NER A S TUDY , supra note 4, at 3. 34 77 Fed. Reg. 1320, 1341 Table III.B.3

- 3 (Jan. 9, 2012)

. 35 A similar situation is required for 2013. The 2013 total renewable obligation is 9.74 percent , whereas the biomass

- based diesel requirement is only 1.13 percent , leav ing diesel refiners and importers with a deficit of 8.61 percent

. See EPA, 2060

- AR43, R EGULATION OF F UELS AND F UEL A DDITIVES : 2013 R ENEWABLE F UEL S TANDARDS , pre

publication copy at 88 (Aug

. 6, 2013)(hereinafter 2013 RFS Final Rule) ( to be codified at 40 CFR § 80.1405(a)(4)).10

U.S. market be low the level that the market currently demands. 36 This diesel deficit is another example of inadequate domestic supply that would support EPA’s granting of this Petition request. In this case, there is an inadequate supply of biomass

- based diesel needed to generate a sufficient quantity of RINs to support the sale of diesel fuel in quantities demanded by consumers. To address this problem, EPA must waive the total RFS requirement, as described herein.

II. Unless Waived, the RFS Will Cause Severe Economic Ha rm . As discussed above, RINs effectively function as a permit to supply gasoline and diesel in the United States. If a refiner cannot secure enough RINs to meet its RVOs, then the refiner is limited in the amount of gasoline and diesel it may supply for U.S. consumption. Consequently , the inad equate supply of RINs leads to an inadequate domestic supply of gasoline and diesel fuel for U

. S

. consumption and presages severe economic consequences stemming from the RFS.

A. The Blendwall Will Force Obligated Parties To Supply Less Fuel for U.S. Consum ption, Setting Off a Chain of Events That Causes a Massive Decline in GDP

.
The fuels market already is experiencing the economic effects of the impending blendwall. Starting early this year, prices for ethanol D6 RINs skyrocketed, rising from an average of below 4 cents per RIN in years prior to 2013 to over a $ 1.40 per RIN in July 2013 . A significant price spike occurred in conjunction with EPA’s announcement of the proposed renewable fuel volumes for 2013. The current ethanol RIN price is now many mul tiples of the average ethanol RIN price experienced in the five years since the volume requirements for renewable fuels contained in section 211(o)(2)(B) were increased to their current level.

While the near term economic effects of higher RIN prices are troublesome enough, the arrival of the blendwall in 201 3 and depletion of banked RINs in 2014 likely will force obligated parties to take drastic measures to comply with the law . NERA Economic Consulting has projected the economic impacts that the blendwa ll will impose on consumers and the U.S. economy through 2015. 37 NERA’s model projects a $1,300 decline in average household consumption and an aggregate GDP loss of $270 billion in 2014

. 38 If these effects are not somehow avoided by changes to the current implementation of the RFS, NERA concluded that the aggregate economic impacts by 2015 will be a loss of a staggering $770 billion in GDP. 39

The decrease in GDP , projected by NERA , results from a combination of (1) structural problems within the RFS itse lf and (2) technical constraints that prevent the development and deployment of higher ethanol blends that could forestall the blendwall. 40 With regard to the structural problems , the RFS requires each obligated part y to meet an annual RVO , which is calculated as a percent of t heir total annual volume of gasoline and diesel produced or imported for sale in the United States by that obligated party during the year. 41 Thus, the final RVO in a given year for an obligated party will fluctuate based on its own fuel production and imports. As the RFS

- mandated volumes increase i n the face of

36 NER A S TUDY , supra note 4, at 31. 37 Id. at 3 8

- 39. 38 Id. at 38

- 39 and Table 14

. 39 Id. at 8 , 38

- 39

. 40 Id. at 4. 41 40 C.F.R. § 80.1407.11

declining gasoline demand and infrastructure and vehicle incompatibility constraint s — and the blendwall is hit

— obligated parties will need more RINs than they can get fro m E10

. That is to say , the volumes of RINs associated with corn

- based and sugarcane

- based ethanol that the obligated part ies need to comply with the RFS will exceed RIN s they purchase f rom downstream entities that blend 10

- percent ethanol in gasoline. Thus, obligated parties will need to draw down previously banked RINs ; there will be no “excess” RINs generated for compliance. E xisting and available RINs now are likely being held or used for compliance , rather than being sold in the marketplace, and ob ligated parties needing to buy RINs to comply in 2014 will face a lack of feasible options to sustain their level o f gasoline or diesel production and imports. 42 Because RINs effectively operate as a permit to sell specific quantities of gasoline and diese l, w hen obligated parties cannot acquire RINs , they must reduce the amount of gasoline and/or diesel they sell in the United States to remain in compliance with RFS

. With regard to the technical constraints , the U.S. fuel market lacks the physical infrastructure , compatible vehicles, and consumer demand to support enough sales volumes of ethanol

- blended fuels other than E10 to meet the growing mandate . While it is legally permissible to blend ethanol in gasoline to produce E85 or E15 blends, simply because EPA has removed one legal impediment to the production of these blends does not mean that local regulations allow the use of these fuels, or that the market and consumers can or will accommodate their use.

Without an adequate supply of RINs, ob ligated parties will turn to the other compliance options available to them: (1) a decrease in fuel production ; (2) a decrease in transportation fuel imports ; and/or (3) an increase in gasoline/diesel exports. 43 The se alternatives reduce the number of RIN S an obligated party needs to demonstrate compliance with the RFS . A decrease in transportation fuel supplied to the domestic economy over and above the current and projected d ecrease in demand for transportation fuels will likely result in higher fuel costs and will have effects through out the U.S. economy as manufacturers, distributors, and suppliers adjust to higher fuel costs. 44 T he market’s response to obligated parties’ attempt to meet their RVOs and comply with the RFS ultim ately will force individual households to decrease consumption at the pump and elsewhere

. 45

As detailed in the NERA S tudy, the overall effect of hitting the blendwall without viable compliance alternatives beyond reducing supply will be a contraction of multiple sectors of the U.S. economy that will ultimately result in a massive decrease in GDP, totaling $770 billion in 2015 . This severe adverse economic impact would be extraordinarily harmful to tens of millions of Americans and far exceeds any level n ecessary to constitute “severe economic harm” under CAA section 211(o)(7).

Importantly, in the context of considering the harms that will result in 2014 and 2015, nothing in the Clean Air Act requires that the severe economic harm occur in the same year that EPA issues the waiver. 46 EPA itself recognized that it h as discretion when determining what time period to examine with respect to a severe economic harm analysis in its denial of North Carolina’s and Arkansas’s waiver petition s

. 47 W hile EPA previous ly declined to examine impacts beyond the current calendar year due to

42 NERA S TUDY , supra note 4 , at 30. 43 Id. at 27. 44 Id. at 7. 45 Id. 46 See 42 U.S.C. § 7545(o)(7)(A).
47 See 77 Fed. Reg. 70,752, 70,757 (Nov. 27, 2012)

.12

an inability to properly assess the relevant variables, such a limitation is data

- driven , not a function of the requirements of section 211(o)(7). 48

The NERA Study fully accounts for fluctuations in fuel prices and availability, and it provides sufficient certainty to conclude severe economic harm will result from reaching the blendwall in the years following 2013. 49 Existing infrastructure cannot support the higher

- ethanol blend fuels required to avoid the blendwall. Thus, the NERA Study forms a more than sufficient basis for EPA to waive the requirements of section 211(o)(2) in 2014 and subsequent years.

B. The Harms Detailed in the NERA Study Are Unprecedented

.
The E10 blendwall has arrived, making 2014 unlike any other year that EPA previously examined. As explained in the NERA Study, infrastructure, technological, and market limitations will restrict the ability of obligated parties to market ethanol blends higher than E10 for use in conventional vehicles. 50 As a result, the only practical compliance strategy for obligated parties will be to reduce the amount of fuel produced for the U .S. market, causing sharp declines in fuel availability and associated increases in fuel prices. 51 In 2014, the ultimate result will be a decrease in average household consumption of $1,300 and a net GDP loss of $270 billion. The severe economic harm becomes worse in 2015 with a decrease in average household consumption of $2,700 and a net GDP loss of $770 billion. 52 EPA’s issuance of a waiver here will help ameliorate these effects of the blendw all because it would remove the existing, rather than theoretical, limitation of the supply of gasoline and diesel

— th u s, this situation differs from earlier wai ver situations, where the waiver’s impact was not as clear.

The harms calculated in the NERA Study as the result of the blendwall are immediate and unprecedented . In denying the RFS waiver request of several States and other parties in 2012, EPA relied upon Iowa State University’s model to evaluate the impact of a potential waiver on corn prices, food prices, feed prices, and fuel prices. 53 EPA’s denial of the 2012 waiver request expressed the result of the Iowa S tate model in terms of avoided costs and concluded that the waiver would have decreased annual household expenditures on fuel just $1.98

- $17.40. 54 In EPA’s denial of Tex a s’ s 2008 waiver petition, EPA re lied on the same Iowa State model and concluded implementation of the RFS would increase annual household expenditures only $3.43

- $34.29. 55 Unlike those years, the country has run out of practical options because vehicle and refueling infrastructure compatibility is at the blendwall. In

48 Id. 49 See id. at 70,758 (noting that a waiver petition based on the blendwall itself could provide a proper analysis of all the relevant factors required to grant a petition based on sever e economic harm occurring in a year different than the year of the petition’s filing).
50 The issues associated with E15 and E85 compliance options are discussed in detail in Sections III.B and III.C, infra

. 51 NERA S TUDY , supra note 4 , at 2. 52 Id. at 8 Table 3. 53 77 Fed. Reg. at 70,761. Petitioners do not suggest that the projected levels of harm in the 2008 and 2012 waiver requests, in addition to other information submitted for EPA’s consideration, were insufficient to justify the Administrator’s exer tion of RFS waiver authority, only that the economic harms detailed in the NERA Study present adverse economic impacts of another magnitude altogether than the effects EPA projected in the 2008 and 2012 waiver decisions. 54 Id. at 70,765. 55 73 Fed. Reg. 47, 168, 47,179 (Aug. 13, 2008).13

contrast to these rather small , previously projected effects, the NERA Study finds that the blendwall will significantly increase costs for both fuel and finished goods in 2014

. 56

In stark contrast with prior waiver petitions to the EPA, the economic harms that will occur here (absent waiver) not only are “certainly impending,” they are immediate, unprecedented, widespread , and severe. Indeed, as detailed by NERA, the adverse economic impacts will be felt by virtually every American household and by most of the U

. S

. economy. Petitioners respectfully submit that the ultimate cost

— a massive decrease in GDP totaling $770 billion in 2015

— far exceeds any level necessary to constitute “severe economic harm” under CAA 211(o)(7).

III. Severe Harms Flowing From the RFS Can Be Avoided Only Through A Waiver

. Having established that the blendwall will result in an inadequate supply of RINs and thereby lead to severe economic harm, we now turn our attention to potential alternative mechanisms to delay or avoid the arrival of the blendwall , and explain why they are in fact unavaili ng and do not defeat this Petition

. The only solution to the blendwall problem that will avoid inadequate domestic supplies and severe economic harm is the issuance of a waiver. Unlike previous waiver request situations, in this case, issuance of a waive r will provide relief from the binding nature of the RFS and avoid the harms of the blendwall because it will remove the limitation on the supply of gasoline and diesel fuel that currently exists.
A study titled “Renewable Fuel Standards and the Ethanol B lendwall” was recently conducted by MathPro and is attached in its entirety in Attachment 2 of this waiver petition. 57 MathPro developed a spreadsheet

- based model (“Software Tool”) to assess specified compliance approaches for various schedules of annual r enewable fuel v olumes that EPA might establish. 58 The spreadsheet use d EIA’s 2013 Annual Energy Outlook of transportation energy demand (AEO 2013)

. 59 MathPro then assess ed hypothetical scenarios involving assumed schedules of annual renewable fuel volumes and various compliance approaches using this tool

. 60

Scenario 1 represents the most aggressive case, and assumes that EPA leave s the total renewable fuel and advanced biofuel standards unchanged from the EISA volume schedule. 61

 Scenario 1A: EISA volume standards , unrestricted expansion of FAME, no expansion of E85, AEO cellulosic biofuel volumes

.
 Scenario 1B: EISA volume standards , expansion of E85, no expansion of FAME, AEO cellulosic biofuel volumes

.
 Scenario 1C: EISA volume standards , expansion of E 85, expansion of FAME to 5 percent , AEO cellulosic biofuel volumes

.

56 NERA S TUDY , supra note 4, at 8. 57 M ATH P RO , R ENEWABLE F UEL S TANDARDS AND THE E THANOL B LENDWALL ( Aug. 13, 2013 ) (hereinafter MATHPRO S TUDY ) (Attachment 2). 58 Id. at 2

. 59 Id

. 60 Id

. 61 Id. at 10

.14

Scenario 2 assumes that EPA modif ies the annual total renewable fuel and advanced biofuel volume standards to account for cellulosic biofuel being available in volumes significantly lower tha n contemplated in EISA. 62 Annual cellulosic biofuel volume standards (and the split between ethanol and diesel) are set at the volumes forecast in the AEO 2013 Reference C ase. 63

 Scenario 2A: Adjusted EISA volume standards , unrestricted expansion of FAME, no expansion of E85, AEO cellulosic biofuel volumes

.
 Scenario 2B: Adjusted EISA volume standards , expansion of E85, no expansion of FAME, AEO cellulosic biofuel volumes

.
 Scenario 2C: Adjusted EISA volume standards , expansion of E85, expansion of FA ME to 5 percent , AEO cellulosic biofuel volumes

. Scenario 3 assumes a RFS schedule that maximizes ethanol use without exceeding the E10 blendwall. 64

 Scenario 3A: Maximum ethanol without exceeding the E10 blendwall, no FAME expansion , no cellulosic biofue l volumes

.
 Scenario 3B: Maximum ethanol without exceeding the E10 blendwall, no FAME expansion , and AEO cellulosic biofuel volumes

.
The k ey conclusions from the Math Pro study are summarized below: 65

 Use of carry over RINs alone can delay some of the conse quences of the ethanol blendwall t o 2014 , but not beyond

.
 Subsequently, steep and likely unattainable increases in either E85 use or biomass

- based diesel ( “ FAME ” ) use would be required t o meet the RFS volume standards.

 Expanded use of FAME, to generate excess D4 RINs, could delay reaching th e ethanol blendwall after carry over RINs are exhausted. But the likelihood and extent of the delay depends on the annual volume standards established by EPA and the extent to which FAME production and use can be incr eased.

 With FAME use limited to 5 percent of the distillate pool, ethanol blendwall would be reached in 2015

.
 When the ethanol blendwall is reached (with limited FAME expansion), the volume of E85 necessary to generate sufficient RINs for compliance with the renewable fuel volume standards would require rapid, large expansion in the availability of E85 and in the number of FFVs using E85. In most of the cases studied, the necessary expansions would be beyond what might be considered feasible

.
 Annual volume standards can be set that maximize ethanol use subject to the practical constraints imposed by the E10 blendwall. Such volume standards would facilitate compliance with RFS requirements.

The Exhibits below from the MathPro study summarize the scenar io results. 66 In the case of FAME , note that the required volumes far exceed the nameplate capacity of 2.2 billion gallons per EIA. In the case of

62 Id. at 13

. 63 Id

. 64 Id. at 14

. 65 Id. at 16

. 66 Id. at Exhibits 4 and 5

.15

E85 , note that the required volumes far exceed the current use of 0.1 billion gallons per EIA (too small of a number to appear on the graph).

A. Carryover RINs Will Not Prevent the Market Imbalance Caused by the Blendwall.

EPA itself noted the imminence of the RFS blendwall in the preamble to its proposed RFS volumes for 2013. In its proposed rule, EPA stated its belief that the economic effects from the blendwall would16

likely be averted in 2013 because there are sufficient carryover RINs that can be used for compliance. 67 EPA expressed doubts , however, that such a surplus will be available to forestall the blendwall in 2014. 68 Moreover, concerns related to RIN market volatility should call into question EPA’s belief that su fficient qua ntity of RINs exist for the entire regulated community to avoid the blendwall. A ccording to many experts , t he scarcity of valid RINs has le d to a rapid rise in the price of RINs due to increasing demand in the face of inability to increase sur plus RIN s

. 69 Based on these concerns, EPA must reassess its projections that sufficient carryover RINs will be available to supplement the 2013 market to ensure compliance with the RFS mandates , and EPA also must f urther evaluate the projected shortfall of RINs in 2014.

The blendwall effects may be avoided in 2013 only if obligated parties have sufficient carryover RINs to meet their requirements under the RFS

— a questionable conclusion given the current volatility of the RIN trading market. 70 Several econo mists have stated that the RIN carryover will be reduced significantly by the end of 2013 and will be insufficient to meet the 2014 RFS mandates

. 71 Charles River Associates completed a study in 2011 that concluded that the market would encounter the E10 blendwall by 2013

. 72 The study concluded that efforts to increase E85 or E15 and to decrease the presence of E0 (neat gasoline) in the domestic market could not be implemented economically or quickly enough to forestall the blendwall. 73 Additionally, EPA ’s original estimates of when the market would reach the blendwall were based on fuel consumption estimates found in the AEO 2009, 74 while the Charles Ri ver Study’s fuel consumption estimates come from the AEO 2011. 75 The difference in the projection of when the blendwall will be reached can be explained in part by an examination of the Annual Energy Outlook reports, which show declining estimates of trans portation fuel consumption in successive years. 76 Lower fuel consumption requires that a higher percentage of ethanol be blended into gasoline in order to meet the renewable volume targets and accelerates the arrival of the

67 78 Fed. Reg. 9282, 9301 (Feb. 7, 2013). 68 Id. See also USDA E CONOMIC R ESEARCH S ERVICE , FDS

- 13d

- SA, H IGH RIN P RICES S IGNAL C ONSTRAINTS TO U.S. E THANOL E XPANSION 1, 3 (Apr. 12, 2013) ( stating that “T his shortfall in meeting the conventional ethanol RFS will soon transmit to a shortfall in the availability of conventional RINs relative to the demand for RINs for RFS compliance, likely to occur in 2014 once carryover RINs are no longer sufficient to fill the gap.”).
69 S ince January 7, 2013, RIN prices rose from 7.1 cents per credit to over $1.00 per credit, representing an increase of over 2700 percent in the price of RINs. See Robert Wagner, Ethanol RIN Prices Up 2740% Year To Date , Seeking Alpha (July 19, 2013) , http: //seekingalpha.com/article/1558892

- ethanol

- rin

- prices

- up

- 2740

- year

- to

date?sourc e=bloomberg. 70 Most refiners do not blend ethanol and are dependent upon purchasing RINs for compliance. Some refiners do not have a supply of “banked RINs” and now may be unable to acquire suffic ient RINs at reasonable prices. See e.g. , Frank Pici, Monroe Energy Lett er to EPA, Docket ID No. EPA

- HQ

- OAR

- 2012

- 0546

- 0110 (Apr

. 7, 2013).
71 See , e.g., University of Illinois, Exploding Ethanol RINs Prices: What’s the Story? Table 1 http://farmdocdaily.illinois.edu/2013/03/exploding

- ethanol

- rins

- prices.html (Mar. 8, 2013). 72 See H ARRY F OSTER , R OBERT B ARON , AND P AUL B ERNSTEIN , I MPACT OF THE B LENDWALL C ONSTRAINT IN C OMPLYING WITH THE R ENEWABLE F UEL S TANDARD , C HARLES R IVER A SSOCIATES 5 (Nov. 2, 2011) [hereinafter C HARLES R IVER S TUDY ]. 73 Id.
74 EPA , R ENEWABLE F UEL S TANDARD P ROGRAM (RFS2) R EGULATORY I MPACT A NALYSIS 238 (2010) [ hereinafter RFS2 RIA] ; see U.S. E NERGY I NFORMATION A DMINISTRATION , DOE/EIA

- 0383 (2009), A NNUAL E NERGY O UTLOOK 2009 (“AEO 2009”)

. 75 C HARLES R IVER S TUDY , supra note 63 , at 15. 76 See , e.g. U.S. E NERGY I NFORMATION A DMINISTRATION , A NNUAL E NERGY O UTLOOK 2012 E ARLY R ELEASE O VERVIEW 5 (Jan. 23, 2012); compare with U.S. E NERGY I NFORMATION A DMINISTRATION , A NNUAL E NERGY O UTLOOK 2013 E ARLY R ELEASE O VERVIEW 1, 6 (Dec. 5, 2012).17

blendwall. 77 Regardless of these differences, both studies support the undeniable fact that the blendwall will be reached in 2013.
Unlike the earlier work, the MathPro study takes into account the RIN carryover and uses the most up

to

- date energy demand from AEO 2013.

B. E15 Is Not a Vi able Solution to the Blendwall.

EPA has approved the sale of E15 for sale for use in model year 2001 and later vehicles . That approval

was based exclusively on a Department of Energy study indicating that E15 would not adversely affect emissions control systems in a select group of on

- road vehicles

. 78 Petitioners question , but do not attempt to challenge , th e E15 waiver decision in this Petition

. T he DOE study look ed at other electronic and mechanical systems ( e.g. , engines, fuel syst ems) essential for vehicle functionality , but this was a cursory, last

- minute, approach that was inappropriate for extrapolation

. 79

The fact that only two vehicle manufacturers have approved of E15 , and have only done so for vehicles produced in the most recent two model years , demonstrates just how radically the widespread use of E15 would impact the existing fleet . EPA’s approval was based on their limited analysis of emissions control systems. E15 c reates numerous concerns for consumers, refiners, eth anol producers, fuel retailers, and auto manufacturers

. E15 is not a viable mechanism for the transportation sector to absorb more ethanol

- blended fuels (and thereby also generate additional RINs), nor does it do anything to prevent

— or even delay

— the blen dwall. Instead, E15 merely provides one limited, problematic avenue for additional RFS compliance that is insufficient to surmount the issues that the blendwall creates.

1. E15 I s Incompatible With the Existing Vehicle Fleet

.
For automobiles built before 2011, automobile manufacturers are unanimous. They have stated that the use of E15 may damage vehicle engines and will void warranties. 80 In the face of these public pronouncements, the sale of E15 creates concerns over not only consumer dissatisfaction and brand reputational harm , but also potential liabilities for obligated parties, fuel distributors , ethanol producers , and engine manufacturers. 81 The Coordinating Research Council ( “ CRC ” ) conducted extensive stud ies

77 See C HARLES R IVER S TUD Y , supra note 63 , at 15

- 16. 78 See 75 Fed. Reg. 68,094 (Nov. 4, 2010) (providing E15 waiver for vehicles model year 2007 and after for light duty motor vehicles); 76 Fed. Reg. 4662 (Jan. 26, 2011) (providing E15 for vehicles model year 2001

- 2006 for light d uty motor vehicles). 79 EPA should have used tests specifically designed by automotive engineers to evaluate those effects

— the approach that the Coordinating Research Council took. 80 See Letter from Representative James Sensenbrenner to Lisa Jackson, Admini strator, Envtl. Protection Agency (July 5, 2011), available at http://sensenbrenner.house.gov/uploadedfiles/e15_auto_responses.pdf (summarizing comments from automakers on the use of E15 and expressing concern for the effects of E15 on vehicles); see also Gary Strauss, AAA Warns E15 Gasoline Could Cause Car Damage , USA T ODAY , Nov. 30, 2012, available at http://www.usatoday.com/story/news/nation/2012/11/30/aaa

- e15

- gas

- harm

- cars/1735793/ (noting statements by BMW, Chrysler, Nissan, Toyota , and Volkswagen tha t their warranties will not cover fuel

- related claims caused by E15, and statements from Ford, Honda, Kia, Mercedes

- Benz , and Volvo that E15 use will void warranties). 81 See Overview of the Renewable Fuel Standard: Stakeholder Perspectives: Hearing Befor e the Subcomm. on Energy and Power of the H. Comm. on Energy and Commerce, 133 th Cong. 5 (2013) (s tatement Shane Karr, Vice President for Federal Government Affairs, Alliance of Automobile Manufacturers ) [hereinafter Alliance Testimony].18

examining the potential effects of E 20 and E15 use on motor vehicle engines and fuel system components across a sample set of commonly

- used post

- 2001 model year light duty vehicles. 82 The stud ies found that some vehicles

— ones that EPA approved for use with E15 after reviewing effects on emis sions

— experienced fuel pump system failures or other mechanical damage from operating on intermediate

- level ethanol blends. 83 Moreover, the fuel pump systems that failed or exhibited other effects during testing on E15 are used in a substantial number of t he 29 million 2001

- 2007 model year vehicles represented in the studies

. 84 The engine durability study showed that two popular gasoline engines used in light

- duty automotive applications of 2001

- 2009 model year vehicles failed with mechanical damage when op erated on E15 and E20. 85 The damage that E15 will inflict on a significant number of vehicles translate s to a significant potential liability for multiple entities throughout the fuel supply chain.

Furthermore, consumer organizations including AAA fear that the public’s unfamiliarity with E15 will lead to misuse and vehicle damage. 86 In a recent survey, AAA found that “[a]n overwhelming 95 percent of consumers surveyed have not heard of E15, a newly approved gasoline blend that contains up to 1 5 percent ethanol.” 87 Based on this finding and the fact that less than 5 percent of the vehicles on the road are approved by their manufacturers to use E15, AAA urged EPA to halt the sale of E15. 88 Even Public Citizen ha s come out in opposition to E15. In a recent amicus brief filed in the U.S. Supreme Court, Public Citizen identified the harm to consumers that will result from E15: (1) incompatibility with vehicles, and the likely damage to many vehicles for which E15 has been approved; ( 2 ) the potential for misfueling ; (3) reductions in gas mileage ; and (4) greater fueling and food costs. 89

The fuel segregation and labeling requirements attendant to the marketing of E15 depend on market and consumer acceptance . In fact, EPA itself recognized the potential dangers resulting from the improper use of E15 when it approved the E15 waivers. 90 EPA determined that the use of product transfer documents to track the distribution of E15 and “attention” labels on fueling stations were necessary to minimize th e risk of vehicle damage caused by misfueling. 91 Thus, E15 is far from a “drop

82 See C OORDINATING R ESEARCH C OUNCIL , I NTERMEDIATE

- L EVEL E THANOL B LENDS E NGINE D URABILITY S TUDY (Apr

. 2012) , available at http://www.crcao.org/reports/recentstudies2012/CM

- 136

- 09

- 1B%20Engine%20Durability/CRC%20CM

- 136

- 09

- 1B%20Final%20Report.pdf ; see also C OORDINATING R ESEARCH C OUNCIL , D URABILITY OF F UEL P UMPS AND F UEL L EVEL S ENDERS
IN N EAT AND A GGRESSIVE E15 (Jan. 2013), available at http://www.crcao.org/reports/recentstudies2013/CRC%20664%20[AVFL

15a]/AVFL%2015a%20[CRC%20664]%20Final%20Report%20only.pdf

. 83 C OORDINATIN G R ESEARCH C OUNCIL , D URABILITY OF F UEL P UMPS AND F UEL L EVEL S ENDERS IN N EAT AND A GGRESSIVE E15 1

- 3 (Jan. 2013), available at http://www.crcao.org/reports/recentstudies2013/CRC%20664%20[AVFL

15a]/AVFL%2015a%20[CRC%20664]%20Final%20Report%20only.pdf

. 84 Id

. at 3. 85 C OORDINATING R ESEARCH C OUNCIL , I NTERMEDIATE

- L EVEL E THANOL B LENDS E NGINE D URABILITY S TUDY , supra note 73, at 15

. 86 Press Release, AAA, New E15 Gasoline May Damage Vehicles and Cause Consumer Confusion (Nov. 30, 2012), available at http://newsroom.aaa.com/2012/11/new

- e15

- gasoline

- may

- damage

- vehicles

- and

- cause

- consumer

confusion/; see also Brief of Amicus Curiae Public Citizen, Inc., in Support of Petitioners, Alliance of Automobile Manufacturers v. U.S. Envtl. Protection Agency, 133 S. Ct. 2880 (2013) (No. 12

- 1167). 87 Press Release, AAA, supra note 77. 88 Id. 89 See Brief of Amicus Curiae Public Citizen , supra note 77. 90 See 75 Fed. Reg. at 68,049

- 50 (noting the difficulties of ensuring the proper labeling of E15 pumps due to the fact that most retail stations are independently operated). 91 Id.19

in” solution to the blendwall. The fuel’ s very use is conditioned by restrictions in state law, by acceptable light duty vehicle types, by labeling of the fuel , and through a c ontinuing inability to use the fuel in any non

- road vehicle engine or vehicle, including such ubiquitous consumer items as lawnmowers and hedge trimmers. EPA cannot reasonably rely on a potentially unsafe fuel source as a compliance option, especially whe n the manufacturers of those vehicles have warned their customers not to use E15.

2. E15 Impairs Vehicle Fue l Economy

. Relatedly, E15 also results in lower fuel economy due to the higher concentration of ethanol in the fuel. A Department of Energy study f ound that the use of E15 over E10 results in a 1.6 percent loss in fuel economy. 92 Particularly in the current economic climate, consumers are unlikely to choose a product that fails to deliver long

- term savings at the pump.

3. E15 I s Incompatible W ith the Existing Refueling Infrastructure , the Vast Majority of Which I s Not Owned by Obligated Parties

. The E15 infrastructure is not under the control of the parties obligated to comply with RFS , given that more than 95 percent of gasoline stations are ind ependently owned . While refiners and importers are obligated to comply with the mandates, they own less than 5 percent o f the gasoline stations in the U nited States , and thus cannot completely control what fuel will be offered or not offered to consumers at the retail level. With limited exceptions, obligated parties cannot themselves decide to install infrastructure or carry a new type of fuel. Individual retail outlets will largely decide when to offer E15

— or not. They will decide (1) whether to assume the risk of damaging their customers’ gasoline engines and (2) whether and how to upgrade their facilities to replace tanks, dispensers , and related equipment to carry E15. 93 And their decisions are made more difficult by the fact that n o one knows if consumers will actually purchase the product. For those obligated parties that operate retail facilities, the cost of retrofitting those facilities to store and dispense E15 is prohibitive

. Retail fuel sales have been a low margin, highly competitive business that generally cannot afford the costs associated with hardening their fuel storage and dis pensing systems to handle E15.

A study conducted by the National Renewable Energy Laboratory in 2010 evaluating retail fuel dispensing equipme nt types already approved for E10 found that the use of higher ethanol

- blended fuels in both new and older equipment resulted in a reduced levels of safety and performance. 94 To ensure that the dispensing equipment is safe , federal regulations require only approved or “listed” devices may be used for dispensing motor fuel at fueling stations , which requires station operators who wish to offer ethanol blends higher than E10 to retrofit or to install new , specially designed pumps that

are listed as compatible with higher blends of ethanol by a nationally recognized testing laboratory

92 A LTERNATIVE F UELS D ATA C ENTER , U.S. D EP ’ T OF E NERGY , E15 Approved for Use in 2001 and Newer Vehicles (Feb. 11, 2011), http://www.afdc.energy.gov/technology_bulletin_1210.html (last visited Mar. 12, 2013). 93 See Overview of the Renewable Fuel Standard: Stakeholder Perspectives, Hearing Before the Subcomm. on Energy and Power of the H. Comm. on Energy and Commerce , 113 th Cong. (July 23, 2013) (s tatement of Joseph Petrowski on behalf of the Society of Independent Gasoline Marketers of America and the National Association of Convenience Stores , available at http://docs.house.gov/meetings/IF/IF03/20130723/101184/HHRG

- 113

- IF03

- Wstate

- PetrowskiJ

- 20130723.pdf [hereinafter SIGMA/NACS Testimony ]. 94 See Ken neth Boyce & Thomas Chapman, N ATIONAL R ENEWABLE E NERGY L ABORATORY , Dispensing Equipment Testing With Mid

- Level Ethanol/Gasoline Test Fluid 16 (2010), available at http://www.nrel.gov/docs/fy11osti/49187.pdf.20

(NRTL)

. 95 Prior to 2010, Underwriters Laboratories (the primary NRTL) had not listed a single dispenser as compatible with any ethanol concentration greater than 10 percent. 96 EPA states “[b]ecause it is common for tank owners to use their tanks for 30 years or more, most UST systems currently in use are likely to contain components not designed to store ethanol blends greater than 10 percent.” 97 Selling E15 safely will requir e expensive investments in retail fueling equipment

— which are beyond the control of obligated parties that own less than 5 percent of gasoline stations

— and which may not be made unless sufficient demand for higher blend fuels exists to justify such expendi tures.
The Society of Independent Gasoline Marketers of America (“SIGMA”) and the National Association of Convenience Stores (“NACS”) recently testified to Congress that potential liabilities associated with selling E15 prevent E15 from being a viable s olution to the blendwall :
Without regard to these unanticipated market realities, the required RFS volume targets continue to increase year after year. As a practical matter, these targets can only be met if more ethanol is blended into gasoline. The mark et is not able to do this at the present time, largely because (as discussed below) retailers fear that selling gasoline blends greater than 10 percent ethanol (so

- called “E10”) will increase their liability exposure.

* * * *

As you are likely aware, EPA recently authorized the use of E15 in certain vehicles. However, this has so far done very little to expand the use of renewable fuels, due largely to a lack of consumer demand, as well as retailers’ liability and compatibility concerns and state and local restrictions on selling E15. Indeed, EPA’s decision to approve the sale of E15 serves to highlight the limitations that directly affect retailers and impede the implementation of the RFS. 98

The costs associated with E15 dispen ser and storage systems compatibility can be formidable. 99 Purchasing new E

- 15 compatible dispensers costs approximately $20,000 per dispenser, while retrofitting a dispenser, if even possible, can be done for $2,000

- $4,000 per dispenser. Even if a retail establishment were willing to expend the capital to ensure E15 compatible dispensers, ma ny stations will find it impossible to determine the compatibility of their underground storage systems and “[w]hen a retailer proceeds to crack open concrete to address underground equipment issues, costs can quickly exceed $100,000 per location. ” 100

A rec ent survey by NACS found similar limitations for mid

- level ethanol blends : “ recent consumer input indicates that the market is not ready to accommodate sufficient volumes of these alternative fuel blends to satisfy the requirements of the RFS. Inadequate infrastructure and limited consumer demand

95 29 C

. F

. R

. 19 1 0.106(g). 96 SIGMA/NACS Testimony, supra note 8 4 at 5. 97 EPA, Notice of Final Guidance, Compatibility of Underground Storage Tank Systems with Biofuel Blends, 76 Fed. Reg. 39 , 095, 39 , 096 (July 5, 2011), 98 SIGMA/NACS Testimony, supra note 84 , at 4

- 5. See also NACS “Challenges Remain Before E15 Usage is Widespread, http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_2013/Pages/Challenges

- Remain

Before

- E15

- Usage

- Is

- Widespread.aspx (last visited August 8, 2013). 99 SIGMA/NACS Testimony, supra note 8 4 , at 5

- 6, 100 Id. at 6.21

puts the future of the RFS in peril unless adjustments are made. ” 101 Moreover, “[r] etailers recognize this limitation in demand, with more than three

- quarters (79 % ) of the NACS members surveyed citing lack of dema nd as the reason that they don’t sell the fuel. ” 102 The NACS Survey also confirms the retail station operators’ concern s over the potential legal risks of selling E15 :
Demand isn’t the only issue limiting availability. Retailers also expressed concerns abo ut the costs associated with upgrading or replacing equipment to legally store and sell these new fuels: 46% said that the costs to upgrade to sell E15 were a concern, and 44% said that the costs to upgrade for E85 were a concern. Failure to use certified equipment can expose retailers to potential liability. Retailers also expressed concerns over potential liability from misfueling: 46% and 44% cited liability concerns over E15 and E85, respectively. 103

For these reasons, NACS believes that “ the statutory increases in renewable fuel volumes sold each year must be revised to reflect the declining size of the overall gasoline marke t.” 104

S tate regulatory approvals stand as an additional obstacle to the introduction of E15 . DOE has noted that 90 state laws and regulations in more than 30 states limit the sale of E15 , and it is not known when they will be revised or amended. 105 A Congressional Research Service report includes an overview of the various concerns:
A key non

- vehicle issue is whether existing i nfrastructure can support ethanol blends above E10. Like automobiles, while some existing gasoline tanks and pumps were designed and/or certified to handle up to E10, none to date have been designed or certified to handle higher ethanol blends. Even if t he fuel is approved by EPA for use in motor vehicles, presumably fuel suppliers and/or retailers would be unwilling to sell the fuel unless they are confident that it will not damage their existing systems or lead to liability issues in the future. Otherw ise, it seems doubtful that fuel suppliers and retailers would voluntarily upgrade their systems to handle the new fuel. Further, loan covenants and insurance policies would need to be modified to reflect the use of the higher ethanol blend. 106

101 See NACS Survey: Evolve the Renewable Fuel s Standard, Natl. Assoc. of C onvenience Stores ( June 11, 2013 ) , http://www.nacsonline.com/News/Daily/Pages/ND0611131.aspx#.UeNKrZXLZUQ

. “O nly 26% of fuel consumers said that they are familiar with E15, and this lack of awareness significan tly diminishes potential demand. A fter E15 was described to surveyed consumers, only 59% of them said that they would consider purchasing E15 if it were the same price per gallon as gasoline.” Id. 102 Id. 103 Id. 104 Id. 105 See U.S. D EP ’ T OF E NERGY , E15, Alternative Fuels Data Center, http://www.afdc.energy.gov/fuels/ethanol_e15.html (stating that “ [ t ] here are more than 90 state laws and regulations currently limiting sales of E15 in more than 30 states. Some state restri ctions in conflict include a 10 percent ethanol blend cap, state biofuels mandates, technical fuel specification standards, and waivers. It is unknown when the update of laws and regulations to allow E15 sales will be completed”).
106 B RENT D. Y ACOBUCCI , C ONG

. R ESEARCH S ERV ., R40445, I NTERMEDIATE

- L EVEL B LENDS OF E THANOL IN G ASOLINE , AND THE E THANOL “B LEND W ALL ” 11

- 12 (2010) (footnote omitted)

.22

Blendstock for E15 blending differs from blendstock for E10 blending, and would present its own infrastructure/storage issues at refineries/terminals. For instance, while E10

- BOB benefits from a summertime 1 psi RVP waiver, E15

- BOB does not. This would r equire that E10

- BOB be segregated from E15

- BOB during the volatility control season from the refinery all the way through the distribution system to retail. Further, producers of E15

- BOB must have an EPA

- approved E15 misfueling mitigation plan ( “ MMP ” ) in place before its blendstock can be sold for blending E15. E10

- BOB does not require an MMP to be in place. These differing suitability requirements will make it necessary that the two blendstocks be kept segregated downstream of the refinery year

- round. Such segregation requirements make offering an additional blendstock specifically for E 15 unworkable and impractical.

I n its 2009 Federal Register notice, EPA acknowledged that the driving motivation behind the original petition for the E15 waivers was the need to find a fuel source that could delay the blendwall. 107 The original hope was that the use of E15 would provide ti me for the maturation of alternative sources that would ensure long

- term, sustained compliance with the RFS. But that clearly has not happened. A waiver of the RFS in 2014 provides a reasonable, rational way to proceed in the face of the confluence of

ma ny different circumstances preventing E15 use for the foreseeable future.

The risks and potential liabilities presented by E15 in terms of vehicle and infrastructure incompatibility cannot be overstated and must not be ignored by EPA. This petition is not about the wisdom of RFS or ethanol particularly. It is about the simple facts and realities presented by the E10 blendwall. It is difficult to understand how or why the federal government would knowingly and intentionally enforce a rule that seeks to requir e the manufacture and sale of a fuel product (E15) that :

 w ill damage engines and other systems in millions of vehicles that have been “approved” by EPA for E15, but which are unapproved by the vehicle manufacturers and for which use may void the

ve hicle warranty;

 i s illegal and unavailable for tens of millions of other automobiles, trucks, off

- road vehicles, boats and small

- equipment products, and which will decrease the availability of the gasoline required by owners of these products;

 r esults in fewer miles

- per

- gallon for most vehicles, thus reducing vehicle efficiency at a time when the federal government is promulgating aggressive vehicle efficiency standards ;

 i s incompatible with, and thus cannot legally be stored in or dispensed from, the va st majority of the existing gasoline retail distribution system, thus forcing thousands of small business owners to either incur enormous costs to upgrade their systems or run the economic and environmental risks posed by c arrying an incompatible product; and

 r equires obligated party manufacturers and importers, fuel suppliers, distributors and retailers, engine and vehicle manufacturers, and many others, to face potential liabilities and litigation all for complying with the federal mandate. 108

107 74 Fed. Reg. 18,228, 18,229 (Apr

. 21, 2009). 108 Unlike the different fuel nozzle sizes required for un leaded and leaded gasoline (which themselves did not completely stop improper usage of leaded fuel), however, there are no physical safeguards to prevent consumer misuse of E15.23

Accordingly , it is un reasonable to expect fuel suppliers to introduce E15 and assume these risks.

C. E85 Is Not a Viable Solution to the Blendwall.

Many of the factors that have prevented E15 from expanding in the domestic fuel market and slowing the arrival of the blendwall also prohibit E85 from serving as a solution to the blendwall problem. Moreover, t here are simply not enough flex

- fuel vehicles (“FFVs”) to use enough ethanol to delay the blendwall. Under any reasonable assumptions relating to the growth of th e market for FFVs , there will still not be enough FFVs to avoid the blendwall in the foreseeable future

. In the United States, there is a very limited market for E85

— a n ethanol/gasoline blend that in practice ranges from 51 percent to 83 percent denatured ethanol

— which can be sold for use in FFVs

. Even with very optimistic projections of the growth in E85 sales, the NERA Study concludes that E85 is an ineffective solution to prevent the blendwall from continuing into 2014. 109 E85 fails to provide a viable solution because of the significant market limitations and infrastructure constraints identified below.
The MathPro study shows that E85 is not a viable solution to the blendwall (see E85 graph on page 15 ).

In the scenario assuming no reduction in total renewable and advanced biofuel volumes in proportion to cellulosic biofuel reduction, the data in the MathPro study show that E85 fuel demand would need to grow from 0.02 billion gallons in 2013 to ~1.9 billion gallons in 20 14 (over 9000 percent increase), to ~7.9 billion gallons in 2015, and to 22.4 billion gallons in 2020. 110 Such growth would be unprecedented for any industry

. Furthermore, “ [ t ] he ability of the prospective FFV fleet’s [sic] to absorb E85 volumes would be e xceeded by 2017 (even under the optimistic assumptions that FFV owners using E85 would use it exclusively). . . . This result implies that FFV sales would have to expand considerably beyond those projected in AEO 2013 .” 111

In the scenario assuming a reduc t ion in total renewable and advanced biofuel volumes in proportion to cellulosic biofuel reduction, the data in the MathPro study shows that E85 fuel demand would need to grow from 0.02 billion gallons in 2013 to ~3.5 billion gallons in 2015 (over 17,000 percent increase), to ~7.3 billion gallons in 2020. S imilar to the previous case, s uch growth would be unprecedented. Also use of E85 fuel in FFVs would need to increase to over 50 percent of the time, when , according to EIA , consumers in the marketplac e use E85 less than 5 percent of the time. 112

1. The E 85 Refueling Infrastructure Is Inadequate

.
The over 2,300 E85 fueling stations currently in existence in the United States 113 represent only approximately 2 percent of domestic fueling stations. H igh investment costs prevent the rapid construction of new stations or the conversion of existing stations. New fueling tanks for E85 cost up to $200,000, a substantial investment for a product that lacks demonstrated demand in the

109 NERA S TUDY , supra note 4, at 32. 110 MATHPRO S TUDY , supra note 57, at 11

. 111 Id. at 1 2

. 112 Id. at 13

. 113 U.S. D EP ’ T OF E NERGY , E THANOL F UELING S TATION L OCATIONS , http://www.afdc.energy.gov/fuels/ethanol_locations.html (last visited 8/11 /2013).24

marketplace. 114 Moreover , most fueling stations contain two tanks one for regular gasoline and the other for premium gasoline, with mid

- grade being produced by blending the two. 115 Retrofitting or converting an existing tank would result in a retailer losing an existing proven rev enue stream in exchange for a product with speculative demand. 116 Given these impediments, it is not surprising that

o nly 200 to 500 E85 dispensers are installed each year, represent ing a miniscule portion of the fueling station market. 117 Th is number pales in comparison to the over 156 ,000 gas stations 118 in the United States. 119 T he costs associated with E85 infrastructure are important because, even though many gas stations sell “branded” fuel, obligated parties do not own the vast majority of retail gas stations across the country. In fact, more than 95 percent of all gas stations are owned by smaller businesses (non

obligated parties)

. 120 EPA cannot expect independently

- owned businesses that operate on thin margins to risk installing expensiv e E85 dispensing equipment in the absence of strong consumer demand. Even if the number of stations continues to grow at a rate of 500 per year, E85 stations would still likely represent a mere 3 percent of the fueling station market by the end of 2013

. 121 Because they are not obligated parties under the RFS, these small business owners also lack the regulatory incentive to make the costly investments in E85 infrastructure. We also note that distribution of E85 is concentrated in the Midwest and FFV access to E85 is even more limited than these numbers imply.

As the NERA Study points out, even a n overly optimistic growth scenario still fails to produce enough E85 fueling st ations to create a viable alternative to E10. 122 Although the number of FFVs in the market may continue to grow, sufficient infrastructure does not exist to encourage consumers to use E85 in these vehicles. Even if there were a significant expansion in E85 sales in the next two years

— as assumed in the NERA Study

— the study clearly demonstrates that E85 consumption would still be insufficient to avoid the adverse consequences of the blendwall in 2014. 123 Quite optimistically in comparison to the AEO 2011 forec ast, NERA modeled the sale of over 1.6 billion additional gallons of

114 C OMM

. ON E CON

. AND E NV TL

. I MPACTS OF I NCREASING B IOFUELS P ROD

. , R ENEWABLE F UEL S TANDARD : P OTENTIAL E CONOMIC AND E NVIRONMENTAL E FFECTS OF U.S. B IOFUEL P OLICY 385 (The National Academies Press, 2011) . EPA has previously made the following cost estimates: (1) the total cost of installing a two

- nozzle E85 dispenser is $23,000; (2) the cost of

a utomatic tank

- level gauging equipment is $6,500; (3) the cost of installing a canopy addition to provide cover for an extra dispenser is $15,000; and (4) the cost of installing a new 15,000

- gallon underground E85 storage tank is $102,000. Based on these f igures, EPA estimated that an E85 installation with one dispenser would cost $131,000, an E85 installation with two dispensers would cost $154,000, an E85 installation with three dispensers would cost $177,000, and upgrading an existing E85 facility from o ne E85 dispenser to three E85 dispensers would costs $130,000. RFS2 RIA, supra note 65, at 781

- 82. 115 NACS ONLINE, Challenges Remain Before E15 Usage Is Widespread, http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_2013/Pages/Challenges

- Remain

- Before

- E15

- Usage

- Is

- Wide spread.aspx

. 116 Id. 117 C HARLES R IVER S TUDY , supra note 6 3 , at 12

- 13

. 118 Third consecutive year station count drops , NPN M AG ., Oct. 2012, at 17 (counting 156,065 stations in 2012). 119 U.S. D EP ’ T OF E NERGY , E THANOL F UELING S TATION L OCATIONS , http://www.afdc.energy.gov/fuels/ethanol_locations.html (last visited 8/11 /2013).; see also John Mayes & Tom Hogan, Market, Production Conditions will Prevent Meeting RFS , O IL & G AS J. (Oct. 12, 2012 ), available at http://www.ogj.com/articles/print/vol

- 110/issue

- 10/processing/market

- production

- conditions

- will

prevent.html.http://factfinder2

. 120 Robert Bradley, It’s Time to Repeal the Renewable Fuel Standard , F ORBES , Apr. 17, 2013, http://www.forbes.com/sites/robertbradley/2013/04/17/its

- time

- to

- repeal

- the

- renewable

- fuel

- standard/.
121 C HARLES R IVER S TUDY , supra note 6 3 , at 13. 122 NERA S TUDY , supra note 4, at 22. 123 Id. at 26

- 38.25

E85 in 2014. 124 The model’s only constraint on the sale of E85 is the ability to build E85 fueling stations. 125 To determine station growth, the NERA Study examined the number of E85 statio ns built from 2005 to 2011

— an average of 340 new stations a year

— and then assumed a construct ion growth rate increase of 25percent per year. 126 Further contributing to the aggressiveness of NERA’s modeling assumptions regarding E85 growth, the demand projec tions used in NERA’s model assume that the volume of E85 sales per station will increase 2.5 times between 2012 and 2015

— an assumption that predicts much stronger demand than the market constraints detailed above would indicate. 127 Yet even with these opti mistic modeling assumptions about E85 station growth and consumption, NERA’s analysis still projects a significant RIN shortfall in 2014. 128

2. There Is Inadequate Consumer Acceptance of E85

. Of equal importance, c onsumers have rejected E85 e ven whe re the infrastructure exist s

. For example, Minnesota has the most extensive network of E85 stations in the United States. 129 A review of monthly E85 sales compared to the number of stations reveals that despite a growing number of E85 retail outlets in Minne sota, annualized average monthly sales of E85 declined by 1.5 percent between 2012 and 2013. 130 In fact, t otal volume sales of E85 in Minnesota have dropped from a peak of 22 million gallons in 200 8 to 15 million gallons in 2012. 131 Further, adding to the c hallenge of entering the E85 market, the average monthly throughput since 2008 is consistently less than 5,000 gallons per month, 132 which is roughly 4 percent of the average gasoline station’s throughput of 128,000 gallons per month. 133 The Minnesota market highlights weak consumer demand for E85 and suggests that building additional E85 stations on a national scale would fail to result in an appreciable (if any) increase in the use of E85.

EPA understands that E85 refueling rates are low , estimat ing that the current E85 refueling frequency rate is only 4 percent for FFVs with reasonable access to E85. EPA projects that this rate will need to increase to 58 percent to ameliorate the impact of the E10 blendwall

. 134 The current low refueling rate highli ghts consumer reluctance to use E85 as a fuel even when it is an option, likely due to the fuel economy penalty. 135 To date, the drivers of FFVs have overwhelmingly refueled with gasoline and rarely chosen E85. The fuel for a FFV is a consumer choice. A p otential requirement for the production of more FFVs will not necessarily result in a large increase in sales of E85 because drivers of FFVs have the option to select E10.

124 Id. at 23. 125 Id. at 22. 126 Id. 127 Id. 128 Id. at 26

- 38. 129 C HARLES R IVER S TUDY

, supra note 64

, at 22. 130 M INN

. D EPT

. OF C OMMERCE , 2013 Minnesota E85 + Mid

- Blends Station Report , available at http://mn.gov/commerce/energy/images/E

- 85

- Fuel

- Use

- Data.pdf

. The 2013 available data through June was doubled to create an annual figure. 131 Id. 132 Id. 133 NACS ONLINE , 2013 NACS Retail Fuels Report: The U.S. Petroleum Industry: Statistics, Definitions, http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_ 2013/Pages/Statistics

- and

- Definitions.aspx (last visited Aug. 10, 2013). 134 75 Fed. Reg. 14,670, 14,762 (Ma r. 26, 2010). 135 See Alliance Testimony, supra note 72, at 7 (stating that t he “ primary factors affecting the lack of E85 usage are pricing, availability, total full

- tank range, and consumers’ willingness to use the fuel”).26

EPA shares this perspective:

Similarly, EPA believes it is not appropriate to as sume that ethanol FFVs will primarily use E85, as there is no extra vehicle cost to purchase an FFV (typically a consumer does not choose between an FFV and a non

- FFV of the same vehicle model), E85 fuel is no cheaper and in fact usually more expensive per mile, and use of E85 reduces overall vehicle range since there is only one fuel tank (as opposed to PHEVs and dual fuel CNG vehicles which have two fuel storage devices and therefore the use of the alternative fuel raises overall vehicle range). Further, even with approximately 10 million ethanol FFVs in the U

. S

. car and light truck fleet, fuel use data demonstrate that ethanol FFVs only use E85 less than one percent of the time. 136

EPA acknowledged the uncertainty that surrounds E85 in the A gency’s recent draft guidance for calculating compliance credits issued to auto manufacturers under the GHG tailpipe emission standards. 137 The GHG tailpipe emission standards provide auto manufacturers with a credit for certain vehicles, such as FFVs, calculated t hrough the use of a weighting factor (the “F value”). Currently, EPA has set the F value for FFVs at 0.50, meaning that the agency assumes a FFV uses E85 fifty percent of the time. In the draft guidance, EPA noted that the limited usage of E85 in FFVs su ggests a more appropriate F value closer to zero. 138 FFVs and E85 cannot represent a viable solution to forestalling the blendwall when EPA itself concludes that FFV

- owners rarely fuel their vehicles with E85. The limitations of E85 as an RFS compliance op tion and a lack of viable compliance alternatives will only hasten the arrival of the blendwall. Moreover, low E85 sales translate to an inadequate supply of RINs, which does nothing to forestall the problems caused by the E10 blendwall

.
Based on the limited use of E85, EPA reduced the F value from 0.50 to 0.20 for FFVs model years 2016

- 2019. 139 This drastic change in the F value creates a major disincentive for automakers to build FFVs. The draft guidance points out that there is a historic relationsh ip between an incentive for FFV production, such as the compliance credit, and the production of FFVs, and yet EPA fails to explain how the reduced F value will not adversely affect FFV production. 140 EPA’s actions in this arena highlight the inconsistencie s that result from the interaction of the GHG tailpipe emission standards and the RFS. The RFS calls for refiners to blend ever

- increasing amounts of ethanol with gasoline and now EPA proposes to remove the biggest incentive for auto manufacturers to buil d a vehicle fleet that can safely run on high

- ethanol blends. The GHG tailpipe emission standards do not act in a vacuum and EPA’s draft guidance will only serve to frustrate future compliance with the RFS.

136 EPA , EPA

- 420

- R

- 12

- 017 , 2017 AND L ATER M ODEL Y EAR L IGHT

- D UTY V EHICLE G REENHOUSE G AS E MISSIONS AND C ORPORATE F UEL E CONOMY S TANDARDS : R ESPONSE TO C OMMENTS 6

- 134 (Aug. 2012) , available at http://www.epa.gov/otaq/climate/documents/420r12017.pdf

. 137 See EPA , D RAFT G UIDANCE L ETTER : E85 F LEXIBLE F UEL V EHICLE W EIGHTING F ACTOR FOR M ODEL Y EAR 2016

- 2019 6 ( Mar. 22, 2013), available at http://www.epa.gov/otaq/regs/ld

- hwy/greenhouse/documents/draft

- ffv

- guidance

- letter.pdf [hereinafter D RAFT G UIDANCE L ETTER ]. 138 Id. 139 Id. at 1. Given the historical E85 usage, a 20 percent F value represents an arbitrarily high estimate for E85 refueling rates. 140 Id. at 11.27

The chart below shows EIA’s projections in 2012 and 2013 of E85 fuel use as a percentage of tran sportation energy in the U.S. Note the sharp decrease in the projections

– E85 fuel is expected to be less than 1 percent of transportation energy demand in the most recent AEO

.

A s if the foregoing were not sufficient to demonstrate the limitations on E85, automobile manufacturers caution drivers against repeatedly switching back and forth between E85 and gasoline due to concerns that constant shifts in the ethanol content of the fuel can damage car engi nes. 141 States with their own renewable fuel requirements also warn against fuel switching unless the vehicle requires half a tank or more of fuel, and not without first burning off the remaining original fuel in the tank. 142 Ultimately, this combination of market constraints and concerns related to long

- term vehicle maintenance limit the ability of E85 to prevent the blendwall.

D. Biomass

- Based Diesel Is Not a Viable Solution To Prevent the Blendwall.

A nother purported alternative, biomass

- based diese l , also fails to provide a viable solution to prevent the blendwall. There are two principal challenges to the increased use of biomass

- based diesel. First, as explained above, there is a practical constraint in biomass

- based diesel marketability that mak es the introduction of blends above B5

— a blend of 5 percent bio di e sel and 95 percent conventional diesel

— for most diesel

- powered vehicles impossible ; this constraint causes diesel production to incur a n unavoidable RIN deficit. 143 Further, the use of bio mass

- based diesel is also limited by the lack of sufficient biomass

- based diesel feedstocks to saturate the diesel pool at B5. 144 Indeed , biomass

- based diesel feedstock constraints likely will continue for the foreseeable future, which sets up a diesel defi cit as explained in Section I.B , supra

. The RFS regulations identify three separate categories of bio mass

- based diesel: biodiesel, renewab le diesel that is not co

- processed with petroleum, and cellulosic diesel. 145 Under the regulations, any

141 See Tech Tips

– E85 Fuel , G ENERAL M OTORS , http://www.gmfleet.com/content/dam/gmfleet/global/master/nscwebsite/en/Home/Shared_Resources/PDFs/G MC1

- 12

- 03142

- 262%20E85%20Ethanol%20Fluid.pdf (last visited Mar. 15, 2013).
142 I LL

. D EP ’ T OF T R ANSPORTATION , Frequently Asked E85 Questions , http://www2.illinois.gov/gov/green/Documents/FAQ's%20E85%20ver3.pdf (last visited Aug. 12 , 2013). 143 C HARLES R IVER S TUDY , supra note 6 3 , at 35

- 36. 144 University of Illinois, The Ethanol Blend Wall, Biodiesel Production Capacity, and the RFS...Something Has to Give , (Feb

. 13, 2013) , http://farmdocdaily.illinois.edu/2013/02/ethanol

- blend

- wall

- biodiesel

- RFS.html (“the increase in biodie sel feedstock requirements would simply overwhelm feedstock markets”).
145 See 40 C.F.R. § 80.1401 (defining “Biomass

- based diesel” and “Cellulosic diesel”).28

combination of these fuels can be used to meet the bio mass

- based diesel , total advanced, and total renewable fuel mandates. 146 Because bio mass

- based diesel has an ethanol

- equivalence value greater than 1.0 , 147 each of these fuels also has the ability to generate additional RINs and could help forestall the blendwall. 148 This potential is offset , however, by significant limitations in the availability of the necessary feedstocks.
The most common type of biodiesel is “FAME” biodiese l, which is produced through the trans

esteri fication of plant and animal fats. 149 The resultant fuel is composed of fatty acid methyl esters ( “ FAME ” ), which are chemically distinct from petroleum fuels and possess different physical properties. 150 Because its production technology is mature and it requires a lower capital investment than other types of biomass

- based diesel production, FAME biodiesel is likely to remain the primary biodiesel stock for the foreseeable future. 151 Th e availability of a ffordable feedstocks to produce FAME biodiesel , however, is limited. 152 While biodiesel can be made from a number of different plant and animal fats, soybean oil is the most common feedstock. 153 Because soybean oil and other feedstocks are commercially valua ble commodities with numerous other uses, feedstock price and availability will be affected not only by soybean yield but also by market competition for feedstocks. 154

In addition to feedstock limitations, there are a number of practical constraints to the widespread use of FAME biodiesel. For instance, FAME biodiesel is typified by significant variations in quality, which in turn leads to inconsistent performance, part icularly at low temperatures. This leads to a seasonal pattern of acceptance. Further, FAME biodiesel presents its own logistic challenges. In particular, the potential for trailback into jet fuel precludes movements of blends containing FAME biodiesel on many common carrier pipelines . Finally, the vast majority of existing terminals do not currently have the infrastructure to receive , store, and blend FAME biodiesel. Even assuming the necessary infrastructure eventually can be developed, these facilit ies cannot realistically be constructed in the short term.

In contrast to FAME biodiesel, renewable diesel and cellulosic diesel are pure hydrocarbon fuels

. 155 To d ate, due to economic/technological hurdles, production of renewable diesel and cellulosic di esel has lagged far behind the volumes required by the RFS. 156 In fact, in its proposed volumes for cellulosic and advanced biofuels for 2013, the EPA stated that it expects the vast majority of required volume of bio mass

- based diesel for 2013 (1.28 billion gallons) to be met by FAME biodiesel

— which has its own

146 See id. ; 40 C.F.R. § 80.1405 (setting forth Renewable Fuel Standards for “biomass

- based diesel”).
147 See 40 C.F.R. § 80.1415(b) (assigning equivalence values to various renewable fuels). 148 See C HARLES R IVER S TUDY , supra note 6 3 , at 32

- 33 (analyzing the increased use of biodiesel as blendstock as a potential method to delay breach of the E10 blendwall). 149 Id. at 33. 150 Id. 151 Id. at 34. 152 Id. at 37. 153 Id. 154 Id. 155 Id. at 34. 156 See Robert Wisner, EPA’s Proposed Biofuels Mandates for 2013

– Challenges for the Biofuels Industry , A GRIC

. M ARKETING R ESOURCE C ENTER (Mar. 2013), http://www.agmrc.org/renewable_energ y/biofuelsbiorefining_general/epas

- proposed

- biofuels

- mandates

- for

2013

--- challenges

- for

- the

- biofuels

- industry/ ( discuss ing historical and future problems associated with meeting the RFS’ requirements for biomass

- based diesel and cellulosic diesel).29

limitations, as noted above. 157 For these reasons, bio mass

- based diesel production does not provide a viable solution to avoid the blendwall.

The MathPro study shows that biomass

- based diesel is not a viable solution to the blendwall (see FAME graph on page 15 ).

In the scenario assuming no reduc tion in the total renewable fuel and advanced biofuel volumes in proportion to cellulosic biofuel reduction, the MathPro data show that 2 billion gallons of FAME would be required in 2014 (~40 percent increase vs. 2013), 4.7 billion gallons of FAME would be required in 2015 (~300 percent increase vs. 2013) and by 2020 11.1 billion gallons of FAME would be required by 2020 (~825 percent incre ase vs. 2013)

. 158 Per MathPro, “[b] y 2015, the FAME volume would exceed (i) the current 5 vol % limit on FAME blending in diesel fuel, and (ii) the biodiesel industry’s current nameplate capacity of about 2.2 B gal/yr . By 2020, FAME blending would have to account for about 16 vol% of the distillate pool to enable compliance with the volume standards.” 159

In the scenario whe re the total renewable fuel and advanced biofuel volumes is reduced in proportion to cellulosic biofuel reduction, the MathPro data show that “FAME use would begin to expand in 2015, by which time the gasoline pool is saturated with ethanol (2012) and carryover RINs have been exhausted (2014). By 2017, FAME blending would exceed the current 5% blending limit in diesel fuel, and FAME produc tion would have to reach 3.6 B gal/y, over 50% higher than the reported current FAME nameplate capacity of about 2.2 B gal/y . By 2020, FAME would have to account for about 6.5 vol% of the distillate pool to enable compliance with the RFS volume standards , which exceeds the current blending limit of 5 vol% .” 160

E. Deficit R ollover I s N ot a S olution to the B lendwall

. Some have suggested that the ability to roll a RIN deficit over in to the following year could be a solution to the blendwall problem. That is incorrect. In fact, when the first obligated parties opt to carry a deficit, it should be a signal to EPA that the RFS has become infeasible. Although it is permissible to roll a RIN deficit over for one year, EPA’s rules state that the entire de ficit and the entire obligation must be met in the second year. Given that the RFS mandates escalate year by year , rolling a deficit over from 2014 in to 20 15 will not solve the problem. This is because the rapidly increasing mandated volumes will make it virtually impossible for a party in deficit ever to recover from the deficit. What options would the obligated party have in the second year to remain in compliance with the law except to severely curtail its obligation ?

F. When Obligated Parties Reduce Domestic Production Because of the Blendwall, Systemic RIN Shortages Prevent Other Companies from Using It as an O pportunit y T o Increase Their Domestic Sales Volumes and Market Share.

In the RFS 2013 final rule, EPA incorrect ly dismisses the potential for reduced domestic fuel supplies, resulting from increased fuel exports and /or decreased fuel imports

. 161 According to EPA, domestic

157 78 Fe d. Reg. at 9,285

. 158 MATHPRO S TUDY , supra note 57, at Exhibit 1A

. 159 Id. at 11. 160 Id. at 13. 161 2013 RFS Final Rule, supra note 35, at 66

- 67.30

supply is unlikely to drop when certain obligated parties are unable to supply the market becau se other obligated parties would simply increase sales volumes in an effort to gain market share

. 162 This reasoning represents a fundamental misunderstanding of the blendwall problem and ignores the fact that the blendwall affects the entire industry. 163 NERA explains that “the blending percentage standard for total renewable fuel will eventually exceed the maximum feasible level of renewable fuel that can be contained on average in a gallon of transportation fuel given the technological, market, and infra structure constraints in the economy. ” 164 As a result, RINs will become scarce for everyone

. 165 A scarcity of RINs likely will result in fewer gallons of gasoline and diesel that may be legally sold

— a scenario that cannot be alleviated through the use of E15 or E85, as discussed elsewhere in this Petition. The contraction of the market is due to the fact that every batch of transportation fuel sold in the United States requires a specific percentage of RINs to be obtained. If surplus RINs are not available, no additional fuel may be sold in the domest ic market.

As reported by NERA, there are limited compliance mechanisms , and they include reducing the RFS compliance obligation by reducing domestic fuel supplies ( e.g. , increasing exports, reducing production )

. NERA uses diesel as a specific example to illustrate how annual percentage standards, applied to both gasoline and diesel, could result in the tightening of the diesel supply initially, and then result in smaller gasoline and diesel supplies. 166

In the RFS 2013 final rule, EPA also incorrectly asserts that high feedstock prices are a primary driver for RIN price increases. 167 One needs only point out that RINs prices were only a few pennies for years, while relative ethanol and petroleum prices varied, but only just recently shot up in 2013 while the ethanol and petroleum prices did not change significantly from prior year’s variations. What has changed is the ethanol and gasoline consumption data that show we were nearing the blend wall. According to N ERA, the cost of RINs depends on available supply, and RIN prices increase when there is an imbalance between supply and demand. 168 While the markets are certainly related, ethanol supply and demand is not necessarily a factor in RIN price. As noted in thi s Petition, compliance with the RFS is becoming more difficult due to blending requirements exceeding the amount of renewable fuel that can be folded into U.S. transportation fuels. It would be wrong to conclude that RIN prices are increased due to lack o f ethanol supplies, especially during a period when the United States is a net exporter of ethanol. If the market demands more ethanol, then market signals via ethanol prices are sufficient.

Last, EPA indicates the impact of increasing RIN prices is not to increase overall transportation fuel costs, but rather to reduce the price of higher renewable content fuels ( e.g. , E85) relative to the price of other fuels with a lower renewable content (e.g., E10). To use more E85, retailers must drop the price bel ow

162 Id. 163 EPA is confusing an initial competitive market dynamic as the blendwall approaches with the blendwall impact itself. All players do not run short of RINs at the same time. While some obligated parties are already constrained and exposed to the full market RIN costs, others have a RINs inventory and lower average RINs costs. Obligated parties with lower costs would be expected to gain market share at the expense of higher cost suppliers. But the supply of RINs relative to demand is shifting and will continue to tighten as the RINs inventory is drawn down and fewer are available for sal e as the mandates increase and additional RINs must be found in the marketplace to demonstrate compliance. 164 NERA S TUDY , supra note 4, at 26. 165 Id. at 26

- 30. 166 Id. at 31

- 34. 167 2013 RFS Final Rule, supra note 35, at 66. 168 See NERA S TUDY , supra note 4, at 29

- 30.31

that of gasoline to overcome the consumers’ rejection of its efficiency loss and inconvenience. That has not occurred. According to the AAA, as of August 12, 2013 , the national average retail price for E85 was selling at a 1 7

- cent premium to regular g asoline o n an energy

- equivalent basis

. 169 Moreover, the independently

- owned retail service stations do not share the compliance burden that obligated parties bear to meet the RFS requirements. EPA’s flawed logic assumes that obligated parties can overcome the blendwall merely by encouraging increased E85 consumption through dramatically reduced prices. As discussed in this Petition, this is not so.

IV. A Partial Waiver C an A void the I nadequate D omestic S upply and A void S evere E conomic H arm.

A. The NERA Study Provides a Fundamentally New Analysis Than Studies Previously Considered by EPA.

The NERA Study differs in two fundamental respects from prior studies considered and rejected by EPA: (1) with respect to its assumptions about E10 production ; and (2) in its economic modeling. In both divergences from prior studies, the NERA Study responds directly to EPA’s stated criteria for analyzing waiver petitions

.

In its 2008 denial of Texas’ s waiver petition, EPA explained that it believed the Iowa S tate model was the best available model to examine the impacts of a RFS waiver because it is a stochastic model and it captures the interaction between the agricultural and energy markets. 170 In its final notice of action, EPA dismissed several studies exam ining the ability of refiners to decrease ethanol blending because the studies failed to address whether the economics of ethanol and gasoline production would lead refiners to reduce blending rates in the event of a waiver. 171 The prior analyses assumed a departure from the production of E10 and decreased use of ethanol as oxygenate in the event of a waiver, which EPA deemed implausible under current market conditions. 172 In contrast, the NERA Study assumes that all refiners will continue to produce as much E10 as possible and examines a situation in which production of E10 alone is no longer sufficient to meet the RFS. 173 This reflects the actual blendwall that faces the United States now and is an important difference that distinguishes and validates the NER A Study , unlike the prior studies considered and rejected by EPA.

F urther , in its prior waiver denials, EPA faulted studies for failing to model interactions between the fuel and agricultural sectors and for valuing ethanol on an energy equivalent, rathe r than a volumetric,

169 http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asp (last visited Aug. 13, 2013). 170 73 Fed. Reg. at 47,174.
171 Id. 172 Id. 173 EPA also expressed doubts about studies presented in the comment period on its denial of waiver requests in 2012. EPA found that there are a number of business and technical reasons that may prevent refiners from

mov ing away from the production of E10. See 77 Fed. Reg. at 70,767. As with the doubts EPA expressed in its 2008 denial, these concerns have no place in the current evaluation, as the NERA S tudy makes no assumptions that refiners will shift away from the pr oduction of E10. In its prior denials of petitions for waivers under the RFS, the EPA declined to rely upon other studies offered by previous petitioners and other commenters, noting several shortcomings with the studies. The NERA report also does not suf fer from these same alleged deficiencies, and its economy

- wide analysis is sufficiently robust to serve as the basis of a determination that implementation of the RFS will cause severe economic harm.32

basis. 174 EPA has also rejected commenters’ submissions of studies on the impacts of the RFS on the livestock industry, finding that these studies “do not focus on the impact s directly related to the RFS.” 175 The NERA S tudy is different because it is focused on the behavior of refiners in response to the blendwall and the cascading effects that such behavior will have on fuel prices and ultimately on the economy as a whole. 176 The study assumes that sufficient ethanol to meet the RFS’s vol ume obligations will remain available and that virtually the entire gasoline pool will be E10. Further, the NERA S tudy relies upon a broad economic model that examines the interaction among f ive energy and seven non

energy sectors. 177 Therefore, the NERA S tudy is not subject to the same shortcomings that have caused EPA to question previous studies submitted by commenters in support of a waiver of the RFS.

B. The Rationale s Supporting Previous Waiver Decisions Do Not Preclude Waiver of the 2014 RFS , and Imme diate Action Is Necessary.

As explained above, this Petition is unlike those that have preceded it because

— unlike the prior waiver petitions

— the blendwall is now here, and a waiver is concretely necessary. Despite this key difference, it bears mention that EPA has at least twice considered the “standards” to be applied in evaluating whether a waiver petition under section 211(o)(7)(A) would re lieve a severe economic harm cause by the RFS. In its 2008 denial of a waiver petition from the state of Texas, EPA first interpreted the language of section 211(o)(7)(A) and concluded that the Clean Air Act requires a “generally high degree of confidence that implementation of the RFS program would severely harm the economy of a State, region, or the United States.” 178 EPA rejected the Texas’ 2008 waiver petition, finding that a waiver of the RFS would have no impact on ethanol demand during the period of the waiver and therefore would not increase the feed and fuel prices that Texas alleged were the source of severe economic harm. 179 EPA considered a second waiver petition from the Governors of several states in 2012. In considering the 2012 petition, EPA invited comment on its 2008 interpretation of section 211(o)(7)(A). 180 EPA ultimately rejected the waiver petition , concluding that the evidence did not support that the RFS was causing severe economic harm because “the weight of the evidence shows that it is very likely that the RFS volume requirements will have no impact on ethanol production volumes in the relevant time frame, and therefore no impact on corn, food, or fuel prices.” 181 I n doing so, the EPA determined that its 2008 interpretation of the waiv er provision was correct and that “EPA interprets ‘severely harm’ as specifying a high threshold for the nature and degree of harm.” 182

While Petitioners believe that EPA has, to date, adopted an unnecessarily narrow view of its discretion to issue waivers under section 211(o)(7)(A), that fact is immaterial here because t he impacts described in the NERA Study unquestionably rise to the level of severe economic harm upon which a waiver can be based. EPA must immediately issue a waiver to avoid the inadequate domestic supply and severe adverse economic impacts that will be caused by the RFS. Nothing in the Clean Air Act requires that the severe economic harm serving as the basis for the waiver petition must occur in the same year that EPA

174 73 Fed. Reg. at 47,174. 175 Id. at 47,178. 176 NERA S TUDY , supra note 4, at 7 (explaining that NERA relies upon its transportation fuel and macroeconomic models in evaluating the impacts of the RFS).
177 Id. at 14. 178 73 Fed. Reg. at 47,16 9. 179 Id. at 47,168

- 69

. 180 77 Fed. Reg. 52,715 (Aug. 30, 2012). 181 77 Fed. Reg. at 70,775

. 182 Id. at 70,756.33

issues the waiver. 183 The statutory language governing the application of the severe economic harm test for a waiver provides “implementation of the requirement would severely harm the economy or environment of a State, a region, or the United States.” 184 The use of the conditi onal tense rather than the present tense suggests that future harm is an appropriate basis for granting the waiver.

EPA itself recognized that the agency has “ discretion in determining the appropriate time period to analyze” with respect to a severe eco nomic harm analysis in its denial of North Carolina’s and Arkansas’s waiver petition s

. 185 Indeed, EPA previously requested petitioners to file waiver petitions 6 months in advance to facilitate EPA’s review of the petition. 186 By its own admission, EPA does not expect to wait 6 months from the time severe harm begins before granting a waiver.

Previously, EPA declined to examine impacts beyond the current calendar year due to an inability to properly assess the relevant variables. 187 The NERA Study fully accounts for fluctuations in fuel prices and availability, and it provides sufficient certainty to conclude severe economic harm will result from reaching the blendwall in the years following 2013. 188 Existing infrastructure cannot su pport the higher

ethanol blend fuels required to avoid the blendwall. Moreover, the fact that a waiver applies broadly to the entire regulated community

— and n ot simply to an individual party

— implies that the waiver provision is meant to serve as a tool to address structural issues that could affect the successful implementation of the RFS.

C

. In C ontrast to E arlier W aiver R equest S ituations, in T his I nstance, I ssuance of a W aiver W ill P rovide R elief and A void the H arms R esulting F rom the B lendwall.

The fundamental problem is that RINs are effectively permits to supply gasoline and diesel fuel for U

. S

. consumption, and that as the mandates exceed the ability of the transportation system to consume the mandated levels of renewable fuel, this will result in a shortage of permits to supply gasoline and diesel fuel. By granting a waiver, EPA will solve this problem and avoid the potentially disastrous impacts of the blendwall by eliminating this limitation on gasoline and diesel fuels for U

. S

. consumption. E PA must take immediate action to avoid the severe harm that the blendwall will inflict on consumers and the economy. In contrast to earlier waiver requests, where EPA determined that issuance of the waiver would likely not have provided the relief the petitioners sought, in this case, issuance of a waive r will provide relief and avoid the harms that would be inflicted by the blendwall.

V

. There Is an Inadequate Domestic Supply of Cellulosic and Other Advanced Biofuels

.
The RFS contains mandates for t otal advanced biofuels and two subsets of total advanced fuels ( biomass

- based diesel and cellulosic fuels ) . Total advanced fuel requirements are greater than the sum of biomass

- based diesel and cellulosic fuels. That surplus over and above biomass

- based diesel and cellulosic fuels we will refer to as other advanced fuels. We note that there is little to no concrete

183 See 42 U.S.C. § 7545(o)(7)(A). 184 Id. (emphasis added). 185 See 77 Fed. Reg. at 70,757 (“In considering the time frame used for this technical analysis, EPA recognizes that we have discretion in determining the appr opriate time period to analyze.”). 186 73 Fed. Reg. at 47,184. 187 77 Fed. Reg. at 70,757

- 58. 188 See id. at 70,758 (noting that a waiver petition based on the blendwall itself could provide a proper analysis of all the relevant factors required to grant a petition based on severe economic harm occurring in a year different than the year of the petition’s filing).34

evidence that the domestic supply of either cellulosic biofuels or other advanced biofuels will reach the designated statutory targets

.

A. Inadequate Supply of Cellulosic Biofuels.

T he data in the EPA Moderated Transaction System (EMTS) indicates that no cellulosic biofuel was produced in 2011 and very little was produced in 2012. EMTS data show less than 49,000 gallons of cellulosic biofue l production in 2013 to date. 189 These facts suggest that the cellulosic biofuel statutory mandate should be waived based on an inadequate domestic supply. A recent U.S. Court of Appeals decision required EPA to e stablish a realistic cellulosic biofuel sta ndard pursuant to the Clean Air Act

. 190 E ven a complete waiver of this mandate , however , would not be enough to abate the crisis caused by the E10 blendwall.

B. An Inadequate Domestic Supply of Advanced Biofuels.
The 2014 statutory level for advanced biofuels is 3.75 billion gallons. The obligation to blend “advanced” biofuels exceeds the sum of biomass

- based diesel and cellulosic biofuels, and EPA expects the difference to be made up with sugarcane

- based ethanol and extra biomass

- based diesel. A miniscule amount of sugar cane

- based ethanol is produced domestically. Most is sourced from Brazil. The mandate results in imports of other advanced biofuels, which is contrary to the goals of EISA to promote energy inde pendence and security. Drawing from the clear language of the section 211(o) waiver provision, only “domestic supply” should be considered when setting the advanced biofuel and total renewable volumes.

Domestic producers cannot meet the EISA’s advanced biofuels requirements. In this regard, EPA recently identified Brazilian sugarcane ethanol as a potential source to meet the RFS advanced biofuel requirements. 191 EPA’s reliance on Brazilian ethanol crowds out the development of domestic advanced biofuels and actually fosters dependence on a foreign fuel source

— in direct conflict with the Congressional intent of EISA. More importantly for purposes of addressing the blendwall, Brazilian sugarcane ethanol is simply an ethanol derived from a different feedst ock and, therefore, subject to the same blending constraints as corn

- based ethanol. The mandate to incentivize the import of Brazilian sugarcane ethanol merely displaces domestically produced ethanol, but does not help address the ethanol blendwall crisis

. The RFS has caused significant quantities of sugarcane

- ethanol to be imported from Brazil to meet the advanced biofuel mandate, while corn

- based ethanol is sent to Brazil to satisfy consumer deman d in that country. This fuel shuffling between the U.S. and Brazil is a n unintended consequence of the RFS.

Putting aside for a moment the fact that Brazilian sugarcane

- derived ethanol neither helps the ethanol blendwall problem nor qualifies a s a domestic fuel, significant uncertainty exists with respect to Brazil’s ability to export increasing volumes of sugarcane ethanol. EPA’s advanced biofuel volumes for 2013 rely on the import of 666 million gallons of sugarcane ethanol from Brazil. 192 Uncertainty exists whe ther Brazil can increase exports to actually meet this demand. Idled mills and poor harvests have led

189 EPA , 2013 RFS2 D ATA
– RIN G ENERATION AND R ENEWABLE F UEL V OLUME P RODUCTION BY M ONTH , http://www.epa.gov/otaq/fuels/rfsdata/2013emts.htm (last visited Jul y 30, 2013). 190 API v. EPA , 706 F.3d 474 (D.C. Cir. 2013). 191 78 Fed. Reg. at 9285

. 192 Id.35

Brazilian officials to acknowledge that the country most likely cannot increase production and export in 2013 to meet the needs created by EPA’s new targ et levels. 193 Although production of sugarcane has recently increased, 194 l ocal domestic programs, such as new ethanol mandates for gasoline sold in Brazil, may further constrain Brazil’s supply of sugarcane ethanol made available for export. Starting June 1, 2013, all gasoline sold in Brazi l must contain 25 percent ethanol, up from 20 percent

. 195 Unlike in the U nited States , a large portion of the auto fleet is designed to run on g asoline containing more than 10 percent ethanol. 196 Reliance on imported advanced renewable fuel undermines the Energy Independence and Security Act ’s goals of enhancing domestic energy security.

The RFS Advance d Biofuel statutory target for 2014 is 3.75 billion gallons

. It is likely that the available amount of cellulosic biofuel would be de minimis , and may be excluded from this calculation. The domestic supplies of biomass

- based diesel and cellulosic biofuels are limited and require EPA to waive at least 1.83 billion gallons from 3.75 billion gallon s in 2014.
The EPA has the statutory authority to write the advanced mandate down to at least the existing biodiesel production capacity if not further. This may be the only realistic path for implementing the RFS in the next several years. 197

Even if EPA exercises its authority to reduce the cellulosic biofuel mandate to zero and the advance biofuel mandate to 1.92 billion (representing the amount of biomass

- based diesel RINs that can be feasibly produced), while simultaneously lowering the tot al RFS mandate by an equivalent amount, the ethanol blendwall problem would remain. To avoid this problem, EPA must go further and waive an even greater amount of the total RFS mandate than is represented by the shortfall in the cellulosic and advanced ca tegories

.

VI. Conclusion

As explained above, this Petition is unlike any that have come before it . T he blendwall and its myriad attendant harms are certainly at hand as evidenced by a number of factors . The current RFS , based on projections of demand tha t have not materialized, directly threaten s the economy and energy infrastructure of the United States , as well as the well

- being of every American consumer. T he EPA must exercise its authority under section 211(o)(7) to waive the requirements of section 211(o)(2) of the Clean Air Act in a manner that

— at minimum

— is sufficient to delay the ethanol blendwall beyond 2014. The economic impacts of maintaining the status quo are significant , and the h arms outlined in this P etition are of a sufficient nature and severity to justify the waiver requested herein. In addition to the inadequate domestic supply of gasoline and diesel , the severe economic harm caused by the RFS volumes also justif ies EPA’s exer cise o f its waiver authority. Each of the se harms is se vere on a regional

193 Reese Ewing, Analysis: Brazil Ethanol Returns to US as Biofuel Rules Pave Way , R EUTERS , Sept. 20, 2012, http://www.reuters.com/article/2012/09/20/u s

- ethanol

- brazil

- exports

- idUSBRE88J14J20120920. 194 Isis Almeida, Brazil Sugar

- Cane Use for Fuel Seen by Datagro Above Outlook , B LOOMBERG , Jul y 5, 2013, http://www.bloomberg.com/news/2013

- 07

- 05/brazil

- s

- sugar

- cane

- use

- for

- fuel

- seen

- by

- datagro

- beating

outlook.html

. 195 Erin Voegele, Brazil to Increase Ethanol Blend Level to 25 Percent , E THANOL P RODUCER M AG

. , Mar. 7, 2013, http://www.ethanolproducer.com/articl es/9628/brazil

- to

- increase

- ethanol

- blend

- level

- to

- 25

- percent. 196 See Brazilian Transportation Fleet , Sugarcane.org, http://sugarcane.org/the

- brazilian

- experience/br azilian

transportation

- fleet (last visited Aug. 12, 2013). 197 University of Illinois, The Ethanol Blend Wall, Biodiesel Production Capacity, and the RFS...Something Has to Give , (Feb. 13, 2013 ), http://farmdocdaily.illinois.edu/2013/02/ethanol

- blend

- wall

- biod iesel

- RFS.html

.36

or national scale, and each could be mitigated if EPA acts now to waive the RFS for 2014, giving farmers ample time to adjust their production decisions accordingly.

To be s u re, delaying the ethanol blendwall until 2015 will not solve the underlying problem of accelerating RFS mandates. But EPA has clear authority to grant multiple waivers. Section 211(o)(7)(C) provides that waivers are limited to one year, but may be “renewed” by the Administrator after inter

agency consultation. G iven the likelihood that production, supply , and market conditions described in this P etition will continue past 2014 barring a statutory change to the RFS, EPA should also give clear indication in the context of granting a waiver that the methodology used to determine RFS volume waived in 2014 will be used in subsequent years. A clear statement of intent to grant additional waivers if current conditions persist will send a clear message to the marketplace and allow for the most efficient resolution of thi s matter.

In sum, now is the time for EPA to act. The blendwall cannot realistically be forestalled, and its impact on the United States would be devastating. EPA has the authority to prevent this catastrophe. Petitioners urge EPA to do so by grant in g the requested waiver.

Petitioners thank EPA for considering this P etition and the information w ithin and appended to it.

Respectfully submitted,

A MERICAN F UEL & P ETROCHEMICAL M ANUFACTURERS A MERICAN P ETROLEUM I NSTITUTE

_ _____________________________________ ______________________________________ Richard Moskowitz Robert Greco III General Counsel Group Director Downstream and Industry Operations

# Attachment 1

## October 2012



# Economic Impacts Resulting from Implementation of RFS2 Program

Prepared For: American Petroleum Institute

## Project Team

Paul Bernstein, Senior Consultant

Bob Baron, Outside Consultant

W. David Montgomery, Senior Vice President

Shirley Xiong, Consultant

Mei Yuan, Senior Consultant

The findings contained in this report may contain p redictions based on current data and historical trends. Any such predictions a re subject to inherent risks and uncertainties. In particular, actual results could be impacted by future events that cannot be predicted or controlled, including, witho ut limitation, changes in business strategies, the development of future products and services, changes in market and industry conditions, the outcome of contingencies, changes in management, and changes in law or regulations. Neither API nor NER A accept responsibility for actual
results or future events. The opinions expressed herein are those of the auth ors and do not necessarily represent the views of NERA Economic Consulting or any other NERA consultant.

NERA Economic Consulting 1255 23rd Street NW Washington, DC 20037 Tel: +1 202 466 3510 Fax: +1 202 466 3605

www.nera.comNERA Economic Consulting i



## Contents Executive Summary .................................

................................................... .....................................1

I. Introduction ......................................

................................................... .................................4
A. Phase 1 ...........................................

................................................... ...................................4
B. Phase II...........................................

................................................... ...................................6

II. Background ........................................

................................................... ...............................9
A. RFS2 ..............................................

................................................... ...................................9

III. Description of the Models .........................

................................................... ......................12
A. Transportation Fuel Model .........................

................................................... ....................12
B. N ew 

### ERA Macroeconomic Model ...........................

................................................... .........14
C. Model Integration..................................

................................................... ..........................15
D. Analytical Methodology ............................

................................................... .....................15
E. Description of Reference Case and Two Modeling Scen arios ..........................................17
F. Model Parameters ..................................

................................................... .........................19
G. Analytical Methodology ............................

................................................... .....................25

IV. Results ...........................................

................................................... ..................................26
A. The Dilemma with RFS2 .............................

................................................... ...................26
B. RFS2 Implementation ...............................

................................................... ......................27
C. Diesel Death Spiral ...............................

................................................... ..........................31
D. The Role of Banked RINs ...........................

................................................... ....................34
E. RFS2 Program Will Eventually Fail .................

................................................... ..............36
F. Economic Impact of RFS2 ...........................

................................................... ...................38

V. Conclusions .......................................

................................................... ..............................40 Appendix A: Renewable Fuels Standard Description .

................................................... ..............41
A. Renewable Fuel Standard (RFS2) ....................

................................................... ...............41 Appendix B: Detailed Model Description ...........

................................................... ......................45
A. Transportation Fuel Model .........................

................................................... ....................45
B. Macroeconomic Model in N ew 

### ERA Modeling System ............................... .......................54
C. Integration of Models .............................

................................................... .........................56NERA Economic Consulting ii



### INDEX OF FIGURES AND TABLES

Figure 1: Economic Impact of Hitting the RFS2 Blen d Wall: The Death Spiral ......................... 3 Figure 2: Death Spiral Effect on the Diesel Fuel Ma rket from the RFS2 ................................ ....... 6 Figure 3: Development of the NERA Reference Case .

................................................... ............ 17 Figure 4: Characterization of Scenarios 1 and 2 ..

................................................... ..................... 18 Figure 5: RIN Obligations .........................

................................................... ................................ 28 Figure 6: Percentage Change in Cost per Gallon of M otor Gasoline and Diesel ......................... 29 Figure 7: Change in Blended Fuels Sales (Motor Gaso line and Diesel) .................................. .... 30 Figure 8: Progression of the Diesel Death Spiral...

................................................... .................... 31 Figure 9. Declining Diesel Demand Forecasting (201 2 – 2015) ......................................... ........ 34 Figure 10: EISA '07 Renewable Fuel Standard 2008-20 22 ................................................ .......... 42 Figure 11: EPA’s Formulas for the RFS2 Percentage Mandates .......................................... ....... 51

Table 1: Fuel Production and Blending Options for M eeting RFS2 Compliance .......................... 2 Table 2: Fuel Production and Blending Options for M eeting RFS2 Compliance .......................... 5 Table 3: Changes in Consumption, Labor Income, and GDP Relative to Baseline (2010$) .......... 8 Table 4: Range of Biomass Based Diesel Availability (Billions of Gallons per Year) ................ 19
Table 5: Reference Case Fuel Price Ratios for Blen ded Gasoline and Diesels (Ratio on a GGE Basis of Biofuel to Conventional Fuel) ............

................................................... ............. 19 Table 6: Number of E85 Stations Built Annually (20 05 through 2011) .................................. ... 22 Table 7: Sales of E85 (Billions of Gallons) ......

................................................... ........................ 23 Table 8: Computation of Available RINs at the Begin ning of 2012 (Billions) ........................... . 24 Table 9: RFS2 Mandated Total Biofuels Percentage a nd the Maximum Percentage of Renewable Fuel in Finished Fuel in Diesel, E85, and E10 .....

................................................... ......... 26 Table 10: RFS2 Mandated Total Biofuels Percentage and Associated RIN Values ................... 33 Table 11: RIN Deficit or Surplus per Gallon of Fue l Sold (RIN/Gallon of Fuel) ....................... 35 Table 12: Cumulative Total of Surplus Banked RINs i n Billions ........................................ ........ 36 Table 13: RFS2 Collapse for Scenario 1............

................................................... ....................... 37NERA Economic Consulting iii



### Table 14: Changes in Consumption per Household, Con sumption, Labor Income and GDP Relative to Baseline (2010$s) .....................

................................................... ................... 39 Table 15: September 2011 STEO and AEO 2011 Referen ce Scenario – Sales of Gasoline Fuels (Billions of Gallons, Unless Otherwise Noted) .....

................................................... ........ 45
Table 16: NERA Reference Case Sales of Gasoline Fu els (Billions of Gallons Unless Noted Otherwise) ........................................

................................................... .............................. 46
Table 17: NERA Reference Case Sales of Diesel Fuel s (Billions of Gallons) ........................... . 46
Table 18: NERA Reference Case Sales of Biofuels in Motor Gasoline (Billions of Gallons) .... 47
Table 19: Baseline Fuel Price Ratios for Blended G asoline and Diesels (Ratio on a GGE Basis of Biofuel to Conventional Fuel) ..................

................................................... ................. 48 Table 20: AEO 2011 Reference Case Fuel Prices ($/G allon)............................................. ......... 50
Table 21: EPA’s Final Rule for RFS standards for 2 012................................................ ............. 52
Table 22: Maximum Amount of Biomass Based Diesel T hat Can be Produced (Billions of Gallons) ..........................................

................................................... ................................ 53 Table 23: Sales of E85 (Billions of Gallons) .....

................................................... ....................... 54NERA Economic Consulting iv



### TERMINOLOGY

AEO Annual Energy Outlook. An annual publication from t he EIA that offers

projections that can be used as a basis for examina tion and discussion of energy production, consumption, technology and mark et trends and the direction they may take in the future. This study u sed AEO2011.

CARB California Air Resources Board

CGE Computable General Equilibrium

Biodiesel A type of biomass-based diesel comprised of mono-al kyl esters of long

chain fatty acids derived from vegetable oils or an imal fats, and meeting the requirements of ASTM D 6751. A blend of biodie sel fuel with petroleum-based diesel fuel designated BXX, where X X represents the volume percentage of biodiesel fuel in the blend.

Biomass based diesel Includes biodiesel and renewable diesel

Biofuel Producer or Importer Generator of RINs at the point of biofuel productio n or the port of

importation
Blending Percentage Standard Ratio of renewable fuel volumes required by RFS2 an d the total gallons of

gasoline and diesel fuel that will be sold in the u pcoming year

EIA Energy Information Administration

EISA ‘07 Energy Independence and Security Act of 2007

EPA United States Environmental Protection Agency

E0 Neat gasoline; 100% petroleum gasoline, does not co ntain ethanol

E10 A gasoline blend containing 10 percent ethanol by v olume (E10)

E85 An ethanol/gasoline fuel blend containing a relativ ely high percentage of

ethanol by volume and a relatively low percentage o f petroleum hydrocarbons by volume. While its name connotes a b lend of 85% ethanol and 15% gasoline, the ethanol content of E85 is sea sonally adjusted to meet ASTM recommended specifications and to improve vehi cle cold-start and warm-up performance. Following the EIA’s practice, we will analyze E85 sales under the assumption that fuel sold as E85 co nsists of 74% ethanol and 26% gasoline by volume on a year-round average basis.NERA Economic Consulting v



### FFV Fuel Flexible Vehicles: certified to use ethanol/g asoline blends containing

up to 85 percent volume ethanol

N ew 

### ERA NERA’s proprietary macroeconomic model
Obligated Party Companies that produce and/or import gasoline and/o r diesel fuel

Reference Case NERA Reference Case (no RFS2 mandate)

RFS2 Renewable Fuel Standard Per Energy Independence and Security Act of

2007

RINs Renewable identification numbers (Credits for compl iance with RFS2)

Scenario 1 NERA scenario with implementation of RFS2 and AEO R eference Case

biodiesel supplies

Scenario 2 NERA scenario with implementation of RFS2 and AEO H igh Fuel Price

case biodiesel supplies

### 1



## Executive Summary

The American Petroleum Institute (API) commissioned NERA Economic Consulting (NERA) to conduct a study of the economics and comp liance issues related to the implementation of the Renewable Fuel Standard (RFS2 ) per the Energy Independence and Security Act of 2007. NERA relied upon publically available information and NERA’s proprietary economic modeling to develop the analys is. The study found that RFS2, in its current form, will likely become infeasible within the next three or four years, which would result in significant harm to the U.S. economy.

The RFS2 requires transportation fuel producers and importers (obligated parties) to incorporate specified volumes and categories of bio fuels into their products annually. These mandates increase yearly, and collectively, require the use of 36 billion gallons of renewable fuels in 2022. Each year the annual total renewabl e fuel volume mandate is calculated as a percentage of the nation’s total projected fuel con sumption for the upcoming year. The renewable fuel volume obligation (RVO) for each obl igated party is calculated by applying that percentage to the total annual volume of gasoline a nd diesel produced or imported by each obligated party during that year. Compliance with the RFS2 each year is demonstrated through “Renewable Identification Numbers” (RINs) which are unique identifiers attached to every gallon of renewable fuel produced or imported. Obl igated parties submit RINs as evidence of meeting the annual RVO.

Table 1 lists the four primary mechanisms that obli gated parties can use for compliance with the RFS2. In the early years of the RFS2 prog ram, these mechanisms offered a workable means for compliance. However, as the RFS2 volume requirements increase, combined with higher vehicle fuel efficiencies, these mechanisms become less effective until the RFS2 reaches the point of infeasibility.

### 2

Table 1: Fuel Production and Blending Options for M eeting RFS2 Compliance

Compliance Mechanism Limitation Minimize production of E0 Demand for E0 will not completely disappear due to customer demand and limits on ethanol distribution Increase production of E85 Demand for E85 will remain low due to limited E85 infrastructure, E85’s low fuel economy, and consume r preference for conventional fuels
Increase use of biodiesel The available volume of biodiesel is relatively sma ll compared to the overall RFS2 requirement
Produce and market E15 Market penetration of E15 will be limited by vehicl e warranty, retail infrastructure, misfueling, and ge neral liability issues

As these mechanisms approach their limit, obligated parties will reach the point when biofuels cannot be incorporated into fuel products at the volumes necessary to meet the RIN obligation because of technological, infrastructure or market constraints.

This study finds that the RFS2 volume requirements will exceed the transportation fuel market’s ability to absorb the biofuel volumes mand ated within three to four years. At that point in time obligated parties will not be able to meet market demand for transportation fuel and still remain in compliance with the RFS2. Therefore, aft er exhausting all other available options for compliance, individual obligated parties, each acti ng independently, could be forced to reduce their RIN obligation by decreasing the volume of tr ansportation fuel supplied to the domestic market – either by reducing production or exporting

.
As domestic fuel supplies decrease, large increases in transportation fuel costs would ripple through the economy imposing significant cos ts on society. More specifically, as the RFS2 mandate is ratcheted up every year, the fuels market will be pushed into a death spiral shown in Figure 1. The death spiral depicts the ec onomic harm that occurs as individual obligated parties act to remain in compliance with the program. Once the blend wall has been reached, the annual increase in the RVO results in decreased fuel availability and increased fuel costs to society. These increased fuel costs have a broad impact across the economy.

### 3

Figure 1: Economic Impact of Hitting the RFS2 Blen d Wall: The Death Spiral

This process repeats itself yearly. As domestic su pply continues to decline, the blending percentage obligation becomes increasingly untenabl e. Obligated parties rely on RINs acquired and carried forward from earlier years to meet comp liance obligations. However, the findings and analysis of this report indicate that by 2015-2 016 compliance with the RFS2 in its current form will likely be infeasible, which would result in significant damage to the economy.

The death spiral impact is seen most acutely in the diesel fuel market. The tightening of the diesel supply (up to 15% decline in 2015) cause s large fuel cost increases to ripple through the economy, adversely affecting employment, income , consumption, and GDP. By 2015, the adverse macroeconomic impacts include a $770 billio n decline in GDP and a corresponding reduction in consumption per household of $2,700.

### 4



## I. Introduction

The American Petroleum Institute (API) commissioned a two-phase study of the economics and compliance issues resulting from the implementation of the Renewable Fuel Standard (RFS2) per the Energy Independence and Sec urity Act of 2007. The RFS2 requires transportation fuel produces and importers (obligat ed parties) to incorporate specified volumes and categories of biofuels into their products annu ally. These mandates increase each year, and collectively, require the use of 36 billion gallons of renewable fuels in 2022. Each year the
annual total renewable fuel volume mandate is calcu lated as a percentage of the nation’s total projected fuel consumption for the upcoming year. T he renewable fuel volume obligation (RVO) for each obligated party is calculated by applying that percentage to the total annual volume of gasoline and diesel produced or imported by each ob ligated party during that year. Compliance with the RFS2 each year is demonstrated through “Re newable Identification Numbers” (RINs) which are unique identifiers attached to every gall on of renewable fuel produced or imported. Obligated parties submit RINs as evidence of their compliance with the RVO.



### A. Phase 1
API retained Charles River Associates (CRA) to cond uct Phase I of the study. 1 

### The work concluded that the increasing volumes mandated by t he RFS2 will eventually exceed the market’s ability to absorb ethanol into petroleum f uel. That is, the RVO will eventually exceed
the maximum feasible level of renewable fuel that c an be contained on average in a gallon of petroleum transportation fuel given technological, behavioral, and infrastructure constraints. Using EIA’s Annual Energy Outlook AEO 2011, the stu dy estimated that the so-called blend wall (maximum concentration of ethanol of 10% that can be blended in gasoline and used by conventional gasoline-powered motor vehicles) will be reached by 2013.

To comply with the RFS2 mandates, obligated parties have increased production of E10 and E85 while minimizing production of E0 (pure gas oline). To the extent that biodiesel is available, obligated parties have blended biodiesel to produce B5. As the RFS2 mandated volumes for renewable fuels increase, however, thes e mechanisms reach their limit.

1 Phase I study report: “Impact of the Blend Wall Con straint in Complying with the Renewable Fuel Standa rd,” Charles River Associates, November 2, 2011.

### 5

Table 2: Fuel Production and Blending Options for M eeting RFS2 Compliance

Compliance Mechanism Limitation Minimize production of E0 Demand for E0 will not completely disappear due to customer demand and limits on ethanol distribution Increase production of E85 Demand for E85 will remain low due to limited E85 infrastructure, E85’s low fuel economy, and consume r preference for conventional fuels
Increase use of biodiesel The available volume of biodiesel is relatively sma ll compared to the overall RFS2 requirement
Produce and market E15 Market penetration of E15 will be limited by vehicl e warranty, retail infrastructure, misfueling, and ge neral liability issues

The Phase 1 study concluded that as obligated parti es exhaust these methods of compliance, they will eventually be forced to eithe r decrease the production volumes or export product in order to reduce their individual biofuel obligation and meet RFS2 volume percentage requirements. These market shifts will initially r esult in a tightening of the diesel fuel supply followed by subsequent years of reductions in both the gasoline and diesel fuel supply. The shrinking domestic petroleum fuel supply coupled wi th expanding RFS2 requirements would result in making compliance increasingly more diffi cult and lead to significant economic impacts.

In Figure 2 this effect is depicted as a death spir al of the diesel fuel market. Each year obligated parties must absorb increasing volumes of biofuels into declining volumes of petroleum fuel without exceeding the approved perce nt blending limits. In each of the years under review in this study, the previous year’s red uced forecast for diesel fuel demand exacerbates compliance hurdles for the following ye ar, resulting in economic harm to trucking and commerce first and eventually impacting the U.S . economy as a whole.

### 6

Figure 2: Death Spiral Effect on the Diesel Fuel Ma rket from the RFS2

This process repeats itself yearly. As domestic su pply continues to decline, the blending percentage obligation becomes increasingly unattain able. Obligated parties rely on RINs acquired and carried forward from earlier years to meet compliance obligations. However, the findings and analysis of this report indicate that by 2015-16 compliance with the RFS2 would become infeasible and result in significant damage to the economy.

Phase II of the study builds on the findings of Pha se I and quantifies the economic impacts of complying with the RFS2 requirements.



### B. Phase II
For Phase II of the study, API retained NERA Econom ic Consulting (NERA) to analyze the potential impacts on the transportation fuels m arket and the U.S. economy resulting from complying with the RFS2. NERA relied upon publical ly available information and NERA’s proprietary economic modeling to develop the analys is. Diesel/biofuel blending results in RIN deficit

Obligated Parties must purchase surplus RINs or reduce diesel production Diesel cost increases EPA determines the Final Percentage Standards for renewable fuel

blending 2012 RFS2 Volume Target (RVO) AEO2012 Forecast Gasoline + Diesel

Diesel sales decline 2013 RVO
AEO2013 Forecast Gasoline + Diesel

2014 Cycle

2015 Cycle

### 7

NERA used two proprietary models: NERA’s transporta tion fuel model and the N ew 

### ERA
macroeconomic model. These models were run 2 

### to quantify the economic impacts from implementation of the RFS2. Specifically, the tran sportation fuel model estimates the amount of fuel produced for and consumed by the transportatio n sector, and explicitly estimates the demand for E0, E10, E85, B0, and B5. The N ew 

### ERA macroeconomic model 3 

### simulates all economic interactions in the U.S. economy, including those a mong industry, households, and the government.

The macroeconomic impacts of the RFS2 mandate on th e U.S. economy were estimated through the year 2015. These results show large in creases in transportation fuel costs and disruptions to the transportation fuel supply that will ripple adversely through the economy. From 2012 to 2014, the higher transportation diesel fuel costs will have the biggest and most immediate impact on the economy. The cost to move raw materials and finished goods about the country will increase. This increased cost will be passed through to consumers in the form of higher costs on finished goods and services and, as a result, consumption per household will drop. Although labor earnings initially rise, such an increase is modest compared to the loss in consumption, as labor earnings are unable to offset the higher costs for goods. In the near term, investment and production is temporarily accelerate d in anticipation of rising prices and GDP increases, but this shift is unsustainable and by 2 014, GDP declines by more than $250 billion.

In 2015, the economic impacts worsen. In addition to the negative impact of higher costs for finished goods and services caused by rising di esel fuel costs, gasoline costs increase as a
result of RSF2. Consumers are left with fewer doll ars to spend on other goods and services, resulting in lower consumption. Lower levels of co nsumption lead to declining production of goods and services that consumers would have otherw ise purchased. In 2015, the consumption per household declines by about $2,700 per year fro m baseline levels, with total U.S. consumption declining by about $340 billion. Since there is lower demand for finished goods

2 The macroeconomic model was connected to the transp ortation fuel model through a one-way link in which the macroeconomic model incorporated the fuel cost incr eases of the transportation model. 3 The N ew ERA macroeconomic model uses the resulting scenario fuel prices from the transportation fuel model. Then the N ew ERA macroeconomic model is run to assess the econom y wide impacts of the changes in fuel prices. Since the transportation model becomes inf easible in 2015 under Scenario 1, we could not run the N ew ERA macroeconomic model over the 2012 to 2015 time horizon. Therefore, the following impacts are reflective of Scenario 2, but these should be consi dered as a lower bound of what might occur.

### 8

and services, the need for workers to provide those goods and services drops. As a result of the smaller size of the economy, workers would earn $58 0 billion less (Table 3). These negative impacts are also reflected by the loss in GDP of $7 70 billion dollars.

Table 3: Changes in Consumption, Labor Income, and GDP Relative to Baseline (2010$)

2012 2013 2014 2015 Change in Average Consumption per Household -$1,200 -$1,200 -$1,300 -$2,700
Change in Consumption (Billions) -$150 -$140 -$160 -$340
Change in Labor Income (Billions) $24 $42 $27 -$580
Change in GDP (Billions) $43 $50 -$270 -$770
Source: NERA N ew ERA model results.



### The remainder of this report provides details on th e models used, the reference cases, and the detailed results of the modeling analysis. The appendices provide descriptions of the RFS2 program and model details.

### 9



## II. Background

A. RFS2
Congress first established a Renewable Fuel Standar d (RFS) in 2005 with the enactment of the Energy Policy Act of 2005 (EPACT). Two year s later, Congress passed the Energy Independence and Security Act of 2007 (EISA ‘07) wh ich superseded and greatly expanded the biofuels blending mandate. This expanded RFS is re ferred to as RFS2, which applies to all transportation fuel used in the United States—inclu ding diesel fuel intended for use in highway motor vehicles, non-road, locomotive, and marine di esel. 4 

### RFS2 introduces four new major
distinctions from RFS:
1. RFS2 increases the mandated usage volumes and exten ds the time frame over which the volumes ramp up to 2022;
2. RFS2 subdivides the total renewable fuel requiremen t into four separate but nested categories—total renewable fuels, advanced biofuels , biomass-based diesel, and cellulosic biofuel—each with its own volume require ment or standard;
3. Biofuels qualifying under each nested category must achieve certain minimum thresholds of lifecycle greenhouse gas (GHG) emission performa nce, with certain exceptions applicable to existing facilities; and
4. All renewable fuel must be made from feedstocks tha t meet the new definition of renewable biomass, including certain land use restr ictions.

1. Nested Mandates
Because of the nested nature of the biofuel categor ies, any renewable fuel that meets the requirement for cellulosic biofuels or biomass-base d diesel is also valid for meeting the overall advanced biofuels requirement. Thus, any combinati on of cellulosic biofuels or biomass-based
biodiesel would count toward the advanced biofuels mandate, thereby reducing the potential need for imported sugarcane ethanol to meet the “ot her” advanced biofuels mandate. Similarly, any renewable fuel that meets the requirement for a dvanced biofuels is also valid for meeting the total renewable fuels requirement. As a result, an y combination of cellulosic biofuels, biomass-

4 Heating oil, jet fuel, and fuels for ocean-going ve ssels are excluded from RFS2’s national transportat ion fuel supply; however, renewable fuels used for these pur poses may count towards the RFS2 mandates.

### 10

based biodiesel, or imported sugarcane ethanol that exceeds the advanced biofuel mandate would reduce the potential need for corn-starch ethanol t o meet the overall mandate.

2. Waivers
The EPA Administrator has the authority to waive th e RFS requirements, in whole or in part, if, in his/her determination, there is inadeq uate domestic supply to meet the mandate, or if “implementation of the requirement would severely h arm the economy or environment of a State, a region, or the United States.” 5 

### Further, under certain conditions, the EPA Admini strator may waive (in whole or in part) the specific carve- outs for cellulosic biofuel and biomass-based
diesel fuel. 6 

### Furthermore, EISA ‘07 requires that EPA evaluate and make an appropriate market determination for setting the cellulosic standard e ach year.

3. Implementation
Under EISA ‘07, the U.S. Environmental Protection A gency (EPA) is responsible for implementing regulations to ensure that transportat ion fuels sold in the United States contain a
minimum volume of renewable fuels in accordance wit h the four nested volume mandates of the RFS2. Compliance with the RFS2 is demonstrated by the use of RINs. 7 

### A RIN is generated by a biofuel producer or importe r at the point of biofuel production or the port of importation. Each gallon of ethanol ge nerates one RIN. Biodiesel generates 1.5 RINs per gallon. RIN generators must register with the EPA. After a RIN is created by a biofuel producer or importer, it must be reported to the EP A. RINs are transferable. Congress determines the total renewable fuel volume that must be incorporated into the nation’s fuel supply each year—referred to as a RVO . The EPA translates the RVO into blending percentage standards that are used by obli gated parties to determine their individual

5 Clean Air Act section 211(o)(7)(A)(i). 6 For example, in February 2010 EPA waived most of th e 2010 cellulosic biofuel carve-out—EISA ‘07 had se t the mandate at 100 million gallons but EPA lowered the requirement to 6.5 million gallons, more than 90% l ess than scheduled by EISA ‘07. Then, in July 2010, EPA low ered the 2011 RFS for cellulosic biofuels to a rang e of 5 to 17.1 million gallons. EPA cited a lack of current and expected production capacity, driven largely by a lack of investment in commercial-scale refineries. In 2011 , EPA waived more than 98% of the cellulosic biofue l volume EISA “07 required for 2012. 7 For tracking purposes, each RIN has a unique 38-cha racter number that is issued (in accordance with EP A guidelines). Each RIN identifies which of the four RFS categories—total, advanced, cellulosic, or bio diesel— the biofuel satisfies. In addition, a biodiesel RI N has an equivalence value of 1.5 when being used a s an advanced biofuel.

### 11

RVO. 8 

### This percentage standard represents the ratio of renewable fuel volumes required by RFS2 to the projected total gallons of gasoline and diesel fuel that will be sold in the upcoming year. The EPA relies on projections from the Depar tment of Energy’s Energy Information Administration (EIA) for the information to estimat e the expected total gallons sold. Companies that refine or import gasoline or diesel transportation fuel for the retail market are obligated to include a quantity of biofuels equ al to the percentage of their total annual fuel sales. At the end of the year, each obligated part y must have enough RINs to show that it has
met its share of each of the four mandated standard s. If an obligated party has met its mandated share an d has acquired surplus RINs, it can sell the extra RINs to another party or it can hold onto the RINs for future use (to be used the following year, but the previous year’s RINs can co mprise only up to 20% of the current year’s obligation). 9

8 The blending percentage standard is computed as the total amount of renewable fuels mandated under RFS 2 to be used in a given year expressed as a percentage o f expected total U.S. transportation fuel use. Thi s ratio is adjusted to account for the small refinery exemptio ns. A separate ratio is calculated for each of the four biofuel categories.
9 A RIN would not be viable for any year’s RVO beyond the immediately successive year; thus giving it essentially a two-year lifespan. For any individual company, up to 20% of the current year’s RVO may b e met by RINs from the previous calendar year.

### 12



## III. Description of the Models
This study used NERA’s proprietary transportation f uel model and its N ew 

### ERA
macroeconomic model. These models were run interac tively 10 

### to quantify the economic impacts from RFS2 that are reported in this study. This se ction describes both models. A more detailed description of the models, including a model formul ation is provided in Appendix B.



### A. Transportation Fuel Model
The transportation fuel model is a partial-equilibr ium model designed to estimate the amount of fuel produced for and consumed by the tra nsportation sector. The model maximizes the discounted present value of household consumpti on (a measure of household value) subject to meeting the RFS2 program fuel requirements and s atisfying the transportation sector’s demand for fuel while not violating any transportat ion sector infrastructure constraints.
The model is calibrated in the near term to the EIA ’s Short-Term Energy Outlook (STEO) for September 2011 and in the long term to t he AEO 2011 forecast, with a few minor adjustments to ensure that the E10 blend wall is no t violated.

1. The Transportation Fuel Model is designed to Model RFS2 Program Characteristics
The transportation fuel model was customized to sim ulate the impacts resulting from the RFS2 program. The model solves in one-year time st eps, and has a flexible time horizon. For purposes of this analysis, the first endogenous yea r is 2012 and the last year is 2015. The model solves for the demand of the following finished fue ls: E0 (100% petroleum gasoline), E10 (gasoline containing at most 10% ethanol by volume) , E85 (assumed to contain 74% ethanol by volume), and diesel fuel may contain up to 5% bioma ss based diesel or B5. The model also solves for the following fuel components used in th e production of the above finished fuels: petroleum gasoline, corn ethanol, sugar ethanol, ce llulosic ethanol, petroleum diesel, and
biodiesel. The model combines the six fuel components into the four finished fuels, which can be consumed by motor vehicles subject to the following constraints:

10 The macroeconomic model was connected to the transp ortation fuel model through a one-way link.

### 13

 Minimum E0 use held to 5% of total transportation f uel consumption to represent incomplete market conversion to E10 and preference of some consumers for E0;

 Conventional vehicles can consume either E0 or E10;

 Flexible fuel vehicles (FFVs) can use E0, E10 or E8 5; and

 Commercial trucks/buses, ships, and trains are allo wed to use up to a 5% blend of
biodiesel.

2. RFS/RIN Constraints:

The model accounts for the minimum annual volume of biofuel sales required under the RFS2 program by including constraints on three type s of biofuels:

 Biomass-based diesel;

 Advanced biofuel (includes cellulosic biofuels, bio mass-based diesel, and sugar ethanol);
and

 Renewable fuel (includes advanced biofuel and corn ethanol). For this analysis, we assume that cellulosic biomas s will continue to be commercially available only in very limited quantities, and as a result, EPA would continue to grant a waiver. This assumption avoids the debate about the economi c and technical feasibility of producing
cellulosic fuel 11 

### because this analysis assumes ample supplies of co rn and sugar ethanol to meet the RFS2 mandates. As a result, there is no need f or cellulosic ethanol to meet the non-cellulosic RFS2 targets. As discussed in detail in Appendix B, the fuel supp ly curves capture all pertinent technological issues (penetration rate, availabilit y, and cost) for the different fuels. Similarly, t he fuel demand curves capture the loss in utility from having to reduce travel and also the loss in welfare from fuel scarcity. Different scenarios we re modeled, as discussed in section E. The change in economic activity between the scenarios a nd the baseline provides the economic impacts of the RFS2 policy.

11 There is a secondary effect of assuming no measurab le supplies of cellulosic biomass. Assuming no sig nificant amount of cellulosic biomass production necessitate s the production of additional amounts of biodiesel and sugar-based ethanol to meet the advanced biofuel re quirement, and this affects costs.

### 14

The model also incorporates constraints on the avai lability of various finished fuels to account for both consumer acceptance and infrastruc ture issues. The sales of E85 are limited
based on these issues. Biodiesel sales are limited by supply of biodiesel feedstocks.



### B. N ew 

### ERA Macroeconomic Model

The N ew 

### ERA macroeconomic model is a forward-looking dynami c computable general equilibrium model of the United States. The model simulates all economic interactions in the U.S. economy, including those among industry, house holds, and the government. The macroeconomic and energy forecasts that are used to project the benchmark year going forward are calibrated to AEO 2011 produced by the EIA. Be cause the model is calibrated to an internally-consistent energy forecast, the use of t he model is particularly well suited to analyze economic and energy policies and environmental regu lations. For this study, the N ew 

### ERA model runs from 2012 to 2015 in one-year increm ents. The model includes five energy and seven non-energy sec tors: energy sectors include crude oil, oil refining, natural gas extraction and distribution, coal, and electricity; the non-energy sectors include agriculture, commercial transportation (exc luding trucking), energy intensive sectors, manufacturing, motor vehicle production, services, and trucking. The macroeconomic model incorporates all production sectors and final demands of the economy and is linked through terms of trade. The effects of policies are transmitted throughout the economy as all sectors and agents in the econom y respond until the economy reaches equilibrium. The ability of the model to track the se effects and substitution possibilities across sectors makes it a unique tool for analyzing polici es such as those involving energy and environmental regulations. These general equilibri um substitution effects, however, are not fully captured in a partial-equilibrium framework or with in an input-output modeling framework. The smooth production and consumption functions employe d in this general-equilibrium model enable gradual substitution of inputs in response t o relative price changes thus avoiding “all-ornothing” solutions. Business investment decisions are informed by futur e policies and outlook. The forwardlooking characteristic of the model enables busines ses and consumers to determine the optimal savings and investment while anticipating future po licies with perfect foresight. The alternative approach on savings and investment decisions is to assume agents in the model are myopic, and

### 15

thus have no expectations for the future. Though b oth approaches have their limitations, the latter approach can lead the model to produce incon sistent or incorrect impacts from an announced future policy.



### C. Model Integration
The economic impacts of the RFS2 program were deter mined using the following methodology:
1. Using the transportation fuel model, the baseline a nd scenarios were run to determine the effect on fuel prices resulting from the RFS2 requi rements for increased use of biofuels. The imposition of the RFS2 program leads to changes in fuel prices from the EIA
baseline.
2. Using the N ew 

### ERA macroeconomic model, the resulting changes in f uel prices were translated into taxes (or subsidies) on gasoline an d diesel that yield the same fuel price changes as seen in the transportation fuel model.



### D. Analytical Methodology
All cases were run using NERA’s transportation fuel model, which allowed us to simulate the dynamics of RFS2 compliance and the us e of surplus RIN carryovers, and the methodology that EPA uses each year to determine th e minimum percentages of the different categories of biofuels delineated in the RFS2 stand ard that fuel suppliers must use. The transportation fuel model determined the impact of the RFS2 mandate on the quantities of finished gasoline (E0, E10, and E85) and diesel consumed in the transportation sector. In addition, the model calculated volumes of individual biofuels blended in the finished gasoline (corn ethanol, sugar ethanol, and cellulos ic ethanol) and diesel. The N ew 

### ERA macroeconomic model then determined the impact on t he U.S. economy of meeting the RFS2 mandate. The results were expressed in terms of we ll-known economic parameters: changes in consumer purchasing power, GDP, and labor earnings. Implementation of the RFS2 may create a dynamic tha t can be characterized as a “death spiral,” in which higher costs in the current year lead to lower demand, which in turn lead to higher costs in the next year and so on. NERA’s tr ansportation fuel model represents this process by solving in a recursive dynamic fashion. That is, the model minimizes the cost of

### 16

compliance for the current year, through the use an d value of surplus RINs that were carried forward. Therefore, the years are linked through t he RINs. For example, the available surplus RINs at the beginning of 2012 represents 1.69 billi on gallons of renewable fuel, which is the estimated amount of surplus RINs at the end of 2011 based on AEO 2011 fuel consumption data. After defining the RINs available at the beginning of 2012 and calibrating the model’s supply
and demand curves to the AEO’s forecasted 2012 valu es, the model was solved with the RFS2
constraints and other infrastructure constraints fo r the year 2012. The RINs available at the end of 2012, or the numbe r of RINs carried forward to 2013, equals the RINs available at the beginning of 2012 (1.69 billion gallons) plus the difference between the number of RINs generated and the number of RINs submitted for compliance during
2012. The model will store RINs or use RINs in 201 2 until either the value of a surplus RIN equals the marginal cost of complying with the RFS2 mandate or surplus RINs are depleted. This process is repeated for each successive year. If any of the RFS2 or infrastructure constraints bi nd, then the average fuel price may rise to cause a switch in fuel consumption patterns whic h results in an increase of the percentage of renewable fuel sales to the level required by the R FS2 constraint. An increase in average fuel prices would cause a drop in the equilibrium level of fuel consumption from the EIA’s forecast. The value of the elasticity of demand has a signifi cant effect on the relationship between the increase in fuel price and decline in fuel demand. The more elastic the demand curve, the less prices need to move to induce consumers to reduce t heir demand and thus the easier and less costly it is to meet the RFS2 targets. As the abso lute value of the elasticity of demand declines, demand becomes more inelastic and the cost of compl iance increases. Once finished with 2012, the model then solves for 2013. However, instead of using the EIA’s forecast for 2013 energy consumption, the val ues to which the model calibrates its energy consumption are adjusted based on the model’s 2012 solution values for energy consumption. Assuming that the RFS2 constraint binds for 2012, t he forecasted fuel sales volumes will differ
in 2012 from that of the EIA’s forecast. To be conservative regarding the costs of the RFS2 mandate, we allow surplus RINs to be exhausted over the model horizon. Retaining RINs f or later years would raise program costs in the near term. This is because the transportation sector would need to consume higher percentage levels of biofuels in the near term inst ead of relying on the RINs generated in prior

### 17

years to assist the sector in complying with RFS2. Allowing the RINs to be consumed in the near term ( e.g. , 2014-2015 timeframe) rather than retaining RINs a fter 2015 allows obligated parties to meet the mandates with lower volumes of renewable fuels and hence reduces the burden of the policy.



### E. Description of Reference Case and Two Modeling Scen arios
To analyze the economic impacts of the RFS2 mandate , it was necessary to develop a
Reference Case in which the RFS2 was not in force a nd a set of scenarios in which RFS2 was assumed to be fully implemented. Then by comparing the scenarios to the Reference Case it is possible to isolate the effects of the RFS2 mandate . This section first discusses the construction of the Reference Case and then describes the assump tions underlying each of the two scenarios.

1. Reference Case
The Reference Case is based upon AEO 2011 projectio ns of transportation fuel supply, demand and prices, but with some modifications (Fig ure 3). Unlike EIA, our Reference Case limits the amount of ethanol in the gasoline pool t o not violate the blend wall, and reduces the
level of E0 sales. Our Reference Case includes the AEO 2011forecast for both biodiesel (which is less than that required under RFS2) and E85 cons umption. Although the mix of fuel in our
Reference Case differs from that in the EIA’s AEO 2 011 Reference Case, we maintain consistency with EIA’s forecast of total energy (or vehicle-miles traveled, VMT) consumed in the transportation sector.
Figure 3: Development of the NERA Reference Case

2. Modeling Scenarios
Our scenarios (Figure 4) used the same assumptions as the Reference Case with the added constraint that in each year obligated partie s must comply with the RFS2 program requirements while still not violating the blend wa ll. A gallon of biodiesel is worth 1.5 RINs. EIA 2011 Reference Case Adjust ethanol in gasoline sales so blend wall not exceeded

Adjust E0 and E10 sales so total energy maintained NERA Reference Case

### 18

Also, the volume of biodiesel sales forecast in the EIA’s Reference Case can only make up a percentage of biodiesel in diesel that is far below the B5 blending limit. Therefore, one way for obligated parties to increase the percentage of bio fuels in their total fuel sales is to increase the amount of biodiesel they blend with conventional di esel. However, biodiesel production levels are quite uncertain.
Figure 4: Characterization of Scenarios 1 and 2

NERA developed two scenarios that differed only in their estimate of the availability of biodiesel supplies in the next four years (2012 thr ough 2015). Scenario 1 limited use to no more than that proposed by EPA in their 2012 RFS2 NPRM. Scenario 2 limited biomass based diesel use to that forecast in the EIA AEO 2011 High Oil P rice Scenario. These estimates are intended to bracket the likely range of biomass based diesel availability. The range of biomass based diesel availability is shown in Table 4.

 Scenario 1 – Biomass based diesel production is cap ped at the limit proposed by EPA in
their 2012 RFS2 NPRM. This level reflects the leve ls used in the Phase I analysis.

 Scenario 2 - Biomass based diesel production capped at level in AEO 2011 High Oil
Price Case. NERA Reference Case Apply RFS2 mandates

Biodiesel production capped at RFS2 mandate level

Apply RFS2 mandates Biodiesel production capped at AEO High Oil Price Scenario level Scenario 1: Mandate level of biodiesel

Scenario 2: High biodiesel level

### 19

Table 4: Range of Biomass Based Diesel Availability (Billions of Gallons per Year)

2012 2013 2014 2015
Reference Case 0.92 1.07 1.07 1.23
Scenario 1 1.00 1.28 1.28 1.28
Scenario 2 1.35 1.74 1.66 1.90 Source: NERA analysis and EIA’s Annual Energy Outl ook 2011. 

## F. Model Parameters

1. Fuel Prices
All fuel prices are national, annual averages over multiple grades of fuel. Our Reference Case prices for finished products (gasoline and die sel) are the same as those forecast in the AEO 2011 Reference Case. The NERA Reference Case price s for individual types of biofuels were developed using a variety of sources and are expres sed relative to petroleum gasoline or diesel prices. These relative prices are shown in Table 5 , and the logic and sources upon which these relative prices are based are described below. 12



### Table 5: Reference Case Fuel Price Ratios for Blen ded Gasoline and Diesels (Ratio on a
GGE 13 

### Basis of Biofuel to Conventional Fuel) 14



### 2010 2011 2012 2013 2014 2015
Gasoline 1.00 1.00 1.00 1.00 1.00 1.00
Corn Ethanol 1.86 1.78 1.72 1.61 1.58 1.49 Sugarcane Ethanol 2.08 2.00 1.92 1.81 1.77 1.67
Cellulosic Ethanol 2.62 2.48 2.41 2.23 2.13 2.01
Diesel 1.00 1.00 1.00 1.00 1.00 1.00 Soy-Based Biodiesel 1.74 1.66 1.7 1.66 1.65 1.64

Source: EIA’s AEO 2011, EIA, California Energy Comm ission, IHS Glocal Insight, American Trucking Association, and NERA analysis.

12 The gasoline and diesel prices are taken from the A EO 2011 forecast. 13 Gasoline gallon equivalent basis; fuels GGE are ad justed by relative heating value to petroleum gasol ine. 14 All price ratios are national, annual averages ov er multiple grades of fuel. For gasoline, the grad es include regular unleaded, 89 octane unleaded, and premium u nleaded.

### 20

Corn Ethanol:

 Ratio of corn ethanol to gasoline is from the AEO 2 011 Reference Case, Table A12. We assumed a corn price equal to the average $/bushel price from January 1, 2008 through September 1, 2011 (or $5.00/bushel). We took the c apital, operations, and maintenance
costs from the EIA. 15 

### Summing up all of these costs yielded the forecas ted price for corn
ethanol.

 Sugar Ethanol: Ratio of sugar ethanol prices to ga soline prices taken from California Energy Commission statistics. 16



###  Cellulosic Ethanol: Ratio of cellulosic ethanol pr ices to gasoline prices based on EIA’s cost build up. 17 

### To estimate this cost, we averaged two EIA foreca sts – one based on the capital cost for cellulosic ethanol and the other b ased on the capital cost for biodiesel gasification. However, the future cost of cellulos ic ethanol is uncertain. 18



###  Soy-Based Biodiesel: Ratio of soy-based biodiesel to petroleum diesel prices taken as average of historical spot prices. We calculated th e averages based upon three sources: IHS Global Insight, the American Trucking Associati on’s August 2011 comments on the EPA’s proposed RFS2 rule, and the average ratio of spot SME B100 to spot ultra-low sulfur petroleum diesel from 2009 through 2011. 19



### 2. Supply Elasticities
In addition, supply elasticities were derived by us ing fuel price and fuel supply information from EIA’s AEO 2011 Reference and High Oil Price Cases. These two cases provided time series for the prices and quantities of the different fuels. The price elasticity of

15 Statton, Mac, “Development of Production Costs as a Driver for the National Energy Modeling System,” E nergy Information Administration, Presentation at Interna tional Fuel Ethanol Workshop, June 29, 2011. 16 California Energy Commission, “2011 Integrated Ener gy Policy Report,” February 2012. 17 Statton, Mac, “Development of Production Costs as a Driver for the National Energy Modeling System,” E nergy Information Administration, Presentation at Interna tional Fuel Ethanol Workshop, June 29, 2011. 18 Because we assume the RFS mandate for cellulosic et hanol will be waived, cellulosic ethanol is likely to be irrelevant in our analysis as long as its price is sufficiently greater than that of sugar ethanol, fo r sugar ethanol will be the ethanol of choice to meet the advanced biofuels mandate, and corn and sugar ethanol will b e used in the production of E10 and E85 to help meet the over all biofuel requirement. 19 Kruse, John, “Biodiesel Production Prospects for th e Next Decade,” IHS Global Insight’s Agriculture Gr oup, March 2011; Moskowitz, Richard, “American Trucking Associations’ comment on the EPA’s proposed Regulation of Fuels and Fuel Additives: 2012 Renewa ble Fuel Standards,” August 2011; and Chicago spot prices for ultra-low sulfur diesel and B100.

### 21

supply for each fuel is derived by dividing the per centage change in quantity of fuel demanded by the percentage change in fuel price. The percen tage change in quantity and price are computed by comparing the difference between the fu el consumed and the price of fuel, respectively, in the AEO High Oil Price and Referen ce Cases. The elasticity of supply varies slightly from year to year, but on average, the ela sticity of supply is about 0.4 for corn ethanol and 1.2 for sugar ethanol and soy-based biodiesel. The elasticity for petroleum fuels is 0.8. 20



### 3. Demand Elasticities

The model has a demand curve for each finished fuel – E0, E10, E85, and diesel. The
functional form of these curves is identical to tha t of the fuel supply curves. For the demand curves, the elasticity is the fuel’s own-price elas ticity of demand. Because this analysis concerns itself only with the next few years, the demand cur ves’ elasticity equaled that of Dahl’s estimate for short-term elasticity of -0.1. 21



### 4. E85
Our characterization of the potential for E85 sales in the Phase II research is built upon the initial research on E85 performed as part of th e Phase I study. The Phase I study evaluated the different factors affecting E85 demand. The Ph ase I research concluded that future demand for E85 is not limited by the number of FFVs, but i nstead factors such as consumer reluctance to purchase a new fuel and lack of infrastructure. Co nsumer reluctance stems from the lower fuel economy and limited range of E85. Economic theory suggests and the EPA acknowledges, E85 would have to be priced at a discount to gasoline t o induce cost conscious FFV owners to buy E85 instead of gasoline. Progress in overcoming th e lack of retail infrastructure is likely to be slowed by the relatively high investment costs and uncertain returns facing the parties that will be required to install the necessary infrastructure , particularly in the case of the numerous small and independent business people that own individual retail fuel stations.

20 Paltsev, Sergey, John M. Reilly, Henry D. Jacoby, R ishard S. Eckaus, James McFarland, Marcus Sarofim, Malcolm Asadoorian, and Mustafa Babiker, “The MIT E missions and Prediction and Policy Analysis (EPPA). Model Version 4,” August 2005. 21 Dahl, C.A., “A survey of energy demand elasticities for the developing world,” Journal of Energy and Development

18(I), 1—48, 1994.

### 22

For the Phase II analysis, our estimate of potentia l E85 availability is constructed based upon an optimistic set of assumptions about the iss ues affecting E85 sales. We assumed that there were no consumer acceptance issues. We assum ed that new E85 retail stations would be strategically located in areas proximate to where F FV vehicles operated so that there was no distance penalty for FFVs to travel to an E85 stati on. We based our estimates of potentially available E85 solely upon how quickly new E85
retail stations could be built. The Phase I resear ch identified historical data on the level of new
station construction. Table 6 shows the number of new stations built by year for the period from 2005 through 2011. During this period on average, there were about 340 stations built annually and the growth rate for new stations declined. For the period from 2012 through 2015 we optimistically assumed that new E85 station constru ction would grow at a rate of 25% per year. We also assumed that the volume of E85 sales per st ation would grow about 2.5 times during the period from 2012 to 2015. Table 7 presents our pro jection for maximum E85 sales as compared with the EIA’s forecast of expected E85 sales.
Table 6: Number of E85 Stations Built Annually (20 05 through 2011)

# of E85 Stations
Total Annual Change
2005 436
2006 762 326
2007 1,208 446
2008 1,644 436
2009 1,928 284
2010 2,142 214
2011 2,442 300 Source: United States Department of Energy, Alterna tive Fuels Data Center, http://www.afdc.energy.gov/afdc/data/docs/alt_fueli ng_stations_fuel.xls.

### 23

Table 7: Sales of E85 (Billions of Gallons)

2012 2013 2014 2015

AEO 2011 Forecast 0.06 0.07 0.08 0.09
Maximum Potential E85 Sales 0.54 0.99 1.7 2.6 Source: EIA’s AEO 2011, NERA N ew ERA model results.



### 5. RIN Banking
RIN banking in this report represents how surplus R INs can be carried from one compliance period to the next by an obligated party . Based upon EIA’s AEO 2011 Table 11, we estimated that as of the beginning of January 2012, there were collectively 1.69 billion surplus
RINs available. We refer to these RINs as the init ial inventory of RINs available for compliance. To arrive at this estimate, we first analyzed how m any RINs were available at the end of 2010, which was the first year the policy was in ef fect and then assessed how many RINs were
carried forward from 2010 to 2011 and then from 201 1 to 2012.
The AEO 2011 shows that for 2010 13.64 billion RINs were generated in the U.S. 22 

### The mandate requires 12.95 billion RINs for 2010; hence there was a surplus of 0.69 billion RINs. Since 0.69 billion RINs represents less than 20% of the target renewable fuel volume, all surplus
RINs could be banked or carried forward for use in the following year. Therefore, we assume that at the beginning of 2011, there were 0.69 bill ion RINs available to be used. In 2011, the EIA estimates that 14.95 billion RINs were generate d in the U.S., while only 13.95 billion RINs were needed to comply with the regulation. Therefo re, there would have been a surplus of 1billion RINs for 2013 (again this is less than 20% of the target so the full quantity could be banked). Adding this to the beginning of the year bank yields a 2011 end-of-year bank of 1.69 billion RINs. This figure becomes the number of RI Ns in the bank at the beginning of 2012 (Table 8).

22 AEO 2011, Table 11. Ethanol production is equiva lent to 13.18 billion physical gallons (13.18 billi on RIN gallons) and biodiesel production is equivalent to 0.31 billion physical gallons (0.465 billion RIN ga llons).

### 24

Table 8: Computation of Available RINs at the Begin ning of 2012 (Billions)

2010 2011 2012 RINs Available at the Beginning of the Year 0.00 0.69 1.69 RFS2 Total Renewable Fuel required 12.95 13.95 15.20
RINs Generated 13.64 14.95 Surplus RINs at End of Year 0.69 1.00 20% Max RIN Carryover Allowed into Next Year 2.79 3.04
RINs Available at the End of the Year 0.69 1.69 Source: EIA’s AEO 2011 and NERA analysis.



### 6. Cellulosic Biofuel
As discussed earlier, EPA can waive the RFS2 requir ement, in whole or in part, if there is an inadequate supply to meet the mandate. With res pect to the cellulosic biofuels mandate, there is an established track record by EPA of substantia lly reducing the cellulosic biofuel requirement because of the lack of commercially-available produ ction. In 2010 and 2011, there were no cellulosic biofuel RINs generated. For 2012, EPA h as reduced the requirement for cellulosic biofuels to less than 10 million gallons from the 5 00 million gallons required under RFS2. As a result of the lack of progress in developing c ommercially-available supplies of
cellulosic biomass and the technical and economic h urdles that remain with the production of cellulosic ethanol, and the time required to build and put into service biomass-to-liquids facilities, 23 

### we concluded that it was unlikely that cellulosic biofuels will be used in any appreciable quantities during our forecast horizon.

7. Other Fuel Constraints and Assumptions
The Reference Case imposed both the gasoline blend wall (no more than 10% ethanol) as well as the biodiesel blend limit (no more than 5% biodiesel). We allowed petroleum gasoline
either to be blended with ethanol to make E10 or E8 5, or to be sold as neat gasoline (E0). A review of EIA data from May 2008 through April 2012 showed that E0 reached a low of about 5% in April 2012. The more gasoline that is used t o produce E0 means that there is less to be

23 Phase I report, p. 16.

### 25

blended with ethanol, and hence the more difficult it would be to comply with RFS2. To be conservative in our assessment of the compliance co sts of RFS2, we assume that in the Reference Case, the share of gasoline used to produ ce E0 can drop to as little as 5%. This is consistent with April 2012 data generated by EIA. 24



### G. Analytical Methodology
The two scenarios were analyzed using NERA’s transp ortation fuel model, which allowed us to simulate the dynamics of the RIN bank ing and the methodology that EPA uses each year to determine the minimum percentage of th e different categories of biofuels delineated in the RFS2 standard that fuel suppliers must use. The transportation fuel model determined the impact of the RFS2 mandate on the transportation se ctor using the quantities of finished gasoline (E0, E10, and E85) and diesel consumed. In additio n, the model calculated volumes of individual biofuels blended in the finished gasolin e (corn ethanol, sugar ethanol, and cellulosic ethanol) and diesel (biodiesel). The N ew 

### ERA macroeconomic model then determined the impact on the U.S. economy of meeting the RFS2 mandate. T he results are expressed in terms of common economic parameters: changes in GDP, labor e arnings, and consumer purchasing

power.

24 EIA Weekly Refiner and Blender Net Production data available at: http://www.eia.gov/dnav/pet/pet_pnp_wprodrb_dcu_nus _w.htm. Access date: May 31, 2012.

### 26



## IV. Results

A. The Dilemma with RFS2
There is a fundamental problem with the RFS2 mandat e: the blending percentage standard for total renewable fuel will eventually exceed the maximum feasible level of renewable fuel that can be contained on average in a gallon of transpor tation fuel given the technological, market, and infrastructure constraints in the economy.

In 2015, the total renewable fuels volume mandate r equires that renewable fuels make up 11% of the total gallons of transportation fuel sol d (see Table 9). This exceeds the volume that can be blended in E10 and diesel, which comprise mo re than 95% of the fuel market. 25 

### The only transportation fuel with a renewable fuel blending percentage above 11% is E85, but as was discussed earlier, it is unlikely that more than 2. 6 billion gallons could be sold in 2015 when the total transportation fuel demand is estimated to be approximately 180 billion gallons.

Table 9: RFS2 Mandated Total Biofuels Percentage a nd the Maximum Percentage of Renewable Fuel in Finished Fuel in Diesel, E85, and E10

2012 2013 2014 2015
RVO as Percentage of Total Finished Fuel Sales 8.4% 9.0% 9.8% 11.0%

Max Diesel Biofuel % (Blending biodiesel at 5% is accounted as 7.5% for compliance with total renewable fuel volume standard) 5.0% 5.0% 5.0% 5.0%

Max E85 Biofuel % 74.0% 74.0% 74.0% 74.0% Max E10 Biofuel % 10.0% 10.0% 10.0% 10.0% Source: NERA assumptions and analysis.



### In order to meet the RFS2 target in 2015, RINs that were banked in prior years must be used. However, as the banked RINs become exhausted, the v alue of RINs will increase as will the cost

25 E10 can contain no more than 10% ethanol. E85 is assumed to contain 74% ethanol on an annual average basis. Diesel can contain no more than 5% biodiesel. Biodi esel, however, earns 1.5 RIN credits for each gallo n, so a 5% volumetric blend equates to 7.5% biodiesel on a RIN basis.

### 27

of gasoline and diesel. This will result in the dr astic cut in sales of diesel, E10, and E0 so that E85 becomes a much larger share of the transportati on fuel market. 26



### B. RFS2 Implementation
RFS2 requires that at the end of each year, obligat ed parties have enough RINs to meet their RVO. An obligated party can increase its num ber of RINs by increasing the amount of
biofuels blended into its current fuel volumes. Ad ditionally, an obligated party can acquire RINs by purchasing either biofuel from a biofuel produce r or RINs from another obligated party. The lack of surplus RIN supply results in high RIN valu e and reduced total fuel demand so that the ratio of RINs to physical gallons increases. Conve rsely, if additional RINs are not available for purchase, an obligated party may have no option oth er than to reduce its total volume of fuel produced so that its current stock of RINs is suffi cient to meet its RVO. It is likely that over time an obligated party would be forced to do some combination of both acquiring surplus RINs and reducing the volume of fuel produced to meet it s RVO. Each obligated party will choose its optimal compli ance path based upon the cost of RINs, the market response to changes in fuel cost, technology limitations on blending biofuels with petroleum, and infrastructure and consumer acc eptance issues surrounding increasing E85 sales. An obligated party may first try to blend m ore biofuels into its transportation fuels in order to acquire RINs. For the motor gasoline fuel s, this increase is accomplished by increasing the share of ethanol in motor gasoline by blending more ethanol into conventional gasoline (limited by the blend wall), increasing production of E10 in the early years, or increasing production of E85. For diesel, increasing the cont ent of biofuels means adding more biodiesel into the finished diesel fuel (limited by a 5% blen ding maximum). The ability of obligated parties to increase the blending percentage of biof uels is limited by the availability of biodiesel, blending and infrastructure constraints, and the si ze of the E85 market. Producing E85 gives obligated parties the greatest surplus RINs per gallon of fuel sold. E10 gallons generate a small amount of surplus RINs through 2014. On the other hand, diesel

26 In our analysis the ethanol blend wall is reached i n 2012-2013. However, the severe economic impacts do not occur until 2015-2016. The reason is that in 2012 – 2014 obligated parties acquire as many RINs as is feasible in anticipation of being unable to meet the RFS2 re quirements in later years. The result is that the excess RINs postpone the severe economic impacts that result wh en obligated parties can no longer acquire the numb er of RINS required to comply with RFS2 mandated volumes and thus are forced to limit supplies of gasoline a nd diesel.

### 28

always generates a deficit in RINs. Obligated part ies that sell diesel in the U.S. must always acquire additional RINs beyond those generated thro ugh biodiesel blending because the percentage of biodiesel in diesel is below the tota l renewable fuels blending percentage obligation. Increasing the biodiesel content in fi nished diesel reduces the number of RINs that need to be purchased to offset the deficit. Hence all available biodiesel supplies are purchased by obligated parties, but biodiesel supplies are li mited.
Figure 5: RIN Obligations

Source: NERA analysis.



### As a result, diesel can be thought of as incurring a RIN deficit and gasoline, for the first few years at least, as creating a surplus of RINs. The value of RINs that must be purchased separately is reflected in the cost of the finished gasoline or diesel. 27 

### If a fuel requires the purchase of RINs, such as with diesel, the cost of the finished product will increase. If the

27 The value of a gallon of diesel equals the cost to produce diesel plus the price of additional RINs th at must be purchased to meet the blending percentage standard. The value of gasoline (E10 or E85) equals the cos t to produce E10 or E85 less the price of excess RINs th at the fuel generates and can be sold. The RIN mar ket equilibrates at the point where the marginal value of selling one more gallon of diesel equals the val ue of selling one more gallon of E10 or E85. 8.4% 9.0% 9.8% 11.0%

0% 2% 4% 6% 8% 10% 12%

2012 2013 2014 2015Required Percentage of Biofuel(%)

RFS2 Year Required RIN Obligation

E10

B5

E10 = 10% Ethanol E85 = 74% Ethanol B5 = 5% Biod iesel (Biodiesel earns 1.5 RINS/Gal)

### 29

production of a fuel generates surplus RINs that ca n be sold, such as with E85 and E10 early on, then the cost of the finished product will decrease

. By 2015, however, E10 is no longer generating surpl us RINs. In fact, it cannot generate enough RINs to meet its own blending percentage obl igation. As a result, the gasoline cost increases significantly reflecting the shortage of RINs available (see Figure 6).
Figure 6: Percentage Change in Cost per Gallon of M otor Gasoline and Diesel

Source: NERA N ew ERA model results. 

### As RINs become scarcer, fewer gallons of fuels that require additional RINs can be produced. Since the economy still demands these t ransportation fuels, the value of the RIN will increase to the point that the cost of the fuel, wh ich includes the cost of the necessary RINs, results in the demand equilibrating with the supply of fuel. Consequently the cost to produce fuels that require the purchase of additional RINs increases ( e.g. , diesel), and the cost to produce fuels that generate surplus RINs declines ( e.g. , E85). Diesel costs increase by 45% to 80% in 2014 for Sce narios 2 and 1, respectively; and the cost of diesel increases by over 300% in 2015 in Sc enario 2. These cost increases match up with a drop in sales of 2 to 3 billion gallons in 2014 f or Scenarios 2 and 1, respectively; and a decline of 7 billion gallons in 2015 for Scenario 2, which represents a decline of over 15% from the
Reference Case. On the other side, blended fuels that generate surp lus RINs experience a decline in fuel costs, which induces greater sales. Motor gasoline sales increase by roughly 2 billion gallons from the Reference Case for all years between 2012 and 2014. In 2015, motor gasoline sales decline by at least 3 billion gallons from Referenc e Case levels (see Figure 7).

Scenario 1 Scenario 2

-10% 0% 10% 20% 30% 40%

2012 2013 2014 2015Percentage Change in Cost per Gallon of MotorGasoline (Relative to Baseline) Motor Gasoline

Scenario 1 Scenario 2

-100% 0% 100% 200% 300% 400%

2012 2013 2014 2015Percentage Change in Cost per Gallon of Diesel(Relative to Baseline) Diesel

### 30

Figure 7: Change in Blended Fuels Sales (Motor Gaso line and Diesel)

Source: NERA N ew ERA model results.



### However with time this approach of increasing E10 s ales and reducing diesel sales to comply is not sustainable. As illustrated in Figur e 5, the originally targeted blending percentage
standard for total renewable fuel 28 

### increases with time. From 2012 through 2014 the b lending percentage standard is less than 10%, which is lowe r than the gasoline blend wall limit. But as the blending percentage standard increases, this co ntribution of E10 to producing surplus RINs shrinks. This shrinkage occurs at the same time tha t the gap increases between the total RVO and the total RINs collected from blending biodiesel. In other words, as fewer excess RINs are being generated more RINs are demanded. Thus to comply w ith the total biofuels mandate the reduction in diesel sales would become so large tha t it would lead to such severe rationing of diesel so as to cause extreme disruption in the com mercial transportation sector. It is this growing gap between RIN supply and RIN demand that causes the approach to be unsustainable by 2015-16.

28 Originally targeted blending percentage standard equals the total renewable fuel volume as required by EISA ‘07 divided by EIA’s 2011 forecast for transportation f uel demand. Motor Gasoline Motor Gasoline

Diesel Diesel

-8 -6 -4 -2 0 2 4

2012 2013 2014 2012 2013 2014 2015Change in Blended Fuels (Billions of Gallons),Relative to Reference Case

Scenario 1 Scenario 2

### 31



### C. Diesel Death Spiral
An unintended consequence of the regulatory procedu res for determining compliance is the potentially self-destructive way in which the a nnual blending percentage standards are determined. Figure 8 schematically presents the se ries of steps which result from EPA setting greater blending percentage obligations that cause an increasingly steep decline in diesel sales and lead to unattainable compliance obligations and supply disruptions.
Figure 8: Progression of the Diesel Death Spiral

Diesel/biofuel blending results in RIN deficit

Obligated Parties must purchase surplus RINs or reduce diesel production Diesel cost increases EPA determines the Final Percentage Standards for renewable fuel

blending 2012 RFS2 Volume Target (RVO) AEO2012 Forecast Gasoline + Diesel

Diesel sales decline 2013 RVO
AEO2013 Forecast Gasoline + Diesel

2014 Cycle

2015 Cycle

### 32

As specified in EISA ’07, each year EPA calculates the next year’s blending percentage standards as the ratio of the targeted biofuel volu mes to the EIA’s forecast for total transportation fuel sales in the next year. To comply with the bl ending percentage obligations, obligated parties have several options:

 Sell more E85;

 Increase the ethanol content in gasoline;

 Sell less E0; and

 Increase the biomass-based diesel content in diesel

. Each of these options has limitations. As the Phas e I study concluded, there is limited consumer acceptance of E85 and limited infrastructu re from which to dispense E85. The blending of ethanol into gasoline is restricted by the blend wall. Higher ethanol blends such as E15 are unlikely to be widely sold in the near futu re. E0 sales are unlikely to fall below 5% of total gasoline sales in the next several years, and there is a limited amount of biodiesel that can be cost-effectively produced. In order to meet the blending percentage obligation , obligated parties would be forced to change the mix of fuels they sell to the extent tha t is possible in order to acquire enough RINs to meet the RFS2 mandates. All obligated parties woul d sell as much E85 and blend as much biodiesel into diesel as possible because of the re latively high RINs per gallon these actions generate: 0.74 RINs per gallon of E85 (typical), wh ich compares to only 0.1 RINs for E10 and zero for E0. Biomass based diesel earns 1.5 RINs/g allon, or 0.075 RINs, when blended to make a gallon of B5.
The difference between the renewable fuel volumes m andated by the RFS2 program and the RINs generated through blending of biofuels int o finished products represents the surplus or shortfall in RINs. If obligated parties continued to supply the same volumes of gasoline and diesel fuel, they would not be able to blend enough biofuel, or purchase enough surplus RINs, to remain in compliance with RSF2. This shortage in R INs puts upward pressure on RIN values (Table 10). For Scenario 1, in 2015 the program be comes infeasible, so there is no RIN value
listed in the table.

### 33

Table 10: RFS2 Mandated Total Biofuels Percentage and Associated RIN Values

2012 2013 2014 2015
Renewable Volume Obligation as Blending Percentage 8.4% 9.0% 9.8% 11.0%

RIN value Scenario 1 (2010$/RIN) $10 $14 $27 Note 1

RIN value Scenario 2 (2010$/ RIN) $5 $10 $17 $100

Note 1: Model solution for Scenario 1 in the year 2015 was infeasible.

Source: NERA analysis and N ew ERA model results. 

### The cost of the RINs is borne by the obligated part y and leads to higher costs and lower sales (effectively rationing) for fuels that requir e additional RINs. The cost of RINs also depends on the supply of RINs, which depends greatl y on the supply of excess RINs from gasoline sales. During the first few years, the re sult is that the cost of diesel increases because this fuel requires RINs and the cost of E10 and E85 declines since these fuels produce excess RINs. The higher cost dampens demand for diesel, w hich results in the EIA lowering its forecast for diesel sales. The lower forecast for demand, m eans that the next year’s blending percentage obligation becomes higher than it would have been, resulting in additional pressure on obligated parties who blend diesel to acquire even more RINs. This process repeats each year. The reduced diesel demand forecasting is depicted in Fi gure 9. The top black line represents the
AEO diesel demand for 2011. As the cost of diesel rises, demand declines in subsequent years. The declining demand forecasted through NERA modeli ng is shown in order for 2012, 2013, 2014 years by the blue, red, and green lines, respe ctively.

### 34

Figure 9. Declining Diesel Demand Forecasting (201 2 – 2015)

Source: NERA N ew ERA model results.



### Eventually the RFS2 total renewable fuel target inc reases to the point that it is no longer possible to satisfy the mandate through the availab le compliance mechanisms. As a result, the blending percentage obligation becomes infeasible.



### D. The Role of Banked RINs
Table 11 displays the shortfall or surplus of RINs from selling a gallon of diesel, E10, or E85. The shortfall for diesel depends on the scena rio studied, because the amount of biodiesel differs by scenario. Under Scenario 2, more biodie sel is available and consequently blended with petroleum diesel to yield more RINs per gallon of finished diesel than in Scenario 1. Since
the E10 blend wall is reached in both scenarios for all years, the RIN shortfall and surplus are the same across scenarios as is the E85 RIN surplus. T he level of E10’s RIN deficit or surplus suggests how great demand for previously banked RIN s will be. AEO Forecast in 2011 Forecast in 2012

Forecast in 2013

Forecast in 2014

41 42 43 44 45 46 47

2012 2013 2014 2015Diesel Fuel (Billions of Gallons) 

### Diesel

NERA Modeled Diesel Demand Forecast

### 35

Table 11: RIN Deficit or Surplus per Gallon of Fue l Sold (RIN/Gallon of Fuel)

2012 2013 2014 2015

Diesel Scenario 1 -0.048 -0.045 -0.053

Scenario 2 -0.036 -0.030 -0.040 -0.038
E10 Both Scenarios 0.016 0.010 0.002 -0.010

E85 Both Scenarios 0.66 0.65 0.64 0.63

Source: NERA N ew ERA model results.



### One way obligated parties may lessen the problems c reated by the gap between maximum RINs generated by blending B5 diesel and th e total renewable fuel blending percentage obligation is to purchase or use RINs th at have been banked from previous years. Depending upon the circumstances in a given year, o bligated parties may choose to either acquire additional RINs or use RINs that they acqui red in the previous year. The availability of RINs reserved for later use depends critically on t he surplus RINs generated through the production of E10.
Table 11 shows that the surplus RINs decline dramat ically to almost zero in 2014 and becomes negative in 2015. Therefore, in the first two years, it may be possible to increase the number of banked RINs, but by 2014 only sales of E8 5 would contribute anything meaningful to the surplus RIN supply. From 2014 surplus RIN inve ntories would be drawn down in an effort to make up for the shortfall in RINs created by die sel sales. Table 12 shows the decline of surplus RINs over tim e. The table illustrates that in the early years obligated parties will acquire more RIN s than they need for compliance ( i.e. , they will add RINs to their RIN bank) and use these bank ed RINs in the later years: from 2013
onward in Scenario 1 and from 2014 onward in Scenar io 2. This market behavior is reflective of the value of RINs early on being relatively inexpen sive compared to the value of RINs later when the RFS2 mandates become more stringent. The total of cumulative banked RINs
increases until 2013 in Scenario 1. In Scenario 2 t he total increases until 2014 because there are more RINs available from the blending of biodiesel into finished diesel in Scenario 2. The subsequent exhaustion of the RIN surplus portends a n impending collapse in terms of the RFS mandate leading to an infeasible outcome in the fue ls market.

### 36

Table 12: Cumulative Total of Surplus Banked RINs i n Billions

Scenario 1 Scenario

2

2012 Starting RIN Surplus 1.69 1.69 Surplus RINs Produced 0.16 0.67

RINS Used 0.00 0.00
End of Year RIN Surplus 1.85 2.36

2013 Starting RIN Surplus 1.85 2.36 Surplus RINs Produced 0.00 0.29

RINS Used 0.40 0.00
End of Year RIN Surplus 1.45 2.65

2014 Starting RIN Surplus 1.45 2.65
Excess RINs Produced 0.00 0.00

RINS Used 1.45 0.92
End of Year RIN Surplus 0.00 1.73

2015 Starting RIN Surplus NA 1.73 Surplus RINs Produced NA 0.00

RINS Used NA 1.73
End of Year RIN Surplus NA 0.00

Source: NERA N ew ERA model results.


### E. RFS2 Program Will Eventually Fail
With time the RFS2 requirements become more stringe nt and options for complying
become more limited: the blend wall is encountered , E85 is sold at maximum levels, and biodiesel production is fully exhausted. The resul t is that the demand for RINs exceeds the supply, which causes RIN values to increase and obl igated parties to draw down their bank of RINs. Eventually the surplus of RINs is depleted ( Table 12).

### 37

With surplus RINs depleted at the end of 2014 for S cenario 1, obligated parties must meet the total biofuels obligation percentage of cl ose to 11% in 2015 through the blending and sale of E0, E10, E85, and B5 diesel. There are no surplus RINs from previous years that can be used. The 11% RVO target exceeds the ethanol conte nt in E10, which means that E85 sales must greatly increase to make up for the shortfall. But the market infrastructure and consumer acceptance limits E85 sales causing surplus RINs fr om E85 sales to be scarce. To remain in compliance, obligated parties would have to drastic ally curtail their sales of diesel and E10. Table 13 shows that if the supply of gasoline and d iesel were reduced by over 50% from the EIA’s Reference Case, then obligated parties could comply with RFS2. Clearly, this is an infeasible result. In addition, this result leads to far fewer biofuel gallons (9.4 billion gallons) being sold compared with the 2015 RFS total renewa ble fuel volume mandate of 20.5 billion gallons. As reported in Table 10, the model soluti on was infeasible for 2015 for scenario 1. Table 13 illustrates the unrealistic changes in fue l consumption that would have to take place for the RFS2 policy to be achievable.
Table 13: RFS2 Collapse for Scenario 1

Renewable Fuel per Gallon (%) Fuel

Sales (Billion Gallons) RINs

(Billions) EIA

Reference Scenario 2015 Levels (Billion Gallons) %

Reduction in Fuel Scenario 1 vs. EIA

Obligation % 11.0%
E85 74% 2.6 1.9
Diesel 7.5% 20 1.5
E10 10% 60 6.0
E0 0% 3.0
Motor Gasoline 140 53%
Diesel 46.2 57%
Total 85.6 9.4 186.2
Source: NERA N ew ERA model results. 

### In scenario 2, this infeasibility is delayed until 2016 because the additional biodiesel supplies allow about 1.7 billion RINs to be carried forward from 2014 and to be used in 2015.

### 38

Exhausting the bank of RINs in 2015 fails to preven t the escalation of diesel costs, and they increase by over 300% from the Reference Case.



### F. Economic Impact of RFS2
The macroeconomic impacts of the RFS2 mandate on th e U.S. economy were estimated through the year 2015. The estimates show that the increasing demand for and escalating cost of
RINs causes dramatic increases in the cost of dies el and ultimately, the cost of gasoline by 2015. These higher costs ripple through the economy, coll ectively harming economic growth. From 2012 through 2014, the higher diesel fuel cost s increase the cost to move raw materials and finished goods about the country. Th is increased cost will be passed through to consumers of finished goods and services. As a res ult, consumption of goods and services declines. The lower gasoline prices in this time p eriod slightly offset the negative impacts on consumption from the higher diesel prices. 29 

### In the 2012 to 2014 time frame, labor earnings incr ease, but their increase is modest compared to the loss in consumption, as labor earni ngs are unable to offset the higher costs for goods. 30 

### In the near term, investment and production is te mporarily accelerated in anticipation of rising costs, and GDP increases, but this shift is unsustainable. By 2014 GDP declines by more than $250 billion. In 2015, the economic impacts worsen. In addition to the negative impact of higher costs for finished goods and services caused by rising di esel fuel costs, gasoline costs increase relative
to the baseline as a result of RSF2. Consumers are left with fewer dollars to spend on other goods and services resulting in lower consumption. Lower consumption translates into less need for the production of other goods and services that consumers would have otherwise purchased. The combined effect of less money consumers have av ailable to spend with the higher cost for finished goods and services means that con sumption declines even further. By 2015, consumption per household declines by about $2,700 per year and total consumption declines by about $340 billion. Since there is lower demand fo r finished goods and services, there is less need for workers to provide those goods and service s. As a result, workers would earn $584

29 Consumers are affected by higher diesel prices whi ch are reflected through increases in the costs of goods and services. 30 Increases in biofuel production lead to increases in labor demand.

### 39

billion less as a result of the smaller size of the economy resulting from the implementation of RFS2 (Table 14). These negative impacts are also e xpressed by the loss in GDP of $770 billion.
Table 14: Changes in Consumption per Household, Con sumption, Labor Income and GDP Relative to Baseline (2010$s)

2012 2013 2014 2015 Change in Average Consumption per Household ($/Household) -$1,200 -$1,200 -$1,300 -$2,700
Change in Consumption (Billions of $s) -$150 -$140 -$160 -$340 Change in Labor Income (Billions of $s) $24 $42 $27 -$580 Change in GDP (Billions of $s) $43 $50 -$270 -$770
Source: NERA N ew ERA model results.

### 40



## V. Conclusions
The RFS2 mandate as currently written is likely inf easible given the current technological, infrastructure and market constraint s of the transportation sector. The fuel capability of the existing fleet, the infrastructur e of the fuel distribution system and limited compliance mechanisms are some of the factors that undermine the viability of the RFS2. As obligated parties seek to comply with the RFS2, the mandates lead to unintended consequences that have dramatic and potentially long-term negati ve impacts on the motor fuel industry’s ability to meet market demand and on the economy as a whole. As it becomes increasingly difficult for obligated parties to generate suffici ent RINs to comply with the blending percentage obligation targets from RFS2, very large increases in transportation fuel costs ripple through the economy causing negative macroeconomic impacts. De pending on biodiesel availability, this collapse occurs in 2015 to 2016 timeframe. By 2015, the adverse macroeconomic impacts include a $770 billion decline in GDP and a corresp onding reduction in consumption per household of $2,700.

### 41



## Appendix A: Renewable Fuels Standard Description

A. Renewable Fuel Standard (RFS2)
Congress first established a Renewable Fuel Standar d (RFS1) in 2005 with the enactment of EPACT. Two years later, Congress passed EISA ‘0 7 which included RFS2 that increased the volume mandates of renewable fuels and expanded the transportation fuel mix beyond gasoline. RFS2 became effective in 2010 and applies to all tr ansportation fuel used in the United States—including diesel fuel intended for use in hi ghway motor vehicles, non-road, locomotive, and marine diesel. As shown in Figure 10, RFS2 con sists of four nested mandates for the
minimum volume of renewable fuels contained in the transportation fuels sold in the United States. These mandates increase each year, and col lectively, require the use of 36 billion gallons
of renewable fuels in 2022.

### 42

Figure 10: EISA '07 Renewable Fuel Standard 2008-20 22

Each of the four nested mandates (biofuel categorie s) has its own lifecycle GHG minimum emission reduction requirements and annual volume mandate.

• 

### Total renewable fuel is produced from renewable bio mass and must reduce GHG emissions by at least 20% from the baseline value.

• 

### Advanced biofuel is a subcategory of renewable fuel having a lifecycle GHG emission at least 50% less than the baseline value.

• 

### Biomass-based diesel is a subcategory of advanced b iofuel, and includes biodiesel or renewable diesel fuel having a lifecycle GHG emissi on at least 50% less than the baseline value.

• 

### Cellulosic biofuel – a subcategory of advanced biof uel, and includes fuel produced from cellulose, hemicelluloses or lignin and having a li fecycle GHG emission at least 60% less than the baseline value.

Notes: Cellulosic biofuel requirments were reduced per waiv er approval by EPA for 2010-2012: 2010: 100 million gallons reduced to 6.5 millio n gallons 2011: 250 million gallons reduced to 6.6 millio n gallons 2012: 500 million gallons reduced to 8.65 millio n gallons

Biomass-based Diesel requirement for 2013-2022 has y et to be determined by the EPA but shall be no less than 1 billion gallons. This graph assumes 1 b illion gallons per year in 2012-2022.

### 43

Because of the nested nature of the biofuel categor ies, any renewable fuel that meets the requirement for cellulosic biofuels or biomass-base d diesel is also valid for meeting the overall advanced biofuels requirement. Similarly, any renew able fuel that meets the advanced biofuel requirement is also valid for meeting the total ren ewable fuel mandate. By November 30 of each year, EPA sets for the follo wing year the blending percentage standard for total renewable fuel, advanced biofuel , biomass-based diesel, and cellulosic biofuel by dividing the volumetric mandates for each biofue l category by the projected annual transportation fuel demand forecasted by EIA. Renewable fuel producers and importers generate cre dits in proportion to the amount and type of renewable fuel produced/imported – these cr edits are called RINs. Transportation fuel producers and importers (“oblig ated parties”) must acquire sufficient RINs to demonstrate compliance. Their compliance re quirement is based on the amount of gasoline and diesel they refine or import. The num ber of required RINs, for each renewable fuel category, is calculated by multiplying the blending percentage standard for that year as set by EPA with the volume of gasoline or diesel obligated parties produce or import in that year. Fuels sold that contain less than the blending perc entage standard incur a RIN deficit, and fuels that contain more than the blending percentag e standard accrue surplus RINs. The overall annual blending percentage standard is met if the s urplus RINs generated from fuels containing greater than the required percentage are sufficient to offset the RIN deficits from fuels containing less than the required percentage. An obligated pa rty is in compliance with RFS2 if its supply of RINs for each of the four renewable fuel categories equals or exceeds its fuel sales times the EPA’s stated blending percentage standard for each renewable fuel category. Fuels currently sold into the U.S. market include E 0 and E10 gasoline, B0 and B5 diesel and E85, an alternative fuel containing greater tha n 50% ethanol by volume. E10 is the predominant fuel in the market, when the ethanol vo lume requirement is greater than what can be achieved by blending E10, the E10 blend wall has be en reached, and the blend wall will restrict the greater use of renewable fuels.
Most biodiesel fuel is consumed in blended diesel f uels in which petroleum-based diesel fuel constitutes 95 percent or more of the blend by volume. The most common of such blends is B5 (five percent biodiesel by volume). Most diesel engine manufacturers and automakers

### 44

continue to recommend the use of blends not greater than five percent. These requirements effectively create a B5 blend limit that is analogo us to the E10 blend wall. Original equipment manufacturers design and warrant y engines and vehicles consistent with the E10 specification. Vehicle manufacturers have stated that use of fuels with higher ethanol content would void their warranty on existi ng vehicles with the exception of FFVs, which can accommodate ethanol gasoline blends with as much as 85% by volume ethanol. EPA has approved two partial waivers, that together , allow E15 in vintage 2001 on-road
vehicles and newer. For reasons described in the r eport, however, volumes of E15 are not considered to be materially significant. For examp le, the EIA in its recent Short-Term Energy
Outlook assumed zero E15 demand in 2012 and 2013. 31

31 “This forecast assumes that E15 (gasoline blended with 15 percent ethanol by volume) does not yet re ach the market. Consequently, U.S. ethanol production is p rojected to exceed the volume that can easily be us ed in the U.S. liquid fuels pool, so the Nation will continue to be a net exporter of ethanol over the next two years.” Energy Information Administration, Short Term Energ y Outlook, p. 10, May, 2012.

### 45



## Appendix B: Detailed Model Description
This analysis used the linked system of NERA’s prop rietary bottom-up transportation
fuel model and its N ew 

### ERA macroeconomic model. This section describes th ese two models.



### A. Transportation Fuel Model
The transportation fuel model is a partial equilibr ium model designed to estimate the amount of fuel produced for and consumed by the tra nsportation sector with and without the RFS2 mandate in place. The model maximizes the sum of consumers’ and producers’ surplus subject to meeting the RFS2 program fuel requiremen ts and satisfying the transportation sector’s demand for fuel while not violating any transportat ion sector infrastructure constraints.
1. Input Data Assumptions for the Model Baseline
The fuel sales forecast for the gasoline market is based upon the AEO 2011 Reference scenario. Table 15 reports the EIA’s forecast for petroleum gasoline and ethanol sales as well as E85. To be optimistic about the ability of obligat ed parties to meet the RFS2 mandate, we assume that the level of E0 sales is only five perc ent of the total petroleum gasoline sales. Until recently, this percentage has been above 10% (see P hase I report). Applying this assumption to the AEO’s forecast yields the following forecast fo r E0, E85, and petroleum and ethanol in the remaining motor gasoline fuel (Table 15).
Table 15: September 2011 STEO and AEO 2011 Referen ce Scenario – Sales of Gasoline Fuels (Billions of Gallons, Unless Otherwise Noted)

Fuel (Billions of Gallons or %) 2012 2013 2014 2015
E0 6.28 6.29 6.28 6.27
Petroleum in E10 119.24 119.54 119.40 119.22
Ethanol in E10 15.01 15.25 15.48 15.72 % Ethanol in E10 11.2% 11.3% 11.5% 11.7%
E85 0.06 0.07 0.08 0.09
Source: EIA’s AEO 2011 and EIA’s STEO September 20 11.

### 46

The fundamental problem with the EIA’s forecast is that the percentage of ethanol in E10 exceeds the blend wall of 10%. In 2012, the share of ethanol in E10 is forecasted to be 11.2%. To eliminate this infeasibility, we adjusted the sa les of ethanol and petroleum in E10 so that the modified E10 would comply with the E10 blend wall w hile the overall total energy content in motor gasoline remained the same. That is, the for ecast used in the model maintains the total energy demanded on an MMBtu basis for travel (Table 16).

Table 16: NERA Reference Case Sales of Gasoline Fu els (Billions of Gallons Unless Noted Otherwise) Fuel (Billions of Gallons or %) 2012 2013 2014 2015

E0 6.28 6.29 6.28 6.27
Petroleum in E10 120.35 120.77 120.79 120.78
Ethanol in E10 13.37 13.42 13.42 13.42 % Ethanol in E10 10.0% 10.0% 10.0% 10.0%
E85 0.06 0.07 0.08 0.09 Source: NERA Analysis.



### The AEO’s 2011 forecast without modifications is us ed for the petroleum diesel and biomass based diesel sales forecast (Table 17).

Table 17: NERA Reference Case Sales of Diesel Fuel s (Billions of Gallons)

2012 2013 2014 2015
Petroleum Diesel 41.8 43.9 44.2 45.0
Biomass based diesel 0.92 1.07 1.07 1.23 Effective Biodiesel % 2.2% 2.4% 2.4% 2.7%
Source: EIA’s AEO 2011 and NERA analysis.



### For the forecasts for the volume of biofuel compone nts in motor gasoline, we disaggregate the ethanol production into corn, cell ulosic, and sugar ethanol (see Table 18). Sugar ethanol consumption is based on the Food and Agricultural Policy Research Institute’s (FAPRI’s) 2011 Outlook. We use the EIA’s forecast for cellulosic ethanol. Corn-based ethanol equals the sum of ethanol used in E10 and E85 less cellulosic and sugar ethanol consumption.

### 47

This assumption is optimistic because it gives high er volumes for sugar ethanol. Ethanol use in
E10 and E85 is inferred from Table 18.

Table 18: NERA Reference Case Sales of Biofuels in Motor Gasoline (Billions of Gallons)

2012 2013 2014 2015
Corn Ethanol 12.60 12.22 11.16 10.49 Sugar Ethanol 0.81 1.25 2.33 3.00
Cellulosic Ethanol 0.01 0.01 0.01 0.01 Sources: Food and Agricultural Policy Research Ins titute for sugar ethanol imports.
Note: Corn ethanol = Ethanol in E10 + Ethanol in E 85 – Sugar Ethanol – Cellulosic
Ethanol


### The forecasts for fuel price ratios are based upon a number of data sources. The gasoline and diesel prices come from AEO’s 2011 Reference fo recast. For corn ethanol we built up the prices from the EIA's work. We assumed a corn pric e equal to the average $/bushel price from January 1, 2008 to September 1, 2011 (or $5.00/bush el). We took the capital, operations, and
maintenance costs from the EIA. 32 

### Summing up all these costs yielded the forecasted price for corn based ethanol. The price of sugar ethanol is assumed to be $1.00 to $1.50 per gallon higher than neat gasoline based on recent actual price dif ferentials between the two fuels. 33 

### The cost of
cellulosic ethanol is uncertain. 34 

### To estimate this cost, we averaged two EIA forec asts – one based on the capital cost for cellulosic ethanol an d the other based on the capital cost for biodiesel gasification. 35 

### For biodiesel, we made use of three sources: Glo bal Insights, the American Trucking Association’s comment on the EPA’ s proposed rule entitled: Regulation of
Fuels and Fuel Additives: 2012 Renewable Fuel Stand ards , and the average ratio of spot SME B100 to spot ultra-low sulfur petroleum diesel from 2009 through 2011.

32 Statton, Mac, “Development of Production Costs as a Driver for the National Energy Modeling System,” Energy Information Administration, Presentation at Interna tional Fuel Ethanol Workshop, June 29, 2011. 33 California Energy Commission, “2011 Integrated Ene rgy Policy Report,” February 2012. 34 Because we assume the RFS mandate for cellulosic e thanol will be waived, cellulosic ethanol is likely to be irrelevant in our analysis as long as its price is sufficiently greater than that of sugar ethanol, fo r sugar ethanol will be the ethanol of choice to meet the advanced biofuels mandate, and corn and sugar ethanol will b e used in the production of E10 and E85 to help meet the over all biofuel requirement. 35 Statton, Mac, “Development of Production Costs as a Driver for the National Energy Modeling System,” Energy Information Administration, Presentation at Interna tional Fuel Ethanol Workshop, June 29, 2011.

### 48

All price ratios are national, annual averages over multiple grades of fuel. For gasoline, the grades include regular unleaded, 89 octane unle aded, and premium unleaded (Table 19).

Table 19: Baseline Fuel Price Ratios for Blended G asoline and Diesels (Ratio on a GGE Basis of Biofuel to Conventional Fuel)

2010 2011 2012 2013 2014 2015
Gasoline 1.00 1.00 1.00 1.00 1.00 1.00
Corn Ethanol 1.86 1.78 1.72 1.61 1.58 1.49 Sugarcane Ethanol 2.08 2.00 1.92 1.81 1.77 1.67
Cellulosic Ethanol 2.62 2.48 2.41 2.23 2.13 2.01
Diesel 1.00 1.00 1.00 1.00 1.00 1.00 Soy-Based Biodiesel 1.74 1.66 1.7 1.66 1.65 1.64

Source: NERA assumptions.



### 2. Fuel Supply Curves
To address the changes in fuel production from the baseline, we use separate supply curves for each fuel. The elasticity of the supply dictates how the prices of fuels change with changes in production. In particular, they help de termine how costly it is to expand biofuel production above the Reference Case levels. Each supply curve is benchmarked to the NERA Refere nce Case, which is a slight
modification of the EIA’s Reference Case. The Refe rence Case price and quantity are denoted by (Q 0 

### (t),P 0 

### (t)). Each supply curve is also defined by an elas ticity that is estimated from several data points from the EIA’s Reference and High Oil P rice scenarios. Each supply curve has the following functional form: Q(t)/Q 0 

### (t) = (P(t)/P 0 

### (t)) elasticity 

### Formulation of the supply curves is such that the m odel replicates the Reference Case if no RFS2 mandate is imposed. For each year, the ben chmark datum point for the biodiesel supply curve is derived from the EIA’s reference sc enario projections for fuel quantities and prices. The benchmark datum point for the corn eth anol supply curve comes from our adjusted EIA reference scenario (NERA Reference Case) for qu antities and the EIA’s cost analysis. For

### 49

sugar ethanol, we used the EIA’s demand forecast an d the ARB’s cost ratio of sugar ethanol to corn ethanol. Table 17, Table 18, and Table 19 rep ort the prices and quantities to which the supply curves were calibrated. 36 

### The own price elasticity for each fuel is derived b y dividing the percentage change in quantity of fuel demanded by the percentage change in fuel price. The percentage change in quantity and price are computed by comparing the di fference between the fuel consumed and price of fuel, respectively, in the AEO high oil pr ice and reference scenarios. The elasticity of supply varies a bit from year to year, but on avera ge, the elasticity of supply is about 0.4 for corn ethanol, 1.2 for sugar ethanol and biodiesel. The elasticity for petroleum fuels was is 0.8. 37



### 3. Demand Curves

The model has a demand curve for each final fuel – E0, E10, E85, and diesel. The
functional form of these curves is identical to tha t of the fuel supply curves. For the demand curves, the elasticity is the fuel’s own price elas ticity of demand. Because this analysis concerns itself only with the next few years, the demand cur ves’ elasticity equaled that of Dahl’s estimate for short-term elasticity of -0.1. 38


### These curves are calibrated to the demand data in T able 16 and Table 17. The EIA’s AEO 2011 Reference Case provides the gasoline and d iesel prices to which the demand curves’ initial prices are calibrated (Table 20). As with the supply curves, the demand curves are structured so that the model replicates the NERA Re ference Case level of demand for each fuel
in the absence of the RFS2 mandate.

36 The previous section provides more detail on how th e forecast prices were derived. 37 Paltsev, Sergey, John M. Reilly, Henry D. Jacoby, R ishard S. Eckaus, James McFarland, Marcus Sarofim, Malcolm Asadoorian, and Mustafa Babiker, “The MIT E missions and Prediction and Policy Analysis (EPPA). Model Version 4,” August 2005. 38 Dahl, C.A., “A survey of energy demand elasticities for the developing world,” Journal of Energy and Development

18(I), 1—48, 1994.

### 50

Table 20: AEO 2011 Reference Case Fuel Prices ($/G allon)

Fuel 2012 2013 2014 2015
Gasoline 2.82 2.97 3.05 3.13
Diesel 2.92 2.97 3.02 3.08
Source: EIA’s AEO 2011.


### 4. Transportation Fuel Model is Designed to Model RFS2 Program Characteristics
The transportation fuel model was customized to sim ulate the impacts resulting from the RFS2 program. The model solves in one-year time st eps and has a flexible time horizon. The first endogenous year is 2012. The model tracks th e sale of the following fuels: E0 (100% petroleum gasoline), E10 (gasoline containing at mo st 10% by volume ethanol), E85 (assumed to contain 74% ethanol by volume), and diesel (contain ing at most 5% biodiesel). The model also tracks the use of the following fuel components in the production of the above finished fuels: petroleum gasoline, corn ethanol, sugar ethanol, ce llulosic ethanol, petroleum diesel, and
biodiesel. The model combines the six fuel components into the four end-use fuels, which can be consumed by specific vehicle types:

 Minimum E0 use held to 5% to represent incomplete m arket conversion to E10 and preference of some consumers for E0;

 Conventional vehicles can consume either E0 or E10;

 FFVs can use E0, E10, or E85; and

 Commercial trucks/buses, ships, and trains are allo wed to use diesel, which has up to a five percent mix of biodiesel (B5).

5. RFS/RIN Constraints

The model includes three biofuel constraints to acc ount for the minimum annual volume of biofuel sales required under the RFS2 program:

 Biomass based diesel;

 Advanced biofuel (includes cellulosic biofuels, bio mass-based diesel, and sugar ethanol);
and

 Renewable fuel (includes advanced biofuel and corn ethanol).

### 51

For this analysis, we omit the RFS2 constraint for cellulosic ethanol under the assumption that the EPA would continue to grant a waiver becau se cellulosic biofuels will be commercially available only in very limited quantities. This as sumption avoids the debate about the economic and technical feasibility of producing cellulosic b iofuel 39 

### and is likely optimistic given the current difficulty procuring cellulosic biofuel sup plies. Since this analysis assumes ample supplies of corn and sugar ethanol to meet the RFS2 mandates, there is no need for cellulosic ethanol to meet the non-cellulosic RFS2 targets. Therefore, we model the following three RFS2 constr aints, which are defined in the EPA’s Final Rule for the Regulation of Fuels and Fu el Additives.
Figure 11: EPA’s Formulas for the RFS2 Percentage Mandates 40

39 We note that there is a second- or third-order effe ct of assuming no measurable cellulosic supplies. Assuming no significant amount of cellulosic ethanol production necessitates additional amounts of biodiesel and s ugar based ethanol to meet the advanced biofuel requirement, a nd this affects costs and compliance. 40 http://www.gpo.gov/fdsys/pkg/FR-2012-01-09/pdf/2011 -33451.pdf , at p. 19.

### 52

The final standards for 2012 are provided below in Table 21.

Table 21: EPA’s Final Rule for RFS standards for 2 012 41



### Fuel Percentage
Cellulosic biofuel 0.002% to 0.01%
Biomass-based diesel 0.91%
Advanced biofuel 1.21%
Renewable fuel 9.21%
Source: EPA.



### 6. Model Formulation
The following text describes the transportation fue l model – its objective function and constraints - at a high-level. Maximize: Consumer Surplus + Producer Surplus + Value of RIN Bank Subject to: RFS2 advanced biofuel constraint (% r equirement) RFS2 biodiesel constraint (% requirement) RFS2 total biofuel constraint (% requirement)
Blend wall constraint for E10 not to exceed 10% et hanol
Blend wall constraint for diesel not to exceed 5% biodiesel Limit on E85 sales based on Phase I findings for p enetration of E85

stations
Lower bound on E0 sales as a fraction of total sal es (calibrated to baseline

levels) Upper bound on biodiesel production RIN bank(t) = RIN bank(t-1) + RIN Deposit(t) – RIN withdrawal(t) t = 2012, ..., 2015
RIN bank cannot exceed 20% of biofuel sales... Consumer Surplus = the area under the demand curve for each delivered fuel ( e.g. , E0, E10, etc .)

41 EPA’s Section I on pg. 1323 of the EPA’s Final Rule for the Regulation of Fuels and Fuel Additives: 20 12 Renewable Fuel Standards. Table I.A. 3-2.

### 53

Producer Surplus = the area under the supply curve for each fuel component ( e.g. , corn ethanol, biodiesel, etc .) RIN bank in 2012 equals the carryover of RINs from 2011. The supply curves capture the technological issues (penetration rate, availability, and cost) for the different fuels. The demand curves f or fuel capture the loss in utility from having to
reduce travel and also the loss in welfare from hav ing to switch fuels. The RFS constraint is applied only in the RFS2 scenarios. The change in economic activity between the scenario and the baseline provides the economic impacts of the R FS policy. The models for the reference and high biofuel scena rios differ only in the upper bound for the amount of biodiesel production. Table 22 r eports these levels.

Table 22: Maximum Amount of Biomass Based Diesel T hat Can be Produced (Billions of Gallons)

Scenario 2012 2013 2014 2015

Reference Scenario 1.00 1.28 1.28 1.28 High Biodiesel Scenario 1.35 1.74 1.66 1.90
Source: EIA’s AEO 2011 and NERA analysis.



### The sales of E85 are limited by how q uickly the E85 fueling infrastructure can be expanded. At the end of 2011, there were only abou t 2,400 stations that sold E85. This small volume resulted in E85 making up only about 1% of a ll potential FFV fuel purchases. By allowing the addition of E85 pumps in retail statio ns to increase at a rate far faster than that in recent history (1,000 stations per year versus abou t 400 stations per year from 2006 through 2010), yields about 6,400 stations by 2015. Given people’s propensity to seek out E85 stations if they have a FFV, we assume that this level of stati ons translates into the following bound on E85 sales (see Phase I report for more details). Table 23 shows that this upper limit on E85 sales is quite optimistic relative to the EIA’s forecasted E 85 sales.

### 54

Table 23: Sales of E85 (Billions of Gallons)

2012 2013 2014 2015
AEO 2011 0.06 0.07 0.08 0.09
Maximum 0.54 0.99 1.7 2.6
Source: EIA’s AEO 2011 and NERA N ew ERA model results.



### B. Macroeconomic Model in N ew 

### ERA Modeling System

The N ew 

### ERA macroeconomic model is a forward-looking dynami c computable general equilibrium model of the United States. The model simulates all economic interactions in the U.S. economy, including those among industry, house holds, and the government. The economic
interactions are based on the IMPLAN 2008 database for a benchmark year, which includes regional detail on economic interactions among 440 different economic sectors. The macroeconomic and energy forecasts that are used to project the benchmark year going forward are calibrated to the most recent AEO produced by t he EIA. Because the model is calibrated to an internally-consistent energy forecast, the use o f the model is particularly well suited to analyze economic and energy policies and environmen tal regulations. For this study, the N ew 

### ERA macroeconomic model was set to run from 2012 to 2015 in one year time steps. We aggregated all the states into one U.S. region since the RFS2 program is a nationwide policy. We then aggregated the 440 se ctors into five energy and seven non-energy sectors: energy sectors include crude oil, oil ref ining, natural gas extraction and distribution, coal, and electricity; the non-energy sectors inclu de agriculture, commercial transportation (excluding trucking), energy intensive sectors, man ufacturing, motor vehicle production, services, and trucking.
The N ew 

### ERA model incorporates EIA energy quantities and en ergy prices into the IMPLAN Social Accounting Matrices. This in-house d eveloped approach results in a balanced energy-economy dataset that has an internally consi stent energy benchmark data as well as
IMPLAN consistent economic values. The macroeconomic model incorporates all production sectors and final demands of the economy and is linked through terms of trade. The effects of policies are transmitted throughout the economy as all sectors and agents in the econom y respond until the economy reaches equilibrium. The ability of the model to track the se effects and substitution possibilities across

### 55

sectors and regions makes it a unique tool for anal yzing policies such as those involving energy and environmental regulations. These general equil ibrium substitution effects, however, are not fully captured in a partial equilibrium framework o r within an input-output modeling framework. The smooth production and consumption functions emp loyed in this general equilibrium model enable gradual substitution of inputs in response t o relative price changes thus avoiding all or nothing solutions. Business investment decisions are informed by futur e policies and outlook. The forwardlooking characteristic of the model enables busines ses and consumers to determine the optimal savings and investment while anticipating future po licies with perfect foresight. The alternative approach on savings and investment decisions is to assume agents in the model are myopic, thus have no expectations for the future. Though both a pproaches are equally unrealistic to a certain extent, the latter approach can lead the model to p roduce inconsistent or incorrect impacts from an announced future policy. The CGE computable general equilibrium modeling too l such as the N ew 

### ERA macroeconomic model can analyze scenarios or polici es that call for large shocks outside
historical observation. Econometric models are uns uitable for policies that impose large impacts because these models’ production and consumption fu nctions remain invariant under the policy. In addition, econometric models assume that the fut ure path depends on the past experience therefore fail to capture how the economy might res pond under a different and new environment. For example, an econometric model cannot represent changes in fuel efficiency in response to increases in energy prices. However, N ew 

### ERA macroeconomic model can consistently capture future policy changes that envisage having large ef fects.
The N ew 

### ERA macroeconomic model is also a unique tool that can iterate over sequential policies to generate consistent equilibrium solutio ns starting from an internally consistent equilibrium baseline forecast (such as the AEO Refe rence Case). This ability of the model is particularly helpful to decompose macroeconomic eff ects of individual policies. For example, if one desires to perform economic analysis of a polic y that includes multiple regulations, the
N ew 

### ERA modeling framework can be used as a tool to lay er in one regulation at a time to determine the incremental effects of each policy.

### 56



### C. Integration of Models
To estimate the economic impacts of the RFS2 progra m on the overall economy, we established a one way linkage between the bottom-up transportation model and the top-down
macroeconomic model. We first ran the reference an d high biofuel scenarios through the transportation fuel model. The imposition of the R FS2 program leads to fuel price increases from the baseline without this program. For the to p-down macroeconomic model, we translated the resulting higher fuel prices by applying a tax on gasoline and diesel that yields the same fuel price increase as seen in the bottom-up transportat ion fuel model.

### 57 NERA Economic Consulting 1255 23rd Street NW Washington, DC 20037 Tel: +1 202 466 3510 Fax: +1 202 466 3605

www.nera.com

# Attachment 2

## FINAL R EPORT

RENEWABLE FUEL STANDARD S

AND THE ETHANOL BLENDWALL

Prepared for

A MERICAN 

### P ETROLEUM 

### I NSTITUTE



### By

MathPro Inc.

August 8 , 201 3

MathPro Inc. P.O. Box 34404 West Bethesda, Maryland 20827

- 0404 301

- 951

- 9006R enewable F uel S tandards and the Ethanol Blendwall Final Report



### G LOSSARY

• 

### AEO : Annual Energy Outlook , published by the Energy Information Administration
,

Department of Energy.

• 

### Co

- processed renewable diesel (CDR) : B iodiesel produced by hydrotreating virgin vegetable oils

or animal fats in conjunction with conventional hydrocarbons. CDR qualifies as an “advanced biofuel” under EISA (but not as a “ biomass

- based diesel ”).

• E0, E10, and E10+ : Gasoline containing no ethanol, gasoline containing 10 vol% ethanol, and

gasoline containing more than 10 vol% ethanol (e.g., E 15), respectively.

• E85 : A vehi cle fuel that is mixture of hydrocarbon blendstocks and 5 1 % to 85 vol% ethanol

(generally about 74 vol% ).

• EIA : Energy Information A dministration

.

• EISA : Energy Independence and Security Act of 2007.

• Ethanol Equivalency Factors : Factors used to c onvert biodiesel (and bio

- butanol) volumes to

equivalent volumes of ethanol (based on relative energy content) for the purpose of calculating total renewable and advanced biofuel volumes required under EISA.

• Ethanol Blendwall : A constraint on the volume of ethanol that can be blended into the U.S. gasoline

pool that is reached when essentially all U.S. gasoline is ethanol

- blended at 10 vol%.

• EPA : Environmental Protection Agency.

• FAME : Fatty acid methyl ester, a biodiesel p roduced by processing raw vegetable oil (typically

soybean, rapeseed, or canola oil) or animal fats through a chemical process called trans

- esterification.

• FFV : Flex

- fuel vehicle , a vehicle capable of using gasoline , E10+, or E85.

• MOVES : Motor Vehicl e Emission Simulator
, a complex, mobile source emission modeling system

developed by EPA’s Office of Transportation and Air Quality.

• NEMS : National Energy Modeling System
, an energy modeling system used by the

Department of Energy to develop energy projections reported in each year’s AEO.

• Non

- co - processed renewable diesel (NCRD) : biodiesel produced by hydrotreating virgin

vegetable oils or animal fats. NCRD qualifies as a “ biomass

- based diesel .”

• Vehicle Survival Rate : T he percentage of vehicles of a given model year remaining in service in a

subsequent year. For example, the estimated ten

- year survival rate of cars is a bout 83% in MOVES and 75% in NEMS.

August 8, 2013 1R enewable F uel S tandards and the Ethanol Blendwall Final Report



### I NTRODUCTION



### T he American Petroleum Institute (API ) retained MathPro Inc. to assess, in light of the E10 blendwall, annual renewable fuel volume standards th at EPA might establish to implement the Renewable Fuels Standard (RFS). The study comprised two parts.

Part 1 involved the develop ment of a spreadsheet

- based model (“Softwa re Tool”) to assess specified compliance approaches for various schedules of annual renewable fuel volumes that EPA might establish. The spreadsheet incorporates the projections of energy demand in the transportation sector in EIA’s Annual Energy Outlook 2013 ( AEO 2013 ) Reference and High Price c ase s

.
Part 2 involved appl ication of the Software Tool to assess three hypothetical scenarios involving assumed schedules of annual renewable fuel volumes and various compliance approaches.
This report is the final work product of the project.
The report is in four sections.

1. Background 2. Elements of the Software Tool 3. RFS Scenarios Analyzed and Results 4. Conclusions

August 8, 2013 2R enewable F uel S tandards and the Ethanol Blendwall Final Report



### 1. B ACKGROUND 

### The Energy Independence and Security Act of 2007 (EISA) established a schedule of renewable fuel volume requirements, shown in T able 1 below

. EPA implement s this schedule through

annu al rulemakings (as required by S ection 211(o) of the amended Clean Air Act )

. The annual volume schedule set forth i n EISA reflected the assumption that there would be substantial increases in production of cellulosic biofuel s and lesser increases in the production of other advanced biofuels (imported sugarcane ethanol and biomass

- based diesel ). The EISA volume schedule also implicitly limited the use of corn ethanol to 15 billion gal lons per year (B gal /y ).

EISA requires EPA, each year, to:

• set renewable fuel standards for the following year;

• set cellulosic biofuel volume standards based on evaluations of cellulosic biofuel production capacity (if less than EISA volumes); and

• establish volume standards for biomass

- based diesel for 2013 and later years considering various factors, including production and infrastructure capabilities. Table 1: EISA Schedule of Renewable Fuel Volumes (Billion gallons/year)

Renewable Fuel Advanced Biofuel All All BiomassRenewable Advanced Cellulosic based Year Fuel Biofuel Biofuel Diesel

2006 4.00 2007 4.70 2008 9.00 2009 11.10 0.60 0.50 2010 12.95 0.95 0.10 0.65 2011 13.95 1.35 0.25 0.80 2012 15.20 2.00 0.50 1.00 2013 16.55 2.75 1.00 >= 1 2014 18.12 3.75 1.75 >= 1 2015 20.50 5.50 3.00 >= 1 2016 22.25 7.25 4.25 >= 1 2017 24.00 9.00 5.50 >= 1 2018 26.00 11.00 7.00 >= 1 2019 28.00 13.00 8.50 >= 1 2020 30.00 15.00 10.50 >= 1 2021 33.00 18.00 13.50 >= 1 2022 36.00 21.00 16.00 >= 1 2023 (1) (1) (1) (1)

(1) To be determined by EPA in a future rulemaking

August 8, 2013 3R enewable F uel S tandards and the Ethanol Blendwall Final Report



### As Table 2 indicates, thus far EPA has promulgated annual volume standards for : ( i ) total renewable and advanced biofuel equal to those specified in EISA; ( ii ) biomass

- based diesel equal to those specified in EISA for 2010 to 2012, with an increase for 2013; and ( ii i ) cellulosic biofuel substantially lower than those specified in EISA, because production capabilit y is minimal

. ( Note that the asterisks in Table 2 denote volumes in EPA’s proposed RFS standards rule for 2013. )

EPA’s policy has been that, if sugarcane ethanol and biomass

- based diesel (primarily FAME) are likely to be available in sufficient quantities to support EISA’s schedule of total renewable and advanced biofuel volume s , those volume s should be met
, for cons istency with the GHG reduction goals of the A ct. 1 

### That is, EPA has elected not to re flect in its total r enewable and

a dvanced b iofuel volume standards the lack of available cellulosic biofuel

. EPA implements its v olume s tandards by setting annual p ercent age s tandards for each of the four renewable biofuel categories . EPA calculates the annual p ercentage s tandard for each category as the ratio of that category’s v olume s tandard to the total volume of U.S. gasoline and diesel us e projected for that year by EIA

. 2 

### In turn, obligated parties (primarily domestic refineries and

1 Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards; Proposed Rule, Federal Register , Vol

78, No. 26, 02/07/13, p. 9295.

2 Gasoline and diesel use in Alaska are excluded from the calculations, as are projected volumes of gasoline and

diesel production by exempted small refiners (such exemptions end by 2013). Each of the Percentage Standards, * * *

August 8, 2013 4 

### Table 2 : EPA Schedule of Renewable Fuel Volumes (Billion gallons/year)

Renewable Fuel Advanced Biofuel All All BiomassRenewable Advanced Cellulosic based Year Fuel Biofuel Biofuel Diesel

2010 12.95 0.95 0.065 1.15 1 2011 13.95 1.35 0.060 0.80 2012 15.20 2.00 0.010 1.00 2013 2 16.55 2.75 0.014 1.28

1 Carries over the 2009 EISA volume requirement into 2010. 2 Proposed volume standards. Note: Volumes are in ethanol-equivalent gallons, except for Biomass-based Diesel, which is in physical gallons.R enewable F uel S tandards and the Ethanol Blendwall Final Report


### transportation fuel importers) must use the p ercentage s tandards to calculate the ir Renewable Volume Obligations (RVOs) for each category of biofuel.
Compliance by obligated parties wit h their RVOs (individually calculated as the p ercentage st andards times their combined sales of petroleum

- based gasoline and diesel fuel) is accomplished through the accumulation of sufficient Renewable Identification Numbers (RINs). RINs , of which there are five types, are generated with each gallon of biofuels used domestically

.
Table 3 , below, shows the five types of RINs , the RINs generated per gallon of biofuel (the “ethanol equivalency” factor), and the biofuel categories to which various RIN types may be applied for compliance.

For example, one gallon of FAME generates 1.5 D4 RINs, and D4 RINs may be used to comply with an obligated party’s RVOs for b iomass

- based diesel
, a dvanced b iofuel, and/or total

r enewable fuel. T able 3 also shows that c ellulosic biofuel w aiver c redit s may be used to comply only with RVO s for c ellulosic biofuel

. 3


### RINs may be bought and sold and held in inventory as “carry

- over RINs.” In fact, due to “over

compliance
, ” mostly during 2010 and 2011, the combined inventory of RINs at the end of 2012

including that for Bioma ss

- based diesel, is calculated in terms of “ethanol

- equivalency” to be compatible with the RIN system described in the next few paragraphs.

3 If the cellulosic biofuel volume standard set by EPA is less than that specified in EISA, EPA must make cellulos ic

biofuel waiver credits available for purchase at a price equal to the greater of 25¢/gal or the average wholesale price of gasoline less $3 per gal. Such waiver credits have been used by obligated parties to meet most of their cellulosic biofuel RVOs f rom 2010 to 2012.

Table 3: RINs Generated per Physical Gallon of Biofuel

-- Ethanol Equivalency Factors

Number Biofuel Category for which RINs of RINS May Be Used for Compliance Type of Type Generated Biomass

Renewable of per Gallon Renewable Advanced Cellulosic Based Fuel RIN of Biofuel Biofuel Biofuel Biofuel Diesel

Corn ethanol D6 1 

## • Sugarcane Ethanol D5 1 

## • • Cellulosic Ethanol D3 1 

## • • • Cellulosic Diesel D7 1.7 

## • • • Co

- processed Renewable Diesel D5 1.7 

## • • Non Co

- processed Renewable Diesel D4 1.7 

## • • • FAME Biodiesel D4 1.5 

## • • •

Cellulosic Biofuel Waiver Credit 1 

## •

August 8, 2013 5R enewable F uel S tandards and the Ethanol Blendwall Final Report



### stood at almost 2.6 billion RIN

- gallons, as shown in Table 4 , below. These carry

- over RINs are available for use in complying with RVOs for 2013 and later years.

“Over

- compliance” with r enewable fuel RVOs in 201 0 and 2011 was possible because the volumes of ethanol called for by the v olume s tandards for those years were less than the volumes of ethanol needed to saturate the gasoline pool with 10% ethanol. Thus, w ith the bulk of the gasoline pool being E10 in 20 10 and 2011, U.S. gasoline production generated excess (carry

over) D6 RINs . H owever, that is no longer the case. In fact, physical compliance with EP A’s proposed v olume s tandards for 2013 would require ethanol use in excess of 10% of the gasoline pool

. Once th e E10 b lendwall is reached, any additional ethanol use mandated by EPA would exceed the U.S. gasoline pool’s capacity to absorb ethanol without resort to E15 or E85 blending.

E15 and E85 have achieved only limited market acceptance, due in part to vehicle warranty issues with E15 and infrastructure limitations for both E15 and E85. I n addition, when higher blends of ethanol are sold alongside E10, ethanol’s fuel economy deficit becomes apparent to

consumers . S ignificant expa nsion in the u se of higher ethanol blends would require the price of D6 RINs to increase sufficiently to reduce the effective rack price of ethanol to a level that would make these higher blends economic ally attractive to consumers

.
I ncreasing FAME production (beyond volumes required to meet the b iomass

- based diesel volume standards) may be an avenue t o delay reaching the E10 blendwall , as excess D4 RINs may be used as D6 RINs for complying with r enewable f uel RVOs. Biodiesel production remains well below cur rent capacity (about 50% of capacity in 2012) , even after application of the recently

- extended $1.00/gal subsidy for bio

- diesel production. Congress’ willingness to continue that subsidy is uncertain, which in turn creates uncertainty regarding the econom ic feasibility of FAME production in the future. Table 4: Estimated Carry-over RINs as of 2012 (million gallons)

RIN Carry-Over Type RINs

Total 2,587 Renewable D6 2,097 Advanced Biofuel D5 175 Biomass-based Diesel D4 315 Cellulosic Ethanol D3 0.0201 Cellulosic Diesel D7 0.0017

Source: Derived from EPA's Website, as of April 12, 2013. (http://www.epa.gov/otaq/fuels/rfsdata/2012emts.htm)

August 8, 2013 6R enewable F uel S tandards and the Ethanol Blendwall Final Report



### The burden of near

- term compliance with renewable f uel RVOs s eems to rest primarily on carryover RINs (coupled, possibly, with expanded FAME production). M uch of t he inventory of carryo ver RINs at the start of 2013 ( ≈ 2.6 B gal/y ) is likely to be used in 2013. This means that the introduction of additional volumes of FAME or E85 is likely to be required in 2014 and beyond.

August 8, 2013 7R enewable F uel S tandards and the Ethanol Blendwall Final Report



### 2. E LEMENTS OF THE 

### S OFTWARE 

### T OOL



### The Software Tool is designed to assess alternative schedules of v olume s tandards that EPA might set. It consists of a number of sections , including:

• User inputs

. In this section , t he user can specify an annual volume scenario, along with other parameters such as the compliance method, the extent of FAME expansion, the use of E85 or E10+ to absorb excess ethanol, etc.

• Carry

- over RINs . This section includes data on the inventory of RINs as of the end of 2012 as reported by EPA

.

• AEO forecasts . This section contains selected forecasts from AEO 2013 Reference and High Oil Price cases.

• Vehicle fleet composition . This section estimates the year

- by

- year distribution of vehicles and fuel use, by vehicle type and vintage, using reported data on vehicle sales, forecasts of vehicle sales from AEO 2013 , and assumptions regarding vehicle survivability rates and VMT from MOVES and NEMS

.

• Outputs . This section presents results of interest.

The Software Tool incorporates three alternative methods for compliance with the designated annual V olume Stand ards

.

• Use of carry

- over RINs . In this option, obligated parties use excess RINs accumulated in 2010 to 2012 to aid in complying with the RFS v olume s tandards for 2013 and thereafter. ( A ccumulated D4 RINs are used solely to reduce the physical use of corn or sugarcane ethanol and are not used to reduce current FAME production .)
The user may place upper limits on the percentage of the available RIN inventory used for compliance in a given year. This simulates obligated parties (that accumulated more RINs than needed for compliance) holding back RINs for their own subsequent use, rather than selling them on the open market.

• Expansion of FAME production . In this option, obligated parties, in addition to using carry

- over RINs for compliance purposes, c ause production of FAME to expand beyond the annual volumes needed to meet the biomass

- based diesel v olume s tandards . This g enerate s “excess” D4 RINs that are used to reduce the physical use of imported sugarcane ethanol (which generates D5 RINs) or corn ethanol (which generates D6 RINs) in combined volume equal to the volume of excess D4 RINs.

The annual volume of FAME expands to the lesser of ( i ) the volume needed to generate sufficient excess D4 RINs to prevent reaching the ethanol blendwall, or ( ii ) t he volume consistent with limits on the percentage of FAME that can be blended in the distillate

August 8, 2013 8R enewable F uel S tandards and the Ethanol Blendwall Final Report 

### pool due to product specifications or marketing constraints that limit higher FAME/diesel blends

. Unlike the use of carry

- over RINs , which can be implemented directly by obligated parties, expansion of FAME production would come about indirectly from price signals generated in the RIN market. The Software Tool does not simulate this latter process, nor does it assess the implications of expanded production on the production cost or market price of FAME . I t simply assumes that expansion of FAME occurs and estimates the extent of the required expansion.

• Expansion of E85 production. In this option, in addition to the use of c arry

- over RINs for compliance purpo ses, E85 production is allowed to expand to meet the annual r enewable f uel volume s tandards. The additional E85 generate s additional D6 RINs to aid in meeting the annual r enewable f uel volumes.
The Software Tool also calculates the percentage of FFVs that must use E85. The Software Tool calculates the number of FFVs each year based on EIA and EPA data and methodologies , with the assumption that any FFV using E85 uses only E85 for the entire year

.
The Software Tool allows the pairing of any combination of volume sc enarios and compliance method.

The compliance method i n which FAME production expands reflect s the assumption that EPA does not adjust annual v olume s tandards upwards in subsequent ye ars in response to FAME production in excess of that necessary to meet the current year’s b iomass

- based diesel volume standard. The effects of such reactive behavior by EPA can be assessed by using the Software Tool’s “user

- specified RFS schedule” to iter atively expand the volume standards for total

r enewable, a dvanced b iofuel, and b iomass

- based diesel in response to the previous year’s FAME

use. The Software Tool computes the combined volume of corn, sugarcane, and cellulosic ethanol needed to comply wit h the annual v olume s tandards. If that combined volume exceeds the volume of ethanol that can be absorbed in the gasoline pool through E10 (i. e ., the E10 blendwall is reached ), t he “excess” ethanol is absorbed through expansion of higher ethanol blends

– E85 or E10+
, as specified by the user. The calculated volumes of E10 and E85 ( or E10+ ) must satisfy two constraints: ( i ) the volume of ethanol in the gasoline pool (defined here as including E0, E10, and higher ethanol blends such as E85) equals the volu me of ethanol required to meet the annual v olume s tandards; and ( ii ) the combined energy content of the gasoline pool equals the combined energy content of the gasoline pool (E10 and E85) forecast in AEO 2013 for either the Reference or High Oil Price case s, as specified by the user.

August 8, 2013 9R enewable F uel S tandards and the Ethanol Blendwall Final Report



### 3. RFS S CENARIOS 

### A NALYZED AND 

### R ESULTS



### T he analysis assessed three potential annual volume scenarios and
, within each scenario , various means of compliance with the specified annual v olume s tandards . The scenarios span the range of future annual v olume s tandards that EPA plausibly might set

. All three scenarios use EIA’s AEO 2013 projections for c ellulosic biofuel volumes
, rather than the statutory volumes.

The first scenario adopts the EISA vol ume standards for t otal renewable fuel and advanced biofuel , notwithstanding that future production of c ellulosic biofuel likely will fall well short of EISA volumes.

The second scenario reduces the EISA volume standards for total r enewable fuel and t otal

a dvanced b iofuel for each year by an amount equivalent to the difference between the AEO 2013 projection of c ellulosic biofuel volumes and the EISA volume standard for c ellulosic biofuel.

T he third scenario represents t otal r enewable fuel volume s for each year consistent with the projected gasoline pool volume being E10. (That is, ethanol volumes are limited to 10% of the projected gasoline demand , so that the gasoline pool reach es but does not exceed the E10 blendwall).

In terms of the year i n which the E10 blendwall is reached (and exceeded), the first scenario accelerates it, the second delays it, and the third avoids it. Thus far, EPA has issued standards consistent with the first scenario.

The various scenarios (and the alternative compl iance approaches for each scenario) that were analyzed and the results of the analysis are discussed b elow. Detailed quantitative results of the analysis are shown in the exhibits following the last section of this report.
Expansion of E1 5 was not asse ssed as a compliance approach for absorbing volumes of ethanol in excess of those required to reach the E10 blendwall

.

3.1 Scenario 1: EISA volume schedule for t otal Renewable Fuel and Advanced Biofuel
In this scenario, the annual renewable fuel and ad vanced biofuel volume standards are set equal to the corresponding EISA volume standards. The annual biomass

- based diesel volumes are set at 1.28 B gal (as proposed by EPA for 2013) and the annual cellulosic biofuel volumes (and the split between ethanol and biodiesel) are set at the volumes forecast in the AEO 2013 Reference

case. This scenario represents the most aggressive case, where EPA would leave the total renewable and advanced biofuel standards unchanged from the EISA volume schedule, notwithstanding that

c ellulosic biofuel is and is projected to remain available in only small volumes.

August 8, 2013 10R enewable F uel S tandards and the Ethanol Blendwall Final Report



### Scenario 1A: EISA volume standards , unrestricted expansion of FAME, no expansion of E85, AEO 2013 cellulosic biofuel volumes

The results for Scenario 1A are shown in Exhibit 1A . The analysis assum es unrestricted expansion of FAME production and calculates the volumes required to avoid exceeding the E10 blendwall.
In this compliance approach, FAME blending begins a rapid expa nsion in 2014
, by which time the gasoline pool has been saturated with ethanol (2012) and carry

- over RINs have been exhausted (2014). T o achieve compliance, about 2 B gal/y of FAME w ould be required in 2014 ; 4.7 B gal/y in 2015 ; and 11.1 B gal/y in 2020. These volumes are substantial ly larger than current production levels.
By 2015, the FAME volume would exceed (i ) the current 5 vol% limit on FAME blending in diesel fuel, and (ii ) the biodiesel industry’s current nameplate capacity of about 2.2 B gal/y

. 4 

### By 2 020, FAME blending would have to account for about 16 vol% of the distillate pool to enable compliance with the volume standards.
In summary, the analysis of this scenario indicates that compliance with the EISA standards through unrestricted expa nsion of FAME production would require a rapid and large expansion in the production and use of biomass

- based diesel and would exceed existing constraints on biofuel content in diesel fuel.

Scenario 1 B : EISA volume standards , expansion of E85, no expansi on of FAME, AEO cellulosic biofuel volumes

The results for Scenario 1 B are shown in Exhibit 1B

. The analysis represents E85 expansion as the compliance method and calculates E85 volumes required to meet the EISA volume standards.

The analysis places no restrictions on E85 expansion and holds biomass

- based diesel volume constant at the 2013 RFS standard of 1.28 billion gallons

. Annual cellulosic biofuel volume standards (and the split between ethanol and diesel) are set at the volumes forecast in the AEO 2013 Reference case.
In this compliance scenario, as in S cenario 1A, carry

- over RINs would be consumed in 2013 and 2014 to assist in compliance. The E10 blendwall would be reached in 2014, and ethanol’s share of the gasoline pool would increase from about 11 vol% in 2014 to almost 20 vol% by 2020. E85 consumption would have to grow from 0.02 B gal/y in 2013 to ~ 1.9 B gal/y in 2014
, ~ 7.9 B gal/y in 2015, and 22.4 B gal/y in 20 20.
Furthermore, as Exhibit 1B indicates, most of the increase in ethanol volume would have to come from imported sugarcane ethanol. Sugarcane ethanol volumes would have to grow to 1.2

4 Biodiesel production capacity as reported on the Energy Information Administration website;

http://www.eia.gov/biofuels/biodiesel/production/table1.pdf

August 8, 2013 11R enewable F uel S tandards and the Ethanol Blendwall Final Report 

### B gal/y in 2014, 3. 1 B gal/y in 2015
, and 12

. 3 B gal/y in 20 20. By contrast, Braz i l ’s maximum annual production capacity for sugarcane ethanol is ~ 6 B gal/y
, and exports to the U.S. have not exceeded 0.7 B gal/y

. The results also indicate that the required volumes of E85 would be too large to be supported by the prospective fleet of FFVs 5



### . The ability of the pro spective FFV fleet’s to absorb E85 volumes would be exceeded by 2017 (even under the optimistic assumptions that FFV owners using E85 would use it exclusively)

. Exhibit 1B shows that by 2017
, the percent age of FFVs using E85 fuel would have to exceed 100 %

. This result implies that FFV sales would have to expand considerably beyond those projected in AEO 2013

. Overall, t he analysis indicates that compliance with the EISA through expansion of E85 consumption would require a rapid and substantial expansio n in the production and use of E85, a corresponding expansion in the supply of imported sugarcane ethanol, and an infeasibly high degree of E85 use by the projected FFV fleet.

Scenario 1 C : EISA volume standards , expansion of E85, expansion of FAME to 5 vol %, AEO cellulosic biofuel volumes

The results for Scenario 1 C are shown in Exhibit 1C . The analysis represents compliance through a combination of E85 fuel expansion and FAME expansion up to B5 , with c ellulosic biofuels held at levels projected in AEO 2013

.
As in Scenarios 1A and 1B, carry

- over RINs would be consumed in 2013 and 2014 to assist in compliance. The E10 blendwall would be reached in 2015, and ethanol’s share of the gasoline pool would increase from about 11.5 vol% in 2015 to 18.5 vol% by 2020.
Relative to Scenario 1B, the expansion in FAME use to 5 vol% of the diesel pool would delay reaching the E10 blendwall and reduce the call for E85. However, t he results shown in Exhibit 1C indicate that meeting the EISA volume standards w ith this approach would still require large volumes of E85, sugarcane ethanol imports, and FAME use

. Furthermore, as in Scenario 1B, the required volumes of E85 could not be supported by the prospective fleet of FFVs ; by 2019 the projected FFV fleet would not be able to use the required E85 volumes.

3.2 Scenario 2: EISA volume schedule of t otal Renewable Fuel and Advanced Biofuel adjusted for reductions in Cellulosic B iofuel.
In this scenario, EPA would modify the annual total renewable fuel and advanced biofuel volume standards to account for cellulosic biofuel being available only in volumes significantly

5 FFVs’ prospective annual share of gasoline use (in BTUs) was calculated using estimated vehicle stocks as of

2009, reported vehicle (and FFV) sales for 2010 to 2012, AEO forecast vehicle (and FFV) sales for 2013 and after, vehicle survival rates, estima tes of VMT by vehicle vintage, and reported and forecast vehicle fuel economy.

August 8, 2013 12R enewable F uel S tandards and the Ethanol Blendwall Final Report



### lower than those contemplated in EISA

. Annual cellulosic biofuel volume standards (and the split between ethanol and diesel) are set at t he volumes forecast in the AEO 2013 Reference case.
For example, EISA sets the cellulosic biofuel volume standard in 2016 at 4.25 billion ethanol

equivalent gallons, whereas AEO 2013 projects cellulosic biofuel production for 2016 of about 0.38 billion ethanol

- equivalent gallons, yielding a delta cellulosic biofuel volume of about 3.87 billion ethanol

- equivalent gallons. Subtracting the delta cellulosic biofuel volume from the 2016 EISA renewable fuel volume standard of 22.25 B gal/y and the advanced bi ofuel volume standard of 7.25 B gal/y yields adjusted volume standards of 18.38 B gal/y and 3.38 B gal/y
, respectively.
For 2014, this procedure yields t otal renewable fuel and advanced biofuel volume standards lower than those already proposed by EPA f or 2013. Consequently, the v olume s tandards proposed by EPA for 2013 are assumed to be imposed for 2014 (and in 2015 for a dvanced b iofuel). The v olume s tandards in later years reflect the EISA schedule with c ellulosic biofuel backed out.

Scenario 2A. A djusted EISA volume standards , unrestricted expansion of FAME, no expansion of E85, AEO cellulosic biofuel volumes

The results for Scenario 2A are shown in Exhibit 2 A As in S cenario 1A, t he analysis represents unrestricted expansion of FAME production as required to avoid exceeding the E10 blendwall.
Under this approach, FAME use would begin to expand in 2015, by which time the gasoline pool is saturated with ethanol (2012) and carry

- over RINs have been exhausted (2014). By 2017, FAME blending would ex ceed the current 5% blending limit in diesel fuel, and FAME production would have to reach 3.6 B gal/y
, over 50% higher than the reported current FAME nameplate capacity of about 2.2 B gal/y . By 2020, FAME would have to account for about 6.5 vol% of the d istillate pool to enable compliance with the RFS volume standards , which exceeds the current blending limit of 5 vol%

.
Scenario 2B : Adjusted EISA volume standards , expansion of E85, no expansion of FAME, AEO cellulosic biofuel volumes

The results for Sce nario 2B are shown in Exhibit 2B

. As in Scenario 1B, the analysis represents expansion of E85 use as required to avoid exceeding the E10 blendwall, with FAME use held constant at 1.28 B gal/y and carry

- over RINs consumed by 2015.
Under this approach, the E10 blendwall would be reached in 2015 , even with the EISA volume standards reduced to reflect the shortfall in cellulosic biofuel supply

. E85 fuel demand would have to grow from 0.02 B gal/y in 2013 to ~ 3.5 B gal/y in 201 5 and
~ 7. 3 B gal/y in 20 20

. As indicated in Exhibit 2B, over half of the fuel used by the projected FFV fleet would have to be E85 by 2019. Reaching this level of E85 use would call for a significant change in consumer behavior

. Similarly, s ugar cane ethan ol imports would have to double by 2016 vs. 2012 and

August 8, 2013 13R enewable F uel S tandards and the Ethanol Blendwall Final Report


### grow to 2.25 B gal/y in 201 9. These levels far exceed historical imports of sugar cane ethanol from Brazil

.
Scenario 2C: Adjusted EISA volume standards, expansion of E85, expansion of FAME to 5 vol %, AEO cellulosic biofuel volumes

The results for Scenario 2 C are shown in Exhibit 2C

. In this scenario, carry

- over RINs would be consumed by 201 4 to assist in compliance. Expand ed FAME blending

– to 2.9 B gal/y in 2015 and 3.4 B gal/y in 2017

– would delay reaching the E10 blendwall until 2017. The current 5 vol% blending limit for FAME would be reach ed by 2017

. E thanol’s share of the gasoline pool would increase from slightly over 10 vol% in 2017 to about 11 vol% by 2020.
The analysis of Scenarios 2A
, 2B , 2C indicates that compliance with the EISA standards, even if they were to be adjusted to reflect the shortfall in cellulosic biofuel supply, would require rapid expansion in the production and use of either FAME o r E85. The required expansion in FAM E production and use would require going beyond the 5 vol% limit on FAME blending in diesel fuel. The required expansion in E85 use would require corresponding expansion in the supply of imported sugarcane ethanol, and an infeasibly high degree of E85 use by the projected FFV fleet.

3.3 Scenario 3: Derived RFS schedule that maximizes ethanol use without exceeding the E10 blendwall.
In this scenario, the gasoline pool is entirely E10 (with de minim i s volumes of E85) , and the annual RFS volume standards are calculated to be consistent with this level of ethanol use, given the AEO 2013 Reference case projections of gasoline use. For this calculation, the b iomass

based diesel volume standard are held at 1.28 billion physical gallons (the 2 013 standard) ; a ll available carry

- over RINs are used in 2013 and 2014 ( and are incorporated in the computed renewable fuel volume standards for those years ) . In Scenario 3A, cellulosic biofuel volume standards are set at zero; in Scenario 3B, cellulosic volume standards are consistent with AEO 2013 Reference case projections of cellulosic biofuel use.

Scenario 3A: Maximum ethano l use without exceeding the E10 blendwall, n o FAME expansion
, no cellulosic biofuel volumes

In this scenario
, the annual cellu losic biofuel volume standards are set at zero.

Scenario 3B: Maximum ethanol use without exceeding the E10 blendwall , n o FAME expansion
, and AEO 2013 cellulosic biofuel volumes
In this scenario, the a nnual cellulosic biofuel volume standards (and the split between cellulosic ethanol and diesel) are set at the volumes forecast in the AEO 2013 Reference case.

The results for Scenarios 3A and 3B are shown in Exhibits 3A and 3B

. As the exhibits indicate, the results of the two scenarios are similar. The projected total annual volumes of ethanol are the same in the two scenarios . The relative shares of corn, sugarcane, and cellulosic ethanol in the

August 8, 2013 14R enewable F uel S tandards and the Ethanol Blendwall Final Report 

### two scenarios differ only slig htly (reflecting the availability of small projected volumes of cellulosic ethanol in Scenario 3B). Similarly, the calculated volume standards differ slightly between the two scenarios, reflecting the availability of small volumes of cellulosic biofuel (e thanol and diesel) in Scenario 3B.

The estimated combined volume of corn, sugarcane, and cellulosic ethanol would be about 13.4 billion gallons in 2013 and would declin e thereafter to about 12.7 billion gallons in 2020 ( in response to forecast declines in gasoline use). The calculated annual total r enewable volume standards are higher in 2013 and 2014 than in other years because carry

- over RINs are assumed to be used in 2013 and 2014 : 60% of the inventory in 2013 and the balance in 2014.

* * * * * * * * * *

Exhibits 4 and 5 (at the very end of the report) show, in graphical form, the estimated annual volumes of FAME and E85 required for compliance with the RFS standards in the various scenarios a nalyzed.
Exhibit 4 shows (i) the annual profiles of FAME volumes in Scenarios 1A, 1C, 2A, and 2C and (ii) the current total U.S. nameplate capacity for FAME production, as reported by EIA.
Exhibit 5 shows (i) the annual profiles of E85 volumes in Sce narios 1B, 1C, 2B, and 2C.

August 8, 2013 15R enewable F uel S tandards and the Ethanol Blendwall Final Report



### 4

. C ONC LUSIONS


### The primary conclusions from this analysis are:

• Use of carry

- over RINs alone can delay some of the consequences of the ethanol blendwall to 2014, but not beyond.

• Subsequently, steep and likely unattainable increases in either E85 use or biomass

- based diesel (FAME) use would be required to meet the RFS volume standards.

• Expanded use of FAME, to generate excess D4 RINs, c ould delay reaching the ethanol blendwall after carry

- over RINs are exhausted. But the likelihood and extent of the delay depends on the annual volume standards established by EPA and the extent to which FAME production and use can be increased.

• If EPA were to increase the annual volume standards in response to expanded FAME production, such increases would negate some or all of the compliance benefits associated with increased use of FAME, thereby limit ing the extent to which increased use of FAME c ould avoi d or delay reaching the E10 blendwall.

• With FAME use is limited to 5 vol% of the distillate pool, EPA’s continued use of the EISA volume schedule for renewable fuel and advanced biofuel likely would result in reaching the ethanol blendwall in 2015.

• When the ethanol blendwall is reached (with limited FAME expansion), the volume of E85 necessary to generate sufficient RINs for compliance with the r enewable f uel volume standards would require rapid, large expansion in the availability of E85 and in the numb er of FFVs using E85

. In most of the cases studied, the necessary expansions

w ould be beyond what might be considered feasible.

• Annual volume standards can be set that maximize ethanol use subject to the practical constraints imposed by the E10 blendwall . Such volume standards would facilitate compliance with RFS requirements.

August 8, 2013 16RFS and the Ethanol Blendwall

Exhibit 1A: EISA Volume Standards, Unrestrict ed Expansion of FAME, No Expansion of E85, A E O Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 16.55 18.12 20.50 22.25 24.00 26.00 28.00 30.00 Advanced Biofuel 2.00 2.75 3.75 5.50 7.25 9.00 11.00 13.00 15.00 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.010 0.014 0.281 0.313 0.381 0.401 0.426 0.457 0.494 Use of Carry-over RINs (MM EOH equiv gal) 1,036 1,550 0 0 0 0 0 0 Renewable (D6) 1036 106 1000000 Advanced Biofuel (D5) 0 175 0 0 0 0 0 0 Biomass-Based Diesel (D4) 0 315 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 Carry-over RIN Inventory (MM EOH equiv gal) 2,587 1,550 0 0 0 0 0 0 0 Renewable (D6) 2,097 106 10000000 Advanced Biofuel (D5) 175 175 0 0 0 0 0 0 0 Biomass-Based Diesel (D4) 315 315 0 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.022 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Physical Volumes of Biofuels (B gal) Ethanol Corn 12.6 12.8 12.5 12.2 12.2 12.1 12.0 11.9 11.8 Sugar Cane 0.46 0.64 0.46 0.64 0.64 0.64 0.64 0.64 0.64 Cellulosic 0.000 0.006 0.234 0.234 0.234 0.234 0.234 0.234 0.234 Diesel FAME 0.0 1.2 2.0 4.7 5.8 7.0 8.3 9.7 11.1 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.00 0.03 0.05 0.09 0.10 0.11 0.13 0.15
V olumes of Finished Fuels (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.6 8.5 8.5 8.5 8.4 8.3 8.3 E85 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 Ethanol Share of Pool (Vol %) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Distillate, including biodiesel (MM b/d) 4.0 4.1 4.2 4.3 4.3 4.3 4.4 4.4 FAME Share (Vol %) 2.0% 3.2% 7.0% 8.6% 10.2% 12.1% 14.0% 15.9% FAME Share > 5% ( X ) X X X X X X
FFV Detail Share of Light Duty Vehicle Sales 7.5% 8.4% 8.7% 8.5% 8.6% 8.5% 8.3% 8.1% 8.0% Share of Light Duty Vehicle Stock 5.0% 5.4% 5.9% 6.3% 6.6% 7.0% 7.3% 7.5% 7.8% Required Percentage of FFVs Using E85 - - - - - - - - - Insufficient FFVs to Absorb E85 ( X ) E85 Volume (B gal/y) 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02
1 Annual biofuel volume standards set by EPA: 2012-2013 -- actual; 2014 & after -- projected.

August 8, 2013 Math ProRFS and the Ethanol Blendwall

Exhibit 1B: EISA Volume Standards, Expa nsion of E85, No Expansion of FAME, A E O Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached X X X X X X X RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 16.55 18.12 20.50 22.25 24.00 26.00 28.00 30.00 Advanced Biofuel 2.00 2.75 3.75 5.50 7.25 9.00 11.00 13.00 15.00 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.010 0.014 0.281 0.313 0.381 0.401 0.426 0.457 0.494 Use of Carry-over RINs (MM EOH equiv gal) 1,036 1,550 0 0 0 0 0 0 Renewable (D6) 1036 106 1000000 Advanced Biofuel (D5) 0 175 0 0 0 0 0 0 Biomass-Based Diesel (D4) 0 315 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 Carry-over RIN Inventory (MM EOH equiv gal) 2,587 1,550 0 0 0 0 0 0 0 Renewable (D6) 2,097 106 10000000 Advanced Biofuel (D5) 175 175 0 0 0 0 0 0 0 Biomass-Based Diesel (D4) 315 315 0 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.022 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Physical Volumes of Biofuels (B gal) Ethanol Corn 12.6 12.8 13.0 15.0 15.0 15.0 15.0 15.0 15.0 Sugar Cane 0.46 0.64 1.20 3.09 4.70 6.40 8.33 10.30 12.26 Cellulosic 0.000 0.006 0.234 0.234 0.234 0.234 0.234 0.234 0.234 Diesel FAME 0.9 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.00 0.03 0.05 0.09 0.10 0.11 0.13 0.15
V olumes of Finished Fuels (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.5 8.1 8.0 7.8 7.6 7.4 7.1 E85 0.001 0.123 0.514 0.678 0.853 1.052 1.256 1.461 Ethanol Share of Pool (Vol %) 10.0% 10.9% 13.8% 15.0% 16.3% 17.8% 19.3% 20.9% Distillate, including biodiesel (MM b/d) 4.0 4.2 4.3 4.4 4.4 4.4 4.5 4.5 FAME Share (Vol %) 2.0% 1.9% 1.8% 1.8% 1.8% 1.7% 1.7% 1.7% FAME Share > 5% ( X )
FFV Detail Share of Light Duty Vehicle Sales 7.5% 8.4% 8.7% 8.5% 8.6% 8.5% 8.3% 8.1% 8.0% Share of Light Duty Vehicle Stock 5.0% 5.4% 5.9% 6.3% 6.6% 7.0% 7.3% 7.5% 7.8% Required Percentage of FFVs Using E85 - - 17.2% 68.2% 85.7% 103.7% 124.1% 144.8% 166.1% Insufficient FFVs to Absorb E85 ( X ) X X X X E85 Volume (B gal/y) 0.02 1.89 7.89 10.40 13.08 16.13 19.25 22.40
1 Annual biofuel volume standards set by EPA: 2012-2013 -- actual; 2014 & after -- projected.

August 8, 2013 Math ProRFS and the Ethanol Blendwall

Exhibit 1C: EISA Volume Standards, Expansion of E85, Expansion of FAME to 5 vol%, A E O Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached X X X X X X RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 16.55 18.12 20.50 22.25 24.00 26.00 28.00 30.00 Advanced Biofuel 2.00 2.75 3.75 5.50 7.25 9.00 11.00 13.00 15.00 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.010 0.014 0.281 0.313 0.381 0.401 0.426 0.457 0.494 Use of Carry-over RINs (MM EOH equiv gal) 1,036 1,550 0 0 0 0 0 0 Renewable (D6) 1036 106 1000000 Advanced Biofuel (D5) 0 175 0 0 0 0 0 0 Biomass-Based Diesel (D4) 0 315 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 Carry-over RIN Inventory (MM EOH equiv gal) 2,587 1,550 0 0 0 0 0 0 0 Renewable (D6) 2,097 106 10000000 Advanced Biofuel (D5) 175 175 0 0 0 0 0 0 0 Biomass-Based Diesel (D4) 315 315 0 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.022 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Physical Volumes of Biofuels (B gal) Ethanol Corn 12.6 12.8 12.5 14.3 15.0 15.0 15.0 15.0 15.0 Sugar Cane 0.46 0.64 0.46 0.64 1.47 3.13 5.01 6.94 8.88 Cellulosic 0.000 0.006 0.234 0.234 0.234 0.234 0.234 0.234 0.234 Diesel FAME 0.0 1.2 2.0 3.3 3.3 3.4 3.4 3.4 3.4 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.00 0.03 0.05 0.09 0.10 0.11 0.13 0.15
V olumes of Finished Fuels (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.6 8.4 8.2 8.1 7.8 7.6 7.4 E85 0.001 0.001 0.203 0.360 0.531 0.725 0.925 1.128 Ethanol Share of Pool (Vol %) 10.0% 10.0% 11.5% 12.7% 14.0% 15.4% 16.9% 18.5% Distillate, including biodiesel (MM b/d) 4.0 4.1 4.3 4.4 4.4 4.5 4.5 4.5 FAME Share (Vol %) 2.0% 3.2% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% FAME Share > 5% ( X )
FFV Detail Share of Light Duty Vehicle Sales 7.5% 8.4% 8.7% 8.5% 8.6% 8.5% 8.3% 8.1% 8.0% Share of Light Duty Vehicle Stock 5.0% 5.4% 5.9% 6.3% 6.6% 7.0% 7.3% 7.5% 7.8% Required Percentage of FFVs Using E85 - - - 26.9% 45.6% 64.5% 85.5% 106.6% 128.2% Insufficient FFVs to Absorb E85 ( X ) X X E85 Volume (B gal/y) 0.02 0.02 3.11 5.52 8.14 11.11 14.17 17.28
1 Annual biofuel volume standards set by EPA: 2012-2013 -- actual; 2014 & after -- projected.

August 8, 2013 Math ProRFS and the Ethanol Blendwall

Exhibit 2A: Adjusted EISA Volume Standards, Unr estricted Expansion of FAME, No Expansion of E85, A E O Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 16.55 16.65 17.81 18.38 18.90 19.43 19.96 19.99 Advanced Biofuel 2.00 2.75 2.75 2.81 3.38 3.90 4.43 4.96 4.99 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.010 0.014 0.281 0.313 0.381 0.401 0.426 0.457 0.494 Use of Carry-over RINs (MM EOH equiv gal) 1,036 1,550 0 0 0 0 0 0 Renewable (D6) 1036 106 1000000 Advanced Biofuel (D5) 0 175 0 0 0 0 0 0 Biomass-Based Diesel (D4) 0 315 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 Carry-over RIN Inventory (MM EOH equiv gal) 2,587 1,550 0 0 0 0 0 0 0 Renewable (D6) 2,097 106 10000000 Advanced Biofuel (D5) 175 175 0 0 0 0 0 0 0 Biomass-Based Diesel (D4) 315 315 0 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.022 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Physical Volumes of Biofuels (B gal) Ethanol Corn 12.6 12.8 12.5 12.2 12.2 12.1 12.0 11.9 11.8 Sugar Cane 0.46 0.64 0.46 0.64 0.64 0.64 0.64 0.64 0.64 Cellulosic 0.000 0.006 0.234 0.234 0.234 0.234 0.234 0.234 0.234 Diesel FAME 0.0 1.2 1.0 2.9 3.2 3.6 3.9 4.3 4.4 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.00 0.03 0.05 0.09 0.10 0.11 0.13 0.15
V olumes of Finished Fuels (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.6 8.5 8.5 8.5 8.4 8.3 8.3 E85 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 Ethanol Share of Pool (Vol %) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Distillate, including biodiesel (MM b/d) 4.0 4.2 4.2 4.2 4.3 4.3 4.4 4.4 FAME Share (Vol %) 2.0% 1.6% 4.3% 4.8% 5.3% 5.7% 6.3% 6.4% FAME Share > 5% ( X ) X X X X
FFV Detail Share of Light Duty Vehicle Sales 7.5% 8.4% 8.7% 8.5% 8.6% 8.5% 8.3% 8.1% 8.0% Share of Light Duty Vehicle Stock 5.0% 5.4% 5.9% 6.3% 6.6% 7.0% 7.3% 7.5% 7.8% Required Percentage of FFVs Using E85 - - - - - - - - - Insufficient FFVs to Absorb E85 ( X ) E85 Volume (B gal/y) 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02
1 Annual biofuel volume standards set by EPA: 2012-2013 -- actual; 2014 & after -- projected.

August 8, 2013 Math ProRFS and the Ethanol Blendwall

Exhibit 2B: Adjusted EISA Volume Standards, Expansion of E85, No Expansion of FAME, A E O Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached X X X X X X RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 16.55 16.65 17.81 18.38 18.90 19.43 19.96 19.99 Advanced Biofuel 2.00 2.75 2.75 2.81 3.38 3.90 4.43 4.96 4.99 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.010 0.014 0.281 0.313 0.381 0.401 0.426 0.457 0.494 Use of Carry-over RINs (MM EOH equiv gal) 1,036 1,317 233 0 0 0 0 0 Renewable (D6) 1036 106 1000000 Advanced Biofuel (D5) 0 175 0 0 0 0 0 0 Biomass-Based Diesel (D4) 0 82 233 0 0 0 0 0 Cellulosic (D3 & D7) 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 Carry-over RIN Inventory (MM EOH equiv gal) 2,587 1,550 233 0 0 0 0 0 0 Renewable (D6) 2,097 106 10000000 Advanced Biofuel (D5) 175 175 0 0 0 0 0 0 0 Biomass-Based Diesel (D4) 315 315 233 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.022 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Physical Volumes of Biofuels (B gal) Ethanol Corn 12.6 12.8 12.8 14.8 15.0 15.0 15.0 15.0 15.0 Sugar Cane 0.46 0.64 0.20 0.40 0.83 1.30 1.76 2.26 2.25 Cellulosic 0.000 0.006 0.234 0.234 0.234 0.234 0.234 0.234 0.234 Diesel FAME 0.9 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.00 0.03 0.05 0.09 0.10 0.11 0.13 0.15
V olumes of Finished Fuels (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.6 8.4 8.3 8.2 8.1 8.0 7.9 E85 0.001 0.001 0.226 0.297 0.351 0.404 0.463 0.474 Ethanol Share of Pool (Vol %) 10.0% 10.0% 11.7% 12.2% 12.6% 13.0% 13.5% 13.6% Distillate, including biodiesel (MM b/d) 4.0 4.2 4.3 4.4 4.4 4.4 4.5 4.5 FAME Share (Vol %) 2.0% 1.9% 1.8% 1.8% 1.8% 1.7% 1.7% 1.7% FAME Share > 5% ( X )
FFV Detail Share of Light Duty Vehicle Sales 7.5% 8.4% 8.7% 8.5% 8.6% 8.5% 8.3% 8.1% 8.0% Share of Light Duty Vehicle Stock 5.0% 5.4% 5.9% 6.3% 6.6% 7.0% 7.3% 7.5% 7.8% Required Percentage of FFVs Using E85 - - - 30.0% 37.5% 42.6% 47.6% 53.4% 53.9% Insufficient FFVs to Absorb E85 ( X ) E85 Volume (B gal/y) 0.02 0.02 3.47 4.55 5.37 6.19 7.09 7.27
1 Annual biofuel volume standards set by EPA: 2012-2013 -- actual; 2014 & after -- projected.

August 8, 2013 Math ProRFS and the Ethanol Blendwall

Exhibit 2C: Adjusted EISA Volume Standards, Ex pansion of E85, Expansion of FAME to 5 vol%, A E O Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached X X X X RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 16.55 16.65 17.81 18.38 18.90 19.43 19.96 19.99 Advanced Biofuel 2.00 2.75 2.75 2.81 3.38 3.90 4.43 4.96 4.99 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.010 0.014 0.281 0.313 0.381 0.401 0.426 0.457 0.494 Use of Carry-over RINs (MM EOH equiv gal) 1,036 1,550 0 0 0 0 0 0 Renewable (D6) 1036 106 1000000 Advanced Biofuel (D5) 0 175 0 0 0 0 0 0 Biomass-Based Diesel (D4) 0 315 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 Carry-over RIN Inventory (MM EOH equiv gal) 2,587 1,550 0 0 0 0 0 0 0 Renewable (D6) 2,097 106 10000000 Advanced Biofuel (D5) 175 175 0 0 0 0 0 0 0 Biomass-Based Diesel (D4) 315 315 0 0 0 0 0 0 0 Cellulosic (D3 & D7) 0.022 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Physical Volumes of Biofuels (B gal) Ethanol Corn 12.6 12.8 12.5 12.2 12.2 12.4 12.8 13.3 13.2 Sugar Cane 0.46 0.64 0.46 0.64 0.64 0.64 0.64 0.64 0.64 Cellulosic 0.000 0.006 0.234 0.234 0.234 0.234 0.234 0.234 0.234 Diesel FAME 0.0 1.2 1.0 2.9 3.2 3.4 3.4 3.4 3.4 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.00 0.03 0.05 0.09 0.10 0.11 0.13 0.15
V olumes of Finished Fuels (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.6 8.5 8.5 8.4 8.4 8.2 8.2 E85 0.001 0.001 0.001 0.001 0.028 0.077 0.131 0.141 Ethanol Share of Pool (Vol %) 10.0% 10.0% 10.0% 10.0% 10.2% 10.6% 11.0% 11.1% Distillate, including biodiesel (MM b/d) 4.0 4.2 4.2 4.2 4.3 4.4 4.4 4.4 FAME Share (Vol %) 2.0% 1.6% 4.3% 4.8% 5.0% 5.0% 5.0% 5.0% FAME Share > 5% ( X )
FFV Detail Share of Light Duty Vehicle Sales 7.5% 8.4% 8.7% 8.5% 8.6% 8.5% 8.3% 8.1% 8.0% Share of Light Duty Vehicle Stock 5.0% 5.4% 5.9% 6.3% 6.6% 7.0% 7.3% 7.5% 7.8% Required Percentage of FFVs Using E85 - - - - - 3.4% 9.0% 15.2% 16.0% Insufficient FFVs to Absorb E85 ( X ) E85 Volume (B gal/y) 0.02 0.02 0.02 0.02 0.43 1.17 2.02 2.16
1 Annual biofuel volume standards set by EPA: 2012-2013 -- actual; 2014 & after -- projected.

August 8, 2013 Math ProRFS and the Ethanol Blendwall

Exhibit 3A: Maximum Ethanol Use without Exceeding the E10 Blendwall, No FAME Expansion, No Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 17.06 16.32 15.22 15.24 15.19 15.15 15.05 14.93 Advanced Biofuel 2.00 2.75 2.75 2.75 2.83 2.85 2.89 2.89 2.90 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Carry-over RINs (MM EOH equiv gal) Use 1.6 1.0 0.0 0.0 0.0 0.0 0.0 0.0 Inventory 2.6 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Physical Volume of Biofuels (B gal) Ethanol Corn 12.8 12.5 12.5 12.4 12.3 12.3 12.2 12.0 Sugar Cane 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 Cellulosic 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Diesel FAME 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Fuel Volumes (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.6 8.5 8.5 8.5 8.4 8.3 8.3 E10+ E85 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 Distillate, including biodiesel (MM b/d) 4.0 4.2 4.3 4.4 4.4 4.4 4.5 4.5 FAME Share (%) 2.0% 1.9% 1.8% 1.8% 1.8% 1.7% 1.7% 1.7%
1 Annual biofuel volume standards set by EPA: 2012 -- actual; 2013 & after -- projected

August 8, 2013 Math ProRFS and the Ethanol Blendwall

Exhibit 3B: Maximum Ethanol Use without Exceeding the E10 Blendwall, No FAME Expansion, AE O Cellulosic Biofuel Volumes Category 2012 2013 2014 2015 2016 2017 2018 2019 2020
E10 Blendwall Reached RFS Volume Schedule (B EOH equiv gal) 1 Renewable 15.20 17.07 16.36 15.30 15.38 15.36 15.34 15.28 15.20 Advanced Biofuel 2.00 2.75 3.02 3.05 3.19 3.24 3.31 3.34 3.38 Biomass-Based Diesel (B physical gal) 1.00 1.28 1.28 1.28 1.28 1.28 1.28 1.28 1.28 Cellulosic 0.01 0.01 0.28 0.31 0.38 0.40 0.43 0.46 0.49 Carry-over RINs (MM EOH equiv gal) Use 1.6 1.0 0.0 0.0 0.0 0.0 0.0 0.0 Inventory 2.6 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Physical Volume of Biofuels (B gal) Ethanol Corn 12.8 12.3 12.2 12.2 12.1 12.0 11.9 11.8 Sugar Cane 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 Cellulosic 0.01 0.23 0.23 0.23 0.23 0.23 0.23 0.23 Diesel FAME 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 Non-co-processed 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Co-processed 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Cellulosic 0.00 0.03 0.05 0.09 0.10 0.11 0.13 0.15 Fuel Volumes (MM b/d) Gasoline E0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 E10 8.7 8.6 8.5 8.5 8.5 8.4 8.3 8.3 E10+ E85 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 Distillate, including biodiesel (MM b/d) 4.0 4.2 4.3 4.4 4.4 4.4 4.5 4.5 FAME Share (%) 2.0% 1.9% 1.8% 1.8% 1.8% 1.7% 1.7% 1.7%
1 Annual biofuel volume standards set by EPA: 2012 -- actual; 2013 & after -- projected

August 8, 2013 Math Pro

### RFS and the Ethanol Blendwall

Exhibit 4: FAME Volume, by Scenario

Note: 2013 nameplate capacity from EIA website. 

### 0 2 4 6 8 10 12

2013 2014 2015 2016 2017 2018 2019 2020Billion Gallons 

### Scenario 1A Scenario 1C Scenario 2A Scenario 2C 2013 Nameplate Capacity

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## Math Pro

### RFS and the Ethanol Blendwall

Exhibit 5: E85 Volume, by Scenario

Note: E85 use in 2012 was on the order of 0.1 B gallons ( AEO 2013 ). 

### 0 5 10 15 20 25

2013 2014 2015 2016 2017 2018 2019 2020Billion Gallons 

### Scenario 1B
Scenario 1C
Scenario 2B
Scenario 2C

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## Math Pro