Regulation of Fuels and Fuel Additives:


Renewable Fuel Standard Program


Summary and Analysis of Comments


Chapter 6


Costs


Assessment and Standards Division 

Office of Transportation and Air Quality 

U.S. Environmental Protection Agency 

EPA420-R-07-006 

April 2007 
RFS Summary and Analysis of Comments 

6 COSTS 

6.1 Feedstock Costs ........................................................................................................... 6-1 

6.2 Corn-ethanol Production and Costs............................................................................. 6-2 

6.3 Cellulosic Ethanol Production ..................................................................................... 6-6 

6.4 Biodiesel Production.................................................................................................... 6-6

6.5 Distribution Costs ........................................................................................................ 6-7 

6.5.1 Ethanol Distribution Costs...................................................................................6-7 

6.5.2 Biodiesel Distribution Costs................................................................................ 6-9 

6.6 Blending Costs and Impacts on Gasoline Costs ........................................................ 6-10 

RFS Summary and Analysis of Comments 

6 COSTS 

What We Proposed: 

The comments in this section correspond to Section VII of the preamble to the proposed 

rule, and are targeted at the projected costs of the program. A summary of the comments 

received, as well as our response to those comments, are located below. 

6.1 Feedstock Costs 

What Commenters Said: 

The American Petroleum Institute (API) commented that EPA assumes only a 3.6% 

increase in corn prices between the 7.2 billion gallon use case and the 9.6 billion gallon use 

cases. Given the implied increase in demand for corn between these cases, API believes that it is 

likely that the corn price increase will be significantly above 3.6%. Also, corn futures for 

December 2006 delivery are $3.44 per bushel. API suggested that EPA recheck the production 

cost estimates and perform some sensitivity analysis using various corn price assumptions. 

The commenter stated that it believes the corn ethanol, cellulosic ethanol, and soyderived biodiesel production cost estimates (71 FR 55608) are of little value because of the 

volatility in prices on the feedstocks. The commenter stated that it believes that the underlying 

prices on the feedstocks, the assumed amount of feedstock needed to produce a gallon of ethanol 

or biodiesel, and the net operational costs are what should have been reported—this would allow 

for a clearer assessment of the total production costs under alternative prices on feedstock. 

Letters:

American Petroleum Institute (API) OAR-2005-0161-0185 

Our Response: 

Our cost estimates are generally point estimates using the best available information. We 

then do sensitivities around these estimates. In the case of corn ethanol production, we have 

updated the RIA to include changes in cost over a range of corn, dried distiller grain (DDGS), 

and natural gas prices. 

The model we used to project agricultural commodity prices (FASOM; see Chapter 8 of 

the RIA for details) is a long run equilibrium model, so it does not reflect the futures market 

(typically six months or less). We believe these long run projections are more indicative of 

sustained prices ethanol producers will pay as the system matures. Like petroleum refiners, 

ethanol producers generally lock in feedstock contracts for long term production needs, then use 

spot or near term markets for unforeseen marginal needs. 

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Chapter 6: Costs 

Three issues remain at the center of estimating cellulosic costs. First, feedstock costs are 

the most obvious, since no one knows yet which feedstock will be the cheapest; most likely, a 

variety of feedstocks will be used in different parts of the country. Secondly, no one knows for 

sure how much ethanol can really be produced by any of the feedstocks in an operation any 

larger than a laboratory bench. There are a couple of pilot or demonstration-size units, but there 

are no reliable data. Thirdly, no one has constructed a full-sized, fully-operational cellulosic 

ethanol plant, so no one knows for sure what the capital or operating costs are going to be; 

besides which, the capital and operating costs for each different feedstock and/or process will 

quite likely be different. 

6.2 Corn-ethanol Production and Costs 

What Commenters Said: 

API noted that for corn ethanol, EPA estimated the per gallon cost of ethanol to range 

from $1.20 per gallon in 2012 (2004 dollars) in the case of 7.2 billion gallons per year case and 

$1.26 per gallon in the case of the 9.6 billion gallon case. The commenter stated that, in regard 

to the statement made on page 134 (3rd paragraph) of the Draft Regulatory Impact Analysis 

(DRIA)1, the corn ethanol production costs ($1.20 - $1.26 per gallon) seem low, typical estimates 

seem to be roughly $1.35 to $1.50 per gallon with corn at $2.25 per bushel (this is roughly the 

corn price used in EPA’s analysis), even accounting for DDG sale credits. The commenter noted 

that EPA assumed only a 3.6% increase in corn prices between the 7.2 billion gallon use case 

and the 9.6 billion gallon use cases. Given the implied increase in demand for corn between 

these 2 cases, the commenter stated that it believes that it is likely that the corn price increase 

will be significantly above 3.6%. Also, corn futures for December 2006 delivery are $3.44 per 

bushel. The commenter suggested that EPA recheck the production cost estimates and perform 

some sensitivity analysis using various corn price assumptions. The commenter also noted that 

EPA assumed that ethanol prices remain constant despite substantial increases in production and 

consumption (DRIA, p.262). The commenter stated that it believes that a regression model of 

ethanol prices against gasoline prices (and perhaps other variables), would give a reliable price 

elasticity coefficient. The commenter further stated that use of this standard economic analysis 

would allow EPA to develop a yearly forecast of ethanol prices. 

Gary-Williams Energy Corporation (GWEC) commented that, according to the ethanol 

industry, corn production and plants to make ethanol are expected to increase significantly in the 

Corn Belt over the next decade. The commenter noted that around 97% of the country’s current 

corn-based ethanol plant capacity is in Petroleum Administration District for Defense (PADD) 2 

(where the commenter’s refinery is located and markets most of its gasoline). The commenter 

also noted that about 88% of ethanol plants now under construction and 85% of probable new 

plants will be in PADD 2. The commenter stated that it has been suggested that large refining 

companies may decide to meet their RFS blending obligations at plants near ethanol production 

1

 Page 134, 3rd paragraph: “We have estimated an average corn ethanol production cost of $1.20 per gallon in 2012 

(2004 dollars) in the case of 7.5 billion gallons per year and $1.26 per gallon in the case of 9.9 billion gallons per 

year. For cellulosic ethanol, we estimate it will cost approximately $1.65 in 2012 (2004 dollars) to produce a gallon 

of ethanol using corn stover as a cellulosic feedstock.” 

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RFS Summary and Analysis of Comments 

sources – which the commenter believes will decrease the transportation costs and result in an 

imbalance in the distribution of ethanol, with a concentration in the corn-belt area and lower 

volumes on the coasts. The commenter stated that in PADD 2, gasoline volume will soon grow 

by at least 10% if regional refineries elect to blend as much ethanol as possible. As more flex 

vehicles come into use and retail distribution systems are put in place, the commenter stated that 

it believes that gasoline volume will increase further – demand is not expected to keep pace and 

prices will drop below national averages. As a result, the commenter believes that the Corn Belt 

will enjoy lower gasoline prices than the rest of the country; and further, the benefits provided by 

ethanol will be concentrated in that area. 

A private citizen commented that it believes that the proposal’s lack of data on 

operational costs is a major omission. The commenter suggested that EPA delineate the net 

operational costs, and also publish the item-by-item net operational costs. The commenter 

further stated that the proposal has assembled a large amount of information on the subject and 

will be valuable background for further discussions and evaluations. 

Letters: 

American Petroleum Institute (API) OAR-2005-0161-0185 

Gary-Williams Energy Corporation (GWEC) OAR-2005-0161-0207 

Private Citizen OAR-2005-0161-0158, -0159 

Our Response: 

Please see responses to comments in the previous section on general feedstock costs. 

First, we intentionally did not assess the costs of the RFS program based on ethanol 

prices because the price of ethanol likely does not represent its production cost, particularly 

because ethanol use is subsidized at 51 cents per each gallon of ethanol and it is priced based on 

volume relative to gasoline, not energy content. Since our intent is to estimate the real cost to 

society of the RFS, using ethanol’s production cost is more appropriate than its price. For the 

proposed rule we did estimate different ethanol production costs based on different ethanol 

demand volumes under the RFS and EIA cases. We estimated ethanol production costs for the 

proposed rule to be $1.20 per gallon for the RFS case, and $1.26 per gallon for the EIA case. For 

the final rule cost analysis, we are estimating the ethanol production cost to be $1.26 per gallon 

for the RFS case and $1.32 for the EIA case. The increases in ethanol production costs assume 

higher corn and differing DDG prices. 

We believe there are multiple factors that will influence where ethanol is most heavily 

used, and in turn, its impact on gasoline demand and price. It is reasonable that a large volume 

of ethanol will be blended into gasoline in PADD 2, since distribution costs will be very low and 

there are mandates or tax incentives in a number of these states. This may result in lower 

gasoline demand in PADD 2, though this effect should not be surprising, since the purpose of the 

Renewable Fuels Standard is to decrease our use of and dependence on petroleum (most of 

which is from imported oil). We believe there will also be economic motivation to use large 

quantities of ethanol wherever gasoline is relatively expensive or where ethanol has value as a 

high octane, low-toxicity blendstock. For example, our refinery cost model shows a higher 

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Chapter 6: Costs 

preference for using ethanol in California and Federal Reformulated Gasoline (RFG) areas over 

blending all of the gasoline in the Midwest with 10 percent ethanol. However, it is important to 

point out that the increase in ethanol blended into gasoline will be phased in over time, so the 

increased ethanol will offset the increased demand for gasoline as opposed to reducing output 

from refineries. 

In the table below are more details from the U.S Department of Agriculture (USDA) corn 

ethanol production cost model. 

6-4
RFS Summary and Analysis of Comments 

Cost details for 81 MMgal/yr corn ethanol plant based on USDA model. 

Natural Gas Coal 

cents/gal cents/gal 

MATERIAL INPUTS 

Corn Feedstock 87.19 87.19 

Caustic 0.46 0.46 

Alpha-Amylase 1.19 1.19 

Gluco-Amylase 1.73 1.73 

Gasoline 10.67 10.67 

Sulfuric Acid 0.17 0.17 

Lime 0.08 0.08 

Makeup Water 0.06 0.06 

Urea 0.33 0.33 

Yeast 0.37 0.37 

Corn Feed Hauling 7.67 7.67 

Water 0.69 0.69 

Electricity 3.50 4.02 

Natural Gas 19.38 0.00 

Coal 0.00 6.91 

Subtotal 133.47 121.53 

CO-PRODUCTS 

DDGS -26.67 -26.67 

Carbon Dioxide 0.00 0.00 

Subtotal -26.67 -26.67 

TOTAL VARIABLE COSTS 106.80 94.86 

LABOR 

Plant Operators' Salaries 1.31 1.56 

Maintenance Salaries 1.18 1.72 

Supervision & Administration 1.00 1.31 

Employee Benefits 1.04 1.37 

Subtotal 4.53 5.96 

OTHER COSTS 

Operating Supplies 0.89 1.29 

Maintenance Supplies 1.18 1.72 

Insurance & Local Taxes 0.94 1.37 

Captial Depreciation 11.81 17.16 

Subtotal 14.82 21.53 

TOTAL FIXED COSTS 19.35 27.49 

TOTAL PRODUCTION COST 126.14 122.35 

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Chapter 6: Costs 

6.3 Cellulosic Ethanol Production 

What Commenters Said: 

API commented that personnel at the U.S. Department of Energy (DOE) indicate $2.26 

per gallon as an estimate of cellulosic ethanol production costs, in contrast to EPA’s cost 

estimate of $1.65 per gallon. 

Letters:

American Petroleum Institute (API) OAR-2005-0161-0185 

Our Response: 

In that we do not have a reference, other than “DOE personnel,” for the $2.26 cost to 

which API referred [p.15], it is not possible for us to compare the DOE estimate with ours. 

Several different processes, some of which use different feedstocks, have been proposed for 

producing cellulosic ethanol. While several of these processes show promise, as of the date of 

this rule, none has been shown to be ‘the best’ overall. The choice of feedstock, process, and 

plant location has been shown to have large impacts on the estimated cost of cellulosic ethanol. 

Regardless, currently an estimate for producing cellulosic ethanol would necessarily be based on 

assumptions, for the most part. Since there are no publicly available, “real-world” capital and 

production costs (including those for gathering, transporting, storing, and feeding the various 

feedstocks), we decided to use a study prepared by the National Renewable Energy Laboratory, 

an organization working under contract with DOE, using corn stover as a feedstock. Given the 

time constraints for finishing this rule, we believe this would provide a reasonable estimate, 

especially in view of the dearth of real-world data. 

6.4 Biodiesel Production 

What Commenters Said: 

API noted that the proposal estimated production costs of soy-derived biodiesel of $2.06 

per gallon in 2004 and $1.89 per gallon in 2012. The commenter noted that current soy costs are 

roughly $2.00 per gallon, and thus questioned how soy-derived biodiesel production costs could 

be $2.06. The commenter stated that it believes that a better estimate would be $2.50 per gallon 

for soy-derived biodiesel. The commenter also stated that, for biodiesel, the cost range is 

between $1.89 and $2.11 if produced using soybean oil and less if using yellow grease or other 

relatively low cost or no-cost feedstock. 

Letters:

American Petroleum Institute (API) OAR-2005-0161-0185 

Our Response: 

6-6
RFS Summary and Analysis of Comments 

We based our biodiesel production costs based on oil feedstock prices as forecasted by 

USDA in 2012 under the RFS mandate and with EIA biodiesel fuel projections. As such, the 

feedstock prices used are those that are projected to occur in 2012. Additionally, from our 

biodiesel cost presentation, it is possible for the reader to calculate biodiesel production cost with 

higher feedstock costs, than those used in our analysis. This can be accomplished, as we provide 

separate estimates of the effects that feedstock prices and operating cost have on the total 

production cost of biodiesel. This provides a mechanism to estimate biodiesel production costs 

with a wide variety of biodiesel feedstock oil prices, in addition to those reflecting current 

market conditions. 

6.5 Distribution Costs 

6.5.1 Ethanol Distribution Costs 

6.5.1.1 Estimated Ethanol Transportation Costs 

What Commenters Said: 

API commented that it believes that the estimated ethanol transportation cost of 9.2 cents 

per gallon is low and should be adjusted. The commenter suggested that EPA check current 

ethanol shipping rates. The commenter also stated that, according to Jim Jordan and Associates, 

current regular railcar movements are roughly 17 to 22 cents per gallon from Chicago to 

Philadelphia, and 15 to 20 cents per gallon if shipped via unit train. 

Letters:

American Petroleum Institute (API) OAR-2005-0161-0185 

Our Response: 

As suggested by the commenter, we compared current ethanol rail shipping cost to the 

estimated shipping costs in the proposal. The tank cars used to ship ethanol (or biodiesel) by rail 

are typically not provided by the rail carrier. Some ethanol shippers own their rail cars, but most 

are leased from a third party. Thus, there are two components to the cost of shipping ethanol by 

rail: 1) the ethanol freight tariff and associated fuel surcharge assessed by the rail carrier, and 2) 

cost of leasing the necessary rail tank cars. 

We obtained information about current rail car lease rates from various industry sources 

on the condition that the sources are not identified. Based on this information, we are estimating 

a current $650 per month lease fee for a 30,000 gallon ethanol rail car, with a single shipment 

being completed each month by regular rail car movement (i.e., at single car rates), and 1.5 

shipments being completed if shipment is made via unit train. We obtained current single car 

and unit train ethanol freight tariff rates and associated fuel surcharge information from CSX and 

BNSF rail companies at www.csx.com and www.bnsf.com. We derived current unit train and 

single car rail ethanol shipping costs by totaling the relevant rail car lease fees, rail tariffs, and 

fuel surcharges. 

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Chapter 6: Costs 

Our estimate of the current cost of shipping ethanol from Chicago to Philadelphia is 10 

cents per gallon via unit train and 12 cents per gallon at single car rates.2 The proposal 

estimated the hub terminal ethanol shipping cost to be 8.4 cents per gallon and the satellite 

terminal shipping cost to be 10.4 cents per gallon. Thus, current ethanol freight rates from 

Chicago to Philadelphia rail are approximately 1.6 cents greater than those estimated for 

Pennsylvania as a whole in the proposal.3 The Jim Jordan and Associates report referenced by 

API is a proprietary report to which we do not have access. API did not respond to our 

solicitation for additional discussion regarding why the cost estimates they reported from 

shipping ethanol from Chicago to Philadelphia by rail are so much higher (5 to 10 cents per 

gallon) than the current rail shipping cost that we derived. 

Evaluation of the current rail freight cost estimates shows that these are reasonably 

consistent with the ethanol shipping costs in the proposal. For example, current rail shipping 

costs from Chicago to Albany New York are 11 cents per gallon if conducted on a single car 

basis, and 13 cents per gallon if shipped via unit train. The proposal estimated an ethanol 

shipping cost to New York of 11.4 cents per gallon for hub terminals and 13.4 cents per gallon 

for satellite terminals. Current rail shipping costs from Southwest Iowa to central California are 

20 cents per gallon if conducted on a single car basis, and 16 cents per gallon if shipped via unit 

train. The proposal estimated an ethanol shipping cost to California of 16.5 cents per gallon for 

hub terminals and 18.5 cents per gallon for satellite terminals. 

We do not believe that the modest differences between current rail ethanol freight rates 

and the ethanol freight rates estimated in the proposal in themselves necessarily indicate that the 

estimated ethanol shipping costs in the proposed rule are too low. The ethanol distribution 

system is currently evolving and we believe there is considerable room for increased efficiencies 

and concomitant lower shipping costs than those today. The recent precipitous discontinuation 

of the use of methyl tertiary butyl ether (MTBE) and its replacement by ethanol necessitated the 

rapid development of an expanded ethanol distribution infrastructure. This rapid expansion may 

have resulted in temporary spikes in ethanol shipping costs that may explain the higher ethanol 

freight cost in the report referenced by API. 

In conducting our review, however, we identified several areas where it was appropriate 

to make adjustments to our estimated ethanol freight costs.4 Incorporating these adjustments, we 

arrived at an estimated national average ethanol freight cost of 11.3 cents per gallon under the 

Renewable Fuel Standard (RFS) case (6.67 billion gallons of ethanol per year in 2012) and 11.9 

cents per gallon under the Energy Information Administration (EIA) case (9.6 billion gallons of 

ethanol per year in 2012). This compares to the 9.2 cent per gallon ethanol freight cost estimate 

for both the RFS and EIA cases in the proposal. We assumed that these freight costs do not 

include the cost of capital recovery for the distribution facility improvements necessary to handle 

the increased volume of ethanol under the RFS and EIA cases. Adding in the annualized capital 

2

 There currently is no unit train ethanol service from Chicago to Philadelphia. We estimated the Chicago to

Philadelphia unit train freight rate by comparing the difference between unit train and single car freight rates in

locations where both services are currently available. 3

 In areas where rail is the predominate means of transportation, hub terminal rates are comparable to unit train rates 

and satellite terminal rates are comparable to single car rates. 4

 See Chapter 7.3 of the RIA for additional discussion of our estimation of ethanol freight costs. 

6-8
RFS Summary and Analysis of Comments 

costs, results in a total annual ethanol distribution cost of 12.7 cents per gallon under the RFS 

case and 13.1 cents per gallon under the EIA case. This compares to the 10.3 cent per gallon 

ethanol distribution cost estimate for both the RFS and EIA cases in the proposal. 

6.5.1.2 Blending and Distribution 

What Commenters Said: 

Harms Oil commented that it is common in South Dakota for there to be a limitation in 

the number of entities offering ethanol at a terminal. The commenter noted that there are 

generally 25 different sellers of gasoline and only 5-10 suppliers of ethanol. The commenter 

further noted that, as a result of this practice, some blenders have made investments in off-site 

bulk blending facilities. The commenter stated that it believes that the market has thus shown a 

need for blending at places other than the pipeline terminal, even when there is renewable 

product available at the terminal. The commenter stated that it believes that off-site, bulk plant 

blending of ethanol is less efficient and more costly than pipeline terminal blending. Further, the 

commenter noted that the only way the renewable product will be sold in a competitive 

environment, is if the renewable product is offered at a lower price than the product in the 

terminal. The commenter stated that it believes that retention of the opportunity to offer blended 

product in the marketplace will foster more competition, and in our opinion, lower the price of 

the blended product to the consumer. 

Letters:

Harms Oil OAR-2005-0161-0220 

Our Response: 

We designed the final rule to not interfere with current practices of distributing and 

blending ethanol. Parties who blended ethanol with gasoline downstream of the terminal will 

continue to be able to do so. Compared to a 3.9 billion gallon per year ethanol use reference 

case, we estimated 243 additional terminals would install ethanol blending systems to meet the 

requirement under the RFS for 6.7 billion gallons per year of ethanol use by 2012. Under the 9.6 

billion gallon per year ethanol use case projected by the Energy Information Administration 

(EIA) for 2012, we estimated that 515 additional terminals would install ethanol blending 

systems. Thus, we expect that the number of terminals that offer ethanol (and ethanol blended 

gasoline) will increase significantly as the volume of ethanol used increases over time. 

6.5.2 Biodiesel Distribution Costs 

What Commenters Said: 

API commented that it believes that EPA’s assertion that the estimated freight costs for 

ethanol of 9.2 cents per gallon adequately reflects the freight costs for biodiesel is speculation 

6-9
Chapter 6: Costs 

with no basis in fact. However, the commenter did not provide any specific suggestions 

regarding how the estimates of biodiesel distribution costs should be amended. 

Letters:

American Petroleum Institute (API) OAR-2005-0161-0185 

Our Response: 

We sought additional information regarding the freight costs for biodiesel. This 

information indicates that freight costs for biodiesel are typically 30 percent higher than those for 

ethanol which translates into an estimate of 15.5 cents per gallon for biodiesel freight costs. This 

estimate is based on our review of publicly available biodiesel and ethanol freight rates from 

CSX and BNSF rail at www.csx.com and www.bnsf.com, on information regarding the lease 

rates for biodiesel versus ethanol freight cars considering the smaller size of biodiesel tank cars5, 

and on discussions with biodiesel distributors. Including the cost of capital recovery for the 

necessary distribution facility changes, we estimate the cost of distributing biodiesel to be 21.5 

cents per gallon. 

6.6 Blending Costs and Impacts on Gasoline Costs 

What Commenters Said: 

The New York State Department of Environmental Conservation commented that it 

believes that better use of standard economic analytical techniques could significantly improve 

the economic analysis of this and future rulemakings. The commenter stated that it believes that 

EPA’s treatment of labor costs as part of fixed plant costs (DRIA p.236) is an unorthodox 

methodology. The commenter noted that labor costs normally vary with production volume, 

thus it believes that they should be classified as variable costs in future economic analyses. The 

commenter also noted that API stated that a regression model of gasoline price against crude oil 

prices (and other appropriate variables) could provide more reliable estimates of the sensitivity 

of gasoline prices to crude oil price changes than the price ratios used by EPA in the sensitivity 

analysis conducted to compare $70 per barrel crude oil to $47 per barrel crude oil. 

The Missouri Department of Natural Resources commented that, if RINs prove to be 

higher in cost/price as they are traded from one entity to another and the RIN value is higher than 

the equivalent value of the ethanol it replaces, the higher cost would obviously be borne by 

downstream consumers. The commenter stated that it was unclear if the modeling performed for 

EPA’s cost estimates included an evaluation of the potential cost of RINs subject to the credit 

program. The commenter also noted that EPA did not account for any tax subsidy for renewable 

fuels and that these costs represent production costs of the fuel and not the market price (retail). 

The commenter stated that it believes that it is appropriate for EPA to consider using an 

inflationary index from base-line year 2004 to 2012 to include a "worse” and “best” case 

scenario to allow for a range in potential costs through the transition period. The commenter 

5

 Ethanol freight cars have a capacity of 30,000 gallons, whereas biodiesel freight cars typically have a capacity of 

25,500 gallons. 

6-10
RFS Summary and Analysis of Comments 

further stated that it believes that this would be very meaningful in determining the cost-to-retail 

price relationship and the potential economic impact on the transportation sector. The 

commenter also believes that this would provide insights to potential excise tax receipts for 

federal and state governments through 2012 as more renewable fuels are introduced into the 

nation’s transportation fuel stream. 

The Missouri Department of Natural Resources commented that it also believes that, 

while it is important to measure the economic impact of renewable fuels at the production or cost 

level, it is important to convey the retail price impact of a national renewable fuel policy. The 

commenter noted that U.S. consumers focus on the price of fuel at the pump, not the cost of 

product at the factory; thus to affect true market transformation, consumers must perceive 

renewable fuels not as the rule and not the exception. The commenter thus stated that it believes 

that EPA should make every effort to identify all related direct and indirect costs, including 

external costs, related to RFS transition and make its best effort to fully analyze and present this 

data or information in the final rule. 

API commented that it believes EPA’s estimates (DRIA, p.135, 2nd paragraph) of overall 

gasoline costs given the fuel changes assumed (both with and without the subsidy) are low given 

the underestimates of ethanol production costs, the underestimates of biodiesel production costs, 

and the underestimates of ethanol transportation costs. 

Letters: 

American Petroleum Institute (API) OAR-2005-0161-0185 

Missouri Department of Natural Resources (MDNR) OAR-2005-0161-0217 

New York State Department of Environmental Conservation (NYDEC) OAR-2005-0161-

0169 

Our Response: 

One commenter stated that labor costs should be treated as a variable cost as opposed to a 

fixed cost. Labor costs may be treated as fixed or variable costs depending on how the laborers 

are employed by refiners. Regardless of how refiners treat their labor costs, as new refining units 

are installed, the labor would be expected to be fully utilized with that new refinery unit and the 

labor cost would be incurred. Thus, assigning the labor costs as fixed or variable costs is only an 

accounting issue. Also, labor costs are a very small part of the total costs so that even if they are 

not incurred because a refinery unit was to be shut down, their impact on the remaining cost is 

very small. For the final rule cost analysis, we used a linear programming refinery model to 

estimate the cost of the RFS. The linear programming refinery model treats labor as a variable 

cost. 

The commenter said that for our crude oil price sensitivity analysis we conducted for the 

proposed rule, a more reliable estimate of gasoline price can be estimated with respect to higher 

crude oil price than that we estimated for the proposed rule. A more robust estimate of gasoline 

price with respect to crude price can be made, however, we simply wanted to make the point that 

higher crude oil prices would improve the economics of blending ethanol into gasoline based on 

a simple order-of-magnitude cost analysis. 

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Chapter 6: Costs 

One commenter stated that RINs may be higher in price than the equivalent value of 

ethanol, resulting in a higher cost to the consumer. We try as much as possible to estimate the 

impact on society based costs instead of prices because prices may estimate higher or lower 

impacts than production costs and may include transfer payments which are not real costs. In 

this case, because ethanol receives a subsidy, ethanol could be priced substantially below its 

production cost. Thus, even if RINs are valued higher than ethanol’s market price, the RINs are 

likely to be valued lower than ethanol’s production cost. To avoid these various distortions to 

the estimated societal cost of the program, we value ethanol based on its estimated production 

cost. We did provide the estimated impacts based on ethanol’s subsidy applied to its production 

cost. This additional analysis helps to illustrate ethanol’s impact on gasoline prices “at the 

pump.” Overall, given that all scenarios project much larger ethanol use than required by the 

RFS, we do not foresee RINs adding any significant costs to the use of renewables. 

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