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MEMORANDUM

Subject: Illustrative Costs Impact of the Final RFS2 Standards, 2014-2016

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

Quality

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

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

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

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

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

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

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

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

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

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

these two biofuels have been most widely used in the past. We believe these scenarios provide a 

range of possible costs of meeting the final standards. 

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

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

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

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

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

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

within society and not additional costs). Also, we did not attempt to estimate the infrastructure 

costs (e.g., E85 pump installations) that would be required to meet these RFS standards. In 

addition, because more ethanol gallons must be consumed to go the same distance as gasoline 

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

due to each of the biofuels’ lesser energy content, we consider the costs of ethanol and biomassbased diesel on an energy equivalent basis to their petroleum replacements (i.e., per energy

equivalent gallon (EEG)).

1. Baseline Consideration

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

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

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

2016 advanced standard is the applicable 2015 advanced standard), an approach consistent with 

past practices. Arguments could be made for using a variety of alternative baselines such as the 

statutory renewable fuel volumes (e.g., the required volumes in the Energy Independence and 
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Security Act (EISA) of 2007 for 2013, 2014, and 2015) or the volumes of renewable fuels that 

would be produced in the complete absence of the RFS program (e.g., “no RFS”). However, we 

believe the difference between each year’s standards provides information that is illustrative of 

the magnitude of the potential overall costs of the standards being finalized today without adding 

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

question the usefulness of the cost comparison. 

Use of alternative baselines other than the 2013, 2014 and 2015 applicable standards is 

problematic from a practical standpoint. For example, using the 2013, 2014, and 2015 statutory

volumes would require estimating a hypothetical set of cellulosic fuel costs as part of the 

baseline. Since liquid cellulosic fuels are not currently being produced in significant quantities, 

estimating their average costs of production would be highly speculative on EPA’s part. 

Furthermore, trying to estimate the hypothetical mix of fuels that could meet the annual EISA 

volumes would introduce a level of complexity that would not necessarily provide a more robust 

estimate of costs. 

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

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

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

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

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

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

program would be an uncertain exercise. For example, absent the RFS, billions of gallons of 

ethanol would still be produced for consumption in the U.S. fuel market due to ethanol’s value as 

a low cost octane enhancer. Another factor that would impact consumption absent the RFS is

individual state renewable fuel mandates, each of which would have to be assessed to determine 

this baseline. Thus, we believe that estimating the quantities of renewable fuels that would be 

used in the absence of the RFS program, as well as their associated costs, would be highly 

speculative.

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

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

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

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

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

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

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

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

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

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

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

baseline.

1

 

 

1 Given the near-term time frame of the impacts we have not deflated the illustrative costs to a base year. Illustrative 

costs are in nominal 2015 dollars.
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The 2014 standards were not finalized in 2014 so it is difficult to estimate what their 

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

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

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

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

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

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

production levels in 2014, suggesting that the 2014 standards we are proposing have no costs. 

Given the disputable foundation of this historical dynamic, we have not attempted to estimate the 

costs of the 2014 standards. Therefore, we only evaluate costs for the 2015 and 2016 advanced 

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

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

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

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

biodiesel and then compares that cost to the energy-equivalent gallon of petroleum-based diesel.2 

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

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

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

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

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

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

standard and the different feedstocks’ costs would be speculative. Based on historical data, 52

percent of the feedstock used for U.S. biodiesel production in 2015 (through August) was from 

soybean oil, the largest source of feedstock used to make biodiesel.3 Other feedstocks such as 

oils derived from wastes are generally less costly so they will be preferentially used regardless of 

the volume set. However, there are not enough oils derived from wastes to fully supply the 

advanced standards we are proposing. Thus, we believe it is appropriate to make the simplifying 

assumption that the marginal feedstock used to produce biodiesel to meet the total advanced 

biofuel standard will be from soybean oil. 

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

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

 

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

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

3

In terms of feedstock poundage. By way of comparison, the next largest source of feedstock for 2015 biodiesel 

production was yellow grease (13%), followed by corn oil (11%) and canola oil (9%). For calendar year 2014 these 

proportions were soybean oil (51%), yellow grease (11%), canola oil (11%), and corn oil (10%). 

Monthly Biodiesel Production Report. October 30, 2015. U.S. Energy Information Administration

http://www.eia.gov/biofuels/biodiesel/production/
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(USDA-WASDE) forecasts.4 Soybean oil feedstock costs represent the majority of the overall 

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

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

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

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

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

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

the coproduct (i.e., glycerin) value for both 2015 and 2016.5 FAPRI-Missouri also include an 

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

gallon in 2016.6 For our lower cost estimate, we used a forecast of 2014 average biodiesel 

variable cost projections of $0.50/gallon from the National Biodiesel Board.7 We then compare 

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

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

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

from the U.S. Department of Energy, Energy Information Administration’s (EIA) Short Term 

Energy Outlook (STEO) Report.8 The STEO price is $1.71 in 2015 and $1.82 in 2016.

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

2014, 2.67 billion gallons. The total advanced biofuel volumes are being finalized for 2015 at 

2.88 billion gallons and 3.60 billion gallons in 2016. 

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

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

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

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

of 3.2 cents per pound.9 However, given the current low-price or glutted condition of 

commodity markets in general, including soybean oil markets, it is also possible that changes in 

biomass-based diesel volumes would have minimal impacts on prices in the near-term, before 

supply adjusts. Therefore, in our low price estimate, we assume there is no upward price pressure 

on soybean oil prices from greater biomass-based diesel volumes. Applying the cost impact

assumptions to the projected range of USDA-WASDE soybean oil prices results in soybean oil 

price estimates at 32 to 34 cents per pound for 2015, and 28 to 40 cents per pound for 2016.

 

4

2014/2015: 31.6 cents/lb, 2015/2016: 27.5-30.5 cents/lb USDA, World Agricultural Supply and Demand Estimates 

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

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

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

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

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

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

to include operating returns into our soybean cost estimates.

7

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

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

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

processing costs at this time.

8 Energy Information Administration (EIA), Short Term Energy Outlook (STEO). October 2015

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

9 Babcock, Bruce, et. al. Biofuel Taxes, Subsidies, and Mandates: Impacts on US and Brazilian Markets (May 2013) 

http://www.card.iastate.edu/publications/dbs/pdffiles/13sr108.pdf
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Considering non-feedstock variable production cost estimates from FAPRI-Missouri and the 

National Biodiesel Board, and low and high WASDE soybean oil estimates, the resulting 

biodiesel costs range from $3.16 to $3.42 per gallon in 2015 and $2.82 to $4.28 per gallon in 

2016 (on a diesel gallon equivalent basis).

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

fuel displaced on an energy equivalent basis, results in an overall annual cost of $203 to $240 

million in 2015 and $480 to $1,182 million in 2016. Table 1 below shows estimates of per gallon 

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

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

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

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

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

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

are expected to be produced to meet the 2015 and 2016 total advanced biofuel standard. It should 

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

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

USDA/EIA price estimates.

Table 1

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

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

2015 2016

Low High Low High

Per Gallon 

Differences in 

Cost ($/gallon)

1.45 1.71 1.00 2.46

Total Annual 

Costs (millions 

of dollars)

203 240 480 1,182

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

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

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

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

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

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

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

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

that is when the two are blended together and represents the approximate costs to society absent 
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transfer payments. On this basis, EPA estimates the costs of producing and transporting a gallon 

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

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

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

from the Oil Price Information Service (OPIS) from October 2014 to October 2015, we estimate 

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

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

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

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

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

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

the port at Santos. Using data collected by Argus in a daily Argus Americas Biofuels report, we 

assume that it costs an additional $0.19/gallon to transport the sugarcane ethanol from Santos to 

the U.S. where the ethanol can be blended with gasoline.10 Based on the range of OPIS prices, 

the delivered price of sugarcane ethanol to the U.S. ranges from $1.53 to $2.31 per gallon. For 

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

the STEO, which is $1.70 per gallon and $1.67 per gallon, respectively.

11

 

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

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

basis, results in an overall estimated annual cost of $186 to $431 million for 2015 and $656 to 

$1,493 million for 2016. Table 2 below shows estimates of per gallon increases on an energy

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

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

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

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

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

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

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

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

are not reflected in current OPIS/EIA price estimates.

 

10Argus Americas Biofuels, Argus. $0.19 per gallon estimate was taken from the October 14, 2015 daily report. This 

report is in the docket as “Argus, Argus Americas Biofuels, Issue 15-198._14 October 2015”

11 Energy Information Administration (EIA), Short Term Energy Outlook (STEO). October 2015

http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf
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Table 2

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

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

2015 2016

Low High Low High

Per Gallon 

Difference in 

Cost ($/gallon)

0.89 2.05 0.91 2.07

Total Annual 

Costs (millions 

of dollars)

186 431 656 1,493

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

In this section, we assess the difference in cost associated with a change in the implied 

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

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

to meet the entire conventional renewable fuel volumes.

The implied 2014 volume allowance for conventional renewable fuel is 13.61 billion 

gallons, 14.05 billion gallons in 2015, and 14.50 billion gallons in 2016. If corn ethanol is used 

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

renewable fuel volumes, an increase in 440 million gallons of corn ethanol would be required in 

2015 and 450 million gallons in 2016. In Table 3, we show estimates of differences in costs on a 

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

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

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

starting with USDA-WASDE estimated corn prices for 2015 and 2016.12 We then estimate the 

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

Missouri, FAPRI March 2015 U.S. Baseline Briefing Book.13 There are many factors that 

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

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

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

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

 

12 2014/2015: 3.70 $/bushel, 2015/2015: 3.50-4.10 $/bushel USDA, World Agricultural Supply and Demand 

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

as a base for 2016. http://www.usda.gov/oce/commodity/wasde/latest.pdf

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

2015) http://www.fapri.missouri.edu/wp-content/uploads/2015/03/FAPRI-MU-Report-01-15.pdf
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demanded internationally so changes in international demand will have impacts on domestic 

prices independent of the RFS program. 

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

billion gallons of corn ethanol results in an increase in corn costs of $0.21/bushel.14 Using this 

relationship, we estimate that corn prices will increase by roughly $0.09 bushel in 2015 and 

$0.18 per bushel in 2016 (approximately $0.03 and $0.06 per gallon of corn ethanol for 2015 and 

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

will cost $1.77 per gallon ($2.66 per gallon on a gasoline gallon equivalent basis (GGE)) in 2015 

and $1.79 and $2.00 per gallon ($2.68 and $3.00 per GGE) in 2016.

15

 To estimate the premium 

per gallon against wholesale gasoline, we estimated the price of a gallon of wholesale gasoline 

using the latest EIA STEO estimates. As mentioned previously, STEO estimates an average 

wholesale gasoline price of $1.70 per gallon for 2015 and $1.67 per gallon for 2016. We assume 

that the wholesale price of gasoline represents the costs of producing gasoline. 

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

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

basis, results in an overall estimated annual cost of $424 million for 2015 and $453 to $597

million for 2016. Table 3 below shows estimates of per gallon increases on an energy equivalent 

basis as well as total annual costs for 2015 and 2016 of using greater amounts of corn ethanol to 

meet the entire conventional renewable fuel volumes. It is worth noting that corn ethanol costs 

and wholesale gasoline costs could vary depending on evolving supply and demand factors not 

reflected in current USDA/EIA price estimates.16

Table 3

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

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

Gasoline

2015 2016

Low High

Per Gallon Difference 

in Cost ($/gallon) 0.96 1.01 1.33

Total Annual Costs 

(millions of dollars) 424 453 597

 

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

http://www.card.iastate.edu/publications/dbs/pdffiles/13wp543.pdf

15 WASDE only reports a single price for 2014/2015 versus a range, so we do not provide a high and low estimate

for 2015.

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

Midwest contributed to an increase in the “corn crush spread.” The corn crush spread is a dollar value of the 

difference between the combined sales values of the products (ethanol and DDGs) and the cost of corn. This resulted 

in higher prices of ethanol than was forecasted.
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The short time frame provided for the annual renewable fuel rule process does not allow 

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

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

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

RFS program as a whole are best assessed when the program is fully mature in 2022.17 We 

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

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

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

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

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

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

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

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

benefits in the 2010 RFS Final Rule. 

 

17 77 FR 59477, September 27, 2012.