Biofuels Law and Regulation: Economic Consequences of Conflict

1. Biofuels Law and Regulation: Economic Consequences of Conflict Presented to: Energy Biosciences Institute Biofuels Law and Regulation Conference April 19, 2013 John M. Urbanchuk Managing Partner Agriculture and Biofuels Consulting, LLP

2. Why do we need biofuels?

3. World oil prices remain high

4. Ethanol prices compare favorably to gasoline to the benefit of consumers

5. Price margins continue to favor blending ethanol

6. So, what’s the problem? • As gasoline consumption declines so does the market for ethanol. • The law requires 36 BG of renewable fuels (mostly ethanol) to be used by 2022. • But regulators (EPA) are essentially preventing achievement of this target 6

7. Ethanol has hit the blend wall. In order to meet RFS targets blend levels must grow • Currently ethanol is used in 10% of motor fuel. • EPA has approved E15 blends in autos produced after 2001 • However as gasoline consumption declines higher blends will be needed • A blend of 26% would be needed to meet the 2022 RFS II ethanol target of 31 bil gal. 7

8. The biofuels policy landscape is changing • Biofuel critics got their wish. The principal Federal tax incentive and secondary tariff expired 12/31/11. • The RFS2 mandate remains under attack. • Concerns over effects of higher blends on engines • Protests by livestock and food industry over impacts on feed costs and food prices • Anger over loss of market share from oil companies 8

9. Why the fight over higher blends? • Concerns over effects of higher blends on engines • Auto companies and others are primary opponents • Brazil experience suggests that this is not a real problem • Small engines still a concern • Protests by livestock and food industry over impacts on feed costs and food prices • Highly emotional issue but no empirical evidence that increased biofuels use had led to higher food prices • Will dissolve as biofuels use second-generation (non-food) feedstocks • Anger over loss of market share by oil companies • OK, who wouldn’t complain about losing 30% market share to a mandated product?

10. Legislation to repeal or reform RFS has been introduced in Congress • EPA has grudgingly approved higher ethanol blends • EPA has denied RFS waiver requests based on claims of extreme adverse economic impacts • But, EPA has been very slow to approve new advanced biofuel feedstocks with the effect of restraining new investment What has been the response? 10

11. Increased uncertainty and risk for new investment • Meeting RFS cap of 15 billion gallons of corn starch ethanol is no problem. • Currently 211 refineries have nameplate capacity of 14.7 billion gallons with an average capacity of 70 MGY. • Second generation (cellulose) production finally is coming on line • But, much more new investment is required • Assuming a 50 MGY capacity, as many as 400 new plants will be needed to be built by 2022 to meet RFS2 target at a capital cost of nearly $90 billion! What is the impact of these responses? 11

12. Current regulations provide sufficient flexibility that negate the need to repeal or overhaul the RFS. • The RFS regulation contains a number of provisions that provide both compliance flexibility for obligated parties and regulatory flexibility EPA. These measures are intended to • Afford EPA the ability to administratively adjust RFS requirements on an annual basis in light of prevailing fuel market and economic conditions • Provide obligated parties the ability to comply with annual RFS requirements in the event of a shortage of renewable fuel or other market anomaly. What can be done? 12

13. Annual Renewable Volume Obligation (RVO) Percentage • Cellulosic Biofuel Waiver Provisions • Advanced Biofuel Standard Adjustment • Total RFS Adjustment • Total RFS Waiver Authority • Future Modification of Applicable RFS Volumes EPA has considerable administrative flexibility Thanks to Geoff Cooper, RFA

14. RIN Banking and Trading • RIN Roll-Over Allowance • Deficit Carry-Forward Provision • Small Refiner Exemptions • RIN Interchangeability Obligated parties also have flexibility Thanks to Geoff Cooper, RFA

15. The industry spent nearly $40 billion to produce 13.3 billion gallons of ethanol in 2012. • The ethanol industry contributed $43.4 billion to the nation’s GDP • The economic activities of the ethanol industry put more than $30 billion into the pockets of Americans. • The ethanol industry supported more than 380,000 jobs in all sectors of the economy. • Ethanol displaced 465 million barrels at a value of $47.2 billion. • Meeting RFS targets is expected to support more than 1 million jobs by 2022 • These impacts and future gains will be threatened by wholesale changes to the RFS. What is the economic impact of ethanol? 15

16. In conclusion • Existing flexibilities render legislative reform of the RFS program unnecessary and imprudent. • Biofuels production will expand both in the U.S. and globally but significant challenges remain. • How these challenges are addressed will determine how the industry will grow, where new investment will be made, and who enjoys the economic benefits. 16