By Scott Gerlt • ASA Chief Economist  

The Environmental Protection Agency released its final Renewable Volume Obligations for 2023 through 2025 on June 21. The RVOs set the minimum biofuel blending levels in the fuel supply in the United States. The announcement was delayed by one week from the original date of June 14. Market reaction to the announcement was swift and negative. Soybean oil futures contracts fell by the maximum allowed amount of four cents per pound for the day. Credits for biomass-based diesel, which includes biodiesel and renewable diesel, in the Renewable Fuel Standard fell from $1.47 to $1.36 that day. The market expected larger blending levels for biomass-based diesel over the next few years than the rule delivered. EPA arrived at the less-than-expected numbers through a combination of feedstock estimates and assumptions about ethanol consumption.

EPA released its proposed RVOs for 2023-2025 last December. The proposal contained many firsts. It was the first time an RVO was finalized in which Congress no longer provided volume targets for categories other than biomass-based diesel; it was the first time EPA proposed volume obligations more than one year into the future; and, it was the first time EPA considered adding credits for electric vehicles (eRINs). A well-constructed three year rule would provide more certainty than the one-year rules under which the industry has always operated. The eRIN component would have treated RINs from electric vehicles differently from how credits (RINs) from liquid fuels have been treated and created program risk if EPA’s EV projections for the next three were significantly off. EPA dropped eRINs from the final rule, although the concept could resurface.

EPA’s proposed RVO included almost no growth for biomass-based diesel. This was due to assumptions EPA used about feedstock availability that did not appropriately account for expansion in soybean crushing or canola availability. The final rule better accounts for the realities of feedstock growth but still remains well below the potential of the biomass-based industry (Figure 1). Biomass-based diesel can be sold into several categories in the RFS, including ones specifically for BBD, advanced and conventional, although the prior two have been the main categories and the latter is the category for which corn-based ethanol qualifies. EPA didn’t change the RVOs for 2023 from the proposal. However, it did change the conversion factor for calculating the obligations credits required (RINs) from the RVO, which is in gallons. This factor had traditionally been 1.5 RINs per gallon, which is equal to biodiesel’s RIN generation. However, renewable diesel now constitutes about as much production as biodiesel and generates 1.7 RINs per gallon. To account for this, EPA changed the conversion factor to 1.6. This update better matches reality, as before, RIN compliance was underestimated. The practical effect of this change is that more RINs will be required in the BBD category and less in the applied advanced gap[i]. This change can be seen in 2023, where 280 million RINs were transferred between the implied advanced gap and BBD.

Figure 1

EPA’s proposal increased the implied advanced gap and BBD RVO by 300 million RINs between 2022 and 2025. The final rule increased by over threefold to 950 million more RINs. This translates into almost 500 million more “wet” gallons of biofuels above the 2022 levels once changes in the ratio of biodiesel and renewable diesel used to fill the requirements and their associated RIN generations are accounted for. Yet, the nearly 6 billion RINs required in these two categories is well below the potential industry capacity of over 14 billion RINs. Given that the RVOs largely set the upper limit for BBD blending due the to economics of production, either announced renewable plants will have to be delayed or cancelled, capacity will have to be underutilized, or less-competitive plants will have to cease production.

The growing discrepancies in Figure 1 appear for two reasons. The first is that EPA set the rule based on estimated feedstocks available to feed the renewable diesel plants. While the agency did not account for soybean crushing in the proposal, it improved its methodology based on ASA and other industry feedback for the final rule. This results in about 500 million gallons of additional BBD gallons from soybean oil over the period based on calculations of crush expansion (Figure 2). Embedded in the assumptions is that 20% of the increased crush expansion is for non-biofuel use, which is chiefly human consumption. This would put soybean oil consumption for non-biofuel uses the highest since the 2007/2008 marketing year.

Figure 2

The second-highest category of biomass-based diesel production by feedstock is fats, oils and grease (FOG), which includes waste greases such as used cooking oil. These feedstocks tend to be scored with low carbon intensities, which increases their values in California’s low carbon fuel program—where most renewable diesel is consumed. As such, much of the renewable diesel is produced with FOG. Canola oil received a pathway to be used in renewable diesel in the United States in late 2022, which accounts for its growth. This also contributed to EPA’s increased RVOs, as the agency had not recognized increased canola oil supplies in the proposal. Distillers corn oil (DCO) is scored as a waste feedstock in California, which leads to high credit values in the state accounting for its large usage in renewable diesel.

The other reason for EPA’s discrepancy is its assumptions for ethanol consumption (Figure 3). Ethanol consumption dropped during the pandemic when personal vehicle travel fell. Ethanol consumption has been in the area of 10%, according to EIA data, for over 10 years due to the blend wall. EPA assumes gasoline consumption does not pop back to pre-pandemic levels. The conventional category of the RVO is the portion that corn starch ethanol qualifies for. With EPA’s assumptions of only modest increases of ethanol blending, this creates an almost-one billion gallon gap in the conventional category that must be filled with other biofuels compared to 500 million gallons before the pandemic.

Figure 3

EPA assumes this gap is largely filled with biomass-based diesel (Figure 4). As previously mentioned, BBD RINs can be used in the BBD-specific, advanced, or conventional categories. However, the RINs generated from these gallons for the more specific categories will always be worth at least the value of the more general categories. In other words, the conventional RINs should never be worth more than the advanced RINs, which should never be worth more than BBD RINs. The amount of BBD filling the conventional gap is particularly high in 2023, as EPA assumes soybean oil-based renewable diesel is used to fill 250 million RINs that must be added due to a court order (ACE remand). The agency decreased the conventional category by 250 million RINs for 2024 and 2025 from the proposal. While EPA is increasing the BBD and advanced gap categories of the RFS, its assumptions about lower ethanol use require BBD to backfill the conventional category. This results in over 20% of the RINs from biomass-based diesel used in the conventional category in 2023, according to agency numbers. In essence, the marginal gallon of BBD will be tied to ethanol consumption. As ethanol can produce RINs more inexpensively than BBD, if gasoline consumption is higher than EPA projects or if ethanol blending levels increase, BBD’s share of the conventional gap will shrink.

Figure 4

The RVOs set the size of the biomass-based diesel market for the next three years. EPA’s updated assumptions about feedstock supplies resulted in modest increases in the final numbers. However, they remain well below potential capacity for the biofuel industry. Soybean markets face several risks from the final rule. The first is that the size of the BBD market is closely tied to ethanol consumption. The other is that, with the size of BBD essentially fixed for the domestic markets, if one feedstock increases its share it must be at the expense of another feedstock. This year has seen increases in used cooking oil imports for biofuel production. The RVO allows room for growth in soybean demand, but if the reality over the next several years differs from EPA’s projections, that demand growth may be curtailed.

[i] The implied advanced gap is the advanced requirement minus cellulosic and BBD in RINs.