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By Cole Gustafson, Published May 26 2009

New energy economics: EPA proposal changes biofuels landscape

FARGO - On May 5, 2009, the U.S. Environmental Protection Agency announced proposed regulations regarding implementation of the 2007 Energy Independence and Security Act. Despite the legislation’s namesake, there isn’t much security for the growth of traditional corn ethanol.

EISA was landmark legislation for the biofuels industry because it set a national goal of producing 36 billion gallons per year of renewable energy.

Following passage, a national debate ensued on whether our country had enough land available to produce this quantity of biofuels and its impact on food supplies (food vs. fuel).

The original EISA legislation defined three types of biofuels –conventional, advanced and cellulosic. Conventional biofuel is traditional ethanol produced from cornstarch (grain). Advanced and cellulosic biofuels were defined based on their ability to reduce greenhouse gas emissions. Advanced biofuels must reduce greenhouse gas emissions by up to 50 percent, while cellulosic must reduce greenhouse gas emissions by up to 60 percent.

EISA included a specific column for production of conventional biofuels and eventually increasing production to 15 billion gallons per year by 2022.

Advanced and cellulosic biofuels only included ranges of 5 to 21 billion gallons per year and 3 to16 billion gallons per year, respectively, because the federal government was uncertain how rapidly these new technologies could be commercialized. The legislation charged the EPA with reviewing and updating these guidelines annually.

The EPA now has provided more clarity. Conventional biofuels in the future must reduce greenhouse gas emissions by up to 20 percent. In determining this calculation, the EPA now includes both “direct” and “indirect” causes during the lifecycle of production. The latter component commonly is referred to as indirect land use change. However, the EPA finds that any new traditional corn grain ethanol plant would reduce greenhouse gas emissions by only up to 16 percent, so it would not qualify as a conventional biofuel.

In its proposed regulations, though, the EPA is grandfathering in traditional corn grain ethanol plants built before Dec. 19, 2007. Therefore, existing ethanol plants will be able to continue to operate and produce ethanol that conforms to the federal guidelines for the time being. It is uncertain how long this grandfathering provision will last, especially as new technologies arise and production of conventional biofuels with a greater than 20 percent greenhouse gas emissions reduction occurs.

Existing corn grain ethanol plants are investing in new technology, such as fractionation and changing plant energy sources, in an effort to reduce greenhouse gas emissions. In doing so, the plants increase their chances of being able to meet the tighter EPA regulations being proposed.

To ensure compliance with new EPA regulations, each gallon of biofuel produced will have a unique 34-digit renewable identification number. Blenders will have to document that they have purchased appropriate quantities of each type of biofuel when producing their final consumer products.

The greatest challenge the biofuels industry now faces is finding capital to construct new advanced and cellulosic plants. With unproven biofuels conversion technology, changing EPA regulations and weak financial markets, new investment capital is going to be difficult to procure.

Cole Gustafson is a biofuels economist with the NDSU Extension Service.