Cellulosic Biofuel Waiver Credits: Part I

On February 3, 2010, the U.S. EPA finalized its long-awaited amendments to the National Renewable Fuel Standard program (“RFS2”), which increased mandated quotas of ethanol, biodiesel and other biofuels in the U.S. transportation fuel supply. The National Renewable Fuel Standard program was originally created in the 2005 federal energy bill and substantially modified by the Energy Independence and Security Act of 2007 (“EISA”). The RFS2 program sets quotas for biofuels in U.S. fuel supply starting at 12.95 billion gallons in 2010 with an ultimate goal of 36 billion gallons of renewable fuel by 2022. The rule includes nested sub-quotas for advanced biofuels, cellulosic biofuels and biomass-based diesel, with the goal for cellulosic fuels at 21 billion gallons by 2022. The policy goals of the RFS2 include energy independence through displacing imported petroleum and increased domestic energy supplies. 

Over the next few months, we will explore various provisions relating to cellulosic biofuels under RFS2. This post will begin to describe the credits the EPA has named “Cellulosic Biofuel Waiver Credits” (“Waiver Credits”) that will be issued to obligated parties under the circumstances described below.

EISA requires the EPA to set the cellulosic biofuel standard for each calendar year based on the lesser of (i) the volume specified in EISA or (ii) the projected volume of biofuel production based on estimates for that year. Under the final rule, the EPA has determined that projected volume for cellulosic biofuels production for 2010 would be 6.5 million gallons, well below the 100 million gallon mandate in EISA and the EPA’s proposed rule issued in May 2009. When the project volume is less than the mandate required by EISA (“Short Years”), the EPA is required to make Waiver Credits available for sale to obligated parties in order to allow obligated parties to meet their renewable volume obligations under EISA.

EISA requires the price of Waiver Credits to be an inflation-adjusted price that is the higher of (i) $0.25 per gallon or (ii) the amount by which $3.00 per gallon exceeds the average wholesale price of a gallon of gasoline in the Unites States. Based on this formula, EPA stated it will make available these Waiver Credits available for a price of $1.58 per gallon-RIN for compliance year 2010. Generally speaking, this means that an obligated party should be indifferent between buying a gallon of gasoline plus a Waiver Credit versus buying a gallon of cellulosic biofuel for a price equal to or less than the price of the gallon of gasoline plus the cost of the Waiver Credit. For example, if a gallon of gasoline costs $1.50 in 2010, an obligated party would pay $3.08 ($1.50 + $1.58) to sell a gallon of fuel and comply with its renewable volume obligation. Alternatively, the obligated party could buy a gallon of cellulosic biofuel for some price equal to or less than $3.08 (most likely a cellulosic biofuels producer would offer a discount to make the decision easy for the obligated party).

Thus, the renewable volume obligations combined with the Waiver Credits can operate as a floor to make the economics work better for producers of the cellulosic biofuels during Short Years.¹ At the same time, producers cannot charge exorbitant prices to obligated parties because the foregoing pricing structure will operate as a cap on the amount that obligated parties would be willing to pay for a gallon of cellulosic biofuel. Indeed, without the Waiver Credits obligated parties would be in a very bad negotiating position relative to producers of cellulosic biofuels during Short Years because there would be very little supply available to allow obligated parties to meet the renewable volume obligations under RFS2. In years other than Short Years, presumably market forces will dictate the price of cellulosic biofuels.

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1. For the purposes of the foregoing analysis, I have ignored the fact that obligated parties may have to incur capital and increased operational expenditures to deal with the storage, blending and transportation of cellulosic biofuels for simplicity. Capital and operational expenditures to deal with these issues could affect the price that an obligated party is willing to pay for cellulosic biofuels.

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