Regulation of Fuels and Fuel Additives: Renewable Fuel Standard ...

The increased use of renewable fuels such as ethanol and biodiesel is also expected to
have the added benefit of providing an expanded market for agricultural products such as
corn and soybeans. Based on our analysis, there is also an expectation that the expanded
use of renewable fuels will provide reductions in carbon dioxide emissions and air toxics
emissions such as benzene from the transportation sector, while other emissions such as
hydrocarbons and oxides of nitrogen may increase.
The level of the renewable fuels standard set forth by Congress works in
conjunction with other provisions that were enacted as part of the Energy Act. In
particular, the level of the renewable fuel standard more than offset the possible loss in
demand for renewable fuels occasioned by the Act’s repeal of the oxygen content
mandate in the reformulated gasoline program while allowing greater flexibility in how
renewable fuels were blended into the nation’s fuel supply. The renewable fuel standard
additionally created a specific annual level for minimum renewable fuel use which
increases over time, ensuring overall growth in the demand and opportunity for
renewable fuels.
Because renewable fuels such as ethanol and biodiesel are not new to the U.S.
transportation sector, the expansion of their use is expected to follow distribution and
blending practices already in place. For instance, the market already has the necessary
production and distribution mechanisms in place in many areas, and the ability to expand
these mechanisms into new markets. Recent spikes in ethanol use resulting first from the
state MTBE bans, and now the virtual elimination of MTBE from the marketplace, have
tested the limits of the ethanol distribution system. However, future growth is expected
to move in a more orderly fashion since the use of renewable fuels will not be
geographically constrained and, given EIA volume projections, investment decisions can
follow market forces rather than regulatory mandates. In addition, the increased
production volumes of ethanol and the expanded penetration of ethanol in new markets
may create new opportunities for blending of E85, a blend of 85 percent ethanol and 15
percent gasoline, in the long run. The increased availability of E85 will mean that more
flexible fueled vehicles (FFV) can use this fuel. Of the approximately 5 million FFVs
currently in use in the U.S, most are currently fueled with conventional gasoline rather
than E85, in part due to the limited availability of E85.
Given the ever-increasing demand for petroleum-based products in the
transportation sector, the RFS program is an important first step in U.S. efforts to move
toward energy independence. The RFS standard provides the certainty that at least a
minimum amount of renewable fuel will be used in the U.S., which in turn provides
investment certainty for the growth in production capacity of renewable fuels. However,
the RFS program is not the only thing impacting demand for ethanol and other renewable
fuels. As Congress was developing the RFS program in the Energy Act, several large
states were adopting and implementing bans on the use of MTBE in gasoline. As a
result, refiners were forced to switch to ethanol to satisfy the oxygen content mandate for
their reformulated gasoline in the U.S., causing a large, quick increase in demand for
ethanol. Even more importantly, with the removal of the oxygen content mandate for
RFG, refiners elected to remove essentially all MTBE from the gasoline supply in the
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