EPACT2005 requires that the use of renewable motor fuels be increased from the 2004 level of just over 4 billion gallons to a minimum of 7.5 billion gallons in 2012, after which the requirement grows at a rate equal to the growth of the gasoline pool [19]. The law does not require that every gallon of gasoline or diesel fuel be blended with renewable fuels. Refiners are free to use renewable fuels, such as ethanol and biodiesel, in geographic regions and fuel formulations that make the most sense, as long as they meet the overall standard. Conventional gasoline and diesel can be blended with renewables without any change to the petroleum components, although fuels used in areas with air quality problems are likely to require adjustment to the base gasoline or diesel fuel if they are to be blended with renewables. 

Before EPACT2005, a major portion of the RFG pool was blended with methyl tertiary butyl ether (MTBE) to meet required oxygen levels, increase volume, improve octane, and maintain compatibility with existing petroleum product pipelines without a large increase in gasoline volatility. The oxygen content was required under CAAA90 [20]. Ethanol is the only other economically feasible oxygenate, but it is incompatible with existing pipelines because of its affinity for water and causes substantial increases in gasoline volatility. Because MTBE was easier to blend and ship, refiners preferred to meet oxygen requirements with MTBE. Over the past several years, however,  various State and local governments have banned the use of MTBE, and some have even brought lawsuits against MTBE producers over concerns that spilled MTBE and gasoline containing MTBE were polluting groundwater. 

In EPACT2005, Congress repealed the oxygen requirement for Federal RFG but declined to prohibit defective product claims against producers and blenders of MTBE. Refiners believed that the lack of an oxygenate requirement would increase their liability in future groundwater contamination cases and voluntarily eliminated MTBE from the gasoline pool in the summer of 2006. 

Several of the largest MTBE-consuming States had already banned the use of MTBE and switched to ethanol-blended gasoline by the time EPACT2005 was passed. California, New York, and Connecticut implemented MTBE bans in 2004 [21]. Ethanol distillers, petroleum refiners, and petroleum product terminal operators invested in process changes and additional tanks to accommodate the ethanol. Despite the flexibility allowed by the EPACT2005 RFS and its repeal of the oxygen content requirement, refiners began using ethanol in all RFG in summer 2006. 

Overall levels of ethanol and biodiesel use are projected to exceed the EPACT2005 requirement in all AEO2007 cases, given the projected prices for corn and crude oil, the lack of viable substitutes for MTBE, and extension of the tax credit for ethanol blending [22]. EPACT2005 requires the use of 250 million gallons per year of ethanol produced from cellulose after 2013. Production of cellulosic ethanol rises only to the minimum requirement in the AEO2007 reference case, because the projected capital costs of cellulosic ethanol plants are significantly higher than those of corn ethanol plants. 

An older Federal energy law has been used specifically to promote biodiesel. The Energy Policy Act of 1992 required certain vehicle fleets to purchase alternative-fueled light vehicles, but the vehicles were not actually required to run on alternative fuels. The Energy Conservation Reauthorization Act of 1998 allowed the purchase of 450 gallons of pure biodiesel to offset the requirement to purchase one alternative-fueled light vehicle [23]. In AEO2007, biodiesel demand for Federal fleet purchase offsets is projected to be 7.4 million gallons per year in 2012 and 8.8 million gallons per year in 2030. 

Several States have their own requirements for ethanol and biodiesel in their motor fuel supplies, which are reflected in AEO2007. Minnesota, a major producer of ethanol, has required all gasoline to contain at least 7.7 percent ethanol since 1997 [24]. Hawaii requires 85 percent of its gasoline to contain 10 percent ethanol, effective on April 2, 2006 [25]. The intention of the law is to spur local production of ethanol from sugar, but the ethanol could also come from the U.S. mainland or from Brazil. 

Minnesota was also the first State to require biodiesel blending into diesel fuel, at 2 percent by volume [26]. The requirement became effective in mid-2005, when two new biodiesel plants, each with 30 million gallons per year capacity, began operation in the State. The law was waived several times because of quality problems with the biodiesel, but it is again in effect. Washington requires 2 percent ethanol in gasoline and 2 percent biodiesel in diesel fuel no later than November 30, 2008. The requirement will increase to 5 percent once the State can produce biodiesel equal to 3 percent of its diesel demand [27]. Louisiana enacted a requirement for 2 percent ethanol in gasoline and 2 percent biodiesel in diesel fuel, once sufficient capacity is built in-State [28, 29]. Assuming that Louisiana’s 2-percent and Washington’s 5-percent requirements are triggered, Louisiana, Minnesota, and Washington will require 102 million gallons of biodiesel in 2012 and 146 million gallons in 2030. 

The Federal and State policies on renewable fuels have various effects on gasoline supply and price. The substitution of ethanol for MTBE in RFG reduces the yield of gasoline and gasoline components from a given refinery configuration. In the long run, refiners are expected to make additional investments to get back some of the gasoline capacity they lost. 

Because ethanol currently is economically competitive as a gasoline blending component in Minnesota, its use in that State is not dependent on the ethanol content requirement, which is estimated to have no adverse impact on gasoline prices. Hawaii, on the other hand, must either produce ethanol from costly sugar or ship ethanol from the U.S. mainland or Brazil. Because both options are expected to be expensive, it is likely that Hawaii’s program will raise gasoline prices. The biodiesel requirements in Minnesota, Louisiana, and Washington may increase the availability of diesel fuel in the short run and are likely to increase diesel prices after the Federal motor fuels excise tax credits for blending biodiesel expire. In the longer run, renewable fuels requirements do not affect the availability of gasoline and diesel fuel, because refiners are expected to adjust refinery expansion plans in light of these mandates.

Notes and Sources

Contact: Peter Gross
Phone: 202-586-8822
E-mail: peter.gross@eia.doe.gov