February 15, 2022
Reducing carbon emissions from the U.S. transportation section will be a challenge requiring the utilization of a range of solutions. With combustion engines making up the vast majority of the fleet today and for the foreseeable future, biofuels represent one of the most practical solutions to lowering U.S. transportation emissions in the near term. But what is the future of the biofuels market? What are the policies being considered to support ethanol, biodiesel and renewable diesel and what are the barriers to biofuels adoption – things like fuel compatibility issues, feedstock availability, and vehicle fleet projections? Listen in as Stratas Advisors and Transportation Energy Institute discuss these issues and more and look for our report coming out in spring 2022!
- Austin Trotta, Biofuels Analyst, Stratas Advisors
- Eric Lundin, Biofuels Analyst, Stratas Advisors
Welcome to Carpool Chats, a podcast brought to you by the Transportation Energy Institute.
Welcome everybody, to our next episode of Carpool Chats. We’re going to have a really good discussion, a brief overview of a report that everyone will be seeing soon regarding biofuels, the look at biofuels in a post-2022 type world, kind of aligning this discussion with the reboot of the renewable fuel standard in January of 2023 and looking forward towards how are we going to decarbonize the existing US internal combustion engine fleet? As we see the adoption, the gradual adoption rate of electric vehicles, we know that the internal combustion engine’s going to be around for decades. So what can we do from a liquid fuel standpoint, in those same engines, to reduce the CO2 emissions coming from that? So today, we have with us Stratas Advisors. We’ve got Austin Trotta and Eric Lundin. And welcome, gentlemen.
Speaker 3 (01:16):
Austin Trotta (01:17):
So this report is really a kickoff to some new things that the Transportation Energy Institute is going to be focusing on. And we’re going to be taking a deep dive into what can I occur here under this under the new administration, policies that are coming out, whether or not a company is tackling their ESG demands, or they’re looking at offering new fuels to the public or within their fleet, their existing fleet? When I look at biofuels, I always look at it in the metrics, is how can we be cost competitive. Right? How can biodiesel and renewable diesel and ethanol, for example, compete with gasoline and diesel fuel so that the end consumer doesn’t get hurt or the marketer can increase their fuel margins.
I mean, those are typically the lens that I look at, look through it, but now we’ve got this new metric that everybody is hyper focused on, and that is not just the cost of the fuel, but what’s that carbon cost? How do we ultimately reduce the CO2 in those fuels? So, Austin, would you like to kick us off a little bit on talking about the paper that’s going to be coming out shortly?
Austin Trotta (02:46):
Yeah. Thank you, Jeff. So yeah, the paper is really a look at the current state of biofuels in the US market in the context of decarbonizing the transport sector. So it looks at the two main pathways currently of biofuels, which is ethanol, and then on the diesel side, biodiesel and renewable diesel. And then we get into current proposed legislation, and then also all the framework around fuel compatibility, feedstock availability, and the vehicle fleet projections as well.
Excellent. And I’ve reviewed the report several times now. And earlier we were talking about how when you’re reviewing this report, you’re no longer looking at volumes consumed or volume demand, and then the price point. We’re also trying to include, or what you’re including in this report is the cost of carbon. And for us to get our minds around that, it takes a little bit of shifting. Right? We have to start looking at transportation and fuels, again, through that new lens, which is very interesting. We don’t have a carbon tax today. I don’t think we’re going to have a carbon tax anytime in the near future, but everything in this report goes back to what is the cost of that CO2 avoidance on a gram CO2 equivalent per mega jewel basis and looking at the carbon intensities of the fuels.
And so what the report is looking at, really to your point, is breaking down the two primary fuels that are out there. You’re looking at some other ones too, but really in the United States right now, we’ve got ethanol, which is the vast majority of alternative fuels right now, and then the biodiesel renewable diesel mix. So let’s talk about the biodiesel and renewable diesel right now and looking at it in a sense of where is it going? We hear a lot about renewable diesel right now, the plate capacity production building up. And you’ve got some interesting facts in the report that I’d like to touch on. Right now, we’re looking at about 900 million gallons of production of renewable diesel. Where is that going in the future with all these new discussions of new facilities being built?
Austin Trotta (05:28):
Yeah, so the announced capacity by 2025 would be 5.9 billion gallons of renewable diesel or 5 billion additional gallons. And if you kind of discount that a bit, given that some of the projects will likely not come to fruition, we’re still looking at an estimate of about 5 billion gallons, so about five times more renewable diesel production than current levels, which is quite the astronomical rise.
That is a huge jump. So 900 million to about 5 billion conservatively. What’s that going to do to our feedstock? I mean, then the next discussion, the next national discussion is the stress put on feedstock. What are you seeing? What’s the relationship between renewable diesel and biodiesel moving forward? As many are reporting right now, we’re topping out for our feedstocks right now. So there’s going to be this struggle on feedstocks alone, let alone new industries like sustainable aviation fuel and in other industries coming to the table saying, “Hey, we’re lacking oils here.” How do you foresee that panning out? What’s going to come out of that?
Austin Trotta (06:50):
Yeah. And just for a little bit of context on what’s fueling this rise, the California Low Carbon Fuel Standard program is the crux of demand for renewable diesel right now, since it basically requires an over compliance in the diesel pool to make up for shortfall of compliance in the gasoline side. So that’s basically where most of this renewable diesel is slated to go. And as that rises, there will be some cannibalism of biodiesel production, but yeah, as you alluded to the feedstock side is already pretty tight, not just between producers, but also from food processing and animal feed producers. So a five times increase will be interesting since that’s going to increase prices and costs of production, but it’s also going to lead to increased competition for the lowest CI, or the least carbon intense feedstock, which will push more producers to use higher carbon intensity feedstock, lowering their credit value. It’ll also push the other producers into higher CI feedstock. And then it also increased the risk of fraud and an increased deforestation risk across the world.
Yeah. Some all very good points. And so we’re… There’s a good chance we’re going to see some of the existing biodiesel facilities really turn into pretreatment facilities to create the renewable diesel…
Austin Trotta (08:35):
… is what I’m hearing out there. So it’s not like they’re going to be mothball. They’re lost here. They’re still going to be functioning. And of course, to a number of your points there, what happens to the carbon intensity as we have to pretreat and transport and increase our refining to get to that renewable diesel specifications? So all things that, I think we’re going to be looking at coming up here in the future. What I’m hearing in the report right now is that there’s not a huge increase in the carbon intensity moving from a biodiesel to a renewable diesel, which is fantastic.
And of course, the other big deal here is that renewable diesel is a completely fungible drop in fuel. So biodiesel being limited to a 20% blend, RD or HBO is a drop in fuel, can be used as is. So in your estimation, when we talk about LCFS driving this… Right? We got the LCFS on the west coast, California, Oregon, Washington, whenever, and then we got the RFS. So all of this, it’s really the west coast demand that’s driving it. Do we have an indication as to what that diesel demand along the west coast is? And I apologize for dropping that on you, but when we’re talking about roughly 5 billion gallons of renewable diesel, is that going to satisfy a big chunk of the diesel demand on the west coast where it’s cost effective to use it?
Austin Trotta (10:27):
Yeah. We’ve seen an explosion in the percent of diesel in the diesel pool in California especially. As you mentioned, biodiesel, in some cases, is blended at 20%, but historically you’ve seen it at about 5 to 6 to maybe 7% of the California pool. But as renewable diesel has been, as you said, as a drop in fuel, has been basically the swing producer of LCFS credits in California. We’ve seen the percentage rise to over 20, 30 and nearing about 40% of the diesel pool currently. And as you said, as it’s projected to rise, it could be well over 50% of the diesel pool in California.
All right. And that kind of is… It’s kind of a good segue into talking about what’s going on with ethanol right now, because we still have these opportunities to reduce the carbon intensity of the biodiesel renewable, through efficiencies, through land use practices, through farming practices. And all of that’s being discussed right now. We’ve got boots on the ground that are assessing farmlands in South and North Dakota. I think [inaudible 00:11:48] you guys have a great example in your report talking about the differences that farming practices can make from egg crops going to biofuels. And those were some huge swings, huge differences, just in farming practices alone, what that does to the carbon intensity of the final product. So hopefully, everybody picks up on that in the report that we do have a lot of room to improve.
And taking a segue, moving into the ethanol discussion, talk about room for improvement. You dive really deep into the carbon capture program that’s being proposed. And it’s moving forward. Right? I’m in Iowa today, and so I hear about the pipeline system as being discussed. Do you want to dive into that a little bit and talk about, kind of specifically, what’s the schedule for that? How many facilities or gallons is that going to impact? And then, what’s that going to do to the carbon intensity of that ethanol?
Austin Trotta (13:05):
Yeah. So we’ve seen a flurry of announcements on the carbon capture side of ethanol production. And for a bit of context, we’ve seen ethanol’s carbon intensity reduce substantially over the past decade. And the industry has announced a net zero target for 2050 in order to remain competitive in the future, as a net zero fuel as the goal. And that would be mainly met through carbon capture, and then as you alluded to sustainable farming practices, incentivized by low carbon fuel programs where you receive more credit value the lower carbon intensity your fuel is. There’s also, on the carbon capture side, another incentive, which is in the internal revenue code, section 45Q, which gives you a tax credit for carbon capture from industrial processes.
Austin Trotta (14:03):
And now, ethanol producers have announced projects to capture the carbon from their ethanol production and store it under the ground and receive this credit value, which is currently about $32 per metric ton of carbon captured. And that rises to $50 by 2026, and thereafter is peg two inflation. And also there’s current legislation out there, included in the bill back better bill, which would raise that credit value from $50 in 2026 to $85, which would increase the amount of ethanol projects looking at this carbon captured technology. And today, there’s about 16 billion gallons of ethanol production, and about two thirds of that ethanol production has announced joining one of these carbon capture projects.
Austin Trotta (15:02):
And that would have an effect of reducing the carbon intensity by about 20 to 30 grams of CO2 out of a top line carbon intensity of about 50 to 60, depending on the project. So you’re reducing the carbon intensity by about half right there if these projects are successful, because historically, there hasn’t been that many carbon capture projects that have been successful, but the industry is optimistic with these new tax credits that these projects will be successful.
So the ethanol producers are going to gain on the front end through tax incentives, through 45Q of the internal revenue code. But then on the back end, their credits, because their carbon intensity is going to drop by about 25 points, the value on a per gallon basis is going to go way up. And so California’s got to be tickled about this, because that’s where a lot of this stuff wants to go, or any market that has a low carbon fuel standard where you can capture a RIN credit and a low carbon fuel standard credit. And so that’s amazing. That’s pretty cool. I would encourage anybody. I mean, you can go online and you can Google where this pipeline throughout the Midwest is planning on going.
And it sounds like a pretty far a fetched idea, but they’re talking within three to five years of having this infrastructure in place. I don’t know how many of the 30 ethanol facilities that [inaudible 00:16:43] talked about are, what the schedule is for all of them, but that’s a pretty quick timeline, relatively speaking, and in a good push towards their goal of net zero in that industry. So there’s going to be a value add to the renewable fuel blender or the downstream party that’s able to capture those gallons of ethanol, which sounds like it’s going to be most of those gallons of ethanol. I mean, those are some pretty big numbers.
Speaker 3 (17:15):
Yeah. And I think the [crosstalk 00:17:17]. Sorry. Economically, it’s a very economical option for further reducing costs, because I think it reduces the cost of reducing carbon emissions from overall US biofuels consumption, and I think it was by 20 to 30%, depending on the level of, or the number of projects or the number of ethanol plants that undertake this. And so it’s a very good incremental add on to what biofuels do today.
That, and we’re still having the discussions on E15. Right? I mean, we’re still… I mean, I think this discussion, what you guys just said is only going to push those discussions on E15. And yes, there’s a lot of things to talk about that from compatibility to engine warranty, et cetera. But when you’ve got a cost savings, that’s that potential behind it, you’re going to get a lot more folks behind it. So that’s going to be really interesting to see. That and in ethanol, in your report, the feedstock availability to move to E15, the feedstock is there, unlike other biofuels. So it sounds like we’ve got room to grow, the ethanol production facility does anyway. And it’ll be interesting to kind of crunch those numbers to see how far that can go, moving from the your standard E10 blend out to an E15 blend, 15% ethanol blend.
So I mean, I think in my experience, what I’ve seen is, the more fuels you have out there and the mix of credits, those that are savvy and blending and taking advantage of that, you can be really ultra-competitive in the market space. And so the more tools you have to be competitive, typically the happier you’re going to be, as long as you’re jumping into this and staying ahead of the curve, which is really cool. The one big unknown that we have, and we talked about this a little bit earlier, is what’s going to happen to the RFS post 2022. And EPA takes the reins and they start setting standards. Are they going to… Are they going to maintain their volume metric standard as it is today, or are they going to move more towards a carbon performance to standard like we see in a low carbon fuel standard?
The problem with ethanol, as you guys point out, is that by statute, it’s locked in to a D6 RIN bucket, and it can’t break out of that, even though we might get down to a 60% GHG reduction by volume and into… They can’t get out of that D6 mandate volume, when quite frankly, it should be an advanced biofuel at that point. Today, we’re pretty close to being an advanced biofuel by what we’re seeing. So that’s going to be really interesting to see what EPA does there. Of course, to break ethanol out of that bucket is going to take some congressional activity, because that’s all in statute. So I’m not sure. I got to believe that some industry folks are actively lobbying to maybe move towards a performance standard and get away from the volume metric standard that’s kind of holding back the progress made on reducing the carbon intensity of the fuels.
Your point on potential fraud though is well taken. Right? We’ve seen this. We’ve seen this over the years with people manipulating the system. And let’s, I mean, right down to people sitting in their bathrobes generating RIN credits in their kitchen. Most of those people are in jail or have already served their time, but it is something that we certainly need the oversight and the engineers in there to qualify all of those gallons. So, that’s going to be interesting to watch as well.
Austin Trotta (21:48):
Yeah, exactly. As we’ve seen in the past couple years, a lot of the focus has been on the biodiesel and renewable diesel side, which as we mentioned, may come to some headwinds with feedstock availability. Meanwhile, in the background, ethanol, with some of these CI improvements, it’s really interesting to see if these carbon capture products will be successful and if sustainable farming practices become widespread and have a strong impact on the carbon intensity. There could be, as you mentioned, there could be a shift in support for ethanol or a shift in focus to a low carbon ethanol, which could be a huge development for the market if it were to come to fruition.
Well, I mean, one thing’s for sure. I mean, we have to tackle this. When we’ve got folks that are claiming that electrification is the end all game here and ignoring in this idea that combustion engines are going to be on the road for decades. You can’t ignore that if you want to be honest about the situation, if you want to have an honest discussion about climate change or CO2 reduction. We can’t put all of our eggs in one basket. So I think the report that you guys have done is really going to help us set the stage for where are the improvements being made today? Where can they be made in the future, and looking at different schemas to get that done, because those vehicles are going to be on the road for a very long time. And so it’s a very timely report. And I think it’s…
Like I said, it’s going to be really a good jumping off point for the Transportation Energy Institute as we start diving deeper into the biofuels or alternative fuels in the existing engine. So I really thank you guys for your time. I think this has been… I’m looking forward to getting feedback on the report, and I’m looking to get more in the future.