Study finds RFS2 will result high compliance costs for producers

By Erin Voegele | September 15, 2009
Report posted Sept. 24, 2009, at 5:55 p.m. CST

A new study recently commissioned by the National Corn Growers Association found that the U.S. EPA's proposed rule for the second stage of the renewable fuel standard (RFS2) is likely to result in high-up front and recurring compliance costs for ethanol producers. The study, titled "Compliance Costs Associated with the Proposed Rulemaking for the Renewable Fuels Standard," was completed by Informa Economics.

In May the EPA released its proposed rule for the RFS2, which lays out the agency's strategy for achieving the renewable fuel mandates and compliance standards established by the Energy Independence and Security Act of 2007 (EISA). EISA ultimately requires the use of 36 billion gallons of renewable fuel by 2022.

The proposed rule specifies four unique categories of renewable fuel, each with its own respective mandate and greenhouse gas (GHG) reduction threshold. In order for biofuel producers to generate renewable identification numbers (RINs), renewable fuels must meet their respective GHG reduction thresholds and be manufactured from feedstock that meets the definition of renewable biomass. The rule would also require all biofuel producers to re-register with the EPA and complete a third-party engineering review. The engineering review would need to be repeated every three years.

Under EISA, renewable biomass is defined to include planted crops and crop residue, planted trees and tree residue, animal wastes, algae, and yard and food wastes. The definition also limits these feedstocks according to the management practices of the land they are produced on. In the case of crop and crop residues - such as corn and soybeans - in order to qualify as renewable biomass, the feedstock must be harvested from agricultural land that was cleared or cultivated prior to Dec. 19, 2007. In addition, the land must be actively managed or fallow and non-forested. Feedstocks that don't meet this definition of renewable biomass cannot be used to produce fuel that complies with the RFS2.

In order to ensure compliance with this element of the proposed rule, the EPA would require documentation that feedstocks used to produce fuels that are used to meet the RFS2 mandates are cultivated on the correct type of land. In the proposed rule, the EPA lays out a variety of ways this could be accomplished. Some of these options include establishing a third-party reporting system. Other options would rely on a verification system established by each ethanol producer. In addition, it is possible a system could be put into place in which tracking and reporting is only required once a certain acreage benchmark is reached.

According to the study published by Informa, a trigger system would be the most efficient and least expensive option for tracking feedstocks. Under this option, the need to verify feedstock origin would only be triggered once enough new land is brought into production to exceed the acreage that was already being farmed in 2007. The study states that long-term agricultural land trends in the U.S. suggest it is unlikely this baseline acreage will be exceeded through 2022.

As part of its study, Informa surveyed a sample of U.S. ethanol producers and grain elevators in order to gauge their opinions on the expected costs of these new requirements. According to Informa, survey respondents included 12 ethanol companies that represent 20 percent of total U.S. ethanol capacity and 12 elevators that represent a wide array of operations in different regions of the country.

The survey found that:
Only one respondent was aware of new farm land that was brought into production in their region.
A minority of ethanol companies plan to hire new staff or establish new record keeping systems in order to comply with the feedstock tracking requirements of the RFS2. In addition, most of the ethanol companies surveyed plan to use internal staff rather than third parties to verify feedstock suppliers records. However, Informa's study notes that many of these respondents were not aware that elevator managers who responded to the survey indicated that confidentiality considerations would prevent them from releasing this information directly to ethanol companies.
Ethanol companies that reported they would add staff for feedstock tracking compliance reported expected additional personal costs in the range of $60,000 to $500,000 annually. The cost of additional software for tracking purposes was estimated to be $5,000 plus an annual fee of $5,000 to $10,000.
The expected cost of third-party verification ranged from $30,000 to $500,000 per plant.
Respondents estimated the cost of an engineering review to range from $10,000 to $150,000 per plant.
Only one respondent believed it would be possible for famers to segregate corn storage based on the land used to cultivate the crop.
No grain elevators surveyed were willing to segregate corn from newly established croplands.
The elevators surveyed reported that it would be necessary to collect documentation of corn origin before taking delivery of the product.
Respondents estimated farmers would need to be paid a 2 cent to 5 cent premium per bushel of corn to provide documentation to elevators
Depending on location, respondents estimated ethanol producers purchasing corn directly from the farmer would need to pay up to a 10 cent premium per bushel in order to receive needed documentation

According to Informa's survey results, the start-up cost to implement the new provisions of RFS2 would cost an ethanol plant an average of $2,177 per million gallons of capacity. The annual cost to implement these changes was found to be $4,272 per million gallons of capacity for total feedstocks costs other than handling, and $27,978 per million gallons for handling charges. For feedstock producers, the cost of RFS2 would mainly consist of extra management and recordkeeping time.

The survey ultimately found that the up-front cost to the ethanol industry would be nearly $30 million, with annual recurring compliance costs of $420 million. This annual cost is roughly equivalent to 3.2 cents per gallon of ethanol.