The United States has employed a number of biofuel subsidy and tariff programs since the 1970s that have influenced the economic feasibility of biorefineries. The majority of these programs expired at the end of 2011 (Pear, 2012) and the US government has switched the focus of biofuels policy from protectionist programs to a low-carbon mandate in the form of the Renewable Fuel Standard. Whereas past biofuels programs have focused primarily on first generation biofuels and ethanol pathways, the current mandate is broader in scope and includes biofuel pathways ranging from ethanol to butanol to biobased gasoline and diesel (so-called drop-in biofuels).

Up until their expiration at the end of 2011, the US maintained a redeemable tax credit (i. e., a credit first applied against a taxpayer’s tax burden with any excess being received as a direct payment) worth $0.45 for every gallon ($0.12/liter) of pure ethanol blended with gasoline for use as transportation fuel in the form of the volumetric ethanol excise tax credit (VEETC). A concurrent tariff on ethanol imports was also employed to prevent foreign ethanol producers (particularly Brazilian, as sugarcane ethanol has historically been cheaper to produce than corn ethanol) from utilizing the subsidy. Ethanol importers were required to pay a 2.5% ad valorem tariff plus a fixed $0.54/gal tariff on all imported ethanol. This had the effect of making Brazilian sugarcane ethanol more expensive in the US than US corn ethanol (see Table 2.5) despite the former’s smaller production costs. A number of smaller subsidy programs affected other biofuel pathways. Biodiesel producers received a $1 non-refundable tax credit (i. e., a credit applied only to a taxpayer’s tax burden) for every gallon ($0.26/liter) blended with diesel or sold as fuel. Cellulosic ethanol producers received (and still receive) a $1.01 non-refundable tax credit for every gallon ($0.27/liter) of cellulosic ethanol blended with gasoline or sold as fuel in the form of the cellulosic biofuel producer tax credit (CBPTC). Non-refundable tax credits were also available for small ethanol producers and liquefied gas producers.

Popular concerns that corn ethanol production was causing starvation in the developing world (Runge and Senauer, 2007) and deforestation in the Amazon (Searchinger et al, 2008) combined with a shift toward government austerity in the US to undermine political support for first generation biofuel protectionism. With the exception of the CBPTC, all of the aforementioned subsidy and tariff programs were allowed to expire by Congress at the end of 2011, leaving the Renewable Fuel Standard as the primary driver of US biofuel policy. The first iteration of the Renewable Fuel Standard (RFS1) was created by the Energy Policy Act of 2005 to serve as a simple biofuel mandate. Rapid growth in US corn ethanol production left it obsolete soon after its creation and the Energy Independence and Security Act of 2007 replaced it with a greatly expanded (both in scope and volume) Renewable Fuel Standard (RFS2). The RFS2 combines an increased biofuel mandate (36 million gallons (136 million liters) per year by 2020) with a low-carbon fuel standard (LCFS). Four separate yet nested biofuel categories exist whereas the RFS1 had only one: (1) total renewable fuels, (2) advanced biofuels, (3) biomass-based diesel, and (4) cellulosic biofuels. Each category has a particular volumetric mandate that changes over time; total renewable fuels comprise the majority of the mandate but are permanently capped in 2015, and by 2022 the cellulosic biofuel category becomes responsible for a plurality of the mandate.

The definitions of each RFS2 category encompass both biofuel type and feedstock source (Energy Independence and Security Act, 2007). To qualify for the total renewable fuels category, a biofuel must be sourced from renewable biomass (i. e., biomass meeting land-use restrictions) and achieve a 20% lifecycle greenhouse gas emission (GHG) threshold relative to gasoline. Advanced biofuels must achieve a 50% GHG reduction and cannot include corn ethanol (regardless of its lifecycle GHG analysis). Biomass-based diesel must also achieve a 50% GHG reduction and includes both biodiesel produced via transesterification and renewable diesel. Finally, cellulosic biofuels must achieve a 60% GHG reduction versus gasoline and be sourced from lignocellulosic feedstocks. Emissions from indirect land — use changes (ILUC) must be accounted for when determining whether a biofuel achieves a category’s GHG reduction threshold.

The RFS2 impacts the economic feasibility of biorefineries by attaching a renewable identification number (RIN) to every gallon of biofuel blended with or sold as transportation fuel in the US. The RFS2 requires blenders to own a certain number of RINs proportionate to their market share at the end of each year to demonstrate compliance with the mandate. A blender that has met its share of the mandate can sell any excess RINs to a blender that has not, or can bank them for future use. RIN values increase when the supply of biofuels within an RFS2 category exceeds demand and can serve as an important source of income for biofuels producers, as RIN values for the biomass-based diesel category reached $1.60/gal in August 2011 (McPhail et al., 2011). When demand exceeds supply (i. e., when the mandate has not been met), the core value of an RIN is the difference between the biofuel’s production cost and the market price of gasoline or diesel (RIN values do not drop below 0 when this market price exceeds the biofuel’s production cost). RINs are allowed to be publicly traded, however, so speculator activity can also affect RIN value.

The effect of the RINs is to ensure that biofuel producers receive the minimum value necessary to cover costs of production. When gasoline and diesel prices are greater than biofuel production costs, then the core RIN value is 0, as biofuel producers do not need additional incentive to produce up to the mandated volume. When gasoline and diesel prices are less than biofuel production costs, then the core RIN value increases to the level necessary to incentivize sufficient production to meet the mandate. As an example, assume that the three lignocellulosic ethanol TEA results presented in Table 2.7 are three different biorefineries and the cellulosic ethanol produced by each qualifies for the cellulosic biofuels category of the RFS2. Initial production will fall short of the mandated volume (the

EPA has waived the cellulosic biofuels mandate in recent years due to a complete lack of production) and, assuming a pre-tax gasoline price of $3/ gal, the RIN value will be sufficiently high to incentivize production at all three biorefineries, or $2.10/gge (the difference between the highest biofuel production cost, $5.10/gge, and the pre-tax gasoline price). The biorefinery capable of achieving the lowest production cost will attain the greatest profit but all three will be profitable. This will change as total cellulosic biofuel production exceeds the mandated volume, however. Assuming the first two biorefineries produce enough to satisfy the mandate and the pre-tax gasoline price remains $3/gal, then the RIN value will decline to the difference between the pre-tax gasoline price and the second highest biofuel production cost ($4.29/gge), or $1.29/gge. In this way, the RFS2 ensures that biofuel producers remain economically feasible when gasoline and diesel prices are low while eliminating the prospect of government — subsidized windfall profits when gasoline and diesel prices are high.