For First Time, E.P.A. Proposes Reducing Ethanol Requirement for Gas Mix

The move was expected, but it drew bitter complaints from advocates of ethanol, including some environmentalists, who see the corn-based fuel blend as a weapon to fight climate change. It was also unwelcome news to farmers, who noted that the decision came at a time when a record corn crop is expected, and the price of a bushel has fallen almost to the cost of production.

“We’re all just sort of scratching our heads here today and wondering why this administration is telling us to burn less of a clean-burning American fuel,” said Bob Dinneen, president of the Renewable Fuels Association.

Farmers, ethanol producers and high-tech companies trying to make renewable fuels from wastes have all invested heavily in the ethanol industry, with an expectation of a heavy demand, advocates said.

But the E.P.A. said that a big part of the problem was that automobile fuel systems and service stations were not set up to absorb more than about 10 percent ethanol. Most cars on the road, according to the automakers, and most fuel pumps, according to service station groups, are limited to the current mixture, called E10, and there has been little demand by consumers for more.

Charles Drevna, president of the American Fuel and Petrochemical Manufacturers, said that the ethanol interests were relying on “a continual government program that is an anachronism in 2013, that is seriously flawed, that puts consumers at risk, that consumers don’t want.”

The timeline for phasing in enormous volumes of renewable fuel is laid out in the Energy Independence and Security Act of 2007, but the schedule has turned out to be impractical, forcing year-by-year adjustments. In the years since the law was passed, imports of oil have declined sharply and domestic production has risen.

Meanwhile, American oil production has increased in ways not expected in 2007, because of a new drilling technique, horizontal drilling in shale combined with fracking, the same technique that has flooded the market with natural gas.

Last month, domestic oil production exceeded oil imports for the first time in years. That has led the oil refiners to argue that requiring ethanol use to displace oil imports is no longer so important, and that the whole system of mandates should be dropped.

At the same time, there has also been a decline in the overall demand for motor fuel, and it is poised to go yet lower. Demand had been growing, year by year, and Congress expected it to continue to do so. The 2007 law set ethanol quotas that would have meant a modest percentage increase in the amount of ethanol used in the mix.

Instead, ethanol became an unexpectedly large percentage of total fuel supply, and began to push up against the barrier of 10 percent, the maximum ethanol fraction allowable in most gasoline.

Millions of cars can handle blends of up to 85 percent ethanol, “flex fuel” vehicles, but few consumers like that fuel so few filling stations sell it.

Those that do are struggling. For example, on Nov. 6, a Sunoco station at a suburban mall in Potomac, Md., about 15 miles northwest of the E.P.A. headquarters, opened an E85 pump, with a formal ribbon-cutting and speeches by Maryland officials. But the manager, Amit Sharma, said Friday that the pump was selling only 60 to 70 gallons a day. “It’s nothing,” he said. One problem, according to Mr. Sharma and others, is that many people drive the flex fuel vehicles, but do not understand that means they can accept up to 85 percent ethanol.

In another strategy to dispose of rising volumes of ethanol, the producers have pushed the E.P.A. into allowing a blend that is 15 percent ethanol rather than 10, but few gas stations are equipped to sell that, and since it is approved only for newer cars, few stations have spent the money to refit their pumps to handle it. In addition, trade associations for companies that make power garden equipment and boat engines complain that that fuel will cause breakdowns.

The E.P.A. will now take public comment, which is certain to be voluminous, as the issue is crucial not only to corn farmers, who produce most of the feedstock for ethanol, and for oil companies, whose product can be displaced by the fuel, but also to all other corn customers, including livestock producers, grocers and restaurant chains.

Ethanol, the most prominent of the renewable fuels, divides environmentalists. It may involve modestly lower carbon production, but the increased market for it may also have increased farmers’ use of fragile, marginal land. Its effect on fuel prices at the pump is disputed.

Greentech: Squeezing More From Ethanol

The effort to untangle itself from this sticky situation is part of a larger proposal by the federal government to make the most sweeping changes in gasoline since lead additives were banned.

Tucked inside the E.P.A.’s March announcement of a plan to cut the amount of sulfur allowed in gasoline was an audacious suggestion that sought to solve all three ethanol challenges at once. The proposal, for a fuel that is 30 percent ethanol, could reduce tailpipe emissions and improve fuel economy — and even encourage drivers to use more ethanol.

“You make the dog like the dog food,” said William H. Woebkenberg, senior engineer for fuels policy in the United States at Mercedes-Benz.

The idea is that while today’s typical pump blend — E10, which is 10 percent ethanol and 90 percent gasoline — has drawbacks, a blend of 30 percent ethanol and 70 percent gasoline could take advantage of ethanol’s strengths. Unlike a flexible-fuel vehicle that can use E85 formulations but offers little financial or performance benefit, an engine tuned specifically for E30 would perform better on that fuel than on the standard E10, creating a market incentive.

The idea has widespread support among technical experts.

It also has another appealing aspect: current ethanol policy is probably unsustainable, because Congress has ordered the oil companies to use ever-larger amounts of ethanol. To comply with the mandate, ethanol levels would have to exceed 10 percent of each gallon of fuel, yet many automakers advise against using higher concentrations unless the car is equipped for it. With a declining demand for gasoline, the problem becomes more acute.

The 30 percent idea is laid out deep in the 938-page text of the proposed Tier 3 rule, which would lower the amount of sulfur in gasoline by two-thirds, to the level required in California. In the proposal, the E.P.A. asked automakers to comment on E30.

Like other efforts to introduce new fuels, it would require big investments at gas stations for blending pumps and storage tanks.

Still, there is a powerful incentive in the E.P.A. plan: offering automakers the option of having their cars certified on E30. Before a new car can be sold in the United States, the company must submit data on the vehicle’s pollution output and fuel economy to the E.P.A. Certifying with E30 would call for engines optimized to take advantage of the blend’s octane rating of 93 or perhaps higher.

Using high-octane premium-grade gas in an engine that does not require it offers no benefit. But in engines designed to squeeze the fuel-air mixture to very high pressures before igniting it with the spark plug, high-octane fuel burns predictably and can produce more horsepower. (On the other hand, burning low-octane gas in an engine tuned for premium grade can cause erratic combustion, or knocking, and result in severe engine damage.)

Ethanol contains only about two-thirds as much energy as gasoline, gallon for gallon. But if it is burned in engines designed for high cylinder pressures, it will produce competitive horsepower.

In general, the oil companies have opposed using higher concentrations of ethanol. The oil industry is trying to get Congress to change federal rules so they can use less ethanol, not more.

But various engine and fuel experts like the idea, because the E.P.A. is inviting the auto companies to take advantage of the good characteristics of ethanol, including an octane rating that is well over 100.

“That’s getting smarter,” said Margaret Wooldridge, a professor of mechanical engineering at the University of Michigan. The way ethanol is used now, she said, “if anybody does notice there’s any ethanol in the fuel, it’s always in a way that is negative.”

The trouble with the flexible fuel vehicles on the market now, which can run at blends of up to 85 percent ethanol, is that they are still mostly optimized for gasoline, not ethanol, she said. While there are millions of such vehicles on the road, they run mostly on E10 because that is a better bargain for the driver.

Higher concentrations are no better, and ethanol companies are struggling for acceptance of E15 with drivers, who show little enthusiasm.

“E15 is the answer to the question nobody asked,” said Mr. Woebkenberg of Mercedes-Benz. “It is a detriment.”

But an E30 blend in an engine designed to use that fuel would be attractive to car buyers, he said, with “ridiculous power and good fuel economy,” and owners of those cars would seek out the fuel, unlike owners of flex-fuel cars.

“I hope that the E.P.A. agrees to do it,” said C. Boyden Gray, a former aide to President George H. W. Bush who is now a Washington lawyer representing energy clients. In coming years, Mr. Gray and others say, more cars are going to be engineered for high-octane fuel so they can get better fuel economy as automakers move to double economy, and high-octane fuel with 30 percent ethanol is cleaner than blends relying more heavily on gasoline.

But Mr. Gray and other experts said that the E.P.A. would probably have to do more than just give automakers the option to certify vehicles on E30; it would probably have to mandate its availability to give car shoppers confidence that they would be able to refuel such vehicles.

Ethanol Glut Threatens a Rise in Gasoline Prices

Refiners have been trading so-called ethanol credits furiously in an effort to meet federal environmental mandates, helping to significantly push up the cost of those credits — a jump to more than $1 from a few pennies in the last several days, and drivers are feeling the effects, experts say.

Prices for premium gas are now about 30.2 cents over the price of regular, according to Trilby Lundberg of the Lundberg Survey. That is up from 24.1 cents in 2010 and 18.2 cents in 2000. Any increases could affect about a third of this year’s car models, because premium fuel is required or recommended for them, according to Edmunds.com.

Experts disagree on the reasons for a widening gap between the costs of regular and premium gas. Reasons for the ethanol surplus are even more broadly in dispute, between producers and the oil companies. Gas companies are required under federal law to blend a certain number of gallons of ethanol into the fuel. But refiners argue that some cannot reach that requirement because they are nearing or at the so-called blend wall, the maximum percentage of ethanol in gasoline that most gas stations can handle, 10 percent. They also note that is the maximum level recommended by auto manufacturers for most cars.

Refiners blame Congress, arguing that the ethanol quota was set at a time when gasoline demand was expected to rise steadily. Instead, demand has declined, and refiners, obligated to blend more ethanol than they can actually use, have resorted to buying a lot of ethanol credits, known as renewable identification numbers (or RINs), to meet the mandated levels.

Ms. Lundberg described this as “buying forgiveness from the government.” The credits’ popularity has driven up the price nearly tenfold since January.

On the other side of the debate are the ethanol producers, who say prices are pushed lower because their product is cheaper than gasoline. This is true on a gallon-per-gallon basis, although ethanol provides less energy per gallon.

The argument over ethanol and gas prices highlights the politics of the Renewable Fuel Standard, set by a 2007 law. The ethanol lobby accuses the oil companies of ratcheting up the demand for fuel credits as a way of applying pressure on lawmakers to reduce the alternative fuel mandates. Congress could change the rules, or the Environmental Protection Agency, which set up the electronic marketplace where ethanol credits are traded, could adjust them.

The ethanol credits, like some other kinds of environmental credits, can be banked as well as bought and sold. Some companies have a surplus. But those without them have rushed into a market that is thinly traded, driving the spike in prices, according to the American Fuel and Petrochemical Manufacturers, a trade association.

“The market’s broken, because the Renewable Fuel Standard has been broken since the day it was enacted,” said Charles T. Drevna, president of the group. The refiners rely on a certain amount of ethanol as a way to increase octane, but they have been fighting the standard since it was created, partly because it requires them to use advanced biofuels that are not actually in commercial production.

Oil refiners also warn that higher prices for the credits will encourage fraud, something the ethanol trading system has encountered in the past.

There are two ways the ethanol credit issue could drive gas prices higher. Mr. Drevna said that refiners would probably seek to recover the cost of the credits, which were a mere seven cents or so at the beginning of this year, in the prices they charge. And Eric G. Lee, an analyst at Citi Research, said that some refiners might seek to avoid the ethanol requirement by exporting their gas, which could tighten supplies in the United States.

According to Mr. Lee, large refiners spent $100 million to $300 million each for credits in 2012, when prices were about 4 cents. “At $1 a gallon levels, the numbers become astronomical very quickly,” he said Wednesday.

But at the Renewable Fuels Association, Bob Dinneen, the president, said that the refiners were the sellers of the credits as well as the buyers, so that it was a flow of money among the oil companies. Ethanol companies make the fuel, he said, and sell it to refiners, who either use it themselves to meet their obligations, or use it but spin off the credit for sale to someone else.

“When I see volatility like that in any market, it’s not market fundamentals at work, it’s probably something else all together,” he said. “It’s more like the oil companies trying to create a little hysteria to support the notion that the Renewable Fuel Standard is broken, but I think it’s working just fine.”

He said oil companies should be investing in stations so that they can sell e85, the blend that is 85 percent ethanol and 15 percent gas, which millions of “flex fuel” cars can use, or e15, the 15 percent blend. The E.P.A. has approved e15 for most cars but the manufacturers advise against using it, and most service stations would need substantial investments in new equipment to sell it.

Using ethanol once was a cheap way to increase octane to make premium fuel, said an oil expert, Lawrence J. Goldstein, of the Energy Policy Research Foundation, because it has an octane of 113. But refiners have reached the limit of the amount they can blend, he said.

In addition, he said, an increase in American oil production, mostly from shale, allows refiners to use domestic crude instead of imported crude, but some of the new domestic supply has fewer high-octane ingredients than the African crudes it is replacing. And some refiners may increase their exports of gas in response to high credit prices, experts said. If the gasoline is exported, it does not have to meet the American ethanol requirement.

The long-term outlook for premium fuel is uncertain. Auto companies can build cars that get more miles per gallon if they use high-octane fuel, and the auto companies have agreed to double the average fuel economy of their cars and light trucks by 2025.

At Edmunds.com, analyst Bill Visnic said the demand for premium would be higher except that carmakers had learned to use an alternate technology, direct injection of fuel, combined with turbocharging, to get higher mileage.

But the number of cars that use high-octane fuel is substantial.

Michael Webber, of the Center for International Energy and Environmental Policy at the University of Texas at Austin, said he asked his students how many of them drove cars that needed premium fuel. “Out of 100 people, 10 hands went up,” he said. These were probably not mostly luxury cars, he said. “Grad students normally aren’t rich,” he said.