Tuesday, August 25, 2009

Most Renewable

According to the U.S. Department of Environmental Protection (EPA) some alternative transportation fuels are more renewable than others. Held against the EPA’s Renewable Fuel Standards II biofuel using waste grease as feed stock has been given the lowest carbon rating, i.e. its production, transport and usage creates the least carbon emissions among the current menu of fuels.

As we noted in the August 21st post “Standard Stumble,” these “mid-term grades” were not well received by some. Especially since the new RFS standard also increases the volume of renewable fuel required to be blended into gasoline from 9 billion gallons in 2008 to 36 billion gallons by 2022. This is a significant market opportunity by any measure.

To no one’s surprise, except perhaps their shareholders, dry mill ethanol producers using corn as feedstock turned up at the bottom of the list. Most of corn ethanol’s carbon emissions come from land use changes and production energy requirement. Cellulosic ethanol processes using switch grass or corn-stover feed stock fair much better against the EPA’s lifecycle assessment yard stick.

The stakes being high, the losers that have not faired well in the EPA’s lifecycle assessment have questioned the EPA’s analysis of the environmental impact of renewable transportation fuels cumbersome. Others argue with the EPA’s conclusion that implementation will have the equivalent effect of removing 24 million vehicles from the road. Expressed in emissions terms - 150 million tons of CO2 per year.

It is important to put the emissions and fossil fuel savings into perspective, consider that the 36 billion gallons in gasoline replaced by renewable fuel is equivalent to 1.84 billion barrels of crude oil or 5.0 million per day. Since we are currently importing 9.0 million barrels per day, this represents a meaningful savings even if the EPA is off in their calculations by a wide margin. (One barrel of crude oil produces 19.6 gallons of finished gas or 9 gallons of diesel fuel.)

It seems to that the geopolitical implications of reduced dependence upon imported fuel are as critical in renewable fuel discussion as the carbon emission element. With these two factors driving policy makers, investors might consider the Renewable Fuel Standards as firmly established in the country’s economic fabric. This reasoning puts bio-diesel and cellulosic ethanol producers on the long side and corn ethanol producers on the short list.

In the next post we look catch up with some of the cellulosic ethanol companies mentioned in previous posts.

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