Who’s blocking ‘good’ ethanol? by Craig Giammona @FortuneMagazine August 7, 2013, 4:48 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — When Royal DSM opens a $250 million facility in Emmetsburg, Iowa in a few months, it could be the first of its kind in the country to make biofuel from corn waste on a commercial scale. The DSM plant is one of a handful of cellulosic fuel facilities racing to start production in the next few months, but the project has landed the company in the middle of an imbroglio with the oil industry over federal renewable fuel requirements. Cellulosic ethanol — made from perennial grasses, wood, or plant waste — is considered a step forward in the biofuel market, eliminating the food vs. fuel argument that has shadowed corn ethanol as the federal renewable fuel standard (RFS) has pushed higher in recent years. But the market for cellulosic biofuel is dependent on the RFS — a Congressional mandate that has come under attack in recent months. MORE: Why America’s youth aren’t finding jobs Gasoline and diesel refiners, represented by the American Petroleum Institute, want Congress to scrap the RFS, which requires increasing volumes of biofuels to be blended into transportation fuels each year. The target is 36 billion gallons by 2022, with 16 billion of that coming from cellulosic sources. The political fight over the fuel mandate is heating up as refiners approach the point where they’ll have to starting blending gas with more than 10% biofuels. The Environmental Protection Agency on Tuesday finally certified the biofuel mandate for 2013, eight months after the due date, requiring 16.55 billion gallons of biofuels, including 6 million gallons of cellulosic, to be blended into the fuel supply, for an average blend rate of 9.74%. The industry has almost a year to comply. The fuel standards for 2014 are due Nov. 30, and were expected to include a gross volume of biofuel that would push the industry beyond the 10% blend. But EPA said Tuesday it would use “flexibilities” in the RFS law to reduce the required volume of biofuel. E10, as the blend of gas and 10% biofuel is known, is widely available across the country. But the oil and gas industry is eager to hold the line at a 10% biofuels blend, arguing E15 will damage car engines that are not equipped for the blend and necessitate major capital improvements to the nation’s gas supply infrastructure. Supporters of biofuels, including companies like DSM, a $12 billion Dutch multinational life sciences and materials company, dismiss the concerns from big oil and argue the lobbying effort is just an attempt to protect profits. “This is all about preserving the oil and gas monopoly that has existed in this country for 100 years,” said Hugh Welsh, president of DSM’s North American operation, which is based in Parsippany, N.J. The construction of DSM’s plant, a joint venture with ethanol producer POET, should be completed by the end of the year, with production of cellulosic ethanol ramping up in the first six months of 2014. The Iowa plant will use approximately 285,000 tons of corn waste to produce about 25 million gallons of cellulosic fuel a year. Once production starts, DSM wants to license the technology to other firms and help build the dozens of cellulosic biofuel plants required to reach the federal target by 2022. Welsh is confident that RFS won’t go away, but he’s concerned the scuttlebutt in Congress will muddy the waters and make Wall Street skittish about investing in cellulosic projects. “I’m not worried about Congress or the American people, but this is a massive distraction,” Welsh said. “This has strong support in the White House, but the oil industry can win just by having the debate.” The renewable fuel standard, passed in 2005 under President George W. Bush and strengthened by Congress in 2007, was created with an eye toward reducing greenhouse gas emission and stemming fuel imports. The implementation of the program by EPA has been a bit spotty, but supporters in the biofuel industry say it’s working fine, with ethanol, in volumes varying by region, blended into about 97% of the gas sold in the U.S. “The whole point of the RFS is to reduce reliance on petroleum,” said Bob Dinneen, president and CEO of the Renewable Fuels Association. “That’s what has the refiners apoplectic, the fact that RFS is working. This is a battle for market share.” MORE: What every company can learn from Lego The oil and gas industry thinks RFS may be working a little too well. API points out that American gas consumption has been lower than was projected when the program was beefed up in 2007, without a corresponding shift in the biofuel targets. EPA, in its announcement Tuesday, seemed to acknowledge this complaint. RFS has also been criticized by livestock and poultry producers who say higher corn prices are driving up the cost of food, and by environmental groups that believe the increased demand for corn-based ethanol has encouraged farmers to plow virgin land. The move toward commercial production of cellulosic biofuels, an effort that has experienced fits and starts over the last several years, is expected to ease some of these concerns. The next few months will be critical for the future of cellulosic biofuels. In addition to DSM, there are at least three similar projects in development around the country. INEOS, a British company, recently announced that it had started production of cellulosic fuel made from plant and wood waste at a Florida plant, with shipments to begin later this month. Their target output is 8 million gallons a year. For DSM, whose initials stand for Dutch State Mines, the biofuels plant constitutes the latest step away from its coal mining roots. The company went public in 1989 and started selling off its industrial interests and made a major move into vitamins and nutritional supplements, which now form the core of the company’s business. Executives at DSM have part of their compensation tied to sustainability ratings, and Welsh is betting on sharp growth in the demand for advanced biofuels in the U.S. But the market is almost entirely pegged to the renewable fuel standard and the whims of an unpredictable and perpetually gridlocked Congress. In this case, gridlock might work just fine for the biofuel producers, assuming the debate in Washington, D.C. doesn’t scare off Wall Street.