The olive branch was a sign of peace in ancient Greek and Roman cultures. Renewable fuel producers and refiners could sure exchange one right now. Source: Wikimedia Commons / Marie-Lan Nguyen.

The same agency that refused to reduce volume obligations for corn ethanol for refiners during and after last year's historic drought has done an abrupt about-face on policy. The Environmental Protection Agency has proposed 2014 volume obligations that would reduce biofuel mandates for the first time under the current Renewable Fuel Standard, or RFS2. While the proposals won't be finalized until early 2014 and only after renewable fuel producers voice their concerns, the EPA has created a potentially toxic atmosphere surrounding attitudes toward biofuels.

Admittedly, the EPA is in a tough spot. On one hand. it must acknowledge the concerns of refiners and automakers regarding the Blend Wall with gasoline fuel. On the other hand, a viable alternative to ethanol isn't readily available in large quantities (mostly because of the agency's over-funding of corn ethanol over the years). Cellulosic ethanol simply doesn't have adequate production capacity, nor does it solve the overall problem of using ethanol as a gasoline blendstock. No other alternative fuel has the capacity to serve as an immediate replacement, although isobutanol is awfully close. Can the EPA extend an olive branch to refiners while simultaneously creating a massive opportunity for biobased isobutanol producers such as Green Biologics, Gevo, BP (BP -0.67%), and DuPont (DD)?

The time has arrived
It's pretty clear that the ethanol industry, specifically the bulk creating first-generation corn ethanol, will need to check any hopes of growing past 13 billion gallons of annual production to remain below the 10% blending limits of gasoline. As fuel economy increases in the coming decade and drives fuel consumption lower ethanol's share of the fuel market will decline. That presents a major problem for the ethanol industry, which has a current annual capacity of 14.7 billion gallons and another 223 million gallons under construction.

*2013 production estimate provided by POET. Source: EIA.gov.

Ethanol producers will be forced to idle facilities if they can't find other ways to utilize their facilities and feedstock supplies. Luckily, technologies for producing isobutanol offer a promising alternative in the short term. Biobased isobutanol producers still need to master their respective processes to optimize commercial operations but could realistically begin replacing substantial amounts of the nation's corn ethanol capacity within the next 24 to 36 months.

How could it work?
All three major isobutanol producers -- Green Biologics, Gevo, and Butamax (BP and DuPont) -- have developed platforms that enable a seamless retrofit of existing ethanol biorefineries. A retrofit model will allow for lower capital costs and lower risks associated with building new biorefineries. Cooperation is still needed to ensure the quickest route to commercialization.

The EPA could extend substantial subsidies such as grants and tax credits to first-generation corn ethanol producers to give them incentive to switch to isobutanol production. After all, the first-generation corn ethanol industry doubled capacity in the four-year period spanning from 2003 to 2007 and doubled capacity again during the following three-year period on the heels of concentrated subsidies. A similar model would definitely work for isobutanol, especially considering that the infrastructure (biorefineries) and supply chains (feedstock agreements) already exist.

Why would corn ethanol producers want to transition to isobutanol?
Isobutanol is simply better. While 10 gallons of ethanol capacity becomes just 8.2 gallons of isobutanol capacity, the latter is more valuable. It can be blended into gasoline at higher ratios (20%) than ethanol (10%), is compatible with existing infrastructure and pipelines, and is more energy-dense than ethanol. It can also be used as a chemical building block to create a wide range of high-value biobased chemicals. Green Biologics estimates that the global annual opportunities for isobutanol as a blendstock, biofuel, and chemical intermediate exceed $80 billion, $700 billion, and $6 billion, respectively.  

Everyone wins
If the EPA takes full advantage of the opportunity at hand, then the United States could wield the world's first major market for a next-generation biofuel. A world-class isobutanol industry would not only sport key advantages over even cellulosic ethanol and save face for the agency, but would also add a tremendous amount of value to the national economy.

Transitioning from ethanol to isobutanol is almost too obvious of a solution. Of course, this represents a best-case scenario that is unlikely to develop as rapidly or with the same magnitude as I've outlined. However, opportunistic investors will want to stay tuned to seize the megaopportunity that could present itself should the EPA get its move on.