Under a 2007 energy law, Congress had required fuel suppliers to produce 1 billion gallons of the cellulosic ethanol in 2013. During the year, only 810,000 gallons were produced. Oil producers have challenged the EPA's requirement that they must purchase cellulosic fuel that was not available.

The reversal of the mandate comes several months after the EPA softened its corn ethanol requirement. In November, the EPA backed off its push to raise the ethanol blend with gasoline to E15 from the current E10. Gasoline sold in the U.S. is now blended with 10 percent ethanol.