Trump Proposes Hitting Oil Refiners With Boosted Biofuel Quotas

(Bloomberg) -- Ethanol producers and farm-state leaders blasted a Trump administration proposal that would force refiners to blend more biofuel into petroleum next year, arguing the modest planned increase is undercut by EPA waivers exempting refineries from the mandate.

Under the Environmental Protection Agency proposal released Tuesday, refiners would have to blend 19.88 billion gallons of biofuels next year, a 3.1 percent increase over current quotas. The EPA is proposing to maintain a 15 billion gallon quota for conventional renewable fuels such as corn-based ethanol, the maximum allowed under federal law.

The proposed 2019 target for advanced biofuels would be 4.88 billion gallons, including at least 381 million gallons of cellulosic renewable fuel, such as ethanol made from switchgrass. The EPA also outlined a potential 2.43 billion gallon quota for biodiesel in 2020, a 15.7 percent increase from the 2.1 billion gallons required in 2019.

But that failed to satisfy agricultural leaders, who say the proposed increases are an illusion as long as the EPA keeps exempting small refineries from the mandates. Under federal law, small facilities facing a "disproportionate economic hardship" can win waivers from the annual biofuel blending requirements.

"This is a status quo proposal for ethanol, and the status quo is bad," said Monte Shaw, executive director of the Renewable Fuels Association. As long as the EPA "is granting small refinery exemptions left and right," Shaw said, "the ethanol number isn’t worth the paper it’s written on."

Trump Proposes Hitting Oil Refiners With Boosted Biofuel Quotas

The EPA proposal doesn’t include a previously drafted plan that would require larger refineries to use more biofuel to make up for smaller refineries’ exemptions.

Agency officials briefly considered incorporating an additional 1.5 billion gallons of biofuel requirements into the proposed quotas with the aim of making up for potential exemptions granted to small refineries. Because that would have meant redistributing the biofuel burden to larger, non-exempted refineries, oil industry leaders complained, and in response, the EPA jettisoned the plan, at least for now.

For more than a decade, a law known as the Renewable Fuel Standard has compelled refiners to use renewable fuel, with the EPA required to set the precise annual quotas. The new proposal keeps the EPA on track to finalize renewable fuel quotas by Nov. 30, a deadline under federal law.

"I’ve traveled to numerous states and heard firsthand about the importance of the RFS to farmers and local communities across the country," EPA Administrator Scott Pruitt said in a news release. "Issuing the proposed rule on time meets Congress’s statutory deadlines, which the previous administration failed to do, and provides regulatory certainty to all impacted stakeholders."

President Donald Trump has been struggling to strike a balance on biofuel policy, bridging the competing interests of Midwestern farmers and the oil industry. For months, the White House has led negotiations over broader possible biofuel policy changes.

Some independent oil refiners have asked the Trump administration to ease the biofuel mandate, complaining about the cost of tradable credits known as Renewable Identification Numbers, or RINs, that are used to show they have fulfilled annual blending quotas. Meanwhile, agricultural interests argue the program is working as Congress intended and any revisions would hurt the Corn Belt.

Ethanol supporters also have criticized the EPA waivers. Senator Chuck Grassley, a Republican from Iowa, on Tuesday morning said the agency’s proposed biofuel quotas are "smoke" as long as waived requirements aren’t redistributed to non-exempted refineries.

Exemptions representing some 2.25 million gallons worth of biofuel were granted for 2017 and 2016, according to the EPA proposal. That includes waivers covering 1.46 million RINs in 2017, the EPA said.

The EPA’s proposed 15 billion gallon requirement for conventional biofuels "should, in theory, send a positive signal to the market," but not against the backdrop of the waivers and without any commitment that EPA is changing its approach to granting these exemptions, said Bob Dinneen, president of the Renewable Fuels Association.

The EPA proposal divided biofuel advocates. While it angered ethanol producers and advocates, supporters of biodiesel and next-generation alternatives were encouraged by planned increases.

The Trump administration’s proposed jump in quotas for biodiesel typically made from soybeans recognizes the industry’s "ability to produce higher volumes," said Kurt Kovarik, vice president of federal affairs at the National Biodiesel Board.

And Mike McAdams, president of the Advanced Biofuels Association, said the EPA proposal rightly recognized gains in the production of next-generation alternatives to corn-based ethanol. “Additional cellulosic facilities are scheduled to come on line in the near future," McAdams said, and the proposed targets "will ensure a market for these new gallons."

Oil industry leaders weren’t sanguine.

“EPA made the right call in not reallocating the waived small refiner exemption volumes" but the proposal illustrates this is "a broken government program," said Frank Macchiarola, a group director for the American Petroleum Institute. "By increasing biomass-diesel and the overall biofuels volumes the government is putting its thumb on the scale, picking winners and losers."

Americans are projected to consume about 144 billion gallons of gasoline in 2019, slightly higher than 2018 levels, according to the June 12 Energy Information Administration Short-Term Energy Outlook.

Prices for the credits tracking 2018 ethanol targets slumped 3.5 percent to 28 cents apiece, on track for the steepest one-day decline in a week.

Amid volatile prices for those credits and allegations of manipulation, the EPA will ask the public to recommend ways to bolster that market’s transparency. The agency’s proposal asks whether it would be prudent to limit who can trade RINs or how long those credits could be held after they are generated.

©2018 Bloomberg L.P.