Trump Embraces Reform of Opaque Biofuel Credit Market

(Bloomberg) -- President Donald Trump is moving to clamp down on a scandal-plagued $2.25 billion market in biofuel compliance credits, embracing reforms that could block Wall Street banks from trading them.

Trump will direct his Environmental Protection Agency on Tuesday to pursue the changes as a way to quash manipulation and bolster transparency in the obscure Renewable Identification Number market, said a senior White House official. At the same time, Trump will order the EPA to take steps to enable the year-round sale of gasoline containing as much as 15 percent ethanol, according to the official, who discussed the planned announcement on the condition of anonymity.

By combining the policy announcements on Tuesday, Trump is trying to deliver on his campaign promises to support ethanol while also addressing some independent refiners’ concerns about the high cost of fulfilling U.S. mandates compelling them to use the corn-based fuel additive.

But that is a difficult balancing act, and the president is bound to leave some faction displeased, said Scott Irwin, an agricultural economist at the University of Illinois at Urbana-Champaign.

‘’There is essentially no common ground,” he said. “It’s devolved to the place, at least between corn, ethanol and oil refiners, as a zero-sum game.” Anything Trump gives to one side he is taking away from the other, Irwin added. 

EPA Rulemaking

Both steps require separate, formal rulemaking by the EPA, which could take months. Even then, there could be years of additional uncertainty, as foes in the oil industry have vowed to challenge an EPA waiver allowing year-round sales of E15 gasoline, arguing that the agency does not have the legal authority to issue it administratively, without further action from Congress.

The planned market reforms come amid criticism of the Bush-era Renewable Fuel Standard that compels refiners to use biofuel. Those companies use tradable credits to prove they have satisfied annual blending quotas, but the market for those has been riven with scandal. The U.S. government has obtained more than 30 criminal convictions for biofuel fraud, with some scam artists selling fake credits tied to fuel they never produced.

The government originally created the credits, known as Renewable Identification Numbers, or RINs, as a way to give fuel refiners and importers more flexibility in satisfying annual biofuel quotas. But those RINs morphed from a simple compliance tool into a lucrative financial commodity that has been traded by Wall Street banks.

Market Speculation

Some independent refiners have complained that market speculation and manipulation drive wild swings in the value of those credits, with some traders abandoning sales after negotiating them and others placing fraudulent bids with the goal of inducing higher prices.

Trump is asking the EPA to consider an array of market reforms. For instance, the agency could limit trading to the fuel refiners and importers that are required to fulfill U.S. biofuel quotas, the senior White House official said.

Other options include requiring traders to disclose RIN positions that exceed yet-to-be-determined amounts, limiting the amount of time they can hold the credits and requiring more frequent, quarterly reporting on their activity, according to the official.

Any one of the moves would be a major change in a market that largely goes unpoliced now. Although the EPA has signed an agreement to collaborate with the Commodity Futures Trading Commission in overseeing the market, lawmakers last year signaled that wasn’t enough, by formally asking the Federal Trade Commission to investigate possible manipulation they blamed for widely fluctuating RIN prices.

Refiners Back

Independent refiners, including Valero Energy Corp., HollyFrontier Corp. and PBF Energy Inc., have recommended some of the changes.

Limiting trading to obligated parties would reduce speculation in the marketplace, the senior White House official said. Even without the possible changes, some banks that previously traded RINs years ago have exited the market, and the outlook for relatively low credit prices is likely to deter them from resuming the activity.

Trump’s planned E15 shift delivers an immediate political victory to biofuel producers and corn farmers who have been battered by the president’s trade policy and China’s retaliatory tariffs. The broader trade war that has ensnared agriculture may have played a role in the Trump administration’s E15 action, Irwin said.

Emily Skor, chief executive officer of Growth Energy, said the timing of the announcement couldn’t be better for farmers wrestling with lower income.

Under the change, the EPA would waive that higher-ethanol gasoline from federal air pollution rules that currently block sales from June 1 to Sept. 15 in areas where smog is a problem. That would give biofuel producers an opportunity to grow their share of the 143- billion-gallon gasoline market -- now about 10 percent.

The shift may unleash an additional 14 million gallons of additional ethanol in the first year, but there’s more potential down the road, said Neelesh Nerurkar, with the Washington-based research firm ClearView Energy Partners. “It can have larger impacts over time as retailers consider investments needed to sell E15 and customers consider the new offering,” he said in an email.

The move is being cheered by ethanol advocates, who say the biofuel’s potential has effectively been capped by the summertime fueling restrictions. Some retailers are deterred by the three-and-a-half-month blackout period, because if they offer E15 they may have to change pumps and warning labels at the start and end of each summer.

Only about 1,430 of the nation’s 122,000 filling stations sell E15 now.

Trump’s action begins eliminating “this antiquated, red-tape-laden regulation,” said Geoff Cooper, head of the Renewable Fuels Association. “This is the right signal to the marketplace at just the right time, as both farmers and renewable fuel producers desperately need new market opportunities and sources of demand.”

Oil industry leaders blasted Trump’s moves, arguing the E15 shift violated federal law, could exacerbate existing problems with the U.S. biofuel mandate and fell far short of a broad compromise to overhaul the Renewable Fuel Standard.

“The president has promised to broker a deal to reform the RFS that works for all stakeholders. This isn’t it,” said Chet Thompson, president of the American Fuel and Petrochemical Manufacturers refining trade group. “We are disappointed to see that despite good-faith efforts by refiners to find potential solutions, the administration has unilaterally embraced a one-sided approach that only serves the ethanol community.”

©2018 Bloomberg L.P.