Week Ending October 11, 2019

Latest RFS Deal Angers Refiners, Pleases Farmers, Again; Details Yet to Come

This Article Appears as Published in Foster Report No 3269
Latest RFS Deal Angers Refiners, Pleases Farmers, Again; Details Yet to Come

The oil industry has vowed to challenge the Trump administration’s latest agreement on the Renewable Fuel Standard (RFS), with claims that the expanded mandate for ethanol volumes is being proposed without legal authority.

The proposal is designed to have the Environmental Protection Agency (EPA) include renewable fuel volumes based on the exemptions granted to small refineries. It includes biofuel blending quotas that will be calculated to include gallons exempted from the RFS mandate, based on a three-year, rolling average, officials explained.

Details on the plan will be provided in a forthcoming notice that will address 2020 renewable volume standards under the RFS, EPA said. The deal will go through a comment period and will not become final until later this year.

Initial reactions were praise from farm-state lawmakers and corn growers and disappointment from the oil sector and refiners.

Republican Sens. Joni Ernst and Chuck Grassley of Iowa said the announcement shows President Donald Trump is an ally of farmers and the plan will provide certainty for ethanol producers. In comments included with the EPA announcement, they said the proposal is crafted exactly as the RFS is meant to function.

The American Petroleum Institute (API) and the American Fuel & Petrochemical Manufacturers (AFPM) disagree with that assessment. “This rushed policy announcement is equivalent to changing the rules in the middle of the game and is a loser for the American consumer,” API President and CEO Mike Sommers and AFPM President and CEO Chet Thompson said in a joint statement.

“We will vigorously challenge this new policy in the weeks to come and continue advocating for Congress to reform the RFS,” they said.

API officials and the boating industry (with motors that are not compatible with E15) expanded on their opposition to the proposal in an October 10 media call. The negative effects on consumers have not been considered, which has been a trend in the RFS since the law was passed more than 10 years ago, said Nicole Vasilaros, senior vice president of government and legal affairs with the National Marine Manufacturing Association.

The plan will provide little, if any, relief to farmers and there is no logic in the notion of having volumes exempted by EPA included in the required volumes of the program, said Frank Macchiarola, vice president of downstream and industry operations at API. Sound policymaking is not borne out of political whims, which is what appears to be driving the Trump administration efforts on the RFS and E15 mandates, Macchiarola said.

“We continue to urge the administration to abandon this proposal,” and API will pursue all available challenges, he said.

Vasilaros, Macchiarola and David Kennedy, manager of government affairs for BoatUS, the boat owners association, all commented that they are waiting for more details on the proposal. The statement from EPA includes one line about “streamlined labeling” for E15, which is quite vague and could mean reduced warning labels and increased risk of misfuelling engines by consumers. Boat owners have a preference for ethanol-free fuel, and mandating more of it in the marketplace could lead to harmful effects, Kennedy said.

As a sign of how rushed and arbitrary the announcement from EPA is, the proposal at one point refers to 15 billion gallons of ethanol to be blended into fuel supplies in 2020 and includes comments from supporters that refer to 16 billion gallons, Macchiarola said.

There is no statutory support for what the Trump administration is proposing, which is why past administrations avoided such steps, he said.

Scott Segal, partner and co-head of Bracewell’s Policy Resolution Group, which represents refiners, said the Trump administration plan faces a tough task in meeting legal requirements and litigation is likely. “To the extent that expanded volume of ethanol use is predicated on the existence of small refinery exemptions, there is no authority to do so under the Clean Air Act,” Segal said in a statement. Any attempt to undermine the effectiveness of small refinery exemptions as a safety valve under the Clean Air Act will run counter to the statute and applicable case law, he said.

Segal and others maintain that the refinery exemptions do not suppress ethanol demand, and that mandates for more biofuel volumes will result in imports of foreign biofuels to meet the requirements. Labor groups pointed to data from EPA and the Energy Information Administration showing imports of foreign fuels to meet RFS requirements in each of the last three years, harming American energy producers.

Using the RFS to gain political support from farm states also is not wise given the union workers in key states like Texas, Ohio, and Pennsylvania, where refinery workers will be affected and electoral votes are greater than states such as Iowa, Segal added. Refinery and manufacturing jobs in the energy sector are an important element for President Donald Trump’s re-election effort, and siding with farmers in the RFS dispute could come back to harm that effort, observers said.

Sen. John Barrasso (R-Wyo.), chairman of the Senate Environment and Public Works Committee, said any plan to reallocate small refineries’ biofuel obligations to other refineries will do more harm than good. “No one should be surprised if it leads to closed refineries, lost jobs, and higher fuel prices,” he said in a statement. “This proposal risks mass layoffs and higher gasoline and diesel prices. It’s not a winning strategy for American workers or our nation’s economy.”

Governors and lawmakers from farm states, along with the oil industry, had been waiting on a “giant package” that Trump promised in an August 29 tweet about the RFS to try and please both sides. The RFS has been a thorn in the side of past presidents striving to please agriculture interests and the oil industry that usually have opposing views of the law, how it should be carried out, and whether it should be scrapped due to the boom in U.S. oil production. Trump has aimed to satisfy both sides through different measures, with mixed results, and API claiming that the renewable identification number (RIN) market transparency measures of past efforts do not amount to much compared with the benefits given to corn growers.

The RFS requires refineries to blend biofuels into the nation’s fuel supply to encourage the development of biofuels (primarily ethanol from corn), with renewable fuel volume obligations set each year in November. The law allows EPA to grant exemptions, or waivers, to small refineries if the requirements would cause economic hardship, and under the Trump administration EPA has granted numerous exemptions.

Farmers and Midwest lawmakers have complained that the exemptions undercut demand for corn, while API, AFPM, and oil advocates assert that they protect refineries from closing, maintain blue-collar jobs and have no true effect on ethanol demand or agriculture markets.

The deal is viewed by many as the Trump administration’s attempt to appease corn growers harmed by tariffs and trade disputes with China and their anger over EPA decisions to grant exemptions to small refineries from their obligations under the RFS. The latest round of 31 exemptions came in August, freeing those refineries from their requirements to blend biofuels or buy RIN credits from those who are not exempt.

Sommers and Thompson said the “misguided reallocation” of biofuel volumes associated with small refinery exemptions punishes companies working to comply with the RFS and is an attempt to force more E15 into the nation’s fuel supply, even though a majority of vehicles on the road today are not designed to use it. The plan will provide no immediate relief to farmers and will instead further distort the fuels market. “It is by no means a win-win,” they said, countering claims of the administration.

The October 4 announcement was made by EPA and the Department of Agriculture, with EPA Administrator Andrew Wheeler saying President Trump’s leadership led to the agreement “that continues to promote domestic ethanol and biodiesel production, supporting our nation’s farmers and providing greater energy security.” The steps laid out will expand domestic energy production and improve the RFS program to have sustained biofuel production that will help American farmers, Wheeler said.

The details will be provided in a forthcoming notice that will build off the recently proposed 2020 renewable volume standards. EPA will propose and request public comment on expanding biofuel requirements beginning in 2020.

EPA will seek comment on actions to ensure that more than 15 billion gallons of conventional ethanol be blended into the U.S. fuel supply beginning in 2020, and that the volume obligation for biomass-based diesel is met. “This will include accounting for relief expected to be provided for small refineries,” EPA said.

The proposal builds on Trump administration plans to allow year-round sales of E15, including a rulemaking to streamline labeling at fueling station pumps and removing other barriers to the sale of E15.

The lone concession to the oil sector appears to be a promise to have EPA continue to evaluate options for RIN market transparency and reform, which was included when the expanded sales of E15 were announced earlier this year.

However, API has told the agency numerous times that the primary factor on RIN price volatility is the changing EPA announcements themselves, Macchiarola said. EPA will make arbitrary announcements on ethanol requirements and then wonder why RIN prices become volatile, he said during the media call.

The Department of Agriculture effort will have the agency seek opportunities through the budget process to consider infrastructure projects to facilitate higher biofuel blends, according to the proposal.

The National Corn Growers Association, Renewable Fuels Association, American Soybean Association, and other ethanol supporters issued a joint statement thanking President Trump for the plan to support farm families and biofuel producers. The groups vowed to work closely with those involved and the White House to see that the plan is finalized and the promised volumes start flowing. “The EPA must uphold the president’s commitment to restore demand, based on a three-year average of all the exempted gallons, beginning with the 2020 biofuel standards,” the groups said.

Some Democrat lawmakers in rural states remain skeptical that the relief promised to farmers will be delivered. Rep. Collin Peterson (D-Minn.), chairman of the House Agriculture Committee, said he is looking forward to seeing the details of EPA’s plan to ensure it is not “just another IOU to struggling farmers and shuttered biofuel plants.” Peterson and Rep. David Loebsack (D-Iowa) noted that the refinery exemptions granted by EPA to date amount to 4 billion gallons in waived volumes from the past three years.

The proposal does nothing to increase the transparency around the refineries that seek exemptions or the process by which EPA determines which refineries qualify for the exemptions, Loebsack said. “I will be closely watching the implementation of this deal to ensure the administration follows through on its promise to our farmers and biofuel producers and will continue fighting to uphold the integrity of the RFS,” he said.

By Tom Tiernan ttiernan@fosterreport.com

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