High stakes for ethanol, oil interests in EPA biofuels proposal sent to White House

The contents of a draft proposal that would purportedly lower biofuel blending requirements for the extended 2020 compliance period and for 2021 could force the White House to reveal its hand on an issue that has long pit the farm and ethanol lobby against certain oil interests.

Thus far, the White House has been silent on biofuel policy issues pending before the Environmental Protection Agency. But a yet-to-be-made-public draft Renewable Fuel Standard proposal sent Aug. 26 to the White House Office of Management and Budget for interagency review stands to put the future of either biofuel producers or merchant refineries at risk, depending on what direction the EPA's final rule ultimately takes.

The EPA annually reviews biofuel blending targets set by Congress and generally issues a rule setting renewable volume obligations in line with market conditions. The Trump administration, however, did not issue such a rule before leaving office, and the EPA under President Joe Biden extended compliance deadlines for the 2019 RVO to Nov. 30 of this year and for the 2020 RVO to Jan. 31, 2022.

The 2020 RVO set the total renewable fuel volume at 20.09 billion gallons. Advanced biofuel was set for 5.09 billion gallons, including 590 million gallons of cellulosic biofuel. The 2020 biodiesel amount was set at 2.43 billion gallons.

Moving the draft regulation to OMB is a key step before the EPA can formally propose the biofuel blending requirements and launch the comment and hearing process that leads to setting the final annual volumes.

"The White House may be particularly concerned about American drivers and how fuel costs could pose risks to thin congressional majorities ahead of the 2022 mid-term elections," ClearView Energy Partners said in an Aug. 27 research note. "A policy stance to raise blending requirements could hand Biden's critics an argument that his administration is contributing to higher fuel costs."

Biofuel industry concerns

Biofuel producers have sounded the alarms as reports suggest a retroactive reduction of the 2020 RVO could be in play along with plans to lower the amount of renewable fuel that must be mixed with gasoline and diesel in 2021 ahead of raising those volumes in 2022.

"If the reported rumors ... prove to be true, it could be absolutely devastating to our industry," Renewable Fuels Association President and CEO Geoff Cooper said in an email Aug. 27. "At a time when ethanol producers are still recovering from the extraordinary market collapse related to COVID, our industry simply cannot afford to go through another turbulent cycle of EPA-induced demand destruction and RFS mismanagement."

Cooper asserted that oil refiners, biofuel producers, farmers and other market participants have already made plans and investment decisions based on the 2020 RVO, which was finalized nearly two years ago.

He also pointed out that "the RFS already includes a self-correcting mechanism that adjusts actual renewable fuel blending requirements lower if actual gasoline and diesel consumption falls." As such, the actual blending requirements for each category of fuel in 2020 were lowered 10%, in line with the total consumption of gasoline and diesel in 2020 being 10% lower than EPA had initially projected.

"No additional adjustments are warranted or legally justified," Cooper argued.

Any cuts to the 2020 and 2021 RVOs "would represent a win for oil refiners at the expense of low-carbon biofuel producers and farmers," he added. "Lowering the RFS volumes would raise serious questions about the administration's stated commitments to clean energy, combatting climate change, and boosting domestic manufacturing jobs."

Merchant refiner woes

Integrated oil companies, with a larger marketing and retail presence, are generally able to generate more RFS compliance credits, called RINs, compared with smaller merchant refiners who often lack blending facilities or retail gas stations where those RINs are generated. Those independent and smaller refiners must, in turn, purchase RINs to demonstrate compliance.

RIN prices peaked at all-time highs in early June, reaching $1.9775/RIN June 8. High biofuel feedstock prices bolstered RIN values since August 2020. RIN market participants have seen soybean oil and corn futures climbing to multiyear highs as bullish for RINs.

Oil-state lawmakers and merchant refiners have argued that these runaway RIN prices, tightened RIN availability and a depleting bank of carryover RINs from past years are threatening the economic viability of a host of merchant refiners. Refinery closures would mean a loss of union jobs, potential fuel supply issues, skyrocketing gasoline prices and increased reliance on foreign fuel imports, they have said.

They are seeking significantly lowered biofuel blending requirements for 2020, 2021 and 2022, and a rightsizing of blending volumes as EPA looks to reset the RFS program for 2023 and beyond.

"EPA must take into account record-setting 2021 compliance costs as well as current fuel demand that's been diminished by the pandemic," a spokesperson for the refining group American Fuel & Petrochemical Manufacturers said Aug. 27.

"We're still not back to pre-pandemic levels and [the Energy Information Administration's] latest projections for gasoline suggest we won't be until after 2022," the spokesperson added. "The amount of ethanol the US can absorb is directly tied to the amount of gasoline we're consuming. Pretending otherwise will only hurt US consumers and speed up complete depletion of the RIN bank."