Lately, it seems that there is a surprise around every corner for the biofuels industry. This week’s headscratcher – EPA proposed 15 percent reduction of 2018 blending targets for biodiesel, despite biodiesel volumes being set over a year in advance. Additionally, rumors are circulating that EPA is considering further modifications to the biofuels program – all designed to reduce compliance costs for the petroleum industry.
While EPA proposed lowering the biodiesel volumes to 2.1 billion gallons for 2018 under the Renewable Fuel Standard (RFS) in July, the latest proposal seeks to use a general waiver to further lower biodiesel volumes, despite the biodiesel’s nameplate capacity of over 4 billion gallons. According to EPA, further reductions are needed due to “market circumstances that would make the price of biomass-based diesel fuel increase significantly.”
Specifically, EPA is referring to the economic impact of the $1 per gallon Biodiesel Blender’s Tax Credit, which expired in August. While EPA states that “it does not appear that the expiration of the tax credit has had a direct impact on the price of unblended biodiesel in 2017,” the agency expects that the tax credit, combined with U.S. tariffs on imported biodiesel will impact blenders – namely petroleum refiners – who are obligated to comply with the rule.
And therein lies the rub. Earlier in 2017, President Trump was considering moving blender obligation away from refiners, a move which would primarily appease merchant refiner-owner Carl Icahn, a former special advisor to the President. Icahn argued that smaller refiners were on the hook for millions in compliance costs but could not blend biofuels. The change was scrapped – as both the majority of the biofuels industry and the petroleum majors were against the move.
Although Icahn is out of the White House, it appears he’s still exerting considerable influence over the administration.
On the heels of Tuesday’s announcement came rumors that EPA Administrator Scott Pruitt is mulling the idea of allowing biofuels exports to be eligible to garner Renewable Identification Numbers (RINs), the tradable compliance mechanism of the RFS. Currently, the U.S. biofuels industry exports about 1 billion gallons of biofuels. Under the RFS, these exports are not eligible for credits, as the law was designed to increase the domestic production and use of these fuels. In assigning RINs to export gallons, the effect would be a dramatic drop in price.
According to Aakash Doshi, a Citigroup Inc. analyst, if both changes were implemented, RIN prices could drop to 30 cents. Last week, RINs ranged in price from 88 cents to just over a dollar. RINs provide necessary incentive for capital investment in the industry, but with so much turmoil within the administration, it is likely the financial sector’s interest in the biofuels world will continue to cool. Already, immediately after the announcement soy prices tumbled, and ethanol stock fell as well. On Wednesday, Pacific Ethanol Inc.’s stock slipped 2.5 percent, and Renewable Energy Group (REG), a biodiesel producer’s stock fell 6.2 percent.
Lawmakers quickly expressed their frustration at EPA. Earlier this week, Senator Joni Ernst (R-IA), a state that overwhelmingly voted for President Trump and is the top biodiesel producer, wrote a letter to the President, stating, “It is my hope that your EPA has not forgotten about the pledges that were made to my constituents and to farmers across the country.”
During a floor speech on Wednesday, Senator Grassley (R-IA) commented, “This seems like a bait-and-switch from EPA’s prior proposal and from assurances from President Trump himself and Cabinet secretaries in my office. Reducing volumes as the EPA proposes would undermine renewable fuel production. That’s contrary to the worthwhile goal of America first. It’ll undermine U.S. workers, and harm the U.S. economy, particularly in rural areas. It’s contrary to the goal of meeting the country’s fuel needs through domestic production, which is critical to economic growth. This all gives me a strong suspicion that Big Oil and oil refineries are prevailing, despite assurances to the contrary.” It remains to be seen if a way forward for the biodiesel tax credit is possible in the broader tax package.
For more information see:
- Notice of Data Availability Concerning Potential Reductions in the Volume Requirements for 2018 Renewable Fuel and 2019 Biomass-Based Diesel under the Renewable Fuels Standard Program, EPA
- Trump Told Iowa He'd Save Ethanol. His EPA Chief Has Other Ideas, Bloomberg
- U.S. Biofuel Credit Prices Fall as EPA Considers Change, Reuters