Could a Potential Biofuels Rule Change Be a Trojan Horse to Hurt the Ethanol Industry?

Rumors have been swirling that the White House is poised to release an Executive Order that would provide “regulatory relief” for the biofuels industry by ending prohibitions on the year-round sale of E15, in exchange for goodies to President Trump’s special advisor on regulatory overhaul, Carl Icahn, a majority stakeholder in CVR Refining. The change could net Icahn a cool $200 million a year in savings.

While the White House denies such allegations, with oil execs filling Trump’s inner circle, the ethanol industry remains on tenterhooks.

The deal may sound good: it shifts blending requirements from fuel refiners to those who actually blend the fuels. Plus, the White House would change regulatory language to allow for the year-round sale of E15, something that the biofuels industry has been requesting from EPA for years.

The problem: the only beneficiaries of such a change are the “merchant refiners”—small refineries, like Icahn’s CVR Refining—that chose not to invest in renewable fuels infrastructure or technology. Instead, companies like Icahn’s comply with the law by purchasing credits—Renewable Identification Numbers (RINs). That’s all well and good, but RIN prices are rising, and merchant refiners aren’t happy.

Merchant refiners have been complaining that they are receiving the short end of the stick, stuck with purchasing more expensive RINs, while integrated refineries are soaking up “free” RINs by blending and selling them for windfall profits. However, the complaints of CVR and other merchant refiners are largely contrived, according to analysis by EPA.

In an analysis of petitions EPA received to change the point of obligation (from refiner to blender), the agency found that “the RFS [Renewable Fuel Standard] program [is] generally working to increase supplies of renewable fuel … a change in the point of obligation is not likely to enhance the achievement of the program’s growth.” They also found that “merchant refiners are generally not uniquely adversely impacted (relative to integrated refiners).”

According to EPA, “all refiners and importers of gasoline and diesel fuel incur costs to comply with RFS obligations.” So while merchant refiners are directly tracking the cost of compliance by purchasing RINs, the costs and benefits associated with the RFS is baked into the entire refining process. Simply put, the assertion from Valero, CVR, and other merchant refiners that others are getting the RINs “free” and then selling them for windfall profits simply isn’t true.

What would the net effect of transferring compliance downstream be? The list is long and includes increased complexity of compliance, greater costs to administering the program at EPA, and transferring compliance to smaller companies that may not have the resources to comply with the program. The change could also slow the investment in cellulosic fuels, which are 60 percent less greenhouse gas intensive than gasoline.

EPA concluded there was no good reason to move the point of obligation in November, and the ethanol industry, integrated refiners and fuel retailers agreed—basically, everyone but merchant refiners.

It seems that complainants, such as Valero and CVR, know exactly what would happen to the Renewable Fuel Standard if this switch were to happen—increased complexity in administering the program, increased costs, ineffective enforcement and implementation and a resulting cooling of investments in the commercialization of new fuels and infrastructure. Indeed, such changes could severely diminish the ethanol industry, while professing to fix it.

For more information see:

CVR SEC Holdings 
Petitions for Reconsideration under the Renewable Fuel Standard Program, EPA