Trump Agency Proposes Overhaul of Biofuel Credit Trading

February 20, 2019 11:00 PM
 
The Trump administration is planning to propose an overhaul of the opaque market for trading biofuel compliance credits amid complaints of hoarding and wild price swings, according to people familiar with the matter.

(Bloomberg) -- The Trump administration is planning to propose an overhaul of the opaque market for trading biofuel compliance credits amid complaints of hoarding and wild price swings, according to people familiar with the matter.

The Environmental Protection Agency is set to lay out several options in coming weeks, including barring Wall Street banks and other outsiders from trading the credits, said the people, who asked for anonymity to discuss internal deliberations.

The EPA is taking the action under orders from President Donald Trump, who last year told the agency to pursue reforms while simultaneously lifting summertime fueling restrictions on higher-ethanol gasoline. The EPA is honing its proposal in preparation for unveiling it as soon as next month.

The effort focuses on Renewable Identification Numbers, or RINs, a system of credits the government initially created to give refiners and importers more flexibility in satisfying annual biofuel quotas. RINs morphed from a simple compliance tool into a financial commodity, with values swinging in concert with policy news from Washington. Some independent refiners have alleged speculation and manipulation in the RINs market, asserting that traders have abandoned some sales after negotiating them and others have placed fraudulent bids with the goal of inducing higher prices.

Billionaire Carl Icahn, the majority owner of independent oil refiner CVR Energy Inc., had complained that the program structure is “rigged” and changes were needed.

The EPA isn’t planning to prescribe a single option. Instead, regulators expect to outline several specific possible changes and then seek public comment on the ideas -- including the interplay between possible combinations, the people said.

One option under consideration would set position limits at 120 percent of refiners’ and importers’ biofuel-blending obligations, a measure aimed at preventing companies from maintaining a hoard of credits they can sell whenever prices spike, according to three people familiar with the plan. Another would require market participants to reveal how many RINs they hold over a yet-to-be specified threshold. Another change would limit trading to “obligated parties” -- the fuel refiners and importers forced to use the credits to prove they have fulfilled biofuel quotas.

The EPA also may propose capping how long companies and traders can hold RINs.

The agency is also preparing a sweeping overhaul of the U.S. biofuel mandate that would establish new benchmarks for renewable fuel use through 2022.

The effort divides the oil industry. The current approach benefits some fuel retailers and oil companies that make money by selling RINs they generate from mixing ethanol and other renewable fuels into gasoline and diesel. They argue that the revamps are a solution in search of a problem and that restrictive position limits may further decrease liquidity and boost volatility.

Some oil refiners that lack the blending infrastructure to generate enough credits on their own insist reforms are needed to damp speculation. They argue that earlier EPA efforts to boost transparency, including monthly disclosures about RIN prices and refineries waived from biofuel quotas, haven’t gone far enough.

Frank Macchiarola, a group director at the American Petroleum Institute, said the EPA’s planned rulemaking on higher ethanol E15 gasoline and RIN reform is already “critically flawed.”

“The structural RIN changes under consideration to increase transparency in the RINs market are likely to do more harm than good,” Macchiarola said. “The EPA has already enacted improvements to the program that improve transparency for market participants.”

RINs tracking 2019 ethanol compliance targets fell 3.4 percent to 21.5 cents on Wednesday, data compiled by Bloomberg show. They cost more than 90 cents when Trump was elected in November 2016.

They have swung wildly in recent years, sometimes stoked by Trump administration efforts to alter the U.S. biofuel mandate. On Feb. 28, 2017, a day after Bloomberg News reported that Icahn had hashed out a deal with renewable fuels industry proponents, prices for credits tracking ethanol consumption plunged 35 percent to 30 cents. By October 2017, they more than tripled to 98 cents, only to plummet to 3 cents a year later.

CME Group Inc. launched RINs futures contracts in 2013 and delisted them four years later because of a lack of liquidity.

 

©2019 Bloomberg L.P.

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