Brazil ethanol, Argentine biodiesel factors behind RFS delay
South American biofuels are the reason why EPA chief pulled back RFS announcement. Concerns that refiners will import ethanol from Brazil and biodiesel from Argentina to fulfill Renewable Fuel Standard (RFS) volume requirements helped lead US EPA Administrator Scott Pruitt to reconsider quotas for those fuels, according to several reports and sources. A coming announcement may include lowering the targets so refiners can rely mostly on U.S.-made biodiesel and corn ethanol.
Rethinking initial decisions. Until the pullback, EPA had sent the White House Office of Management and Budget (OMB) proposed quotas that would have required the use of 15 billion gallons of conventional corn-based renewable fuel. But some reports note the new concerns are causing the agency to rethink that approach.
As for biodiesel, U.S. biodiesel producers filed a trade complaint against imports from Argentina and Indonesia, asking the government to impose tariffs to counter what they say are unfair subsidies and dumping. But the U.S. trade decision will take a while to be announced and that could delay the EPA RFS announcement longer than initially thought.
A biodiesel analyst comments: “The American biodiesel industry simply does not have the production capacity to meet the lofty mandates it aspires to and shortsighted angling to block imports only serves to undermine their own industry interests. The domestic industry confuses nameplate capacity with actual capacity. Many plants catalogued for its nameplate capacity haven’t run in years and couldn’t even with fantasy price projections let alone domestic realities. When a $1.00 per gallon tax credit was on the table these plants couldn’t operate profitably and now without the $1.00? The industry has argued for a 2.8 billion biodiesel mandate some 700 million gallons than they have now. Where do they expect that additional production to come from? Keep in mind any volume set above the 1 billion biodiesel mandate is discretionary yet the domestic industry has sued EPA even though the agency has consistently given biodiesel increases...the only category to receive consistent increases above the statutory mandate.”
Should the U.S. government announce measures to restrict imports, the price of credits tracking compliance with RFS mandates would “drive up consumer cost significantly,” said Mike McAdams, president of the Advanced Biofuels Association. “If you want to stick it to the consumer, Mr. Administrator, just roll back the number for imported fuels with your misguided America-first policy,” McAdams, whose members include Brazilian-based producers, said in an interview with Bloomberg BNA. “You need imports to satisfy targets.”
The RFS allows refiners to use imports to help satisfy mandates and make up for domestic shortfalls. The U.S. imported 36 million gallons of ethanol from Brazil last year, down from more than 400 million gallons in 2012, according to the Energy Information Administration. U.S. distillers produced a record 15.3 billion gallons of ethanol in 2016, it said.
Besides the overall biofuel target, EPA sets volume requirements for biodiesel, typically derived from soybean oil; advanced biofuel, which has lower carbon emissions; and cellulosic ethanol, which comes from sources such as crop waste or algae.
Sugarcane-derived ethanol made in Brazil qualifies as an “advanced biofuel,” which means it can satisfy quotas for two different types of fuel in the program — both for advanced biofuel and total renewable fuel. Corn-based ethanol does not qualify as advanced.
Imported biodiesel meets requirements for three different required fuels — advanced, total and biodiesel. Under the program, refiners receive 1.5 compliance credits for each gallon of biodiesel they blend into petroleum.
“We don’t put stock in rumors that delay in RVOs has to do with changing the point of obligation or RVP,” said Geoff Cooper, vice president of industry trade group Renewable Fuels Association. “I think [the delayed release] is related to making sure the cellulosic and advanced numbers are right. We haven’t seen anything to lead us to believe the conventional volume will be anything other than 15 billion gallons,” Coopers said.
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RFS BACKGROUND
Under the RFS program, biofuel must be blended into transportation fuel in increasing amounts each year, capping out at 36 billion gallons by 2022. Compliance with the blending obligations are imposed on petroleum importers and refiners — “obligated parties.” The annual amounts of the various categories of biofuels that must be blended are referred to as Renewable Volume Obligations (RVOs). Obligated parties can comply with the RFS program by either blending the requisite volume of renewable fuel into their transportation fuel or purchasing credits designated as Renewable Identification Numbers (RINs) to meet the RVO.
Although the Clean Air Act sets forth annual volumetric targets for certain biofuels, EPA is required to establish enforceable RVOs via a formal rule-making process. Separate quotas and blending requirements are determined for cellulosic biofuels, biomass-based diesel, advanced biofuels, and total renewable fuels. Refiners and importers must either blend the requisite amount of each of the four categories of biofuels, or acquire the necessary amount of RINs for each of the categories. Parties that purchase or sell RINs are required to enter the transaction information into the EPA Moderated Transaction System.
In November of 2016, EPA set an RVO of 19.28 billion gallons of total biofuel for 2017; this was an increase from the 18.11 billion gallon figure adopted for 2016, but still below the statutory standard of 24 billion gallons. In January of 2017, President Trump ordered a temporary freeze and review of thirty EPA regulations that had been issued between the time of the U.S. election and his inauguration, including the 2017-18 RVOs. The regulatory freeze expired without the new administration making changes to the 2017-18 RVOs; RIN prices rose after the freeze expiration.
Meanwhile, a policy initiative by Carl Icahn (an investor in the petroleum sector who also serves as a special advisor to President Trump) would shift responsibility for meeting RVO requirements away from refiners and importers to blenders and others in the chain of commerce. A ruling by EPA on the Icahn initiative may be several months away, sources note. The public comment period on the Icahn-backed measure ended February 22.
