EPA Relents on Ethanol Mandate With Overdue Renewables Quota

Farmer Mike Vis holds a handful of corn on his farm in Valley Springs, South Dakota, U.S., on Tuesday, July 8, 2008.

Photographer: Aaron Packard/Bloomberg News

The Obama administration proposed cutting quotas for the use of renewable fuels, lowering the mandate for corn ethanol set by law.

The plan by the U.S. Environmental Protection Agency is a retreat from aggressive goals set by Congress almost a decade ago to promote American-grown alternatives to fossil fuels from hostile nations. The program is backed by corn growers who sell almost a third of their crop to fuel producers, and opposed by the oil industry, anti-hunger groups and small-engine users.

Ethanol and oil-industry advocates have battled over whether targets in the 2007 law are obsolete because gasoline demand has grown more slowly than forecast and the U.S. has had a boom in domestic oil production.

“We believe these proposed volume requirements will provide a strong incentive for continued investment and growth in biofuels,” said Janet McCabe, the EPA official in charge of the program. “But we must recognize real-world impediments to the growth of biofuels in the marketplace.”

In its proposal Friday, the EPA said corn-ethanol levels should be 13.4 billion gallons this year and 14 billion for 2016. The law set 15 billion gallons for both years. The quota for biodiesel would increase to 1.7 billion gallons this year and 1.8 billion next. The agency also set levels for 2014 at the level produced by the industry.

Timely Quotas

After delaying the decision by more than a year, the EPA pledged to issue the annual quotas on time in the future. It said predictability and the forecast for growth from this year to next should help the biofuel industry grow. Even with the cuts, the requirements would require record use of renewable fuels.

And in a bid to help farmers, the administration of President Barack Obama also pledged Friday $100 million to help install ethanol blending pumps at service stations. Those would allow drivers to choose to use higher blends of ethanol than the standard 10 percent.

The ethanol mandate announcement cut the value of certificates known as Renewable Identification Numbers, or RINs, issued by the EPA to track compliance. RINs sank 24 percent to 45 cents, according to StarFuels Inc., a Jupiter, Florida-based broker.

The RINs are attached to each gallon of biofuel and refiners can trade them to other parties once they’ve consumed renewable fuel. RINs for biodiesel jumped 10 cents to 97 cents.

Fuel Demand

But even as it cut the fuel demand from the levels set out in the statute, EPA is pushing refiners to use more ethanol, a turnabout from an abandoned 2014 proposal. EPA is relying to a great extent on increases in production of biodiesel, which doesn’t have the same blending constraints as ethanol. Also, lower oil prices mean greater gasoline use, and with it more ethanol demand.

The new 2016 quotas “represents a pretty substantial jump from where EPA was in the 2014 proposal,” said Tim Cheung, an analyst at ClearView Energy in Washington. “And a lot of things could change between proposal and final.”

The agency said it would issue the final standard by Nov. 30 after receiving public comment and holding a hearing June 25 in Kansas City, Kansas.

Corn Suit

Ethanol producers criticized the EPA’s decision and corn growers said they may sue.

Chip Bowling, a Maryland corn-producer and president of the National Corn Growers Association, said the EPA has “chosen to ignore the law.”

“We are evaluating our legal options for defending the law and protecting the rights of farmers and consumers,” he said in a statement. “We will fight to protect and build profitable demand for corn.”

Jeff Lautt, chief executive officer of Poet LLC, the second-largest U.S. ethanol producer, said the EPA decision “puts the oil industry’s agenda ahead of farmers and rural America.”

Archer-Daniels-Midland Co., the largest U.S. ethanol producer, rose 8 cents to $52.74 in New York trading. The stock fell 50 cents from an intraday high as the plan was released.

‘At least there is some optimism for the future,’’ said Jerrod Kitt, an analyst at Linn Group in Chicago.

‘Blend Wall’

The oil industry praised the EPA for spelling out limits in the use of ethanol, which it labels as the “blend wall.”

“That’s an important consideration on their part,” Jack Gerard, president of the American Petroleum Institute, told reporters. “But, unfortunately, part of what is happening here is that some of their rosy scenarios” are envisaging long-term growth of that fuel, he said.

The market is showing low demand for high-ethanol blends, and growing demand of ethanol-free fuel, he said.

The legislation required refiners to use 20.5 billion gallons of renewable fuels this year and 22.25 billion in 2016, based on 2007 fuel consumption forecasts. EPA has the legal authority to adjust those totals, and set the overall levels for renewable fuels at 16.3 billion gallons and 17.4 billion gallons respectively.

“If the goal of the administration was to set the stage for protracted and complex litigation over the rule when finalized later this year, today’s proposal is a giant step toward that objective,” said Stephen Brown, a Washington representative for refiner Tesoro Corp.

The U.S. Department of Agriculture’s pledge of $100 million in matching funds to states to expand the use of special fuel pumps is intended to allow drivers to blend more ethanol into their gasoline.

The agency has long championed these so-called blender pumps, and the announcement on the same day as the renewable fuel proposal lets the Obama administration to demonstrate that it still supports the fuel.

“They are committed to the industry,” Agriculture Secretary Tom Vilsack said of the EPA. “They also have to work in the real world, relative to how much gas is being consumed.”

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