Biofuels Battle Heating Up

By Steve Kopperud, SLK Strategies

The decade-long policy war over the need for a Renewable Fuel Standard (RFS) is escalating and Armageddon may come in 2018 as combat heats up among biofuels makers, production agriculture, and the petroleum industry. There could be heavy casualties and no doubt more than a few victims of friendly fire.

Those who go to the mat to protect the RFS argue the program fosters use of alternative fuels, jump-starting an emerging industry, creating jobs, contributing to the economy, and accelerating America’s rejection of imported petroleum, just as Congress – in its wisdom – knew it would. The government’s program requires conventional fuel refiners to blend specified amounts of biofuels into their products annually.

The argument against the RFS is that the federal program creates an arbitrary market for biofuels, a market less robust without the government mandate. Petroleum companies find the program an expensive pain in the neck while others, including major livestock and poultry producer groups who want the RFS to disappear, contend the program has outlived its usefulness and is now superfluous to evolving demand for biofuels. Farmers and ranchers particularly believe that in the case of corn ethanol, and to a lesser degree soy-based biodiesel, biofuels illogically compete with human and animal food for plant feedstocks, holding per-bushel prices for these commodities at artificially high levels thereby inflating the cost of meat, milk, and eggs. Personal care product companies (e.g., soaps, detergents, etc.) also dislike the animal fat-based biodiesel side of the alternative fuels market arguing the cost of glycerine particularly is held unnaturally high.

If only the whole RFS/biofuels debate was so black and white. There is a good chunk of truth to both sides of the biofuel production/use issue. However, there are very few matters that politically inspire as much passion and street fighting as the ongoing need for the RFS, and its “currency” known as renewable identification numbers (RINs).

It is fair to say Congress generally hates the RFS. In fact, the program is so politically volatile that the 2016 presidential Iowa caucuses demanded support for and protection of the RFS as a pivotal candidate selection issue. While President Donald Trump swore undying loyalty to the RFS and everything for which it stands, then White House aspirant Senator Ted Cruz (R-TX), no fan of the RFS or any other federal biofuels support given his “Big Oil” state roots, shot directly at the RFS, yet won the Iowa caucuses handily.

For most lawmakers, however, to attack the RFS is to bring down the wrath of not only large, commercial biofuels refiners, but also thousands of small, backyard makers of corn ethanol, plant and animal-based biodiesel, cellulosic ethanol, and other biobased fuels, not to mention the plant biotechnology sector. To defend the RFS draws a bullseye on a lawmaker’s back, a target at which large poultry integrators, meat processors, and others carefully aim. It is a classic damned-if-you-do, damned-if-you-don’t political scenario, or as one Illinois House member once put it, “I can’t win for losin’ on this one.”

All RFS fronts were relatively quiet this past summer when the Environmental Protection Agency (EPA) released in July its proposed RFS mandates for 2019, combined with what are called renewable volume obligations (RVOs), similar requirements of petroleum refiners. Biofuels makers and those who supply feedstocks thereto, including renderers, rejoiced when the agency returned to using statutorily set amounts of the various alternative fuels – levels significantly higher than computed during President Barack Obama’s administration.

At the time, EPA Administrator Scott Pruitt said, “We are proposing new volumes consistent with market realities focused on actual production and consumer demand, while being cognizant of the challenges that exist in bringing advanced biofuels into the marketplace. Timely implementation provides certainty to American refiners, the agriculture community, and broader fuels industry, all of which play an important role in the RFS program.” Truth be told, EPA is no great fan of the RFS program given its complexity and political volatility.

The proposal requires 19.24 billion gallons of biofuels overall to be blended into qualifying fuels, with 15 billion of that met by conventional or corn-based ethanol. The remaining 4.24 billion gallons of the mandate will be met by blending so-called advanced biofuels, including 238 million gallons of cellulosic ethanol and at least 2.1 billion gallons of biodiesel/renewable diesel. EPA also began a technical analysis to “inform a future rule to reset the statutory volumes for cellulosic, advanced, and total biofuels.”

Comments were collected and in late October, the agency sent its final proposal to the Office of Management and Budget for final interagency review and sign-off, well ahead of EPA’s statutory release deadline of November 30. At the same time, war clouds gathered quickly. Orbiting the RFS in the biofuels universe are related issues of high contention, including oil and gas interests wanting the RFS point of obligation – those responsible for ensuring blending at specified levels is occurring – shifted to the fuel wholesaler and demands by the ethanol industry that 15 percent ethanol (E15) blends be legally sold year-round, not just during warmer summer months. The Department of Commerce and International Trade Commission were also reviewing industry complaints of Argentine and Indonesian export biodiesel dumping brought by the National Biodiesel Board and others (see Biofuels Bulletin on page 26).

Critical mass was quickly reached on the policy side and then stuff hit the proverbial fan. Given the gross political sensitivity over protecting the RFS and getting as much alternative fuel into the marketplace as possible, Pruitt nonetheless stepped on a political landmine when EPA published in October a notice of data availability (NODA) on the biodiesel RFS. Pruitt, a native of Oklahoma and keenly aware of Big Oil’s economic and political clout in his home state, got the notion that cutting the biodiesel RFS by at least 325 million gallons – or maybe cutting it to 1 billion gallons, the lowest level allowed by law – might be a good idea. The agency also asked if EPA should allow cheap imported biodiesel to count against the RFS/RVO mandate.

Pruitt quickly learned how bad those proposals were.

Within hours of the NODA publication, the renewable fuel industry unleashed a hurricane of press releases attacking the EPA action and Pruitt. While the NODA sought information on Pruitt’s inclination to slash only the biodiesel RFS/RVO, the broad industry saw the action as a scary precedent and as the administration turning its back on a campaign promise of unending support for biofuels generally and the RFS program specifically.

Senator Charles Grassley (R-IA), Congress’ avenging angel for biobased alternative fuels, particularly ethanol in all forms, took to the Senate floor accusing Trump of bait-and-switch rhetoric on the RFS. Grassley demanded Pruitt meet with him and any other equally concerned senators to explain the agency’s actions. As those Senate battle lines were drawn, the chamber’s Environment and Public Works Committee very publicly postponed a scheduled confirmation vote on several EPA key nominees until lawmakers were appeased.

Grassley hit Pruitt with a letter signed by 34 bipartisan Senate members outlining in detail concerns with not only the RFS issue, but the proposal to permit ethanol imports to count toward mandated RFS volumes. This latter move, industry said, would spur imports, drop domestic production, and skew the price and market for RINs. Pruitt was also barraged with angry letters from the governors of Iowa, South Dakota, Missouri, Kansas, and Nebraska – the heart of biofuels country.

Trump ordered Pruitt to go to Capitol Hill, hat in hand, and make nice with Grassley and Senators Joni Ernst (R-IA), Pat Roberts (R-KS), Deb Fischer (R-NE), Ben Sasse (R-NE), John Thune (R-SD), and Mike Rounds (R-SD). Pruitt, however, stopped short of verbal assurances to the senators that he would kill the NODA action, though he did indicate he looks favorably on allowing E15 to be sold year-round. While most of the irate lawmakers reportedly left the hour-plus-long session in Grassley’s office reassured that Pruitt understands their concerns, Ernst, who placed the formal stranglehold on the fate of those EPA program management nominees, decided to trust but verify. She demanded in writing Pruitt’s commitment to do the right thing by biofuels and the RFS before she lifted her hold on the agency nominees.

Trump and Pruitt both personally called Iowa Governor Kim Reynolds and Kansas Governor Sam Brownback to reiterate administration support for ethanol, biodiesel, and renewable fuels broadly. Reynolds was widely quoted, saying the conversations were “constructive” and “positive.”

A few days later in a follow-up letter to the seven senators, Pruitt assured the lawmakers he is well aware “my responsibility…is to faithfully administer the laws passed by the US Congress. This agency must and will respect those laws.” His statement echoed assurances he gave many of these same Senators prior to and during his confirmation process when asked about his support for a strong RFS.

Pruitt assured the senators that the EPA will meet its November 30 statutory deadline to publish its final biofuels RFS/RVO for 2019. He said while it would be “inappropriate for him to prejudge the ongoing RFS/RVO process…preliminary analysis suggests that all of the final RVOs should be set at amounts that are equal to or greater than the proposed amounts, including at least 2.1 billion gallons for biomass-based diesel (biodiesel/renewable diesel) in 2018 and 2019.” He also told the lawmakers he will not pursue regulations allowing biofuel imports to qualify as part of the RFS despite a letter from four major oil refiners pleading with him to do so.

Pruitt wrote he is still not sure his agency has the legal authority to issue a formal waiver of the current seasonal sales restriction on E15 but vowed to work with Congress to either clarify his agency’s authority on the matter or receive legal authority to issue the waiver. He also said he decided to not grant a petition to shift the point of obligation on RFS blending.

As word of Pruitt’s capitulation got out, senators representing the oil producing states of Texas, Oklahoma, Arizona, Utah, Pennsylvania, and Wyoming made their individual and collective frustration publicly known. In their own letter to Trump, the senators demanded a summit to talk about the RFS. They urged the White House to cut the RFS from its July proposal, saying absent such an adjustment, the current RFS mandates as proposed “will result in a loss of jobs around the country, particularly in our states.”

“We request that within the next three weeks, you convene a meeting regarding the RFS and pro-jobs policies with us, our Senate colleagues who previously lobbied you on behalf of the ethanol industry, and relevant members of your administration to discuss a pathway forward toward a mutually agreeable solution that will also save refining jobs and help unleash an American energy renaissance,” the lawmakers wrote.

Adding insult to injury, and taking a page from Ernst’s playbook, Cruz immediately slapped a formal hold on the nomination of Iowa Agriculture Secretary Bill Northey to be United States (US) Department of Agriculture undersecretary for farm production and conservation. The hold is Cruz’s response to the actions by Grassley and Ernst that forced Trump to publicly and extensively reaffirm support for the RFS.

“This has nothing to do with Bill Northey, they need to get that right, but I don’t see the connection,” a frustrated Ernst told a reporter. “He’ll be in charge of conservation programs; it will have nothing to do with the RFS. So why are they blocking him because of the RFS? Just because Big Oil doesn’t like it.”

As if the RFS sparring match was not enough, and as Ernst and Cruz enjoyed their finger-pointing exercise, combat broke out on another biofuels front – a new skirmish over RINs, the RINs market, and alleged manipulation thereof.

Pennsylvania Governor Tom Wolfe fired the first volley in late October when he formally requested Trump waive the RFS/RVO for northeastern US fuel refiners so that the price of RINs would drop significantly. For those who do not live for biofuels, a RIN is a 38-digit number identifying a specific fuel lot and can be bought and sold by refiners on a market of sorts to offset their legal RFS blending responsibility. Companies that refine, import, or blend fossil fuels must fulfill RFS mandates. To ensure compliance, obligated parties are periodically required to demonstrate they have met their RFS quota by submitting a certain amount of RINs to EPA. Because each of these RINs represents an amount of biofuel blended into fossil fuels, the RINs submitted to EPA are a quantitative representation of the amount of biofuel blended into fossil fuels. Right now, RIN prices are high and markets are erratic. Wolfe says he is concerned that if RIN prices do not drop and stabilize, “the volatile market may lead to the closure of one or more of these merchant refiners, which would be devastating to the regional economy.”

The Wolfe letter escalated the RIN battle in early November when a bipartisan group of lawmakers formally asked the Federal Trade Commission (FTC) to investigate possible manipulation in the RFS market for RIN credits. In a letter to FTC, Senator Tom Carper (D-DE), along with five northeastern lawmakers, told the commission that RIN credit prices have fluctuated wildly, surging at times by 200 percent. Supporting the Wolfe letter, the lawmakers said oil refiners in eastern Pennsylvania have long complained the federal requirement to purchase RINs hurts profitability. The letter was signed by Senators Cory Booker (D-NJ), Bob Casey (D-PA), and Chris Coons (D-DE) as well as Representatives Lisa Blunt Rochester (D-DE) and Pat Meehan (R-PA).

Carper is the ranking member of the Senate Environment and Public Works Committee and no stranger to RFS and RIN issues. He has long wanted to see changes in RIN trading and said any legislation dealing with the RFS or RINs should include measures to increase transparency in the RIN market.

As the war expands, many lawmakers caught in the crossfire are hoping for a solution that will please everyone or get them off the hook. However, that likelihood is slim. For now, many members of Congress will hide behind the strategy to “let the RFS expire in 2022 and then be done with it.” During the Iowa caucuses, the so-called RFS expiration option was used often when candidates were quizzed about their dedication to the biofuels program.

However, there is a problem. The RFS does not expire in 2022. Upon closer reading of the authorizing legislation, it actually never expires. Not to put too fine a point on it, but in 2022 and thereafter, the EPA administrator, following some fairly broad guidelines set down by Congress, gets to set the RFS/RVO on an annual basis until Congress repeals or amends the law.

The most cogent explanation of the reality of the RFS lifespan is found in a 2016 article by Jonathan Coppess of the University of Illinois’ Department of Agricultural and Consumer Economics. He writes broadly on matters related to the RFS, RINs, EPA waiver authority, and so on.

Coppess writes, “As was pointed out…the RFS does not expire in 2022. The statute provides specific volumetric mandates in a set of tables that run through calendar year 2022. It also provides, however, that for those years after 2022, the EPA administrator is to establish the applicable volumes for each year. This is continuing and permanent authority for the RFS; the statute does not contain a sunset or end-date provision. After 2022, the applicable volumetric mandates for renewable fuels are to be determined by the EPA administrator, and based on analysis of the impact of the production and use of renewable fuels on various matters such as environment factors, US energy security, infrastructure, cost to consumers of using renewable fuels, and other factors including job creation and food and commodity prices.”

Will there be a peace accord on the RFS controversy, RIN market manipulation allegations, and a jarring realization that without congressional action this war could last forever? Look to 2018, unless the issue is just too hot for an election year.

December 2017 RENDER | back