(Bloomberg) -- The Trump administration on Tuesday advanced a plan meant to expand the U.S. market for corn-based ethanol and place trading restrictions on credits that refiners use to prove they are using biofuel.
The Environmental Protection Agency proposal is a first step in fulfilling President Donald Trump’s promise to unleash sales of gasoline containing 15 percent ethanol and deliver at least a symbolic victory to corn farmers in the Midwest who have been battered by his trade fight with China. Air pollution requirements currently block sales of that E15 gasoline from June 1 to Sept. 15 in areas where smog is a problem, and the EPA proposal would effectively lift those restrictions so it could be sold year round.
At the same time, the administration is seeking to mollify some independent oil refiners that complain about volatile prices and possible hoarding of the credits required to prove they have satisfied annual biofuel blending quotas.
The EPA is asking the public to weigh in on possible trading restrictions on those credits, known as Renewable Identification Numbers, despite warnings from large integrated oil companies and truck stops that changes in the thinly traded RINs market could do more harm than good.
Trump committed to both moves during an event last October in Iowa, the heart of the U.S. corn belt, saying the E15 shift would help farmers.
“Consistent with President Trump’s direction, EPA is working to propose and finalize these changes by the summer driving season,” EPA Administrator Andrew Wheeler said in a news release.
The agency will take public comments on the proposal and plans to hold a public hearing on March 29. Administration officials are aiming to finalize it before June 1, when the seasonal fueling restrictions block sales around the country.
The EPA’s move comes as the agency seeks to balance competing oil and biofuel industry interests and prepares to approve a slew of requests from refineries seeking to be waived from annual renewable fuel quotas.
If the EPA proposal survives legal challenges, it could help grow the domestic market for ethanol over the long run, though analysts say gains could take a while to materialize.
Most gasoline sold in the U.S. today contains 10 percent ethanol, and only about 1 percent of filling stations now sell E15. But ethanol advocates say waiving E15 from seasonal fueling restrictions will drive more filling stations to offer the higher-ethanol blend, removing the roadblock of needing to change pumps and labels seasonally.
Ethanol plants, mostly concentrated in the corn-rich U.S. Midwest, could use the boost. Margins have been poor amid a supply glut that’s been exacerbated by the trade hubbub with China. Green Plains Inc. Chief Executive Officer Todd Becker told analysts last month that the industry collectively may have burned through about $1 billion in cash to weather the rough environment.
“With ethanol plants shutting down or idling, and farmers experiencing the worst conditions in more than a decade, removing the summertime ban on E15 once and for all would send a desperately needed signal to the marketplace,” said Geoff Cooper, president of the Renewable Fuels Association.
Ethanol has traditionally traded at a discount to gasoline and that should help drive adoption of the higher blend, Cooper said. The trade group is pushing EPA to separate the E15 component from the proposed RIN changes, arguing the combination could slow the process.
Ethanol’s gain comes at the expense of the oil industry, which has lobbied against the move and vowed to fight it in federal court. The American Petroleum Institute has argued the EPA should abandon the entire effort, asserting that the E15 change risks engine damage in older vehicles, the move flouts federal law and that the proposed RIN changes do nothing to solve more fundamental problems with the U.S. biofuel mandate.
“The agency’s proposed changes to the RINs market could increase costs for fuel producers and lead to higher prices for consumers,” said API Vice President Frank Macchiarola. “The proposed changes move the goal posts for U.S. energy companies that have already made capital investments and business decisions” based on the current program.
The EPA is asking the public to weigh in on several restrictions to the holding and trading of RINs, including largely limiting sales of credits tracking ethanol consumption to fuel exporters, importers and refiners. The agency also is proposing to require companies that aren’t obligated to satisfy biofuel quotas to sell or retire RINs they obtain each quarter.
A proposed two-part holding limit on RINs tracking ethanol consumption is designed “to prevent potential accumulation of market power.”
Under the limit, details would be revealed about companies holding more than 3 percent of the credits necessary to satisfy an implied nationwide target for conventional biofuel as well as more RINs than needed to meet 130 percent of their individual quotas.
The agency also is asking the public to comment on whether exceeding the thresholds should be barred altogether. The EPA raises the possibility of further changes, such as employing a third-party monitor to analyze the RIN market and screen it “for potential anti-competitive behavior.”
Some independent refiners, including Valero Energy Corp., have argued that trading restrictions would help rein in the RINs market and decrease compliance costs.
“Refiners, small-business owners and consumers concerned with the potential for price spikes and manipulation also welcome long-overdue action to propose needed reforms,” said the Fueling American Jobs Coalition, which represents some oil refiners and station owners.
(Adds proposal details and industry reaction.)
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