Midwest Lawmakers Blitz White House as EPA seeks Lower Biodiesel Mandate

Brian Milne - DTN Refined Fuels Editor,
November 17, 2017

US senators, representatives and state governors largely from the Midwest took the White House by storm in mid-October in response to a late September notice from the US Environmental Protection Agency seeking data and comments for the justification in reducing the volume requirement for biomass-based diesel under the Renewable Fuel Standard.

On July 5, EPA submitted its 2018 RFS proposal for public comment that modestly reduced demand requirements under the program. While seen as a mixed bag for farm states and a missed opportunity by biodiesel proponents whom sought a volume increase in the biomass-based diesel nested category, the proposal provided guarded optimism for the biofuel industry considering widespread concern the Trump administration would make dramatic changes to the RFS despite Trump’s insistence that he would support the program.

The July proposal set the demand mandate for the RFS for 2018 at 19.24 billion gallons, including 15 billion gallons for conventional renewables that are overwhelmingly satisfied by corn-based ethanol – the maximum allowed under the program. The proposal cut the demand mandate for the advanced biofuel and cellulosic biofuel nested categories to 4.24 billion gallons and 238 million gallons, respectively, while leaving the volume requirement for biomass-based diesel unchanged at 2.1 billion gallons for 2018 and 2019.

“In closing, we strongly recommend that EPA finalize the [Renewable Volume Obligation] levels that were included in the initial draft proposal sent to the White House Office of Management and Budget for review in May 2017: 384 million gallons of cellulosic biofuel; 4.38 billion gallons of advanced biofuel; and 19.38 billion gallons of total renewable fuel,” said the Renewable Fuels Association, a Washington, DC-based trade group for the ethanol industry.

In its comments, the National Biodiesel Board sought an increase in the advanced biofuel volume for 2018 from 4.24 billion gallons to 4.75 billion gallons or higher and the biomass-based diesel volume for 2019 to at least 2.5 billion gallons, with biomass-based diesel the only nested category to have its demand mandate proposed for two years. The trade association argued that the US biodiesel industry has plenty of unused production capacity, and the higher mandate for the advanced biofuel is needed to grow the market.

While proponents argued for higher volume requirements, the oil industry sought deep cuts in the RFS mandate or an outright repeal.

“Acknowledgment of the high cost of compliance has been a long time coming, and we are grateful that this EPA proposal comes closer to reflecting what the market has shown year after year – the mandated levels of advanced, cellulosic, and biodiesel in the RFS are unrealistic. Nevertheless, the mandates for conventional and advanced biofuels are still too high – either exceeding demonstrated domestic biofuel production or the ability to use more biofuel than vehicles, engines, and the fueling infrastructure can handle,” the American Fuel & Petrochemical Manufacturers said July 5.

So, the issuance on September 26 of a Notice of Data Availability seeking reasoning to reduce RFS volume obligations stunned the biofuels industry while cheered by the oil industry. US Senator Chuck Grassley, R-Iowa, who has championed the RFS for years and said President Donald Trump had assured him of his support for the program, suggested the EPA was pulling a bait-and-switch, and promised retaliation by holding up nominations for the agency.

“Unfortunately, the Environmental Protection Agency’s proposals seem to take us backward, not forward. While I have appreciated the accessibility of the EPA and have had many positive conversations about the RFS, I have some significant concerns with the direction the agency appears to be taking,” said Iowa Governor Kim Reynolds.

Spot biodiesel prices were under pressure following the NODA release despite advancing ultra-low sulfur diesel fuel prices, with New York Mercantile Exchange ULSD futures trading at a 27-month high on the spot continuous chart in late September. Spot biodiesel prices frequently trade in a cash differential against the futures contract. The value for Renewable Identification Numbers, credits used to show compliance with the RFS that trade in the open market, plunged to six-month lows.

The onslaught of legislators and governors, mainly from the Republican Party, appeared to get their message heard, with reports indicating Trump told the EPA on October 18 to stand down in the agency’s efforts to weaken the RFS. RIN values shot up on the news with the belief the NODA is a dead letter amid the building political support for the RFS.

When considering the arguments raised by the EPA in its September notice tied with the Trump administration’s protectionist tendencies however, the mid-October win for RFS proponents appears to be a tactical retreat by the White House, with the final rule due by November 30.

In their notice, EPA raised concern that there would be an adequate supply of biomass-based diesel for several reasons, including a higher cost for blenders and consumers of biodiesel following the lapse of a $1 gallon tax credit, which expired on the last day of 2016. The EPA’s argument is the cost of biodiesel for the blender increased $1 gallon because of the lost tax subsidy, which would diminish demand.

EPA is also seeking comments and data on the effect to domestic supply with the loss of imports from Argentina and Indonesia after the US Department of Commerce made a preliminary ruling in August imposing duties on imports from the two countries in response to an antidumping and countervailing duty petition. The US Department of Agriculture said the United States imported a record volume of 692.9 million gallons of biodiesel in 2016, up 96% from 2015, with almost 65% or 448.5 million gallons of the biodiesel imported from Argentina.

“With the current administration, it is a real possibility that foreign renewable fuel sources will not be allowed to participate in the [RFS] program. If this occurs, the cost of the program will increase due to the added cost of the domestic biodiesel,” said Thomas Hogan, P.E., senior vice president with Dallas-based Turner, Mason & Company.

EPA’s NODA is looking to thread the needle in triggering a waiver from the biomass-based diesel mandate by seeking comments on what justifies inadequate domestic supply and severe economic harm. A court ruling in July suggests securing a waiver from the RFS will be a challenge, with the court focusing on Congress’ intent in establishing the law – The Energy Independence and Security Act. The court said the RFS is a market forcing policy designed to increase demand for renewable fuel.

“EPA repeatedly highlights the comments and concerns from the oil industry commenters that the phrase inadequate domestic supply should be considered in light of the Congressional intent that the RFS improve U.S. energy independence and security,” writes Jonathan Coppess with the University of Illinois Department of Agriculture and Consumer Economics in their farmdoc daily series.

Coppess disagrees with the analysis, pointing to the market forcing policy mechanism.

In addition to these provisions, there has been lively discussion on attaching RINs to exports that would significantly add to the availability of RINs in the open market since RINs are now stripped from exports. During the first seven months of 2017, US ethanol exports totaled 810.7 million gallons, according to the Energy Information Administration.

The EPA has heaped a pile of uncertainty upon US biodiesel producers of which they haven’t experienced despite years of working through the ambiguities of the federal government. This uncertainty will undoubtedly chill investments and slow production in the short term, with spot biodiesel and RINs trading now captured in a headline driven market.