Biden’s Climate Goals Will Boost Ethanol for Now

Source: By Jinjoo Lee, Wall Street Journal • Posted: Thursday, January 28, 2021

Oil refiners and ethanol producers’ collective pain hasn’t done much to align their interests

The next four years are expected to be tough for oil refiners seeking relief from Renewable Fuel Standard quotas for blending ethanol and biodiesel.

In the tug of war for former President Donald Trump’s favors, oil refiners won some surprising victories over ethanol producers. Their fortunes are about to flip under President Joe Biden’s climate-driven administration.

The fate of U.S. oil refiners and ethanol are inextricably linked through the so-called Renewable Fuel Standard, which sets annual quotas for the quantity of ethanol and biodiesel that must be blended into transportation fuels. The burden of meeting the blending requirements falls on those that refine or import oil. Those unable to meet any given year’s quota must fulfill it by buying Renewable Identification Numbers (RINs) in the open market from those who have blended gallons to spare.

But sometimes the price of those RINs becomes excessively burdensome. Much to the ethanol industry’s chagrin, the Environmental Protection Agency issued 85 exemptions for refiners unable to meet the required blending requirements under the Trump administration—a big jump from the 23 given out during Barack Obama’s second term (prior to that, small refiners were automatically exempted). Exemptions are granted if refiners can prove they were unable to meet obligations without running into “disproportionate economic hardship.” The issue came into focus in 2018 when refiner Philadelphia Energy Solutions went bankrupt, partly blaming Renewable Fuel Standard-related payments. That same year refiner CVR Energy, owned by former Trump adviser Carl Icahn, also got a valuable exemption.

The next four years are likely to be tougher for oil refiners seeking relief. For one, the 10th U.S. Circuit Court of Appeals ruled in January 2020 that the Environmental Protection Agency wrongly exempted three refineries from renewable fuel requirements. Its ruling also narrowed down the number of refiners that would qualify for future exemptions. Since that ruling, RIN prices have skyrocketed, fetching about 10 times what they did a year ago, according to data from S&P Global Platts. The U.S. Supreme Court is set to take up the case after two refiners appealed the decision.

The Biden administration has signaled climate issues as one of its priorities. New leadership at the EPA will be in charge of determining blending obligations for 2021, which the previous administration didn’t set by the Nov. 30 deadline. The new volume obligations likely won’t emerge until the second half of the year. Corey Lavinsky, director of global biofuels at S&P Global Platts, notes that Biden’s EPA is likely to set strong mandates for 2021 and 2022 and to enforce them.

While that will be welcome news for the ethanol industry and corn farmers, it has potential to cause more pain for refiners—particularly the smaller ones already hurt by the collapse in volume and margins due to the pandemic. RINs are generated only by those that actually blend ethanol with the gasoline, which tends to happen later in the distribution process. Integrated refiners such asPhillips 66 and Marathon Petroleum can meet their obligations without having to buy them from the market, but those with less-robust distribution systems—including HollyFrontier, PBF Energy and Valero Energy—must buy RINs to meet their obligations. Notably, PBF Energy and HollyFrontier have lost 61% and 36% of their value over the past 12 months, respectively.

Of course, 2020 was also a tough year for the politically-influential ethanol industry, which needs healthy transportation demand. Rubbing salt in the wound was the Trump administration’s trade war with China, which caused a drop in ethanol exports. Rising corn prices also have squeezed ethanol producer margins.

The two industries are at loggerheads, and exemptions aren’t the only issue. The ethanol industry group Renewable Fuels Association is in favor of a national low-carbon fuel standard, which the American Fuel & Petrochemical Manufacturers—the industry group representing oil refiners—opposes. The AFPM’s preference is to push for a national octane standard that would replace the Renewable Fuel Standard—a move that doesn’t jibe with the ethanol industry. Ethanol is an oxygenate that boosts octane levels, but producers prefer hard nationwide quotas.

While the climate-friendly administration is likely to help the ethanol industry in the short run, the larger collective threat for both is that of electric vehicle–friendly policies. “It will be interesting to see how ethanol and biodiesel interests potentially line up with their gasoline and diesel counterparts,” notes Susan Lafferty, partner at law firm Eversheds Sutherland.

There is nothing like a shared threat to bring enemies together. For now though, one industry’s gain will continue to be the other’s pain.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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