Should corn growers be nervous about Donald Trump?

Source: By Sam Brodey, MinnPost • Posted: Tuesday, April 11, 2017

There are a few sacred cows in midwestern politics — fried foods, state fairs, manufacturing jobs  — but lately, the most untouchable of them has been ethanol: ensuring that the fuel made from midwestern corn continues to be pumped into cars around the country.

On paper, President Donald Trump should be loath to mess with ethanol: He won the White House on the strength of a strong performance in farm country. Of the country’s top ten ethanol-producing states, only two — Minnesota and Illinois — did not break for Trump.

As president, however, Trump sent mixed signals on his fealty to a key aspect of ethanol policy, the Renewable Fuel Standard, or RFS, which determines the amount of ethanol that must be blended into the nation’s fuel supply.

Trump and certain deputies, like Secretary of Agriculture nominee Sonny Perdue and Environmental Protection Agency Administrator Scott Pruitt, have publicly stated their support of maintaining the RFS. But wary farm advocates are looking past those statements and into troubling hints that the Trump era could bring major changes to a policy that’s proven a significant boon to their business.

Some key advisers around Trump have it out for the RFS — in particular, billionaire investor Carl Icahn, who Trump admires and looks to for advice on economic issues. Icahn and others in the oil industry are eyeing a rule change to the RFS that appears minor but that could have significant effects on the business of ethanol in the U.S., if not undo the industry altogether.

An activist investor — and advisor?

Since its birth in 2005 as part of the Energy Policy Act, the RFS has largely enjoyed broad support from two different presidential administrations and both parties in Congress.

Making U.S.-produced biofuel an important part of the country’s energy supply was good politics in an era when the idea of buying oil from countries like Saudi Arabia was broadly unpopular, and when the public began to grow more concerned about fossil fuels’ impact on climate change.

Even as the U.S. began to produce more energy domestically, and science cast serious doubt on ethanol’s claims to eco-friendliness, the RFS was protected by sustained, organized lobbying from midwestern lawmakers in both parties, making the issue a third rail in states like Iowa — a serious consideration for any politician hoping to get, or keep, a job in the White House.

The EPA mandated in 2016 that 10.10 percent of the fuel supply must consist of ethanol. While there have been battles over the years on the level of ethanol that should be blended into the fuel supply, the program has never faced a legitimate threat.

In the eyes of industry allies, that changed with the election of Trump. Though he has voiced support for the RFS in speeches, the president quickly surrounded himself with advisers and cabinet secretaries with backgrounds in the oil and gas industry, which has lobbied to eliminate the RFS.

To lead the EPA, the agency tasked not only with setting ethanol levels in the RFS but enforcing them, Trump selected Pruitt, the former Oklahoma attorney general who once called the RFS “unworkable.” (In his confirmation hearing in the Senate, Pruitt stated that he would not undermine the RFS as EPA administrator.)

Then there is Icahn, another Queens-born billionaire who Trump named as his “special adviser” to overhaul — and dismantle — many federal regulations. Observers have pointed out that Icahn, who made his $13 billion fortune partly through ruthless corporate raiding in the 1980s, has vast financial holdings that raise several ethical red flags for a presidential adviser.

But particular scrutiny has come down on Icahn’s 82 percent stake in CVR Energy, a Texas energy company primarily involved in refining petroleum. Icahn’s deep involvement in the refining business has caused him to be a vocal opponent of the RFS, which he called “stupidity.”

Carl Icahn

REUTERS/Brendan McDermid

Carl Icahn is eyeing a rule change to the RFS that could have significant effects on the business of ethanol in the U.S.

Icahn’s objections are rooted in the complex supply chain and regulatory ecosystem surrounding the ethanol business. The RFS puts the obligation of mixing biofuel into petroleum onto a small group of about 150 oil companies, fuel importers, and petroleum refiners, who are responsible for ensuring that the fuel that makes it into your gas tank has the level of ethanol that’s required by the current RFS. The EPA is responsible for ensuring that they comply.

Ethanol is added into the fuel supply at so-called blending terminals. Some of these facilities are owned by major oil companies like ExxonMobil, who invested in the terminals as ways to make RFS compliance easier and cheaper. But some refining firms, like CVR Energy, did not invest in that infrastructure, instead going all-in on refining, and those refiners have to buy renewable fuel credits to meet their RFS obligations.

Concern over Icahn’s influence

The change that’s reportedly getting an audience in the Trump White House has to do with the so-called point of obligation, or whose responsibility it is to make sure that gasoline has the correct level of ethanol.

The refiners would like that burden to shift downstream in the ethanol supply chain, closer to the point of sale. In other words, to smaller blenders and retailers. By shifting it to them, refiners like Icahn’s would no longer have to buy ethanol credits, saving them a ton of money — as much as $200 million, in Icahn’s telling.

Last year, Barack Obama’s EPA, which generally supported a strong RFS, rejected that proposed rule change. But its proponents sensed an opening with the transfer of power to Trump: on March 24, U.S. refining executives traveled to the White House to speak with senior administration officials, including Trump’s senior energy adviser, about changes to the RFS. Reuters reported the news, characterizing it as a normal meeting, but also as a sign the administration is considering changes to the RFS.

It’s unclear what role Icahn played in orchestrating the meeting. But in the days that followed, the market responded positively to the prospect of changes: the value of CVR’s stock grew by over ten percent. That translated into a $126 million increase of the worth of Icahn’s holdings.

President Donald Trump

REUTERS/Carlos Barria

As president, Donald Trump has sent mixed signals on his fealty to a key aspect of ethanol policy, the Renewable Fuel Standard.

That alarmed a group of Senate Democrats, including Sens. Amy Klobuchar and Al Franken. Already concerned about Icahn’s role in Trump’s orbit, they sent a letter to White House counsel Don McGahn in February, and again in March, asking for more information about proposed changes to the RFS and anything Icahn may have done to push for them.

“We are concerned that his substantial and widespread private-sector investment present perverse incentives for Mr. Icahn in his role as a special advisor to the President,” the senators wrote. They cited a report from Public Citizen, the watchdog group founded by Ralph Nader, which claimed “this is the purest definition of a conflict of interest that you can get.”

Klobuchar, in an interview with MinnPost, said Icahn “comes out with this proposal that jacks up his own holdings by $100 million, his own portfolio, but would screw every small farmer and ethanol industry employee in the midwest.” (She said the White House has not responded to questions the senators asked in their letter.)

Icahn told CNN that conflict-of-interest allegations were “ridiculous,” and the White House has downplayed Icahn’s role in official business.

A complicated ripple effect

It’s clear how those in the refining business could benefit from this change to ethanol policy. But how would it affect the corn farmers and ethanol blenders who produce the final product, and the retailers that sell it?

Broadly, if the change were to be implemented, the RFS would be harder for companies to comply with and for federal regulators to enforce. By shifting the point of obligation, the group of 150 so-called “obligated parties,” would expand dramatically, anywhere from 1,000 to 1,500.

A significant chunk of that bigger group would consist of independent or smaller fuel retailers who largely don’t have the experience or staff power to comply with the rule or deal with the EPA. In turn, the EPA — facing 30 percent budget cuts under Trump — would have a harder time enforcing RFS with 150 parties, let alone 1,500.

According to Wally Tyner, an ethanol expert at Purdue University, that challenge represents a circle that may be too hard to square. “To say, we’re going to increase your difficulty in enforcing the RFS by a factor of eight, or ten, I don’t see how that could work,” he said. “It won’t work in the short run.”

“If you have a system like this that by nature is complicated,” Tyner explains, “you want to make it as simple as you can and meet the rules of the law, make enforcement cheaper and more efficient,” he explained.

If the change Icahn desires is made, Tyner says, “There’s a real fear that EPA couldn’t enforce the RFS anymore. They had trouble enforcing it for biodiesel even as it stands. There’s fraud all over the place.”

Though the change wouldn’t affect all retailers in the same way, most businesses that sell gas are not welcoming the proposal. One independent Minnesota petroleum retailer, Little Canada-based Minnoco, has vocally opposed changing current policy. Lance Klatt, Minnoco’s executive director, wrote in an op-ed that “Rewriting the RFS now to benefit the refining sector would create a logistical nightmare for fuel retailers, [and] raise costs.”

For farmers and allies of the ethanol industry, the negatives of the rule change are pretty clear: by making the RFS more complicated and difficult to enforce, it could defang the policy so much as to render it irrelevant.

Taking the Midwest for granted?

But this wonky-sounding change, if implemented, would have big impacts outside the ethanol and gasoline businesses, experts say.

For one, consumers would likely have to pay more at the pump for their gasoline. According to Jason Hill, a professor at the University of Minnesota, the increased compliance costs would get passed on to consumers. “Someone’s gotta pay the extra cost,” Purdue’s Tyner said.

Another consequence is that the Trump administration could have to deal with some nasty political backlash, and one that would have limited upside. The RFS, Tyner says, “costs very little. It’s a blip on any radar screen, a tiny blip. It’s quite possible that they’ll decide they’ll leave it alone, the political cost of messing with it is too great.”

The latter reason is why Klobuchar says she doubts Trump would go through with the change, adding that it’s rare to see big oil and corn groups on the same side of an ethanol issue. “That’s how out of the box his position is,” she said, referring to Icahn.

She said that the efforts of a group of senators, including farm country Republicans, has made a difference in deflating Icahn’s proposal. “Luckily, we pushed back hard,” Klobuchar said. “So far we haven’t seen that proposal be seriously put forward again. That’s what we have to do… We have to keep asserting ourselves to compete with an administration that’s given lip service to supporting ethanol, but is surrounded by people who made their living off oil.”

It’s unclear what the status of any RFS changes are right now. The White House has denied talk of an executive order, but ethanol advocates are reminding themselves that Trump’s unpredictability means that anything is possible.

For now, what is certain is that the RFS, and those in the ethanol industry, face a more dubious political climate than they have in a decade.

Klobuchar did point some cause for comfort: the increased political relevance of the Midwest, where Trump secured key support for his 2016 victory, and which he’ll need again if he wants to win. “People aren’t taking the midwest for granted anymore,” she said.