Will Obama slash ethanol mandate?

Source: By DARREN GOODE Updated: 11/11/13 7:06 PM EST, Politico • Posted: Tuesday, November 12, 2013

The Obama administration may be about to hand the oil industry a major victory by reducing the federal requirement for blending ethanol into fuel — a decision with big implications for farm-state politics, food prices and the nation’s energy markets.

As early as Tuesday, the Environmental Protection Agency is expected to announce how many billions of gallons of ethanol it will require refiners to blend into gasoline and diesel fuel in 2014. If it sticks with a draft version that leaked in October, the agency will lower the amount to 2012 levels.

The debate over how much ethanol should be forced into the American gasoline supply pits powerhouse special interests against each other. On the pro-ethanol side: the renewable fuels industry, corn growers and many Midwestern lawmakers. On the anti-ethanol side: the oil industry, restaurant owners, livestock and poultry producers and, increasingly, a disenchanted environmental movement that no longer believes the plant-based fuel is a greener alternative to fossil fuels. In addition, a new generation of tea party Republicans — viscerally opposed to government mandates and fuel subsidies — has joined the fight against ethanol.

The EPA’s decision, just three months after the agency hiked the long-overdue 2013 ethanol mandate despite the oil industry’s pleas, could mark a shift in momentum in the biofuels wars. Congressional leaders are talking about rewriting the law that created the mandate, while oil lobbyists continue to fight to repeal it entirely.

The feud cuts across party lines: A Republican-led Congress created the mandate in 2005, a Democratically controlled Congress strengthened it in 2007 and President Barack Obama’s administration has steadily enforced it each year he’s been in office.

The debate over the 2014 requirements has brought a steady stream of lobbyist foot traffic to Pennsylvania Avenue, with pro-ethanol groups and their foes from the oil, food and restaurant industries holding almost daily meetings with the White House in the past few weeks. Republican Iowa Gov. Terry Branstad has stepped up on the ethanol side, holding three phone conversations on the issue with administration leaders like Environmental Protection Agency Administrator Gina McCarthy and Agriculture Secretary Tom Vilsack.

“The governor shared his concerns at the highest level because he wanted to underscore the importance of the RFS in diversifying our nation’s energy portfolio, giving consumers [a] choice and breaking Big Oil’s monopoly on transportation fuels, and in reducing harmful emissions from petroleum-based fossil fuels,” Branstad spokesman Tim Albrecht said by email.

Ethanol backers are threatening to file a lawsuit if EPA scales back the mandate. The agency can reduce the volume mandate for traditional biofuels — corn ethanol — only if the requirements would harm the economy or environment, or if “there is an inadequate domestic supply,” according to the law.

“None of those three have been met,” said Jon Doggett, vice president for public policy at the National Corn Growers Association.

But the law does not say supply of what. The oil industry argues that the language refers to the amount of gasoline blended with biofuels that could be physically sold in the U.S. The ethanol industry says it means the amount of ethanol that can be produced in or imported to the U.S.

Ethanol supporters say a pullback would contradict Obama’s goals of reducing dependence on oil and lessening vehicles’ carbon dioxide emissions.

Meanwhile, the American Petroleum Institute has already gone to court to challenge the EPA’s 2013 ethanol requirement, and has threatened a lawsuit if the agency doesn’t finalize the 2014 mandates by Nov. 30, as required by the law. Oil industry supporters are likely to join the courtroom fray over the 2014 mandate as well, since EPA may not reduce the requirements as much as they want.

Opponents say the mandate distorts fuel markets and will raise gasoline prices, especially as the increased blending requirements collide with declining demand for gasoline. They also note that production of “cellulosic” forms of ethanol from sources like husks and switchgrass have been a small fraction of what Congress expected six years ago.

The EPA twice so far — in 2012 and 2008 — denied requests by several governors of major livestock-producing states that wanted waivers to the mandate. Those included Texas Gov. Rick Perry, who argued it drove up corn prices during a drought.

“This isn’t oil versus corn,” said Stephen Brown, vice president and counsel for federal government affairs at the oil-refining company Tesoro. “This is a lot of interests, of which oil is one of them, arrayed against corn.”

The mandate, known as the renewable fuel standard, requires gasoline refiners to use specific amounts of corn and cellulosic ethanol, biodiesel and other plant-based alternatives. The 2007 law requires the amounts to increase each year, although EPA is responsible for setting the numbers and enforcing the requirements.

The players in the debate aren’t really new and neither are their arguments. But the fight took on a new intensity in October, after the leaked EPA draft suggested that the agency for the first time will lower, instead of increasing, the annual mandate. The draft called for lowering the number from the congressionally prescribed 2014 mandate of 16.55 billion gallons to about 15.2 billion gallons.

Two months before that, EPA had hinted that a shift was coming, announcing it intended to scale back next year’s volume requirements to levels “that are reasonably attainable.” Still, the October leak caught corn ethanol backers by surprise.

“‘Shocked’ would be a minor word” for how ethanol supporters reacted to the leak, Doggett said. “None of us ever thought there would be a discussion about reducing the corn numbers.”

The EPA’s reasoning in the draft partly matches the oil industry’s arguments about the impending so-called blend wall: Because people are driving less and cars are becoming more fuel-efficient, gasoline consumption in the U.S. is declining. That means refiners will soon reach the physical limit of how many gallons of ethanol they can blend into the gasoline supply — unless the mandate is scaled back, the oil groups argue.

Biofuel supporters say the blend wall is a myth crafted by the oil industry to maintain its corner on the gasoline market. They argue that the law was intended to force more widespread use of gasoline blended with larger percentages of ethanol, higher than the now-common 10 percent.

The leaked draft “was the first hard evidence that the administration agrees with the concept of a blend wall that is likely to be hit in 2014,” Tesoro’s Brown said.

McCarthy tried to calm the waters, stressing in a statement last month that the EPA had made no decision. But Renewable Fuels Association President Bob Dinneen, who heads one of the top ethanol industry groups, said he expects the agency to reduce the mandate.

“The EPA has adopted the oil companies’ narrative with respect to the blend wall,” Dinneen said.

Lobbyists on both sides have held two dozen meetings with the White House, EPA and other branches of the administration since Sept. 19. They include representatives of ExxonMobil, PepsiCo, Kraft Foods, DuPont and Honeywell, and major trade associations like the American Petroleum Institute, the National Corn Growers Association, the Renewable Fuels Association and the Grocery Manufacturers Association.

Besides the mandate itself, the oil industry has complained about wide swings in the price of the biofuel credits that the EPA requires refiners to buy. The price went from pennies to more than $1 per gallon at one point this year — evidence that the blend wall is approaching, the oil groups say. Buyers also have been hit by a flood of fraudulent credits, prompting refiners to complain that the EPA is failing to police the market.

Ethanol backers argue that oil companies are manipulating the crisis over the blend wall and the biofuel credits by refusing to build more infrastructure to support higher ethanol blends.

The issue eventually may come back to Congress, where ethanol’s once-powerful congressional lobby — including former House Speaker Dennis Hastert, Senate GOP leader Bob Dole and Senate Democratic leader Tom Daschle — has withered.

House Energy and Commerce Committee Chairman Fred Upton (R-Mich.) and ranking member Henry Waxman (D-Calif.) are talking about how to potentially modify the renewable fuels mandate in a way that may freeze or scale back the corn ethanol requirement while preserving the ability of other alternative fuels to blossom. The negotiations may not move forward with corn ethanol-friendly lawmakers like Rep. John Shimkus (R-Ill.), a senior member of the committee.

Sens. Dianne Feinstein (D-Calif.) and Tom Coburn (R-Okla.) have recently formed an unusual marriage on the issue, producing a bill that would cut the corn ethanol mandate but leave the requirements for advanced biofuels.

House Majority Leader Eric Cantor (R-Va.) met with oil industry representatives during the summer, where the potential option of tying an ethanol deal to a must-pass debt ceiling plan was discussed. He is close friends with Delta Air Lines lobbyist Andrea Newman, who with other officials at the airline met with White House and EPA officials Oct. 22 on the requirement for 2014. Delta bought an oil refinery in Pennsylvania in 2012 to help lower jet fuel costs.

But any real movement on legislative proposals probably won’t happen until next year, if at all during this Congress, increasing the focus on how the EPA handles the mandate.