Farmdoc: RIN Cap Damages RFS

OMAHA (DTN) -- Capping the price of biofuel credits at 10 cents would essentially eliminate the Renewable Fuel Standard mandate for biodiesel and possibly hurt corn-based ethanol, according to an analysis by farmdoc at the University of Illinois Urbana-Champaign.

In meetings with President Donald Trump's administration in recent weeks, Sen. Ted Cruz, R-Texas, proposed capping the price of renewable identification numbers, or RINs, at 10 cents as a way to control RFS compliance costs.

A new analysis by farmdoc, however, said capping RINs essentially would be waiving RFS requirements to blend more biofuels.

In addition, the analysis by agriculture economists Scott Irwin and Jonathan Coppess in the department of agricultural and consumer economics at Illinois, said such a cap likely would violate the U.S. Environmental Protection Agency's RFS waiver authority, as well.

Farmdoc said any biodiesel price below $2.64 per gallon would lead to no biodiesel blending, making a 10-cent cap unfeasible.

Further, a 10-cent cap would be the same as waiving the biomass-based diesel mandate "down to zero, the total advanced mandate down to zero (assuming cellulosic is eliminated by the cap as well), and the conventional ethanol mandate down to the level of the E10 blend wall or lower."

One year ago, the $1 blenders tax credit for biodiesel expired and has not been renewed.

Farmdoc said if a 10-cent cap was in place and the $1 credit renewed, the mandated biodiesel blending would be about 876 million gallons -- far below current RFS volumes. The most recent renewable volume obligations in the RFS set the biodiesel number at 2.1 billion gallons, and the industry has said it could produce about 2.6 billion gallons.

CORN ETHANOL HURT

Farmdoc said the proposed cap would hurt corn-based, conventional ethanol by knocking the mandate "down to the level of the E10 blend wall or lower."

Cruz offered the proposal on behalf of oil refiners. In response, biofuel industry leaders sent a letter to the president last week with details on why the RIN market exists, how it is operated by EPA, and some of the problems EPA has in providing transparency on RIN trading.

RINs are generated when a qualified renewable fuel is either produced or imported. RINs then are bought within the refinery industry by companies that are not producing or buying enough renewable fuels to meet their blending obligations.

There are several nested categories for RINs depending upon the renewable -- such as corn ethanol or biodiesel -- which do have different values. D6 is considered the baseline RIN.

The Cruz proposal is for the EPA to sell a 10-cent, fixed-price waiver credit that would qualify as a RIN and satisfy a petroleum blender's obligations. The proceeds from the 10-cent waiver sales would help pay for renewable-fuel blending infrastructure, tied to an existing program such as the Biofuel Infrastructure Partnership or a similar fund.

The senator also proposed the establishment of a working group, including administration officials, to find a long-term solution the RIN issue.

Further, Cruz has not released his confirmation hold on Iowa Agriculture Secretary Bill Northey's nomination as a USDA undersecretary.

The farmdoc analysis said the conventional ethanol mandate is at the E10 blend wall or lower if a 10-cent price cap is implemented.

"If the blending margin on ethanol is positive, then: 1) the conventional ethanol mandate would be equal to the E10 blend wall because it is profitable to blend ethanol up to the physical maximum, and 2) the D6 ethanol RINs price would be at most a few cents, well under the 10-cent cap," farmdoc said.

"If the blending margin on ethanol is negative, then the conventional ethanol mandate would be below the E10 blend wall and reduced to the point where the D6 ethanol RINs price would be 10 cents, the capped price level. Since the blend margin on ethanol has generally been positive, the first scenario where the conventional ethanol mandate equals the E10 blend wall is most likely."

WAIVER AUTHORITY

Farmdoc said a 10-cent cap would essentially offer a waiver to complying with the RFS. With cellulosic ethanol as an exception, the agency can waive the RFS mandates in three scenarios.

First, biomass-based diesel volumes can be waived if there is a significant disruption of feedstock or other market problems that lead biomass-based diesel prices to spike.

Second, EPA can waive RFS mandates if there is likely to be severe economic harm. Third, the agency can waive the RFS if there is inadequate domestic supply of biofuels.

"There is no legitimate cause for direct waiver of any portion of the RFS outside of these three explicit authorities," farmdoc said.

"Because a cap on RINs prices operates as a waiver by other means, it also must be justified. There is now considerable guidance from the courts on the limits to these authorities, which would present a substantial challenge to justifying the imposition of a RINs price cap."

Read the farmdoc analysis here: http://farmdocdaily.illinois.edu/…

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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