Ethanol Blog

As the EPA prepares a proposed rule to allow year-round E15 sales and to reform the biofuels credits market, the American Petroleum Institute released a white paper on Tuesday that argues reforms are not needed.

Instead, the API paper points to the need to reform the Renewable Fuel Standard itself in response to concerns about the market for Renewable Identification Numbers, or RINs.

Though the API held a press conference on Tuesday to announce the release of the white paper, essentially the content was nothing new. The group used the occasion to continue to call for RFS reform, and to oppose year-round E15 in restating it will keep open its legal options.

Calls for RINs reform rang out as a wave of refiners and others have expressed concern about market price volatility, and the costs of complying with the RFS. Philadelphia Energy Solutions filed for bankruptcy protection in recent years, claiming it was driven to the brink of financial ruin by exorbitant RINs prices.

Sen. Ted Cruz, R-Texas, and others used the PES situation as a platform for pushing RFS reform.

The API study on Tuesday, however, essentially dismantles the narrative that RINs costs are hurting refiners.

"Moreover, EPA's and others' studies have repeatedly found that RIN purchasers -- even small and independent refineries -- are generally able to recover their RIN costs in the price of the gasoline they sell," the API white paper said. "Accordingly, EPA has explained that there is no economic harm to RIN purchasers, even if RIN prices are high, because those costs are recouped in the gasoline blend stock and diesel. For these reasons, EPA should be extremely cautious before embarking upon radical changes to the long-standing RIN market.

"As noted above, EPA has found that obligated parties, including merchant refiners and small refineries, 'are charging more for domestic gasoline and diesel to ensure that they recoup the costs associated' with RFS compliance, and so on average there is no negative economic impact on RIN purchasers. EPA has also noted that even assuming small refineries, which tend to rely on the RIN market, are unable to recoup their compliance costs, the estimated maximum compliance cost-to-sales percentage was at most '.006%,' a negligible amount. EPA thus concluded that 'there is no net cost to small refiners resulting from the RFS program.'"

The EPA reportedly is set to propose a number of reforms that may include prohibiting or limiting non-obligated parties from buying and selling RINs, setting a limit for how long RINs can be held, and may allow RINs holders to retire the credits in real time so as to stem a flood of credits hitting the market at a given time.

Obligated parties to the RFS including refiners and others, are allowed to buy RINs or blend biofuels to comply with the law.

"At bottom, this broad academic consensus indicates that the fundamental problems with the RFS relate to the blend wall, EPA's imposition of regulatory mandates to use particular volumes of biofuel, policy uncertainty, and ongoing policy changes," the API white paper says.

The white paper includes a graphic that shows the ups and downs in RINs prices, and how they correlate with EPA actions on the RFS, as well as a number of political events.

For instance, RINs prices dropped when EPA released volumes for 2014 to 2016, in 2015, then spiked when the agency finalized the rule. After the EPA proposed the 2017 RFS volumes, the RINs price rallied in the summer of 2016. After President Donald Trump won election and announced Scott Pruitt would head the agency, RINs prices dropped dramatically. Following a White House meeting on an RFS compromise in 2017, the prices dropped again.

What's more, the API white paper reiterates that neither EPA nor the Commodity Futures Trading Corp., have found manipulation of the RINs market by traders who may be short RINs. The API makes the case that if traders were concerned about such manipulation, they would have invested in blending infrastructure.

"But the desire of some market participants to gain a windfall on RIN pricing by skewing the market in favor of RIN purchasers is not a proper basis on which to reorder the RIN market," the white paper said. "Moreover, if those entities short on RINs truly thought that RIN prices were inflated and manipulated, they presumably would have invested in their own RIN generation infrastructure to avoid the need to rely on the RIN market.

"A number of potential drastic alterations of the RIN market have been proposed. These suffer from a variety of legal, economic, and practical flaws. As a threshold matter, these various proposals are founded on a mistaken premise: that hoarding and market manipulation are driving up RIN prices and causing price volatility. Both EPA and the CFTC have made clear that they do not have any information suggesting that hoarding or manipulation is affecting the RIN market.

"Moreover, the consensus in the literature that is the blend wall and EPA's mandates are the drivers of volatility and high prices. In the absence of evidence of hoarding or manipulation, it would be imprudent for EPA to make major changes to the operation of the RIN market, which has been in place for over a decade and has created significant reliance interests based on its longstanding structure. That is particularly so given EPA's repeated findings that obligated parties, including small and merchant refiners that are 'short' on RINs, generally recover the costs of the RINs they purchase in the gasoline they sell."

Read the white paper here: https://www.api.org/…

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

Follow me on Twitter @toddneeleyDTN

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