Texas Requests RFS Waiver

OMAHA (DTN) -- Texas Gov. Greg Abbott has become the second governor to ask the U.S. Environmental Protection Agency for a waiver from the Renewable Fuel Standard. Abbott asked EPA Administrator Scott Pruitt on Friday to cap the amount of ethanol in the Texas gasoline pool at 9.7%.

In November, Pennsylvania Gov. Tom Wolfe asked for a similar waiver. Both governors claimed in letters to Pruitt that refiners and the economy in general are being hurt by costs to comply with the RFS. The agency can grant waivers to the law if petitioners prove it causes severe economic harm.

"Current implementation of this dated federal mandate severely impacts Texas' otherwise strong economy and jeopardizes the employment of hundreds of thousands of Texans," Abbott said in a letter to Pruitt. "It should come as no surprise that RFS is of major importance to Texans and Texas industry."

Texas has 29 refineries that produce more than 5.1 million barrels of oil daily, or about one-third of the capacity in the United States. The state leads the country in crude oil production and refining. The state's oil and gas sector employs 315,000 people, generating state tax revenue.

"This revenue goes toward funding Texas schools, Medicaid and children's health insurance programs, child protective services, infrastructure and first responders such as police and firefighters," Abbott said in the letter. "Texas has the largest concentration of jobs in the refining industry worldwide, so it goes without saying that the economy of the oil and gas sector is absolutely critical to the economy of the Lone Star State."

In particular, Abbott argues, refiners are being hurt by the costs to comply with the RFS through the volatile prices of renewable identification numbers, or RINs.

"The escalating and unjustified RIN prices are creating a severe economic hardship for refiners, small retailers, consumers, skilled labor and others," he wrote. "In recent years, RIN, which are mere pieces of paper created to demonstrate compliance with RFS, have escalated in price to over $1.40 per gallon of ethanol equivalent and are traded on a dark market subject to manipulation and even fraud. RIN were originally assumed to be a no-cost or low-cost measurement of compliance, yet now industry finds itself spending billions of dollars on these credits annually.

"These dollars are not taxes, but massive wealth transfers from the petroleum refining sector to blenders and traders. Texas companies directly suffer from spike RIN prices."

RIN COSTS

In an interview with DTN in 2016, Scott Irwin, Laurence J. Norton chair of agricultural marketing for University of Illinois at Urbana-Champaign, said that although the oil industry laments RIN prices as hurting their bottom line, the reality is those companies typically pass along the higher costs to consumers.

"There is a massive misunderstanding of RINs prices," Irwin said. "A huge issue is the pass-through issue. What is argued is the different parties in the fuel supply chain are big winners and losers on that 90 cents (price of credits this fall). Merchant refiners say they are short RINs, have to buy them and it is killing profits. It is complete bunk."

Gas stations are points of RFS obligation. Irwin said it is unlikely retailers absorb RFS compliance costs; instead, they pass it on to consumers. "We know that's how sales taxes work," he said. "It's not necessarily 100%, but it is close."

An Informa Economics study, however, found changing credit prices between 2013 and 2015 did not lead to higher gasoline prices. IE wrote in a May 2015 whitepaper for the Renewable Fuels Association that changes in credits prices from 2013 to 2015 "did not cause changes" in retail gasoline prices. The study found gasoline prices were driven mainly by movements in crude oil prices and gasoline demand.

Irwin said one way to understand biofuel credits is to think of them as a gasoline tax. Gasoline taxes ultimately show up as higher pump prices.

"This is exactly what happens," he said.

"What they (oil and gas companies) will say is that on their income statements they have to book a large expense for RINs, but they have a bump in revenue because of increased blend stock prices that never shows up," Irwin said.

TEXAS BENEFITS

Renewable Fuels Association President and CEO Bob Dinneen said Texas has benefitted from the RFS.

"Gov. Abbott's waiver request doesn't come anywhere close to meeting the very high threshold required by the statute for proving 'severe harm,'" he said in a statement to DTN. "The truth is, the RFS is helping, not harming, the Texas economy by offering greater consumer choice, lower-cost fuels, and thousands of jobs in ethanol production and agriculture. While Texas is always labeled as a big oil and gas state, the RFS has supported a burgeoning renewable fuels industry in the Lone Star State as well."

According to the RFA, there are four ethanol plants operating in Texas and 199 stations offer E85 and other flex fuels. In addition, dozens of Texas stations sell E15, and the state touts one of the largest numbers of flex-fuel vehicles in the nation.

"Gov. Abbott's waiver request ignores this critical Texas industry and would undermine the significant economic benefits it offers each and every day," Dinneen said.

The RFA said the agency's threshold for action specifically says that "an impact on any particular industry would not trigger a waiver.

"Rather, the agency will look at the impact on the economy as a whole and with ethanol today being less expensive than gasoline, and providing consumers significant savings at the pump, that is a threshold that simply is not met today."

Two weeks ago, a Wells Fargo analysis that examined studies from Harvard University, MIT, the University of Michigan, Iowa State University, and others, concluded that merchant refiners recoup their RIN costs through higher refining margins.

"When these facts are properly taken into consideration, it is clear that EPA has no choice but to deny Gov. Abbott's request for a waiver of the RFS requirements," Dinneen said.

Abbott said in the letter the time was "ripe for EPA to grant substantive relief from the unique, adverse impacts the RFS" has on his state.

"The extreme, detrimental impacts on large portions of the refining sector have now placed unacceptable burdens on the Texas economy and the economy and security of the nation as a whole," he said. "The program is now placing tremendous burdens on industrial and retail employment, and capital expansion and construction in the refining sector."

Read Gov. Abbott's full letter here: http://bit.ly/…

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

Follow him on Twitter @toddneeleyDTN

(AG/ES)

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