EPA Proposes Corn-Ethanol Cuts to RFS

LINCOLN, Neb. (DTN) -- The Biden administration on Tuesday announced proposed cuts to the Renewable Fuel Standard, the rejection of all pending small-refinery exemptions and the approval of federal aid to biofuel producers hurt by the COVID-19 economic shutdown.

The EPA proposal calls for retroactive cuts to the corn-ethanol portion of RFS volumes below 15 billion gallons at 12.5 billion for 2020 and sets the level at 13.32 billion for 2021.

The proposal delivers a victory to oil producers who have been asking for cuts to conventional ethanol for some time. The agency would then increase corn-ethanol volumes to 15 billion gallons in 2022.

The negative RFS news for biofuels and agriculture was offset by EPA's proposed rejection of the pending 65 small-refinery exemption requests for 2016 through 2021. As part of the announcement, EPA proposed a new method for determining who receives exemptions.

Also, USDA announced the approval of $800 million in aid for biofuels producers hurt by the COVID-19 economic shutdown.

Ahead of the official announcement, the price of corn-ethanol renewable identification numbers, or RINs, took a major hit.

Tom Kloza, co-founder of the Oil Price Information Service, or OPIS, reported on Twitter, "Ethanol RINs (80cts) getting clobbered on speculation of EPA release of lower compliance numbers." The price is the lowest since January.

In total, the Biden administration would retroactively cut 2020 RFS volumes by nearly 3 billion gallons from the final 20.09 billion gallons to 17.13 billion gallons. The EPA proposes setting the overall numbers for 2021 at 18.52 billion gallons and at 20.77 billion gallons for 2022.

DTN Lead Analyst Todd Hultman said the RFS cuts for 2020 and 2021 are in line with lower gasoline demand. U.S. gasoline demand was down 13% in 2020 and down about 5% so far in 2021.

The petroleum industry and supporters in Congress have been calling for EPA to lower the 2020 RVO figure to fall more in line with the lower overall fuel usage that came with the pandemic shutdowns that froze fuel usage in spring 2020.

The agency's proposal also retroactively cuts the 2020 volume number for advanced biofuels such as biomass-based diesel from 5.09 billion gallons to 4.63 billion. EPA then proposes setting the advanced number at 5.2 billion in 2021 and 5.77 billion in 2022.

"Despite multiple challenging dynamics affecting the RFS program in recent years, EPA remains committed to the growth of biofuels in America as a critical strategy to secure a clean, zero-carbon energy future," EPA Administrator Michael Regan said in a news release.

"This package of actions will enable us to get the RFS program back in growth mode by setting ambitious levels for 2022, and by reinforcing the foundation of the program so that it's rooted in science and the law."

PROPOSED SRE CHANGES

The EPA said in a news release its rejection of all pending small-refinery exemption requests was in response to a decision rendered by the U.S. Court of Appeals for the 10th Circuit in Denver.

"This decision, issued in 2020, narrowed the situations in which EPA can grant SREs," the agency said.

"EPA is sharing a proposed adjudication of pending SRE petitions that presents EPA's approach in applying the direction from the court. The proposed decision document articulates the agency's updated interpretation of its CAA statutory authority to grant SREs, and our analysis of the available data on RFS costs and market dynamics that compel the proposed denial."

The EPA announced it was opening a public comment period for its "updated interpretation" of the Clean Air Act that would be "highly consequential" to refining companies.

EPA PROPOSES 500 MILLION-GALLON REMAND

EPA also proposed to add a 250 million-gallon "supplemental obligation" to the volumes proposed for 2022 and said it intends to add another 250 million gallons in 2023.

"This would address the remand of the 2014-2016 annual rule by the D.C. Circuit Court of Appeals in Americans for Clean Energy v. EPA," the agency said in a news release.

"Spreading this obligation over two years would provide the market time to respond to this supplemental obligation."

REACTION TO PROPOSAL

Democratic House Biofuels Caucus Reps. Cindy Axne, Iowa; Angie Craig, Minnesota; and Ron Kind and Mark Pocan, Wisconsin, said in a joint statement the EPA proposal begins to get the RFS back on track.

"After months of unnecessary delay, we are glad that the EPA has released the long-overdue renewable volume obligations," they said.

"The 2022 number sets the biofuels industry on the right path moving forward. And the end of the abuse of small-refinery exemptions -- which provide relief to oil companies at the expense of family farmers -- is welcome news."

The Renewable Fuels Association said the proposal was a "modest step in the right direction" despite EPA's attempt to retroactively cut 2020 volumes.

"We recognize that the previous administration left the RFS program in total disarray when it departed Washington, and today's package from EPA marks an important step toward finally putting the RFS back on track," RFA President and CEO Geoff Cooper said in a statement.

"However, today's proposals do not quite get us all the way there, and more work is needed to ensure the RFS drives maximum growth in the production and use of low-carbon renewable fuels."

Growth Energy CEO Emily Skor gave the EPA proposal a mixed review.

"EPA's projection of strong biofuel blending requirements in 2022, commitment to halt illegal refinery exemptions, and long-awaited progress toward complying with a 2017 court order on lost gallons represent a welcome step forward," she said in a statement.

"However, we are extremely disappointed EPA has proposed rolling back requirements for 2020 and lowering volumes for 2021."

American Fuel and Petrochemical Manufacturers President and CEO Chet Thompson said the proposal would increase RFS compliance costs for refiners.

"So much for the Biden administration being concerned about rising energy costs," he said in a statement.

"The 2022 proposal would needlessly increase already record-breaking RFS compliance costs which, in turn, will raise the cost of producing gasoline and diesel for U.S. consumers. The RFS is broken and must be fixed."

Sen. Charles Grassley, R-Iowa, said on Tuesday morning that he and other lawmakers representing biofuel-producing states have had no communication with the Biden administration on the RFS.

"I want you to know that as major state that produces a lot of biofuels, I have not had the courtesy of any comments or any update from the administration," Grassley said during a press call with agriculture journalists ahead of the announcement.

"All I can tell you is that his (EPA Administrator Michael Regan's) promise for consultation hasn't been held because I haven't been in consultation with him. And I haven't heard that he's following through with consultation with the ethanol industry."

USDA BIOFUELS AID

Hoping to offset any bad news from EPA, USDA released up to $800 million to help support biofuel producers.

USDA released $700 million of promised economic relief through the new Biofuel Producer Program to help address losses in sales early in the pandemic when lockdowns scaled back consumers from buying fuel. Payments will be based on the producer's market loss volume in 2020, which is calculated by the amount of fuel produced in 2020 in comparison to 2019.

U.S. Agriculture Secretary Tom Vilsack credited Biden for providing the aid to biofuel producers, though much of it had been authorized by Congress as far back as a year ago. An aid package approved by Congress in late December last year authorized USDA to provide coronavirus relief to the biofuels industry.

"As we continue to rebuild the nation's economy, USDA is targeting resources and investments to improve the strength and resiliency of America's sustainable fuel markets," Vilsack said.

"The relief we're announcing today will pave the way to economic recovery for America's biofuel producers, stimulate a critical market for U.S. farmers and ranchers and move the country closer to President Biden's goal of net-zero carbon emissions by 2050."

In the coming months, USDA also will release another $100 million for biofuel infrastructure such as blender pumps, to help increase the sales and use of higher blends of ethanol and biodiesel.

The Renewable Fuels Association said in a statement the economic relief was welcomed.

"Ethanol producers are still struggling to recover from COVID-related market losses after what has been the most difficult and trying time in the industry's history," said Cooper.

"At the peak of the pandemic, more than half of our nation's ethanol capacity was idled. To this day, many plants remain offline or are operating at reduced output rates and the pandemic has cost the industry well over $5 billion in lost revenue. We are grateful to USDA Sec. Vilsack and the Biden administration for finalizing this relief package to help our industry recover, as well as the additional infrastructure funding."

Read more on DTN:

"EPA Sends RFS Volumes Proposal to OMB," https://www.dtnpf.com/…

"Biden Admin to Delay Late RFS Proposals," https://www.dtnpf.com/…

DTN Ag Policy Editor Chris Clayton contributed to this story.

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

Follow him on Twitter @DTNeeley

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