Refiners Argue EPA Can Cut Biofuel Quota Despite Defeat in Court

(Bloomberg) -- Refiners told the U.S. Environmental Protection Agency to cut biofuel quotas for 2018, arguing that a federal court decision against the agency shouldn’t prevent it from setting targets below levels enshrined in law.

The administration of President Donald Trump still has the authority to waive congressional biofuel levels to avert economic or environmental harm, refiner Valero Energy Corp. and oil industry trade groups said at an EPA hearing on the issue Tuesday in Washington. Economic harm could result, industry groups said, if refiners are forced to blend more than 10 percent ethanol into the fuel supply, a level the oil industry dubs the blend wall.

"The ethanol blend wall is a real constraint on today’s fuel supply system that makes the statutory volumes unattainable and limits the use of ethanol," said Frank Macchiarola, a group director at the American Petroleum Institute, which represents oil companies such as Exxon Mobil Corp.

Nothing in a ruling by a federal court in Washington last week "clips the wings of the EPA" to set lower biofuel quotas that avoid economic harm, said Scott Segal, a Bracewell LLP lobbyist representing Valero. "Severe harm can be established on a number of fronts."

Biofuel producers such as Poet LLC, however, argued that ruling largely handcuffs the EPA, forcing the government to require the use of 15 billion gallons of ethanol and more next generation biofuel next year and for years to come.

The dueling opinions illustrate the challenge facing Trump and EPA Administrator Scott Pruitt as they try to fulfill political promises to help corn farmers in the Midwest, appease oil companies eager to protect market share and live within the contours of a biofuel mandate created last decade when the U.S. was hooked on imports of Mideast crude.

In a unanimous ruling Friday, a three-judge panel sided with ethanol producers in saying the EPA was wrong to justify setting lower quotas for 2016 based on constraints in demand, such as limited infrastructure to deliver the product to consumers or the availability of higher blended fuel mixes. For years, the oil industry has argued that the congressional target in the Renewable Fuel Standard push refiners past a 10 percent blend wall for ethanol in gasoline -- the amount that can be easily blended because it is acceptable in all cars and trucks. Ethanol producers argued that was the entire point of the law.

Most gasoline sold in the U.S. is E10, or 10 percent ethanol. Higher ethanol blends, including E15 and E85, are not available at all filling stations and not all vehicles can use them, oil industry leaders said Tuesday.

Trump’s EPA has proposed requiring the use of 15 billion gallons of conventional renewable fuels in 2018 -- the maximum allowed for that category in law -- while lowering proposed quotas for advanced alternatives that have been slow to commercialize, including cellulosic ethanol made from corn stalks and other non-edible materials. The agency is set to finalize the 2018 targets before the end of this year.

The Side of Pessimism

Biofuel groups complained that the reductions for advanced biofuel use will curtail growth in the market.

"The agency has erred on the side of pessimism with regard to the potential for significant growth in cellulosic ethanol," said Bob Dinneen, head of the Renewable Fuels Association. The "spirit and intent" of the law was to "maximize the nation’s use of these fuels, to drive marketplace innovation and investment in these new technologies, and to make the U.S. more energy diverse."

Jan Koninckx, DuPont Co.’s global business director for advanced biofuels, said Trump’s EPA used a flawed methodology to estimate potential cellulosic ethanol production and propose requiring 238 million gallons of it for 2018. That’s down from 311 million gallons required this year.

"EPA must revisit the process used in the current proposal for cellulosic ethanol and follow its own guidance and process used for the 2016 and 2017 cellulosic" quotas, Koninckx said.

Higher advanced biofuel targets would help drive innovation and spur more production, said Pete Ricketts, the governor of Nebraska.

Still, overall, EPA’s "proposal is consistent with the president’s statements of support for the corn ethanol industry," Ricketts said.

With assistance from Mario Parker.To contact the reporters on this story: Jennifer A. Dlouhy in Washington at jdlouhy1@bloomberg.net; Ari Natter in Washington at anatter5@bloomberg.net. To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net Mark Drajem.

Copyright 2017 Bloomberg News.

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