ANALYSIS: Retroactive cuts to US biofuel blend mandates unlikely to hit supply, demand

A potential retroactive lowering of biofuel blending obligations for 2020 is unlikely to affect biofuel supply and production, experts...

A potential retroactive lowering of biofuel blending obligations for 2020 is unlikely to affect biofuel supply and production, experts say, while compliance credits (RINS) could feel an impact.

Last Thursday, the Environmental Protection Agency (EPA) sent over a proposal on the blending requirements to the White House’s Office of Management and Budget for review.

“The proposal aims to get the (Renewable Fuel Standard) program back on track by setting targets that are forward looking and growth oriented, while addressing challenges stemming from decisions made under the prior administration,” an EPA spokesperson said in a statement to Fastmarkets.

The statement went on to express how the, “EPA will continue to engage with all RFS stakeholders to gather input and understand their concerns so that the final rule can achieve the program’s objectives.”

While the agency did not confirm the recommended action it proposed, industry conversations revolve around the EPA proposing to lower the mandate.

“If implemented, this retroactive lowering wouldn’t mean much for biodiesel – that’s a separate animal,” senior analyst at The Jacobsen Bob Lane told Energy Census.

The 2021 biomass-based diesel RVO was finalized last year and so it will likely stay at 2.43 billion gallons and have no effect, Lane said, “given that segment of fuel production over-produces each year relative to its RVO.”

To that effect, commodity broker at Frontier Futures J.R. Edmonson said that, given the cuts are retroactive to the Renewable Fuel Standard (RFS) mandates, it should not have an enormous impact on the current supply and demand of biofuels. 

Under the RFS program, refiners or importers of gasoline and diesel fuel must comply with renewable fuel blending mandates or obtain credits, RINs, to meet the EPA specified Renewable Volume Obligation (RVO).

“What it did was tank the D6 RIN market and take away some revenue from the biofuel producers who generate those RINs,” Edmonson said, adding that an initial drop recorded in mid-June came following a rumor that cuts were to be made, “with the most recent drop [documented] from the announcement.”

More broadly, total demand for RINs would fall, “if you cut the mandate for 2020, and because we haven’t yet finalized 2020 compliance,” University of Illinois agricultural economist Scott Irwin said, adding that therefore there is less total demand “by the magnitude of the cuts because of less compliance.”

“Think of 2020/21/22 as one big compliance pool right now – the size of the compliance pool for those three years will be reduced because they’re almost all happening simultaneously and that will directionally impact RIN prices,” Irwin said, adding that a potential lowering of the mandate will have little if any impact on corn given that the demand for corn in the form of ethanol “is almost entirely independent of RIN prices.”

Sources maintain however that a retroactive lowering is unlikely to happen due to a number of factors, including political hurdles and the fact that it has never been done before.

According to Grain Service Corp analyst Diana Klemme, the initial leaks were likely “trial balloons”, to gauge industry reaction ahead of a potential decision from the US administration.

“Talks on the mandate [remain] tied up in politics,” Klemme said, adding that at this stage there are currently “more questions than answers.”

“Biden is focused on energy efficiency, which is good, but at the mercy of oil refineries,” she said.

“The other route I can see is that they potentially just delay this decision, current RFS statues end after 2022,” Lane said, adding that at this point the EPA is at their discretion to apply applicable realistic volume requirements.

That said, “to my knowledge, a mandate in place has never been retroactively changed,” he said, adding that action would be challenged by industry groups and face “inevitable legal fights”.

Last week, 17 oil state senators signed a petition, calling on the Biden administration to lower the RVO for 2020 in order to ease mounting financial pressures due to soaring costs of RIN compliance credits.

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