The secretive market for trading biofuel compliance credits between Wall Street banks and other private interest may be in its last days, as the Donald Trump administration prepares to crack down on the shady practice. The ramped-up attention from the federal government comes in response to complaints of credit hoarding and volatile prices. The United States Environmental Protection Agency (EPA) will present several plans for confronting the issue in the next few weeks, according to Bloomberg’s reporting based on insider information from anonymous sources.
The issue primarily revolves around a system of Renewable Identification Numbers (RINs) used to track government credits originally intended to give refiners and importers more leeway when it comes to meeting what some argued were too-high annual biofuel quotas. What began as a simple solution to a compliance problem, however, quickly transformed into a financial commodity, with the value of these RINs seeing massive peaks and troughs in accordance with any new policy developments coming out of the federal government. There have also been accusations of corruption in the RINs market, with some independent refiners decrying that the market is rife with speculation and manipulation, with traders abandoning previously negotiated sales, fraudulent bids to artificially inflate prices, and more.
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One vocal critic of the RIN system has been billionaire Carl Icahn, who owns the majority of the independent oil refinery CVR Energy Inc. Icahn publicly denounced the credit system as “rigged” and in need of an overhaul. Under pressure from industry heavyweights such as Icahn, last year President Trump directed the EPA to develop a plan for reforming the problematic biofuel compliance credit system, a directive that came down at the same time that his administration ended fueling restrictions for high ethanol content gasoline.
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The EPA’s plans for reform, which are due to be released in the coming weeks, will not be limited to any one single approach. It is anticipated that regulators will lay out various potential system changes which will be made available for public comment. The EPA is open to applying more than one change in order to fix the RIN market in the best possible manner.
Reportedly, one of the potential solutions under consideration would set a cap at 120 percent of the biofuel blend obligations for refiners and importers in an effort to discourage private companies from collecting and hoarding credits to sell off during a price spike. Other proposed fixes include enforced transparency of how many RINs each market participant possesses over a certain threshold, putting a cap on how long a company or trader can sit on any one RIN, and limiting who can trade the credits to strictly “obligated parties” (in other words those refiners and importers who have to use the credits when proving that they’ve met their biofuel mixing quotas for the year).
The EPA’s biofuel credits and quotas system has been at the middle of a widespread debate for several years now, and not just because of problematic RINs market trading. Biofuels quotas are smack in the middle of a power struggle between the oil and agriculture industries. As the Trump administration has eased and walked back strict Obama-era biofuel blend requirements, the biofuels industry, and therefore the U.S. corn industry, has been hit hard. Under Trump a massive amount of biofuels waivers have been granted to refiners who are all too eager to skirt costly biofuel quotas.
The current debate over the RINs is just one more wrinkle in an already complicated and divided industry. The EPA is working on their proposals to fix the RINs market at the same time that they are already working on a massive reorganization of the existing biofuels mandate that would establish new targets for renewable fuel use through the year 2022.
By Haley Zaremba for Oilprice.com
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