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Robert Rapier

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Ethanol Industry Suffers Major Blow

Ethanol supporters were certain conditions for them would improve following Environmental Protection Agency (EPA) Administrator Scott Pruitt’s resignation. As Oklahoma’s Attorney General, Pruitt had sued the EPA over the Renewable Fuel Standard (RFS). As EPA Administrator, Pruitt was generally viewed as hostile to the ethanol industry.

One of the biggest sources of contention was that Pruitt granted waivers to a number of refineries that sought relief from their ethanol blending quotas. As stipulated within the Energy Policy Act of 2005, hardship waivers are only offered to the small refineries producing 75,000 barrels a day or less that the EPA says face “disproportionate economic hardship” after reviewing their applications and profiles. Granting hardship waivers to those who need them was part of the original RFS plan.

Granting hardship waivers to those who need them was part of the original RFS plan. However, the ethanol industry argued that the waivers were being granted too liberally, and they were being granted in many cases to huge refiners like Valero.

Following Pruitt’s departure, Andrew Wheeler, who was Pruitt’s second-in-command, took over as EPA Administrator. He furthered angered the ethanol industry by granting a batch of new waivers to refineries that requested them. Iowa Senator Chuck Grassley blasted the decision on Twitter and complained that these “ridiculous RFS waivers” would translate into “nearly a billion bushels of corn demand lost.”

Senator Grassley and other ethanol proponents were angry that EPA is allowing the waivers to reduce the overall blending requirement to below the RFS mandate. They want the RFS requirements to be raised to make up for previous losses due to the waivers.

But according to Dr. Scott H. Irwin, the Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois at Urbana-Champaign, these waivers do not even reduce demand for renewable fuel blends. In a Jan. 16 study, he said: “the data now clearly show that small refinery exemptions (SREs) under the RFS have not reduced physical ethanol use.” Related: Can This Former Oil Giant Become Energy Independent?

Now, a federal appeals court has denied a renewable fuel group’s attempt to block the EPA from issuing SREs to the Renewable Fuel Standard.

The renewable group, known as the American Biofuel Association (ABFA), claimed that the EPA improperly considered a number of factors in its granting of SREs– an argument that the appeals court dismissed as unsubstantiated.

“ABFA’s criticisms merely reflect its disagreement with EPA’s reasonable application of its discretion. In a facial challenge, this is not enough,” it wrote.  “ABFA must show that there are ‘no set of circumstances’ in which EPA’s approach would be valid. EPA appropriately considered information included in DOE’s analysis and other economic information.”

Irwin’s study confirmed that the EPA’s issuance of SREs has not caused demand destruction:

There continues to be considerable interest in whether small refinery exemptions (SREs) under the RFS have ‘destroyed’ demand for ethanol in the physical market. It seems obvious that this would be the case since SREs have had the effect of annually waiving more than a billion gallons of the conventional ethanol mandate under the RFS since 2017.  However, the analysis in two earlier farmdoc daily articles (September 13, 2018December 13, 2018) provides little evidence that the aggregate blend rate for ethanol has been reduced by SREs.”

Related: The Bad Gas Deal That Brought Down A Prime Minister

The northeast has relied on these hardship waivers because of the high cost of complying with the RFS ethanol mandate. Northeast refineries like Philadelphia Energy Solutions have filed for bankruptcy as a result of the costs associated with it already. For these reasons, Dr. J. Winston Porter, a former assistant administrator of the EPA, says that eliminating the small refinery exemptions could jeopardize the security of the entire RFS:

Ironically, failing to continue issuing hardship waivers represents the true threat to ethanol demand and the existing scope of the Renewable Fuel Standard. Should the EPA refrain from saving the small refineries struggling with the compliance costs, as was the intent of the law all along, bankruptcies will ensue, energy competition will fall. The EPA will then have no choice but to significantly lower renewable fuel volume obligations to prevent further instability. Is that really what the law’s proponents want?”

While the ostensible basis of ABFA’s concerns is that the EPA’s granting of SREs has created demand destruction on farmers, ethanol production remains at an all-time high.

Senator Grassley and other ethanol supporters are unlikely to be pleased with this decision, but perhaps they would be better served to focus on the trade war with China. That has certainly created a great deal of demand destruction for farmers.

By Robert Rapier

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Leave a comment
  • Howard Hull on June 03 2019 said:
    And now the whole of corn country is flooded and we will be short of supply. What will we do!

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