Trump Photo by Ron Sachs-Pool/Getty Images

Trump orders federal agencies to boost biofuel-blending quotas

Trump sides with farmers, ethanol producers and political leaders in Iowa

By Jennifer A. Dlouhy and Mario Parker

President Donald Trump, seeking to tamp down political fallout in U.S. farm states essential to his re-election, has ordered federal agencies to shift course on relieving some oil refineries of requirements to use biofuel such as corn-based ethanol.

Trump and top cabinet leaders decided late Thursday they wouldn’t make changes to just-issued waivers that allow small refineries to ignore the mandates, but agreed to start boosting biofuel-blending quotas to make up for expected exemptions beginning in 2021. The outcome was described by four people familiar with the matter who asked not to be named before a formal announcement could be made.

The decision was reached after a flurry of White House meetings this week on the issue, which divides two of Trump’s top political constituencies: rural Americans and the oil industry. With the move, Trump is largely siding with farmers, ethanol producers and political leaders in Iowa that have accused the president of turning his back on the industry.

But the administration’s shift risks blowback in Pennsylvania and other battleground states, where blue-collar refinery workers have held rallies to push for relief from U.S. biofuel quotas they say are too expensive. The largest coalition of U.S. building trades unions on Thursday warned Trump that changing course on exemptions would betray the president’s “campaign promise to protect every manufacturing job.”

Encouraging E15

“President Trump is committed to ensuring our country not only continues to be the agricultural envy of the world, but also remains energy independent and secure,” White House spokesman Judd Deere said.

Iowa-based biodiesel producer Renewable Energy Group Inc. climbed as much as 4.5% on the news, and traded up 5.5% to $11.64 at 1:50 p.m. in New York. Pacific Ethanol Inc. and Green Plains Inc. briefly gained before resuming losses as the U.S.-China trade war showed signs of deepening with the latter announcing plans to levy additional tariffs on American-made goods and Trump promising to respond.

Administration officials agreed to the broad contours of a renewable fuel plan, including further moves to encourage the use of E15 gasoline containing 15% ethanol, beyond the 10% variety common across the U.S. E15 could be dispensed alongside conventional ethanol blends at filling stations, under the drafted changes.

EPA’s Plan

Under the tentative plan, the Environmental Protection Agency also will give a 500-million-gallon boost to the amount of conventional renewable fuel, such as ethanol, that must be used in 2020. A separate quota for biodiesel, typically made from soybeans, would get a 250 million gallon increase.

Additionally, the administration will enhance a program meant to expand U.S. fueling infrastructure and get more ethanol into the system. The EPA will adopt an Agriculture Department assessment of the greenhouse gas emissions associated with renewable fuel, and will expand environmental credits encouraging automakers to produce “flex-fuel” vehicles that can run on high-ethanol gasoline.

Iowa Backlash

The EPA has drawn intense criticism for its Aug. 9 decision to exempt 31 refineries from 2018 biofuel-blending requirements. Although federal law authorizes the waivers for small refineries facing an economic hardship, the number of those exemptions has surged during the Trump administration, and biofuel producers say they are being handed out too freely.

The backlash has been most severe in Iowa, the nation’s top producer of ethanol and the corn used in its manufacture. It is also critical for Trump’s re-election; the state twice voted for Barack Obama before voting to send Trump to the White House in 2016.

Trump’s Democratic challengers have seized on the issue, with frontrunner Joe Biden accusing the president of lying to farmers and abandoning a campaign promise to “unleash ethanol.”

However, EPA officials and oil industry leaders say the waivers haven’t harmed domestic ethanol demand and blame a glut of the product for suppressing prices. Trump’s trade war with China has exacerbated the industry’s economic challenges. As with U.S.-grown agricultural products, including soybeans, ethanol faces retaliatory tariffs in China.

Latest Blow

Against the backdrop of tariffs, the exemptions delivered another blow to the U.S. Midwest, where guaranteed domestic ethanol demand helps provide a floor of support for corn farmers and buttresses swings in commodity prices. Ethanol refining accounts for about 40% of U.S. corn consumption.

American “agriculture has a problem if ethanol doesn’t do well,” Green Plains Inc. chief executive officer Todd Becker said in a telephone interview on Thursday. The Omaha, Nebraska-based company created a political action committee last month, and Becker told analysts in May that Green Plains plans to “engage” 2020 U.S. presidential candidates on ethanol policies.

Becker said he “can’t fault” Trump for getting tough on China, but the combination of the trade war and small refinery exemptions was causing too much pain. “You don’t fight China and then give out SREs,” Becker said. “Farmers are furious now.”

Biofuel Quotas

Agriculture Secretary Sonny Perdue had urged the White House to rescind some of the recently issued waivers -- at least those for refineries tied to “big” oil companies -- according to an Aug. 20 memo obtained by Bloomberg.

EPA officials successfully argued that would be illegal.

Instead, Trump directed the agency to increase biofuel quotas to make up for the exemptions, a so-called “reallocation” that will effectively boost the burden for larger refineries that are not eligible to win waivers. The EPA will start incorporating expected exemptions into annual biofuel quotas beginning with 2021.

Oil industry leaders blasted the tentative agreement on Friday, saying it would do little for U.S. farmers while hurting domestic refiners.

“Reallocation would be a major hit to fuel manufacturers in Pennsylvania and Ohio -- and refinery workers across the country -- with zero benefit to ethanol,” said Derrick Morgan, a senior vice president with the American Fuel and Petrochemical Manufacturers. “Those celebrating will ultimately be foreign biofuel producers whose biodiesel is being imported to help meet mandates.”

‘Arbitrary’ Policy

The EPA typically sets each year’s biofuel blending requirements by Nov. 30 of the preceding year, except for biodiesel quotas, which are set two years in advance. Under the U.S. Renewable Fuel Standard program, there’s a specific mandate for biodiesel, but the soybean-based product can also be used to satisfy an implied 15 billion gallon quota for conventional renewable fuel.

Frank Macchiarola, a vice president at the American Petroleum Institute, called the drafted plan a “rushed, arbitrary policy.”

“We hope the administration walks back from the brink of a disastrous political decision that punishes American drivers,” Macchiarola said. “Bad policy is bad politics.”

Although the tentative plan was meant to assuage biofuel allies, it’s not clear it was having the intended effect Friday, amid industry skepticism the EPA will follow through on the agreement. Iowa officials are preparing to visit Washington for a formal rollout of the policy changes.

Biodiesel industry advocates say they can produce more fuel -- and the Trump administration needs to take that into account.

“With a level playing field in biodiesel trade in 2018, domestic producers increased output by several hundred million gallons,” said National Biodiesel Board spokesman Paul Winters. “We can continue to do so -- as long as EPA stops using RFS waivers to destroy demand and put biodiesel producers out of business.”

--With assistance from Jennifer Jacobs.
To contact the reporters on this story:
Jennifer A. Dlouhy in Washington at jdlouhy1@bloomberg.net;
Mario Parker in Chicago at mparker22@bloomberg.net
To contact the editors responsible for this story:
Jon Morgan at jmorgan97@bloomberg.net
Elizabeth Wasserman, Ros Krasny
© 2019 Bloomberg L.P.
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