Another Year of Uncertainty for Biofuels

As we approach the end of 2018, we reflect on a year that was full of surprises for the biofuels industry.
By Michael McAdams | October 30, 2018

As we approach the end of 2018, we reflect on a year that was full of surprises for the biofuels industry. What stands out the most was former U.S. EPA Administrator Scott Pruitt’s application of small refinery exemptions (SREs) under the Renewable Fuels Standard to purposefully lower the value of D6 RIN credits. This action was not prompted by “disproportionate economic harm,” as was purported. Rather, this was a clear abuse of power to deliver the economic outcome that Pruitt personally desired for his supporters in the refining industry. In the end, he successfully transferred hundreds of millions of dollars from parties in compliance with the RFS to parties who were not.

Including exemptions granted to parties who had never before received them, the agency has now granted nearly 50 exemptions for compliance years going back to 2015. This exempted 2.25 billion RINs that were dumped into the market for 2018, creating a surplus of RINs for the current compliance year. Because of these extra RINs in the marketplace, in 2018, we will ultimately not blend the mandated 19.88 billion gallons. In this manner, these SREs have essentially undercut the proposed renewable volume obligations for the entire year, and if the situation is not rectified, it will continue to do so in 2019.

Since the news of these SREs began to leak in March, the price of the conventional D6 RIN has dropped significantly. Today, the price differential is in the neighborhood of 60 cents. The D4 biomass-based diesel RIN has also dropped to a four-year low to under 40 cents.

It is evident that EPA somehow altered the criteria it utilizes for granting these exemptions without any publically disclosed process. When evaluating the applications for these exemptions, up until now, EPA has required all of the mandated criteria to demonstrate disproportionate economic harm be met, not just some of the criteria. Now, we do not know what standard is being applied. So far, the Advanced Biofuels Association has yet to receive a response to its Freedom of Information Act request for information on the who, what, when and how these SREs were granted. It has been over five months since we filed the request.

Acting EPA Administrator Andrew Wheeler has made some progress toward increasing transparency for these SREs since taking the helm at EPA. In the past month, the agency has launched a dashboard to track the number of SREs applications received, the number granted for each compliance year, and the volume of gallons affected by these exemptions. This is a good first step, but we remain in the dark regarding who received these exemptions, when they received them, and on what grounds the determination of “disproportionate economic harm” was made.

Ultimately, we remain concerned that without intervention from the court, EPA will move forward with the same approach on SREs in 2019, and that the exemptions will have similar effects on the RIN market in the coming year. This would be devastating, particularly for those in the biomass-based diesel space, where producers report that demand was reduced significantly as a result of the compliance waivers. The RFS statute never intended for these waivers to have a 15 percent impact on the overall RVO. At this level, they undermine the entire intent of the program as written by Congress. As the acting administrator observed, at least it will be more difficult to argue disproportional economic harm for these small refineries when the D6 RIN price has dropped by approximately 75 percent for the majority of 2018.

Industry stakeholders must continue to insist that EPA increase transparency on when, and on what grounds, they grant these waivers. There are currently three lawsuits pending before the federal court, challenging the EPA’s ability to increase by four times the number of waivers granted for any previous year. Hopefully, the court will shed some light on what happened, and direct the agency to be more judicious in its application of the standard. Otherwise, 2019 stands to be another year of confusion and lack of certainty for the RFS program.

Author: Michael McAdams
President, Advanced Biofuels Association