COLUMN-EPA offers palliative, not a cure, for RINsanity: Campbell

Tue Aug 6, 2013 2:28pm EDT

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By Robert Campbell

NEW YORK Aug 6 (Reuters) - Eight months after the legal deadline the Obama Administration has released the 2013 Renewable Fuels Standard rule. More importantly it promised waivers next year that will supposedly keep this badly designed law from inflating gasoline prices.

Is this a cause for celebration? Hardly anyone will be truly happy with this decision. The agricultural lobby will be dismayed by the tacit abandonment of the effort to dump ever more corn into the nation's fuel mix.

Those merchant oil refiners who do not blend their own fuel such as Valero or CVR Refining are still on the hook to buy up as many ethanol blending credits, known as RINs, as they were before.

The firms that profit from this set up - the traders and hedge funds that have been speculating on RINs as well as companies like oil major BP that blend more gasoline than they import and manufacture - will still be winners from this flawed system but even they must be wondering if it would be preferable to have a clear legal regime rather than an endless series of ad hoc fixes.

So what have the regulators done? They've thrown a bone to the losers in this trade in the form of an extended compliance deadline and a reduction of the unworkable advanced biofuels requirement that will ease the pressure on buyers for 2013.

But say you are a trader at one of the firms short RINs. How would you trade for 2014? Would you slow purchases in the hope that the Environmental Protection Agency's 2014 RINs rules are flexible enough to keep your requirements under control? Or do you instead keep buying to try and hoard 2013 RINs?

In essence all the EPA has done is admit that the Renewable Fuel Standard is irretrievably broken without offering a fix. And to be fair it is outside of the EPA's duties to fix the Renewable Fuels Standard (RFS) which is, after all, an act of Congress.

But the United States is now going through the spectacle of trying to enforce the functioning of a renewable fuels policy that it acknowledges is broken.

TIME TO ACT

The problem is, as we all know, extensive. The RFS assumes a gasoline market that is much bigger than it is in reality and one that is growing robustly rather than contracting. Nor are advanced biofuels anywhere near commercial availability. And finally it offers no solution to the thorny question of liabilities arising from the sale of fuel blends with more than 10 percent ethanol.

Fixing these issues means substantial changes to the RFS and the Obama administration seems to have signaled that it is willing to abandon the push to greater than 10 percent ethanol blending in conventional gasoline.

The biofuels industry is also unlikely to be very happy with this ruling. While backers had been ready to throw advanced biofuels requirements under the bus to preserve market share for conventional biofuels, such as corn derived ethanol, they were adamant that the fuels industry should simply be forced to shift to higher ethanol content fuel blends one way or another.

Now they face an abandonment of the policy of ever-higher blends of corn ethanol into the fuel mix in the name of keeping fuel cheap, ironically one of the original arguments for higher biofuels mandates.

No doubt this summer's saga of spiking RINs prices and the policy quagmire engendered by the flawed assumptions of the legislation underpinning the Renewable Fuels Standard will spur an effort within Congress to reform the system.

Any effort at change will likely trigger a colossal lobbying effort as the biofuels industry seeks to preserve its market while the oil firms try to crush the upstart rival. This sort of political set-to is hardly fertile ground for a sensible energy policy.

What's more likely to happen is either a cobbled-together compromise that pleases only entrenched interests or no reform whatsoever that leaves the EPA with no choice but to rely on waivers to mitigate the damage that would be caused by the RFS.

The real winners in this situation would be lawyers and lobbyists. No one else can plausibly say that there is a net benefit for the United States from the endless fighting over ethanol quotas, blending rules and pathways to compliance.

Yet there is a simple way out of this mess that cuts the lobbyists out of the equation. A simple requirement reserving a certain percentage of the fuel mixture for ethanol would streamline enforcement and compliance and allow for sensible long-term planning by all sides in the industry.

Fixing the blending requirement at today's levels in volume terms would ensure a smooth transition to the new regulatory regime and minimize disruption in both the oil refining and biofuels production industries.

Unfortunately achieving this sort of solution will require political leadership both from the Obama Administration as well as the factions in the U.S. Congress that back various aspects of the current regulatory regime. Does the will exist to overcome the poisonous atmosphere in Washington to fix this error or will a solution to the RFS become the latest victim of dysfunction in the American capital?

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