U.S. EPA pauses biofuel deal over oil states' demands, impeachment probe -sources

NEW YORK/WASHINGTON, Oct 1 (Reuters) - The U.S. Environmental Protection Agency has temporarily halted work on a biofuels policy adjustment to help farmers as it awaits direction from the White House, four sources familiar with the matter told Reuters, raising the risk a proposal will not be ready in time to implement next year.

The causes of the delay include recent demands made by the representatives of the oil industry for concessions in the deal to boost biofuel use, as well as the launch by Congress of an impeachment inquiry against President Donald Trump that has diverted the administration’s attention, the sources said.

“EPA will continue to consult with our federal partners on the best path forward to ensure stability in the Renewable Fuel Standard,” an EPA spokesperson said. “The president will always seek to engage with stakeholders to achieve wins for the agriculture and energy sectors.”

The White House was not immediately available for comment.

In September, Trump had met with biofuel officials, farm- and oil-state senators and oil refining executives to hash out the details of a “giant package” related to ethanol that he had promised to farmers in August.

The deal was intended to assuage anger in U.S. farm country - a critical political constituency for Trump as he seeks reelection - over the administration’s recent decision to exempt 31 refineries from their obligations under the Renewable Fuel Standard.

The RFS requires oil refineries to blend biofuels, such as corn-based ethanol, into their fuel or purchase credits from those that do. But the EPA can grant waivers to refineries that process 75,000 barrels-per-day or less if they can prove that compliance would cause them disproportionate economic hardship.

The agriculture industry has said the waivers cut ethanol demand, hurting growers already suffering from lost foreign markets due to the U.S. trade war with China. The oil industry says the exemptions protect refining jobs and have no impact on the amount of ethanol that plants use.

As a result of the meetings, EPA began working on a supplemental notice to add some 5% to the 2020 biofuel blending quotas to make up for the small refinery waivers and effectively boost biofuel demand, two sources said.

The work ran into a delay after Trump held a meeting on Sept. 19 with senators from oil states who demanded a wider overhaul of the biofuels policy, potentially to include a price cap for the trading of the biofuel credits.

“That’s why everything has come to a grinding halt,” one of the sources said. “And then the impeachment inquiry happened and now the EPA is on hold for more guidance from the White House,” the source said.

House Speaker Nancy Pelosi announced last Tuesday that she was formally launching an impeachment probe into a Trump phone call with Ukraine’s prime minister, in which Trump asked for help getting information on the business dealings of presidential hopeful Joe Biden’s son.

The delay at EPA has raised the chances that the administration will not be able to alter next year’s biofuel volumes mandates to help farmers, a potential setback for Trump as he seeks to maintain support in farm country.

The deadline to finalize the RFS mandates for 2020 is Nov. 30, giving the EPA just two months to draft a plan, release it for public comment, and finalize it.

“They are putting together a supplemental rule-making that amends what they put out in June,” a second source with knowledge of the matter said, referring to the existing biofuel proposal for 2020 requiring 20.04 billion gallons (75.9 billion liters) of biofuels be blended into the nation’s fuel.

“Once they hear back from the White House, they will add to the supplemental,” the source said.

The deal initially reached for the supplemental proposal would have lifted the ethanol portion of the 2020 mandate by 500 million gallons, and the unconventional biofuels portion also by 500 million barrels. The proposal also would have added 250 million gallons to the biodiesel mandate for 2021.

Two sources said White House economic advisor Larry Kudlow was made the point-person over the biofuels issue and is seeking to reconcile differences of opinion between the EPA and the U.S. Department of Agriculture over biofuel policy. The EPA has tended to side with refiners, while the Agriculture Department has tended to lean toward the interests of growers.

“Kudlow has been part of it especially to the extent USDA and EPA don’t align,” said one source. (Reporting by Humeyra Pamuk and Stephanie Kelly Editing by Marguerita Choy)