Bearish for ethanol producers & blenders; Bullish for independent refiners who spend hundreds of millions to buy RINS for compliance.
The Environmental Protection Agency (EPA) is considering a policy change to the Renewable Fuel Standard (RFS) regulations that would allow biofuel exports to generate credits for use by refiners to comply with the law.
Under current regulations, any biofuel that is exported loses its Renewable Identification Number (RIN) credit that is attached to each gallon of fuel. The change in policy would mean that an additional 1.2 billion of gallons of biofuel, mostly ethanol, that were exported in 2016 would now generate additional RINS available to refiners to comply with annual biofuel mandates.
The 2017 EPA RFS mandate is 15 billion gallons of renewable fuels. Adding more RINS from another 1.2 billion gallons of exported biofuels would send prices of tradable RINS credits crashing.
We believe the White House and EPA support making the policy change to have ethanol exports generate new RINS. Refiners are hoping EPA will make the change in the final 2018 RFS rule due to be released about November 30, 2017.
However, the policy change may be viewed by agency lawyers as needing its own rulemaking – a process that takes 6-12 months. But even a proposed rule on the export change would trigger a big drop in RINS prices. We think a new proposed rule is the more likely route.
But corn state political pressure on the White House to reject the change will be enormous. President Trump won Iowa in the 2016 general election and has repeatedly expressed his support for ethanol.
However, the ethanol exports change puts the renewable fuels industry in a tough position because it doesn’t make sense for them to oppose a provision that incentivizes exports.
The Bipartisan Policy Center issued a 61-page report in December 2014 entitled “Options for Reforming the Renewable Fuel Standard.” One of its recommendations on page 30 was to “allow exports of biofuels to meaningfully contribute to the RINS program.” The reported cited the advantages of allowing exports to generate RINS: “this approach supports more domestic production” and “may provide a better and more steady incentive for domestically produced fuels.” The full report is available here.
Moreover, adding extra RINS from exports does not affect ethanol production. Of course, the real reason the industry and others oppose it is because they enjoy record profits from high RINS prices.
