June 8, 2017 at 5:00 am ET
The guessing game continues on what direction the Trump administration will push Environmental Protection Agency policy on the Renewable Fuel Standard, the federal law requiring biofuels such as ethanol to be blended into gasoline and diesel fuel. It remains an open question whether the EPA will pursue a policy shift. In 2007 and again in 2010, the EPA concluded, after vigorous review and consideration of public comments, that refiners and importers of motor fuels are the best point of compliance for the RFS noting that a smaller number of obligated parties creates a smaller bureaucracy. That is still the right policy.
Like the EPA, the vast majority of the liquid fuel industry is also strongly opposed to shifting the RFS point of obligation for a variety of regulatory and economic reasons. Over the past 12 years, stakeholders have made significant investments in infrastructure — hundreds of millions of dollars — to respond to market demand to increase the availability of renewable fuels domestically. Refiners, blenders and retailers have assembled complex supply chains above the rack, at blending terminals and downstream to service this market. A change to the RFS point of obligation would certainly satisfy the minority interests of handful of refineries, but it would undercut the investments made by others, disrupt the fuels market and cause consumer gasoline prices to increase. Moving the point of obligation would also jeopardize the renewable fuels market — something that the President opposes and actively campaigned to protect.
What President Donald Trump and his EPA will do is anyone’s guess, but having served as chief of staff to the very first EPA administrator, unsurprisingly, I have some opinions about what should happen.
A Decision Better Left to Congress
The RFS point of obligation was established through a deliberative process that involved legislation and regulation. Media reports have indicated that advisors to the president have tried to use their proximity to the president and urge him to step outside that process and make a change administratively that would benefit their own companies and exclude other stakeholders. That would be a mistake. Republicans in both the House and Senate have indicated that they intend to pursue significant reforms to the RFS program this year, in full view of the public and involving all stakeholders in the industry. This is the right approach and ensures that the process will be fair and transparent. Mitigating unintended consequences of the program should be part of a much larger discussion concerning the future of the RFS. A unilateral decision by EPA or the White House to move the point of obligation would only continue the government’s failed track record of choosing winners and losers in the energy marketplace.
Integrity of the RFS Program
Many terminal operators are smaller entities without the financial and technical resources required to navigate the complexities of the RFS. Refiners and importers have had nearly ten years to develop and implement compliance strategies and systems; they have the appropriate staff in place to make sure that the Renewable Identification Numbers — the compliance currency of the program — they are collecting and purchasing are indeed valid and not fraudulent. If the point of obligation is shifted to smaller terminal operators, it will open up the RIN market to potential widespread errors — or worse, outright fraud within the program. This could lead to marketplace chaos or even a complete collapse of the RFS.
The current point of obligation creates a system that provides an incentive to marketers and retailers to blend higher-cost biofuels into the gasoline and diesel they sell, and then market that blended fuel at a lower price by leveraging the value of the RINs that they can sell to obligated parties. If the marketers or retailers become obligated parties, it will take away those blending economics and change the RINs from a profit center to a cost. The cost for marketers to obtain fuel would increase because they would then be incurring RFS compliance costs, and those additional costs would ultimately result in higher prices at the pump for consumers.
More EPA Bureaucrats Required
There are currently about 200 RFS points of obligation, comprising refineries and fuel importers. In comparison, the U.S. has over 1,000 fuel terminals each with multiple position holders. Shifting the point of obligation downstream will draw many thousands of new position holders into the program. The regulatory burden this would place on the EPA would significantly increase the cost of compliance and administering the program. For an administration intent on eliminating government bureaucracy, changing the RFS program in a way that requires more EPA staff and resources to track transactions, monitor for fraud, and correct inevitable compliance errors would take the EPA in the wrong direction.
The impacts of moving the point of obligation are too great to be decided by an EPA decree. It should be up to Congress to address major reforms to the RFS, which is the fairest way to give all stakeholders a voice in this very complicated issue. Let Congress do its job and provide real reform to the RFS.
Gary Baise is a principal at OFW Law. He was the first chief of staff for the first EPA administrator and subsequently became director of the EPA’s Office of Legislation. He has served as executive assistant to the acting director of the FBI, associate deputy attorney general, and acting deputy attorney general in the Department of Justice.
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