U.S. ethanol use set to rise as EPA unveils biofuels targets

The EPA had hoped to reach a compromise and get renewable fuels use on track after years of delays, meeting a deadline for its announcement that fell as President Barack Obama and other world leaders met in Paris for climate change talks.

It said that fuel companies need to use 18.1 billion gallons of renewables in 2016, up from the 17.4 billion the agency proposed in May but still well short of a target of 22.25 billion gallons set by Congress in 2007.

The EPA’s requirements “provide for ambitious, achievable growth, especially in advanced fuels,” said Janet McCabe, acting assistant administrator of the EPA office that runs the renewable fuel program.

The EPA raised the requirements from the May proposal amid higher-than-expected fuel demand, even as it maintained that challenges remain as motor fuels abut a “blend wall” — the saturation point beyond which oil companies say it is hard to use more biofuels without significant infrastructure changes to gas pumps and vehicles.

The program became a heated battleground for oil and corn lobbies when the EPA in 2013 backpedaled sharply from the Congressional targets. It had to meet a Nov. 30, court-imposed deadline following years of delay and regulatory uncertainty.

On Monday, political representatives from corn farming states, which produce the feedstock for ethanol and are already hurting from low grain prices, said the targets should be increased to those agreed in 2007.

“The EPA doesn’t seem to appreciate that the law on the books requires strong biofuels targets and that consumers like the chance to use alternate fuels,” said Chuck Grassley, a Republican senator from Iowa.

Critics of the program question the environmental benefits of corn-based ethanol and whether greater amounts of the renewable fuel can be used without bigger infrastructure changes. Proponents have said it reduces greenhouse-gas emissions, reduces dependence on foreign oil and boosts rural economies.

The RFS program was implemented in 2005 to reduce U.S. dependence on foreign oil and utilize cleaner, domestic energy sources. Renewables were meant to represent an increasing share of transportation fuels, but the plan met challenges when a slow economic recovery and increasing fuel efficiency prompted fuel demand to fall earlier than many expected.

The EPA’s plan on Monday outlined increasing targets of renewables to use, beginning with retroactive targets for 2014 and for the current year.

Shares in biofuels companies rose on Monday. Pacific Ethanol Inc stock climbed over 20 per cent, Amyris Inc gained 7 per cent and Green Plains Inc rose 5 per cent.

Even so, biofuels groups including Archer Daniels Midland Co (ADM) and Poet LLC questioned the EPA’s decision to reduce requirements from the levels laid out in 2007.

While the requirements represent an improvement, “they still fall short of what we had hoped and what the American people deserve,” an ADM spokesman said in an emailed statement.

“We do not believe it represents an accurate view of the law,” he said.

Renewable fuel credits, known as RINs, gained after the announcement, according to market participants. The credits are used by oil companies as an alternative way to meet EPA targets if they do not blend enough biofuels into gasoline and diesel.

Shares of refiners, which could have to face increasing renewable fuels costs or higher prices for RINs, were mostly down, with Valero Energy Corp and Phillips 66 both losing around 1 per cent.

The finalized rule could face continued uncertainty as many expect legal challenges from oil and ethanol groups that have lobbied heavily on both sides of the policy.

“It’s very likely we’ll challenge the rule,” said Chet Thompson, head of the American Fuel & Petrochemical Manufacturers, which represents oil refiners.

Additional reporting by Tom Polansek; Editing by Alden Bentley and Lisa Shumaker.