The Chain: New U.S. Administration May Lead To Investor Uncertainty Regarding U.S. Biofuels Imports

The Chain: New U.S. Administration May Lead To Investor Uncertainty Regarding U.S. Biofuels Imports
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As published by Chain Reaction Research, the consequences of the November 8, 2016 U.S. election may result in greater uncertainty regarding future U.S. biofuels imports. As reported in Bloomberg, the incoming Trump administration coupled with new leadership in the Senate’s environment committee “may breathe new life into efforts to roll back the EPA’s renewable fuel standard…” The article refers to proposed legislation in the U.S. House of Representatives, supported by 117 lawmakers – including 11 Democrats – that would prohibit EPA from determining annual volumes for biofuels in transportation fuels.

Biofuels Imports

Currently, EPA’s renewable fuel standard requires 9.7 percent ethanol in transportation fuels, which is equivalent to 18.1 billion gallons of biofuels. Since 2007 the annually established biofuels blend percent has provided a consistent demand signal to biofuels investors. The lack of such a requirement may result in an unknown policy-driven demand signal to biofuels investors.

Under the proposed H.R. 5180 “Food and Fuel Consumer Protection Act of 2016” legislation, EPA would not be allowed to place an annual percentage requirement on the biofuels mixed into transportation fuels. That would mean that voluntary biofuels blends might increase or decrease, depending on the price of palm oil vs. gas oil. If gas oil is more expensive than palm oil after switching costs, traders will purchase palm oil, and vice versa. While traders can react within a day, investor timelines are long-term. These mixed pricing and demand signals, given uncertain policy, may also have unknown impacts on land-use planning and public and private sector investment in sustainable agriculture production.

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The U.S. biofuels blend requirements were established in the Energy Independence and Security Act of 2007. The act mandated the implementation of the Renewable Standard Fuel (RSF) program, which required blending of biofuels with transportation fuels to decrease greenhouse gas emissions. Under this law, each year U.S. EPA determines the quantity of the renewable fuel to be blended. This is called the Renewable Volume Obligation (RVO). From 2010 to 2016, under the Obama Administration, the RVO has increased 40 percent to 18.1 billion gallons from 12.9 billion gallons, with a 2022 RVO target of 36 billion gallons.

Currently, companies that import palm oil into the U.S. market must register their refining facilities to meet U.S. EPA requirements and distill palm methyl ester (biofuels) to meet U.S. requirements, to be compliant with ASTM D6751. Because palm methyl ester’s cloud point of 15°C means that palm oil’s biowax clogs fuel filters and fuel injectors below that temperature, which means that palm oil biofuels can only be used in the U.S. during summer months.

S&P Global Platts estimates that five SE Asian biofuels producers are in the process of securing the U.S. EPA approval to export to the U.S. market. Two of SE Asia’s largest palm oil producers, Wilmar and Musim Mas, are currently able to do so. According to the U.S. Department of Agriculture, U.S. imports for all palm oil products, including for biofuels and foods, in 2016 is estimated at 1.27 million metric tons.

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Gabriel Thoumi, CFA, FRM works as Director Capital Markets at Climate Advisers where he manages global financial analytics focusing on mitigating systemic climate risk while advising on “greening” capital markets. He has 18 years of experience managing and deploying frameworks to improve global capital markets sustainability through risk mitigation and return enhancement. Previously, for Calvert Investment Management, he valued global equity, index, and fixed income portfolios and their component positions in the utilities, energy, materials, chemicals, and financial sectors. He worked on quantitative index construction and asset allocation strategies. He engaged Fortune 500 CEOs on approaches to mitigating climate risk using financial risk management tools. He led initiatives to improve financial accounting of exchange-listed products and incorporated natural capital into financial tools. He has also worked at Morgan Stanley's carbon offset company, Wells Fargo Capital Management, and American Express. He is an adjunct at John Hopkins University.
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