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To save jobs, EPA should reform fuel standard

While well-intentioned, the RFS has inadvertently ended up providing a financial windfall for large gasoline retail chains and integrated oil companies at the expense of thousands of small and independent American businesses and workers.

The headquarters of the U.S. Environmental Protection Agency in downtown Washington.
The headquarters of the U.S. Environmental Protection Agency in downtown Washington.Read moreKristoffer Tripplaar / Sipa USA / TNS

When government decides to intervene in the marketplace, it better get it right. If not, it can create chaos, unfairly picking winners and losers and causing real damage to legitimate businesses. For tens of thousands of refinery employees in the Philadelphia area, along with hundreds of local mom-and-pop gas stations, the Environmental Protection Agency got it wrong with its Renewable Fuel Standard (RFS).

While well-intentioned, the RFS has inadvertently created a rigged system. Due to a few fundamental flaws in the way the rule was set up, it has ended up providing a financial windfall for large gasoline retail chains and integrated oil companies at the expense of thousands of small and independent American businesses and workers. The good news for so many local refinery workers and small gas retailers is that EPA has it within its power to change course; hopefully it can do so before it's too late.

To make certain that the annual renewable fuel goals established under the RFS are realized, the government decided to make certain companies responsible for demonstrating that appropriate amounts of renewable fuel are blended into gasoline each year. But for some reason, the onus to do so — known as the "point of obligation" — was put on refiners and importers of petroleum fuel, such as Philadelphia's own Monroe Energy and Philadelphia Energy Solutions, instead of those who actually blend most of the renewable fuels (like ethanol) into gasoline.

In this unfair and nonsensical set-up, the government hands valuable credits (known as RINs) to big convenience store gasoline chains and large integrated oil companies, who do much of the blending, for the renewable fuel they place into pure gasoline made at refineries. Independent refiners, who do little or no blending themselves, are then forced to purchase those expensive credits in order to show they're complying with a process they have little control over.

In February, I published an analysis of the potential long-term effects that this system can have on refiners, many of whom are already in precarious financial situations. I found that the RIN mandate, as its currently structured, puts refiners at higher risk of bankruptcy, placing at risk a significant number of jobs that are tied to the refinery sector both directly and indirectly.

As is usually the case in bankruptcy, workers end up suffering the most acute economic hardship, especially if they are unable to quickly find comparable re-employment. From steel workers to truckers, to the men and women earning minimum wage at their local gas station, an estimated 75,000 to 150,000 American jobs are potentially at risk if U.S. independent refiners go out of business. A total of 15,000 to 20,000 jobs would be lost in Southeastern Pennsylvania alone. The loss of  just 100 refining jobs could reduce local economic output by up to $1 billion — think loss of sales, income, and tax revenue — and trigger exponential job losses at local businesses that work with, or depend on, refineries.

The RFS point of obligation also poses a threat to independent gasoline stations in the Philadelphia region. Large convenience store retail chains have increasingly jumped into the fuel terminal business to maximize the windfall profits while the rigged RFS game lasts. Now swimming in extra cash, these large retailers are free to corner the market and drive mom-and-pop service stations out of business. With large retailers enjoying a significant advantage as a result of the RFS imbalance, small retailers are gradually forced out of the marketplace, reducing competition and leaving consumers with fewer options.

While all this is going on, the actual purpose of the program — to promote use of a broader array of biofuels, diminish our country's dependence on foreign oil, and enhance U.S. energy security — continues largely unfulfilled.

Labor unions, industry leaders, ethanol suppliers, small businesses, and consumer advocates all agree that changing the point of obligation will better serve the policy goals of the RFS, and greatly benefit both American workers and consumers. The current system distorts competition in the refining and gasoline retail industry, risks higher fuel costs for consumers, and threatens our country's overall energy security.

President Trump often touts his election as a victory for the heart and soul of America's working class — certainly validated by his historic win in the Keystone State. The president should act now to reform the RFS — moving the point of obligation to the blending process where it belongs — and removing a government boondoggle that benefits large retailers and integrated, global oil companies whose thirst for RINs credits hurts independent gasoline retailers and puts the squeeze on America's refinery sector that is so critical to Southeastern Pennsylvania.

If the flawed RFS is not reformed, the president's "victory" will seem very hollow indeed.

Alex Holcomb is an assistant professor of finance at the University of Texas at El Paso.