Analysis: Trump's ethanol plan: Hype now, legal fights later

By Humeyra Pamuk and Jarrett Renshaw

WASHNGTON/NEW YORK (Reuters) - President Donald Trump's hyping of a plan to boost ethanol demand drew cheers at an Iowa rally on Tuesday, but the oil refining industry has promised a lawsuit to block the move, so victory for Midwest farmers is far from certain.

Trump on Tuesday indicated that the U.S. Environmental Protection Agency should allow for a waiver for higher-ethanol gasoline, known as E15, to be sold all year, which has been prohibited due to smog concerns. He did not mention the threatened lawsuit and was not asked about it.

The hitch, according to industry experts as well as legal precedent, is that Trump needs an act of Congress to change the rule. New Supreme Court Justice Brett Kavanaugh wrote in 2012 that EPA cannot change the rule unless congress changes the law, and the refining industry has promised to sue if the agency tries.

Still, some ethanol industry experts said Trump's political support in farm states will give him enough cover to push either Congress or regulators to act.

Some said the media coverage of the proposal alone should help Republican members of congress in tight farm state races.

"You can't tell me this didn't have a political impact," said Monte Shaw, head of the Iowa Renewable Fuels Association. He said he was in Cedar Rapids, Iowa, having breakfast on Friday when a waiter congratulated him on Trump's announcement.

He said, however, that Trump must publish the rule ahead of the November election or else Democrats will try to paint the announcement as all show, no substance.

U.S. gasoline sold in the summer contains 10 percent ethanol. For years, the biofuel industry has sought to lift the summer ban on E15, with 15 percent ethanol, to boost domestic demand for corn-based ethanol. Since Trump took office, there has been a tug of war over ethanol policy within his administration.

Trump's former adviser, billionaire oilman Carl Icahn, led an effort to change rules requiring refiners to blend biofuels into gasoline or pay for credits for those who can. The biofuels industry and Democrats blasted his efforts, saying his ownership in refining company CVR Energy created a conflict of interest. Icahn ultimately stepped aside as a presidential adviser.

Trump has tried to thread the needle between the rival corn and oil industries, seeking ways to boost overall ethanol demand while giving refiners relief from the cost. The administration could not secure assurances from the refining industry not to sue over lifting the ban on E15. But with midterm elections looming, Trump moved ahead anyway, siding with Farm Belt supporters who helped secure his narrow 2016 election victory.

Several industry experts said the Clean Air Act forbids such a change without Congressional action.

"EPA can't change a rule that's created by the Congress," said Jonathan Lewis, senior counsel for Clean Air Task Force, a nonprofit working to reduce pollution. "They need the Congress to amend the Clean Air Act."

Kavanaugh wrote in a 2012 case that was dismissed on procedural grounds: "The waiver might be good policy; if so, Congress has the power to enact a new law permitting E15. But under the statute as currently written, EPA lacks authority for the waiver."

The refining industry has seized on this. "We are going to sue, and other organizations are going to sue, and I think the case is pretty black-and-white that it's against the law," Chet Thompson, head of American Fuel and Petrochemical Manufacturers, said.

Despite these headwinds, Trump hyped his plan at a rally on Tuesday in Council Bluffs, Iowa, part of a congressional district where incumbent Republican U.S. Representative David Young faces a tough race.

"I believe the administration understands how important of an issue this is to many farmers across the country," said Andrew Walmsley, a director at the American Farm Bureau, an interest group. "If the Congress can't do it, perhaps EPA should try - that's the mindset."

(Reporting by Jarrett Renshaw and Humeyra Pamuk; additional reporting by Michael Hirtzer in Chicago; Editing by David Gaffen and David Gregorio)