By Cezary Podkul
NEW YORK, Oct 10 (Reuters) - Federal environmental regulators are expected to significantly reduce their biofuel blending mandates for next year, marking a historic retreat from an ambitious 2007 law, according to industry and trade sources.
The U.S. Environmental Protection Agency (EPA) is considering a proposal that would set next year's target for use of renewable fuels at 15.21 billion gallons, less than the 18.15-billion gallon 2014 target established in the law, according to the sources, who said the new figures have circulated in Washington policy circles over the past week.
At 15.21 billion gallons, the proposal would leave room only for some 13 billion gallons of corn-based ethanol to be blended into the nation's gasoline supply - down from 13.8 billion this year and 14.4 billion required by law for 2014.
Speculation and media reports about the potential reduction in the blending levels ripped through financial markets on Thursday, spurring a major rally in the shares of independent refiners who have been paying hundreds of millions of dollars to buy ethanol credits to cover their blending obligations.
Refiner PBF Energy surged by 12 percent, Valero Energy rose 5 percent while corn futures in Chicago tumbled more than 1 percent on the prospect of reduced demand for corn-based ethanol. Ethanol credits known as Renewable Identification Numbers slipped to 40 cents.
The proposal, if ultimately approved, would mark a significant victory for U.S. oil companies, who have been lobbying regulators and Congress to cut biofuel blending mandates that had been eating into their market share.
It would also mark a significant blow to the U.S. corn ethanol industry, which has been urging regulators to stand pat at the ambitious blending targets required under the law.
Already, some ethanol groups are threatening to sue the U.S. Environmental Protection Agency (EPA), which administers the fuel blending program, if it lowers its volume target.
"We will pursue every option," said Bob Dinneen, president of the Renewable Fuels Association, which represents the ethanol industry in Washington, D.C. Lowering the target to such volumes is illegal, he said.
It is not clear whether the EPA has indeed proposed the 15.21 billion gallon figure. Its formal proposal on the 2014 blending rule is now under review by the White House Office of Management and Budget (OMB), which must approve it.
A spokeswoman for the EPA, where most staff have been furloughed due to the partial government shutdown, did not return a request for comment.