Billionaire investor Carl Icahn's oil refining company, CVR Energy, made a massive bet in 2016 that prices for U.S. government biofuels credits would fall — just before Icahn started advising President Donald Trump on regulations driving that market.
The size and specifics of the gamble — involving $186 million worth of biofuels credits the company said it needed at the end of 2016 to satisfy regulatory requirements — have not been previously reported by the media.
The credit system is designed to encourage the mixing of renewable fuels, such as ethanol, into gasoline or diesel. The government awards the biofuels credits to firms that produce such blends — and requires firms that don't, such as CVR, to buy the credits from their competitors.
Icahn's firm positioned itself to slash those regulatory costs by tens of millions of dollars if biofuels credit prices declined, according to a Reuters review of CVR filings with the Securities and Exchange Commission and interviews with two brokers involved in the firm's trading of biofuels credits.
Last year, in a counterintuitive trading strategy, Icahn's refining firm postponed buying biofuels credits and instead sold millions of them — a bet that it could buy the credits it would need later at lower prices, according to the two brokers and CVR's year-end SEC filing.
That strategy looked prescient, starting in December, as prices for biofuels credits fell in response to a series of political events tied to the election of Trump. These included his appointment of Icahn — a vocal critic of biofuels credit mandates — as an unpaid "special advisor to the President" on regulatory issues.
In February, biofuels credit prices fell again after the famed activist investor proposed policy changes to the White House that would free certain refiners — including CVR — from their obligation to buy the credits.
Icahn, who owns an 82-percent stake in CVR Energy, did not respond to repeated phone calls and emails seeking comment. He has said previously that his advocacy on biofuels regulation is not self-serving because it would benefit a broad swath of the U.S. refining industry, including some of CVR's competitors.
Spokespeople for CVR and the Trump administration declined to comment. White House spokeswoman Kelly Love has said previously that Icahn was acting as a private individual in pushing biofuels policy changes and that his "special advisor" appointment was not a formal job in the administration.
CVR has not publicly disclosed the number of credits it sold to other firms or the prices paid, and Reuters was unable to determine the specific amounts.
At year end, after the credit sales, CVR estimated it needed credits worth $186 million to meet its regulatory obligations, according an SEC filing reviewed by Reuters.
The credits may end up costing CVR much less, however, because market prices for renewable fuel credits have since dived.
Last year, when CVR was unloading credits, they sold for an average of 77 cents — and peaked at more than $1, according to prices compiled by Oil Price Information Service.
But prices dropped to about 53 cents by March 31. Biofuels credits traded at 55 cents on Tuesday.
CVR isn't assured of big savings. The amount of money the firm is ultimately forced to spend on biofuels credits depends on their price when it decides to purchase them.
But CVR's credit sell-off last year gave the firm two potentially lucrative options: It could have purchased enough new credits — after prices plummeted early this year — to meet government mandates before March 31; or it could have delayed the required purchases for one more year, as allowed by law, in the hopes that credit prices would fall even further.
CVR declined to comment on which of those options the company chose.
Icahn's policy recommendations to Trump, if enacted, would likely further undermine the value of the credits by reducing demand from refiners such as CVR, which do not have the facilities needed to blend ethanol into gasoline, credit brokers and industry experts said.
Some Democratic lawmakers and biofuels advocates have argued that Icahn's policy recommendations to the Republican administration create a conflict of interest with his investments.
Icahn should not be advising Trump on policy changes that move markets in which Icahn is "speculating deeply," said Brooke Coleman, executive director of the Advanced Biofuels Business Council, a trade group that represents producers of renewable fuels and opposes Icahn's policy recommendations.
"What he's saying would allow him to make more money," Coleman said. "He's in a position to perpetually put uncertainty out in the marketplace."
Richard Painter — a law professor at the University of Minnesota and the chief White House ethics lawyer for former President George W. Bush from 2005 to 2007 — believes that Icahn's unique access to the White House and influence on policy creates a conflict even though, as an informal advisor, he isn't getting a government paycheck.
"We don't give out knighthoods in the United States. If you have a title, that means you have a job," Painter said.
Some experts, however, argue that Icahn avoided a conflict of interest by not taking a paid government position.
"He's free to give his advice. People do that all the time. The rulemaker is free to take their advice or not," said Charles Elson, a finance professor at the University of Delaware. "That's as old as Washington."
The credits were created under the U.S. Renewable Fuel Standard, initially enacted in 2005 under the administration of George W. Bush.
The law aimed to cut greenhouse gas emissions and reduce dependence on foreign oil, while giving a boost to rural economies that grow corn for ethanol production.
The credits create a financial penalty for refiners — such as Icahn's CVR — that don't have the blending facilities needed to create an ethanol-gasoline mix.
Icahn has called the requirement "absurd" and "insane" because it punishes some refiners for failing to do something that they have no ability to do.
Icahn's proposal to the White House would shift the burden of blending ethanol and other biofuels — or buying credits — to a variety of firms with blending facilities, such as integrated oil firms, traders, fuel distributors and retailers.
The full details of Icahn's proposal have not been made public. White House sources have previously told Reuters that the administration is considering the policy change but is concerned about a potential backlash from the ethanol industry.
Icahn's policy proposal is one of several political events that drove down prices in the biofuels credit markets.
Prices tanked on December 7 after Trump appointed Scott Pruitt — a critic of biofuels regulation — to lead the Environmental Protection Agency, which implements those rules.
Credit values declined even faster after December 22, with the naming of Icahn as an advisor on regulation.
On February 27, news broke that Trump — after being advised by Icahn — would be preparing an executive order on biofuels regulation.
The next trading day, biofuels credit prices dropped to an intraday low of 30 cents.