(Recasts first sentence with significance to Icahn and big ethanol producers, updates share prices)
WASHINGTON/NEW YORK, Aug 3 (Reuters) - The Environmental Protection Agency will reject a proposal backed by billionaire Carl Icahn and a handful of refining companies to overhaul the U.S. biofuels program, in a victory for big ethanol producers that had fought to defend the existing policy, three sources familiar matter told Reuters on Thursday.
The decision is a blow to independent oil refiners, including Icahn's CVR Energy and top U.S. refiner Valero Energy Corp, that have said the current U.S. biofuels policy costs them hundreds of millions of dollars by forcing them to blend petroleum-based and plant-based fuels.
The U.S. Renewable Fuel Standard, adopted in 2005, requires refining companies to mix increasing volumes of biofuels like ethanol into the nation's gasoline and diesel supply every year - a policy intended to boost U.S. agriculture, reduce pollution and cut reliance on imports.
Independent refiners petitioned the EPA repeatedly during former President Barack Obama's administration to shift the blending responsibility further down the supply chain to fuel terminals that have more blending capacity.
Icahn, who owns a majority stake in CVR and served as an informal adviser to President Donald Trump on regulation, threw his weight behind the proposed change this winter, submitting a plan to the White House on the topic. This raised the hackles of Democratic lawmakers who said the move was a conflict of interest because of his refinery stake.
Online news site Politico first reported the EPA's decision to block the proposal, citing an unnamed senior administration official.
One of sources who spoke to Reuters said the agency will likely announce the move next week.
An EPA official declined to comment. Efforts to reach Icahn were not successful.
None of the sources were able to give a reason behind EPA's decision. But ethanol producers had lobbied for years against the proposed change, saying it would undermine biofuels policy by making it too complicated.
The sources declined to speak for attribution because they were not authorized to speak publicly.
The stakes were high for refiners. Those unable to blend are required to purchase blending credits, called RINs, from others who can. That requirement cost Valero $750 million in 2016, the company has said.
CVR, which has also incurred huge costs from RIN purchases, had deferred most of its 2016 RIN obligation into this year, betting prices would fall.
RIN prices were stable on Thursday.
"I think refiners knew this was coming," one broker said.
CVR shares dipped 0.3 percent to close at $19.05 on Thursday, while Valero shares were unchanged at $68.50.
Biofuels maker POET LLC applauded the move.
"Changes to the point of obligation would create market confusion, raise fuel prices and remove incentives for offering cleaner-burning biofuel blends to consumers across the country," said spokesman Rob Walther. (Additional reporting by Chris Prentice in New York; Writing by Richard Valdmanis; Editing by Lisa Von Ahn and Matthew Lewis)