By Ayesha Rascoe

WASHINGTON (Reuters) - A U.S. appeals court on Tuesday threw out an oil industry challenge to the Obama administration's 2013 biofuel mandate, ruling that the government has "wide latitude" to decide whether to modify renewable fuel use targets, and by how much.

The U.S. Court of Appeals for the District of Columbia Circuit rejected arguments from refiners that the Environmental Protection Agency had not thoroughly considered how renewable fuel credits are used to satisfy federal targets.

The ruling could have broad implications for the biofuel mandate, as various groups weigh challenges to EPA's management of the program. The EPA's final 2014 quotas are due out in June.

The Renewable Fuel Standard requires increasing amounts of biofuels such as ethanol to be blended into U.S. gasoline and diesel supplies through 2022.

U.S. refiners need to accumulate credits, or Renewable Identification Numbers (RINs), to prove they have blended their share of renewable fuels into gasoline and diesel. If they do not blend, they need to buy RINs.

The oil industry unsuccessfully urged the EPA to lower the federal mandate to use 16.55 billion gallons of biofuels in 2013, saying it would unduly burden refiners.

In its challenge PBF Energy said EPA should not consider the use of left over ethanol credits from 2012 when setting targets for 2013.

"This contention is meritless," the court said, adding that "EPA was entitled to conclude, as it did, that it had wide latitude to consider a range of factors as appropriate."

Monroe Energy, a subsidiary of Delta Air Lines that operates the Trainer refinery complex in Pennsylvania, said the EPA's decision not to cut 2013 biofuel targets did not take into account that companies might need to carry over some ethanol credits for use in 2014, when it finalized the 2013 targets.

The company said the spike in RIN prices last year could cost Monroe more than $100 million.

But the court ruled that expensive fuel credits were not enough to warrant vacating the target and that there was "no ground to conclude the 2013 standards are unlawful simply because RINs are costlier than in prior years."

The court added that higher RIN prices should provide an incentive to invest in more fueling infrastructure and in diversification of the fuel supply.

Other challenges to the 2013 biofuel rule have not yet been ruled upon, the court noted.

The biofuel mandate was conceived at a time when fuel demand was expected to rise steadily.

But a slow economy and rising auto efficiency have kept fuel use stagnant, putting the nation on a course where the biofuel mandate will require more use of ethanol than U.S. fuel markets can currently absorb.

It was the approach of this so called "blend wall" that boosted RIN prices in 2013.


(Additional reporting by Lawrence Hurley; Editing by Howard Goller, Ros Krasny and Diane Craft)