WASHINGTON—The Environmental Protection Agency proposed reducing the amount of ethanol and other biofuels that must be blended into gasoline this year and retroactively lowered last year’s target—a win for refiners who warned that raising the requirement would lift prices at the pump.

The decision comes as the price of ethanol, the most-dominant biofuel, has risen to its highest level in a decade. While U.S. gas prices are driven by the price of crude oil, refiners say ethanol prices have contributed to higher prices at the pump, even though gasoline has dipped from recent highs.

The EPA said it would require refiners to add 18.52 billion gallons of ethanol and other biofuels to be blended into gasoline for 2021—down from a mandate of 20.09 billion gallon previously set for 2020. Although 2021 is almost over, no mandate for the current year has been set.

Agency officials also lowered the amount required for 2020 to 17.13 billion gallons, down from the 20.09 billion gallon-target it had set in late 2019, the last time the blend rate was set.

Had the EPA kept the 2020 mandate at the previous level, refiners would have had to purchase credits from the market to comply with the law. Refiners had lobbied for that relief after the pandemic depressed energy demand.

EPA officials say the new mandate for 2021 matches what the market is expected to use this year.

The agency also proposed that refiners add 20.77 billion gallons of ethanol and other biofuels fuels next year, an amount that it says ranks as the highest in the program’s history. The deal also includes $700 billion in federal aid for biofuel producers.

“EPA remains committed to the growth of biofuels in America as a critical strategy to secure a clean, zero-carbon energy future,” said EPA Administrator

Michael S. Regan

in a statement.

High gas prices have contributed to inflation overall, clouding President Biden’s political agenda including his ambitious plans to address climate change.

In recent weeks, Mr. Biden has asked the Federal Trade Commission to investigate whether the oil-and-gas industry was engaging in illegal conduct to keep prices high and agreed to tap the nation’s Strategic Petroleum Reserve to increase supply.

The downwardly revised 2020 target and newly proposed 2021 target fall short of what ethanol producers and other biofuel trade groups had pushed for from regulators in recent months.

While he was campaigning for president, Mr. Biden said a strong biofuel mandate would help struggling rural economies where people find work at the country’s roughly 200 biorefineries.

The EPA sets blend rates under the so-called Renewable Fuel Standard, which was passed by Congress in 2005 to reduce foreign dependence on oil and reduce smog. It’s supported by lawmakers in states that grow corn, the main ingredient in ethanol, but opposed by some oil refiners who balk at the cost of compliance. Almost all U.S. gasoline contains 10% ethanol.

Write to Katy Stech Ferek at katherine.stech@wsj.com

Ethanol, Gasoline and Prices

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