On December 14, 2015, the Environmental Protection Agency (EPA) published in the Federal Register final volumes for cellulosic biofuel, biomass-based diesel (biodiesel), advanced biofuels and total renewable fuels for 2014, 2015 and 2016 under the Renewable Fuel Standard (RFS), a program codified in the Clean Air Act section 211(o). EPA also set volumes for biodiesel through 2017, as required by statute. EPA had missed its statutory deadlines for the 2014 and 2015 final volumes for these fuels, and in this one rulemaking, EPA caught up with its outstanding obligations. The RFS program has long been a subject of dispute among the refining and biofuels industries. The former are required to blend specified categories of renewable fuels – at this stage mainly ethanol – into the nation’s gasoline in prescribed and increasing amounts. The latter view the program as critical to ensuring a broad market and incentivizing further growth in production. Generally, the refining industry has supported reducing volumes below statutorily mandated levels, in part because of claims that volumes of ethanol above a total of 10% cannot be blended into the nation’s transportation fuel supply -- referred to as the “blend wall.” The biofuels industry, including ethanol producers, has argued that the blend wall is illusory and has pushed for EPA to increase all volumes of renewable fuels along the statutorily specified path, claiming that such requirements are necessary as a market signal to ensure continued industry growth, particularly in advanced biofuels.
In the final rule, EPA sought to navigate between these positions and issued volumes that are less than statutorily specified yet are intended to encourage higher future production. Neither side is likely to be satisfied with the compromise, and judicial challenges are expected. Moreover, EPA’s final volumes for advanced biofuels are still well enough below statutory levels to trigger requirements for modification of future volumes. This has generated concern and uncertainty since EPA has yet to indicate how it might handle such a potentially controversial issue.
EPA Raises Volumes from Its Proposed Rule
EPA initially planned to set 2014-2016 volumes for all RFS fuels significantly below statutory levels through a combination of statutory waivers: the “cellulosic waiver,” which allows the Agency to reduce statutory volumes of advanced biofuels and total renewable fuels up to the amount the Agency has reduced cellulosic biofuels from its specified volumes, and the “general waiver,” which authorizes EPA to reduce required volumes of fuels to avoid severe harm to the economy or environment, or if there is an inadequate domestic supply of the fuel. The proposal caused an extraordinary uproar, with the biofuels industry decrying the significant departure from statutory levels as unjustified and harmful, and challenging the claims that there was an inadequate supply of advanced biofuels and ethanol to meet specified levels. In particular, the lower level of total renewable fuels meant lower amounts of conventional biofuels such as corn-based ethanol and advanced biofuels would be needed for RFS compliance, dampening the market for those fuels.
In its final rule, EPA raised the volumes for the various fuels above the proposed rule but still well below statutory levels, citing an increase in gas and diesel consumption and in biofuels production. For 2014, where actual volumes supplied to the market were known, final volumes did not differ significantly from those proposed, resulting in final volumes nearly 2 billion gallons below the 2014 statutory requirement for total renewable fuels (16.28 million gallons vs. RFS goal of 18.15 billion gallons, with an implicit ethanol mandate (total renewable fuels minus total advanced biofuels) of 13.61 billion gallons). For 2015, where EPA had at least nine months of data on actual production, EPA raised nearly all the fuel categories slightly. These volumes reflected both actual supply and an extrapolation from those amounts for the remaining months of the year, resulting in a “moderate growth” from 2014 volumes. Still, the total volume of total renewable fuels is still well below statutory volumes (16.93 billion gallons vs. RFS goal of 20.5 billion gallons, with an implicit ethanol mandate of 14.05 billion gallons).
For 2016, however, EPA substantially increased its final volumes for total renewable fuels and slightly increased for other fuels. Though the final volume for total renewable fuels is still well below statutory volumes (18.11 billion gallons vs. RFS goal of 22.25 billion gallons), the amount represents a significant increase above the proposed volumes and final 2015 volumes. In EPA’s words, the increase is “as ambitious as can reasonably be justified” and its “best judgment” as to domestic supply of renewable fuels. Subtracting the final volumes for advanced biofuels, the final volume for total renewable fuels would implicitly require 14.50 billion gallons of ethanol to comply with the RFS target, some 500 million gallons below what would have been allowed under statutory levels. EPA also set 2017 volumes for biodiesel at a level below statutory requirements that EPA believed would still encourage further growth in production and use of that fuel.
The 2016 final volumes for total renewable fuels are notable because they represent EPA’s estimate of a reasonable volume of renewable fuel production, based on historic trends, but also are set at a level intended to move the market further forward, incentivizing further production, use and infrastructure development. In so doing, EPA took into account the blend wall, but determined that the market would ultimately push through that limit. As described further below, the final volume for total renewable fuels is also sufficient to avoid a statutory reset for that category, but the final volume for advanced biofuel would trigger the reset provision.
EPA’s Use of Waivers
EPA’s use of statutory waivers is one of the most controversial aspects of its final rule. EPA utilized the cellulosic wavier, found in section 211(o)(7)(D)(i)), to reduce the volumes of total renewable fuels and advanced biofuels to address the shortfall in volumes EPA calculated as available for cellulosic biofuel compared to statutory levels. While it reduced volumes of total renewable fuels the full amount of the cellulosic shortfall, EPA found it necessary to reduce advanced biofuels by only a portion of that shortfall. EPA argued that its use of the cellulosic waiver gives it broad discretion to determine a level that is “reasonably attainable,” taking into account the ability of the market to supply such fuels through domestic production and import.
EPA combined the cellulosic waiver with its general waiver, found in section 211(o)(7)(A), to establish final volumes for total renewable fuels, essentially augmenting the cellulosic waiver by finding that there was an insufficient supply of ethanol and advanced biofuels to meet statutory total renewable fuels volumes. EPA had proposed such a combination for advanced biofuels as well, but ultimately determined that shortfalls in advanced biofuels for 2014-2106 were less than the reductions in cellulosic biofuels for those years.
EPA made its determination of inadequate supply by estimating what volumes of cellulosic, biodiesel and other advanced biofuels (e.g. sugarcane ethanol) might actually be available in 2015 and 2016. But it also took into account the blend wall, concluding that limited demand for transportation fuel and constraints in the market’s ability to absorb more ethanol in the fuel blend constituted relevant factors in determining adequacy of supply. EPA rejected arguments by commenters that inadequate demand was not the same as inadequate supply.
At the same time, EPA found “no compelling evidence that a nationwide average ethanol concentration in gasoline cannot exceed 10.0% in 2016.” The Agency concluded the market in the short term could slightly exceed that amount, and in the long term could well surpass it as the necessary infrastructure would develop to accommodate higher blends and/or other non-ethanol renewable fuel use would increase. In the end, EPA determined it should adopt volumes that, while lower than the statutory mandates, would be sufficiently high to spur the market for renewable fuels in order to better approximate statutory mandates in later years. EPA asserted that such action would fulfill the intent of the RFS program to overcome market constraints and increase the amount of renewable fuels in the U.S. transportation fuel mix. EPA also acknowledged, however, that RFS standards were only one factor in the complicated series of actions and decisions that ultimately affect renewable fuels production and use.
Other Factors Considered by EPA
Under the RFS, parties generating renewable fuels create renewable identification numbers or RINs which are used by regulated parties to demonstrate compliance with the RFS. These RINs may be banked and traded, subject to certain regulatory requirements. Since RINs represent gallons of renewable fuels, parties arguing for increased RFS volumes asserted that EPA should take into account any RINs banked and carried over for a given compliance year, thereby potentially increasing the volumes that could be set for that year. However, EPA determined it would be best for the program to allow such RINs to be available as buffers for compliance and flexibility purposes and to provide RIN liquidity. Thus, it did not take them into account when setting annual volumes for any of the years at issue.
Triggering A Statutory Reset
The final rule is particularly notable for what it doesn’t discuss – statutory reset. Under section 211(o)(7)(F), EPA is to undertake a modification of the statutory volumes starting in 2016 when it has waived any applicable volume requirement below 20% for two consecutive years, or at least 50% for a single year. While EPA waived statutory volumes for total renewable fuels in its final rule, it did not trigger the 20% level for any of the years. However, final volumes for advanced biofuels, also waived by EPA, fall below the 20% figure for two consecutive years. This would require EPA to promulgate a rule within a year from issuing a waiver to modify the statutory volumes for advanced biofuels through 2022. Significantly, EPA does not reference the reset provision in the final rule, so it is unclear how the Agency intends to implement the provision. One would reasonably expect EPA to do so when it issues a proposed rule for 2017 volumes in mid-2016. This will be an important step since EPA’s actions could significantly impact the long-term market outlook for advanced biofuels. The lack of clarity already has created uncertainty in the industry.
Now that it is back on its mandated schedule, EPA expects to propose 2017 volumes for cellulosic biofuel, advanced biofuels and total renewable fuels in mid-2016, in time to set final volumes by November 30, 2016. This deadline is fairly close to the end of the Obama Administration, so the action will likely be controversial throughout the second half of 2016. If further delayed, it could be issued by a new administration, potentially one not as committed to increasing renewable fuels as a method to address climate change. How EPA might use the advanced biofuels reset will be an important issue in the debate, and could spur Congressional efforts to change the entire program.
Moreover, the deadline for filing judicial challenges to the 2014-2016 final volumes is mid-February 2016, and it is likely that the rule will be challenged by either or both members of the refining and biofuel industries. Hence, the reasonableness of EPA’s estimates and judgments about the current and future markets for ethanol and other biofuels will likely be subject to continued debate and judicial scrutiny.