As EPA Plan Looms, Lobbying Intensifies Over RFS Biofuel Volume Cuts

Source: By Stuart Parker, InsideEPA • Posted: Monday, September 20, 2021

Lobbying efforts by biofuels groups, refiners and others are accelerating ahead of EPA’s release of a proposal expected to reduce biofuel blending requirements under the renewable fuel standard (RFS) for 2021 and potentially 2020, even as required volumes could rebound to statutory targets in 2022.

In a series of recent and upcoming meetings with White House Office of Management and Budget (OMB) officials, stakeholders are pitching to either reduce volumes or safeguard them at existing levels, as EPA weighs whether to cut the program’s blending requirements to reflect reduced overall fuel consumption during the COVID-19 pandemic.

EPA is already nine months overdue to finalize 2021 volumes, and thus far has not even proposed them, leading several sources to doubt whether the volumes can be finalized this year. By law, EPA must also finalize its 2022 RFS volumes by Nov. 30 — another target that EPA looks unlikely to meet.

Adding to the controversy is a possible move by EPA to retroactively reduce biofuel blending mandates for the 2020 compliance year, which would ease compliance burdens on refiners but anger biofuels producers who are opposed to such retroactive steps, possibly presaging fresh litigation should EPA finalize this approach.

Also, EPA’s RFS proposal will to some degree be conditioned by its evolving policy on whether to grant dozens of requests from small refineries for economic hardship exemptions. In the 2020 requirements issued by the Trump administration, EPA increased blending rates to allow for a significant number of such waivers it intended to issue.

But the agency to date has not issued those waivers, providing one point of contention in existing litigation over that rule.

The American Petroleum Institute (API), representing many larger oil companies that blend their own biofuels, met with OMB on Sept. 9 to lay out its position, as outlined in a June l7 letter to EPA.

“The statutory volumes for 2021 and 2022 are unachievable, and EPA must reduce the RFS volumes in 2021 and 2022 to feasible levels. We hope EPA will utilize the cellulosic biofuel waiver authority . . . as a first step to reduce statutory volumes. However, the cellulosic waiver authority by itself is insufficient to reach a feasible set of volume standards in 2021. In 2022, the problem is compounded because the statutory volume of advanced biofuel increases by an additional 500 million gallons, further reducing the effectiveness of the cellulosic biofuel waiver,” API said.

This argument implies a deeper overall cut in biofuel volumes is needed, an approach that would require EPA to invoke its “general” waiver authority under the RFS.

API also has concerns about the supply of RFS compliance credits, or renewable identification numbers (RINs), becoming exhausted soon. If “the 2021 volume standards are not reduced to a feasible level, there is a significant risk that the carryover RIN balance will be depleted. Our modeling shows that the carryover RIN balance is declining and will be exhausted by the end of 2021. EPA has consistently recognized in previous rulemakings that a sufficient balance of carryover RINs is necessary to ensure a properly functioning RIN market,” API says.

Small Refiner Waivers

API further wants EPA to cut its 2020 blending requirements to reflect the agency’s failure to grant small refinery exemptions. API rejected the Trump EPA’s increase in blending rates to compensate for predicted waivers at the outset, because this would in effect have “reallocated” compliance burdens to larger refiners that blend their own fuels.

“The 2020 volumes included a volume increase, known as ‘reallocation’, to compensate for future small refinery exemptions that were expected to return a significant quantity of RINs to the market. Instead, the small refinery exemptions have not been and appear unlikely to be granted. The reallocation of RINs in 2020 has exacerbated the problem of infeasible volume standards. Therefore, the 2020 volumes should not be considered as a viable scenario for the 2021 RFS. Further reductions are necessary,” API said.

Smaller “merchant” refineries share some of the same concerns, but they also diverge from their larger competitors. Small refiners often lack biofuel blending capacity, so they cannot generate their own RINs and must buy them from others at sometimes high prices. These refiners still have dozens of pending requests for hardship waivers before EPA.

One small refinery representative who recently met with OMB tells Inside EPA that the drawdown of the RIN bank is a major concern, which at the extreme could force refiners to “ration” fuel if there were insufficient credits available to sell RFS-compliant fuel.

Containing the high price of RINs also remains a high priority for these companies, as does moving the RFS’ compliance obligation from refiners to fuel blenders — a request EPA constantly denies, despite recurring litigation on the issue. The small refinery source says EPA must set the 2021 RFS volumes at the level that reflects actual consumption.

‘Continued Growth’

Biofuels and farm groups, meanwhile, are defending the existing 2020 volumes and seeking to avoid any reduced blending mandates in 2021 and 2022. They are especially keen to avoid any cut in the corn-ethanol volume “implied” by the RFS statute, established under the Clean Air Act. Although there is no explicit corn-ethanol mandate, the fuel still supplies most of the biofuel required by the overall renewable fuel mandate.

One farm-sector source says the sector supports 2021 and 2022 RFS volume requirements “that allow for continued growth in renewable fuels blending, as intended by the law, and allow for an implied 15 billion gallon conventional biofuel volume.” The source “opposes use of EPA’s general waiver or reset authorities to reduce these volumes due to lack of justification and consistent with the 2017 D.C. Circuit decision” in Americans for Clean Energy v. EPA.

In that ruling, the U.S. Court of Appeals for the District of Columbia Circuit faulted an EPA decision to lower its 2016 volumes from statutory levels using general waiver authority by claiming “inadequate domestic supply” of biofuel, saying the agency confused supply with demand constraints. EPA has never restored the 500 million gallons of blending volume it cut from the 2016 mandate, however.

Farm-sector interests are further “deeply concerned with reports EPA may retroactively propose to lower the 2020 RFS volume,” the source says. “We strongly oppose such a change from EPA’s past practices, which would make the [renewable volume obligation (RVO)] a moving target rather than a binding volume requirement and penalize those who acted in good faith to comply with the RFS while rewarding entities that did not.”

But one fuels-sector source warns biofuels producers that they should not view the 15 billion gallon corn-ethanol volume as “sacrosanct,” and should instead focus on long-term ways to transform the RFS as a carbon-reduction strategy.

A biodiesel-sector source notes that EPA Administrator Michael Regan “has publicly stated that the rules need to ‘reflect reality.’ The reality is that biodiesel and renewable diesel has held steady in 2020 and 2021 and is poised for continued sustainable growth — if EPA maintains a strong RFS. The reality is also that when gasoline and on-road diesel use fell by about 9.5% in 2020 the obligated volumes of renewable fuels also fell by the same percentage. And because biodiesel and renewable diesel use was steady in 2020, there are plenty of RINs available to meet the 2020 RVOs.”

Therefore, “we will ask EPA to support biodiesel and renewable diesel growth in the 2021 and 2022 rules as well as during the set process for 2023 and beyond. We’ll also ask them to follow the law by increasing advanced biofuel volumes in 2022.”

The forthcoming “set” rule will establish blending volumes for 2023 forward, when statutory volumes for all biofuel types expire, except for biodiesel, for which EPA already sets volumes under its own authority.

Also meeting with OMB and EPA are representatives of the renewable natural gas sector, which uses methane from landfills or agriculture to generate gas for power generation or transportation as compressed natural gas. A source with the sector says “we are asking for no reduction in volumes,” and no “going backward” by cutting 2020 volumes. Biogas supplies most of the requirement for cellulosic biofuel, since liquid cellulosic fuel production has fallen far short of the targets set by Congress.

Meanwhile, some environmentalists are also pressing EPA to perform an Endangered Species Act (ESA) consultation with other agencies as part of the RFS rule. The D.C. Circuit in a recent ruling largely upholding the 2019 RFS nonetheless remanded the rule for EPA’s failure to justify not consulting under the ESA. Many environmentalists doubt the GHG-reduction potential of the RFS, and point to adverse environmental impacts on species habitat and water quality. — Stuart Parker (