Biofuel Waiver Use by EPA May Withstand Remand, Attorneys Say

Source: By Brian Dabbs, Bloomberg • Posted: Monday, May 8, 2017

An expected remand of recent EPA biofuel blending requirements isn’t a guaranteed gift to the program’s supporters, attorneys and analysts told Bloomberg BNA.

The U.S. Court of Appeals for the District of Columbia is poised to decide the case in the coming weeks following oral arguments late last month ( Ams. for Clean Energy v. EPA, et al, D.C. Cir., 16-1005, argued 4/24/17 ). Uncertainty prevails about the details of the decision, and there is no clear precedent, the attorneys said. Still, they said that based on what the judges said during the hearing, it was likely the court would send the rule back to the Environmental Protection Agency for revision.

If that happens, the EPA has options to maintain the quotas under challenge, which cover 2014 to 2016, or even reduce them further, attorneys and researchers said. That would be a setback to the biofuel industry’s efforts to get the agency to stop using waivers that reduce the biofuel blending mandates below the target levels set by law.

‘It’s a Supply Problem’

Judges Brett Kavanaugh and Patricia Millett questioned the EPA’s 2014 to 2016 required biofuel volumes and its defense for why it used waivers to allow lower amounts than required by law. The EPA said that waivers were needed largely because of insufficient demand for biofuels.

The agency is able to issue a similar requirement using a supply argument that provides better legal insulation, H. Sterling Burnett, a policy research fellow at the free-market Heartland Institute, told Bloomberg BNA.

“Even if the court throws it out, that doesn’t necessarily give a victory to ethanol promoters because the EPA can come back and say ‘it’s not a demand problem, it’s a supply problem,’” Burnett said. “There’s nothing stopping the agency from issuing the exact same standard and doing a different justification for it.”

“It needs to be set on what you expect the market supply situation to actually look like, the reality of it not the pipe dream because if you issue a pipe dream, you’ll get sued,” he said. “If you issue the reality, you may still get sued but you’ll have evidence backing you up.”

The renewable fuel standard directs the EPA to require annual increased blending of conventional ethanol and advanced biofuel set by Congress in 2007. Congress designed the program to reduce greenhouse gas emissions and give the U.S. more energy independence.

The underlying goal of the statute is to create a biofuel market, rather than respond to existing production.

Refiners and importers comply with the rules by blending fuel or purchasing credits called Renewable Identification Numbers. The 2014 to 2016 rule undercut congressional targets in each year for both ethanol and advanced biofuels, which include biomass-based diesel and cellulosic biofuel made from switchgrass and agricultural waste.

The statute’s waiver authorities focus on insufficient biofuel supply and economic harm.

Blend Wall Concerns

The EPA upped its quotas in the 2017 rule, meeting the congressional target of 15 billion gallons of blended ethanol. But the agency remains concerned about hitting the blend wall, a term used to describe a blending mandate that is above the amount of biofuel refiners and marketers can actually absorb, Chuck Wehland, a partner at Jones Day, told Bloomberg BNA.

“EPA doesn’t think it’s possible for refiners and marketers to blend as much biofuel as the statute commands them to,” Wehland said. “I think EPA is going to find some way to express that in the rulemaking, whether it’s focusing on supply or demand or some other factor.”

The primary reason for the market constraints, Wehland said, is lower-than-expected petroleum consumption nationwide due to EPA fuel economy standards and increasing electric vehicles.

The energy statute directs the EPA to issue RFS proposals in the spring each year in order to finalize rules by Nov. 30. The agency didn’t respond to a Bloomberg BNA request for comment.

EPA Administrator Scott Pruitt has criticized the RFS program in the past, but said he would implement it according to the law during his confirmation process. President Donald Trump, on the other hand, garnered significant support from the Corn Belt pledging to champion ethanol.

General Waiver in the Crosshairs

The biofuel challengers, led by the National Biodiesel Board and the American Coalition for Ethanol, are aiming to crack down on the EPA’s use of the general waiver, which applies to the conventional ethanol requirements, in future rulemakings.

A waiver isn’t needed if the EPA continues to require 15 billion gallons of blended ethanol annually, the top line quota in the energy statute. The statute directs specific targets through 2022.

“The problem is they many not want to do that for a variety of reasons,” Kevin Book, head of research at ClearView Energy Partners, told Bloomberg BNA. “The blend wall is going to get increasingly tight the way we look at it because we see gasoline demands down this year and declining thereafter.”

Retroactive Compliance Unlikely

Even in the event of a remand, the court likely won’t require retroactive compliance with elevated biofuel quotas for 2014 to 2016, a decision that would be a logistical challenge with shaky legal standing, the experts said.

“I would call that an unorthodox solution for trying to solve the problem,” Book said. “It would create new problems that were bigger perhaps than the old problems.”

Byron Dorgan, a former senator from North Dakota and policy adviser at Arent Fox LLP, told Bloomberg BNA the court could, however, direct refiners and importers to blend more biofuel moving forward to compensate for the 2014 to 2016 underbid, a prospect that would likely invite tension between the agency and the ruling. Dorgan helped author the energy statute that included the RFS.

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