EPA Faces Legal, Political Doubts Over RFS Plan To Cut Biofuel Volumes

Source: By Stuart Parker, Inside EPA • Posted: Monday, August 30, 2021

EPA is facing difficult legal and political questions over its plan, recently submitted to the White House for review, to reduce biofuel blending volumes required under the renewable fuel standard (RFS), especially its reported effort to reduce volumes not only for 2021 but also retroactively for 2020.

EPA Aug. 26 sent its long-delayed proposal to set 2021 blending volumes to the White House Office of Management and Budget (OMB) for pre-publication review, according to OMB’s website.

EPA is also expected to propose its volumes for 2022, which by law must be finalized by Nov. 30.

EPA said in a statement that the proposal aims to get the RFS “back on track while addressing challenges stemming from decisions made under the prior administration.”

Various news outlets including Reuters are citing unconfirmed reports that the agency will not only reduce the 2021 volumes requirements below 2020 levels, because of a reduction in overall fuel demand during the COVID-19 pandemic, but may also retroactively cut volumes for 2020.

The agency may restore blending to higher levels for 2022, the reports suggest.

Cutting biofuel blending requirements would appease refiners seeking to lower their compliance obligations under the RFS, which requires them to blend increasing volumes of biofuels into the fuel supply each year unless EPA uses waiver authorities to reduce them from statutory levels.

GOP senators from oil-producing and refining states recently called for a general waiver of the 2020 obligations, citing economic hardship to refiners.

Specifically, reducing volumes for 2020 would help “merchant” refiners that do not blend their own biofuels and must comply with the program by purchasing RFS credits from others, as the price of credits would likely fall and supply increase, helping those that delayed buying credits.

But biofuels groups were swift to reject this idea. “EPA has repeatedly stated that it does not have the authority to go back in time and change RFS volumes that have already been finalized. And the Biden administration knows that reducing the 2021 and 2022 RFS volumes would derail the President’s agenda related to clean energy, climate, and domestic manufacturing jobs. It would also mark a big step backward on the path to net zero GHG emissions by 2050,” Geoff Cooper, president and CEO of the Renewable Fuels Association (RFA), said in a statement.

Yet EPA has informed a federal appeals court that it may reconsider the rule setting volumes for 2020 in light of recent litigation involving small refiner waivers, a key issue in the consolidated U.S. Court of Appeals for the District of Columbia Circuit case RFS Power Coalition, et al. v. EPA.

In the rule for 2020, EPA for the first time increased biofuel blending rates for refiners to compensate for dozens of small refinery waivers it then expected to issue.

Refinery Waivers

But to date, EPA has not granted any such waivers for 2020, and dozens of waiver requests remain undecided by the agency. Oil sector groups in the case are challenging this aspect of the 2020 RFS, among others.

The D.C. Circuit Aug. 19 stayed RFS Power until September 9 at EPA’s request, to allow the agency to decide whether to launch a reconsideration of the 2020 RFS. “If EPA decides that reconsideration is appropriate, then that reconsideration could narrow or moot issues that the Court would need to decide in this case,” EPA said in its July motion for continued abeyance.

The court’s order responded to EPA pleas for more time to determine the implications of the Supreme Court’s June 25 ruling in HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association, where the high court upheld small refiners’ ability to win RFS compliance waivers if they have not held a continuous line of such waivers previously.

The high court’s ruling reversed a 10th Circuit decision on the waivers issue, but it did not address other arguments the 10th Circuit made in rejecting three EPA waivers for small refineries, such as that EPA failed to explain sudden changes in its prior stance that refiners pass on the costs of RFS compliance to their customers, or that waivers must be granted only on the basis of economic hardship traceable directly to the RFS.

ClearView Energy Partners, an independent research firm, in an Aug. 27 research note suggests that setting RFS volumes for 2021 at levels of biofuel actually consumed would be an easier prospect than retroactively reducing volumes for the 2020 compliance year. This is because, in the company’s view, EPA is unlikely to finalize the 2021 regulation until early next year.

But ClearView also cites a political motivation, saying, “the White House may be particularly concerned about American drivers and how fuel costs could pose risks to thin Congressional majorities ahead of the 2022 mid-term elections. A policy stance to raise blending requirements could hand Biden’s critics an argument that his Administration is contributing to higher fuel costs.”

ClearView sees more scope, politically, for a rise in RFS volumes for 2022, assuming a continued economic recovery. “Congressional swing seats in play in the mid-term elections appear to be disproportionately levered to biofuels. Should the Administration feel biofuels policy could help win tight mid-term races, higher blending targets may reassure biofuel stakeholders about the Democrats’ commitment” to the sector.

With respect to retroactively reducing the volume for 2020, ClearView says, “writing down [compliance year, or CY] 2020 obligations seems a more challenging proposition than basing CY 2021 on actuals. CY 2020 percentage standards were set prior to the pandemic, so the effective blending requirement fell with fuel demand. The EPA has a long-standing practice of maintaining percentage standards once finalized, even if fuel market conditions prove different than expected.”

Biofuels groups are often swift to point out this feature of the RFS — volumes are translated into percentages of blending that refiners must meet. If refiners sell less fuel overall, their compliance obligations for biofuel blending are also reduced.

Further, “a retroactive change to the standard might require a higher evidentiary bar to survive judicial review” than a reduction in 2021 volumes relative to 2020, ClearView says. — Stuart Parker (sparker@iwpnews.com)