Ploughing the Same Furrow: EPA Proposes 2017 Renewable Fuel Volumes Using the Methodology From its Previous Rule

Source: By Jim Rubin, Dorsey & Whitney LLP • Posted: Wednesday, June 8, 2016

On May 31, 2016, the Environmental Protection Agency (EPA) published in the Federal Register its proposed 2017 volumes under the Renewable Fuel Standard (RFS), an ever-controversial program established by Congress to spur the development and use of biofuels.  Specifically, EPA proposed volumes for cellulosic biofuel, biomass-based diesel (biodiesel), advanced biofuel and total renewable fuel well below statutorily-prescribed volumes but in amounts EPA estimates will still drive increasing development, distribution and use of these fuels.  In proposing new volumes, EPA utilized largely the same methodology it employed in late 2015 when it retroactively set levels for 2014 and 2015 and established volumes for 2016 for these categories of fuels.  By combining statutory waiver provisions with what it considers realistic estimates of demand, capacity and market growth, EPA has again sought in its 2017 proposal a middle way that would encourage further production of cellulosic, biodiesel and other advanced biofuels through increased volume requirements while recognizing the existing constraints to distribution and use of the fuels.  EPA’s prior rule and methodology are under legal challenge by both the biofuels and refining industries.  The outcome of that case could significantly impact the final volumes for 2017 and beyond.

RFS In a Nutshell

The RFS program, codified in Clean Air Act section 211(o), was intended to increase the use of renewable fuels in the U.S. transportation system in order to reduce greenhouse gas (GHG) emissions and increase energy security.  Congress established statutory volumes for these fuels by category, which increase yearly in order to stimulate further growth in advanced biofuels, which have a lower GHG lifecycle than conventional fuels.  The program also incentivizes the production and use of non-advanced or conventional renewable fuels (chiefly corn-based ethanol), but these volumes are to remain constant in 2015 and beyond, again to focus on advanced biofuels production.  Under the RFS, each November, EPA is to set the following year’s volumes of RFS fuels, except for biodiesel, which is to be set 14 months in advance.  Each of the categories of biofuels is “nested,” meaning cellulosic and biodiesel volumes can also meet advanced biofuel volume requirements, and all three can meet total renewable fuel volume requirements.

Although Congress mandated minimum volumes for each of the fuels through 2022, it provided two statutory waivers in case the specified volumes could not be met in a given year.  The first, known as the cellulosic waiver, section 211(o)(7)(D)(i), allows EPA to reduce the volume of total renewable fuel and advanced biofuel to address any shortfall in volumes EPA calculates as available for cellulosic biofuel compared to statutory levels.  The second, referred to as the “general waiver,” section 211(o)(7)(A), authorizes EPA to reduce volumes by finding there is an inadequate supply of renewable fuel (or to avoid severe economic or environmental harm) to meet statutorily-prescribed renewable fuel levels.

Once volumes are finalized, EPA translates them into compliance obligations that refiners and importers must meet each year through production or purchase and blending of renewable fuels, or, alternatively, through the purchase of renewable identification numbers (RINs), which are generated by other renewable fuel producers.  Hence, the RFS obligation and resulting costs fall directly on refiners and importers which must utilize ever increasing amounts of biofuels to produce transportation fuels in the U.S.  The intended benefits accrue to biofuel producers and importers in terms of an increased market, and ultimately to the public by an increase in fuel diversity and energy security and a reduction in GHG emissions.

Opposing Views

The refining industry has long been critical of the RFS program for its imposition of costs on the industry to benefit renewable fuel producers and its belief that EPA has set volumes that are expensive and largely unattainable.  A chief argument is that ethanol cannot be blended into the nation’s transportation fuel supply in an amount  greater than 10% of that supply for a number of legal (e.g. warranty) and practical reasons (e.g. lack of demand and distribution infrastructure), a phenomenon called the “E10 blend wall” (named after the predominantly marketed gasoline/ethanol blend).  The biofuels industry, on the other hand, sees the steadily increasing volumes of mandated biofuels as absolutely critical to driving the market toward greater production and use, particularly of advanced biofuels, which are generally more expensive than conventional fuels.  They argue that reductions in volume undercut the development of the biofuels market, in violation of Congressional intent.

The 2016 “Compromise” Rule

Neither side was satisfied with EPA’s prior rule, issued in late 2015, which finalized volumes for the RFS fuels belatedly for 2014 and 2015, and for 2016 (and for biodiesel in 2017) well below statutory volumes.  See Figure 1 below.  EPA utilized actual gallons produced for the 2014 and (most of) 2015 figures.  But for 2016, EPA determined that volumes for cellulosic biofuel were far below statutory limits and there were not sufficient volumes of advanced biofuel and total renewable fuels available or able to make up the shortfall.  As to conventional ethanol, EPA agreed that the practical and legal constraints imposed by the “blend wall” prevented significantly higher volumes of total renewable fuel.  Hence, EPA used a portion of the cellulosic waiver to reduce volumes of advanced biofuel from a statutory total of 7.25 billion gallons to 3.61 billion gallons, and combined the cellulosic and general waivers to reduce volumes of total renewable fuel from a statutory total of 22.5 billion gallons to 18.11 billion gallons (or an implicit target of 14.50 billion gallons of conventional ethanol, 500 million gallons below the statutory target).  EPA asserted that constraints on distribution could be considered part of a finding of inadequate domestic supply under the general waiver.  EPA, however, set the volume for total renewable fuels at a level that would slightly exceed the “blend wall,” and stated its intention to go beyond that amount in future rules to help spur the market to overcome these constraints.  This was the first time EPA used these waivers to reduce the advanced biofuel and total renewable fuel volumes.

EPA’s acknowledged compromise was challenged by the refining industry generally as setting volumes too high and by the biofuel industry generally as setting volumes too low.  Judicial challenges to the rule and EPA’s methodology are pending in the D.C. Circuit.

The Current 2017 Proposal 

EPA’s proposed 2017 volumes (and 2018 volume for biodiesel) continue the small but steady increase in volume of biofuels over time, yet are still far below the statutory levels.  See Figure 1 below.  Once again, EPA’s anticipation of a significant shortfall in cellulosic biofuels (312 million gallons versus a statutory 5.5 billion gallons), drives the overall volume proposals.  With this shortfall, EPA finds it impossible to achieve the numbers and timeline set forth by Congress.  EPA further cites, as before, to the same constraints on distribution infrastructure as limiting the ability of renewable fuels, and especially ethanol, to achieve statutory volumes.

As to advanced biofuels, EPA once again determines there is insufficient supply through domestic production and imports to meet the 9 billion gallon mandated volume, and so proposes to use nearly the full amount of the cellulosic waiver to reduce the 2017 volume to 4 billion gallons.  This is an increase of nearly 400 million gallons from the 2016 final volume of 3.61 billion gallons, and represents EPA’s estimation of a “reasonably achievable supply.”

As to total renewable fuels, EPA also determines that there will be inadequate supply to meet statutory volumes, based on the cellulosic shortfall and on the alleged practical and legal constraints of the “blend wall,” and combines the cellulosic and general waivers to reduce the statutory volume from 24 billion gallons to 18.8 billion gallons (or an implicit non-conventional ethanol target of 14.80 billion gallons versus the implicit 15 billion gallon statutory target.)  This represents EPA’s view of the maximum reasonably achievable volume of total renewable fuels, an increase of nearly 700 million gallons from the 2016 final volume of 18.11 billion gallons.  Only biodiesel volumes are expected to increase above statutory levels (as well as an increase of 1 million gallons from the 2016 final volume).  As in the prior rule, EPA has chosen not to draw down the substantial bank of existing RINs to increase 2017 volumes so as to allow the bank to provide compliance flexibility.

EPA ultimately concludes that the proposed volumes of advanced biofuel and total renewable fuel represent significant growth from the outset of the program but that “real-world challenges” continue to constrain that growth.  It further states that the proposed standards “are expected to continue driving the market to overcome constraints in renewable fuel distribution infrastructure, which in turn is expected to lead to substantial growth over time in the production and use of renewable fuels.”  Once again, EPA does not view the “blend wall” as a permanent constraint on the market, but rather proposes volumes that will overcome the constraints through market-driven development of supply infrastructure and the ability of the market to absorb more renewable fuels.

Specter of Reset

There has been significant pressure on Congress to reform the RFS, whether by lowering the statutory volumes permanently, relieving the refiners of compliance obligations and placing them elsewhere, or simply scrapping the whole program.  Even without that pressure, the RFS provides for a statutory reset under section 211(o)(7)(F), starting in 2016, when EPA has waived any applicable volume requirement below 20% for two consecutive years, or at least 50% for a single year.  This finding would require EPA to promulgate a rule within a year from issuing the waiver to modify the statutory volumes through 2022.  EPA has gone above the 20% trigger for advanced biofuels for 2015 and 2016, and does so again for 2017 in its current proposal (the proposed 2017 volume, if finalized, would also exceed the 50% trigger).  EPA would trigger the 20% threshold for total renewable fuels for the first time in its 2017 proposal.  Significantly, EPA’s proposal makes no mention of the statutory reset or how it would address this provision, but it is likely to face the issue in public comments.

Potential Next Steps  

EPA is accepting public comments on its 2017 proposal through July 11, 2016 and has promised to issue a final rule in November 2016, likely after the elections.  EPA has asked for better information on estimates for production and import of all categories of fuels as well as gasoline and diesel consumption.  In the final rule, EPA may very well change its volumes based on what information it receives in comments, as it did between the 2014-2016 proposed and final volumes.  At the same time, EPA will be defending its methodology in court while its 2014-2016 volumes are being litigated, including its same use of the waivers.  It is unclear if a final ruling in that case will come down before the 2017 final rules are issued, and if it does, it may not give EPA enough time to re-consider its 2017 volumes, if necessary, to respond to any adverse findings.  Indeed, EPA is once again likely to face critical comments from all sides as it seeks a final resolution that best approximates the realities of the market while trying to spur that market forward.

Fig. 1:  RFS Statutory and Final Volumes:  2014-2017 

  2014 statutory   2014 final   2015 statutory  2015 final  2016 statutory  2016 final 2017 statutory  2017 proposed 
Cellulosic biofuel (million gallons) 1.75 (billion) 33 3 (billion) 123  4.25 (billion) 230  5.5 (billion) 312
Biodiesel (billion gallons)  ≥1  1.63  ≥1  1.73  ≥1 1.9  ≥1 2.0 (final); 2.1 proposed for 2018
Advanced biofuels (billion gallons)  3.75 2.67 5.5 2.88 7.25 3.61 9.0 4.0
Total renewable fuels (billion gallons)  18.15 16.28 20.5 16.93 22.5 18.11 24 18.8