RFS backers assess strategies for legal assault on EPA rule proposal

Source: Amanda Peterka, E&E reporter • Posted: Tuesday, November 19, 2013

On Friday, U.S. EPA proposed to reduce the nation’s ethanol and advanced biofuel mandates for the first time since the nation had a renewable fuel standard.

In its proposed rule, EPA said it believes a reduction in volumes is necessitated by the ethanol “blend wall,” the term used by oil companies for the technically feasible amount of ethanol that can be used in today’s fueling infrastructure and vehicles (E&ENews PM, Oct. 15). The agency would require 15.21 billion gallons of renewable fuel production next year, compared to the 18.15 billion gallons set into statute.

“We believe that the ethanol blend wall represents a circumstance that warrants a reduction in the mandated volumes for 2014,” EPA said in its 204-page proposed rule.

But the path it’s chosen to achieve the reduction for next year is facing criticism from the biofuels industry and some agriculture and energy experts. They say the agency is on shaky legal footing based on the criteria given by the 2007 Energy Independence and Security Act, through which Congress created the RFS, and have threatened lawsuits if the agency finalizes the rule.

“The blend wall should not be a factor in a waiver decision,” said Bob Dinneen, president and CEO of the Renewable Fuels Association. “The minute you introduce blending capacity or blending considerations into a decision on whether or not to waive the program is the minute you take the nation’s renewable fuel policy away from the statute and you put it in the hands of the oil companies.”

Although the 2007 EISA set out specific levels of biofuels production that must be achieved each year until 2022, it allowed EPA some leeway in deciding what those amounts should be. Every year, EPA goes through an exercise of estimating production levels for the following year and releases its targets.

Until now, the agency has never proposed to reduce the overall renewable fuel mandate, which includes the conventional corn ethanol target, nor has it proposed to lower the advanced biofuel goal, which accounts for fuel not made from corn starch.

For next year’s biofuels goals, EPA has proposed to use a combination of the 2007 statute’s two waiver provisions. One allows the agency to reduce the overall advanced biofuel and renewable fuel targets by an amount consistent with the agency’s proposed reduction in cellulosic biofuels. This year, EPA has proposed to reduce the cellulosic target by about 1.7 billion gallons compared to the level set out in the statute.

More controversial is EPA’s decision to use its general waiver authority to lower the targets even further than the cellulosic waiver provides for. The dispute centers on the phrase “inadequate domestic supply,” one of two criteria the 2007 statute laid out for providing a general waiver.

EPA has chosen to interpret inadequate domestic supply as entailing the distribution issues involved with the blend wall. With the rule, the agency says the wall — made up of limitations in the amount of ethanol that can be consumed in gasoline, as well as constraints on supplying higher blends of ethanol to vehicles — is an insurmountable barrier to meeting the 2007 statute’s for renewable fuels next year.

“We believe that this ambiguous provision is reasonably and best interpreted to encompass the full range of constraints that could result in an inadequate supply of renewable fuel to the ultimate customers,” the agency said.

The oil industry, while it is pushing for even lower targets, agrees. It argues that the high price for an ethanol credit — known as a “RIN” and used to show compliance with the law — at the beginning of the year demonstrates that the blend wall is a real problem for refiners (Greenwire, March 18).

“We’re not challenging the fact that the Renewable Fuels Association and membership can make more ethanol,” said Charles Drevna, president of the American Fuel & Petrochemical Manufacturers. “We’re challenging the fact that we can only put so much into the system.”

But some experts have called into questioning EPA’s reasoning. In an analysis published before the rule was released, Jonathan Coppess, a professor of agricultural and consumer economics at the University of Illinois in Urbana-Champaign, said the agency “appears to be making a novel use of its waiver authority.”

“EPA’s interpretation of what constitutes inadequate supply could be viewed as contrary to congressional intent to increase renewable fuel production,” Coppess wrote, “because it holds the renewable fuels industry responsible for something beyond its control (the blend wall) at a time when the industry appears capable of producing sufficient quantities to supply the liquid fuel market.”

Both conventional ethanol and advanced biofuel producers argue that the term “inadequate domestic supply” simply refers to the amount of fuel that is produced in a given year and not to the constraints involved with blending it into petroleum-based gasoline and diesel. Producers argue that they are on track to meet or come close to the RFS’s full requirements next year through a combination of fuel production and carryover ethanol credits that are already in the market.

The existing corn ethanol industry’s nameplate capacity is about 14.8 billion gallons, and refiners currently have about 1.7 billion gallons’ worth of credits accumulated in previous years, according to industry experts. The advanced biofuels industry, meanwhile, is on track to reach at least 3.5 billion gallons of production, exceeding this year’s target of 2.75 billion gallons, according to the Advanced Biofuels Association.

“What we’re seeing is the oil industry taking one last run at trying to convince administrators of the RFS to relieve the legal obligation on them to blend more biofuel based on clever arguments meant to disguise the fact that oil companies just don’t want to blend more biofuel,” said Brooke Coleman, executive director of the Advanced Ethanol Council.

High prices a sign of RFS’s effectiveness?

Supporters of the RFS also say that high ethanol credit prices seen in the first half of the year — credits jumped from a few cents a gallon of ethanol in January to a high point of $1.44 in July — were a signal that the renewable fuel standard was working because it was supposed to spur petroleum companies to find ways to blend more ethanol into gasoline and diesel.

Supporters argue that oil companies were well aware that they’d have to invest in ethanol-friendly infrastructure when EISA was signed into law in 2007; the oil industry created the blend wall itself by choosing not to.

“What is surprising about the surge in RIN prices is not that it happened, but that it did not happen earlier,” said Iowa State University agricultural economics researcher Bruce Babcock in a recent study on the economics of ethanol credits.

The price for an ethanol credit is currently below 20 cents, its lowest level since the beginning of the year, thanks to EPA’s proposal and a draft that leaked last month.

EPA acknowledges that in 2007, distribution issues were specifically left out of the final Energy Independence and Security Act by the congressional conference committee convened to reconcile the House and Senate versions of the bill. But it says the statute is vague enough for the agency to have leeway in deciding how it should apply.

In the proposed rule, EPA argues that it’s common understanding for “supply” to refer to the amount of a resource that’s actually available for use. And since the statute didn’t define the word “inadequate,” the agency is free to interpret it in whatever way officials see fit.

If the final targets for next year resemble those in Friday’s proposed rule, biofuel groups have vowed to use whatever means possible, including potential lawsuits, to overturn the decision.

But before that happens, a pending court case in the U.S. Court of Appeals for the District of Columbia Circuit could have implications for how the agency is required to account for carryover credits, according to an analysis Friday by ClearView Energy Partners LLC. That case, filed by oil interests against EPA, could decide whether ethanol credits obtained in previous years can count toward the current year’s requirements