EPA Issues Broad Updates to Renewable Fuel Standards Program: 5 Things to Know

These actions, collectively announced on June 3, 2022, raise RFS compliance obligations for all producers and importers of gasoline and diesel fuel, including small refineries, some of which may have been exempted from compliance with the RFS program in prior years. Below are 5 things to know about EPA’s RFS announcements.

1. EPA Increases Renewable Fuels Volume Requirements Despite Record High Gas Prices

EPA’s rule increases renewable fuels targets for compliance year 2022 across the board relative to 2020 and 2021 levels. In addition, EPA retroactively set the renewable fuels targets for each of those years but chose levels that conformed to the actual amount of renewable fuels consumed in those years. As with any transportation fuels-related rulemaking that is moving forward now, this rulemaking is almost certainly going to be evaluated, at least in part, by the American public on its effect on the costs of transportation fuels, with an increase in such costs perhaps favoring lowering of cellulosic biofuel requirements.

Even though gas prices nationwide are at an all-time high, EPA’s rule would increase the biofuel mandates beyond the 2021 standards, although some types are at levels lower than originally proposed back in December 2021. Notwithstanding reduced volumes for certain categories of renewable fuels as compared to the proposed rule, the final rule mandates increases for every type of renewable fuel in 2022, as seen in the following chart (units are in billions of ethanol-equivalent gallons, except for biomass-based diesel, which is biodiesel-equivalent):

	Proposed 2021	Final 2021	Proposed 2022	Final 2022
Cellulosic biofuel	.62	0.56	.77	.63
Biomass based diesel	2.43	2.43	2.76	2.76
Advanced biofuel	5.20	5.05	5.77	5.63
Total renewable fuel	18.52	18.84	20.77	20.63
Supplemental	N/A	N/A	.25	.25

 

The “supplemental amounts” represent the volumes relevant to Americans for Clean Energy v. EPA (“ACE Decision”) discussed in more detail below.

Whether and how much the rulemaking will increase transportation fuel costs is a key question and EPA seemingly took inconsistent positions on this point.  In the Regulatory Impact Analysis (“RIA”) for the rule, EPA estimated the Renewable Identification Number (“RIN”) price impacts on various fuel blends relative to RFS levels for prior years and for a hypothetical situation where there is no RFS. The range in price impacts ran from $0.17 per gallon of gasoline and diesel to $0.01 per gallon. EPA also estimated that customers of ethanol blends above E10 save up to $0.96 per gallon.

In defending its rejection of requests by small refiners for relief from the RFS, however, EPA took a somewhat contradictory position. Specifically, EPA rejected the notion of disproportionate harm to small refiners relative to large refiners because it found that the market price for these renewable fuels “increases to reflect the cost of the RIN.”¹ In its response to comments, EPA explained its view as follows:

[T]he cost of RINS is not a ‘cost’ borne by obligated parties but rather passed through to . . . their customers and ultimately to consumers of transportation fuels.²

Thus, in EPA’s view, the RFS could impose no hardship to small refiners because they simply pass the costs of the RINs on to the market as do all other refiners. Whether that is actually the case, the prices for RINs currently range from above $1.00 (D6) to above $3.00 (D3), which is far in excess of the cost calculations presented in the RIA. Importantly, the environmental justice analysis for the rulemaking was explicit that any price impacts from the rulemaking “would have a larger impact on lower-income communities.”³ EPA derived this projection indirectly, relying on another agency’s survey data instead of making its own findings. Assuming that the agency is correct about this impact, it would seem important for EPA to be certain about the effects of the RFS on the costs of transportation fuels in the United States.

2. EPA Adds Supplemental Volume Obligations for 2022 and 2023 in Response to the D.C. Circuit’s Remand in Americans for Clean Energy v. EPA

EPA responded to the D.C. Circuit’s 2017 remand in the ACE Decision⁴ by applying a 250-million-gallon supplemental standard in compliance year 2022, with the intention of further proposing an additional 250-million-gallon supplemental standard in compliance year 2023.  Prior to the ACE Decision, EPA used its general waiver authority under 42 U.S.C. § 7545(o)(7) to lower the total renewable fuel volume target for compliance year 2016 by 500 million gallons. While the general waiver authority gives EPA the ability to lower the statutory volume requirement if it determines that “there is an inadequate domestic supply” of renewable fuels, the D.C. Circuit held that this provision unambiguously refers to refiners, blenders, and importers (i.e., the supply side).⁵ EPA, however, impermissibly considered demand-side constraints in the market to determine that the statutory volume requirements were infeasible for 2016.

The court thus vacated the 500-million-gallon total renewable fuel reduction based on EPA’s general waiver authority and remanded the issue to EPA for further consideration. On remand, EPA introduced two supplemental obligations to make up for the 500-million-gallon reduction the agency unlawfully removed from the 2016 total renewable fuel volume standard. According to EPA, the new supplemental volume obligations mean that the original 2016 standard for total renewable fuel will remain unchanged and the compliance demonstrations that refiners and importers made for it will remain in place.⁶ This approach raises some questions particularly for currently obligated parties that may not have been obligated parties in 2015 and 2016. EPA’s approach means that obligated parties must bear a renewable volume obligation (“RVO”) for volumes from a time period when they were not participating in the market.

Interestingly, one commenter suggested that EPA allow obligated parties to use RINS left over from the 2016 time period that could be used to address these obligations for 2022 and 2023. EPA noted that there were 39 million RINs from this time period that had not been used but characterized them as unavailable because they were “expired” (which is true because they are beyond the two-year shelf life set by EPA). Even though EPA was addressing a compliance obligation related to that same time period, the agency somehow concluded that allowing these unused RINS from that time period to be used would be “inappropriate.”⁷ As a result of this approach, however, EPA has added to the compliance demands and pricing impacts for all obligated parties in the current transportation fuels market.

3. EPA Allows Biointermediates but Restricts Their Use

The notion of biointermediates has long raised concerns within EPA because the agency designed the RFS program with the assumption that renewable biomass would be converted into a renewable fuel at a single facility where the nexus between renewable biomass and renewable fuel would be obvious and easy to verify. Ease of verification is an important factor for EPA because of concerns related to fraudulent RIN generation. The interest in a biointermediate that is produced at one facility and shipped to another for addition into a renewable fuel represents an evolutionary step in the renewable fuels industry and seems like a logical step for a market that continues to develop.

The rulemaking revises the RFS to recognize the use of biocrude, free fatty acids, and undenatured ethanol as biointermediates for which RINS can be generated but tightly restricts their usage principally out of concern for double-counting or fraudulent conveyance of RINs.  Moreover, the EPA stands ready to apply strict consequences to both the producer of the biointermediate and the producer of the biofuel in the event of any failures of these biointermediates. By way of overview, the new provisions of the RFS addressing biointermediates include the following concepts:

• Rather than the pathway approach for renewable fuels, only producers named in the regulations may produce biointermediates eligible for RINs;
• Producers of biointermediates must sell to a single renewable fuel producer and they may change customers only once a year;
• But renewable fuel producers may acquire biointermediates from multiple producers;
• The biointermediate producer and its renewable fuel producing customer must both participate in the RFS Quality Assurance Program and must use the same auditor;
• In order to be eligible for approval as a biointermediate, the main criteria would be whether it (A) qualifies as renewable biomass, (B) limits opportunities for double counting, and (C) presents other considerations that may mandate further restrictions;
• Where co-processed with petroleum feedstocks, the measurement of renewable fuel content must be done with an approved C-14 method, or a facility-specific alternative approved by EPA;
• If any RINs from a batch produced using intermediates are invalid, the entire batch will be determined to be invalid unless EPA exercises its discretion to determine otherwise; and
• If the renewable fuel is renewable diesel, renewable gasoline, renewable diesel blendstock or renewable gasoline blendstock, the invalidity of a RIN under 40 C.F.R. § 80.1431(a)(1) would give rise to an RVO because the “fuel will no longer be considered renewable” and “cannot be excluded from an obligated party’s RVO.”⁸ Fines and penalties for the failure of the RIN and associated violations would also remain a possibility.

4. EPA Categorically Rejects Small Refiners Exemptions Finding That They Can Pass Costs On to Wholesale Purchasers

As mentioned above, EPA also announced the denial of 69 petitions from small refineries seeking exemptions from the RFS program for one or more compliance years between 2016 and 2021. EPA reasoned that small refineries cannot categorically show disproportionate economic hardship from compliance with the RFS program because costs to comply are fully passed through to wholesale purchasers of fuel and diesel. In so doing, EPA formally adopted the Tenth Circuit’s interpretation of the CAA’s small refinery exemption in 42 U.S.C. § 7545(o)(9), which requires small refineries to demonstrate that compliance with the RFS program directly caused economic hardship, and that the hardship be disproportionate when compared to other obligated parties.⁹

As we previously discussed, the Supreme Court left this particular Tenth Circuit interpretation in place, giving EPA a green light to limit hardship exemptions and require small refineries to adhere to the RFS’s requirements.  EPA has now taken that step.¹⁰

Specifically, EPA has determined that a small refinery may only be granted an exemption from the RFS program if it sufficiently demonstrates (1) “a direct causal relationship between its RFS compliance costs” and the alleged disproportionate economic hardship and (2) how its specific RFS compliance costs (through the purchase or retirement of RINs) are sufficiently disproportionate compared to other refineries.¹¹ Importantly, however, EPA did not just stop there; the agency determined that unintegrated small refineries are categorically similar to all other refiners and importers when it comes to RFS compliance because they can pass along their compliance costs to consumers in the form of higher wholesale gasoline and diesel prices. And as applied to the pending petitions, EPA found “no evidence supporting the assertions from the petitioning small refineries that their RFS compliance costs are disproportionately greater than for other refineries or that they are not able to pass along their RFS compliance costs to wholesale purchasers.”¹²

EPA’s findings mean that small refineries and other regulated entities will have a difficult, if not impossible, time obtaining the small refinery exemption that Congress expressly provided for in the CAA. As such, small refineries that thought they could demonstrate disproportionate economic hardship should now be preparing to comply with the RFS program and the new volume increases by blending renewable fuels or purchasing RINs from other entities, even if it means that they have to pass the costs of compliance down to consumers.

5. What’s Next for the RFS

As discussed in our earlier analysis, prior waivers granted by the EPA with respect to advanced biofuel targets and corresponding reductions in total renewable fuel targets triggered a “reset” under the RFS, allowing EPA to depart from the statutorily mandated targets. There are no statutory targets after 2023, and no doubt EPA intends for this rulemaking to send a strong signal of continued commitment to increasing renewable fuel production targets. In addition, although only one sentence in the final rulemaking, after decades since Congress first deemed electricity generated from biogas as being an eligible renewable “fuel,” EPA has at long last confirmed that it will address “eRIN” generation in a future rulemaking. Once approved, biogas producers will have additional opportunities to stack environmental attributes under different regulatory programs, such as the California Low Carbon Fuel Standard, with eRINs.

¹ Notice of June 2022 Denial of Petitions for Small Refinery Exemptions Under the Renewable Fuel Standard Program, 87 Fed. Reg. 34,873, 34,874 (June 8, 2022).

² EPA, EPA-420-R-22-009, Renewable Fuel Standard (RFS) Program: RFS Annual Rules: Response to Comments 157 (2022) [EPA, Response to Comments].

³ EPA, EPA-420-R-22-008, Renewable Fuel Standard (RFS) Program: RFS Annual Rules: Regulatory Impact Analysis 250 (2022).

⁴ See 864 F.3d 691 (D.C. Cir. 2017).

⁵ Id. at 707.

⁶ EPA, Renewable Fuel Standard (RFS) Program: RFS Annual Rules 61 (June 3, 2022) (to be published in the Federal Register) [EPA, RFS Annual Rules].

⁷ EPA, Response to Comments at 157.

⁸ EPA, RFS Annual Rules at 101.

⁹ Renewable Fuels Ass’n v. EPA, 948 F.3d 1206, 1243-51 (10th Cir. 2020), rev’d on other grounds by HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Ass’n, 141 S. Ct. 2172 (2021).

¹⁰ On June 9, 2022, three United States Senators wrote to the U.S. Comptroller General asking to review whether EPA’s denial of these petitions is an administrative rulemaking that would be subject to the Congressional Review Act. If the denial announcement is a rulemaking, it would have to go through notice-and-comment procedures.

¹¹ EPA, EPA-420-R-22-011, June 2022 Denial of Petitions for RFS Small Refinery Exemptions 17 (2022).

¹² Id. at 62.