D.C. Circuit Forces EPA to Confront Reality of Economic Impacts of RFS on Small Refiners

On August 14, 2024, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) released a redacted copy of its opinion in Sinclair Wyoming Refining Co. LLC v. EPA,¹ in which the D.C. Circuit upended the U.S. Environmental Protection Agency’s (“EPA” or the “Agency”) overly restrictive treatment of the Renewable Fuel Standard (“RFS”) program’s small refinery exemption (“SRE”) and mostly vacated a series of denials issued by EPA in 2022 to companies petitioning for the SRE. This opinion, alongside the United States Court of Appeals for the Fifth Circuit’s (“Fifth Circuit”) decision last year in Calumet Shreveport Refining, L.L.C. v. EPA,² represents a substantial blow to EPA’s recent efforts to limit small refineries’ access to the SRE. Courts have increasingly scrutinized EPA’s application (or denial) of the SRE to refiners, and now the Agency will need to go back to the drawing board to refine its approach to granting or denying SREs.

Analysis of Sinclair Wyoming Refining

The RFS program establishes requirements for renewable fuels to be blended into U.S. transportation fuels, and EPA tracks regulated entities’ compliance with credits called Renewable Identification Numbers (“RINs”), which entities must obtain and retire. However, small refineries “may at any time petition the [EPA] for an extension of [a separately established] exemption” from their RFS obligations “for the reason of disproportionate economic hardship,” and EPA must, in considering a petition in consultation with the Department of Energy (“DOE”), assess the findings of a statutorily mandated DOE study “and other economic factors.”³ Historically, EPA has applied a 2011 DOE study and scoring matrix to assess SRE petitions and largely granted petitions when recommended by the matrix.⁴ However, following a United States Court of Appeals for the Tenth Circuit (“Tenth Circuit”) opinion that determined that EPA had made several errors when granting certain petitions (which was partially reversed by the Supreme Court and entirely vacated by the Tenth Circuit),⁵ EPA dramatically shifted its approach to the SRE. In April⁶ and June 2022,⁷ the Agency issued two decisions that denied 36 SRE petitions for compliance year 2018 and 69 SRE petitions for compliance years 2016 through 2021, respectively (the “Denial Decisions”). The Denial Decisions were based on EPA’s new determination that a “disproportionate economic hardship” must be solely caused by RFS compliance,⁸ as well as the Agency’s conclusion that small refineries do not experience disproportionate economic hardships under the RFS program because RINs markets are liquid and efficient, allowing regulated entities to “ratably” purchase RINs and recover RINs costs by passing them through to consumers.⁹

Refineries and others challenged the Denial Decisions and related Alternative Compliance Actions. Most of these challenges were consolidated before the D.C. Circuit in Sinclair Wyoming Refining, in which the court largely vacated the Denial Decisions. In doing so, the D.C. Circuit held that the Denial Decisions were contrary to the law because EPA’s new SRE approach impermissibly narrowed the exemption. The court determined that EPA’s new approach to “disproportionate economic hardship” (i.e., refineries would only be eligible for the SRE extension if they experienced hardship caused solely by disproportionate RFS compliance costs, which only include RIN costs) was inconsistent with the Clean Air Act (“CAA”). This was so, the court explained, because (A) “economic hardship” extends beyond just “compliance costs,” and limiting the former to the latter is an impermissibly narrow statutory interpretation; (B) EPA’s exclusive focus on RFS compliance costs functionally read its obligation to consider “other economic factors” beyond economic hardship out of the CAA; and (C) the statutory text does not require that economic hardship be solely caused by RFS compliance, and EPA’s contrary reliance on the Tenth Circuit’s opinion is undermined by that opinion having been entirely vacated.¹⁰ Moreover, the D.C. Circuit explained, EPA’s determination that nonratable RINs purchases should not count toward a “disproportionate economic hardship” because they are a “business choice” that is not caused by RFS compliance is impermissible in light of the CAA’s flexible approach to RFS compliance.¹¹

The D.C. Circuit also held that the Denial Decisions were arbitrary and capricious. The court explained that EPA (A) previously explained that it thought ratable RIN retirements were infeasible, and it failed to explain its changed position in the Denial Decisions that RINs could, and should, be ratably purchased and retired; (B) used an economic model that relied on “sheer speculation” to explain RIN pass-through pricing for almost 30% of all transportation fuel sales during the year (i.e., weekend fuel sales); and (C) assumed that RIN costs are immediately passed through to customers, even though the main study on which it relied showed that more than 25% of RIN pricing is passed through after the date of sale.¹² The D.C. Circuit separately upheld EPA’s denials of two refineries’ SRE petitions (where the refineries were otherwise ineligible for the SRE extension) and rejected three petitions challenging the Alternative Compliance Actions.¹³

Conclusion

As discussed above, with Sinclair Wyoming Refining the D.C. Circuit has rejected two of the main elements of EPA’s legal and economic analysis of the impacts of the RFS program on small refiners. Going forward, EPA must consider economic hardships beyond just the costs of RFS compliance (e.g., supply chain costs or geography-specific issues), and it must go back to the drawing board for its analysis of the economic impacts of the RFS mandate on small refiners.

¹ No. 22-1073, 2024 WL 3801747 (D.C. Cir. July 26, 2024).

² 86 F.4th 1121 (5th Cir. 2023).

³ 42 U.S.C. § 7545(o)(9)(B)(i)–(ii).

⁴ See Sinclair Wyoming Ref. Co. LLC, 2024 WL 3801747, at *3.

⁵ See Renewable Fuels Ass’n v. EPA, 948 F.3d 1206 (10th Cir. 2020), rev’d on other grounds sub nom. HollyFrontier Cheyenne Ref., LLC v. Renewable Fuels Ass’n, 594 U.S. 382 (2021), and vacated, No. 18-9533, 2021 WL 8269239 (10th Cir. July 27, 2021).

⁶ See April 2022 Denial of Petitions for Small Refinery Exemptions Under the Renewable Fuel Standard Program, 87 Fed. Reg. 24,300 (Apr. 25, 2022).

⁷ See Notice of June 2022 Denial of Petitions for Small Refinery Exemptions Under the Renewable Fuel Standard Program, 87 Fed. Reg. 34,873 (June 8, 2022).

⁸ See EPA, EPA-420-D-21-001, Proposed RFS Small Refinery Exemption Decision, at 23–26 (Dec. 2021).

⁹ Id. at 26–52, 62.

¹⁰ Sinclair Wyoming Ref. Co. LLC, 2024 WL 3801747, at *6–9.

¹¹ Id. at *9–10 (“The CAA and Supreme Court precedent make clear that EPA cannot sunset the small refinery exemption by regulatory fiat.”).

¹² Id. at *10–13 (citation omitted).

¹³ See id. at *13–24.

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