EPA Finalizes RFS Set Rule and Biogas Regulatory Reforms, But Drops eRins (For Now)
The U.S. Environmental Protection Agency (“EPA” or “the Agency”) this week released its final Renewable Fuel Standard (“RFS”) “Set Rule”.1 As explained in our prior article, the Set Rule represents a new period for the RFS, with EPA no longer bound by statutory renewable fuel targets and limited guardrails for developing future biofuel targets. The final Set Rule establishes biofuel targets for 2023, 2024, and 2025, which reflect, in part, the EPA’s “projection” that no small refinery exemption it might receive over the next three years will state grounds upon which it could be approved. As anticipated, the EPA declined to finalize its proposal regarding renewable identification numbers (“RINs”) generated from the use of qualifying biogas to power electric vehicles (“EVs”) (known as “eRINs”), deferring final action on the issue until a future rulemaking. With eRINs no longer in the spotlight, the focus of the rule shifts toward the “biogas regulatory reforms,” which fundamentally alter the existing approach to generating and separating RINs resulting from the use of renewable natural gas (“RNG”) as a transportation fuel. EPA hopes that its reforms will streamline facility registration and recordkeeping, while also reducing the risk of double counting RINs from RNG production and distribution. The biogas regulatory reforms become effective on January 1, 2025 for existing facilities with updated registration information due to EPA by October 1, 2024, but any facility registered with EPA on or after July 1, 2024 will need to immediately comply with the reforms.
EPA Sets Three Years’ Worth of Targets Using Set Rule Authority
The EPA has finalized the biofuel targets for the years 2023, 2024, and 2025, which is an inherently speculative process as EPA is functionally predicting demand for transportation fuels over that period.2 The final volumes generally represent an aggregate downward adjustment for certain categories of renewable fuel, but with some increases for discrete categories based on EPA’s decision to be more aggressive in projecting future production of fuels. The renewable fuels that EPA predicts will increase are those derived from biogas, corn kernel fiber (“CKF”) ethanol, and biomass-based diesel. The following chart provides a summary of the final renewable fuel targets.
EPA Final Renewable Fuel Production Targets (2022–2025)
The Agency lowered the cellulosic biofuel volumes for years 2024 and 2025 partly to account for dropping eRINs, but those reductions were offset by increases in projections for RNG to be used in compressed natural gas (“CNG”) and liquefied natural gas (“LNG”) and additional CKF ethanol. Putting the changes into context, the proposed rule set the cellulosic biofuel volume for year 2024 at 1.42 billion gallons, and estimated that approximately (i) 814 million gallons of cellulosic fuel would come from renewable CNG/LNG, (ii) 600 million gallons would come from RNG used to generate electricity (the eRINs), and (iii) 5 million gallons would come from liquid cellulosic fuels, like CKF ethanol. Under the final rule, EPA set the cellulosic biofuel volume for year 2024 at 1.09 billion gallons, and estimates that approximately (i) 1.039 billion gallons will come from renewable CNG/LNG and (ii) 51 million gallons will come from CKF ethanol.
In revising the cellulosic target to account for increased production of renewable CNG/LNG, EPA altered its approach to forecasting RNG production, applying a 25% growth rate for years 2023-2025 on the basis that this is more consistent with the long-term growth trends seen in the industry from 2015-2022, rather than the 13% growth rate EPA originally utilized for years 2023-2025 by looking only at more recent data (the past 24 months). While comments from the biogas industry on the proposed rule appear to have swayed EPA, despite suggestions for a formal “relief valve” mechanism that would allow EPA to adjust certain targets in future years based on actual production or market data from the prior year, the EPA declined to take any such action in the Set Rule.
eRins Gone for Now, But Not Forgotten
EPA’s original proposal to create an eRIN program and designate the EV manufacturer as the RIN generator created significant controversy. This designation provoked opposition from certain groups in the renewable fuels industry, while environmental groups voiced general concerns related to eRINs because of potential environmental justice impacts associated with increased biogas production from landfills and certain agricultural operations. Given the complexity of the eRIN issues and the consent decree deadline to finalize other parts of the proposed rule, the EPA decided not to finalize the eRIN revisions at this time. While EPA did not give any indication in the final rule as to when we may see eRIN rules, EPA attempted to provide reassurance in the preamble that it was committed to eventually finalizing an eRIN program, citing potential benefits such as the reduction of greenhouse gases from biofuel use and increased domestic energy security.
Evolving Requirements for Biogas
EPA reforms range from simply providing clarification to significant changes to the RFS requirements for parties seeking to monetize RINs resulting from the production of renewable fuel from biogas.3 The stated purpose of the biogas revisions are to (1) allow for the use of biogas as an intermediate;4 (2) allow for the use of RNG as a feedstock for biogas-derived renewable fuels other than CNG/LNG; (3) improve program oversight; and (4) minimize or eliminate double counting of biogas volumes and the generation of invalid RINs. Here, we focus on some of the more significant changes in these reforms.
Previously, any party in the RNG production and distribution chain could generate RINs so long as that party could demonstrate that the RNG was used as transportation fuel. This often involved submitting thousands of pages of contracts, creating burdensome recordkeeping requirements and resulting in delays approving facility registrations under the RFS because of how long it took EPA to review the paperwork. EPA has now established specific definitions and requirements for each party it has identified within the RNG production and distribution value chain. See the table below for key terms related to the reforms.
|Biogas||a mixture of biomethane (methane produced was renewable biomass), inert gases, and impurities that meets all the following requirements: (1) It is produced through the anaerobic digestion of renewable biomass under an approved pathway. (2) Non-renewable components have not been added. (3) It requires removal of additional components to be suitable for its designated use (e.g., as a biointermediate, to produce RNG, or to produce biogas-derived renewable fuel).|
|Biogas producer||any person who owns, leases, operates, controls, or supervises a biogas production facility.|
|Biogas production facility||any facility where biogas is produced from renewable biomass under an approved pathway.|
|RNG||a product that meets all the following requirements: (1) It is produced from biogas. (2) It does not require removal of additional components to be suitable for injection into the natural gas commercial pipeline system. (3) It is used to produce renewable fuel.5|
|RNG producer||any person who owns, leases, operates, controls, or supervises an RNG production facility.|
|RNG production facility||a facility where biogas is upgraded to RNG under an approved pathway.|
|RNG RIN separator||any person registered to separate RINs for RNG under § 80.125(d).|
The first of the major changes from the reforms is the incorporation of all of these transactions into the EPA Moderated Transaction System (“EMTS”). As a first step, Biogas producers, RNG producers, and RNG RIN separators must now all register in the EMTS and report the movement of RNG from the point of injection into a commercial natural gas pipeline to the point where the renewable CNG/LNG is dispensed.6 Once effective, EPA will no longer require parties in the biogas production and distribution chain to submit contracts in connection with registering their facilities or submit affidavits and other documentation relating to the transfer of RINs — EPA will now track everything in EMTS.7
The EPA registration process is well understood, though the informational requirements will correspond to the party’s role. For example, biogas and RNG producers must submit information sufficient to establish the baseline volume of production from that facility and information on feedstocks and processes used during production, amongst other items.8
The final rule changes some aspects of the regulation of RIN generation for RNG. First, the RIN generator is the party that upgrades the biogas to RNG. RINs are assigned when a specific volume of RNG enters the commercial natural gas pipeline system. The RIN must stay assigned or bundled with the RNG and cannot be separated (and subsequently traded or sold) until a party can demonstrate that the RNG was used as transportation fuel. EPA notes in the preamble that it expects the RNG RIN separator to be the party that either withdrew the RNG from the commercial pipeline or that was responsible for using that RNG to produce CNG/LNG.9 Of course, the addition to the EMTS structure will require reporting by all registered entities, although the nature of the requirements will depend on the entity’s role in the biogas and RNG production and distribution chain. There are also product transfer documentation requirements imposed on the parties under the reforms.
Each party will also be subject to different reporting requirements. Biogas producers must submit monthly batch reports to EPA on the amount of raw biogas produced, biomethane content, information on the RFS pathway used to produce the renewable fuel, final use of the product, and receiving parties, amongst other information. RNG producers, on the other hand, must file quarterly verification reports on the number of RINs produced from qualifying biogas injected into a commercial natural gas pipeline, the amount and energy content of the biogas used to produce RNG, and RFS pathway information, amongst other information. Meanwhile, RNG RIN separators only must submit periodic reports on facilities that converted the RNG to CNG/LNG and the amount converted, and where the fuel was dispensed and the amount dispensed.
Other areas addressed by EPA’s biogas regulatory reforms include:
- Finalizing testing and measurement procedures for biogas and RNG to protect the validity of RINs.
- Finalizing compliance and enforcement provisions for biogas-derived renewable fuels that are similar to existing RFS provisions, including clarity on prohibited actions, liability, affirmative defenses, and the treatment of invalid RINs.
- Finalizing requirements that biogas producers, RNG producers, and RNG RIN separators undergo annual audits or “attest engagements” to ensure regulatory compliance.
- Limiting biogas production facilities to supplying biogas for only a single use under the RFS (i.e., renewable CNG/LNG, RNG, biointermediate).
- Incorporating new elements for verification into RFS Quality Assurance Plan (“QAP”) requirements for those producers that participate in a QAP.
- Clarifying requirements for RFS auditors to maintain their status as independent.
- Revising equations for determining RIN apportionment where predominantly cellulosic (i.e., non-food-based) feedstocks, which can generate D3 RINs, and non-cellulosic feedstocks, which can generate D5 RINs, are simultaneously converted to biogas via anaerobic digesters.
Finally, the biogas reforms also impose limitations on the storage of biogas and RNG prior to EPA’s acceptance of the producer’s registration. RINs may ultimately be generated from such storage following acceptance of registration so long as the storage is co-located at the biogas or RNG production facility and certain other conditions are met, such as completion of the independent engineer’s review of the facility and that the producer retains custody and title of the biogas or RNG during storage, amongst other requirements.
EPA Declines to Expand Scope of the Rule
While the EPA solicited (and received) comments on considerations that intersect with the Set Rule — e.g., incorporation of carbon intensity metrics into the calculation of RIN values, accounting for use of carbon capture and sequestration in the production of renewable fuels, and the production of sustainable aviation fuel — the Agency ultimately declined to include such considerations in the final rule.
The realignment of roles will in the short term lead to a flurry of contract renegotiations. Parties, such as marketers, that have been the RIN generator both contractually and under regulations for years now may find themselves in a radically different position. There will be at least a little time to prepare for these changes, though, as EPA provided some relief with respect to compliance with the biogas regulatory reforms in the final rule over the proposed rule. The new EMTS requirements may create some complications but should help to manage the transactions and risks more effectively and efficiently. EPA has proposed a schedule for registrations as follows:
- Facilities registered on or after July 1, 2024 must immediately comply with the biogas regulatory reforms.
- For facilities registered under the previous biogas regulations before July 1, 2024, the new regulations will not take effect until January 1, 2025.
- Registration updates for existing facilities will be due October 1, 2024, though parties may wish to submit registration update packages as soon as possible since no party can generate a RIN after January 1, 2025 if the required registrations have not occurred.
In addition, EPA’s repeated concerns with respect to RIN fraud and double counting, coupled with statements that it is coordinating with other governmental entities to study RIN market fraud and manipulation risks, signals increased enforcement risks.
2 EPA explicitly declined to establish biofuel targets for years beyond 2025, citing the unpredictability of making more distant projections for the renewable fuel industry and the need to finalize its targets before statutory deadlines.
3 While there are many general provisions of the RFS regulations that continue to apply to biogas and RNG used to produce transportation fuel, EPA has created a new “Subpart E” to 40 C.F.R. Part 80 that specifically governs requirements for parties within the biogas and RNG production and distribution chain.
4 A biointermediate is defined by EPA to mean any feedstock material that is intended for use to produce renewable fuel that meets certain additional regulatory requirements. In the context of biogas, EPA defined biointermediate to mean biogas or treated biogas that a renewable fuel producer uses to produce renewable fuel other than renewable CNG/LNG at a facility separate from where the biogas is produced. For additional information on regulatory requirements for biointermediates used to generate renewable fuels under the RFS, please contact one of the authors.
5 The proposed rule would have imposed a much more limiting definition on what qualifies as RNG, with specific requirements for biomethane content and other specifications.
6 There are separate requirements that apply to the use of treated biogas in a closed-loop system that does not involve upgrading the treated biogas to RNG and injecting it into a commercial natural gas pipeline system.
7 In addition, EPA will no longer require the submission of certificates of analysis for biogas at registration.
8 RNG RIN separators, on the other hand, must submit a description of the process and equipment used to compress RNG into renewable CNG/LNG and a list of dispensing locations. Biogas and RNG producers must also designate their association with one another at registration.
9 Under the prior regulations, RNG RIN separation occurred upon a party’s demonstration that the underlying biogas was produced from renewable biomass under an EPA-approved pathway and used as a transportation fuel.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.