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EPA Issues Supplemental Proposed Rulemaking That Will Increase the Burdens of Non-Exempt Refiners Beginning in 2020

Making good on President Trump’s promise to corn-growing farmers, on October 28, 2019, the U.S. Environmental Protection Agency (EPA) published a supplemental notice of proposed rulemaking (Supplemental Proposal) that will effectively increase the renewable fuel obligations of non-exempt refiners and other obligated parties beginning in compliance year (CY) 2020. The EPA held a public hearing regarding the Supplemental Proposal in Ypsilanti, Michigan, on October 30, 2019, and will accept comments until November 29, 2019. EPA currently plans to issue a final rule in 2019.

On July 29, 2019, the EPA proposed total renewable fuel standards for CY 2020 and biomass-based diesel standards for CY 2021, consistent with the federal Renewable Fuels Standard (RFS) program. As was the case in past years, the annual standards proposed in July 2019 did not take into consideration the gasoline and diesel volumes of renewable fuels allocated to refiners who qualified for a “small refiner” exemption (based on a successful claim of a disproportionate economic hardship in complying with the program), because such exemptions had not yet been granted by the EPA. At the time of issuance of the July 2019 proposed rulemaking, it was the EPA’s position that it would only take into consideration renewable fuel volumes for small refiner exemptions that had already been granted prior to issuing the final rule for the relevant CY. Historically, because exemptions were being granted after issuance of the final rule for the relevant CY, the EPA subtracted the renewal fuel volumes associated with these exemptions from the volumes established under the final rule, thus resulting in less renewable fuels being required for a given CY than was originally determined under the applicable final rule.

Since issuance of the July 29, 2019 proposed rulemaking, two developments of note occurred. First, in August 2019, the EPA granted 31 small refiner exemptions for compliance year 2018, which the EPA estimates has reduced the volume of gasoline and diesel required to be produced in CY 2018 by 13,420 million gallons and reduced the renewable volume obligations for CY 2018 by 1.43 billion renewable identification numbers (RINs). Second, a core constituency of President Trump in 2016, farmers who planted corn – corn that could be used for the production of corn-based ethanol under the RFS program – along with Senate and House members of large corn-producing states complained, bitterly, about being forgotten by the Trump administration. President Trump is up for re-election in 2020. In a move that the American Petroleum Institute and the American Fuel & Petrochemical Manufacturers criticized as being political in nature to mollify this constituency, the EPA announced it planned to issue a Supplemental Proposal.

Under the Supplemental Proposal, the EPA states that it is now appropriate to project renewal fuel volumes being lost due to granting of small refiner exemptions, in advance of issuing a final rule setting gasoline and diesel volumes of renewal fuels. Under this modified construct, the actual volumes of total renewal fuels (that is, much more than likely, corn-based ethanol) lost from production in a given CY due to small refiner exemptions will be offset with EPA’s projected volumes of renewable fuels associated with exemption requests that are likely to be granted. Acknowledging that there is a degree of uncertainty in the projection of small refiner exemptions to be granted in the future, the EPA seeks to mitigate significant swings in exemptions (and associated renewable fuel volumes) granted in CY 2020 by using an average volume of the gasoline and diesel that is recommended by the U.S. Department of Energy (DOE) over a given three-year period. The EPA is obligated under the Clean Air Act to consult with the DOE in evaluating small refiner exemption petitions but is not bound by any recommendations made by the DOE. Accordingly, the EPA is seeking public comment on projecting the volume of renewable fuels that would be exempt in CY 2020 as a result of small refiner exemptions based on a three-year average of the relief recommended by the DOE, which recommendations by the DOE may include “partial,” in addition to “full,” exemptions. Consequently, the EPA discloses in the Supplemental Proposal that its prior practice notwithstanding, the agency will now grant partial small refiner exemptions, under appropriate circumstances, beginning with the 2020 exemption petitions. In support of its revised approach in granting partial as well as full exemptions, the EPA cites to its statutory authority under the Clean Air Act that permits the agency to issue a final exemption decision consistent with the DOE’s recommendations and also asserts its belief that application of partial, in addition to full, exemptions, is an equally reasonable interpretation of such authority under the statute.

As described in the Supplemental Proposal, for purposes of the CY 2020 projection, the EPA is considering the volumes that would have been lost during two recent three-year periods, 2015-2017 and 2016-2018, had the EPA used applicable DOE recommendations for small refiner exemptions. The EPA indicates that for the DOE 2015-2017 three-year period, exempted volumes lost over that period translate into 3,230 million and 2,420 million gallons of gasoline and diesel renewable fuel, respectively, which resulted in an average reduction in non-exempt refiners (and other obligated parties) obligations of approximately 580 million RINs. Similarly, for the DOE 2016-2018 three-year period, the EPA indicated that exempted volumes over that period translate into 4,240 million and 3,020 million gallons of gasoline and diesel renewal fuel, respectively, which resulted in an average reduction in non-exempt refiners (and other obligated parties) obligations of approximately 770 million RINs. The EPA is seeking comment on use of one of these recent DOE three-year periods as a basis for the CY 2020 projected volumes.

The Energy Policy Act of 2005, as amended by the Energy Independence and Security Act of 2007, the statute upon which the RFS program was established, does not specifically require the agency to redistribute exempted volumes in the manner now proposed by the EPA. Nonetheless, the agency states that this approach is a “reasonable interpretation” of its authority under the statute, especially in light of its authority to “ensure” that renewal fuel volumes are met.

Next up for the EPA, following its October 30, 2019 public hearing on the Supplemental Proposal, is to respond to public comments on the rulemaking. Comments are due to be filed with the agency by no later than November 29, 2019. The EPA indicates in the Supplemental Proposal that it intends to issue a final rule in 2019.

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.