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EPA Reduces Renewable Fuel Standard Targets But Takes a Hard Line on Small Refinery Waivers

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On December 7, 2021, the U.S. Environmental Protection Agency (“EPA”) proposed the long-awaited and much anticipated renewable fuel targets for 2020, 2021, and 2022 under the federal Clean Air Act’s (“CAA”) Renewable Fuel Standard (“RFS”) (the “Proposed Rule”). As anticipated, EPA proposed targets lower than the statutory volume targets set under the Energy Independence and Security Act of 2007 (“EISA”). The Proposed Rule would also reduce the overall 2020 compliance year total renewable fuel volume obligation (“RVO”) to only 17.13 billion gallons (“bn gal”), a substantial retroactive cut on the final volumes for that year, previously set at 20.09 bn gal. EPA cites the COVID-19 pandemic and resulting decreased demand for transportation fuel as the rationale for the cuts to the 2020 volume requirements and setting lower 2021 volume requirements. While the proposed 2020, 2021 and 2022 RVOs may fall short of the biofuels industry’s hopes, the proposed 2022 RVO still represents the highest target ever proposed by EPA under the RFS.

In a separate action (not a rulemaking), the EPA proposed denying 65 pending applications for small refinery exemptions (“SRE”) from RFS obligations from years 2016 through 2021. EPA’s proposed actions denying the pending SREs before the agency also confirms that the Biden administration will likely take a hard line scrutinizing future SRE applications. Coupled with the extreme volatility seen with respect to the price of renewable identification numbers (“RINs”) in 2021, the cuts to the 2020 and 2021 RVOs may ultimately provide little relief for refiners, but the 2022 targets suggest EPA will continue to propose ever-increasing volume requirements for future years.

EPA’s Proposal

The table below identifies the renewable fuel volume requirements proposed by EPA.

Category 2020 Volume Requirement (in bn gal) 2021 Volume Requirement (in bn gal) 2022 Volume Requirement (in bn gal)
Cellulosic Biofuel 0.51 0.62 0.77
Biomass-Based Diesel 2.43 2.43 2.76
Advanced Biofuel 4.63 5.20 5.77
Total Renewable Fuel 17.13 18.52 20.77
Supplemental Standard N/A N/A 0.25

The thesis behind EPA’s proposal for setting reduced volumes is to minimize potential market disruptions. EPA cites the COVID-19 global pandemic and resulting decreases in demand for transportation fuel as one factor to support retroactively cutting the 2020 volume requirement and for setting reduced 2021 volume requirements. EPA modified the 2020 volumes to align with actual renewable fuel use in 2020.

While typically decreased fuel demand would result in corresponding reductions in the volume of renewable fuel required under the RFS, EPA cites the disproportionate impact COVID-19 had on gasoline consumption as compared to diesel consumption as one of the drivers behind its 2020 retroactive cut. The RFS has always relied heavily on blending ethanol with gasoline (typically 10% ethanol blends) to meet the total renewable fuel volume requirements, but renewable blends with diesel are generally below that percentage. COVID-related disruptions saw disproportionate reductions in demands for gasoline as compared to diesel fuel. This served to further reduce RIN generation in 2020, resulting in a corresponding reduction in the number of RINs available for obligated parties to “carryover” into 2021. The original 2020 volume requirements were also set with the expectation that EPA would be granting a large number of SREs, which, as explained below, did not occur.

Similar concerns related to decreases in demand for transportation fuel also informed EPA’s volume requirements for 2021. However, with respect to 2022, EPA did not believe that circumstances warranted lower volume requirements. In addition, as a result of a decision from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) remanding EPA’s 2016 RFS volume requirements, EPA has proposed a “supplemental” biomass-based diesel (“BBD”) volume requirement of 250 million gallons of BBD for 2022 and indicated it will do the same for 2023.

The Proposed Rule goes beyond RVOs and also addresses the generation of RINs from operations involving the processing of “biointermediates.” EPA re-proposes and modifies a 2016 proposed rule that would allow fuel producers to take partially processed biofuels for further processing at a different facility and generate RINs in connection with the production of the finished fuel. Such practices were previously ineligible for RIN generation because of concerns EPA had about the processing of renewable feedstocks at multiple locations and the potential for RIN fraud. As proposed, biocrude, free fatty acid feedstock, and undenatured ethanol (including ethanol solutions containing less than 95% ethanol), are the only biointermediates that, subject to other conditions, would be eligible to generate RINs. Parties seeking to generate RINs through the processing of biointermediates would also be required to implement a quality assurance program in accordance with EPA regulations.

The Reset of the RFS has Arrived

EISA amended the CAA and set statutory targets for renewable fuel volumes through the year 2022, mandating the production of 36 bn gal of total renewable fuel by 2022. How then is EPA able to propose targets less than the statutory mandates? EISA’s amendments to the CAA built in several different sources of authority for EPA to deviate from the statutory targets if certain conditions are met. The CAA provides EPA with general waiver authority and the ability to specifically waive the targets for cellulosic biofuels and BBD. EPA has repeatedly exercised its cellulosic biofuel waiver authority given how production of advanced biofuels has lagged behind the RFS targets, but to date has never used the BBD waiver. The agency has only ever attempted to use its general waiver authority under the RFS once, which was subsequently vacated by the D.C. Circuit.

Exercising the general waiver authority requires consultation with the U.S. Department of Agriculture and the U.S. Department of Energy, as well as a finding by EPA that a reduction in renewable targets is necessary (1) to avoid severe economic or environmental harm or (2) when the domestic renewable fuel supply is inadequate to meet the mandate. A general waiver determination is also subject to public notice and comment. The CAA provides EPA with the authority to waive mandates for cellulosic biofuels if the projected production capacity, as determined by the U.S. Energy Information Agency (“EIA”), for a given year is less than the volume required in the statute. However, the target can only be reduced to the projected available volume as determined by the EIA. No consultation and no public notice is required, and under the CAA, reduction of the cellulosic biofuels target using this waiver provides EPA with the discretion to also reduce volumes of advanced biofuel and total renewable fuel by the same or lesser volume.

The BBD waiver is more limited, and only allows EPA to waive BBD targets for a period of up to 60 days, following consultation with the Departments of Agriculture and Energy, if the EPA determines that there are significant market circumstances (including feedstock disruptions) “that would make the price of biomass-based diesel fuel increase significantly.” Similar to the cellulosic waiver, use of the BBD waiver authority provides EPA with the discretion to also reduce volumes of advanced biofuel and total renewable fuel by the same or lesser volume.

EPA’s use of cellulosic waivers and subsequent reductions in the targets for advanced biofuels and total renewable volumes in prior rulemakings has triggered EPA’s “reset” authority under the RFS. EPA’s reset authority provides the agency with broad discretion to modify renewable fuel production targets based on a review of the implementation of the RFS to date and an analysis of certain factors such as the impact of the production and use of renewable fuels on the environment, cost to consumers for transportation fuels, and the expected annual rate of renewable fuel production, amongst others. EPA relies on its reset authority, its authority to grant cellulosic biofuel waivers, and in some cases both grants of authority, to establish the volumes identified above.

Small Refinery Exemptions

Refineries that produce less than 75,000 barrels of motor fuels per day during a calendar year qualify as a “small refinery” under the RFS and are eligible for an exemption from the RFS requirements. Given that the exemption applies to individual refineries, even companies that own multiple refineries may still pursue an SRE for any facility that meets the definition of a small refinery under the RFS.

EPA’s SRE decisions have been subject to increasing scrutiny over the years. As previously discussed, while the U.S. Supreme Court rejected the United States Court of Appeals for the Tenth Circuit’s constrained reading of the RFS’s SRE provision that sought to impose a continuity requirement on refineries seeking an SRE, that holding did not generally lower the bar for obtaining an SRE.

In its separate proposal, which EPA asserts is not a rulemaking, EPA announced a change in its approach to determining whether disproportionate economic hardship (“DEH”) exists at a small refinery. First, EPA proposes that a DEH is only appropriate when the alleged economic hardship is caused by compliance with the RFS. There must be a direct causal link between the refinery’s costs to comply with the RFS and any DEH; EPA will not consider any other financial factors when determining whether or not DEH exists. Second, the proposal would require parties seeking an SRE to “reconcile” an assertion of DEH with their ability to pass the costs of purchasing RINs through to their customers. And third, while EPA is not imposing a continuity requirement, if finalized as proposed, EPA would require that the party seeking the SRE to have received the original statutory exemption before it can seek an extension of the waiver.

When assessing an SRE, EPA states that its decision will be guided by the following conclusions:

  1. Compliance costs are the same for all obligated parties, regardless of whether or not the obligated party relies on RINs or renewable fuels to meet its RFS compliance obligations.
  2. All obligated parties, including small refineries, can pass compliance costs through to consumers at the point of sale.
  3. If no disproportionate impact and no economic hardship is found, EPA cannot grant an SRE.

In a departure from prior SRE denials, EPA has requested comments on its approach to determining whether DEH exists and its conclusions.

The Future of the RFS

RIN prices saw significant decreases prior to EPA’s publication of the Proposed Rule, but have since generally rebounded. The past year has seen considerable fluctuation in RIN prices, with the price of D6 (ethanol) RINs approaching almost $2 per gallon earlier this year. In addition, EISA only provides volume requirements through 2022; after that time EPA has discretion when setting renewable fuel volume requirements. Despite the reductions contained in the Proposed Rule for 2020 and 2021, EPA signaled it is committed to raising volume requirements in future years. Given the constraints EPA intends to impose on its SRE determinations, obligated parties are unlikely to find relief under that path over the next few years.

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.