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Renewable Fuel Standard: The Next Generation

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Long awaited, the U.S. Environmental Protection Agency (“EPA”) last week released the proposed Renewable Fuel Standard (“RFS”) “set” rule. The set rule represents a new era for EPA in setting biofuel targets, as the targets for years 2023 and beyond are no longer guided by mandated volumes that Congress embedded in the federal Clean Air Act (“CAA”).1 The EPA has proposed biofuel targets for the next three years and, in a significant departure from how the RFS has historically operated, proposes to allocate renewable identification numbers generated from biogas used to power electric vehicles (“EVs”) (known as “eRINs”) to the vehicle manufacturer. In addition, the EPA proposes to modify its approach to allocating RINs with respect to renewable natural gas dispensed as compressed natural gas (“CNG”) or liquefied natural gas (“LNG”) for use as transportation fuel. Critically for fossil fuel refiners, the proposal states that the EPA does not anticipate granting any small refinery exemptions for the 2023–2025 time period.

EPA Proposes to Increase the Volumes

The Energy Independence and Security Act of 2007 (“EISA”) established biofuel targets through the year 2022. After 2022, EISA gave the EPA more discretion to set targets for future years. EISA circumscribed EPA’s discretion in setting volumes somewhat, however, by effectively imposing floors on volumes for advanced biofuels, cellulosic biofuels and biomass-based diesel in the CAA.

In addition to continuing to require coordination with the Departments of Agriculture and Energy, Congress delineated certain other factors that EPA must consider when setting the volume requirements for the years following 2022, but the statute does not explain how the EPA should weigh these. The EPA has already been applying these factors since 2012 when setting biomass-based diesel targets. The EPA states that it holistically balanced a wide range of issues required under EISA as well as other economic and environmental factors when setting the RFS targets, seeking to strike a balance between providing certainty for the regulated community and supporting increased renewable fuel production. Consistent with that perspective, EPA proposed targets for the next three years and increased the targets relative to those for prior years. See this chart for a summary of RFS volume targets.

EPA expressly reserves the right to continue using its statutory waiver authorities under the RFS as needed but notably states that it will not be issuing any cellulosic waiver credits at this time.

There are numerous topics including legal interpretations and scientific points where the EPA seeks comment. The issues range from whether it should: adjust the implied conventional renewable fuel (ethanol) targets downward to account for, amongst other reasons, concerns regarding the so-called E-10 blend wall;2 propose targets for the year 2026 as well, or if it should only set targets for the next two years; or incorporate a carbon intensity metric into the calculation of RIN values for different types of renewable fuels. Other topics for which EPA seeks comment include its interpretations of its set rule authority with its cellulosic waiver authority established pursuant to the CAA; the accounting for the use of carbon capture and sequestration in the production of renewable fuels; and, changes that would support the production of sustainable aviation fuel, as well as transparency considerations.

eRIN Proposal Deviates Significantly From EPA Historical Application of the RFS Program

The EPA’s proposed approach for eRINS would only allow for light-duty electric vehicle original equipment manufacturers (“OEM”) to generate eRINs. Under the EPA’s proposal, biogas used to generate electricity that is used to power electrical vehicles can begin generating D3 or D5 RINs beginning on January 1, 2024 (so long as certain registration and environmental requirements are met); the type of RIN generated will depend on how the renewable electricity is generated and certain other factors. The renewable electricity must be produced from biogas from landfills, municipal wastewater treatment digesters, agricultural digesters, separated municipal solid waste digesters, and waste digesters (for non-cellulosic-based feedstock). Such renewable energy must be “put on a commercial electrical grid serving the conterminous U.S.” and can generate eRINs so long as the OEM demonstrates that the vehicles it produced have used a corresponding quantity of electricity. Stacking other environmental attributes with eRINs, such as credits generated under the California Low Carbon Fuel Standard (“LCFS”), is expressly permissible.

Car Manufacturers Will Be The Only Entity that Can Generate the RIN

The structure proposed by EPA for eRINs represents a major departure from the tried and tested approach for RIN generation and allocation in CNG/LNG contexts. For CNG/LNG, one of several parties can be the entity that generates the RIN including the entity that compresses the biogas into CNG/LNG, the entity that dispenses the CNG/LNG into a transportation vehicle, or the owner of the fleet of vessels itself. EPA identifies three core parties that could be identified as the eRIN generator — biogas producers, renewable electricity generators, or the OEM — and admits that there is “arguably” not one that is clearly more appropriate to designate as the eRIN generator.3 However, EPA found that OEMs are “uniquely positioned” because they are directly invested in the growth of electric vehicles.4 Moreover, EPA asserts that placing the bulk of the responsibility on OEMs will streamline enforceability as there are relatively few OEMs, they are large in size, have vested business interests, and have experience with EPA oversight.5

The Amount of eRINS Will Use a Different Equivalency Value

Since the inception of the RFS program, EPA has set the equivalency value of liquid biofuels relative to the energy content of denatured fuel ethanol. EPA’s concern about applying this same standard to electricity from biogas stems from the fact that there are losses in the biogas-to-electricity pathway as a result of distribution that liquids do not face, EPA estimates a range of only 21.8%-24.5% of input biogas energy making its way into the EV Battery.6 In its proposal, EPA determined that its existing approach to equivalency would “arbitrarily penalize” this activity by limiting RINs to the actual amount of electricity used as a transportation fuel. Instead of a formula that conformed to the fact-based realities of using electricity as a transportation fuel, EPA came up with an approach to sum up “the energy losses” and “incorporated those into the proposed electricity equivalence value.”7 Currently, EPA’s regulations provide that “22.6 KW-hr of electricity shall represent one gallon of renewable fuel with an equivalence of 1.0.” If adopted as proposed, the equivalence value for “electricity from biogas” would be “6.5 kWh per RIN” based on EPA’s decisions to address these losses in the manner proposed.8

Estimates Will Be Used to Calculate eRINs

Since its inception, EPA has limited the amount of environmental attributes that can be realized from the use of renewable fuels in transportation to the volumes of renewable fuels actually used. This concept led to some painstaking requirements for the regulated industry but represented a “bottom-up” approach that functioned on actual volumes of transportation fuel that were actually used in transportation. EPA proposes to approach the quantification of eRINs from using electricity generated from biogas as a transportation fuel in precisely the opposite way.

Rather than using the charging data for EVs to set the volumes of eRINS, EPA proposes to allow the calculation of RINS by these OEMs to use formulas that include “estimates” of miles driven by qualifying vehicles on a fleet basis, which includes EVs and “PHEVs” that are hybrid vehicles that can run on fuels and electricity. The volumes of eRINs would be calculated on a quarterly basis using “higher-level, aggregate data on EV fleet electricity use.”9 Among other concerns, this averaging approach that includes PHEVs would allow RINs to be generated from estimates of miles driven by PHEVs that may have been powered by fossil fuels. EPA acknowledges that California uses charging data information from charging centers for this purpose in its LCFS program but expresses concerns over the volume of vehicles and transactions. These concerns seem hard to understand since the aggregated amounts of electricity dispensed by charging stations would seem to define the amounts of electricity used as a transportation fuel.

Proposed Changes to CNG/LNG RFS Regulations

Currently, any party in the biogas generation/disposition chain for CNG or LNG used as transportation fuel can generate RINs. To-date, the EPA has managed RIN-double counting risks for renewable natural gas (“RNG”) used to produce CNG and LNG through extensive contractual, recordkeeping, and reporting requirements. Concerns regarding increased renewable natural gas use to generate electricity have prompted the agency to propose revisions to its existing regulations. The proposal would establish that the party that can separate the RIN is the party that can demonstrate that the RNG was used as transportation fuel.10 The EPA also believes that these changes will reduce the risk of RIN fraud in connection with the use of biogas as a biointermediate in processes such as hydrogen production, and there are other proposed revisions related to the use of biointermediates.  Certain documentation requirements also would be removed if the EPA finalizes the rule as proposed.

Is This the End of Small Refinery Exemptions?

The number of the small refinery exemption (“SRE”) petitions granted by the EPA has fluctuated over the course of the RFS program.  For compliance years 2016 through 2018, the EPA granted nearly all of SRE petitions that it received. Since then, however, the EPA has denied all pending petitions for compliance years 2019 through 2021. In the most recent batch of SRE denials — 36 in April 2022 and 69 in June 2022 — the EPA took things a step further by categorically proclaiming that small refineries cannot show disproportionate economic hardship due to RFS compliance because all small refineries can recover the cost of RFS compliance through higher prices on wholesale purchasers of gasoline and diesel. As we predicted back then, the EPA’s findings would likely mean that small refineries will have a difficult, if not impossible, time obtaining the SRE Congress expressly provided for in the CAA.

With the proposed rule, the EPA has essentially confirmed that no small refineries will receive the SRE — at least for the 2023, 2024, and 2025 compliance years. The EPA applied its reasoning from the 2022 SRE denials, suggesting that the ability to pass through costs of RFS compliance to customers necessarily precludes disproportionate economic hardship not only in pending petitions, but in all future petitions as well. Though the EPA stated it was not “pre-judging any small refinery exemptions,” it nonetheless “do[es] not anticipate granting small refinery exemptions in the future.” Unless the EPA revisits its conclusions about pass-through costs in a final rule, it may have put the final nail in the coffin for the SRE. However, a recent Government Accountability Office report calls into question EPA’s conclusion about pass-through costs because it rests on a “potentially flawed assumption” that “all parties pay and receive one price” for RINs, and interested parties should raise this conflict during the comment period.

The Future of the RFS

 The set rule represents significant changes to the RFS that will impact both the renewable and fossil fuel industries, but also provides strong signals about the future vitality of the RFS. Many of the EPA’s changes under the current proposal, whether they will be effective or not, are focused on streamlining RFS implementation, signaling that the EPA expects and supports continued growth in renewable fuel production. However, EPA’s approach to eRINs picks clear winners and losers, based on a questionable approach that disregards how the RFS has previously been administered and the workability of alternative approaches to environmental attributes from biogas such as the one in the California LCFS. Comments on the proposed rule are due by February 10, 2023.

1 Under EISA, biomass-based diesel targets only went through 2012.

2 The blend wall represents the physical limit on the amount of ethanol that can be blended into conventional gasoline without potentially causing motor vehicle engine damage.

3 EPA, EPA-HQ-OAR-2021-0427, Proposed Rule for RFS Program: Standards for 2023–2025 and Other Changes, at 195 (Nov. 30, 2022). 

4 Id. at 246. 

5 Id. at 273.

6 DRIA at p. 348.

7 See p. 315 of proposed rule.

8 Proposed rulemaking at p. 316.

9 Proposed Rule at p. 211.

10 An RIN can only be sold or traded once it has been separated from the associated batch of renewable 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.