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The U.S. Environmental Protection Agency Proposes Renewable Fuel Standards for 2014, 2015 and 2016 that Reduce Advanced Biofuel and Total Renewable Fuel Volumes

On May 29, 2015, the U.S. Environmental Protection Agency (the “EPA”) proposed renewable fuel percentage standards for 2014, 2015 and 2016. Based on the pressures created by the ability to supply qualifying renewable fuels, the EPA is proposing to set the advanced biofuel and total renewable fuel volumes at less than the applicable volumes set forth in the Clean Air Act. For 2014, these values are 3.75 billion gallons and 18.15 billion gallons, respectively, while, for 2016, the proposed total renewable fuel volume is almost 5 billion gallons lower than the 2016 statutory volume of 22.25 billion gallons (all volumes ethanol-equivalent). Comments on the proposed rule are due on or before July 27, 2015.

Under Section 211(o) of the Clean Air Act, each November, the EPA is required to set renewable fuel percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel (which includes cellulosic biofuel and biomass-based diesel) and total renewable fuel (which includes advanced biofuel) for all gasoline and diesel produced in or imported into the U.S. the following year. For the last several years, the EPA has missed this deadline. The EPA issued the renewable fuel standards for 2013, which should have been issued in November of 2012, on August 6, 2013, and initially proposed the renewable fuel standards for 2014 on November 15, 2013, but never finalized them and is withdrawing that proposal as part of the current rulemaking. The new proposal, which would bring the renewable fuel standards program back into compliance with the statutory deadlines, is partially driven by a proposed consent decree that would resolve lawsuits brought by petroleum refiners challenging delays in the program, Am. Fuel & Petrochemical Mfrs v. EPA, D. D.C., No. 15-cv-00394.

The renewable fuel standards are expressed as volume percentages and are used by each refiner, blender or importer to determine its renewable fuel volume obligations. The EPA sets the applicable percentages at levels such that if each regulated party meets the percentages and projections of gasoline and diesel use for the year are accurate, then the amount of renewable fuel, cellulosic biofuel, biomass-based diesel and advanced biofuel used will meet the required volumes on a nationwide basis. Thus, to set the renewable fuel percentage standards, the EPA must first specify the required volumes for each fuel type.

The statutory 2014, 2015 and 2016 volumes and proposed 2014, 2015 and 2016 volumes and percentages are set forth below; all volumes are ethanol-equivalent, except biomass-based biofuel, which is actual. The volumes for 2014 reflect the actual supply in 2014, as determined by the number of Renewable Identification Numbers (“RINs”) generated during the year.

Cellulosic Biofuel

The Clean Air Act requires that the EPA base the standard for cellulosic biofuel on the volume of cellulosic biofuel projected to be produced during the relevant year. On January 25, 2013, the D.C. Circuit vacated the EPA’s 2012 standard for cellulosic biofuel. American Petroleum Institute v. EPA, No. 12-1139 (D.C. Cir. Jan. 25, 2013). The court found that the EPA’s projection of the volume of cellulosic biofuel to be produced in 2012 was not neutral, but was tilted in favor of promoting growth in the cellulosic biofuel industry. Following the court’s ruling, the EPA removed the 2012 requirement for cellulosic biofuel. The EPA currently is proposing to remove the 2011 requirement for cellulosic biofuel as well.

As has always been the case, the proposed volume standards for cellulosic biofuel are much lower than those set by the Clean Air Act, which, for 2016, is 4.25 billion gallons (ethanol-equivalent). When the EPA sets the applicable volume for cellulosic biofuel below the volume specified in the Clean Air Act, the EPA is required to offer waiver credits that can be purchased in lieu of acquiring cellulosic biofuel RINs. For the 2014 and 2015 compliance periods, the price per waiver credit is $0.49 and $0.64, respectively.

Biomass-Based Diesel

The Clean Air Act only specifies the volumes of biomass-based biofuel through 2012; after that, the EPA is required to determine the extent to which a portion of the advanced biofuel volume should be set aside exclusively for biomass-based diesel. The volume for biomass-based diesel generally serves as a floor on production, with actual production in 2013 exceeding the required volume by almost 300 million gallons. Thus, while the EPA has proposed increases in the applicable volume of biomass-based diesel for 2015 and 2016, the EPA anticipates that these increases will leave considerable opportunity for investment in and production of other types of advanced biofuel.

Advanced Biofuel and Total Renewable Fuel

The Clean Air Act authorizes the EPA to set volumes for advanced biodiesel and total renewable fuel that are below those specified in the statute. The EPA has advanced two arguments justifying such actions for the 2014, 2015 and 2016 volumes. First, when the EPA sets the cellulosic biofuel volume below the volume specified in Clean Air Act, the EPA is authorized to reduce the applicable volumes of advanced biofuel and total renewable fuel by the same or a lesser amount. The EPA also has general authority under Section 211(o)(7)(A) to wave the statutory volumes based on economic or environmental harm or inadequate domestic fuel supply.

As explained by the EPA, the proposed 2014, 2015 and 2016 volumes for advanced biofuel and total renewable fuel will address “three important realities”:

• substantial limitations in the supply of cellulosic biofuel,
• insufficient supply of other advanced biofuel to offset the shortfall in cellulosic biofuel, and
• practical and legal constraints on the supply of ethanol blends to the vehicles that can use them.

The EPA is proposing to reduce the volumes of advanced biofuel and total renewable fuel “only to the extent necessary” to address the inadequacy of supply. Thus, the EPA is setting volumes of advanced biofuel and total renewable fuel at the “maximum achievable” volumes at the “boundary” between an adequate domestic supply and an inadequate domestic supply. Notably, the EPA expects that compliance with the total renewable fuel volume requirements will require more ethanol use than is possible through widespread use of E10. However, according to the EPA, while the standards must be achievable they also must reflect the power of the market to “drive positive change” in renewable fuel production and use, and are based on the expectation that the market “can and will” respond by increasing supply.

Conclusion

The EPA hopes that by using its Clean Air Act authority to adjust the applicable volumes for advanced biofuel and total renewable fuel, it can continue to support growth in renewable fuels while addressing the practical constraints on fuel supply. The EPA received over 340,000 comments on its November 2013 proposed renewable fuel percentage standards for 2014, and its new proposal is likely to generate similar controversy. We will provide updates on further developments as the comment period proceeds.