2019 Proposed RFS Volumes: The Deep-Dive Analysis

August 24, 2018

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by Antoine Schellinger (Biofuels Digest) In what has now become the final RFS2 issued policy under Scott Pruitt, there is no change from the policy established in the proposed and final 2018 Renewable Volume Obligation (RVO). The use of cellulosic waiver authority still dominates the rationale. EPA still back calculating (“implied volume requirement”) a 15 billion gallon per year corn ethanol market in establishing standards. Should there be litigation over this methodology (quite likely), 2018 and 2019 will be lumped together and ruled on accordingly.

EPA hinted that it might present a NPRM around the rules for RIN ownership designed to prevent hoarding and market manipulation.

EPA is not yet ready to respond to the remand from the DC Circuit to not cite “inadequate domestic supply” as a rationale for invoking “general waiver authority”. Case law is Americans for Clean Energy v. EPA, 864 F.3d 691 (2017) (“ACE”).

All proposed rule changes such as pathway U and bio-intermediates remain in purgatory and have not been commented on in ~2 years.

In order to refresh the main arguments, I have reprinted the Executive Summary from my July 2017 report which laid out the arguments used again in the July 2018 publication.

2017 RFS2 Update Executive Summary:

EPA actively seeking ways to minimize the Renewable Volume Obligation (RVO) from RFS2. Interpretation is that this is a cost on the public and must be diminished. Former interpretation, and general court interpretation, is that statute is technology forcing and that legislation requires market to adapt to ever increasing amount of biofuels in the transportation pool.

EPA rationale for minimizing volumes (in rough order of reliance)

1. Minimize the projected volumes of cellulosic biofuel production. Then use the cellulosic waiver authority expansively to reduce all other forms of biofuel by an equal amount. This is a new interpretation of the cellulosic waiver authority and will certainly be the subject of litigation.

a. This is the only authority actually invoked in this NPRM.

2. Rely on demand side constraints to limit the RVO since there is nowhere to put the volumes into the system. This is already largely been defeated by the 28Jul2017 DC Circuit ruling stating that the EPA is not authorized to consider demand side restraints. Congress intended the market to adjust.

3. Use the general waiver authority should there not enough existing proven capacity to meet the RVO.

4. Use the general waiver authority under the name of “severe economic harm.” If invoked, and quite possibly should the cellulosic waiver authority interpretation fail, this will be the next subject of litigation.

5. Invoke the “reset rule.” Something of the nuclear option stating that this program has gone so far awry that we as administrators have the authority to throw out all of the Congressionally mandated volume.

This simply frames up the battle that is now to be fought by the EPA.

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Carryover RIN Bank Size

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Cellulosic (D3) RIN’s

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Below are the comments comparing the final 2018 RVO versus the proposed 2018 RVO

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Quote summarizing these key aspects (emphasis added)

In previous years when exercising the cellulosic waiver authority to determine the required volume of advanced biofuel, we have taken into account the availability of advanced biofuels, their energy security and GHG benefits, and the apparent intent of Congress as reflected in the statutory volumes tables to substantially increase the use of advanced biofuels over time, as well as factors such as increased costs associated with the use of advanced biofuels and the environmental and food competition concerns raised by some commenters. In considering these factors, in those years, we have concluded that it was appropriate to set the advanced biofuel standard in a manner that would allow the partial backfilling of missing cellulosic volumes with non-cellulosic advanced biofuels. For purposes of this NPRM we are focusing primarily on the availability of advanced biofuels, their GHG and energy security benefits, and the costs associated with increased advanced biofuel mandates to propose no such backfilling with non-cellulosic advanced biofuel volumes in 2018. In other words, we propose to reduce the statutory volume target for advanced biofuel by the same amount as our proposed reduction in cellulosic biofuel. This action takes into account the fact that the substantial growth in advanced biofuel volumes after 2015 that was anticipated by Congress, and reflected in the statutory tables, was to be driven primarily by increases in cellulosic biofuel as opposed to non-cellulosic advanced biofuels. In addition, we recognize that the proposed approach involves placing a greater reliance on cost considerations than we have in past rulemakings. We believe this proposed new approach to balancing relevant considerations and exercising our discretion under the cellulosic waiver authority is permissible under the statute, and consistent with the principles articulated in FCC v. Fox TV Stations, 556 US. 502, 514-15 (2009), regarding circumstances when an agency may appropriately depart from prior policy.

The case citation here is the first salvo at defending the pending suit on the expanded interpretation of the cellulosic waiver authority which goes to the heart of the statute. Is the purpose of the statute to encourage growth and technological development of biofuels (past EPA mantra) or is the purpose to limit RVO’s to the existing (or even reduce) biofuel infrastructure that has been built to minimize the cost and impact of the RFS2 program to the refining fleet (current EPA mantra).

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In summary, the EPA has used the maximum possible extent of the cellulosic waiver authority to provide minimum possible RVO allowed under the statute. This rationale will surely be tested in court.

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Update on Case Law from 28Jul2017 with respect to prior EPA rulemaking on RVO determination:

Bottom Line Ruling from U.S. Appeals Court, District of Columbia Circuit:

At a high level, this affirms the court’s continued assertion that this is a technology forcing statute meant to drive the transportation fuel pool to ever higher portions from biofuels. As such, a practical matter that there simply is not enough biofuels being produced to meet the mandate IS an eligible reason to use waiver authority (supply side constraints). The fact that the market needs to adjust and adopt to an ever greater amount of biofuels IS NOT a reason to use waiver authority (demand side constraints). The court is stating that the market must adjust and adopt. In the current system, that means offering more E15 and E85 blends at the retail level.

Until 2017, the EPA & USDA initiated a blender pump program to assist retail stations in offering higher ethanol blends. That program was halted under the current administration.

The EPA was holding the demand side restrictions as the next line of defense should the broad interpretation of the cellulosic waiver authority be challenged. That is no longer valid. READ MORE

MN BIOFUELS COMMENTS ON PROPOSED 2019 RVOS (Minnesota Bio-Fuels Association)

Excerpt from Minnesota Bio-Fuels Association: a. Suggestion

Revisit the assumptions EPA uses to force the implication in footnote 6. Rather than backing into the conventional renewable fuel volume of 15 billion gallons, take into consideration, for purposes of buttressing the 15 billion gallon RVO, the exemptions (waivers) which have already been granted to small refiners over the last two years.

b. Supporting Rationale

i. Based on EPA’s current assumptions regarding statutorily required volumes of biofuel, it leads to the questionable implication regarding the conventional renewable fuel applicable volume of 15 billion gallons is the difference between the total renewable fuel and advanced biofuel applicable volumes. While on its face and under different circumstances it may be reasonable to make certain assumptions and essentially back into the 15 billion gallon number, the underlying assumptions which lead to the implication are flawed absent some recognition of the carryover RINs.

The flaws in EPA’s assumptions are especially pronounced given the Agency’s statement at RF 32030. Based on EPA’s assertion that the carryover RINs amount to approximately 15 percent of the total renewable fuel volume, if those RINs are applied just to the conventional renewable fuel, that means at least 2.25 billion gallons of renewable fuel could be in the form of paper and electronic transactions rather than actual gallon volumes of renewable fuel displacing finite, carbon intensive petroleum. In short, the actual or potential effect of the carryover RINs could have a profound negative impact in the push to make greater, not lesser, amounts of renewable fuel available to customers in the marketplace.

The flawed assumptions and implications further reveal themselves at other points in the proposed rule. See, for example, the Agency’s stated implication at FR 32026: “As for advanced biofuel, we are proposing the maximum reduction permissible under the cellulosic waiver authority. We are proposing that the reduction in total renewable fuel would be the same as the reduction in advanced biofuel, such that the resulting implied volume requirement for conventional renewable fuel would be 15 billion gallons.”

See, also, the reliance upon the assumption and implication in the “Total Renewable Fuel” section at FR 32026, the justification for the waiver authority and implied volume allowance for conventional biofuel in the text and footnote 11 at FR 32028 and the reference to the “implied volume of 15 billion gallons of conventional fuel” in the text at FR 32048.

To be clear, on its face it may seem reasonable to accept the implication the EPA sets up for the reader, but the implication contains a huge gap based on incomplete information, faulty assumptions and a cramped interpretation of the RFS which prevents the EPA from incorporating its own conclusions about the carryover RINs in the final RVO. This gap in reasoning with respect to how to handle the 15 billion gallon conventional renewable fuel and the small refiner waivers appears to undergird the Agency’s reasoning all of which flies in the face of the clear congressional intent to substantively displace liquid fossil fuel petroleum with renewable fuel rather than accounting and bookkeeping transactions which serve the petroleum industry rather than retail fuel customers and the environment.

Failure to account for the refinery exemptions and waivers could create a situation whereby refiners simply opt to “cash-in” their RINs rather than make the distribution system changes they should have been making since 2005 so as to comply with the RFS. If EPA fails to recognize the actual or potential effect of the 2.25 billion carryover RINs with respect to the implied 15 billion gallon conventional renewable fuel, the proposed rule, as it now stands, could have a significant adverse effect on biofuel producers while thwarting the Congressional intent underlying the Renewable Fuel Standard. That intent is to move the United States to a more sustainable transportation fuel pathway while reducing oil usage and imports and decreasing greenhouse gas emissions, all of which help to make the Nation more resilient in the face of international threats to energy reserves and climate change.

ii. Congressional Intent – Members of Congress and the President, with respect to the energy policy in the United States, intended for the RFS to be the driver for substantive, dramatic and systemic change. In fact, President George W. Bush called for moving beyond a petroleum-based economy. Similarly, based on statements in the Congressional Record, Rep. McCollum expected the RFS would provide a new direction for energy policy in the United States.

Still other Members of Congress, for example, expressed their intent for biofuels to be the energy change agent; i.e., the means by which to move beyond petroleum.

Failure by this EPA to account for the small refiner waivers (i.e., at least 2.25 billion carryover RINs) can put a damper on biofuels, from production to distribution to the use of biofuels throughout the transportation sector, and thereby prevent biofuels from serving as the energy change agent envisioned by Congress.

EPA, on the other hand, can and should follow the Congressional intent with respect to implementation of the RFS by making adjustments to the conventional renewable fuel RVO such that the additive effect of RINs alone will not suffice to assist in attaining the 15 billion gallon RVO requirement. By preventing any backsliding from the need to ensure at least 15 billion gallons of conventional renewable fuel is available in the marketplace, EPA can help keep the RFS on track and thereby more closely fulfill the Congressional intent to move the Nation to greater use of renewable biofuels.

To more fully substantiate our point regarding Congressional intent, we offer the following excerpts taken from the White House archives and the Congressional Record. It is clear that Congress intended for the RFS to be enforced (i.e., to drive greater amounts of renewable fuel into the market so as to displace finite petroleum gasoline) so as to attain the policy objectives which have been expressed by Members of Congress.

(1) Excerpt from President George W. Bush, State of the Union Address 2006:

“Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, [Emphasis Added] which is often imported from unstable parts of the world. The best way to break this addiction is through technology. . . .

By applying the talent and technology of America, this country can dramatically improve our environment, move beyond a petroleum-based economy, [Emphasis Added] and make our dependence on Middle Eastern oil a thing of the past.” – State of the Union Address by the President, United States Capitol, Washington, D.C., January 31, 2006. READ MORE