EPA Interpretation of the "Inadequate Domestic Supply" Waiver for Renewable Fuels Ruled Invalid: Where to from Here?

by Scott Irwin and Darrel Good (FarmDocDaily/University of Illinois) Three words--inadequate domestic supply--have taken center stage in the implementation of the RFS since 2014. The U.S. Environmental Protection Agency (EPA) used a controversial definition of this term to reduce the (implied) conventional ethanol mandate below statutory levels for 2014, 2015, and 2016. A legal challenge was mounted by biofuels groups and the U.S. Court of Appeals in Washington, D.C. ruled in their favor last week. The ruling is generally being interpreted as requiring only the backfill of the shortfall in the 2016 mandate, but there is some uncertainty in this regard. There are also varying opinions about what form the EPA remedy may take. Here we examine some potential outcomes in terms of additional biofuel requirements for alternative interpretations of the Court ruling and alternative EPA remedies.

The EPA has the primary responsibility for implementing the Renewable Fuels Standards (RFS) as outlined in the Energy Independence and Security Act of 2007. That Act established annual mandatory volume requirements for four classes of biofuels to be blended into the domestic motor fuel supply. Those classes include cellulosic biofuels, biomass-based diesel, total advanced biofuels, and conventional biofuels. EPA is responsible for establishing and enforcing annual volume mandates for total biofuels and mandates in each class of biofuel. Statutory provisions guide EPA in establishing the annual volume requirements and some of those provisions either require or allow EPA to establish annual mandates at levels less than the statutory requirements under specific circumstances. Specifically, these waivers include:

The EPA has routinely reduced the cellulosic, and therefore advanced and total mandate, below statutory requirements as required due to "inadequate domestic supplies." However, in the December 2015 Final Rulemaking that established renewable fuel standards for 2014, 2015, and 2016 (and biomass-based biodiesel standards for 2017) the EPA reduced the requirement for total biofuels by more than the reduction in the cellulosic mandate, which seemingly is not allowed under (3) above. The additional reduction was not in in the class of advanced biofuels, but was in the class of implied conventional biofuels (ethanol). In establishing the lower mandates, the EPA argued that the definition of "inadequate domestic supply" is broader than domestic production and import capacity which falls short of mandated quantities of biofuels. The definition was interpreted to include any constraints on delivering biofuels to the final consumer and/or constraints on consumption (demand) of biofuels. The so called E10 blend wall for ethanol, limited infrastructure for delivering higher ethanol blends to the consumer, and vehicle engine warranties that limited use of higher ethanol blends were all cited as examples of "inadequate domestic supply."

A second implementation scenario being discussed is what we refer to as a "shuffle." That is, since the mandate for advanced biofuels in 2014, 2015, and 2016 exceeded the minimum required under the cellulosic waiver and the implied conventional mandate fell short of the minimum, EPA could retroactively switch the "excess" advanced mandate to the "deficit" implied conventional mandate.

A third implementation scenario, referred to here as the "top off" scenario would leave the EPA advanced mandates in the 2015 final rulemaking unchanged and raise the implied conventional mandates to the statutory levels.

The most popular opinion seems to be that the Court of Appeals ruling against the EPA's interpretation of "inadequate domestic supply" used in establishing the 2015 RFS final rulemaking applies only to 2016. In addition, it is generally believed that the EPA remedy will involve increasing the implied conventional (ethanol) mandate by 500 million gallons. If so, the increase could conceivably be implemented in one year, 2018, or over a period of time. Given the ambiguity in the court ruling relative to 2014 and 2015, we included those years in our analysis. Including those years in the remedy would require as much as 2.24 billion gallons (in ethanol equivalents) in additional biofuels production over some period of time. While not impossible to implement, such a remedy would be much more complicated and would likely face stiff resistance. READ MORE