Each year under the federal Renewable Fuel Standard (RFS) program, the Environmental Protection Agency (EPA) sets the volume requirements for cellulosic biofuel, biomass-based diesel, advanced biofuels and total renewable fuel to be produced or imported in the following year. The RFS is the most extensive energy security and greenhouse gas (GHG) reduction tool implemented in the U.S. In June, the EPA released its proposed rule for 2012. The rule attempts to take account for difficulties in domestic cellulosic biofuel production, while still adhering to overall statutory goals including the dramatic expansion of advanced biofuels.

The RFS program was first added as an amendment to the Clean Air Act (CAA) through the Energy Policy Act of 2005 and then was significantly expanded by the Energy Independence and Security Act of 2007. The first iteration of the program is often referred to as RFS1 and called for 7.5 billion gallons of renewable fuel by 2012, a goal that would have easily been met ahead of schedule. The second and current version is often referred to as RFS2 and ultimately calls for 36 billion gallons of renewable fuel by 2022. Importantly, RFS2 also establishes requirements for advanced biofuels, cellulosic biofuel and biomassbased diesel as subcategories of the overall renewable fuel standard. Of the 36 billion gallons required by 2022, only 15 billion gallons can consist of traditional starch-based ethanol (corn ethanol). Indeed, corn-based ethanol reaches a plateau in 2015 and all further RFS2 increases must be met by advanced biofuels.

The EPA bases the standards for the following year on gasoline and diesel projections from the Energy Information Agency (EIA). In addition to the EIA projections, the EPA must also consider the production capability for certain categories of fuels such as cellulosic biofuel when setting the appropriate standard. Once the total volumes are set for each category of fuels, they are translated into a percentage requirement that obligated parties must purchase relative to the total volume of gasoline or diesel produced or imported by the obligated party. U.S. petroleum refiners and importers are obligated parties under the program and, if each refiner and importer meets the requirements, the total amount of renewable fuel used should meet the volumes set on a nationwide basis.

In its June Notice of Proposed Rulemaking (NPRM), the EPA took stock of continued lagging domestic development in the cellulosic biofuel sector but – even in light of delayed commercial development – opted to maintain the full statutory requirements for the broader advanced biofuels and renewable fuel categories. The NPRM also increases the standard for biomass-based diesel for the first time in 2013 and addresses a number of associated outstanding regulatory concerns.

The largest category of fuel – renewable fuel – encompasses all categories and is primarily fulfilled with corn starch ethanol that must reduce GHGs by a minimum of 20 percent compared to petroleum gasoline or be produced at a facility meeting grandfathering requirements. The total volume of renewable fuel proposed for 2012 is 15.2 billion gallons, up from roughly 14 billion gallons in 2011.

The other three categories – advanced biofuels, biomass-based diesel and cellulosic biofuel – must meet higher GHG reduction amounts of 50 percent to 60 percent relative to a fossil fuel baseline. In its annual assessment of the commercialization of the cellulosic biofuel industry, the EPA once again found the industry falling well short of Congressional goals. When the EPA makes such a determination, it then is authorized to reduce the applicable volume of cellulosic biofuel to the projected volume for that year.

To determine which facilities are likely to make cellulosic biofuel commercially available in 2012 and at what levels, the EPA has tracked the progress of over 100 biofuel production facilities. In 2011, EPA determined that a total of five facilities would make cellulosic biofuel commercially available in 2011. Of those five, all are structurally complete but only one is currently registered and eligible to generate fuel to receive credit under the program. In 2012, EPA expects five new facilities to begin commercial production in addition to the existing five facilities. These facilities are at various stages in construction, and there is considerable uncertainty as to whether this second wave of cellulosic production facilities will be able to begin production in 2012.

Among the ten facilities the EPA expects to begin production in 2012, is ZeaChem’s demonstration scale facility in Boardman, Oregon. The facility is capable of producing 250,000 gallons per year. The company’s combination of biochemical and thermochemical technologies allows ZeaChem to produce ethanol and other chemicals from cellulosic sources. The EPA expects the plant to be fully operational in 2012.

As a result of the limited number of facilities expected to be in commercial production in 2012, the EPA proposes to set a mandate level of 3.55 million to 12.9 million gallons for cellulosic biofuels in 2012, only a fraction of the statutory goal of 500 million gallons in 2012. This range even falls short of the range that EPA proposed for 2011 of 6.5 million to 25.5 million gallons. Notably, the EPA specifically requested comments regarding whether the cellulosic biofuel goal should be set more aggressively so as to further incentivize industry development.

Despite the limited development in cellulosic biofuel, the EPA again proposed to maintain the overall advanced biofuels category at the Congressional level of 2 billion gallons. This decision was in part based on the confidence that the 1 billion gallon goal for biomass-based diesel would be met, yielding 1.5 billion gallons of ethanol equivalent fuel. In addition, the EPA anticipates that other advanced biofuels including sugarcane ethanol will enable the fulfillment of this overall goal.

2013 Biomass-Based Diesel Determination Boosts U.S. Biodiesel Industry

The EPA proposed a 1.28 billion gallon volume for biomass-based diesel for 2013. This is the volume that was originally projected in the RFS2 final rulemaking for 2013, the first year for which the statute authorizes EPA to set the volume above the statutory minimum threshold of 1 billion gallons. Alongside the determination that the goal was feasible, the EPA also assessed what it would take to get to the advanced biofuel statutory goal of 2.75 billion gallons in 2013 and to what extent the biomass-based diesel standard could help achieve that standard.

The EPA assessed both domestic and foreign sources of advanced biofuels. In particular, imported Brazilian sugarcane ethanol contributes to meeting this goal with imports ranging from 17 million gallons to 730 million gallons in a given year. On average, U.S. imports of Brazilian fuels have been approximately 200 million gallons. Although Brazil plans to continue dramatically increasing production, international and Brazilian domestic demand for the fuel is also on the rise. In addition, Brazilian exports to the U.S. in 2010 were only 17 million gallons due to poor weather conditions and a heightened market for sweeteners that drove some Brazilian mills to shift from the fuel market to the sweetener market. Thus the EPA projects that just under 200 million gallons is a good estimate of Brazilian sugarcane ethanol imports for the foreseeable future despite Brazil’s growth predictions. Combining lagging development in the domestic cellulosic biofuel market with likely stagnant Brazilian imports, the EPA determined that the total volume of cellulosic biofuel, imported sugarcane ethanol and other advanced biofuels would be less than 1 billion gallons in 2013. It then concluded: “In order to reach an advanced biofuel volume of 2.75 billion gallons, then, it is likely that more than 1.0 billion gallons of biomass-based diesel (representing more than 1.5 billion ethanol-equivalent gallons) will be needed.” Thus, much of the ability to maintain the overall advanced renewable fuel goal relies on the current and future success of the biomass-based diesel industry

Rejection of Challenge to RFS2

In addition to setting proposed volumetric mandates, the EPA used the scheduled rulemaking to address a wide range of ongoing RFS issues. For instance, the EPA proposed to reject a Petition for Reconsideration of RFS2 that was filed by the American Petroleum Institute (API) and the National Petrochemical and Refiners Association (NPRA). Throughout and subsequent to the RFS2 rulemaking, the API and NPRA have asserted procedural and substantive challenges to the RFS2 final rule but have continued to be unsuccessful in these efforts.

Earlier this year, the D.C. District Court denied rehearing in National Petrochemical & Refiners Association v. EPA, which affirmed EPA’s authority to issue the final RFS2 rule after the statutory deadline had passed and with retroactive implications. 630 F.3d 145 (D.C. Cir. 2010). The NPRA had argued that the rule was impermissibly retroactive and that some of the requirements for that period should be stricken. In February of this year, the API and NPRA also submitted a petition to the EPA under the reconsideration provision of the Clean Air Act. The petition argued that the 2011 cellulosic biofuel volume requirement was unrealistically high, that the determination that there were sufficient sources of advanced biofuels lacked factual support and that the EPA’s treatment of delayed Renewable Identification Numbers (RINs) leads to undesirable regulatory uncertainty. To maintain a successful petition, the API and NPRA needed to demonstrate that the objection was impracticable to raise during the public comment period and that the objection was central to the outcome of that rule. Although the EPA asserts that the petitioners are legally foreclosed from raising their arguments at this time for lack of justifying why they would have been impracticable to raise during the comment period, the EPA also goes on to dismiss the substance of the claims.

Resolving Programmatic Errors or Inefficiencies

The EPA also took advantage of the rulemaking to address what the EPA described as inadvertent errors in the regulatory program as well as program modifications. Many of these regulatory changes involve the credits used in the system, known as Renewable Identification Numbers or RINs. The proposed changes include imposing limits on the number of RINs that importers can separate from the underlying renewable fuel, recognizing some small refinery hardships resulting in volume adjustments, expanding attestation requirements to include more focus on product transfer documents, changing the methodology for calculating benzene early credits, tightening the definitions of naphtha and annual cover crops, expanding the canola pathway to encompass all rapeseed and canola, addressing foreign ethanol production and denaturing issues, and eliminating an alternative to the foreign bond requirements. In addition, the NPRM updates the approved pathway chart to include the canola/rapeseed oil pathway for biodiesel. The pathway chart is included in 40 CFR § 80.1426 and describes the pathways that have received approval from the EPA to generate RINs and specifies the D code of the RINs that can be generated by the fuel. Most significantly for renewable fuel producers and obligated parties facing EPA notices of violation or requests for information under section 114 of the Clean Air Act, the EPA proposed relaxing its rigid strict liability standard for invalid RINs. The EPA provided a proposed series of guidelines for allowing some compliance with invalid RINs by obligated parties operating in good faith so long as the RIN generator retires the appropriate number of RINs. This proposal is likely to be welcomed by renewable fuel producers and obligated parties alike who have struggled with the rigid RIN compliance system that has limited capabilities for remedial action.

The EPA explains that the strict standard was put in place to encourage RIN generators to properly generate RINs and parties in the RIN distribution system to take all appropriate actions to ensure that they are not trading or using invalid RINs for compliance purposes. Although the EPA believes these “buyer beware” or “self-policing” mechanisms are a critical component of the RFS2 program, the EPA asserts that introducing some limited flexibility “could reduce disruptions to the RIN market while, if appropriately limited, continu[ing] to apply appropriate pressure on parties that generate, transfer and use RINS to comply with the regulations.”

The EPA proposes to allow improperly generated RINs to be transferred and used for compliance if, among other requirements:
1) the RINs were improperly generated as a result of an inadvertent error,
2) the error is corrected within 60 days,
3) the number of excess RINs generated does not exceed 2% of that which should have been generated from the batch, and
4) this flexibility is not used repeatedly by a single renewable fuel producer. Notably, the EPA is seeking comment on the proposed conditions set forth above as well as any additional or alternative conditions that should be introduced to improve the program should new flexibility be added.

Public comments on the proposed rule must be received by Aug. 11, 2011. These may be submitted through a variety of means, perhaps most conveniently through an email to asdinfo@epa.gov with reference to Docket ID No. EPA-HQ-OAR-2010-0133. EPA’s prior rulemakings in this area have drawn substantial comments, and these comments have often resulted in significant changes being integrated into the final rule.

The Oregon Insider
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Jeff B. Knebel / Managing Editor
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