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Sierra Club v. EPA 18cv3472 NDCA
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Agenda
1. RFS reform
Tab 1: Reform Options Chart Tab 2: Exporting Biofuels White Paper Tab 3: 1 psi Waiver White Paper Tab 4: Small Refinery Exemption White Paper
2. RUMtrading 3. RFS transparency
Tab 5: Transparency Options Chart
4. RFA lawsuit 5. Other
RFS Reform Options
1. Remove export RIN retirement obligation 2. Extend 1-psi RVP waiver to E15 3. Reallocation of exempt small refinery RVOs 4. 10% blending floor
Please See Tab 1
Sierra Club v. EPA 18cv3472 NDCA
RFS Reform
Remove exporter obligation
Repeal 40 CRR. 80.1430 1+ billion gallons of renewable fuel exported annually, 600+ million gallons
generate RINs that must be retired Potentially more RINs from undenatured ethanol
Please See Tab 2
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Sierra Club v. EPA 18cv3472 NDCA
RFS Reform
Extend the 1-psi RVP waiver to E15
Substantial litigation risk!
Amend regulations to allow year round sales of E15 with an RVP of 10 psi
Could increase the supply of D6 RINs
Please See Tab 3
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Sierra Club v. EPA 18cv3472 NDCA
RFS Reform
0 Reallocation of small refinery RVOs
* Substantia/ iifigafion risk! * impracticai/unfair! * Increase RVO to impose small refinery RVOs on other obligated parties
Please See Tab 4
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Sierra Club v. EPA 18cv3472 NDCA
SRE Volume Reallocation Is Not Practica
Nov. 30 2018
EPA deadline to establish RVO for
2019
Dec. 31 2019 Compliance year
ends
Spring 2020 EPA
decisions on small refinery petitions
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Small Refinery Exemption
EPA should maintain its current approach to the small refinery exemption program
Hardship exemption provides much needed relief to small refineries
Small Refinery Exemption
Practical barriers to reallocation of SRE RVOs; EPA sets RVO well before it grants SREs, thus reallocation would need to occur at end of or after close of compliance year
Reallocation would impose uncertainty for regulated parties, including small refineries who are on cusp of hardship status
Could impose $1 to $2 billion in additional compliance costs on obligated parties
Small Refinery Exemption
Legal barriers to reallocation of SRE RVOs:
EPA cannot increase RVO over that provided in the statute. CAA 211(o)(B)(i)(l) ("the applicable volume of renewable fuel. . . shall be determined in accordance with the following table")
Resetting RVO after Nov. 30th of previous year is not permitted by statute. CAA 211(o)(3)(B)(i)
The adjustment provision exists to allow EPA to downwardly adjust RVO, not increase it. CAA 211(o)(3)(C)(ii); 72 Fed. Reg. 23,900, 23,911 (May 1, 2007).
Sierra Club v. EPA 18cv3472 NDCA
SREs Do Not Impact Blending Rate
25, 000, 000.,000
Iftfs Generated v,
20,000,000,000
15. 000. 000.000
V, er
EE
10.000.000.000
5, 000, 000,000
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20IX
M Total RiNs Generated 15,535,487,739
RVO
13,950,000,000
2012 15,352,270,097 15,200,000,000
2013 16,649,629,221 16,550,000,000
2014 17,245,997,350 16,280,000,000
2015 17,931,107,377 16,930,000,060
2016 19,476,196,093 18,110,000,000
2017 19,352,462,163 19,280,000,000
Yea r
l Total RfNs Generated RVO
For 2018, renewable fuel production is 102% of 2017 volumes through April.
o o O
RFS Reform
10% blending floor Impose requirement to blend gasoline to minimum of 10% ethanol Provides certainty to ethanol/corn interests EPA has authority to implement this via regulation
RIN Trading
Trades via brokers can occur over messenger-type exchanges * Intercontinental Exchange {'ICE")
Largest RIN brokers in the marketplace * ICAR - SCR * Blue Ocean - INTL/FC Stone
Brokers take 1/10 cent per RIN commission on both buyer and seller side
RIN Trading Demonstration
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RIN Market Regulation
The lack of regulatory oversight in the RIN market contributes to high RIN prices
8RIN trading is not centralized
RIN hoarding is prevalent
RIN pricing is not transparent
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RIN Market Manipulation
Lack of RIN market regulation leads to market manipulation. For example:
Parties may hold RINs to limit supply and put upward pressure on price
RIN-long party may purchase RINs if prices begin to fall to stabilize price
RIN Price Volatility
Ethanol blending is highly profitable because it is 50-70 cents per gallon cheaper- RIN production cost is negative
RIN prices unrelated to price of ethanol or corn RIN prices unrelated to blending costs
The cost of blending is an order of magnitude below the cost of RINs
RIN prices fluctuate significantly based on regulatory and political decisions
New RIN hedging programs are being introduced; none have succeeded in the past
D6 RIN Price vs. Corn Spot Prices
Standardized {Divided by i/ l/2010 Price!
E thanol, C om , and Crude Prices
7 ............................... ..
Spot Prices Scaled to 9/1/2009 Prices
..................................... .....................
16 ............... ... ...... ...................................................................... ......... i........................................................
15 '..................................................................... ...
................................................................ .....
14 ? :
9/1/2009
9/1/2010
9/1/2011
9/1/2012
9/1/2013
9/1/1014
9/1/2015
9/1/202
To facilitate comparison, ail prices have been divided by 9/1/2009 prices to normalise to 1 A value of 2, for example, meaos the prtce was twice as high that day as on 9/1/2009. Sft) ~ Pfi) / PC9/1/20O9}
EPA and Political Impacts on RIN Prices
Pruitt nominated to hesd EPA
Relevant Oates: EPA Announcements 2/7/13: Proposed 2013 RVO, D6 RIMS price quadruples the next 4-weeks 8/15/13: Final 2013 RVO, RIMS trade down 33% in the next 4-weeks 11/21/14: Statement that 2014 Final Rule will not be set before year-end 5/29/15: Final 2014 RVO and Proposed 2015 & 2016 RVO 11/30/15: Final 2015 RVO, raised 2016 Proposed RVO 5/18/16: Proposed 2017 RVO
8/8/16: Icahn Letter to EPA about RIN market 11/8/16: Trump elected President 11/23/16: Final 2017 RVO 12/8/16: Scott Pruitt nominated to head EPA 1/20/17: Administration Announces Regulatory Freeze 3/20/17; Expiration of Regulatory Freeze
EPA/Political Impacts in the Last 2 Years
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Transparency Ideas
1. Anti-hoarding provision 2. Trade restrictions 3. Purchase restrictions 4. Price and volume transparency
Please See Tab 5
Transparency Ideas
Anti-hoarding provision Non-obligated parties must sell all separated RINs acquired during a calendar quarter in the following quarter. Obligated parties cannot hold more RINs than 120% of their obligation at the end of a calendar quarter. Keeps the RIN moving from producer to obligated party
Transparency Ideas
Trading restriction Two-trade limit per RIN Similar to sulfur and benzene credit trading restrictions
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Transparency Ideas
Purchase restriction Only obligated parties can purchase separated RINs
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Transparency Ideas
Price and volume transparency
Require parties to report the actual purchase/sale price and corresponding volume of a RIN transaction in EMTS (price should be a "matching criteria")
Prices should be subject to attestation like all other criteria of the transaction
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SRE Litigation
RFA and others are suing EPA over grant of HollyFrontier's Cheyenne and Woods Cross refineries, and CVR Energy's Wynnewood refinery
ABFA brought suit in DC Circuit challenging SRE policy
Industry intervention in pending lawsuits
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Reset Provision
0 CAA 211(o)(7)(F) TM Requires EPA to modify statutory volumes if:
(1) at least 20% of statutory volume waived in 2 consecutive years or, (2) 50% of statutory volume waived in one year
Each category likely subject to reset at the end of this year
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# Option
1 Remove Exporter Obligation
....
Oescription/Legaf Authority
EPA vrouid rescind 40 C.F.R, 80.1430 and remove the requirement to retire RINS for exported volumes of renewable fuel.
The plain language of the statute requires only that transportation fuel "sold or introduced into commerce in the United States" contain the statutory amounts of renewable fuel Domestically manufactured renewable fuel is introduced into commerce in the United States | before it is exported.
| This provision is focused on the introduction into commerce of transportation fuel, not the iocation of where the fuel is consumed, in 42 U.S.C. 7545{o}(2XA), Congress explicitly
' prohibited EPA from restricting the geographic areas in which renewable fuel may be used.
RFS Reform Options
implementation
j RIN Price Impact
Pros/Com
Administrative solution. ERA would withdraw 40 C.F.R. 80.1430 and clarify that renewable fuel exporters no longer have an obligation to retire RINs. This is not a complicated process and theoretically, EPA could accomplish the amendment before the end of 2018.
To increase the defensibiiity of the rule, EPA may require that the exporter certify that the ethanol will be used for transportation fuel. Denatured ethanol can only be used for transportation fuel.
Removing the exporter obligation would Increase the supply of RINs end put downward pressure on RIN prices.
In 2017, EfvSTS shows 341 million RINs retired for exports.
If EPA amends the definition of
ethanol to Include denatured and urt-
denatured ethanol exported for use in
transportation fuel, then more
renewable fuel would qualify. This
rulemaking may be complex and may
involve the IRS and state taxing
authorities.
I
increases quantity of RINs and decreases j RIN prices. f+)
I Encourages domestic production. (+)
Likely to have farmer support, {+)
I Decreases enforcement burden. (+)
J There is litigation risk to the extent the RFS was only intended to address domestic supply or transportation fuel to be solely used in the U.S, {-}
Another litigation risk is that the term
j
Transportation fuel" may refer only to
j
blended fuel, in which case only the RINs j
from blended fuel that is exported could be I
exempt from the exporter obligation. {-} !
t Tabi
# Option
...................... ...................................... >
Description/Legai Authority
2 Extend the 1* High litigation risk because it is inconsistent
psi RVP
with plain language of Clean Air Act.
waiver to E15 Amend EPA regulations to permit the sate of
15 with an RVP of 10 psi during the ozone
season {summer months).
Congress directed EPA to "promulgate regulations making it unlawful for any person during the high ozone season to sell, offer for sale, dispense, supply, offer for supply, transport, or introduce into commerce gasoline with a Reid Vapor Pressure in excess of 9.0 pounds per square inch {psi)." Clean Air Act 211{h}{i), 42 U.S.C, 7S45{h){1}.
E10 can have a RVP as high as 10.0 psi. Pursuant to CAA 211(h), which allows a 1 psi waiver for "fuel blends containing gasoline and 10 percent denatured anhydrous ethanol (which is E 1 0 f, EPA granted E10 a waiver that allows for the sale of E10 with a RVP of 10 psi,
RFS Reform Options
Im ple m e n ta tio n
RIM Price Impact
Pros/Cons
Administrative solution. EFA could amend its regulations to extend the 1 psi waiver to ethanol blends greater than 10%. such as 15.
EFA would need io explain In detail the basis for changing its interpretation of the statute because the agency historically interpreted CAA 211(h) to apply only to E1G and not E l 5,
This change may require a legislative fix, however, because the statute
authorizes a 1 psi RVP waiver only
for fuel blends containing 10% ethanol E15 has more than 10% ethanol.
Extending the 1 psi RVP waiver to E1S could increase the supply of D8 RiNs. However, sales of E15 in the United States are low and we do not expect a substantial amount of RIHs to be introduced into the market as a result of this proposal.
The impact on R1N prices from this proposal is expected to be minimal.
High legal risks given plain language of Clean Air Act {-)
Minimal change in RIN process {-}
Environmental groups wit! likely oppose given the increase in ground level ozone {>
State air permitting authorities will likely oppose because proposal will make it more difficult for States to show# attainment with National Ambient Air Quality Standards for ozone (-)
Allows ethanol sales to increase in summer months {+}
2 Tab 1
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| # Option
I 3 Reallocating | Small l Refinery j Exemption
j Description/Legal Authority ... j
EPA would increase lire annual RVG to
j account for the expected granting of Small
Refinery Exemptions (SREs) later In the
[
compliance year.
There is no legal authority available to EPA to J increase the RVO or amend it after the Nov. 30 deadline. The provision in CAA 211(o}{3}fC} only provides authority to discount the annual RVG to account for exempt small refineries use of renewable fuel.
| One of the main purposes of the RFS is to
i ensure that small refineries do not suffer
j economic harm as a result of the RFS.
| Congress recognized that small refineries are j
instrumental to rural America by providing high i
paying jobs and a substantial tax base.
j
Congress never envisioned that the RINs
associated with the Small Refinery Exemptions
would he reallocated.
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RFS Reform Options
Implementation
RiN Price Impact
ErosfCons
BM sM ive^olutign: EPA may try to address this issue as part of the annual RVG rulemaking procedure. To do so, ERA would need to anticipate the volume of conventional fuel produced by small refineries that are likely to receive SREs, Neither the CA nor the RFS regulations permit ERA to guess which parties may be exempt, instead EPA must apply the RVQ based on the formula set forth in 40 C.F.R. 80.1405.
The proposal will likely increase RIN prices by increasing the RVO on obligated parties beyond what is required by the RFS.
Additionally, ERA must set the RVO by Nov. 30 of the previous calendar year - it cannot adjust the RVG after that date.
Implementation is further complicated by the fact that EPA grants SREs after the end of the compliance year. Thus, this approach is impractical and EPA should not prejudge decisions on SREs.
Proposal would be inequitable to other refineries, which in compliance with the RVO throughout the year,
Proposal has high legal risk {-)
Proposal will increase R1N prices and increase pressure from the biendwali {-)
Proposal will not change blending practices and RVG will continue to me met
B
Tab 1
RFS Reform Options
# Option
Description/tegat Authority
Implementation
4 E1 and
Minimum fuel standard of 10% ethanol in ERA to require a minimum of E10 to
Biodiesel Fuel gasoline and [2%] biodiesel in diesel
be sold in the United States for
Specification
transportation fuel.
Replaces biofuel ceiling with free market approach
RIN Price impact
Should not impact RIM prices.
Lays foundation for future octane solutions and RFS reforms
Solves phantom RIN problem from clear gas sales (0)
Pros/Cons
Lays foundation for future octane solutions and RFS reforms {+)
Solves phantom RIM problem from clear gas sates (EO) (+}
Protects biofuel from loss of current market share (+} Increases biofuel consumption (+)
Provides certainty to renewable fuel industry (+}
CM
TAB
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Exporting Biofuels Under the RES
EPA N current regulatory fra m ew o rk addressing exports o f biofuels
A r e n e w a b le fuel p r o d u c e r g e n e ra te s a RUN fo r e a c h g a llo n it p ro d u c e s . T h e R IN re m a in s
"co n n ected " to th e biofuel until it is b len d ed w ith g asoline o r diesel, or i f it is ex p o rted . W h en a
R IN is s e p a ra te d fro m re n e w a b le fu e l v ia b le n d in g , th e b le n d e r is fre e to sell th e RIN to a n o th e r
party. W h en a R IN b eco m es sep arated from ren ew ab le fuel via ex p o rt, h o w ev er, it m ust be
retire d an d c a n n o t b e so ld to a n o th e r p arty . This re stric tio n e x ists as a re su lt o f E P A 's c u rre n t
regulatory fram ew ork, w hich Im poses upon an exporter an export renew able volum e obligation
("ERVO" ). T h e ERVO p r e v e n ts th e R IN fro m b e in g u s e d b y an o b lig a te d p a r ty to c o m p ly w ith th e annual RVO. See 4 0 CFR 8 0 .1427(c), 80.1 4 3 0 .
Eliminating the E P A -created E E VO is consistent with the R F S statutory language
T h e R F S d o e s n o t in a n y w a y m a n d a te that E P A im p o se a n E R V O , an d o n e c o u ld g o as fa r as s a y in g that th e E R V O is ille g a l. T h e E R V O a p p e a rs to b e b a se d o n E P A 's erroneous interpretation o f th e R F S that o n ly d o m e s tic a lly -c o n s u m e d fu el c a n sa tisfy Congress' m a n d a te to in c re a se re n e w a b le fuel u se. H o w e v e r, E P A 's in te rp re ta tio n is in c o n s is te n t with th e p la in la n g u a g e o f th e R F S . S e c tio n 211 (o)(2)(A)(i) is th e g en eral a u th o rity fo r im p o sin g th e an n u al RVOs and states:
[R F S !] N ot later than 1 year after A ugust 8, 2005, the A dm inistrator shall prom ulgate
re g u la tio n s to e n s u re th a t g a s o lin e s o ld o r in tr o d u c e d in to c o m m e rc e in th e U n ite d S ta te s ( e x c e p t in n o n c o n tig u o u s S ta te s o r te r r ito rie s ) , on a n a n n u a l a v e ra g e b a s is , c o n ta in s th e a p p lic a b le v o lu m e o f re n e w a b le fuel determined in accordance w ith su b p a ra g ra p h (B ),
[R F S 2] N o t later th an 1 y e a r after D ecem b er 19, 2007, th e A d m in istrato r shall rev ise tire regulations under th is p aragraph to en su re that transportation fuel sold o r introduced into co m m erce in th e U nited S tates (ex cep t in n o n co n tig u o u s States o r territo ries), on an annual average basis, contains at least the applicable volum e o f renew able fuel, advanced
b io fu e l, c e llu io sie biofuel, an d b io m a ss-b a se d d iese l, d e te rm in e d in a c c o rd a n c e w ith su b p a ra g ra p h (B ) [th e Congressionally m a n d a te d v o lu m e s ] . . . .
In R F S 1 , th e a n n u a l R V O o n ly a p p lie d to gasoline so ld o r in tro d u c e d into c o m m e rc e in th e U n ited S tates, In R F S 2 , h o w e v e r. C o n g re ss b ro a d e n e d th e sta tu te to a p p ly to transportation fu e l
sold o r in tro d u ced into c o m m erce in th e U n ited S tates. In R F S 1, th ere co u ld have b een a
p la u s ib le interpretation th at o n ly b le n d e d fu el (g a so lin e ) co u ld b e u se d to m e e t th e a n n u a l RVO.
H o w ev er, in R F S 2 , th at in terp retatio n is n o lo n g er v iab le becau se tran sp o rtatio n fuel m u st b e
rea d to in c lu d e m o re th a n ju s t g a so lin e . T ra n sp o rta tio n fuel is defined as "a fu el fo r use in m o to r v e h ic le s, motorvehicle e n g in e s, n o n ro a d v e h ic le s, o r n o n ro ad e n g in e s (e x c e p t fo r o c e a n -g o in g v e s s e ls )." S e c tio n 21 l( o ) ( ,l) ( L ) . P u r e ethanol a n d 100 p e r c e n t b io d ie s e l c a n b e u se d a s fu e l in
vehicle engines and are squarely w ithin the definition o f transportation fuels.
T h e s e c o n d te r m to c o n s id e r is ``introduced into commerce in the United States f This is a term o f art in th e leg al w o rld ste m m in g fro m th e U .S , C o n stitu tio n and h a s b e e n d efin e d e x tre m e ly broad by c o u rts . See United States v. Potomac Navigation, Inc. N o . W M N - 0 8 - 7 1 7 , 2 0 0 8 W L 1 1 3 6 3 3 7 4 at *2 (D . M d , J u ly 3. 2 0 0 8 ), W h e n a p ro d u ct is c re a te d d o m e stic a lly an d
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th en tra n sfe rre d to a fac ility to b e ex p o rted , th e p ro d u ct has been in tro d u ced in to c o m m e rc e in th e U nited States, R estrictin g th e d efin itio n o f th e phrase "introduced into co m m e rc e " to only
the sate o f fuel domestically w o u ld ren d e r it superfluous, as it would have th e same m e a n in g as
the term "sold."
A b ro ad in te rp re ta tio n o f th e te rm "introduced into commerce in the United StatesU a ls o is warranted g iv e n th e sta tu to ry p ro v isio n p ro h ib itin g E P fro m re s tric tin g th e g e o g ra p h ic a l sc o p e
o f the R.F5, S ectio n 21 l(o)(2 ){A )(iii){ll)(aa} states th at " [rje g ard le ss o f th e d ate o f
prom ulgation, th e regulations prom ulgated u n d er clause (i) [the annual RVQ rule] . , . shall not
restrict g eographic areas in w hich renew able fuel m ay he used," O nce again, the p lain language
o f the R F 5 p ro g ra m d o e s n ot restric t b io fu e ls to o n ly d o m estic u se, th u s e x p o rts should b e on
equal footing w ith dom estic ethanol.
Im pact o f Removing EM VO
B y re s c in d in g th e re g u la to ry re q u ire m e n t to re tire R IN s fo r ex p o rte d re n e w a b le fu el, EPA would
increase th e supply o f R IN s availab le in th e m arket. A pproxim ately 1 billion gallons o f ren ew ab le fuel is exported annually. N o t all o f this ren ew ab le fuel g enerates R IN s, how ever. Som e renew able fuel producers chose not to reg ister their fuel and generate R IN s If they know th eir fuel is destined for export. A portion o f th is total, approxim ately 400 m illio n gallons, does generate R IN s that are retired upon export. T hus, at least 400 m illion R IN s could enter the m arketplace if EP am ends its regulations.
The re m a in in g am o u n t o f ren e w ab le fuel co u ld also g en erate R IN s i f th e p ro d u c e rs determine it is e c o n o m ic a l to d o so , p o rtio n o f th is v o lu m e Is u n d e n a tu re d eth an o l. Currently, u n d e n a tu re d e th a n o l is n o t e lig ib le to p a rtic ip a te in th e R F S p ro g ra m . A c c o rd in g ly , p ro d u c e rs will e ith e r n e e d to a d d d n a tu r a n t to e th a n o l in o r d e r to g e n e r a te a RIN o r E P A w ill n e e d to w o rk w ith o th e r a g e n c ie s, su c h as th e 1RS, to a m e n d re g u la tio n s to p e rm it e x p o rts o f undenatured ethanol to g e n e ra te RINs,
Conclusion
W e h a v e n o t fo u n d a le g a l b a s is to p re v e n t e x p o rte d biofuels from full p a rtic ip a tio n in th e R F S p ro g ra m . In fa c t, th e statutory la n g u a g e co u ld b e re a d to p ro h ib it th e c u rre n t re g u la to ry structure
that im poses a separate and independent R V O on exports o f biofuels.
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TAB 3
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Extension of 1-psi Waiver to EI5
T h is m e m o ra n d u m a d d re sse s th e E n v iro n m e n ta l P ro te c tio n A g e n c y 's (EPA) a u th o rity to e x te n d th e 1-psi R e id v a p o r p re s s u re (RVP) w a iv e r to g a so lin e c o n ta in in g 15% e th a n o l ( E 15). T h e p la in lan g u ag e o f th e C lean A ir A ct and E P A 's reg u la tio n s c u rren tly lim its th e 1-psi RVP w aiv er to
gasoline containing 10% ethanol (EIO ), T hough proponents o f increased ethanol use suggest
th at th e C le a n A ir A c t g ra n ts ER A a u th o rity to extend th e R V P w a iv e r to a n y fu e l b le n d
containing at least 10% ethanol, E PA has previously rejected such an interpretation. A ccordingly, E P A w ould face significant litigation risk in adopting a contrary position.
Legal R isk o f E xtending the 1-psi R V P Waiver to E15
T h e plain lan g u ag e o f th e C lean A ir A ct, w hich pro h ib its th e ex tension o f the 1-psi R V P w aiver
to E l 5, p o s e s th e b ig g e s t le g a l o b s ta c le to E P A re v is in g its r e g u la tio n s to e x te n d th e a 1-psi
w aiver for E 15.
In th e 1 9 9 0 C le a n A ir A c t a m e n d m e n ts . C o n g r e s s d ire c te d E P A to " p r o m u lg a te r e g u la tio n s m a k in g it u n law fu l fo r a n y person d u rin g th e h ig h o z o n e s e a s o n . . . to sell, o ffe r for sale,
dispense, supply, offer fo r supply, transport, o r introduce into com m erce gasoline w ith a Reid
V a p o r P re ss u re in e x c e ss o f 9 .0 p o u n d s p e r sq u a re in ch (psi)." C le a n A ir A c t 2 1 1(h)(1), 42 U .S .C , 7 5 4 5 (h )(1 ). The s ta tu te c o n ta in s an " e th a n o l waiver,"" h o w e v e r , th a t in c r e a s e s th e R V P lim it " o n e p o u n d p e r s q u a re in c h (p s i) g re a te r th a n th e [9 .0 psi] R e id v a p o r p re s s u re lim ita tio n " for " fuel b le n d s c o n ta in in g g a s o lin e a n d 10 p e rc e n t d e n a tu re d a n h y d ro u s eth an o l."' Id. 2 1 3(h)(4). Under th e s ta tu te , parties a re " d e e m e d to c o m p ly " w ith th e R V P lim its i f th e y c a n d e m o n s tra te th a t " (A ) th e g a s o lin e p o r tio n o f th e blend c o m p lie s w ith the R e id v a p o r p r e s s u r e lim ita tio n s p ro m u lg a te d p u r s u a n t to th is s u b s e c tio n ; (B ) the ethanol portion o f the blend does not exceed its waiver condition under subsection 0 (4 ); and ( ) n o a d d itio n a l alcohol o r o th e r additive h a s b e e n a d d e d to in c re a s e th e R eid V a p o r P re ss u re o f th e e th a n o l portion o f th e blend." Id. 2 1 1 ( h )( 4 )( A ) - ( C ) ( e m p h a s is a d d e d ). S e c tio n 2 1 1 ( h )( 4 ) o f the C le a n A i r Act clearly limits the RVP w a iv e r to EIO. The proponents of biofuels are seeking for E P A to go beyond this Congressional w a v ie r and allow for E15 during t h e high ozone season.
EPA p ro m u lg ated reg u latio n s lim itin g g aso lin e R V P du rin g th e h ig h o zo n e season (g en erally
M ay 1 to S eptem ber 15) based on the siate/region w here the gasoline is sold, dispensed, or
tra n sp o rte d . See 4 0 C.F.R. 8 0 .2 7 (a ). l i r e re g u la tio n s a lso contain a waiver provision allowing g aso lin e c o n ta in in g "d e n a tu red , an h y d ro u s ethanol" at a c o n c e n tra tio n o f "a t least 9% an d no more th a n 10% ( b y v o lu m e ) o f th e g a s o lin e " to e x c e e d th e RVP lim its b y u p to 1 p s i. 4 0 C.F.R. 8 0 .2 7 (d )(2 ). EPA 's reg u lato r} '' w a iv e r fo r "gasohol," o r g a s o lin e th a t c o n ta in s 9-10% e th a n o l a c tu a lly e x is te d b e f o r e C o n g r e s s a m e n d e d S e c tio n 2 1 1 o f th e C le a n A ir A c t in 1 9 9 0 . See 5 4 F e d .
R eg. 11,868, 11,879 (M arch 22, 1989). T hus, E P A view s the 1-psi R V P w aiver provision as a codification o f its original regulations.
in 2 0 1 1 , E P A c o n s id e re d e x te n d in g th e w a iv e r to E 15 b u t c o n c lu d e d that it lacked th e statutory
a u th o r ity to e x te n d th e R V P w a iv e r to g a s o lin e b le n d s g re a te r th a n 10% e th a n o l b e c a u s e " th e
te x t o f s e c tio n 2 1 1 (h )(4 ) a n d th is legislative h isto ry ' s u p p o rts EPA's interpretation, a d o p te d in th e 1991 ru le m a k in g , th a t th e 1 p si w a iv e r o n ly a p p lie s to gasoline blends c o n ta in in g 9 -1 0 v o l%
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ethanol," 76 Fed. R eg. 44,406, 44,433 (July 25, 2011). E P A reached this conclusion prim arily because C ongress had codified E P A 's previous R V P regulations into C lean A ir A ct 2 1 1(h) as
p a rt o f th e 1 9 9 0 a m e n d m e n ts , Id, A c c o rd in g to E P A , C o n g re s sio n a l in te n t is a p p a re n t o n th e
lace o f the statutory provision given that C ongress specified the w aiver applied to fuel blends
containing 10% ethanol. Id,'
E P A c o u ld fa c e s u b s ta n tia l litig a tio n ris k by is s u in g r e g u la tio n s th a t e x te n d th e 1-psi R A T w a iv e r to E l 5. A s E P A a c k n o w le d g e d , th e p la in la n g u a g e o f s e c tio n 2 1 1 (h ) lik e ly r e s tr ic ts th e 1-psi R V P w a iv e r to fuel b le n d s c o n ta in in g 10% eth an o l. W h ile e th a n o l in te rests interpret th e sta tu te
to allow the R V P w aiver to apply to any fuel blend containing a m inim um floor o f 10% ethanol (w hich E l 5 satisfies), such an interpretation m ay not square w ith the plain language o f the statute. A s noted above, C ongress m odeled the R V P w aiver on E P A 's form er regulations, w hich lim ited the 1-psi R V P w aiver to gasoline blends o f 9-10% ethanol. T hough C ongress had the op p o rtu n ity to expand the w aiver to ethanol blends greater than 10% , it did not do so.
T h e leg islativ e h isto ry o f th is p ro v isio n also supports th is in terp retatio n , in c o d ify in g the R V P w aiver. C ongress w an ted "to facilitate th e participation o f ethanol in the transportation fuel industry w hile also lim iting gasoline volatility resulting from ethanol blending," 76 Fed. Reg, at
4 3 ,4 3 4 , Congress su p p o rte d th e sta tu to ry p ro v isio n b y re ly in g on te c h n ic a l d a ta sh o w in g th at g a s o lin e b le n d e d w ith 9 - 1 0 % e th a n o l r e s u lts in a n a p p r o x im a te 1 -p si RVP in c r e a s e o v e r c o n v e n tio n a l g a so lin e . Id. Congress d id n o t lo o k at o ilier b le n d s as p a rt o f its law m a k in g effo rt. id. T h is h is to r y s u p p o rts th e p o s itio n th a t E l 0 Is a c e ilin g n o t a flo o r.
Conclusion
E PA w ould need to provide a solid basis for revising its interpretation o f C lean A ir A ct 211(h) to perm it the R V P w aiv er to ap p ly to fuel b len d s co n tain in g m o re th an 10% ethanol. A ny such new justification w ill be legally suspect given the plain language o f the C lean A it A ct,
1 EPA also clarified that the "deemed to comply" provision of section 211(h) should not be read to authorize extension of a 1-psi RVP waiver to blends of ethanol above 10%, The agency stated that this provision serves as a defense to liability to those who blend gasoline to achieve a 10% ethanol concentration. 76 Fed. Reg, at 43,434 (stating that the provision "is not written as a free standing RVP limit that: acts separate and apart from the 1 psi waiver for 9-10% blends of ethanol").
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Small R e f in e r y Volume Reallocation
The Environmental Protection Agency (EPA) would face significant legal and practical issues if it decides to reallocate the renewable volume obligation (RVO) for small refineries that received an economic hardship waiver to other obligated parties in future Renewable Fuel Standard (RFS) rulemakings. The Clean Air Act (CAA) does not authorize EPA to adjust upwardly the RVO after setting it on November 30 of the previous year. Additionally, reallocation of the RVO in a future year is impractical because it would require obligated parties to blend renewable fuel that would not necessarily exist.
The Small Refinery Exemption
In passing the RFS, Congress acknowledged that small refineries were likely to suffer disproportionate economic harm if required to comply with the renewable fuel blending obligations. To prevent such harm, Congress exempted small refineries from compliance obligations through 2010. CAA 21 l(o)(9), 42 U.S.C. 7545(o)(9); see Hermes Consol., LLC v. EPA, 787 F.3d 568, 572 (D C. Cir. 2015). This exemption provided small refineries time to develop compliance strategies and increase renewable fuel blending capacity. See Hermes, 787 F.3d at 572-73. Congress included within the RFS a mechanism to extend the initial small refinery exemption by directing the Department of Energy (DOE) to conduct a study to determine whether RFS compliance "would impose disproportionate economic hardship on small refineries." See CAA 21 l(o)(9)(A)(ii)(I). If the DOE concluded that the RFS would impose a disproportionate economic hardship on small refineries, then the CAA authorized EPA to exempt those small refineries. CAA 21 l(o)(9)(A)(ii)(II).
In addition to exempting all small refineries, Congress authorized EPA to extend the exemption for individual small refineries on a case-by-case basis. To avail itself of this option, a small refinery can petition EPA at any time for an extension of its exemption. CAA 21 l(o)(9)(B)(i). There are two basic prerequisites for an extension. First, a refinery must be a "small refinery," for any year in which it is seeking an exemption, meaning that it cannot have an average aggregate daily crude throughput greater than 75,000 bpd. Second, the refinery must demonstrate that compliance with the RFS imposes a "disproportionate economic hardship." 40 C.F.R. 80.1441(e)(2)(i)..1
Currently, EPA grants extensions of the small refinery exemption in 1-year increments. EPA generally issues an exemption decision at the end of the compliance year (December 31), or even after the compliance year because a petitioning refinery must provide financial information for the whole year to substantiate a claim of disproportionate economic hardship. The exemption,
1The RFS does not define "disproportionate economic hardship." Recently, the Tenth Circuit found EPA's standard for disproportionate economic harm to be overly rigorous, and directed EPA to evaluate hardship by considering reduced profitability, temporary negative events, as well as risk of closure, and that EPA must compare the effect of RFS compliance costs on a petitioning refinery against the economic state of other refineries. Sinclair Wyo. Refining Co. v. EPA, 887 F.3d 986, 996-98 (10th Cir. 2017).
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therefore, primarily operates retroactively and will result in EPA refunding to the small refinery the RINs it retired for compliance.
Legal Issues with Reallocating Small Refinery RVOs
The CAA prohibits EPA from reallocating volumes from exempt small refineries to other obligated parties.2
Nov. 30 2018 - EPA deadline to establish
RVO for 2019
Dec. 31 2019 Compliance year ends
Spring 2020 EPA decisions
on small refinery petitions
EPA also would be unable to adjust the current year RVO based on the granting of small refinery exemptions. As noted above, EPA generally grants exemptions towards the end of or after the compliance year. Thus, EPA would have to adjust the current-year RVO after the November 30 deadline imposed by the statute. There is no provision in the RFS that permits adjusting the RVO after November 30th.
EPA also lacks legal authority to increase the RVO in a future year based on the renewable fuel volumes associated with small refineries exempt in the previous compliance year. EPA may not increase the RVO by using a volume of renewable fuel greater than that provided in the statute. See, e.g., CAA 21 l(o)(B)(i)(I) ("the applicable volume of renewable fuel for the calendar years
2 The RFS requires EPA to convert the statutorily mandated numeric renewable fuel volumes (in gallons) into a percentage standard each year that can be applied equally to all obligated parties to establish each party's RVO. CAA 21 l(o)(3). In calculating the percentage standard, the CAA directs EPA to divide the estimated volume of transportation fuel projected to be used in the following year by either the statutorily specified volume o f renewable fuel (set forth in CAA 21 1(g)(2)(B)) or a lower volume set by EPA following the use o f its waiver authority. EPA has until November 30 o f the previous calendar year to complete this process. CAA 21 l(o)(3)(B)(i).
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2006 through 2022 shall be determined in accordance with the following table" setting forth specific volumes in gallons (emphasis added)). Instead, EPA 's authority is limited to downward adjustments based on its waiver authority set forth in CAA 211(o)(7). Given these restrictions, EPA would be hard-pressed to justify increasing the RVO in a future year in order to reallocate exempt small refinery RVOs from a previous year.
The "adjustment" provision in the statute, which states that EPA "shall make adjustments . . . to account for the use of renewable fuel during the previous calendar year by small refineries that are exempt" likely does not authorize an upward adjustment in the RVO. CAA 21 l(o)(3)(C)(ii). Instead, this provision operates as a safety valve to ensure that obligated parties' ability to satisfy their blending obligations would not be prejudiced from exempt small refineries use of renewable fuel, which would reduce the available supply to non-exempt parties. EPA clarified the meaning of this provision in promulgating its interpretative regulations, concluding that accounting for the volume of renewable fuel used by exempt small refineries "would reduce the total volume of renewable fuel use required of others, and thus directionally would reduce the percentage standard." 72 Fed. Reg. 23,900, 23,911 (May 1, 2007).
This interpretation is also logical considering that the concept ofRINs did not exist when Congress enacted the statute. In the RFS, Congress directed obligated parties to blend renewable fuel to comply with the statute. If, however, exempt small refineries blended renewable fuel into their transportation fuel, then they would deplete the total volume available to obligated parties for compliance with the RVO. This is so because Congress had not created a credit program that would allow exempt small refineries to sell the credits generated from blending to other obligated parties. Accordingly, Congress permitted EPA to downwardly adjust the RVO to prevent potential compliance obstacles resulting from exempt small refineries using renewable fuel. EPA would face substantial litigation risk justifying a decision to increase the RVO to reallocate volumes from exempt small refineries.
Practical Issues with Reallocating Small Refinery RVOs
Reallocating exempt small refinery RVOs is also impractical and would unfairly burden obligated parties because it would change compliance burdens well into a compliance year.
One of the major obstacles to reallocating exempt small refinery RVOs is the fact that EPA issues exemptions a year or more after issuing the final RVO for the same compliance year. Once EPA sets the RVO, obligated parties develop compliance strategies based upon their anticipated obligation. During the compliance year, obligated parties generally purchase RINs in proportion to their obligation. If EPA were to adjust the RVO at the end of the compliance year to reflect the granting of small refinery exemptions, then obligated parties would have very little time to purchase sufficient RINs to meet their obligation. Moreover, if such an adjustment became common practice, it would induce obligated parties to hoard RINs throughout the year in anticipation of an increased obligation. This would likely lead to high RIN prices and RIN shortages.
Reallocation of the exempt small refinery RVOs also could impose economic hardships on obligated parties. According to EIA data, small refineries are responsible for approximately 10% of domestic refining capacity, and thus would be expected to satisfy approximately 10% of the
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annual renewable fuel requirements. Using the 2018 RVO, this means small refiners would account for approximately 1.9 billion gallons of the 19.29 billion gallon requirement. If EPA reallocated this volume, then the remaining obligated parties would need to retire approximately 1.9 billion more RINs. Assuming RIN prices fall between $0.50 and $1.00, the burden of shifting an additional 1.9 billion gallons will be somewhere between $1 billion and $2 billion.
Conclusion
The plain language of the RFS statute and EPA's regulations prohibits EPA from retroactively increasing the RVO for obligated parties to account for the volumes from exempt small refineries. Moreover, the operation of the RFS makes reallocating volumes from exempt small refineries to other obligated parties impractical.
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Option
1 nti-RIN Hoarding Provisions
Description/Leg&iAuthority
E P A wouldrequire non-obligatedparties to sot!ail separated RINsacquiredduring a calendarquarter in the followingquarter. Additionally,E P A .would prohibit
obligated parties from holding more RINs than 120% of
theirobligation at the end of a calendar quarter.
The C lean Air Act grants E P A broad authority to
establishacreditprogram. C M 211{o){5),
2 RINTrad
R e strictio n s
E P A would Impose a two-traderestriction on RIN
transactions.
T he C lean Air Act grants E P A broad authority to establish a credit program. C M 211{o}{5).
3 RIM Purchase E P A would allow only obligated parties to purchase Restrictions separated RtN s.
T he C lean Air Act grants E P A broad authority to
establish a credit program, CAA 2 1 1{){5),
RINPrice and Volume Transparency
EPAwould require RIN purchases and sa le prices to
match and be subject to annuel attestation.
E O A should publish daily RIN trading activity information ea ch day such as (1) volume o f separated j RIN s transacted by vintage and D code and (2) average separated RIN s trading price by vintage and D code.
ON Transparency Refor Options
Implementation
RINP rice Impact
Pros/Cons
Administrative solution. E P A would need to promulgate new regulations
and would need to update 6 M T S to
include com pliance provisions,
This solution likely would reduce the cost of RiNs by discouraging arbitrage opportunities and market manipulation
Likely to reduce RIN prices. { * )
Com pliance with the anti-hoardingprovision
would be determined on a quarterly bases, thus reducing the administrative burden on ERA and providing flexibility to RIN market participants.
R ed u ces price speculation(*}
Administrative solution, E P A would
promulgateregulationssimilar to
those governing sulfur credit trades,
This solution likely would reduce die
cost of RiN s by discouraging
arbitrageopportunities and market
manipulation
Likely to reduce RIN prices. {*}
LowersRIN transactions and administrative
costs of R F S program. (+)
Reduced RIN liquidity.(-}
Administrative .solution. E P A would promulgate regulations similar to those governing sulfur credit trades.
This would not impact RtN generators as they transfer assign ed R iN s with their fuel.
This, solution likely would reduce RIN costs b ecau se it would prevent nonobllgated parties from entering the RIN market to take ad vantage of arbitrage opportunities or to e n g a g e in RIN market speculation
D o es not restrict the party that can generate or separate RiNs. {+)
Would reduce som e market manipulation end
RIN speculation, (+)
Potentialto reduce RIN liquidity. {-.)
A m i l l t v ^ l U l i o n . E R A would
promulgate regulations requiring price and volum es o f R iN s to be
reported accuratelyand be subject
to attestation,
E P A would modify EMTSdata
gathering system to publish timely
RINtransactional data.
'this solution likely would reduce the cost of RiN s by discouraging arbitrage opportunities and market manipulation.
lik e ly to reduce RIN prices. {
Provides transparency to marketparticipants
and reduces manipulation, !
