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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!
Ethanol, Com, 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
Relevant Oates: EPA Announcements 2/7/13: Proposed 2013 RVO, D6 BINS 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
I<B
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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
j Description/Legal Authority
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I 3 Reallocating EPA would increase lire annual RVG to
| Small
j account for the expected granting of Small
l Refinery
Refinery Exemptions (SREs) later In the
[
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CO
j Exemption
compliance year. There is no legal authority available to EPA to J
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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
>D
O
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 c u rre n t reg u la to ry fr a m e w o r k a d d ressin g exp o rts o f b io fu e ls
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 separated fro m re n e w a b le fu el v ia b le n d in g , th e b le n d e r is fre e to sell th e R IN to a n o th e r p a rty . W h e n a R IN b e c o m e s s e p a ra te d fro m re n e w a b le fu el v ia e x p o rt, h o w e v e r, it m u st b e retired and c a n n o t b e so ld to a n o th e r p arty . This restric tio n e x ists as a resu lt o f EPA 's c u rre n t regulatory fram ew ork, w hich Im poses upon an exporter an export renew able volum e obligation ("ER VO" ). 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 40 CFR 8 0 .1427(c), 8 0 .1430.
Eliminating the E P A -c re a te d E E VO is c o n siste n t with th e RFS statutory la n g u a g e
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 s e a n E R V O , a n d o n e c o u ld g o a s f a 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 s e 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 e l c a n s a tis fy C ongress' m a n d a te to in c r e a s e r e n e w a b le fu el u s e . H ow ever, E P A 's interpretation is in c o n s is te n t w ith th e p la in la n g u a g e o f th e R F S . S e c tio n 21 l(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 RVGs 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 su re th a t g a s o lin e so ld o r in tro d u c e d in to c o m m e rc e in the U n ite d S tates (ex cep t in non co n tig u o u s States o r territories), on an annual average b asis, contains the 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 th e applicable volum e o f renew able fuel, advanced b io fu el, ce llu lo sie biofuel, and b io m a ss-b a se d d iesel, d eterm in ed in ac co rd a n ce w ith su b p a ra g ra p h (B ) [th e Congressionally m an d a ted v o lu m e s ] . . . .
In R F S 1 , th e an n u al R V O o n ly a p p lie d to g a so lin e so ld o r in tro d u c e d into c o m m e rc e in th e U n ite d S ta te s, In RFS2, however. 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 fuel 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 s o lin e ) c o u ld b e u s e d to m e e t th e a n n u a l RVO. H ow ever, in R F S 2 , th a t in te r p re ta tio n is n o lo n g e r v ia b le b e c a u s e tr a n s p o r ta tio n .fuel m u s t b e read to Inclu d e m ore th an ju s t g asoline. T ran sp o rtatio n fuel is d efin ed as "a fuel fo r use in m o to r v e h icles, motorvehicle en g in es, n o n ro ad v e h ic les, o r non ro ad en g in es (ex c e p t fo r o cean -g o in g v e sse ls)," S ec tio n 21 l(o } (J)(L ). P u re ethanol a n d 100 p e rc e n t b io d ie se l can be used as fu el 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 ``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 f This is a term o f art in th e leg al w o rld s te 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 e fin e d e x tre m e ly b r o a d b y courts. S ee U n ited States v. Potomac Navigation, Inc. N o. W M N -0 8 -7 1 7 , 2008 W L 11363374 at *2 (D. Md, Ju ly 3. 2008), W h en a p roduct is created d o m estic a lly and
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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 dom estically w o u ld ren d e r it superfluous, as it would have th e sam e m e a n in g as the term "sold."
A b ro ad in terp retatio n o f th e term "introduced into com m erce in the U nited StatesU a lso is warranted g iv e n th e s ta tu to ry p ro v is io 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 ram d o es not restrict b io fu els to o n ly d o m estic use, th u s ex p o rts should b e on equal footing w ith dom estic ethanol.
Im p a c t o f Removing EM VO
B y resc in d in g th e reg u lato ry req u irem en t to retire R IN s for exp o rted ren ew ab le fuel, 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 ew 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 e th a n o l. Currently, u n d e n a tu re d ethanol is not elig ib le to p articip ate in the R F S p ro g ram . A cco rd in g ly , p ro d u cers will e ith e r n eed to ad d d n a tu ra n t to e th a n o l in o rd e r to g e n e ra 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 leg al b a sis to p rev 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 c o 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 his m em o ran d u m ad d resses th e E n v iro n m en tal P rotection A g en cy 's (EPA) au th o rity to ex ten d th e 1-psi R eid v a p o r p ressu re (RVP) w aiv er to g aso lin e c o n tain in g 15% eth an o l ( E 15). T h e p lain language o f th e C lean A ir A ct and E P A 's regulations currently lim its the 1-psi RVP w aiver to gasoline containing 10% ethanol (EIO ), T hough proponents o f increased ethanol use suggest that th e C lean A ir A c t g ra n ts ERA a u th o rity to extend th e R V P w a iv e r to an y fu el b len 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.
L egal R isk o f E xten d in g th e 1-psi R V P W aiver to E 15
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 leg a l o b s ta c le to E P A re v is in g its re 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 1990 C le a n A ir A c t a m e n d m e n ts. C o n g re ss d ire c te d E P A to " p ro m u lg a te re g u la tio n s m a k in g it u n law fu l fo r an y person d u rin g th e h ig h o z o n e se a so n . . . to sell, o ffer for sale, dispense, supply, offer fo r supply, transport, o r introduce into com m erce gasoline w ith a Reid V ap o r P ressu re in ex cess o f 9 .0 p o u n d s p e r sq u are inch (psi)." C lean A ir A ct 2 1 1(h)(1), 42 U .S .C , 7 5 4 5 (h )(1 ). T he 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 sq u a re in c h (p si) g re a te r th an th e [9.0 psi] R eid v a p o r p re ssu 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 can d e m o n s tra te th a t " (A ) th e g a s o lin e p o rtio n o f th e blend c o m p lie s w ith the R e id v a p o r p re s s u re lim ita tio n s p ro m u lg a te d p u rsu a n t to th is su b se c tio n ; (B ) the eth a n o l p o rtio n o f the b len d d o es n o t exceed its w aiver condition under subsection 0 ( 4 ) ; a n d ( ) no ad d itio n al alcohol o r o th er additive h a s b e e n a d d e d to in c re a s e th e R e id V a p o r P re s s 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 prom ulgated regulations lim iting gasoline R V P during th e high ozone season (generally 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 . S ee 4 0 C.F.R. 8 0 .2 7 (a ). l i r e re g u la tio n s also 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 regulator}'' w a iv e r fo r "gasohol," o r g a so 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 fo re C o n g re s s a m e n d e d S e c tio n 211 o f th e C le a n A ir A c t in 1990. See 5 4 F ed . 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 1 5 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 ak in g , th a t th e 1 p si w a iv e r o n ly ap p lies to gasoline blends co 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 1990 am en d m en ts, Id, A cco rd in g to E PA , C o n g ressio n al in ten t is ap p aren t o n the 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 co u ld face su b sta n tia l litig a tio n risk by issu in g reg u la tio n s th at e x ten d th e 1-psi R A T w aiv er 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 se c tio n 2 1 1 (h ) lik e ly re s tric 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% e th a n o l. W h ile e th a n o l in te re s ts 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 43,434, Congress su p p o rted th e statu to ry p ro v isio n b y rely in g on tech n ical d ata show ing that 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 conven tio n al g asoline. Id. Congress did not look at oilier b len d s as p art o f its law m ak in g effort. id. T h is h isto ry su p p o rts th e p o sitio n th a t E l 0 Is a ceilin g n o t a floor.
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,
1EPA 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 o f 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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TAB 4
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Small Refinery Volum e R e a l l o c a t io n
T h e E n v iro n m en tal P ro tectio n A g en cy (EPA) w o u ld face sig n ifican t legal and p ractical issu es if it d e c id e s to re a llo c a te th e re n e w a b le v o lu m e o b lig a tio n (R V O ) fo r sm a ll re fin e rie s th a t re c e iv e d an eco n o m ic h ard sh ip w aiv er to o th er o b lig ated p arties in fu tu re R en ew ab le F uel S tan d ard (RFS) rulem akings. T he C lean A ir A ct (C A A ) does not authorize EPA to adjust upw ardly the R V O after setting it on N ovem ber 30 o f th e previous year. A dditionally, reallocation o f th e R V O in a futu re y ear is im practical b ecau se it w o u ld req u ire o b lig ated parties to b len d ren ew ab le fuel that w ould not necessarily exist.
The S m a ll R e fin e r y Exemption
In p assin g the R E S, C o n g ress acknowledged th at sm all refin eries w ere lik ely to su ffer disproportionate econom ic harm if required to com ply w ith the renew able fuel blending obligations, T o prevent such harm . C ongress exem pted sm all refineries from com pliance o b lig a tio n s through 2 0 1 0 , C A A 211(o)(9), 4 2 U.S.C. 7 5 4 5 (c)(9 ); see H erm es C o n so l, L L C v. E P A , 7 8 7 F .3 d 5 6 8 , 5 7 2 ( D .C , Cir. 2 0 1 5 ). T h is e x e m p tio n p ro v id e d s m a ll r e f in e r ie s tim e to d e v e lo p c o m p lia n c e stra te g ies an d in cre ase renewable fuel b le n d in g c ap acity . See H erm es, 787 F.3d at 5 7 2 -7 3 . C o n g re s s in c lu d e d w ith in the R F S a m e c h a n ism to e x te n d th e in itia l sm all refin ery ex em p tio n by d irectin g th e D ep artm en t o f E n erg y (DOE) to conduct a stu d y to determine w h e th e r R F S c o m p lia n c e "w o u ld im p o s e disproportionate e c o n o m ic h a rd s h ip o n sm all r e f in e r ie s ," S e e C A A 211 (o)(9)(A )(ii)(I). I f th e D O E concluded th a t th e R F S wro u ld im p o s e a d isp ro p o rtio n a te e c o n o m ic h a rd sh ip on sm all re fin e rie s, th e n th e C A A a u th o riz e d E P A to e x e m p t th o se sm all re fin erie s. C A A 21 l(o){9)(A)(ti)(II).
In a d d itio n to e x e m p tin g all sm a ll re fin e rie s , C o n g re ss a u th o riz e d E P A to extend the e x e m p tio n fo r in d iv id u a l sm all refin e rie s o n a case-by-case b asis. T o a v a il its e lf o f this o p tio n , a sm all re fin e ry c a n p e titio n E P A at a n y tim e for an extension o f its ex em p tio n , C A A 211 (o)(9)(B )(i), T here are tw o basic prerequisites for an extension. First, a refinery m ust be a " sm all refin ery f* fo r a n y y e a r in w h ic h it is se ek in g an e x e m p tio n , m e a n in g th at it can n o t h a v e an av e ra g e a g g re g a te d a ily crude th ro u g h p u t g re a te r th an 7 5 ,0 0 0 bpd. S eco n d , th e refin e ry must d e m o n strate th a t co m p lia n c e with th e R F S im p o ses a "d isp ro p o rtio n a te eco n o m ic h a rd sh ip ," 40 C .F.R . 8 0 .1441(e)(2)(i).
Currently, E R A g ra n ts e x te n s io n s o f th e sm all re fin e ry e x e m p tio n in 1 -y ear in c re m e n ts. E P A g e n e ra lly issu es an e x e m p tio n d e c isio n a t the end o f th e compliance y ear (D e c em b e r 31), o r ev en a fte r th e c o m p lia n c e y e a r b e c a u s e a p e titio n in g re fin e ry m u s t p ro v id e fin a n c ia l information fo r the w hole year to substantiate a claim o f disproportionate econom ic hardship. T he exem ption, th erefo re, p rim a rily o p e ra tes retro ac tiv e ly and wall resu lt in E P A re fu n d in g to th e sm all re fin e ry th e RlNIs it retire d fo r co m p lian ce.
Legal is s u e s w ith Reallocating S m a ll R e fin e r y R. V O s
T h e C A A p ro h ib its ER A from rea llo catin g v o lu m es from exempt sm all refin eries to o th er obligated parties either in the existing com pliance year or future years.
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T h e R F S requires EPA to c o n v e rt th e statutorily m a n d a te d n u m e ric re n e w a b le fuel v o lu m e s (in gallons) into a percentage standard each year that can be ap p lied equ ally to all obligated parties to estab lish each p a rty 's R V O , C A A 211 (o)(3). In calcu latin g th e p ercen tag e standard, the C A A directs EPA to divide the estim ated volum e o f transportation fuel projected to be used in th e fo llo w in g y e a r5 b y e ith e r th e sta tu to rily sp e c ifie d v o lu m e o f renewable fuel (set fo rth in C A A 21 l(o)(2)(B>) o r a lo w er v o lu m e set b y E P A fo llo w in g th e use o f its w aiv er au th o rity , E PA has until N ovem ber 30 o f the previous calendar year to "d eterm in e . , , , w ith respect to the follow ing calendar year, the renew able fuel obligation that ensures that the requirem ents [for b len d in g the sp e cified an n u al ren ew ab le fu el volum es] are m e t " C A A 21 l(o )(3 )(B )(t).
E P A likely lacks legal auth o rity to increase th e R V O in a fu tu re year based on the ren ew ab le fuel volu m es associated w ith sm all refineries exempt in the p rev io u s com p lian ce year. A s Indicated above, EPA m ay not increase the R V O by using a volum e o f renew able fuel greater than that p r o v id e d in th e s ta tu te . See, e.g., C A A 21 l( o ) ( B ) ( i) ( I ) ("the a p p lic a b le volum e o f r e n e w a b le fuel f o r th e c a le n d a r y e a rs 2 0 0 6 th ro u g h 2 0 2 2 sh a ll b e d e te rm in e d in a c c o rd a n c e w ith th e fo llo w in g ta b le " settin g forth specific v o lu m es in g allo n s (em p h asis added)). In stead , E P A 's authority is lim ite d to d o w n w a rd a d ju stm e n ts b a se d o n its w a iv e r a u th o rity se t fo rth in C A A 21 l(o )(7 ). G iven th e se restric tio n s, E P A w ould b e h a rd -p resse d to ju stify in cre asin g th e R V O in a fu tu re y e a r in o rd e r to re a llo c a te e x e m p t small re fin e ry R V O s fro m a p re v io u s year.
T he "ad ju stm e n t" p ro v isio n in the statute, w h ich states th at E P A "sh all m ak e ad ju stm en ts . , , to a c c o u n t fo r th e u s e o f re n e w a b le fuel d u rin g th e p re v io u s c a le n d a r y e a r b y sm a ll refineries that are e x e m p t" lik ely d o e s n o t a u th o rize a n u p w ard a d ju stm e n t in th e R V O , C A A 2 H (o )(3 )(C )(ii), In stead , th is p ro v isio n operates as a safety v a lv e to en su re th at o b lig a te d p a rtie s ' a b ility to s a tisfy th e ir b le n d in g o b lig a tio n s w o u ld n o t b e prejudiced fro m e x e m p t sm all refin eries u se o f re n e w a b le fuel, w h ich w o u ld re d u c e the a v a ila b le su p p ly to n o n -ex e m p t p arties, E PA clarified th e m ea n in g o f this p ro v isio n in p ro m u lg atin g its Interp retativ e reg u latio n s, c o n c lu d in g that a c c o u n tin g f o r th e v o lu m e o f renew able fu e l u s e d b y e x e m p t s m a ll r e f in e r ie s "w o u ld reduce th e to ta l v o lu m e o f renewable fu el u se re q u ire d o f oth ers, and th u s d ire c tio n a lly w ould red u ce th e p ercen tag e stan d ard ," 72 Fed. R eg. 23,900, 23,911 (M ay 1 ,2 0 0 7 ).
T his interpretation is also logical considering that the concept o f R IN s did n ot ex ist when C o n g ress en acted the statu te. In th e R F S , C o n g ress d ire c te d o b lig a te d p arties to b len d ren e w ab le fu el to c o m p ly w ith th e sta tu te . If, h o w e v e r, e x e m p t sm all re fin e rie s b le n d e d renewable fu el into th e ir tra n s p o rta tio n fu el, th e n th e y w o u ld d e p le te th e to tal v o lu m e a v a ila b le to o b lig a te d p a rtie s fo r c o m p lia n c e with th e R V O , T h is is so b e c a u se C o n g re ss h a d n o t created a cre d it p ro g ra m th at w ould allow exem pt sm all refineries to sell the credits generated from blending to other o b lig a te d p a rtie s , A c c o rd in g ly , C o n g re s s permitted E P A to d o w n w a rd ly a d ju s t th e R V O to prevent potential com pliance obstacles resulting from exem pt sm all refineries using renew able fu e l
E P A a ls o w o u ld b e u n a b le to a d ju s t th e current y e a r R V O b a s e d o n th e g r a n tin g o f sm a ll r e f in e r y exem ptions. As noted above, EPA generally grants exem ptions tow ards the end o f or after the co m p lia n c e year. Thus, E P A w o u ld h a v e to ad ju stm e n t th e c u rre n t-y e ar R V O a fte r th e
1EPA obtains this projection from the US Energy Information Administration. CAA 21 1(g)(3)(A).
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N o v em b er 30 d ead lin e im p o sed b y the statute, There is no p ro v isio n in th e RFS th at perm its ad ju stin g th e RVO after N o v em b er 30th, A cco rd in g ly , E P A would face su b stan tial litig a tio n risk ju stify in g such a decision.
P ra ctica l Issues w ith Reallocating S m a ll Refinery R VO s
R e a llo c a tin g e x em p t sm all refin e ry R V O s is also im p ractical and w ould u n fairly b u rd en obligated parties because it w ould change com pliance burdens w ell into a com pliance year.
O n e o f th e m a jo r o b sta c le s to re a llo c a tin g e x e m p t sm a ll re fin e ry RVOs is th e ta c t th at E P A issu e s e x e m p tio n s a y e a r o r m o re a fte r issu in g th e fin al R V O fo r the sam e c o m p lia n c e y ear. O n c e E P A sets the R V O , o b lig a te d p a rtie s d e v e lo p c o m p lia n c e stra te g ie s b a se d u p o n th e ir a n tic ip a te d o b lig a tio n . D u r in g th e c o m p lia n c e y e a r, o b lig a te d p a rtie s g e n e r a lly p u r c h a s e R IN s in p ro p o rtio n to th eir o b lig atio n . If E P A w e re to a d ju st th e R V O at th e en d o f fire c o m p lia n c e y ear to reflect the granting o f sm all refinery exem ptions, then obligated parties w ould have very little tim e to p u rc h a se sufficient R IN s to m e e t th e ir o b lig a tio n . M o re o v e r, if su c h an adjustment b e c am e co m m o n p rac tic e , it w o u ld induce o b lig ated p a rtie s to hoard R IN s th ro u g h o u t th e y e a r in a n tic ip a tio n o f an in c re a se d obligation. T h is w o u ld lik ely le a d to h ig h RIN p ric e s a n d R IN shortages.
R eallo catio n o f th e e x em p t sm all refin ery R V O s also could im p o se e c o n o m ic h ard sh ip s on obligated parties. A ccording to E IA data, sm all refineries are responsible for approxim ately 10% o f d o m estic refin in g cap acity , and th u s w o u ld b e expected to satisfy ap p ro x im ately 10% o f the an n u al renewable fu el re q u ire m e n ts. U sin g th e 2 0 1 8 R V O , th is m e a n s sm all refin ers w o u ld a cco u n t for a p p ro x im a te ly 1.9 b illio n g a llo n s o f th e 19.29 b illio n g a llo n req u irem en t. I f EPA reallocated this volum e, then the rem aining obligated parties w ould need to retire approxim ately 1.9 b illio n m o re R IN s, A s su m in g R IN p ric e s fall b e tw e e n $ 0 .5 0 a n d $ 1 ,0 0 , the b u rd e n o f s h iftin g an ad d itio n al 1,9 b illio n g a llo n s w ill b e somewhere b e tw e e n $1 b illio n and $2 b illio n .
Conclusion
R e a llo c a tio n o f hardship v o lu m e s im p ra c tic a l a n d ille g a l
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Option
1 nti-RIN Hoarding Provisions
Description/Leg&t Authority
EPA would require non-obligated parties to sell all separated RINs acquired during a calendar quarter in the ibiiowsng qtrarter. Additionally, EPA.would prohibit obligated parties from holding more RINs than 120% of their obligation at the end of a calendar quarter.
The Clean Air Act grants EPA broad authority to establish a credit program. C M 211{o){5),
2 RIN Trad Restrictions
EPA would Impose a two-trade restriction cm RIN transactions.
The Clean Air Act grants EPA broad authority to establish a credit program. C M 211{o}{5).
Restrictions
EPA would allow only obligated parties to purchase RINs.
The Clean Air Act grants EPA broad authority to establish a credit program, CAA 211fo)(B).
RIM Price and Volume Transparency
EPA would require RIN purchases and sale prices to match and be subject to annual attestation.
EOA should publish daily RIN trading activity information each day such as (1) volume of separated j RINs transacted by vintage and D code and (2) average separated RINs trading price by vintage and D code.
ON Transparency Refor Options
Implementation
RIN Price impact
Pros/Cons
Administrative solution. EPA would need to promulgate new regulations and would need to update 6MTS to include compliance provisions,
This solution likely would reduce the cost of RiNs by discouraging arbitrage opportunities and market manipulation
Likely to reduce RIN prices. {*)
Compliance with the anti-hoarding provision would be determined on a quarterly bases, thus reducing the administrative burden on ERA and providing flexibility to RIN market participants. (*)
Reduces price speculation (*}
Administrative solution, EPA would promulgate regulations similar to those governing sulfur credit trades,
This solution likely would reduce the cost of RiNs by discouraging arbitrage opportunities and market manipulation
Likely to reduce RIN prices. {*}
Lowers RIN transactions and administrative costs of RFS program. (+)
Reduced RIN liquidity. (-}
Administrative.solution. EPA would promulgate regulations similar to those governing sulfur credit trades.
This would not impact RiN generators as they transfer assigned RiNs with their fuel.
This, solution likely would reduce RIN costs because it would prevent nonobligaied parties from entering the RIN market to take advantage of arbitrage opportunities or to engage in RIN marks! speculation
Does not restrict the party that can generate or separate RiNs. {+)
Would reduce some market manipulation and RIN speculation, (+)
Potential to reduce RIN liquidity. (-)
M ffiio ^ iv n s g y ia ri. EPA would promulgate regulations requiring price and volumes of RiNs to be reported accurately and be subject to attestation,
EPA would modify EMTS data gathering system to publish timely RIN transactional data.
'this solution likely would reduce the cost of RiNs by discouraging arbitrage opportunities and market manipulation.
Likely to reduce RIN prices. {+}
Provides transparency to market participants and reduces manipulation, {>)
