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Daily Environment

Report™

Reproduced with permission from Daily Environment Report,

14 DEN 38, 02/26/2014. Copyright ffi2014 by The Bureau of

National Affairs, Inc. 800-372-1033) http://www.bna.com

ENERGY

RENEWABLE FUELS STANDARD

Concerns about the

Renewable

Fuel Standard RFS) have included an

unrealistic

cellu-

losic biofuel

mandate,

widespread fraud,

belated rulemaking to set

the annual standards,

and a looming

blend

wall that could

put

obligated parties in an insupportable

bind. For

the

2014 RFS, EPA proposes to use for the first ti me its general waiver authority to reduce

the

total

renewable

fuel and advanced

biofuel volume requirements. Consequently, EPA's

proposal will be

the

subject of intense

scrutiny

and commentary,

and

judicial

challenges to

the

final rule are

highly

likely,

including

challenges

to EPA's use of

the

general waiver. Will

EPA's

framework for

the 2014 RFS and beyond survive

judicial scrutiny

and satisfy a

wide

enough range of

industry

and political stakeholders to preserve

the

RFS?

EPA sProposed 2014 Renewable Fuels Standard Enough

to

Resolve

the

C.Ontroversy?

BY

ANN CLAASSEN AND

Eu

HoPsoN

O

n Nov. 29, 2013, the U.S. Environmental Protec

tion Agency (EPA) proposed reductions in the

overall level of the renewable fuel standard RFS)

that

it administers under

the Clean Air

Act

(CAA).

1

I f

2014 Standards

for

the Renewable Fuel

Standard

Pro

gram, 78 Fed. Reg. 71,732 proposed Nov. 29, 2013) (hereinaf-

ter

2014 RFS Proposal ). The

statutory requirements

are

COPYRIGHT

ffi2014

BY

THE

BUREAU OF

NATIONAL

AFFAIRS INC.

adopted,

this

would be EPA's first

overall

volume re

duction for

the

RFS. EPA

repeatedly

has missed

the

statutory deadline of Nov. 30 to establish the standard

for the following year, and for the 2013 RFS the agency

was nine months late, not publishing a final rule until

those of the Clean Air

Act (CAA) as

amended by the Energy

Independence and Security

Act

of 2007 EISA).

CAA§ 211

o),

42 U.S.C. § 7545 2012).

ee lso

230

DEN

A-2, 11/29/13.

ISSN

1060-2976

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Aug. 6, 2013,

thus making

it difficult

for industry

to plan

compliance and biofuel development pathways.

2

EPA

stated in the 2013 RFS

final rule

an

intention to

issue

the

2014

standard

in a

timely manner,

to

allow

obli

gated

parties

to

make informed

decisions

about

their

2013

compliance

strategies.

3

Despite this

goal,

EPA

published

notice

of

its

proposed 2014

standard

only one

day before

the Nov. 30

deadline

for

the final

2014 RFS.

The agency has stated an intent to

publish

the final rule

by the end

of

Feb. 2014,

although this will

be

difficult in

light

of the

number

of

comments

(over 212,000) re

ceived.

The RFS has been

controversial

since its inception

and became particularly so

in

2013.

Among

the largest

issues is

the inability of the

RFS

statutory volume

man

date to avoid the blend wall,

which

is the amount of

ethanol that

can be

blended into

the

transportation

fuel

supply given infrastructure

and

engine compatibility

considerations-currently, about

10 percent.

The statu

tory volumes for

renewable

fuels

increase

annually, but

domestic

fuel

consumption

has been decreasing,

and

the blend

wall

is projected to be reached in 2014 absent

adjustments. EPA's

proposed 2014 RFS seeks

to

reduce

the total renewable fuel

volume

requirement,

which

is

met

primarily with

ethanol, to avoid

the

blend wall. The

significance for

gasoline prices

could

be substantial:

one

recent

study projects that

the 2014 RFS

statutory

requirements, if

not

modified by the EPA,

would

lead to

a

price spike

of 20 cents

per gallon

on the

low

end and

one dollar

per gallon

on the

high

end.

4

Renewable Identification

Numbers

(RI Ns) are the

RFS

compliance mechanism. Obligated parties acquire

RI

Ns

either by blending renewable fuels or by purchas

ing

RI

Ns on the open

market.

Early in 2013, concerns

that

the blend

wall would

be reached

that

year or in

2014 caused

RI

N

prices

to rise

rapidly more

than

25-

fold

above

historic

prices.

5

Prices peaked in July, then

fell significantly

after publication

of the 2013 RFS in

August (which signaled EPA

would

address the blend

wall

in the 2014 RFS),

and

have

fallen

further with

pub

lication

of the proposed 2014 RFS (which indeed seeks

to avoid the blend

wall),

but not down to

pre-2013 lev

els.6 Thus, the

contours

of the

final

2014 RFS

likely

will

influence

the

direction of

future

RI

N

price

trends.

RI

N

prices

affect both

the attractiveness of

investment

in re

newable

fuel

production

and,

potentially,

fuel

prices

in

general.

7

Regulation of Fuels and Fuel Additives: 2013 Renewable

Fuel Standards, 78 Fed. Reg. 49,794 (Aug. 15 2013)

(hereinaf

ter 2013 Final RFS ). See also 158 DEN A-17, 8/15/13.

3

2013 Final RFS at 49,800.

4

Ben Montalbano, Energy Policy Research Foundation

Inc., The

Mortar

is

Nearly

Set: The Consequences of Exceed-

ing the

Blendwall

in 2013

and

2014

p.

2 (2013),

available

at

http://eprinc.org/pdf/EPRI NC-RFS2014.pdf. But see note 7 in-

fra.

5

ee Tristan R. Brown, Have Biofuel Producers Actually

Benefited From Expensive RINs? Seeking

Alpha

(Aug. 11

2013, 8:36 PM), available at http://seekingalpha.com/article/

1627492-have-bi

of

uel-p rod ucers-actual I

y-benefited-fro

m-

ex pensive- ri ns.

6

See Cezary

Podkul,

Analysis:

Still pricey Ethanol

Credits

Show

Risk of EPA Rule Challenge Reuters, Nov. 22, 2013,

available

at http://www.reuters.com/article/2013/11/22/us-ri ns

epa-gasol i ne-prices-anal ysis-idUSBRE9AL05A20131122.

7

A recent study asserts

that

the 2013 RIN price spike did

not affect gasoline prices.

lnforma

Economics Inc., Analysis of

Due to these market

developments

and the blend

wall,

EPA proposes to

significantly alter

the

statutorily

mandated

volumes under

two Clean Air

Act statutory

waiver provisions.

8

The

cellulosic biofuel,

advanced

biofuel, and renewable fuel volumes

would

be reduced

from

statutory requirements.

The 2014 and 2015

biomass-based diesel

volumes would

be

maintained

at

the 2013 level.

Blend

Wall

Concerns Drive

EPA

Toward Overall

Reductions

As noted

above,

customers are generally reluctant

to

use blends above 10 ethanol in gasoline (i.e. E10) as

most vehicle engines currently

on the road are

not

de

signed and/or are not warrantied for higher percent

ages.9 Therefore,

although

EPA allows blends of up to

15

ethanol

(E15)

for

vehicles manufactured

after

2001, market penetration has

not

been

significant.

The

number

of flexible

fuel

vehicles

that

can run on

blends of ethanol

as

high

as E85 is

relatively small. Con

sumption

of both E10 and E85 is further constrained by

l imited

infrastructure

for retail delivery

of those fuels.

10

Due to use of

carryover RI

N

credits and

increased

use

of

biodiesel (which both

lower

the

volume

of

etha

nol

needed

to meet

the

mandate), EPA estimated that

the

total ethanol blended

in 2013

would

not

exceed 10

of the gasoline

volume

sold. In contrast, EPA acknowl

edged in

its

2013

final rule tha t carryover credits likely

will

not be

sufficient

to avoid the blend

wall

in 2014.

11

Accordingly, EPA's

proposed 2014 RFS seeks to

signifi

cantly reduce the volume requirements

from statutory

levels because of blend

wall

concerns and a

cellulosic

biofuel shortfal

12

Table 1

summarizes EPA's

2014 proposed

volumes

as

compared to the

statutory

volumes and proposals in a

waiver

request by the

American

Petroleum

Institute

(API) and the American

Fuel

& Petrochemical Manu

facturers

(AFPM).

13

EPA sWaiver Authority

Under

the

CAA, EPA

has

general authority

to

waive

the RFS in

whole

or

in part

if there

is

either

an

inad

equate

domestic supply

or if the

Administrator deter-

Whether Higher Prices of Renewable Fuel Standard

RINs

Af-

fected Gasoline Prices in 2013 (Jan. 2014),

available at http://

ethanol rfa.3cd n. net/5b92d3a4ba07986622_e0m6b 1 prr. pdf.

8

For

the RFS, Congress mandated annual

volumes of

re

newable fuels to

be

blended into the domestic fuel supply.

Separate

volumes

are specified for

cellulosic

biofuel, biomass

based diesel, advanced biofuel, and renewable fuel. The cellu

losic biofuel and biomass-based diesel

standards

are nested

within the advanced biofuel category, which itself is nested

within

the renewable fuel category.

EPA annually

sets

volumes

for

each

of

the

four

fuel types and then uses projected domes

tic fuel consumption to calculate volume percentages for re

newable fuels. Obligated parties use the volume percentages to

determine their specific compliance obligations.

9

There

also is a blend wall

for

diesel, but renewable diesel

production currently is well below

that

level.

1

See 2014 RFS Proposal at 71,755, 71,759.

ee 2013 Final RFS at 49,823.

12

2014 RFS Proposal

at

71,734.

13

CAA§ 211 (o)(2)(B); 2014 RFS Proposal at 71,734; Letter

from

Am. Fuel

&

Petrochemical Mfrs.

&

Am. Petroleum Inst.

to Gina McCarthy,

Adm'r,

EPA p. 4 (Aug. 13 2013),

available

at http://www.api.org/-/media/Fi es/News/2013/13-August/

RFS-Waiver-Pe tition. pdf.

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3

Table

1 - 2014

RFS volumes

(billions of

gallons

of ethanol equivalent)

Type of Fuel

CAA Requirement EPA

Proposal EPA Projected AFPM API

Cornstarch-based 14.4

fuel

Total advanced 3.75

biofuel

Total renewable 18.15

fuel

mines that severe economic or environmental harm to a

state, region or the

country

as a

whole

would result

from implementing the requirements.

14

EPA also has

specific waiver authority

with

respect to cellulosic bio

fuels and biomass-based diesel.

15

Under

the

specific

cellulosic biofuel and biomass-based diesel waivers, if

the

Administrator

waives

any

portion of the

cellulosic

or

biomass-based diesel requirements, she

may

also re

duce the

corresponding

advanced

biofuel

and

overall

renewable fuel requirements, but has

not

done so for

prior

RFS rules.

For the

2014 RFS, EPA proposes using

a combination of its

cellulosic biofuel

and general

waiver

authorities

to reduce the cellulosic biofuel, ad

vanced biofuel, and total renewable fuel volume re

quirements.16

In interpreting its general

waiver

authority to allow

reduction

of the

total

renewable fuel

requirement,

EPA

employs a novel approach, turning to the

inadequate

domestic supply provision

even

though

actual quanti

ties

of

renewable fuel are projected to exceed the statu

tory

volume

requirement

in

2014. EPA asserts inad

equate domestic

supply

is an ambiguous provision en

compassing the full range of

constraints

on renewable

fuel consumption, including factors affecting the

ability

to

distribute,

blend, dispense, and use renewable fuels.

EPA has denied

prior petitions for

general waivers

with

language

that

sets a

high

bar

for

making the severe

economic hardship

determination.

17

By relying

instead

on the inadequate domestic supply provision, EPA can

avoid

contradiction with these past decisions. The API

and AFPM request for a partial waiver

of

the

2014

RFS

is based on a similar premise-that

there

is an inad

equate domestic supply

of

renewable fuel due to blend

wall

constraints

and

limitations

on the production of

non-ethanol fuels like

biodiesel-but

is not

congruent

with EPA's

proposal

in

all respects.

It

will be

interesting

to see how EPA decides on both its proposed waiver of

the statutory

requirements

and on the

obligated party

waiver requests, decisions which EPA expects to re

lease

at

the same

time.

EPA's proposed novel reading of

its general

waiver

authority is already being challenged

by

commenters

and will potentially be challenged in

court.

14

CAA§ 211

(o)(7)(A).

15

CAA§ 211

(o)(7)(D)(i).

16

2014 RFS Proposal at 71,735.

17

ee

CAA

Section 211 (o)(7)(A);

Office of

Transp. Air

Quality, EPA-420-F-12-075, Fact Sheet: EPA Decision to Deny

Requests for Waiver of the Renewable Fuel

Standard

pp.

1 2

2012),

available

at http://www.epa.gov/otaq/fuels/

renewab lefuels/docu m ents/420 f 12075. pdf.

DAILY ENVIRONMENT REPORT ISSN 1060-2976

Ranges waiver

request

13.01 13.00-13.01 12.88

2.20 2.00-2.51 1.92

15.21

15.00-15.52 14.80

Of

interest for the future

of

the RFS, if substantial

volume

reductions

continue

beyond

2016,

EPA will be

required to

reevaluate the RFS

volumes in

future years.

If any

volumes

are reduced by 20 for two consecutive

years

or

by

50

for a single year, that triggers a re

quirement to

modify

subsequent

annual volumes

for

2016-2022 via rulemaking.

18

EPA would set the new

standards based on a determination by the Administra

tor that takes into account factors specified by the CAA,

including

environmental,

energy security, economic,

and

infrastructure

impacts.

19

The modification of

multiple

years

could

be achieved

through one rulemaking, which

would

avoid the need

for EPA to annually modify the volume requirements to

match

market and

technological developments,

a

pro

cess which engenders uncertainty and

hinders

invest

ment. Given that the

2013

Final RFS reduced the cellu

losic biofuel requirement much more than

50

(from

1.0

billion

gallons

to

6

million gallons), this rulemaking

provision already has been triggered for cellulosic bio

fuel.

2

I f

the

4

advanced

biofuel reduction

proposed

for 2014 is

implemented

and

followed

by

another cut

greater than

20

in

2015,

then this would trigger a re

quired

rulemaking

to modify

advanced

biofuel vol

umes 21 The 2014 proposal

would

reduce

the

total re

newable fuel requirement by only

16

and would not

reduce

the

biomass-based diesel

requirement

at

all;

therefore, these fuels are

not

yet affected by the re

evaluation provision.

22

Cellulosic Biofuel

Volume Requirements

Although Congress

envisioned

dramatic increases

in

cellulosic biofuels

in this decade, technological

im

provements have not kept up with the statutory require

ments. Despite

lowering

the

2014

requirement from

1.75

billion gallons

to 17 million gallons,

23

it is

not clear

that even this new target is attainable. EPA justifies the

17 million

gallon cellulosic

volume requirement

using

production

estimates

from

operating facilities;

24

how

ever, the cellulosic biofuel industry has been capable

of

only negligible cellulosic

production through

Nov.

2013

and has fallen significantly short of production

projec-

18

CAA§

211

(o)(7)(F).

19

CAA§ 211 (o)(2)(B)(ii), (7)(F).

20

ee 2013 Final RFS at 49,795, 49,798.

2

ee 2014 RFS Proposal at 71, 734.

22


23

CAA§

211

(o)(2)(B)(i)(l I I); 2014 RFS Proposal at 71,734.

24

See 2014 RFS Proposal at 71,739.

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4

tions each year to date.

25

Whether

2014

production

tar

gets can be met is uncertain.

26

The

validity

of the

2014 cellulosic biofuel require

ment also must be evaluated in light of a decision by the

D.C. Circuit Court of Appeals that EPA had erred in set

ting the 2012 cellulosic requirement at a level meant to

be technology-forcing (even though actual commercial

cellulosic

fuel production in

2010

and

2011

had been

zero gallons).

27

EPA accordingly rescinded the 2012

cellulosic

requirement in its 2013 RFS rule.

28

Under

the

2014 RFS proposal, EPA

would

rescind its 2011 stan

dard and refund money paid by obligated parties for

cellulosic

biofuel credits for

that

year, because the

2011

standard was based on the same methodology as the

2012

standard.

29

Further, EPA in January granted peti

tions to reconsider the 2013 cellulosic biofuel standard

in

light of

lower production than EPA had anticipated.

3

Given production history and the D.C. Circuit decision,

any more than a very modest 2014 cellulosic biofuel

standard may be

vulnerable

to judicial challenge.

Advanced Biofuel and

Total

Renewable

Fuel

Volume Requirements

EPA proposes significantly reducing both the ad

vanced

biofuel

and total renewable fuel

volume

require

ments.31 Similar to the

reduction

in the

cellulosic

bio

fuel volume requirement, the reductions are due in part

to a projected shortfall of non-cornstarch-based-ethanol

renewable fuels.

32

As discussed above, an

additional

concern driving reduction

of

the total renewable fuel re

quirement is the

imminent

approach of the blend

wall.

33

For advanced biofuels, EPA proposes a

volume

requirement

of

2.20

billion

gallons

reduced from a

statutory

mandate

of

3.75 billion gallons).

34

For total re

newable fuel, EPA proposes a volume requirement

of

15.21

billion

gallons

down from a statutory require

ment of 18.15 billion gallons).

35

These volumes reflect a

reduction equal to

that

of the

cellulosic biofuel

reduc

tion plus

additional

reductions under the

general

waiver provision.

Biomass Based Diesel

Unlike

the other three fuel categories, EPA

left

the

biomass-based diesel volume requirement untouched,

25

Steven Mufson, Cellulosic Ethanol, Once the way

of

the

Future, is off to a Delayed, Boisterous Start, Wash. Post, Nov.

8

2013, available at http://www.washingtonpost.com/business/

economy eel I u osic-eth an ol-o nce-the-way-of-the-futu re-is-off

to-a-dela yed-bo stero us-start/2013/11/08/a1 c41 a70-35c7-11 e3-

8a0e-4e2cf80831fc_story. htm ;

Chris Warren,

Cellulosic Pro-

duction Still) Falls Woefully

Short

of

Mandate (Nov.

6

2013),

available

at

http://www.productsandpower.org/2013/11/06/

eel I u osic -prod ucti o n-sti 11-fal ls-woefu y-sho rt-of-man date/.

26

See

e.g., 2014 RFS Proposal at 71,742.

27

Am. Petroleum Inst.

v

EPA, 706 F.3d 474 (D.C. Cir.

2013). See also 2 DEN A-5, 1/3/13.

28

2013 Final RFS at 49,800 citing Am. Petroleum Inst. 706

F.3d at 474).

29


3

See Letters from Gina McCarthy, EPA Administrator, to

API and AFPM (Jan. 23, 2014),

available

at

http://

www.epa.gov/OTAQ/fuels/renewablefuels/reg u a ti ons. htm.

31


32

Id. Ethanol produced

from

sugarcane qualifies as an ad-

vanced biofuel.

33


34 Id.

35

Id.

proposing a volume

requirement of

1.28 billion gallons

for each

of

2014 and 2015 which is consistent

with

the

2013

level and above the

statutorily required

one

billion

gallons).

36

EPA states it did not propose more than 1.28

billion gallons, even

though it

expects the biomass

based diesel

industry

to be able to produce more in

2014 to allow the market to decide whether to produce

and use volumes of biomass-based diesel above

1.28

bil

lion gallons to meet the advanced biofuel volume re

quirement or to rely on other advanced biofuels.

37

Lawsuits C.Oncerning

the 2013

RFS and

Potential

Lawsuits C.Oncerning

the 2014

RFS

In October, API,

AFPM,

and other industry

parties

sued over the 2013 cellulosic biofuel volume require

ment.38 Industry argued that it is impossible to meet the

requirement because

there

is

not enough cellulosic bio

fuel available.

39

As noted above, EPA recently agreed to

reconsider the

2013

standard, which

may

moot the

law

suit

if

EPA

partially or completely

rescinds its

2013

cel

lulosic biofuel standard, as for 2012 and 2011. Industry

also is seeking to

force

EPA to

abide

by its statutory

deadlines for setting the RFS standards.

4

There also likely

will

be challenges to the 2014 RFS

when

it

is

finalized.

The Renewable Fuels

Association

has already labeled any rollback

of

the volume require

ments aimed at addressing the blend wall as unlawful,

indicating

a

possibility that

the group will file a lawsuit

to challenge the RFS

if

it is finalized as proposed.

41

If

such a

lawsuit

is successful, EPA

might

seek

another

justification to lower

the total renewable

fuel

require

ments in order to avoid the blend wall or Congress

might

legislatively

amend the RFS.

The API stated in

October that

it would file a lawsuit

if

EPA did not meet the Nov. 30 2013 deadline to set the

final

2014

RFS, which EPA did not.

42

Such an action

might

force EPA to

give obligated parties

an

extension

of time to comply with the 2014 RFS,

similar

to what

EPA

granted

for the

2013

RFS.

43

C.Omments on the

2014

RFS Proposal

More

than

212 000

comments have been

submitted

to

the docket, although only about 7 530 have been posted

online as of

this

writing.

44

A preview of the

various

po-

36


37

2014 RFS Proposal at 71,753-54.

38

Petition for Review, Monroe Energy

LLC v

EPA, No. 13-

1265 (D.C. Cir. Oct. 8 2013); Petition for Review,

American

Pe-

troleum Institute v

EPA, No. 13-1267 (D.C. Cir. Oct.

8

2013);

Petition for Review, Am. Fuel Petrochemical Mfrs.

v.

EPA,

No. 13-1268 (D.C.

Cir.

Oct. 10 2013).

See

also 196

DEN

A-3,

10/9/13.

39

Brief for Petitioners

at 22-28, Monroe Energy

LLC v

EPA, Nos. 13-1265, 13-1267 13-1268 (D.C. Cir. Dec.

9

2013).

4

Id. at 28-31.

41

Cezary Podkul, Analysis:

Lawsuits

Likely as EPA De-

clares US Ethanol Blend Wall a Reality, Reuters, Oct. 11

2013,

available

at http://www.reuters.com/article/2013/10/11 /

us-ethanol-blendwall-analysis-idUSBRE99A09420131011.

42

Jennifer A.

Dlouhy, Industry

Group Threatens

Lawsuit

over

2014 Renewable Fuel Quotas, FuelFix (Oct. 17 2013, 5:45

PM),

available

at http://fuelfix.com/blog/2013/10/17/api

th reatens-lawsu t-over -2014-renewable -f uel-q uotas/.

43

2013 Final RFS at 49,823.

44

The vast

majority of

these

comments

are

likely

to

be

identical com men ts submitted as part of mass

comment

cam

paigns, however they still may

be time

consuming to review.

2-26-14 COPYRIGHTffi2014

BY

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OF

NATIONAL AFFAIRS

INC. DEN ISSN

1060-2976

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sitions

was provided

at a public

hearing

on

the pro

posed 2014 RFS on Dec.

5

2013.

45

Some

commenters

oppose the proposed reductions. For example, the Na

tional

Corn

Growers Association asserts

that

the stan

dard for

total

renewable

fuel

should

not be

lowered

at

all

in

part

because it

would

depress

corn

prices,

which

could have a significant adverse

impact

on the

rural

economy.

Midwestern Governors

have made similar

statements, with Mark Dayton, governor of Minnesota,

arguing that

EPA

should

keep the RFS unchanged be

cause the proposed reductions would punish the state

for the public and

private

investments

that

it made to

promote and implement the RFS as

originally

written.

The

governor of Iowa, Terry Branstad, asserts

that

the

proposed reductions would harm corn producers,

nega

tively impact

the rural economy, and possibly lead to in

creased fuel prices.

46

Members

of the

biofuels

industry

also oppose

the

reductions.

The Global Biofuels Busi

ness

Director for DuPont claims

that the proposed re

ductions would reduce investment in the biofuels indus

try because it would decrease the

long-term

certainty of

the RFS.

47

Other

types of

interest groups

oppose the re

ductions;

for

example, the Union

of

Concerned Scien

tists

asserts

that the

proposed 2014 RFS

underestimates

the ability of the

existing

infrastructure to distribute

biofuel

because there

are

more than

enough

flexible

fuel vehicles on the road and E85

pumps to

serve these

vehicles.

48

The

group

also argues

that

EPA

should

quickly begin an off-cycle rulemaking to update the

mandate

levels between 2016 and 2022 so as to

provide

certainty

going

forward,

thereby encouraging greater

investment in biofuels.

49

Other commenters

supported the proposed reduc

tions

as a step in the right

direction.

Bob Greco

of

API

commented that

blend wall concerns

under

the current

statutory framework

could

lead to fuel

rationing

and a

770

billion

decrease

in

U.S. gross

domestic product.

5

Congressman

Bob Goodlatte

of

Virginia

argues

that

the

current

policy creates an

artificial market that drives up

the price

of

corn,

feed

for animals,

and

consumer

food

prices.

5

Goodlatte and 168 other House members

signed onto a

letter

in Oct. 2013 opposing the RFS on

the bases

that

it has increased

corn prices

too

much,

harms

the

environment by leading

to conversion

of

wet-

See

2014

Standards for

the Renewable Fuel

Standard

(RFS)

Program,

Docket No. EPA-HQ-OAR-2013-0479, regulations

.gov,

available at

http://1.usa.gov/OzQv9B.

45

A

transcript of

the hearing is available at http://1.usa.gov/

1jy3C5p.

46

Hanna

Russmann,

EPA Proposes to Reduce Ethanol Pro-

duction

in 2014,

The Daily Reporter (Dec.

7

2013),

available

at http://www.spencerdai

I yreporter.com/story/2031079.htm

I.

47

Janell Baum,

Proposed RFS Changes Weighed

at

EPA

Hearing,

Farm

Futures

(Dec.

6

2013),

available

at http://

farm futures. com /story-pro posed-rfs-chan ges-we g h ed-epa-

h ear n g-0-105738-spx_1.

48

Jeremy

Martin, Senior Scientist, Union

of

Concerned Sci

entists,

Testimony at the Hearing on the 2014 Standards for

the Renewable Fuel Standard Program (Dec. 5 2013),

avail-

able at

http://www.ucsusa.org/assets/documents/clean_

veh icles/RVO-Testi many. pdf.

49 Id.

5

Baum,

supra

note 47.

5

Baum,

supra

note 47.

DAILY

ENVIRONMENT

REPORT

ISSN

1060-2976

5

lands and grassland into

corn

fields, and

will

lead to

blend wall concerns.

52

ext

Steps for the R S

As noted above,

the obligated parties under

the RFS

have expressed

opposition

to the

volume

requirements,

which

are increasingly

difficult to meet. This is

exacer

bated

by the discovery

of RI N

fraud, in which parties

sell RI Ns

although no

renewable fuel was

in

fact

blended.

53

This

creates a

potential

minefield for obli

gated parties that

must

purchase

RI

Ns for

compliance

but are

vulnerable

to

penalties

for

submitting

RI Ns that

turn out to be

fraudulent.

Also, as noted above, the RFS

has been criticized for using a food resource

(corn)

for

fuel, which some

parties

assert leads

to

increased food

prices and incentive to convert natural landscapes to

agricultural lands. Some of the RFS's original support

ers

criticized EPA s

2013 proposal

for allowing

food

based

biofuels

to

make

up the

cellulosic

shortfall.

54

Given these concerns,

various

aspects of

the

RFS

have been proposed for

modification by various

parties,

but

to date no consensus modification path has

emerged. Additionally, several efforts have been initi

ated to entirely repeal the RFS, but that may be a non

starter given the

current political environment

and

the

breadth

of

support

for the RFS,

particularly

from agri

cultural areas.

55

EPA s 2014 proposal appears to stake

a middle ground by

reducing

the volume of food-based

fuels and

at the same time reducing the cellulosic bio

fuel and advanced biofuel volumes. This approach

may

walk a

line among

food consumers, RFS advocates, and

refiners and other obligated parties. Nevertheless,

EPA s

proposed 2014 RFS is

likely to

be challenged,

perhaps by multiple stakeholders with conflicting inter

ests.

Until the past year, commercial

considerations rather

than

the

RFS

mandate drove the majority of the ethanol

production in the United States, as evidenced by the

relatively minimal

pre-2013

prices

of RI Ns and

the ex

tent to

which production

volumes

have exceeded

the

overall

RFS mandate.

Given

past market behavior, bar

ring significant

changes in

oil

or

corn

prices,

cornstarch-based ethanol is likely to stay cost

competitive

to gasoline up to

the level of

the blend wall,

regardless of the RFS mandate.

With the

combination

of reaching the blend wall and the increasing

volumes

of

advanced and

cellulosic biofuels statutorily required

over the next decade, the RFS at least theoretically now

could take

a

more

forward role in

driving further bio

fuel production increases.

However, while

the RFS

was

52

Letter

from

Bob Good atte, Member

of

Congress, et al. to

Gina

McCarthy,

Administrator,

EPA (Oct. 30, 2013),

available

at

https://good atte.house.gov/system/up I oads/293/o rig na

I/

RFS_Letter_to_EPA_Admin_McCarthy.pdf.

53

See

e.g.,

Carey

Gillam, US charges 6 people, firms

with

100 million

biofuels

fraud,

Reuters (Sep. 18 2013),

avail-

able at

http://www.reuters.com/article/2013/09/18/us-usa

biofuels-fraud-id USBRE98H 16W20130918.

54

Jeremy

Martin,

EPA

Should

Do More to Reduce Compe-

tition Between Food and Fuel Crops,

Union

of

Concerned Sci

entists (Aug.

6

2013),

available

at http://www.ucsusa.org/

news/p ress_release/epa-sh

ou

Id-do-mo re-to-reduce-

co m petition -food-fu el-0397. htm

I.

55

Lawmakers Involved in Renewable Fuel

Standard

Revi-

sion Cast Doubt on Effort,

Bloomberg

BNA

(Oct.

3

2013),

available

at

http://climate.bna.com/climate/sum

mary_

news.aspx?I D =249502.

See also

193

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6

meant

to be

technology-forcing,

the statutory

volumes

are increasingly unable to be met by the current market

and

existing technology,

and

the program

also has been

beset by widespread fraudulent RI Ns, potentially fur

ther depressing investment

The

proposed

reduction

of

the advanced biofuel and total renewable fuel require

ments for

2014

marks

an

important shift in

RFS

policy;

consequently, it has been the subject

of

intense scrutiny

and

commentary.

Even

with

the proposed 2014 RFS change

in policy,

the uncertainty

involved in

resetting the volume re

quirements each year

could foster political

pressure for

amendment

of the RFS. For instance, the

annual

reset

ting of the

RFS

volumes could

cause

lower investments

in advanced

biofuels

facilities, additional costs for obli

gated

parties

who

will

need

sufficient time

to enact

their

compliance

strategies, and

uncertainties

for

farm

ers as they are

planning their

crops. As a result, we

might soon witness a groundswell of support for strate

gic

amendment

of

the

RFS or

perhaps

for a multi-year

rulemaking from EPA.

A number of

potential

modifications to the RFS have

been discussed

that would

address the

market uncer

tainty,

as well as remove

concerns

regarding the blend

wall.

As noted

previously,

these

include

repeal

of

the

RFS; however, other

outcomes may prevail given broad

support for the RFS in agricultural states. At the same

time,

potential

reforms

may

prove

quite

divisive, given

the support

and

opposition

to the RFS

by various

sig

nificant stakeholders. In addition, the

overall

current

political climate makes legislative action even less

likely. Assuming

that

the RFS

remains in

effect, there

are a few

proposals that

potentially

could alleviate con

cerns

about

the RFS while

retaining

incentives to in

crease use of renewable fuels:

s Replace

volumetric

targets

with

percentage

tar-

gets: The current statutory

requirements

annually in

crease the absolute volumes although total fuel con

sumption levels are decreasing, leading to the blend

wall squeeze. If the

mandate was given

instead in

terms

of percentages, the squeeze

would

be

ameliorated.

Fur

ther, percentage

mandates

that

would require

substan

tial amounts of E15 or

higher-ethanol-blend

gasoline

could

be set

far enough

in

the

future

to

allow for ad

equate preparation by vehicle

manufacturers

and the

fueling infrastructure.

s

Transfer obligation to acquire RINs: Refineries

currently are the primary obligated parties under the

RFS, even

though

they have limited

control over

the

end users

of

transportation fuel and thus limited

ability

to encourage the use of higher blend vehicles such as

E85. In addition,

some refiners do not

control

blending

operations, forcing them to acquire

RI

Ns on the open

market, where they

have been

significantly more

ex

pensive (and potentially fraudulent). Although the

House Energy and

Commerce

Committee

reportedly

discussed

transferring

the

obligation, details

of the

pro

posal were not disclosed and may not go forward into a

legislative bill.

56

56

Herman

Wang,

US RFS Reform May Change Obliga-

tions

Cut

Small Refiners Exemption Sources

Platts (Sept.

6

2013, 4:58 PM),

available

at http://www.platts.com/latest

news/o /h o uston/us-r fs-refo

rm-may-cha

nge-obl i gati o ns-cut

sm a 11-21525208.

s odify volume

requirements:

Various

proposals

have been discussed that would modify or repeal cer

tain aspects of the RFS.

Examples include

the RFS Re

form

Act, H.R. 1462,

which would

repeal

the

cornstarch-based ethanol

component

of the RFS while

retaining the

advanced

biofuels component.

57

Other bill

provisions would modify how

the

cellulosic biofuel

standard

is calculated,

requiring

EPA to tie the quantity

for a given year to the actual production in the prior

year. 5s

s odify tracking and reporting requirements:

EPA has been

relatively

strict in its interpretations of

what constitutes renewable fuel, particularly in the con

text

of

next-generation transportation

fuels such as

electricity

and

natural

gas.

While

it is

impossible

to

track

individual

electrons

or molecules of methane,

EPA has

required biogenic producers

of electricity

or

natural gas to

show

a plausible, direct connection to

their end-use

transportation

customer.

59

Allowing some

form of

credit

trading

for legitimate

transportation

uses

where

physical transmission is not possible would in

crease the

potential

for these alternative fuels to

con

tribute to reducing blend wall pressures and would pro

vide

alternative compliance

mechanisms. Similar credit

trading

systems are

widely

used

with

respect

to

compli

ance with renewable portfolio standards, and could eas

ily be

implemented under

the RFS.

s Low Carbon Fuel Standard: Congress

could

re

place

the

RFS

with

a

low carbon

fuel

standard

similar

to California s

Low

Carbon Standard.

60

Such a program

would

establish a baseline-required

reduction

in

the

carbon

intensity

of

transportation

fuels and then set up

a credit

trading

system through which

obligated

entities

could buy

and sell credits as necessary

to

meet the re

duction mandate.

s Increase

uptake

of high blend fuels:

Many flex

ible fuel vehicles

owners

use

regular gasoline rather

than E85. Increased usage of E 15 and E85 fue ls cou Id

create

additional

space

under

the blend wall. Incentives

to

expand the

E15 and E85 retail presence

could

enable

the fuel supply to absorb more ethanol.

s Provide additional incentives for drop in fuels:

Given the challenges

of

the blend wall,

Congress and

potentially EPA could create additional incentives to de

velop fuels

that

seamlessly blend with traditional fuels.

This

would

also act to reduce

blend

wall pressure

by

creating additional space under the 10% cap.

Significance of

the 2014 RFS on the

RIN

Market

and ompliance

RI

N prices in 2013 were highly volatile. Blend wall

concerns

drove

corn

ethanol spot

market RI N prices to

a peak of 1.44

per gallon

in July as

compared to prices

around 0.05 per gallon in 2012. Prices dropped nearly

40 percent after the

EPA s announcement

of

the

2013

7

RFS Reform

Act of

2013, H.R. 1462, 113th

Cong.§

101

(2013).

58

H.R. 1462

at§

102.

59

ee

40 C.F.R. § 80.1426 (2012).

6

See

Exec.

Order

No. S-01-07 (Jan.

18

2007),

available

at

http://www.arb.ca.gov/fuels/lcfs/eos0107. pdf.

For more

i

nfor

mation on

California s

Low Carbon Standard, see Cal. Air Res.

Bd.,

Low

Carbon Fuel

Standard Program,

Ca.Gov,

http://

www.arb.ca.gov/fuels/lcfs/lcfs.htm (last updated Jan.

7

2014).

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OF

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INC. DEN ISSN

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RFS,

but

remain high compared to previous years.

6

Af

ter initial

leaks of

EPA s

2014 proposal,

prices dropped

further,

but

were trading ten times higher than histori

cal prices as recently as February 21 due to increased

refiner purchases.

62

RI

N prices are significant for conventional and re

newable fuel production. High

RI

N prices add cost to

the production

of

conventional fuel for obligated parties

(primarily

refiners), and at the same time create oppor

tunities for

those

who

generate

RI

Ns

(primarily

renew

able fuel producers). Given the economic consequences

of RI

N prices to these parties,

it

is important for EPA to

find

a way to stabilize

RI

N prices. However, EPA s fail

ure to finalize

the 2014 RFS on

time,

as it initially

in

tended, does not further stabilization

of RI

N prices;

rather, it

complicates

the

ability

of

obligated parties

and

renewable fuel

producers

to plan their activities, lead

ing to potentially wild

swings

in RI N prices. A

final

2014

RFS

that

avoids the blend

wall

will help prevent

price

inflation,

but

uncertainty

about

2015 and beyond

may

counter

that effect.

6

See Brown, supra note

5.

62

See Cezary

Podkul,

and Gibbons, Robert,

UPDATE

2-Ethanol

RIN credits

break above 50 cts on refinery buying

Reuters, Feb.

6

2014,

available at http://in.reuters.com/article/

2014/02/05/rins-markets-surge -idl N L2NOLA 1YK20140205.

PFL

Markets

Daily February

21

2014 PROGRESSIVE FUELS

LTD., http://www.progressivefuelslimited.com/Web_Data/

pfldaily.pdf

(last visited Feb. 24 2013).

DAILY ENVIRONMENT

REPORT

ISSN 1060-2976

7

onclusion

If

the final 2014 RFS is similar to the proposal, EPA

will

effectively

taper off the dramatic increase required

by the statute,

with

the

mandate reductions coming

from both advanced and cornstarch-based biofuels. Al

though

the reductions in the

volumes

are not as signifi

cant as those requested by obligated parties, EPA ap

pears to be seeking a

middle-of-the-road

approach that

would

relieve the

most extreme impacts

of exceeding

the blend

wall

while distributing

the economic impact

among

various

affected sectors. EPA s approach

al

ready has reduced political

momentum

to legislatively

amend the RFS and, i f it

withstands

any judicial chal

lenges,

may provide

EPA

tools

to

craft

a

permanent

so

lution.

Ann

Claassen is Counsel with the Washington DC

office of Latham

Watkins

LLP.

Her practice

focuses

on assisting companies to negotiate the maze of

environmental health and safety regulations affecting

manufacture processing and use of chemical sub-

stances including biofuels.

Eli

Hopson is an associate with the Washington

DC

office of Latham Watkins LLP in the environmental

and finance departments. His practice focuses on

energy

and environmental

regulations affecting

the

energy sector. He has worked on national energy

policy issues since 2001 in

both

the private and public

sector.

The opinions expressed here do not represent those of

Bloomberg

BNA

which

welcomes other

points

of view.

BNA 2-26-14

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