By Buck B. Endemann and Jeff M. Cohen
The federal Renewable Fuel Standard (RFS) requires refiners and importers of gasoline and diesel to blend a minimum volume of renewable fuel into their transportation fuel products. Refiners and importers subject to the RFS must purchase Renewable Identification Numbers (RINs), which are compliance credits traded on a secondary market, to prove that their fuel contains U.S. Environmental Protection Agency (EPA)-required volumes of cellulosic biofuels, biomass-based diesel, advanced biofuels, and total renewable fuel. While the RFS has generated controversy from the moment its first iteration was passed in the Energy Policy Act of 2005, volatile RIN prices and lower fuel demand have more recently prompted refiners to become increasingly vocal in their opposition to the program.
Two recent court rulings and a rulemaking proceeding could contribute to additional uncertainty, at least in the short term. On August 15, 2017, the U.S. Tenth Circuit Court of Appeals potentially expanded the RFS exemptions available to small refineries, a ruling that was followed by lower RIN prices in the secondary market. The RFS has a case-by-case exemption for small refineries that face “disproportionate economic hardship” in achieving compliance. EPA had previously interpreted the exemption to apply only where there existed an existential threat to a refinery’s survival. In Sinclair Wyoming Refinery Company v. EPA, the 10th Circuit rejected EPA’s interpretation, finding that a small refinery could qualify for an exemption if it suffered hardship that was merely out-of-line with that suffered by other small refineries. While the longer term implications of the case are unclear, if EPA grants more small refinery exemptions, fewer entities will be required to purchase RINs, which could potentially depress the market. It is worth noting that the Tenth Circuit broke with other circuits on the standard used to review EPA’s decision, and this case could be taken up by the U.S. Supreme Court.
While Sinclair may reduce the pool of regulated entities required to buy RINs, there is also reason to believe that EPA may require the remaining refiners and importers to blend an increased volume of biofuels into their gasoline and diesel. On July 28, 2017, the D.C. Circuit Court of Appeals struck down an Obama-era reduction in the amount of ethanol required to be blended in the nation’s fuel supply. In Americans for Clean Energy v. EPA, the D.C. Circuit concluded that the EPA had improperly used its “inadequate domestic supply” waiver to reduce blending targets below Congressionally-approved levels. Going forward, EPA will not be able to consider the “inadequate domestic supply” waiver by considering the retail demand for biofuels—the biofuel supply available to refiners, blenders, and importers should instead be the focus of the analysis. Pro-biofuel stakeholders praised the decision, which could result in more biofuels being sold into the marketplace.
These two cases were decided against the backdrop of EPA’s Renewable Fuel Standard Program rulemaking for its 2018 standards and 2019 biomass-based diesel volume. While the annual rulemaking process is used to set volumetric requirements and to consider various waivers, EPA is also presently seeking comment on whether the proposed 2018 biofuel volumes would cause “severe harm” to the economy. EPA is accepting public comments on the rulemaking through August 31, 2017.
Given recent developments, those in favor and those opposed to the RFS should have plenty to say in the rulemaking proceeding. K&L Gates attorneys are continuing to monitor the situation as we guide our clients through important RIN and RFS issues that affect their businesses.