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Another Wrinkle in the RFS

December 7, 2017

2017 has been a busy year for the Renewable Fuel Standard (RFS). In July, the D.C. Circuit rejected EPA’s interpretation of its general waiver authority (farmdoc daily, August 9, 2017; August 18, 2017). In September, EPA issued a Notice of Data Availability that sought comment and data exploring further avenues to reduce the portions of the advanced mandate (farmdoc daily, October 5, 2017; October 12, 2017; October 19, 2017). A week ago, EPA finalized the RFS volume obligations that maintained the statutory mandates in line with its proposed rule (EPA News Release, Nov. 30, 2017). On November 22, 2017, EPA also denied requests from petitioning interests to change the point of obligation for compliance with the RFS mandates (EPA Response, Nov. 22, 2017). Finally, a recent court decision by the Tenth Circuit Court of Appeals (Sinclair Wyoming Refining Co. v. U.S. E.P.A, Aug. 15, 2017) may add yet another wrinkle to administration of the RFS. In that decision, a federal court concluded that EPA’s denial of a waiver for small refineries was improper. This article reviews the small refinery issue and its potential implications for the RFS standards.

Legal Discussion
When Congress created the RFS in the Energy Policy Act of 2005 (P.L. 109-58) it included a temporary exemption for small refineries from the mandate through 2011. Small refineries were defined as those with less than 75,000 barrels of crude oil throughput in a calendar year. The revised and expanded version of the RFS created in 2007 did not alter this exemption (P.L. 110-140). In 2011, EPA extended the blanket exemption through 2013 in response to demands from Congress for a reassessment of the impacts on small refineries (40 CFR Part 80, Regulation of Fuels and Fuel Additives: 2012 Renewable Fuel Standards; Final Rule, at 1340).

In addition to the blanket waiver through 2013, the statute also provided authority to EPA to grant an extension of the exemption to any small refinery. An exemption was to be based upon petition and due to “disproportionate economic hardship” to the refinery (7 U.S.C. §7545 (o)(9)). Sinclair petitioned EPA to extend the exemption for its two small refineries in Wyoming but EPA denied the petition. It was this denial that the Tenth Circuit Appellate Court reviewed.

The decision making process includes the Department of Energy (DOE), specifically DOE evaluates the impacts on small refineries and provides recommendations to EPA (Sinclair Wyoming Refining v. EPA). DOE’s analysis includes a scoring matrix for assessing the impacts, which includes measurements related to the viability of the refinery under the RFS mandates. EPA focused its conclusion for denying the petitions on the viability aspect of the DOE assessment. EPA rejected DOE’s recommendations and concluded that Sinclair did not meet the “disproportionate economic hardship” requirement. EPA’s decision rested on a conclusion that it was necessary for a small refinery to demonstrate that complying with the RFS threatened the long-term viability of the refinery. In other words, to grant an extension a refinery would have to prove to EPA that the RFS mandate threatened its long-term survival.

The court concluded that EPA improperly interpreted the requirement. The court concluded that EPA’s view was too narrow an interpretation of the statute and that it created too high of a hurdle. The court held that making viability of the refinery a necessary component for exemption went beyond the statute’s requirement of disproportionate economic hardship (Sinclair Wyoming Refining v. EPA).

On its own, the Tenth Circuit decision appears minor. It requires EPA to make use of a more reasonable standard for extending exemptions for small refineries from the RFS mandate. The bigger question may be the extent to which EPA can make use of the authority and court decision.

In the 2010 regulation implementing the RFS renewable volume obligations (RVO) for the 2011 calendar year, EPA provided the formula for calculating the yearly volume requirements (40 CFR, Regulation of Fuels and Fuel Additives: 2011 Renewable Fuel Standards; Final Rule (Dec. 9, 2010)). The RVO calculation includes an estimation of the amount to be produced by small, exempted refineries. Thus, known or expected exemptions are to be taken into account in setting the obligations and would effectively shift some of the obligation to larger refineries.

EPA explained, however, that if any small refineries are granted an extension after the annual rulemaking is finalized, “the parties in question would be exempted but we would not intend to modify the applicable percentage standards” for the remaining non-exempt refineries (Id., at 76804). EPA goes on to add that the RFS is best implemented with a single annual standard and not be revised periodically based upon waivers. More to the point, in its discussion of small refineries, EPA writes that it does “not intend to revise the 2011 standards applicable to other obligated parties to require that they make up for volumes that will not be attained by the exempt refineries” (Id., at 76805).

In the 2017 RVO final rule, EPA noted that it had not approved any exemptions for 2017 and had calculated the volumes without any adjustments for exempted volumes (40 CFR, part 80, Renewable Fuel Standard Program: Standards for 2017 and Biomass-Based Diesel Volume for 2018 (Dec. 12, 2016)). EPA added that if it approves any exemptions after the final rule, those amounts “will not be reflected in the percentage standards that apply to all gasoline or diesel produced or imported in 2017” (Id., at 89800). EPA noted that this adheres to the 2011 final rule that it will not revise the requirements for non-exempt obligated parties.

Combined with its treatment of exemption extensions after the final rule, the Tenth Circuit decision may provide a backdoor method by which EPA could reduce the mandate without using waiver authority. Given EPA’s persistent efforts to expand its waiver authority, this possibility may be more than mere speculation. Now that the final obligations have been established, if EPA grants exemption extensions to small refineries the obligations for those small refineries would effectively disappear from the RFS mandate. Depending on how EPA uses its authority, exempting small refineries could have large implications for the RFS and RINs markets. These implications are discussed in further detail below.

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