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 cellulosic 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

n Nov. 29, 2013, the U.S. Environmental Protection Agency (EPA) proposed reductions in the
overall level of the renewable fuel standard (RFS)
that it administers under the Clean Air Act (CAA). 1 If

1
2014 Standards for the Renewable Fuel Standard Program, 78 Fed. Reg. 71,732 (proposed Nov. 29, 2013) (hereinafter "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 reduction 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). See also 230 DEN A-2, 11/29/13.

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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 obligated 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) received.
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 mandate 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 statutory 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 purchasing 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 25fold 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 publication of the proposed 2014 RFS (which indeed seeks
to avoid the blend wall), but not down to pre-2013 levels.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 renewable fuel production and, potentially, fuel prices in
general. 7
2
Regulation of Fuels and Fuel Additives: 2013 Renewable
Fuel Standards, 78 Fed. Reg. 49,794 (Aug. 15, 2013) (hereinafter "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 Exceeding the Blendwall in 2013 and 2014 p. 2 (2013), available at
http://eprinc.org/pdf/EPRI NC-RFS2014.pdf. But see note 7 infra.
5
See 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 Iy-benefited-fro mex 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 nsepa-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

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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 designed and/or are not warrantied for higher percentages.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. Consumption of both E10 and E85 is further constrained by
limited 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 ethanol 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 acknowledged in its 2013 final rule that carryover credits likely
will not be sufficient to avoid the blend wall in 2014. 11
Accordingly, EPA's proposed 2014 RFS seeks to significantly reduce the volume requirements from statutory
levels because of blend wall concerns and a cellulosic
biofuel shortfal 1. 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 Manufacturers (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 "inadequate domestic supply" or if the Administrator deterWhether Higher Prices of Renewable Fuel Standard RINs Affected Gasoline Prices in 2013 (Jan. 2014), available at http://
ethanol rfa.3cd n. net/5b92d3a4ba07986622_e0m6b 1prr. pdf.
8
For the RFS, Congress mandated annual volumes of renewable fuels to be blended into the domestic fuel supply.
Separate volumes are specified for cellulosic biofuel, biomassbased diesel, advanced biofuel, and renewable fuel. The cellulosic 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 domestic fuel consumption to calculate volume percentages for renewable 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.
10
See 2014 RFS Proposal at 71,755, 71,759.
11
See 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 les/News/2013/13-August/
RFS-Waiver-Petition. pdf.

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Table 1 -

Type of Fuel

2014 RFS volumes (billions of gallons of ethanol equivalent)

CAA Requirement

EPA Proposal

14.4

Cornstarch-based
fuel
Total advanced
biofuel
Total renewable
fuel

13.01

EPA Projected
Ranges
13.00-13.01

AFPM &API
waiver request
12.88

3.75

2.20

2.00-2.51

1.92

18.15

15.21

15.00-15.52

14.80

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 biofuels 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 reduce 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, advanced biofuel, and total renewable fuel volume requirements.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 quantities of renewable fuel are projected to exceed the statutory volume requirement in 2014. EPA asserts "inadequate domestic supply" is an ambiguous provision encompassing 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 inadequate 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 release 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.

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 requirement to modify subsequent annual volumes for
2016-2022 via rulemaking. 18 EPA would set the new
standards based on a determination by the Administrator 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 process which engenders uncertainty and hinders investment. Given that the 2013 Final RFS reduced the cellulosic biofuel requirement much more than 50% (from
1.0 billion gallons to 6 million gallons), this rulemaking
provision already has been triggered for cellulosic biofuel. 20 If the 41 % advanced biofuel reduction proposed
for 2014 is implemented and followed by another cut
greater than 20% in 2015, then this would trigger a required rulemaking to modify advanced biofuel volumes.21 The 2014 proposal would reduce the total renewable 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 reevaluation provision. 22

Cellulosic Biofuel Volume Requirements

Although Congress envisioned dramatic increases in
cellulosic biofuels in this decade, technological improvements have not kept up with the statutory requirements. 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 however, the cellulosic biofuel industry has been capable of
only negligible cellulosic production through Nov. 2013
and has fallen significantly short of production projec-

14

CAA 211 (o)(7)(A).

CAA 211 (o)(7)(D)(i).
16
2014 RFS Proposal at 71,735.
17
See 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/
renew ab lefuels/docu m ents/420f 12075. pdf.
15

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18
19

20
21
22
23

24

CAA 211 (o)(7)(F).

CAA 211 (o)(2)(B)(ii), (7)(F).
See 2013 Final RFS at 49,795, 49,798.
See 2014 RFS Proposal at 71, 734.
2014 RFS Proposal at 71,734.
CAA 211 (o )(2)(B)(i)(l I I); 2014 RFS Proposal at 71,734.
See 2014 RFS Proposal at 71,739.
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tions each year to date. 25 Whether 2014 production targets can be met is uncertain. 26
The validity of the 2014 cellulosic biofuel requirement also must be evaluated in light of a decision by the
D.C. Circuit Court of Appeals that EPA had erred in setting 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 standard 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 petitions to reconsider the 2013 cellulosic biofuel standard
in light of lower production than EPA had anticipated. 30
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 advanced biofuel and total renewable fuel volume requirements.31 Similar to the reduction in the cellulosic biofuel 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 requirement 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 renewable fuel, EPA proposes a volume requirement of
15.21 billion gallons (down from a statutory requirement of 18.15 billion gallons). 35 These volumes reflect a
reduction equal to that of the cellulosic biofuel reduction plus additional reductions under the general
waiver provision.

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 biomassbased 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 billion gallons to meet the advanced biofuel volume requirement 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 requirement.38 Industry argued that it is impossible to meet the
requirement because there is not enough cellulosic biofuel available. 39 As noted above, EPA recently agreed to
reconsider the 2013 standard, which may moot the lawsuit if EPA partially or completely rescinds its 2013 cellulosic 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. 40
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 requirements 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 requirements 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

Biomass-Based Diesel

C.Omments on the 2014 RFS Proposal

Unlike the other three fuel categories, EPA left the

biomass-based diesel volume requirement untouched,

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-

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 Iosic-eth an ol-o nce-the-way-of-the-futu re-is-offto-a-dela yed-bo istero us-start/2013/11/08/a1 c41 a70-35c7-11 e38a0e-4e2cf80831fc_story. htm I; Chris Warren, Cellulosic Production (Still) Falls Woefully Short of Mandate (Nov. 6, 2013),
available at http://www.productsandpower.org/2013/11/06/
eel I u Iosic-prod ucti o n-sti 11-fal ls-woefu 11 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
2014 RFS Proposal at 71,751.
30
See Letters from Gina McCarthy, EPA Administrator, to
API and AFPM (Jan. 23, 2014), available at http://
www.epa.gov/OT AQ/fuels/renewablefuels/reg u la ti o ns. htm.
31
2014 RFS Proposal at 71,754.
32
Id. Ethanol produced from sugarcane qualifies as an advanced biofuel.
33
2014 RFS Proposal at 71,754.
34 Id.
35 Id.

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36

2014 RFS Proposal at 71,752.

2014 RFS Proposal at 71,753-54.
38
Petition for Review, Monroe Energy LLC v. EPA, No. 131265 (D.C. Cir. Oct. 8, 2013); Petition for Review, American Petroleum 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).
40
Id. at 28-31.
41
Cezary Podkul, Analysis: Lawsuits Likely as EPA Declares 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/apith reatens-lawsu it-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 campaigns, however they still may be time consuming to review.
37

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sitions was provided at a public hearing on the proposed 2014 RFS on Dec. 5, 2013. 45 Some commenters
oppose the proposed reductions. For example, the National Corn Growers Association asserts that the standard 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 because 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, negatively impact the rural economy, and possibly lead to increased fuel prices. 46 Members of the biofuels industry
also oppose the reductions. The Global Biofuels Business Director for DuPont claims that the proposed reductions would reduce investment in the biofuels industry because it would decrease the long-term certainty of
the RFS. 47 Other types of interest groups oppose the reductions; for example, the Union of Concerned Scientists 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 reductions 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. 50
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. 51 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 wetSee 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 Production 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-ch an ges-we i g h ed-epah ear in g-0-105738-spx_1.
48
Jeremy Martin, Senior Scientist, Union of Concerned Scientists, Testimony at the Hearing on the 2014 Standards for
the Renewable Fuel Standard Program (Dec. 5, 2013), available
at
http://www.ucsusa.org/assets/documents/clean_
veh icles/RVO-Testi many. pdf.
49 Id.
50
Baum, supra note 47.
51
Baum, supra note 47.
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lands and grassland into corn fields, and will lead to

blend wall concerns. 52

Next Steps for the RFS

As noted above, the obligated parties under the RFS
have expressed opposition to the volume requirements,
which are increasingly difficult to meet. This is exacerbated 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 obligated 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 supporters criticized EPA's 2013 proposal for allowing foodbased 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 initiated to entirely repeal the RFS, but that may be a nonstarter given the current political environment and the
breadth of support for the RFS, particularly from agricultural 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 biofuel 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 interests.
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 extent to which production volumes have exceeded the
overall RFS mandate. Given past market behavior, barring significant changes in oil or corn prices,
cornstarch-based ethanol is likely to stay costcompetitive 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 biofuel production increases. However, while the RFS was
52
Letter from Bob Good latte, Member of Congress, et al. to
Gina McCarthy, Administrator, EPA (Oct. 30, 2013), available
at
https://good latte.house.gov/system/up Ioads/293/o rig i na I/
RFS_Letter_to_EPA_Admin_McCarthy.pdf.
53
See, e.g., Carey Gillam, US. charges 6 people, 3 firms
with $100 million biofuels fraud, Reuters (Sep. 18, 2013), available
at
http://www.reuters.com/article/2013/09/18/us-usabiofuels-fraud-id USBRE98H 16W20130918.
54
Jeremy Martin, EPA Should Do More to Reduce Competition Between Food and Fuel Crops, Union of Concerned Scientists (Aug. 6, 2013), available at http://www.ucsusa.org/
news/p ress_release/epa-sh ou Id-do-mo re-to-reduceco m petition-food-fuel-0397. htm I.
55
Lawmakers Involved in Renewable Fuel Standard Revision 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 DEN A-3, 10/4/13.

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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 further depressing investment The proposed reduction of
the advanced biofuel and total renewable fuel requirements 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 requirements each year could foster political pressure for
amendment of the RFS. For instance, the annual resetting of the RFS volumes could cause lower investments
in advanced biofuels facilities, additional costs for obligated parties who will need sufficient time to enact
their compliance strategies, and uncertainties for farmers as they are planning their crops. As a result, we
might soon witness a groundswell of support for strategic 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 uncertainty, 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 significant 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 concerns about the RFS while retaining incentives to increase use of renewable fuels:

s Modify volume requirements: Various proposals

have been discussed that would modify or repeal certain aspects of the RFS. Examples include the RFS Reform 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 Replace volumetric targets with percentage targets: The current statutory requirements annually increase the absolute volumes although total fuel consumption levels are decreasing, leading to the blend
wall squeeze. If the mandate was given instead in terms
of percentages, the squeeze would be ameliorated. Further, percentage mandates that would require substantial amounts of E15 or higher-ethanol-blend gasoline
could be set far enough in the future to allow for adequate preparation by vehicle manufacturers and the
fueling infrastructure.

s Increase uptake of high-blend fuels: Many flexible fuel vehicles owners use regular gasoline rather
than E85. Increased usage of E 15 and E85 fuels 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 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 expensive (and potentially fraudulent). Although the
House Energy and Commerce Committee reportedly
discussed transferring the obligation, details of the proposal were not disclosed and may not go forward into a
legislative bill. 56
56
Herman Wang, US RFS Reform May Change Obligations, Cut Small Refiners Exemption: Sources, Platts (Sept. 6,
2013, 4:58 PM), available at http://www.platts.com/latestnews/o i l/h o uston/us-rfs-refo rm-may-cha nge-obl i gati o ns-cutsm a 11-21525208.

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s Modify tracking and reporting requirements:

EPA has been relatively strict in its interpretations of
what constitutes renewable fuel, particularly in the context 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 increase the potential for these alternative fuels to contribute to reducing blend wall pressures and would provide alternative compliance mechanisms. Similar credit
trading systems are widely used with respect to compliance with renewable portfolio standards, and could easily be implemented under the RFS.
s Low Carbon Fuel Standard: Congress could replace 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 reduction mandate.

s Provide additional incentives for drop-in fuels:

Given the challenges of the blend wall, Congress and
potentially EPA could create additional incentives to develop 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 Compliance
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
57
RFS Reform Act of 2013, H.R. 1462, 113th Cong. 101
(2013).
58
H.R. 1462 at 102.
59
See 40 C.F.R. 80.1426 (2012).
60
See Exec. Order No. S-01-07 (Jan. 18, 2007), available at
http://www.arb.ca.gov/fuels/lcfs/eos0107. pdf. For more i nformation 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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RFS, but remain high compared to previous years. 61 After initial leaks of EPA's 2014 proposal, prices dropped
further, but were trading ten times higher than historical prices as recently as February 21 due to increased
refiner purchases. 62
RI N prices are significant for conventional and renewable 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 opportunities for those who generate RI Ns (primarily renewable 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 failure to finalize the 2014 RFS on time, as it initially intended, does not further stabilization of RI N prices;
rather, it complicates the ability of obligated parties and
renewable fuel producers to plan their activities, leading 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.
61

See Brown, supra note 5.

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).
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Conclusion
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. Although the reductions in the volumes are not as significant as those requested by obligated parties, EPA appears 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 already has reduced political momentum to legislatively
amend the RFS and, if it withstands any judicial challenges, may provide EPA tools to craft a permanent solution.
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 substances, 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

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