News | January 31, 2014

Renewable Fuels Groups Challenge EPA's Use Of Waiver Authority In 2014 RFS

The Environmental Protection Agency's proposal to reduce the 2014 renewable fuel blending mandates below statutory requirements violates the Clean Air Act, according to renewable fuels producers.

The producers argued in comments on the proposed rule that the EPA is improperly interpreting its Clean Air Act waiver authority to reduce the annual renewable fuel standard blending requirement. The act allows the agency to reduce the annual blending requirements only because of inadequate fuel supply, they said.

Instead, the EPA is proposing to reduce the 2014 blending requirement due to a lack of demand for higher ethanol blends, they said. Renewable fuels producers also said that the EPA's proposal could create regulatory uncertainty that hampers investment in advanced biofuels such as cellulosic ethanol that are on the cusp of widespread commercialization.

Petroleum refiners and food producers supported the EPA's proposed reductions, but the petroleum industry argued that the EPA should reduce the annual blending requirements further.

The comment period on the proposed rule closed Jan. 28.

The EPA proposed reducing the overall renewable fuel standard blending mandate below the statutory requirements for the first time in 2014. The agency is proposing that petroleum refiners and importers blend 15.21 billion gallons of renewable fuels into their products.

That is less than the 18.15 billion gallons required by the Energy Independence and Security Act (Pub. L. No. 110-140) as the agency addresses the “ethanol blend wall,” the point at which the amount of ethanol that must be blended into the gasoline supply exceeds 10 percent, the maximum approved for all vehicles and small engines.

Other Blending Requirements

That 15.21 billion-gallon requirement for 2014 also would stipulate that petroleum refiners and importers blend 2.2 billion gallons of advanced biofuels, including cellulosic ethanol, into the fuel supply. The EPA said it also will seek comment on setting the standard between 15 billion gallons and 15.2 billion gallons, with an advanced biofuel target between 2 billion gallons and 2.51 billion gallons (78 Fed. Reg. 71,732; .

The EPA is proposing to reduce the statutory blending requirements using its authority under Section 211(o)(7) of the Clean Air Act, which allows it to waive the renewable fuel standard requirements if implementing the standard could cause severe economic harm or if there is inadequate domestic supply to meet the requirements.

This is the first time the agency has proposed using that authority. It is has offered a broad interpretation of the term “inadequate domestic supply,” which would allow the EPA to consider other factors such as the petroleum industry's ability to blend the amount of ethanol mandated into the nation's gasoline supply .

Adequate Supply Available

Renewable fuels producers disputed the EPA's interpretation of its waiver authority, arguing they will be able to produce enough fuel to meet the statutory blending requirements for 2014. The EPA's interpretation is substituting a lack of demand for a lack of supply, they said.

“As EPA acknowledges, at least 13.2 billion gallons of ethanol can be consumed through consumption of [gasoline containing 10 percent ethanol], leaving only 1.2 billion gallons to be satisfied through other sources,” said Growth Energy, an ethanol trade group. “If a recent uptick in gasoline consumptions continues, moreover, the remainder shrinks to just 600 million gallons.

“There is no basis to conclude that the supply of ethanol is inadequate to meet this requirement,” the group continued. “Indeed, the proposed rule does not dispute that a sufficient amount of ethanol can be produced to meet the RFS requirements for 2014. Rather, the proposed rule rests on a prediction that there will be inadequate demand for ethanol to satisfy the standards. That is an improper basis to grant a general waiver in multiple respects.”

Increased consumption of gasoline containing 15 percent ethanol (E15) or 85 percent ethanol (E85) would be sufficient to meet the statutory blending requirements for 2014, Growth Energy said. Petroleum refiners also could rely on banked renewable fuel credits from 2013 to help meet their compliance obligations, the group said.

The Renewable Fuels Association said that maintaining the 2014 blending obligations would help drive up prices for renewable identification numbers (RINs), serial numbers attached to batches of renewable fuels that can be traded for credits. The rising credit prices are intended to force refiners to invest in infrastructure for higher ethanol blends in gasoline or advanced biofuels such as cellulosic ethanol, the group said.

Changing Status Quo

“In the end, the RFS program was designed to force the oil industry to change the status quo--not to perpetuate it,” the Renewable Fuels Association said. “The entire purpose of this program would be subverted if the oil industry is rewarded for its failure to take the steps necessary to ensure that it was capable of distributing, blending, and dispensing the renewable fuel volumes required under the statute.”

The American Farm Bureau Federation also said that the EPA's proposed rule could delay some investment in advanced biofuels, which could economically impact farmers.

“According to an EPA report, more than $2.4B was invested in advanced biofuel companies by venture capitalists alone from 2007 through the second quarter of 2011,” the farm bureau said. “This decision sends a negative signal that will stall future investment not only in these new potential fuels but also in the delivery infrastructure that will be critical in the future.”

Petroleum refiners defended the EPA's decision to reduce the 2014 blending mandate below statutory levels and called for the agency to make further reductions.

In joint comments to the EPA, the American Petroleum Institute and the American Fuel & Petrochemical Manufacturers called the proposed reduction “consistent with the plain language of the law.”

Further Reduce Requirements

The petroleum groups called on the EPA to further reduce the 2014 blending requirement, capping ethanol at 9.7 percent of the gasoline supply. The two groups had petitioned the EPA in August to lower the 2014 renewable fuel requirement to 14.8 billion gallons .

“We believe that these volumes fully address the blendwall issues and will avoid significant economic harm as outlined in the waiver petition,” the petroleum groups said.

If the agency doesn't think further reductions are warranted, petroleum refiners asked the EPA to finalize blending requirements at the lower end of the ranges proposed.

Food producers and restaurant operators also called on the EPA to reduce the blending requirement, particularly for corn-based ethanol. They argued that the renewable fuel standard's annually increasing ethanol requirements have boosted food prices for consumers and feed prices for livestock and poultry producers.

“The proposed volumes will continue to provide incentives to overplant corn, which will unfortunately continue the distortions in food commodity costs that have existed since the enactment of the RFS. These distortions have caused the price of a bushel of corn to skyrocket by as much as 300 percent in recent years,” the National Council of Chain Restaurants said.

The council said a study it commissioned showed that the renewable fuel standard is linked to a 10 percent increase in food prices for the typical fast food restaurant.

Higher Corn Prices

Ethanol production consumed 43 percent of the corn crop in 2012 and 2013, and increasing ethanol mandates in the future will drive corn prices higher, the National Chicken Council said.

“Corn is far and away the primary source of nutrition for broiler chickens, rendering the industry captive to escalating, increasingly volatile corn prices,” the council said. “At least a dozen chicken companies have ceased operations, filed for bankruptcy protection, or have been acquired by another company.”

Lawmakers from Midwestern states that produce renewable fuels also opposed the EPA's proposed rule, fearing it would lead to job losses in the agricultural and biofuels sectors.

Sen. Heidi Heitkamp (D-N.D.) called the EPA's proposal “a significant step backward” for biofuels. She said waiving the volume requirements as a result of the ethanol blend wall “creates significant barriers to future biofuels growth.”

“Lack of infrastructure remains one of the key hurdles to further deployment of biofuels into the market,” she said. “Limiting RFS to levels that can be met with existing infrastructure eliminates incentives to invest in the technologies and infrastructure necessary to meet our domestic policy goal of increasing biofuels production and use.”

Iowa Urges Increase

Iowa Gov. Terry Branstad (R) called on the EPA to increase the corn ethanol mandate to 14.4 billion gallons while also requiring 1.7 billion gallons of biodiesel fuels.

“A robust RFS is needed to provide the federal policy predictability that rural America needs to continue investments in the renewable fuels that diversify our nation's energy portfolio, clean the air, provide value-added opportunities to various bio-stocks, give consumers lower-cost choices at the fuel pump, and create good paying jobs that empower rewarding careers,” he said.

Some House Democrats have asked the White House for a meeting to discuss the EPA's proposed rule.

SOURCE: Bloomberg BNA

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