RFS2: Understanding the Basics

Complex rules and a short implementation schedule make the new renewable fuels standard a challenge for producers. A newly published white paper explains the basics.
By Clayton McMartin | March 23, 2010
Feb. 3 marked an unprecedented event in the history of the United States, not only for the biofuels industry but for the entire motoring public. With the signing of the advanced renewable fuel standard (RFS2), U.S. EPA Administrator Lisa Jackson put into motion the first ever regulatory program for establishing greenhouse gas (GHG) performance of the nation's transportation fuels. The regulations are the final result of the legislative efforts undertaken by Congress in the 2007 Energy Independence and Security Act (EISA). With a July 1 implementation date, the much awaited RFS2 will be a full 18 months later than originally anticipated by EISA. Considering the sweeping changes, heated controversies and the overall complexity of the program, the delays in the rulemaking process should really come as no surprise.

The rule-making process was quite controversial and received a good deal of attention from the industry and press, particularly in the area of life-cycle analysis. Of particular concern was the new concept of assessing indirect land use change (ILUC). In the end, EPA retained the ILUC provisions but with a considerable shift in its assessment of the negative impact to GHG emissions.

The pivotal change brought about by EISA is the qualification of a renewable fuel based upon its ability to meet a GHG reduction threshold. The RFS2 regulations contain four separate categories of fuels, each with their own feedstock and performance criteria. Each category has its own mandate of annual volumetric use and a corresponding schedule for increases through 2022. The total mandate grows from more than 13 billion gallons in 2010 to 36 billion gallons in 2022.

A cursory review of RFS2 regulations quickly reveals a complex set of rules and terminology people may not be quite ready to digest. Recognizing the need for industry to grasp certain concepts, compounded by the short five months of implementation, my co-author Graham Noyes of Stoel Rives and I prepared a summation of the rule in the form of a free white paper, titled, "America Advances to Performance-based Biofuels-The Advanced Renewable Fuel Standard, RFS2," which can be accessed at www.CFCH.com/whitepaper.

Over the past three years, in dealing with hundreds of companies on the RFS1 and renewable identification number (RIN) credits, we still see that industry participants find the regulatory language particularly cumbersome and confusing when conducting normal business. Consider, for example, the four categories of fuels in RFS2.

In EPA parlance, the categories are cellulosic biofuel, biomass-based diesel, advanced biofuel and renewable fuel. Each of the fuels must meet certain technology and feedstock requirements. Furthermore, cellulosic biofuel must demonstrate a 60 percent GHG reduction; biomass-based diesel, a 50 percent reduction; and renewable fuel, a 20 percent reduction, or qualify to be grandfathered. It's best to simplify these fuel categories into a short acronym, CBAR. Therefore, there is Type C fuel, Type B fuel, Type A fuel, and Type R fuel. The first letter of each CBAR fuel type corresponds to the first letter of the fuel categories described by EPA. Type C represents cellulosic biofuel, Type B represents biomass-based diesel, and so forth.

Prices for biomass-based diesel Type B RIN credits have been on a sharp rise in 2010, increasing from 11 cents per gallon-RIN to 30 cents, an increase of more than 200 percent in a month. Two primary factors responsible for this are 1) that the new mandate for biomass-based diesel amounts to 1.15 billion gallons in 2010, and 2) the lapse in the biodiesel tax credit-production of biodiesel came to a near standstill in January, attributed directly to Congress' failure to extend the credit. Faced with a mandate and little available product, petroleum refiners are in a classic supply and demand balancing act. With RFS2, Type B RIN credits are used by refiners to satisfy Type B obligations. Economics 101 then tells us that with a constant demand, and supplies drying up, RIN prices will increase.

Will the price of Type B RINs increase to a dollar? Can the 2010 Type B fuel demand be met through any other means? What will happen if the tax credit is reactivated? Is there a possibility the tax credit will be abandoned? These are very real questions and understanding the answers could make or break businesses. Take for example the answer to the first question, which is no, or to the second question, which is yes. The reasons are found hidden in the details of the new regulations. Every company participating in this market must have a clear understanding of these regulations, which govern this very complex economic model, providing options and placing limitations, and are a key prosperity factor in this new era. These environmental regulations are complex enough without the burden of learning all the legalese, so this new white paper covers a lot of ground with the intention of simplifying this important task. RFS2 will impact the entire transportation fuel industry, but none more than the biodiesel sector. Here are just of a few of the biodiesel-specific issues producers should be aware of.

Reregistering plants Existing biodiesel producers must reregister their facilities with EPA, a necessary step to qualify in meeting GHG reduction requirements. Supporting paperwork will be required along with a report from an independent third-party professional chemical engineer, who must conduct a site visit and, for domestic facilities, be licensed through a state engineering agency. For foreign plant engineering inspections, the engineer must be licensed through an official governmental body. This registration step is required for any producer of more than 10,000 gallons annually, and is due by July 1.

2010 volumes The 2009 mandated volume of 500 million gallons for biodiesel fuel carried forward into 2010, making the present year mandate 1.15 billion gallons. However, this does not guarantee a corresponding demand for biodiesel in 2010. EPA made numerous allowances in the final rule for obligated parties to meet this mandate in 2010. It may come as a surprise that any Type B RINs applied to 2009 obligations will come right off the top of the 2010 obligation. Furthermore, 2009 RINs can be applied towards 2010 obligations, as well as a limited number of 2008 RINs. One additional step taken through RFS2 is the "reinstatement" of RINs that were retired as a result of nonroad fuel use. The market will see a number of RFS1 RINs back in play as a result.

New burden for waste processors One of the biggest changes between the proposed and final rules was in feedstock qualification. Provisions exist within the legislative language of EISA that attempt to circumvent new cultivation of land for the purpose of fuel production. Essentially, fuel production from land not in cultivation prior to December 2007 would not qualify for RIN credit generation under RFS2. As proposed, the rule would have required an exhaustive amount of paperwork, tying back to the land for each batch of fuel produced.

EPA made a huge concession in this area and agreed to rely on USDA information to satisfy the requirement pertaining to land use for domestic crops. Unfortunately, there was no similar concession made for waste-derived feedstock or for agriculture products from foreign countries. Unfortunately for biodiesel producers who process animal fats, used cooking oils or waste grease, the burden for recordkeeping and feedstock certification still exists. This could become a rather large burden and possibly limit the marketability of RINs these companies can generate.

It's noteworthy that the March Biodiesel Magazine reported this issue being raised publicly with EPA at the 2010 National Biodiesel Conference & Expo in Grapevine, Texas. Paul Argyrlopolus, the senior advisor to EPA Director Margo Oge, discussed the matter and indicated that EPA would take it under consideration and possibly issue a letter of interpretation. It would seem that this issue could be addressed with a modified definition, but such is the nature of the political and regulatory process. n

Clayton McMartin is the founder of Clean Fuels Clearinghouse, which operates the RINSTAR renewable fuels registry. Reach him at cem@cfch.com.
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