The U.S. Court of Appeals for the District of Columbia Circuit on May 17 denied a motion filed the Advanced Biofuels Association last month seeking a preliminary injunction preventing the EPA from granting any additional small refinery exemptions (SREs) under the Renewable Fuel Standard until its pending lawsuit with the agency is resolved.

The ABFA first filed the case against the EPA in May 2018. Now, more than a year later, the case could be resolved soon. Final briefs are due June 25, with oral arguments expected to be scheduled in early July. Michael McAdams, president of the ABFA, said the court is expected to hand down a final decision soon after.

The lawsuit challenges the EPA’s decision to modify the criteria or lower the threshold by which it determines to grant small refineries an exemption from the RFS due to reasons of “disproportionate economic hardship.”

Data published by the EPA shows the number of SRE petitions filed by small refineries—and the number of approved by the agency—has increased significantly under the Trump administration. For compliance year 2015, the agency received 14 such petitions, approving only seven. Those seven petitions waived approximately 290 million gallons in blending obligations. The following compliance year, SRE petitions grew to 20, with 19 approved and one still pending. Together, those petitions resulted in 790 million gallons of blending obligations being waived. For the 2017 compliance year, 37 SRE petitions were filed, with 35 approved and one still pending. To date, 1.82 billion gallons of 2017 blending obligations have been waived. EPA data shows 40 SRE applications have been submitted to date for compliance year 2018, with 39 still pending and one declared ineligible or withdrawn.

Representatives of the EPA have publically cited an August 2017 decision handed by the U.S. Court of Appeals for the Tenth Circuit for the reason behind the recent uptick in approved SRE applications. In that case, the court found the agency used too strict a standard for “disproportionate economic hardship” when it denied an SRE application filed by Sinclair Oil. Two similar court cases followed. 

However, documents associated with the ongoing lawsuit filed against the EPA by ABFA show the agency changed its policy with regard to the review of SRE applications at least four months before the Court of Appeals handed down its decision in the Sinclair case.

Those documents show the EPA issued a final decision to an SRE petition on May 4, 2017. “EPA used this document, which was not publicly available, to announce a new policy whereby a small refinery is considered to suffer ‘disproportionate economic hardship’ based on adverse structural conditions alone without evidence that RFS Program compliance impacts refinery profitability or competitiveness,” wrote the ABFA in an April 24 filing with the court.

The document goes on state the “EPA has unfailing applied its new methodology since May 4, 2017, repeatedly issuing full exemptions—contrary to DOE’s recommendations—to small refineries with DOE Viability Index scores below 1.0. EPA’s new policy disregards DOE’s methodology, applicable RFS Program statutory language, and its own historic practice.”

“EPA’s change in methodology allowed exempted refineries to avoid purchasing billions of dollars of RINs,” the court documents state. “Despite the enormity of this change, it was made surreptitiously. Rather than announce this change through a rulemaking or a guidance document, EPA slipped it into a footnote of an informal adjudication decision sent to a single refinery and fiercely shielded from public view under the dubious claim that it contained confidential business information.”

The document goes on to explain EPA’s only attempted explanation for its methodology change come via boilerplate in its exemption decisions since May 4, 2017. That boilerplate language reads “EPA has determined that [disproportionate economic hardship] can exist on the basis of adverse structural conditions alone. A difficult year may exacerbate economic problems for small refineries that face disproportionate impacts, resulting in tangible effects including diminished refining margins, reduced profitability, cash flow limitations that can hinder its ability to acquire renewable fuel credits (Renewable Identification Numbers, or RINs) for compliance, and the potential to impair refinery operations. In addition, small refineries sometimes lack access to capital or credit that can also be necessary to achieve compliance.”

A primary goal of the ABFA’s lawsuit is to have the EPA return to its original methodology for granting SREs. “What we’ve asked for is to go back to applying the criteria of the law the way [EPA] had always applied it prior to May 4, 2017,” McAdams said.

He said the ABFA is disappointed the court rejected its injunction, but indicated the group is optimistic about the outcome of the lawsuit, noting the case could be resolved within a few months.

“We look forward to early July—doing our oral arguments,” McAdams said. “That should be most fascinating because we believe, given the fact that we were finally given the …the decision documents on the SREs that were granted last year, that we have proven our case on the merits that the EPA just did basically whatever they wanted to do, and what they did was beyond the legal authority that was intended in the law for SREs and economic harm. And, we believe we can prove they granted full waivers for people that did not have economic harm, that it was arbitrary and capricious, did not meet with the letter of the law, and should be rejected.”

McAdams said those decision documents clearly show the EPA granted 24 waivers even though the U.S. Department of Energy had given them a score of zero. “So, where was the economic harm?” he asked. “They basically used the SRE provision as a dial to just simply lower the compliance costs for the largest refineries in the country…And they did it with no transparency—totally in the dark. They’ve effectively gutted the RFS RVO program and capped it at 17 billion gallons for the last two years.”

McAdams cited analysis by Scott Irwin, a professor of agricultural economics at the University of Illinois at Urbana-Champaign, that shows the EPA’s actions have, over the past three years, resulted in 2.5 billion gallons of demand destruction for the D4 biomass-based diesel pool alone, with more than $7 billion worth of reallocation of resources from the biofuels production side back to the refining side. “I don’t think….Congress intended that to be happening as a result of the small refinery exemption under the RFS,” McAdams said.