Legal Perspective

The environmental benefits of biodiesel over petroleum diesel are many. Biodiesel emits 50 percent less smog-forming hydrocarbons than petro diesel. It emits virtually no acid rain constituents (i.e., sulfur). Potential cancer causing compounds are significantly less. Biodiesel is non-toxic and degrades four times faster than petro diesel.

Despite these benefits, biodiesel, like other on-road fuels and fuel additives, must undergo environmental testing and registration before being commercially marketed.

As a means of regulating emissions from mobile point sources, the U.S. EPA established requirements, pursuant to Sections 211(b)(2) and 211(e) of the Clean Air Act, for mandatory registration of fuels and fuel additives, including biodiesel. Requiring detailed analysis of new fuel or fuel additives, the regulations are set forth in 40 Code of Federal Regulations, Part 79. Fuels not sold into on-road markets (e.g., heating fuel, marine, etc.) are exempt from these regulations.

In general, a biodiesel producer must register its product with the EPA in accordance with a two-part submission. The first is certain basic registration data for each product that includes, for example, a general description of the fuel's hydrocarbon composition, its characteristics, etc. More burdensome, however, are the information requirements of covering "Tier 1," "Tier 2" and possibly "Tier 3" testing and data submissions.

Tier 1 submissions include published data regarding the product, and most importantly, its known health and welfare effects, toxicity data and similar literature. Tier 1 also will include a characterization of the constituents of combustion emissions of the fuel, if necessary. Finally, Tier 1 includes a discussion of potential population exposure to the emission based upon production and use of the particular fuel.

Tier 2 testing consists of requirements designed to detect potential adverse health effects related to inhalation of the emissions, and entails detailed laboratory testing. When Tier 1 and Tier 2 data are complete, producers must submit the results to the EPA for evaluation. Based on these submissions, the EPA may order Tier 3 confirmatory studies for individual cases, focusing on areas of concern identified in earlier tiers.

The EPA regulations recognize the magnitude of registration start-up costs and specifically allow for manufacturers to pool their resources and efforts through collective actions or trade groups. Under the regulations, producers can share their planning efforts, research capabilities and financial resources to satisfy the information gathering and testing requirements of EPA's registration program. Testing done by one selective representative of the group of manufacturers is submitted jointly for all members of the group, and costs are shared among members (including future members) to reduce the burden of compliance. In the case of biodiesel, the National Biodiesel Board (NBB) has already undertaken such collaborative efforts. As reported by Van Gerpen et al. in Building A Successful Biodiesel Business (January 2005), the NBB had, as of the date of that publication, expended $2.2 million on Tier 1, Tier 2 and Tier 3 testing. The NBB is presently the only organization to have submitted Tier 2 data on biodiesel to the EPA, which only NBB members can access for fuel registration purposes.

Interested biodiesel producers should contact the NBB to find out how to participate in its group program. The EPA has accepted NBB data and has recently registered several new biodiesel producers under the program. The NBB has made its Tier 1 and Tier 2 health effects data available to members without charge; non-members must pay $100,000 plus twice the volume dues payable by NBB members for access to it.

The EPA regulations contain two small business provisions relevant to biodiesel producers. A fuel manufacturer of a "non-baseline" fuel with annual sales of less than $50 million need only submit the basic registration data, not Tier 1 and Tier 2 data. Further, a small producer of an "atypical" diesel fuel can qualify for exemption from Tier 2 data submission (but not Tier 1) so long as its annual sales are less than $10 million. Tier 1 data collection alone can be expensive, costing between $100,000 to $250,000, but the requirement may be satisfied either individually or through participation in the NBB. Currently, the EPA classes biodiesel as an "atypical," not a "non-baseline," fuel, for technical reasons.

The small business exemption regulations state that where subsidiary, division or other "complex business arrangements" exist, the "manufacturer," for purposes of measuring annual sales volume, will be considered the entity with "ultimate ownership" of all related parents, subsidiaries, divisions, branches or other operating units. While not artfully phrased in the rules, this provision is intended to prevent evasion of testing and data submission requirements by larger entities through separate affiliates. But it may also have the incidental effect of preventing a modest-sized enterprise (e.g., one with $40 million in total sales) from availing itself of the "under $10 million" exemption, and to that extent, hindering technical and entrepreneurial innovation in the field.

Authors Jonathan Scoll and Todd Guerrero are members of the Agribusiness and Energy Practice Group of Lindquist & Vennum, a leading provider of legal assistance on bioenergy projects throughout the country. They can be reached at (612) 371-3211.