Three recent developments will shape the future of U.S. EPA’s Renewable Fuel Standard. In late July, the U.S. Court of Appeals for the D.C. Circuit in Americans for Clean Energy v. EPA invalidated EPA’s use of its “inadequate domestic supply” waiver authority for the 2014-’16 volume requirements. Weeks before, EPA announced in its proposed standards for 2018 and 2019 that it is beginning work on a new rulemaking to “reset” required RFS volumes for years to come. And on Sept. 26, EPA issued a Notice of Data Availability seeking comment on potential bases for further reducing the proposed 2018 advanced biofuel and total renewable fuel volumes, and/or the 2019 biomass-based diesel (BBD) volume.

EPA’s 2014-’16 rule was promulgated in December 2015, though the statute requires volumes to be set by November of the year before the compliance year (or two years before, for BBD). EPA retroactively set total renewable fuel, advanced biofuel and cellulosic requirements for 2014-’15 at the levels of actual production—while requiring modest prospective increases for 2016 (and 2017 for BBD). The D.C. Circuit rejected biofuel producers’ challenge to the rule, concluding that EPA “may promulgate late renewable fuel requirements—and even apply those standards retroactively—so long as EPA reasonably considers and mitigates any hardship caused to obligated parties by reason of the lateness.”

But the core issue in the case was EPA’s interpretation of its “general waiver” authority to reduce volumes based on “inadequate domestic supply” of renewable fuel. EPA focused on addressing the E10 “blendwall”—shorthand for limitations on the rate at which ethanol use can be increased once the fuel supply is saturated with E10. EPA first used its cellulosic waiver authority, which authorizes EPA—once it reduces cellulosic volumes based on projected production—to reduce total and advanced biofuel volumes by up to the same amount. EPA then used its general waiver authority to further reduce total renewable fuel, reading “inadequate domestic supply” to include situations like the blendwall.

The D.C. Circuit upheld EPA’s use of its cellulosic waiver authority, but not the general waiver. The court held that “the ‘inadequate domestic supply’ provision authorizes EPA to consider supply-side factors affecting the volume of renewable fuel that is available to refiners, blenders, and importers,” but does “not allow EPA to consider the volume of renewable fuel that is available to ultimate consumers or the related demand-side constraints that affect the consumption of renewable fuel by consumers.”

Notably, it struck down only the 2016 standard, not the 2014-’15 standards, though all three were based in part on “inadequate domestic supply.” This seems to reflect the court’s view that EPA has authority to reduce requirements for past years without reliance on a specific waiver authority.

On July 5, EPA proposed requirements for 2018, and BBD standards for 2019, seeking to maintain volumes at levels comparable to the 2017 standards. As in the 2017 rule, EPA relied exclusively on its cellulosic waiver authority to reduce total and advanced requirements. Thus, neither the 2017 rule nor the 2018 proposal are affected by the court’s narrowing of EPA’s “inadequate domestic supply” waiver authority. This approach seems likely to continue. The difference between cellulosic production (which is increasing slowly) and the statutory levels (which rise more quickly) continues to grow, allowing EPA to rely on the cellulosic waiver alone for greater reductions in volumes.  

EPA’s September NODA, meanwhile, requests comment on reductions to the proposed 2018 advanced and total renewable fuels requirements and 2019 BBD requirement. It points to possible price impacts of the expiration of the biodiesel tax credit and pending countervailing duties on imported biodiesel from Argentina and Indonesia. And it seeks comment on several possible authorities to reduce volumes, including the “inadequate domestic supply” provision (read to allow reductions based solely on supply from U.S. producers, not imports), authority to address “severe economic harm,” authority to waive BBD volumes for up to 60 days based on market disruptions (which EPA would apply by reducing annual BBD volumes by the proportion of a year represented by 60 days, or 15 percent), and finally, the statutory factors EPA applies in setting annual BBD volumes.

Potentially overshadowing all these developments, EPA has announced its intention to undertake a rulemaking to “reset” annual RFS requirements for future years. EPA’s 2018-’19 proposal highlights its statutory obligation to “reset” volume standards if annual requirements are waived by 20 percent or more for two consecutive years. This requirement has been triggered for cellulosic and advanced biofuels, and the 2018 rule, if finalized as proposed, would trigger it for total renewable fuel. The 2018-’19 proposal states that EPA’s administrator has directed staff to conduct a technical analysis for such a reset. The outcome of that rulemaking, and the litigation that inevitably would follow, will have substantial consequences for the future of the RFS.
 
Authors: Joel Beauvais, Partner
Joshua Bledsoe, Counsel
Steven Croley, Partner
Environment, Land & Resources Department
Latham & Watkins LLP
joel.beauvais@lw.com
joshua.bledsoe@lw.com
steven.croley@lw.com