American
Fuel & Petrochemical

Manufacturers

**1667 K Street, NW**

**Suite 700 Washington, DC** 

**20006**

**202.457.0480 office**

**202.552.8457 direct**

**202.457.0486 fax Rmoskowitz@afpm.org**  Richard Moskowitz

**General Counsel**

November 20, 2012

The Honorable Lisa Jackson

Administrator U.S. Environmental Protection Agency 1200 Pennsylvania Avenue Washington, DC

RE: Petition for Reconsideration – Docket No. EPA -HQ-OAR-2010-0133

Dear Administrator Jackson:

Pursuant to Section 307(d)(7)(B) of the Clean Air A ct, the American Fuel & Petrochemical Manufacturers (“AFPM”), 1 petitions the Administrator of the U.S. Environmen tal Protection Agency (“Agency” or “EPA”) to reconsider its final rule entitled Regulation of Fuels and Fuel

Additives: 2013 Biomass-Based Diesel Renewable Fue l Volume

. 2

The objections raised in this Petition for Reconsid eration were either impracticable to raise during the public comment period or arose after the close of the public comment period, and they

are of central relevance to the outcome of the Fina l Rule. The Administrator must therefore “convene a proceeding for reconsideration of the ru le and provide the same procedural rights as

would have been afforded had the information been a vailable at the time the rule was proposed.” 3

AFPM submits this Petition based on new facts that are material to EPA’s application of the statutory criteria the agency must apply in establi shing the applicable volume of biomass-based

diesel to be used under the renewable fuel standard for 2013.

BACKGROUND

The federal Renewable Fuel Standard (“RFS”) require s EPA to promulgate a rule establishing a specific amount of biomass-based diesel for 2013. For 2012 and beyond, Congress provided a floor of 1.0 billion gallons that was intended to p rovide an insurance policy to the existing

1 AFPM is a national trade association of more than 400 companies. Its members include virtually all U .S. refiners and petrochemical manufacturers. AFPM members supp ly consumers with a wide variety of products and se rvices used daily in their homes and businesses. These pr oducts include gasoline, diesel fuel, home heating oil, jet fuel,

lubricants and the chemicals that serve as “buildin g blocks” in making diverse products, such as plast ics, clothing, medicine and computers.

2 77 Federal Register

59458 (September 27, 2012) (hereinafter the “Final Rule”).

3 42 U.S.C. § 7607(d)(7)(B).AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 2

biodiesel industry in the form of a guaranteed mark et for their product. Beyond 2012, EPA was given the discretionary authority to increase the b iomass-based diesel mandate beyond a billion gallons, based on its evaluation of six criteria sp ecifically enumerated in the RFS. As demonstrated below, the facts critical to the analy ses and application of the statutory criteria have materially changed since the close of the comm ent period and warrant a reconsideration of

the Final Rule.

DISCUSSION

A. The Administrator’s Discretion to Increase the Biom ass Based Diesel Requirements Under the RFS is Framed by the Application of Six S pecific Statutory Criteria

In determining the biomass based diesel requirement s for 2013, Congress instructed EPA to establish a minimum requirement of 1.0 billion gall ons. 4 Congress gave the Administrator the discretion to promulgate a rule that goes beyond th e 1.0 billion gallon statutory floor, based on its consideration of the following six factors: (1 ) environmental impact; (2) impact upon energy security; (3) expected rate of commercial productio n of renewable fuels; (4) impact upon fuel delivery infrastructure; (5) cost to consumers; and (6) other factors such as job creation, price and supply of agricultural commodities, rural devel opment, and food prices. 5

The application of these criteria to the Administra tor’s decision requires a fact-based analysis. As demonstrated below, the facts underly ing EPA’s analysis for several of the enumerated statutory factors have changed significa ntly and warrant reconsideration of the Administrator’s decision to promulgate a biomass-ba sed diesel mandate in excess of 1.0 billion gallons.

Before addressing the changed circumstances that wa rrant reconsideration of the Administrator’s decision, it is important to unders tand the rationale underlying the statutory

framework created for biomass-based diesel. At the time that the Energy Independence and Security Act of 2007 (“EISA 2007”)was under debate, the National Biodiesel Board (“NBB”) asked other industries to join them in supporting a specific carve-out for biodiesel that would ensure the viability of its existing brick and mort ar facilities. 6 At least one consumer group who historically opposes government fuel mandates joine d the NBB in supporting a 1.0 billion gallon carve-out that was intended to be an insurance poli cy to protect existing biodiesel facilities. At the time, the NBB represented that going forward bi odiesel would be able to compete with petroleum-based diesel fuel and supported the inclu sion of statutory criteria designed to prevent

an increase in the biodiesel mandate if it would re sult in an increase in diesel fuel costs.

4 See 42 U.S.C. § 7545(o)(2)(B)(iv).

5 See 42 U.S.C. § 7545(o)(2)(B)(ii).

6 There were other elements of this compromise, such as the preemption of state biodiesel mandates, tha t were not included in the final legislation.AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 3

Biomass-based diesel qualifies under the advanced b iofuel category of the RFS and therefore should compete with other advanced biofuels to ensu re the goals of the RFS are met in the most

cost effective manner. The biomass-based diesel ma ndate is a dedicated carve-out from the advanced biofuel category and increasing it creates a disincentive for investments in other advanced renewable fuels that may overcome some of the performance limitations associated with biodiesel. As such, the increase of the bioma ss based diesel mandate should be approached very cautiously as the EPA is essentially selecting winners and losers without a clear understanding of the impacts upon the capital inves tment in future fuels. The 2.75 billion gallon Advanced Biofuel Mandate provides more than enough incentive to grow the biodiesel industry, provided that the biodiesel industry can live up to the promises it made at the time EISA 2007 was enacted. If the industry cannot meet these exp ectations, then other advanced biofuels should

be used to meet consumers’ needs in the most cost e ffective manner possible. The six statutory criteria are designed to force EPA to consider thes e variables.

B. New Information Critical to the Administrator’s Ana lysis Compels Reconsideration of

the Final Rule

The public comment period for the rulemaking that i s the subject of this Petition closed on August 11, 2011. 7 During the time between the conclusion of the pub lic comment period and the promulgation of the Final Rule, several facts chang ed that significantly impact the statutory

criteria enumerated above. We believe that these f acts compel the promulgation of a lower biomass-based diesel volumetric requirement for 201 3.

1. The Drought

The Agency could not have anticipated the drought o ur Nation is experiencing when the comment period closed in August 2011. This drought has led to a dramatic reduction in corn and soybean supplies, which has increased livestock and food production costs. The drought has made it very difficult for these industries to plan and remain profitable and has led to multiple waiver requests of the ethanol requirements under t he RFS. Soybean crops, the primary feedstock for biodiesel production, have been simil arly impacted and the Administrator’s discretionary decision to increase the biomass-base d diesel component of the RFS mandates

warrants reconsideration.

Millions of tons of soybean oil meal are used annua lly by animal producers. The large increase in soybean oil meal price means hundreds o f millions of dollars in increased production

costs for these industries. This financial hardshi p will be exacerbated by the discretionary 28 percent increase in the requirement for biomass-bas ed diesel. This new fact is directly relevant to the statutory criteria Congress created to infor m EPA’s decision of appropriate biomass-based diesel quantities. At several points in the preamb le to the Final Rule, EPA acknowledged that

7 See 76 Federal Register 38844 (July 1, 2011) (hereinafter the “Proposed Rul e”).AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 4

the drought will have an impact upon the supply and price of agricultural commodities; however, EPA stopped short of considering its impact in esta blishing the biomass-based diesel volumetric requirement for 2013:

Cost estimates do not account for projections in re cent trends in crop yields and grain prices resulting from drought conditions that are occurring in many areas of the country. 8

* * * *

It should be noted that the projections in Table II I.B-1 do not account for recent trends in crop yields and grain prices resulting from drought conditions that are occurring in many areas of the country. Given the wide range of feedstocks from w hich biodiesel can be produced, the ultimate impact of these droug ht conditions

on the mix of biodiesel feedstocks in 2013 is diffi cult to predict at

this time. 9

The agency states that it “cannot predict the exact impact that these increases in soybean and soybean oil prices will have on food prices in gene ral;” however, that is exactly what Congress requires of the agency before it decides to increase the mandate for biomass-bas ed diesel. 10

Setting the biomass-based diesel mandate at 1.0 bil lion gallons for 2013, the statutory minimum, allows fair competition between the biofue ls and livestock/food industries for soybean supplies. The Administration should not favor soyb ean biodiesel producers at the expense of the

livestock/food industries and the U.S. consumer. T he price impacts on agricultural commodities and the current drought are sufficient justificatio n for the Administration to reconsider the

renewable fuel volume for biomass-based diesel in 2 013.

The preamble to the final rule also contains a disc ussion of the price of soy oil in 2013 and estimates that its price will be $0.45 per poun d under the mandate instead of $0.42 under the billion gallons. This 7 percent increase is signif icant and as a food source is a factor that Congress mandated EPA to consider in its establishm ent of the 2013 biomass-based diesel mandate. In the category of new information that i s available since the Administrator made her decision, we note that the soy oil futures prices a re significantly higher (10 percent) for 2013

than the Administrator’s 45 cent estimate. 11 This new information concerning soy oil prices is

8 77 Federal Register at 59459, note 3.

9 Id. at 59463/2.

10 Id. at 59465/1.

11 Soy oil futures prices for 2013 currently vary fro m 49 cents to 50.5 cents. See Commodities Futures prices at:

www.cnbc.com , last accessed on November 8, 2012.AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 5

directly relevant to the statutory criteria EPA app lies in determining the appropriate amount of

biomass-based diesel for 2013. 12

2. RIN Fraud

EPA is now well aware of the fact that biodiesel pr oducers have inflated the amount of biodiesel actually produced under the RFS mandate. A significant portion of this fraud stems from biodiesel producers generating Renewable Ident ification Numbers (“RINs”) that do not correspond to the gallons of biodiesel they have pr oduced. Another potential source of significant fraud is the failure to retire RINs tha t correspond to the number of gallons of biomassbased diesel that are exported.

To date, EPA has initiated enforcement actions base d on 140 million fraudulent RINs. These RINs represent between 6 and 12 percent of th e entire biodiesel market and raise a serious question as to the true amount of biodiesel that ha s been produced. Moreover, we are aware of several ongoing investigations into additional biod iesel producer fraud that would have a material impact on EPA’s estimate of the amount of gallons actually produced. While the existence of RIN fraud was unknown during the publi c comment period, EPA now recognizes that it is a materially significant problem and is considering regulatory changes to address the predicament. 13 The large number of invalid RINs represents a ser ious disparity in the estimates of expected commercial rate of biodiesel production and also impacts EPA’s conclusion that an increase to 1.28 billion gallons represents only a “moderate” increase in the biomass-based diesel

mandate.

3. Diesel Fuel Exports - Impact on Domestic Energy Sec urity

The Administrator mistakenly concludes that the 201 3 increase in biomass-based diesel beyond the billion gallon statutory floor will impr ove U.S. energy security.

This final standard will assure an increased use of biomass-based diesel in the U.S. and help to improve U.S. energy security. Reducing U.S. petroleum imports and increasing the diversity of U.S. liquid fuel supplies lowers both the financial and strategic

12 On November 16, 2012, EPA denied multiple petition s to waive the RFS requirements for ethanol based u pon the impact of the drought. We note that the legal stan dard for reviewing RFS waiver petitions differs fro m the statutory criteria EPA must consider in establishing the BBD volumetric requirements for 2013. The standard for waiving the RFS is one of severe economic harm, while the crite ria for establishing the BBD volumes include inter alia an analysis of the supply of agricultural commodities.

13 U.S. Environmental Protection Agency, Public Release of Draft Quality Assurance Plan Requ irements , EPA-420- B-12-063 (October 31, 2012). http://www.epa.gov/otaq/fuels/renewablefuels/docume nts/420b12063.pdf

.AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 6

risks caused by potential sudden disruptions in the supply of

imported petroleum to the U.S.

This quote represents a fundamental misunderstandin g of the difference between petroleum crude oil and finished transportation fuels. The i ncrease in biomass-based diesel use in the U.S. from 1.0 billion gallons to 1.28 billion gallons wi ll not displace a single barrel of imported crude oil. This is primarily because biomass-based diese l is a substitute for finished diesel fuel and has no impact upon the U.S. demand for gasoline.

Each barrel of oil refined yields approximately 19 gallons of gasoline and 11 gallons of diesel fuel, as well as 12 gallons of other petrole um-derived products. 14 While these proportions can be adjusted on the margins, in manufacturing ga soline the United States generates more diesel fuel than it can consume domestically. 15 As such, the U.S. has become a net exporter of diesel fuel. For this reason, any requirement to b lend biomass-based diesel will not reduce the amount of crude oil imported into the U.S., it simp ly will cause an increase in the amount of exported diesel fuel it displaces. Thus, the Final Rule’s increase in biomass-based diesel of 280 million gallons will result in a corresponding incr ease in the export of petroleum-derived diesel fuel of 280 million gallons. It will have no impac t upon the amount of crude oil imported and therefore will have no impact on domestic energy se curity. These facts have a direct impact on the Administrator’s analysis of the statutory crite rion of energy security and warrants

reconsideration of the decision to extend the bioma ss-based diesel mandate beyond the 1.0 billion gallon statutory threshold.

The preamble to the Final Rule suggests that the Ad ministrator extrapolated perceived energy security benefits from the RFS generally and applied that analysis to this rulemaking.

Thus, on balance, each gallon of fuel saved as a co nsequence of the renewable fuel standards is anticipated to reduce t otal U.S. imports of petroleum by 0.95 gallons. 16

As demonstrated above and based on the fact that we export diesel fuel, this extrapolation produces an erroneous conclusion with respect to th e impact on energy security from increasing

the biomass-based diesel mandate in 2013. 17

14 See Energy Information Administration, Products Made for a Barrel of Crude Oil

, http://www.eia.gov/energyexplained/index.cfm?page=o il_home

.

15 According to the Energy Information Administration , from January 2012 to August 2012, the U.S. export ed more

than 213 million barrels of distillate fuel. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n =PET&s=MDIEXUS1&f=M

16 77 Federal Register at 59470/2.

17 The Final Rule includes an energy security benefit of $0.15 per gallon derived from the macroeconomic disruption and adjustment costs component of the en ergy security premium. See 77 Federal Register at 59471/3. For the reasons stated herein, this benefit is illu sory.AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 7

The Agency acknowledges that “the U.S. is projecte d to be a net exporter of diesel fuel in 2013.” Notwithstanding this realization, the Agenc y has ignored Congress’ instruction to analyze the energy security impact of this specific Final Rule.

Our energy security analysis does not evaluate the energy security benefits of individual finished petroleum products; rather, our analysis takes into account the energy security ben efits of overall net petroleum product imports.

Congress did not give the Administrator the authori ty to ignore one of the six statutory criteria in

her determination of whether to increase the biomas s-based diesel mandate beyond the 1.0 billion gallon statutory threshold.

Although we believe that the Agency acted arbitrari ly in extrapolating its overall RFS energy security analysis to the Final Rule affectin g only the biomass-based diesel mandate, we note a significant change in facts underlying the A gency’s original analysis of U.S. energy security. Following the close of the comment period the National Petroleum Council released an 18-month study of North American natural gas and oi l resources. 18 This study demonstrates that the United States has much greater access to North American sources of energy than previously thought and warrants reconsideration of the Adminis trator’s conclusions on the impact this rule and the RFS will have on U.S. energy security.

4. Job Creation

EPA’s conclusions on the employment benefits associ ated with an increase in biomassbased diesel from 1.0 billion gallons to 1.28 billi on gallons are overstated given the recent

closures of certain biodiesel facilities and the un derutilization of facilities that have maintained operations. Here again EPA is using biased informa tion provided by the NBB rather than conducting its own analysis. EPA is aware that man y of the biodiesel producers are operating at a reduced rate, some have been idled, and others ha ve permanently closed. Reliance on a prior study as to the overall benefits to rural employmen t under the RFS ignores some of the current facts concerning biodiesel plant utilization that w ould have a material impact on EPA’s conclusions with respect to job creation. EPA shou ld have reviewed the 200 biodiesel producers provided on the NBB list and determined the status and current utilization rates of these facilities as part of its obligation to analyze the statutory criteria. It is far more economical to expand production at an existing plant that is underutiliz ed than it is to bring idle biodiesel plants back on line. Unfortunately, the number of jobs that wi ll be created by increasing the throughput at an

18 National Petroleum Council, Prudent Development: Realizing the Potential of Nor th America’s Abundant Natural

Gas and Oil Resources , (September 2011).AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 8

already operational plant is nowhere near the NBB e stimate of 30 to 40 people. 19 Other estimates of employment provided by NBB are similar ly overstated and EPA should independently investigate these facts. For example , some plants are fed by pipeline while most others are located very close to their feedstock so urce, rendering NBB’s estimate of additional transportation workers unrealistic, since it assume s that each driver can make only one delivery per day. 20

We also note, that it is improper to consider only the positive employment benefits

associated with an increase in the biomass-based di esel mandate and simultaneously acknowledge that the corresponding loss in employme nt in other economic sectors is not quantifiable and therefore may be ignored.

5. Costs and the Impact on the Consumer

EPA’s legal requirement to blend biomass-based dies el will result in increased production and/or imports of this fuel, as obligate d parties must comply with the mandate. The question remains, however, at what cost can this fu el be produced under the mandate.

EPA acknowledged the need to restrain the growth of the biomass-based diesel mandate.

In the NPRM we indicated that, based on the limited information available on the current and historical operation o f the RFS program, it would be prudent for 2013 to consider o nly moderate

increases in biomass-based diesel above the statutory minimu m of 1.0 billion gallons.

Notwithstanding this pronouncement, EPA went on to promulgate a 28% increase in the volumetric mandate. This percentage increase durin g a time of slow economic growth is very aggressive and difficult to justify under the banner of moderate growth. 21

EPA estimates that the cost of increasing the bioma ss-based diesel mandate from 1.0
billion to 1.28 billion will add between $253 milli on and $381 million to consumers transportation fuel bill in 2013. We note that thi s addition to the Nation’s transportation fuel bill

comes at a time when economic conditions in the cou ntry are poor and millions who depend upon transportation fuels remain out of work or und eremployed.

At the close of the comment period, EPA had no way to predict the state of the economy in 2013 or whether the $1 per gallon blending credi t would be extended by Congress; however,

19 On a somewhat related issue, our discussions with a well-known biodiesel plant auditor indicate that the average employment is closer to 25 individuals per plant.

20 See 77 Federal Register at 59477/1.

21 77 Federal Register

at 59461/1 (emphasis added).AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 9

at the time the Final Rule was issued, EPA should h ave done everything in its power to lower the costs of transportation fuels for consumers and und er no circumstances should have exercised its discretion to mandate the use of biodiesel, a fuel that is significantly more expensive than ULSD. Indeed, Congress requires EPA to consider the cost to consumers as one of the statutory criteria

that frames its annual decision to set the biomass- based diesel volumetric requirement.

6. Potential Carbon Reductions

Under the statutory criteria, EPA must consider the environmental impact of its decision to expand the biomass-based diesel mandate by 280 m illion gallons. We note that because biomass-based diesel operates as a requirement nest ed within the advanced biofuels mandate, the likely impact of this decision is to ensure the use of additional biomass-based diesel at the expense of ethanol derived from sugar cane. Focusi ng on the carbon emissions associated with these two fuels, soy-based biodiesel has an average carbon intensity that is ten percent greater than ethanol derived from sugarcane, resulting in t he likely increase in carbon emissions from EPA’s decision to increase biomass-based diesel by 280 million gallons. 22

C. The Statutory Factors Must be Applied Annually

EPA has chosen to downplay the statutory requiremen t to apply these factors annually for each year that it promulgates a biomass-based diese l quantity following 2012 and instead has relied upon the long-term RFS economic analysis, wh ich is contrary to Congress’ intent in specifying the six factors to be examined each year

.

The statute is forward-looking in that it created a program whose energy and environmental benefits are intended to grow over ti me. To evaluate the program on the basis of only one early year’s impacts, as p art of near-term implementation, would be to paint an unbalanced and incomplete pict ure. 23

In substituting the long-term costs and benefits in place of the specific statutory criteria that are to be applied to biomass-based diesel volumes each year following 2012, EPA has ignored the consumer safeguards that Congress wrote into the st atute for each year in which EPA is required to establish a biomass-based diesel volumetric requ irement. To safeguard consumers and other interested parties, Congress intended EPA to adjust the volumetric requirement annually based on factors that change each year. Relying on a lon g-term analysis that ignores the specific variables that change on a more frequent basis is a significant departure from Congressional

intent.

22 See 75 Federal Register 14669, 14790-91 (March 26, 2010).

23 77 Federal Register at 59482/3.AFPM Petition for Reconsideration

Docket No. EPA-HQ-OAR-2010-0133 November 20, 2012 Page 10

Congress intended to provide an insurance policy to the biodiesel producing industry by creating a floor of 1.0 billion gallons of biomass- based diesel that must be blended each year. 24
Any decision to exceed that floor is a discretionar y decision that must be is based upon the annual application of the enumerated statutory fact ors as directed by Congress.

CONCLUSION

At the close of the comment period, EPA could not f oresee whether Congress would eliminate the $1 per gallon biodiesel blending cred it, the impact of the drought on feedstock supplies and prices, the extent of RIN fraud in the biodiesel industry, and the growth of diesel exports ameliorating the energy security benefits f rom biodiesel, all of which have a material impact upon EPA’s analyses of the statutory criteri a underlying the establishment of the annual biomass-based diesel requirement. Based upon these changed facts and new information, the Administrator must reconsider her decision to requi re a 28 percent increase in biomass-based diesel above the statutory minimum established by C ongress.

Respectfully submitted,

Richard Moskowitz

General Counsel

cc: Gina McCarthy

Chris Grundler Byron Bunker

Paul Machiele

24 See 42 U.S.C. § 7545(o)(2)(B)(ii)(v).