*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 1 of 126 ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2010-0133; FRL-XXXX-X]

RIN 2060-AQ76

Regulation of Fuels and Fuel Addi tives: 2012 Renewable Fuel Standards

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

SUMMARY: Under the Clean Air Act Section 211(o), the Environmental Protection Agency is required to set the renewable fuel standards each November for the following year. In general the standards are designed to ensure that the a pplicable volumes of renewable fuel specified in the statute are used. However, the statue specifies that EPA is to project the volume of cellulosic biofuel production for the upcoming year and must base the cellulo sic biofuel standard on that projected volume if it is less than the applicable volume set forth in the Act. EPA is today finalizing a projected cellulosic biofuel volum e for 2012 and annual percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and renewable fuels that will apply to all gasoline and diesel produced or imported in ye ar 2012. In addition, today's action finalizes an applicable volume of biomass-base d diesel that will apply in 2013. This action also presents a number of changes to the RFS2 regulations that ar e designed to clarify existing provisions and to address several unique circumstan ces that have come to light since the RFS2 program became effective on July 1, 2010. Finally, today's rule also makes a minor amendment to the gasoline benzene regulations regarding inclusion of transf erred blendstocks in a refinery's early benzene credit generation calculations.

DATES: This final rule is effective on [ insert date of publication in the Federal Register ].

ADDRESSES: EPA has established a docket for th is action under Docket ID No. EPA-HQOAR-2010-0133. All documents in the docket are listed in the www.regulations.gov index. Although listed in the index, some information is not publicly available, e.g., CBI or other

information whose disclosure is re stricted by statute. Certain other material, such as copyrighted material, will be publicly available only in hard copy. Public ly available docket materials are available either electronically in www.regulations .gov or in hard copy at the Air and Radiation

Docket and Information Cent er, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW, Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566-1744, and the telephone number for the Air Docket is (202) 566-1742.

FOR FURTHER INFORMATION CONTACT: Julia MacAllister, Office of Transportation and Air Quality, Assessment and Standards Division, Envi ronmental Protection Agency, 2000 Traverwood Drive, Ann Arbor MI 48105; Telephone number : 734-214-4131; Fax number: 734-*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 2 of 126 214-4816; E-mail address: macallis ter.julia@epa.gov, or Assessm ent and Standards Division Hotline; telephone number ( 734) 214-4636; E-mail addre ss OTAQPUBLICWEB@epa.gov.

SUPPLEMENTARY INFORMATION:

I. General Information

A. Does this Action Apply to Me?

Entities potentially affected by this proposed rule are those involved with the production, distribution, and sale of transpor tation fuels, including gasoline and diesel fuel or renewable fuels such as ethanol and biodiesel. Potentially regulated categories include:

Category NAICS 1

Codes SIC 2

Codes Examples of Potentially Regulated Entities

Industry Industry Industry Industry Industry Industry

Industry 324110

325193

325199

424690

424710

424720

454319 2911

2869

2869

5169

5171

5172

5989 Petroleum Refineries Ethyl alcohol manufacturing Other basic organic chemical manufacturing Chemical and allied products merchant wholesalers

Petroleum bulk stati ons and terminals Petroleum and petroleu m products merchant

wholesalers

Other fuel dealers

1 North American Industry Cl assification System (NAICS)

2 Standard Industrial Classi fication (SIC) system code.

This table is not intended to be exhaustiv e, but rather provides a guide for readers regarding entities likely to be regulated by this fi nal action. This table lists the types of entities that EPA is now aware could potentially be regula ted by this final action. Other types of entities not listed in the table could also be regulated. To determine whether your activities will be regulated by this final action, you should carefu lly examine the applicability criteria in 40 CFR part 80. If you have any questions regarding the applicability of this final action to a particular entity, consult the person listed in the preceding section.

Outline of this preamble

I. EXECUTIVE SUMMARY ............................................................................................................. .... 6

A. Standards for 2012 ............................................................................................................ ........................... 7

1. Assessment of 2012 Cellulosic Biofuel Volume ............................................................................................... 7

2. Advanced Biofuel and Total Renewable Fuel in 2012 ..................................................................................... 8

3. Percentage Standards for 2012 ....................................................................................................................... 9

B. 2013 Biomass-Based Diesel Volume ...........................................................................................................10

C. Regulatory Changes

.............................................................................................................................. .....10*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 3 of 126 D. 2012 Price for Cellulosic Biofuel Waiver Credits ......................................................................................10

E. Assessment of the Aggregat e Compliance Approach ............................................................................... ....11

II. PROJECTION OF CELLULOSIC VOLUME PRODUCTION AND IMPORTS FOR 2012 .12

A. Statutory Requirements .............................................................................................................................1 3

B. Cellulosic Biofuel Volume Assessment .......................................................................................... ..............14

1. Existing Cellulosic Biofuel Facilities ............................................................................................................... 14

2. Potential New Facilities in 2012 .................................................................................................................... 16

3. Imports of Cellulosic Biofuel ......................................................................................................................... 19

4. Projections from the Energy Information Administration ............................................................................. 20

5. Comments on the Proposed Rule ................................................................................................................. 24

6. Summary of Volume Projections ................................................................................................................... 25

C. Advanced Biofuel and Total Renewable Fuel in 2012 ............................................................................. .....28

D. Biomass-Based Diesel in 2012 .................................................................................................. ...................32

III. FINAL PERCENTAGE STANDARDS FOR 2012 ...............................................................40

A. Background .................................................................................................................... .............................40

B. Calculation of Standards ...................................................................................................... .......................41

1. How Are the Standards Calculated? .............................................................................................................. 41

2. Small Refineries and Small Refiners ............................................................................................................ 42

3. Final Percentage Standards ........................................................................................................................... 44

IV. BIOMASS-BASED DIESEL VOLUME FOR 2013 .........................................................46

A. STATUTORY REQUIREMENTS .................................................................................................46

B. Factors Considered in Assessing 2013 Biomass-Based Diesel Volumes ....................................................48

1. Demand for Biomass-Based Diesel ............................................................................................................... 49

2. Availability of Feedstocks to Produce 1.28 Billion Gallons of Biodiesel ..................................................... 53

a. Grease and Rendered Fats ........................................................................................................................ 53

b. Corn Oil

.............................................................................................................................. ...................... 54

c. Soybean Oil

.............................................................................................................................. ................ 55

d. Other Vegetable Oils

.............................................................................................................................. .. 58

3. Production Capacity

.............................................................................................................................. ........ 58

4. Consumption Capacity

.............................................................................................................................. .... 59

5. Biomass-Based Diesel Distribution Infrastructure ........................................................................................ 61

C. Impacts of 1.28 billion gallons of Biomass-Based Diesel ...........................................................................65

1. Climate Change

.............................................................................................................................. ............... 67

2. Energy Security

.............................................................................................................................. ............... 68

3. Agricultural Commodities and Food Prices .................................................................................................. 68

4. Air Quality

.............................................................................................................................. ...................... 70

5. Transportation Fuel Cost

.............................................................................................................................. . 72*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 4 of 126 6. Deliverability and Transport Costs of Materials, Goods, and Products Other Than Renewable Fuel .......... 74

7. Wetlands, Ecosystems, and Wildlife Habitats ............................................................................................... 75

8. Water Quality and Quantity .......................................................................................................................... 76

a. Impacts on Water Quality and Water Quantity Associated with Soybean Production ............................. 77

b. Impacts on Water Quality and Water Quantity Associated with Biodiesel Production ........................... 79

9. Job Creation and Rural Economic Development .......................................................................................... 80

D. Final 2013 Volume for Biomass-Based Diesel ...........................................................................................81

E. 2014 and Beyond

.............................................................................................................................. ..........82

V. CHANGES TO RFS2 REGULATIONS ........................................................................................82

A. Summary of Amendments .........................................................................................................................82

B. Technical Justification for Equivalence Value Application ......................................................................84

C. Changes to Definitions of Terms ................................................................................................................85

1. Definition of Annual Cover Crop .................................................................................................................. 85

2. Definition of "Naphtha"

.............................................................................................................................. .. 86

D. Technical Amendments Related to RIN Generation and Separation .......................................................86

1. RIN Separation Limit for Obligated Parties .................................................................................................. 86

2. RIN Retirement Provision for Error Correction ............................................................................................ 89

3. Production Outlook Reports Submission Deadline ....................................................................................... 92

4. Attest Procedures

.............................................................................................................................. ............ 93

5. Treatment of Canola and Rapeseed ............................................................................................................... 94

E. Technical Amendments Related to Registration & Recordkeeping ..........................................................94

1. Construction Discontinuance & Completion Documentation ....................................................................... 94

2. Third-Party Engineering Reviews ................................................................................................................. 95

3. Foreign Ethanol Producers ............................................................................................................................ 9 7

F. Additional Amendments and Clarifications ..............................................................................................97

1. Third-Party Engineering Review Addendum ................................................................................................ 97

2. RIN Generation for Fuel Imported from a Registered Foreign Producer ...................................................... 98

3. Bond Posting

.............................................................................................................................. ................... 98

5. Acceptance of Separated Yard Waste and Food Waste Separation Plans ..................................................... 99

6. Transferred Blendstocks in Early Benzene Credit Generation Calculations ............................................... 100

VI. ANNUAL ADMINISTRATIVE ANNOUNCEMENTS ............................................... 102

A. 2011 Price for Cellulosic Bi ofuel Waiver Cred its .............................................................................. .......... 102

B. Assessment of the Domestic Aggr egate Compliance Approach ................................................................. 103

VII. COMMENTS OUTSIDE THE SCOPE OF THIS RULEMAKING ........................ 105

VIII. PUBLIC PARTICIPATION ................................................................................................... 108*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 5 of 126 IX. STATUTORY AND EXECUTIV E ORDER REVIEWS ....................................................... 109

A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation
and Regulatory Review ......................................................................................................... ............................. 109

B. Paperwork Reduction Act ....................................................................................................... ................... 109

C. Regulatory Flexibility Act .................................................................................................... ...................... 110

D. Unfunded Mandates Reform Act .................................................................................................. ............. 111

E. Executive Order 13132: Federalism ............................................................................................. .............. 111

F. Executive Order 13175: Consultation and Coordina tion with Indian Tr ibal Governments ......................... 112

G. Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks ........... 112

H. Executive Order 13211: Actions Concerning Regulati ons That Significantly Affect Energy Supply,
Distribution, or Use .......................................................................................................... .................................. 112

I. National Technology Tran sfer Advanc ement Act .................................................................................. ..... 112

J. Executive Order 12898: Federal Actions to Address En vironmental Justice in Minority Populations and
Low-Income Populations ........................................................................................................ ............................ 113

K. Congressional Review Act ...................................................................................................... ................... 113

X. STATUTORY AUTHORITY ...................................................................................................... 114*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 6 of 126 I. Executive Summary

The Renewable Fuel Standard (RFS) progra m began in 2006 pursuant to the requirements in Clean Air Act (CAA) section 211(o) which we re added through the Energy Policy Act of 2005 (EPAct). The statutory requirements for the RF S program were subsequently modified through the Energy Independence and Security Act of 2007 (EISA), resulting in the promulgation of revised regulatory requirements on March 26, 2010 1 . The transition from the RFS1 requirements of EPAct to the RFS2 requirements of EISA generally occurred on July 1, 2010.

Under RFS2, EPA is required to determine a nd publish the applicable annual percentage standards for each compliance year by November 30 of the previous year. As part of this effort, EPA must determine the project ed volume of cellulosic biofue l production for the following year. If the projected volume of cellulosic biof uel production is less than the applicable volume specified in section 211(o)(2)(B)(i)(III) of the statute, EPA must lowe r the applicable volume

used to set the annual cellulos ic biofuel percentage standard to the projected volume of production. When we lower the applicable volume of cellulosic biofuel in this manner, we are also authorized to lower the applicable volumes of advanced biofuel and/ or total renewable fuel by the same or a lesser amount. Since these eval uations are based on evolving information about emerging segments of the biofuels industry, a nd may result in the applicable volumes differing from those in the statute, we believe that it is appropriate to establish the applicable volumes through a notice-and-comment rule making process. Today's notic e provides our final evaluation of the projected production of ce llulosic biofuel for 2012, our evaluation of whether to lower the applicable volumes of advanced biofuel and to tal renewable fuel, and the final percentage standards for compliance year 2012. We are fina lizing a cellulosic biofuel requirement of 10.45 mill ethanol-equivalent gallons fo r 2012, and are not reducing the advanced biofuel or total renewable fuel requirements below th e levels specified in the statute. The evaluations that led to these 2012 volume requirements were based on a consideration of comments received in response to our notice of proposed rulemaking published on July 1, 2011 2 , the estimate of projected biofuel volumes that the EIA is requi red to provide to EPA by October 31, and other

information that became available.

The statute also requires EPA to determin e and promulgate the applicable volume of

biomass-based diesel that will be required in 2013 and beyond, as the statute does not specify the applicable volumes for years after 2012. This de termination must be made at least 14 months prior to the year in which the volume will be required. The statute identifies a number of factors

that EPA must take into consideration in esta blishing the applicable volume of biomass-based diesel for years after 2012. Today's notice includ es our final assessment of these factors and the

volume of biomass-based dies el that will apply for 2013.

Today's final rule does not include an a ssessment of the environmental impacts of the percentage standards we are setting for 2012. A ll of the impacts of the RFS2 program were

addressed in the RFS2 final rule published on March 26, 2010, including impacts of the biofuel standards specified in the statute. Today's ru lemaking simply sets the standards for 2012 whose impacts were already analyzed previously. Howeve r, as described more fully in Section IV.A,

1 75 FR 14670

2 76 FR 38844*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 7 of 126 we are required to analyze a specified set of environmental and economic impacts for the biomass-based diesel volume we are setting for 2013.

Today's notice also finalizes a number of changes to the RFS2 regulations. These changes are designed to reduce confusion among regulated parties and streamline implementation by clarifying certain terms and ph rases and addressing uni que circumstances that came to light after the RFS2 program went into effect on July 1, 2010. Additionally, this notice also makes a minor amendment to the gasoline benzene regulations regarding inclusion of transferred blendstocks in a refinery’s early benzene credit generation calculations. Further

discussion of all of these chan ges can be found in Section V.

Finally, in today's rulemaking we are a nnouncing the price for cellulosic biofuel waiver credits that will be available for compliance w ith the 2012 cellulosic biof uel requirement, and are also announcing the results of our annual assessm ent of the aggregate compliance approach for U.S. crops and crop residue. These a nnouncements are provided in Section VI.

A. Standards for 2012

1. Assessment of 2012 Cellulosic Biofuel Volume

To estimate the volume of cellulosic biofuel that can be made available in the U.S. in 2012, we researched all potentia l production sources by company and facility. This included sources that were still in the planning stages, those that were under construction, and those that are already producing some volume of cellulosic etha nol, cellulosic diesel, or some other type of cellulosic biofuel. Facilities primarily focused on research and development work with no intention of marketing any fuel produced were not considered for this assessment. From this universe of potential cellulosic biofuel sources we identified the subset that had a possibility of producing some volume of qualifying cellulosic biof uel for use as transportation fuel in 2012.

In today's final rule we specify the proj ected available volume for 2012 that forms the basis for the percentage standard for cellulosic biof uel. To arrive at this final volume, we took

into consideration additional factor s such as the current and expect ed state of funding, the status of the technology, progress towa rds construction and production go als, and other significant factors that could potentially impact fuel pr oduction or the ability of the produced fuel to generate cellulosic RINs. We also considered projections of cellulosic biofuel provided by the Energy Information Administration (EIA). Furt her discussion of these factors can be found in

Section II.B.

In our assessment we focused on domestic sour ces of cellulosic biofuel. While imports of cellulosic biofuels are possible and would be el igible to generate RINs, we believe this is unlikely due to local demand for cellulosic biofuels in the countries in which they are produced as well as the cost associated with transporting these fuels to the U.S. Of the domestic sources,

we estimated that six facilities can make volumes of cellulosic biofuel available for transportation use in the U.S. in 2012. These fac ilities are listed in Table I.A.1-1 along with our estimate of the projected 2012 volume for each.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 8 of 126 Table I.A.1-1 Projected Available Cellulosic Biofuel Plant Volumes for 2012

Company Location Fuel type Projected available volume (million ethanol-equivalent gallons)

American Process Inc. Alpena, MI Ethanol 0.5 Fiberight Blairstown, IA Ethanol 2.0 INEOS Bio Vero Beach, FL Ethanol 3.0 KiOR Columbus, MS Gasoline, Diesel 4.8 KL Energy Corp. Upton, WY Ethanol 0.1 ZeaChem Boardman, OR Ethanol 0.05

Total 10.45

Each of the facilities listed in the Table I.A.1-1 are at different points in their progress towards the production of commercial volumes of cellulosic biofuel. KL Energy Corp. is the only facility in the United States currently generating cellulosic biofuel RINs. American Process Inc., Fiberight, and ZeaChem all anticipate co mpleting construction on their production facilities in late 2011 or early 2012 and plan to begin producing biofuel soon after their facilities are complete. INEOS Bio and KiOR are targeting April 2012 and mid 2012 for the start-up of their respective cellulosic biofuel produc tion facilities. The variation in these expected start-up times, along with the facility production capacities, comp any production plans, and a variety of other

factors have all been taken into account in projecting the availa ble volume of cellulosic biofuel

from each these facilities.

2. Advanced Biofuel and To tal Renewable Fuel in 2012

The statute indicates that we may reduce th e applicable volume of advanced biofuel and

total renewable fuel if we de termine that the projected volum e of cellulosic biofuel production for 2012 falls short of the statutory volume of 500 million gallons. As shown in Table I.A.1-1, we have determined that this is the case. Therefore, we also must evaluate the need to lower the applicable volumes for advanced bi ofuel and total renewable fuel.

To address the need to lower the advanced biofuel standard, we fi rst consider whether it appears likely that the biomass-based diesel volum e of 1.0 billion gallons sp ecified in the statute

can be met in 2012. As discussed in Section II.E , we believe that the 1.0 billion gallon standard

can indeed be met. Since biodiesel has an E quivalence Value of 1.5, 1.0 billion physical gallons of biodiesel would provide 1.5 billion ethanol-equiv alent gallons that can be counted towards the

advanced biofuel standard of 2.0 billion gallons. Of the remaining 0.5 bill gallons, 10.45 mill gallons will be met with cellulosic biofuel. Based on our analysis as described in Section II.C,

we believe that there will be sufficient volumes of other advanced biofuels, such as imported sugarcane ethanol, additional biodies el, or renewable diesel, such th at the standard for advanced biofuel can remain at the statutory level of 2.0 billion gallons.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 9 of 126 3. Percentage Standards for 2012

The renewable fuel standards are expressed as a volume percentage, and are used by each refiner, blender or importer to determine their renewable fuel volume obligations. The applicable percentages are set so that if each regulated party meets the percentages, and if EIA projections of gasoline and diesel use are accurate, then the amount of renewable fuel, cellulosic biofuel, biomass-based diesel, and advanced biofuel used will meet the volumes required on a

nationwide basis.

To calculate the percentage standard for cellulosic biofuel for 2012, we have used the projected annual volume of 10.45 million ethanol -equivalent gallons (representing 8.65 million physical gallons). The applicable volumes for biomass-based diesel , advanced biofuel, and total renewable fuel for 2012 will be those specified in the statute. These volum es are shown in Table

I.A.3-1.

Table I.A.3-1

Final Volumes for 2012

Actual Volume Ethanol Equivalent

Volume a Cellulosic biofuel 8.65 mill gal 10.45 mill gal Biomass-based diesel 1.0 bill gal 1.5 bill gal Advanced biofuel 2.0 bill gal 2.0 bill gal Renewable fuel 15.2 bill gal 15.2 bill gal

a Biodiesel and cellulosic diesel have equivalence values of 1.5 and 1.7 ethanol equivalent gallons respectively. As a result, ethanol-equivalent volumes are larger

than actual volumes for cellulosic biofuel and biomass-based diesel.

Four separate standards are required under th e RFS2 program, corresponding to the four separate volume requirements shown in Table I.A.3-1. The specific formulas we use to calculate the renewable fuel percentage standards ar e contained in the regulations at §80.1405 and repeated in Section III.B.1. The percentage st andards represent the ratio of renewable fuel volume to projected non-renewable gasoline and diesel volume. The projected volume of transportation gasoline and diesel used to calcu late the standards in today's final rule was provided by EIA 3

.

In March 2011, DOE evaluated the impacts of the RFS program on small entities and

concluded that some small refi neries would suffer a dispropor tionate economic hardship if required to participate in the program 4 . As a result, we are required to exempt these few refineries from being obligated parties for a minimu m of two years, and must also exempt their gasoline and diesel volumes from the calculation of the annual percentage standards. The final

standards for 2012 are shown in Table I.A.3-2 an d include the adjustment for exempt small

3 [XXX insert reference to final EIA letter when we get it XXX ].

4 "Small Refinery Exemption Study: An Investigation into Disproportionate Economic Hardship," U.S. Department of Energy, March 2011.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 10 of 126 refineries (which constitute a bout 2.4% of the gasoline pool and 2.9% of the diesel pool).

Detailed calculations can be found in Section III.

Table I.A.3-2 Final Percentage Standards for 2012

Cellulosic biofuel 0.006%

Biomass-based diesel 0.89%

Advanced biofuel 1.19%

Renewable fuel 9.03%

B. 2013 Biomass-Based Diesel Volume

While section 211(o)(2)(B) of the Clean Air Act specifies the volumes of biomass-based diesel (BBD) through year 2012, it directs the EP A to establish the applicable volume of BBD for years after 2012 no later than 14 months before the first year for which the applicable volume will apply. In today's action we are finalizin g an applicable volume of 1.28 bill gallons for biomass-based diesel (BBD) for 2013. This is the volume that was projected for 2013 in the RFS2 final rulemaking, and we are requiring it in 2013 based on consideration of the factors specified in the statute, incl uding a consideration of biodi esel production, consumption, and infrastructure issues. As require d under the statute, we also assessed the likely impact of BBD production and use in a variety of areas, incl uding climate change, energy security, the agricultural sector, air quality, and others. Section IV provides add itional discussion of our

assessment of the 2013 volume of 1.28 bill gallons of BBD.

C. Regulatory Changes

In today's action we are also finalizing a number of changes to the RFS2 regulations. These changes are intended to:

• Clarify certain provisions because we have learned that there is some confusion among some regulated parties • Clarify the application of certain provisions to unique circumstances • Provide greater specificity in the definition of certain terms • Correct regulatory language that in advertently misrepresented our intent

Today's rule also makes a minor amendment to the gasoline benzene regulations regarding

inclusion of transferred blendstocks in a refine ry's early benzene credit generation calculations. A detailed discussion of these regulatory changes is provided in Section V.

D. 2012 Price for Cellulosic Biofuel Waiver Credits

Since we are reducing the required volum e of cellulosic biofuel for 2012 below the applicable volume specified in th e statute, EPA is required to of fer biofuel waiver credits to*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 11 of 126 obligated parties that can be purchased in lie u of acquiring cellulosic biofuel RINs. These

waiver credits are not allowed to be traded or bank ed for future use, are only allowed to be used

to meet the 2012 cellulosic biofuel standard, and cannot be applied to deficits carried over from 2011. Moreover, unlike cellulosic biofuel RINs, waiv er credits may not be used to meet either

the advanced biofuel standard or the total renewable fuel standard. For the 2012 compliance period, we are making cellulosic biofuel waiver cr edits available to obligat ed parties for end-ofyear compliance should they need them at a pr ice of $0.78 per credit. Further discussion is provided in Section VI.A.

E. Assessment of the A ggregate Compliance Approach

As part of the RFS2 regulations, EPA estab lished an aggregate compliance approach for renewable fuel producers who use planted crops and crop residue from U.S. agricultural land. This compliance approach relieve d such producers (and importers of such fuel) of the individual recordkeeping and reporting requirements othe rwise required of producers and importers to verify that feedstocks used in the producti on of RIN-qualifying renewable fuel meet the

definition of renewable biomass. EPA determined that 402 million acres of U.S. agricultural land was available in 2007 (the year of EISA enactment) for production of crops and crop

residue that would meet the defin ition of renewable biomass, and dete rmined that as long as this total number of acres is not exceeded, it is unlikely that new land has been devoted to crop production based on historical tre nds and economic considerations. We indicated that we would conduct an annual evaluation of total U.S. acreage that is cropland, past ureland, or conservation reserve program land, and that if the value exceed 402 million acres, producers using domestically-grown crops or crop residue to pr oduce renewable fuel would be subject to individual recordkeeping and repor ting to verify that their feed stocks meet the definition of

renewable biomass.

The RFS2 regulations provide that EPA will make a finding concerning whether the 2007 baseline amount of U.S. agricultural land has been exceeded in a given year and will publish this finding in the Federal Register by November 30 of the same year. Based on data provided by the USDA, we have estimated that U.S. agricultu ral land reached 396 million acres in 2011, and thus did not exceed the 2007 baseline acreage.

We also stated in the preamble to the final RFS2 rule that if, at any point, EPA finds that the total agricultural land is greater than 397 million acres, EPA will conduct further investigations to evaluate validity of the dom estic aggregate compliance approach. The total acreage estimate of 396 million acres does not exceed the trigger point for further investigation, therefore EPA does not plan to conduct further i nvestigations into this matter. Additional

discussion on this matter can be found in Section VI.B of this preamble.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 12 of 126 II. Projection of Cellulosic Volu me Production and Imports for 2012

In order to project production volume of ce llulosic biofuel in 2012 for use in setting the percentage standard, we collected information on individual facilities that have the potential to produce qualifying volumes for consumption as trans portation fuel, heating oil, or jet fuel in the U.S. in 2012. This section describes the project ed available volume of cellulosic biofuel in 2012

as well as some of the uncertainties associated with those volumes. S ection III describes the derivation of the percentage standards th at will apply to obligated parties in 2012.

The 2012 volume projections in today's fina l rule were based on several sources of

information:

• An estimate from EIA of the volumes of transportation fuel, biomass-based diesel, and cellulosic biofuel that they project will be sold or introduced into

commerce in the U.S. in 2012. • Progress that the cellulosic biofuel industry is making in 2011

• Our own assessment of the cellulosic bi ofuel industry's projected volumes for

2012 • Comments in response to the NPRM

In addition to the sources of information lis ted above EPA had also intended to consider the Production Outlook Reports that are requi red under §80.1449 for all registered renewable fuel producers and importers. These Production Ou tlook Reports were not as useful as EPA had hoped in helping to provide information on the in tentions of cellulosic biofuel producers in 2012 as very few had registered under the RFS progra m and they were thus not required to submit a report. EPA expects that in future years as mo re cellulosic biofuel producers register under the RFS program these reports will become of greater value in helping to determine the appropriate projected available volume of cellulosic biofuel.

In directing EPA to project cellulosic bi ofuel production for purposes of setting the

annual cellulosic biofuel standard, Congress did not specify wh at degree of certainty should be reflected in the projections. However, in response to the NPRM, some commenters cited Executive Order 13563 which states that regulations must in general "promo te predictability and reduce uncertainty." We agree that this must be a goal in the process of determining the appropriate cellulosic biof uel requirement for 2012. The greate st certainty is achieved when the level of the standard is firmly established before it becomes applicable, and all regulated parties can have confidence regarding the immutability of that standard. Doing this ensures that obligated parties know what their obligations will be so that they can begin efforts to meet those obligations, and biofuel producers know what baseline demand for their product will be so that they can secure financing and ramp up production with confidence.

In contrast to statements ma de by several obligated partie s, meeting the dual goals of predictability and reduce uncertainty does not require EPA to specify an applicable volume for cellulosic biofuel that is as low as possible, or based only on demonstrated production. Due to the availability of cellulosic waiver credits, obligated parties always have the means to comply*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 13 of 126 with the cellulosic biofuel standard that we set 5 , and at a cost that is predictable. There is, therefore, no uncertainty with regard to the level of their obligations or the means available to

achieve it.

Moreover, Executive Order 13563 also states th at regulations must in general promote "economic growth, innovation, compe titiveness, and job creation." C onsistent with this goal, we

believe that the cellulosic biof uel standard should promote grow th in the cellulosic biofuel industry according to the goals that Congress established in the RFS program. While the

cellulosic biofuel standard that we set should be within the range of what can be attained based on projected domestic production and import potential, the standard that we set in large part

determines the volumes that will be made available. This is consistent with comments submitted by the Biotechnology Industry Organization and the Renewable Fuels Association. Thus while any standard we set for cellulosic biofuel standa rd for 2012 will have some uncertainty in terms of actual attainment, our intention is to balance such uncertainty with the objective of promoting growth in the industry. Our final projected available volume of 8.65 million gallons of cellulosic biofuel (10.45 million ethanol-equiva lent gallons) for 2012 reflects these considerations.

A. Statutory Requirements

The volumes of renewable fuel to be used under the RFS2 program each year (absent an adjustment or waiver by EPA) are specified in CAA 211(o)(2). These volumes for 2012 are

shown in Table II.A-1.

Table II.A-1 Required Volumes in the Clean Air Act for 2012 (bill gal)

Actual Volume Ethanol Equivalent

Volume

Cellulosic biofuel 0.5 a 0.5

Biomass-based diesel 1.0 1.5

Advanced biofuel 2.0 a 2.0

Renewable fuel 15.2 a 15.2

a These values assume that the biofuels would be ethanol. If any portion of the biofuels used to meet these applicable volumes has a volumetric energy content greater than that for ethanol, these

values will be lower.

By November 30 of each year, the EPA is re quired under CAA 211(o) to determine and publish in the Federal Register the renewable fuel per centage standards for the following year. These standards are to be based in part on transportation fuel volumes estimated by the Energy Information Administration (EIA) for the following year. The calculation of the percentage standards is based on the formulas in §80.1405( c) which express the required volumes of renewable fuel as a volume percentage of gasolin e and diesel sold or introduced into commerce in the 48 contiguous states plus Hawaii.

5 So long as the required volume is below the volume specified in the statute, such that cellulosic biofuel waiver

credits are available.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 14 of 126 The statute requires that if EPA determines that the projected volume of cellulosic biofuel production for the following year is less than the applicable volume shown in Table II.A-1, then EPA is to reduce the applicable volume of cellu losic biofuel to the pr ojected volume available during that calendar year. In addition, if EPA reduces the required volume of cellulosic biofuel below the level specified in the statute, the Act also indicates that we may reduce the applicable

volume of advanced biofuels a nd total renewable fuel by th e same or a lesser volume.

B. Cellulosic Biofuel Volume Assessment

In order to project cellulosic biofuel production for 2012, EPA has tracked the progress of over 100 biofuel producti on facilities. From this list of f acilities we used publically available information, as well as information provide d by DOE and USDA, to make a preliminary

determination of which facilities are the most likely candidate s to produce cellulosic biofuel and make it commercially ava ilable in 2012. Each of these companies was investigated further in order to determine the current status of their facilities and their likely cellulosic biofuel production volumes for the coming years. Inform ation such as the funding status of these facilities, announced constructi on and production ramp up periods , and annual fuel production targets were taken into account. Our projection of the volume of cellulo sic biofuel production in

2012 is based on this information as well as our own assessment of the likelihood of these facilities successfully producing ce llulosic biofuel in the volumes indicated. A brief description of each of the companies we believe can produce cellulosic biofuel and make it commercially

available in 2012 can be found below.

1. Existing Cellulosic Biofuel Facilities

The rule that established the required 2011 cellulosic biofuel volume identified five production facilities that we projected would produce cellulo sic biofuel and make the fuel commercially available in 2011. Each of th ese production facilities are now structurally complete, however they are in various stages of biofuel production. All of these facilities have either produced some volume of cellulosic biofue l in 2011, or are on schedule to do so later in the year. Only KL Energy and Range Fuels, how ever, have completed re gistration of cellulosic biofuel production facilitie s under the RFS2 program and as such they are currently the only facilities of the five listed here currently eligible to generate cellulosic biofuel RINs. For more background information on each of these facilities see the 2011 standards rule 6

.

DuPont Danisco Cellulosic Ethanol (DDC E) successfully started up their small demonstration facility in Vonor e, Tennessee in late 2010. This facility has a maximum production capacity of 250,000 gallons of ethanol pe r year and uses an enzymatic hydrolysis process to convert corn cobs into ethanol. In conversations with EPA in July 2011 DDCE indicated that this facility was currently producin g ethanol at approximate ly half the nameplate capacity, corresponding to a volume of 125,000 gallons per year. The focus of this facility, however, remains gathering information to help successfully design and operate DDCE’s first commercial scale facility. All the cellulosic ethanol currently produced at this facility is used for

6 75 FR 76790, December 9, 2010.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 15 of 126 testing purposes or given away. No RINs are cu rrently generated for this ethanol and it is not available for purchase by obligated parties. DDCE has indicated that they have no plans to generate RINs or sell ethanol produced at their facility in Vonore in 2012. No volume of

cellulosic ethanol has therefore been included in the projections of ava ilable cellulosic biofuel

for 2012.

Fiberight uses an enzymatic hydrolysis pr ocess to convert the biogenic portion of separated municipal solid waste (MSW) into ethanol. Construction on the first stage of Fiberight’s Blairstown, Iowa facility was co mpleted in the summer of 2010. The production capacity of the first stage of this project is 2 million gallons of ethanol per year. Fiberight had planned to begin production of cellulosic biofuel from this facility in late 2010 but poor economic conditions, due in part to low cellulosic RIN values in 2010, caused them to postpone fuel production. Fiberight had also planned to be gin construction on an expansion of this facility in late 2010 that would increase the production pot ential to 6 million gallons of ethanol per year, but were unable to secure funding to carry out the construction as planned. They have since secured funding and began construction on the expa nsion of their Blairstown facility in April 2011. Fiberight anticipates that they will begi n fuel production in early 2012 and will ramp up production at this facility throughout 2012. EPA projects the production of 2 million gallons of cellulosic ethanol from this facility in 2012.

KiOR continues to produce a small volume of renewable crude from agricultural residue at their demonstration facility in Houston, Texa s using a technology they call Biomass Catalytic Cracking (BCC). This technology uses heat and a proprietary catalyst to convert biomass to a renewable crude with a relatively low oxygen cont ent. The renewable crude is then upgraded to produce renewable gasoline and diesel, as well as a small quantity of fuel oil. While KiOR plans to continue to operate their Houston facility in 2012 its main purpose will be to provide small quantities of fuel for testing purposes and to provide data for the optimization of KiOR’s first commercial facility. In conversa tions with EPA KiOR has indicated that it is unlikely that any significant volume of fuel from this facility will be sold commercially. EPA has therefore not included any volume from KiOR’s Houston facility in our projected available volumes for 2012.

KL Energy has developed a process to convert cellulose and hemicellulose into cellulosic sugars using a thermal-mechanical pretreatment pr ocess followed by an enzymatic hydrolysis. It had initially planned to used w oody biomass as their feedstock for cellulosic biofuel production; however its production process is versatile enough to allow for a wide variety of cellulosic feedstocks to be used. In August 2010 KL Energy announced a joint development agreement with Petrobras America Inc. As part of th e agreement Petrobras has invested $11 million to modify KL Energy’s facility in Upton, Wyoming to allow it to process bagasse and other waste products. If successful, Petrobr as and KL Energy plan to work together to integrate the technology into currently existing ethanol producti on facilities in Brazil. The modifications to KL Energy’s facility were comple ted earlier this year. KL Ener gy is currently producing small volumes of cellulosic ethanol and plans to con tinue to do so throughout 2012. In August 2011 KL Energy successfully registered its ce llulosic biofuel producti on facility under the RFS program making it eligible to generate RINs for biofuel produced from this facility. KL Energy has indicated to EPA its intent to generate RINs for the fuel it produces and to sell it*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 16 of 126 commercially in the United States. EPA proj ects that 100,000 gallons of cellulosic ethanol will be available from this facility in 2012.

Range Fuels began production of methanol at their Soperton, Georgia facility in the third quarter of 2010. This facility uses a thermoch emical technology to produce syngas (consisting of mostly hydrogen and carbon monoxide) from a woody biomass feedstock. The syngas is then

converted into fuel with the aid of a chemi cal catalyst developed by Range. Range has developed the capability to produce both methanol and ethanol, depending on the catalyst used. In January 2011, after producing a small volume of ethanol from this facility and proving this capability, Range Fuels shut down the Soperton facility in order to work through technical difficulties they had been experiencing. No timeline has been given for the restart of this facility and fuel production from this facility in 2012 a ppears unlikely. No cellulosic fuel production from Range Fuels has been included in EPA’s 2012 projected available volume.

2. Potential New Facilities in 2012

In the proposed rule EPA discussed five ne w cellulosic biofuel pr oduction facilities that had plans to begin commercial pr oduction at some point in 2012. These facilities were at various stages in the construction process, and as such ha d various degrees of uncertainty associated with any projected 2012 commercial production. Three of these facilities, those being developed by INEOS Bio, KiOR, and ZeaChem, have made si gnificant progress towards completion and are expected to produce and market cellulosic biofue l in 2012. Two of the companies mentioned in the proposed rule, Fulcrum Bioenergy and Te rrabon, are no longer on a schedule to produce cellulosic biofuel in 2012. Finally, EPA has b ecome aware of a sixth company, American Process Inc., which is developing a cellulosic biof uel project that is likely to produce and market

some volume of cellulosic biofuel in 2012. The following section provi des updated information on each of the companies discussed in the proposed rule, as well as a summary of the project being developed by American Process Inc.

Fulcrum Bioenergy is planning to build a facility capable of producing 10.5 million gallons of cellulosic ethanol a nd 16 megawatts of renewable el ectricity per year. It has developed a thermochemical technology to pr oduce ethanol from separated MSW via syngas using a chemical catalyst. In November 2010 Fulcrum announced that it had received a term sheet for an $80 million loan guarantee from DOE and was entering into the final phase of the loan guarantee program. Prior to that Fulc rum had announced that it had signed long term feedstock supply contracts for this facility as we ll as engineering, procurement, and construction contracts. In January 2011 Fulcrum announced it had closed on a $75 million Series C financing that would provide the remaining necessary capital for the construction of its first commercial production facility pending the closing of its DOE lo an guarantee. The loan guarantee, however, has yet to be finalized. As a result the start of the construction of this facility, originally planned for the second quarter of 2011, is now expected to begin in late 2011. EPA has not included any

volume of cellulosic biofuel from Fulcrum Bioene rgy’s facility in our 2012 projected available volume because of this delay.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 17 of 126 INEOS Bio has developed a process for produ cing cellulosic ethanol by first gasifying feedstock material into a syngas and then using naturally occurring bacteria to ferment the syngas into ethanol. In January 2011 USDA announced a $75 million loan guarantee for the

construction of INEOS Bio’s first commercial facility to be built in Vero Beach, Florida. This facility will be capable of producing 8 million ga llons of cellulosic biofuel as well as 6 megawatts of renewable electricity from a variety of feedstocks including yard, agricultural, and wood waste, as well as separated MSW. On February 9, 2011 INEOS Bio broke ground on this facility. Since February significant progress has been made and INEOS Bio remains on target to complete construction on this facility in April 2012. Comme rcial production of cellulosic ethanol is expected to begin soon after constr uction is complete. Three million gallons of cellulosic ethanol from this facility has been included in EPA’s projected available volume for

2012.

After successful operation of their demons tration plant in Houston, Texas KiOR began

construction on its first commercial scale fac ility in May 2011. This facility, located in Columbus, Mississippi, will convert biomass to a low oxygen biocrude using a process KiOR calls Biomass Catalytic Cracking (BCC). BCC uses a catalyst developed by KiOR in a process similar to Fluid Catalytic Cracking currently used in the petroleum industry. KiOR’s Columbus facility will also be capable of upgrading this biocrude into finished gasoline and diesel as well as a small quantity of fuel oil. KiOR plans to finish construction on this facility in the first half of 2012 and begin commercial production early in the third quarter of 2012. KiOR has also announced plans to construct several more co mmercial scale biofuel production facilities in Mississippi and across the southeastern United Stat es. It is unlikely any of these additional facilities will begin prod uction of biofuel in 2012. EPA has included 3 million gallons of cellulosic biofuel (4.8 million ethanol equivalent gallons) from KiOR ’s Columbus facility in our projected available volume for 2012.

Terrabon completed cons truction of a small demonstr ation scale facility for the

conversion of MSW and other wast e materials into gasoline in 2010 and are currently developing plans for their first commercial scale facility. Terrabon utilizes a unique production process that can be used to produce gasoline, diesel, or jet fu el. Feedstock is first fermented into carboxylic acids by a variety of micro organisms. These carboxylic acids are then neutralized to form carboxylate salts that are dewatered, dried, and th ermally converted to ketones. Finally, the ketones are hydrogenated to form alcohols which ca n then be refined into gasoline, diesel, or jet fuel. Terrabon had hoped to begin producing cel lulosic biofuel at their first commercial scale facility some time in 2012, however difficulties in securing the necessary funding have delayed the expected start up of their first commercial scale facility to 2013. EPA has not included any

volume of cellulosic biofuel from Terrabon in our 2012 projected available volume.

ZeaChem has begun construction on a small demonstration scale facility in Boardman, Oregon capable of producing 250,000 gallons of cellulosic ethanol per year. Its production process uses a combination of biochemical and thermochemical technologies to produce ethanol

and other renewable chemicals from cellulosic materi als. The feedstock is first fractionated into two separate streams containing cellulosic sugars and lignin. The cellulosic sugars are fermented into ethyl acetate using a naturally occurring acetogen, which can then be hydrogenated into ethanol. The hydrogen necessary for this pro cess is produced by gasifying the lignin stream*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 18 of 126 from the cellulosic biomass. ZeaChem’s process is flexible and is capable of producing a wide range of renewable chemical and fuel molecule s in addition to ethanol . ZeaChem has made significant progress on its dem onstration facility and currently plans to begin production of cellulosic ethanol from this facility in early 2012. It has indicated to EPA, however, that it is highly unlikely to achieve full production capacity at this facility in its first year of production and has suggested that the produc tion of 50,000 gallons of cellulosic ethanol from this facility in 2012 is a more realistic expectation. Despite this small volume, ZeaChem does intend to generate RINs for the fuel that they produce and to market it commercially. Based on this information EPA has included 0.05 million gallons of cellulosic ethanol in our projected

available volume for 2012.

American Process Inc. (API) is developing a project in Alpena, Michigan capable of producing up to 900,000 gallons of cellulosic etha nol per year from woody biomass. This facility will use a technology developed by API called GreenPower+TM. This technology extracts the hemicelluloses portion of woody biom ass using hot water and hydrolyzes it into cellulosic sugars. These cellulosi c sugars are then converted to ethanol or other alcohols, while the remaining portion of the woody biomass, contai ning mostly cellulose and lignin, is processed into wood paneling at a co-located facility. At larger scale facilities API anticipates burning the

residual biomass in a boiler to produce renewable steam and elec tricity as well as cellulosic biofuel. Construction of the Alpena, Michigan facility began in March 2011 and API anticipates beginning the production of cellulosic ethanol at this site early in 2012. API was not discussed as a potential producer of cellulosic biofuels in 2012 in our proposed rule due to uncertainty about its ability to generate RINs with the intended feedstock and pr oduction process. EPA anticipates these issues will be resolved. Ce llulosic biofuel produced at API’s facility will therefore likely be eligible for cellulosic RI Ns. For our 2012 projected available volume of

cellulosic biofuels we have in cluded 500,000 gallons of cellulosic ethanol from this facility. This volume represents the low end of API’s production target for that year due to the uncertainties associated with the start up of a new industrial facility utilizing a technology unproven at industrial scale.

Another potential source of cellulosic biofue l in 2012 is the application of a technology being developed by EdeniQ. EdeniQ is developi ng a suite of enzymes capable of breaking down cellulose into simple sugars that can then be fermented into ethanol. Rather than build its own production facilities EdeniQ plans to license its enzymes to existing corn ethanol facilities. Such licensing would be accompanied by the Cellunator, an advanced milling device EdeniQ has developed to reduce the pa rticle size of corn kernels to enab le greater conversion of starch to ethanol as well as the conversion of cellulose to simple sugars. EdeniQ claims that its technology would allow corn ethanol facilities to increase ethanol production by 1-2% by converting the cellulosic portion of the corn kernel into ethanol. EdeniQ is also working to increase the effectiveness of its enzymes in orde r to enable ethanol production increases of 3-4% from the cellulose in the corn kernel in the future. EdeniQ plans to begin commercial trials of its technology in the second half of 2011. This t echnology has the potential to be implemented rapidly and produce significant amounts of cellu losic ethanol in 2012 as it requires relatively small capital additions to already existing corn ethanol facilities. While this technology is promising, there is currently no pathway in the RFS2 regulations for the generation of cellulosic biofuel RINs using the cellulosic portion of the co rn kernel as a feedstock. Moreover, EdeniQ*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 19 of 126 has not announced any agreements with corn et hanol producers to install this technology to enable the production of cellulosic ethanol. For these reasons, EPA has not included any cellulosic ethanol production from EdeniQ’s technology in our 2012 projections.

In addition to the facilities mentioned above, EPA is also aware of three companies planning to begin the production of cellulosic biofuels in early 2013. Coskata, Enerkem, and Poet are planning on completing construction on their first commercial scale cellulosic biofuel facilities in late 2012 or early 2013 and producing commercial vol umes of biofuels in 2013.

While all of these facilities c ontinue to make progress to wards commercia l production of cellulosic biofuel in 2013 it is highly unlikely th at any of these facilities will be capable of producing cellulosic biofuels by the end of 2012. EPA has therefore not included any volume of

cellulosic biofuel from these facilities in our projected available volume for 2012. These facilities, along with several other commercial cellulosic biofuel facilities planning to begin production in 2013, notably the first commercial scale facilities from Ab engoa and Mascoma, indicate that the potential exists for the rapid expansion of production volumes in future years.

3. Imports of Cellulosic Biofuel

While domestically produced cellulosic biofuels are the most likely source of cellulosic

biofuel available in the United States, producers and/or importers of cellulosic biofuel produced in other countries may also generate RINs and pa rticipate in the RFS2 program. While the RFS2 program does provide a financial incentive for companies to import cellulosic biofuels into the United States, the combination of local demand, financial incentives from other governments, and transportation costs for the cellulosic biof uel has resulted in no ce llulosic biofuel being imported to the United States thus far. EPA believes this situation is likely to continue in the near future. Additionally, the majority of internationally based cellulosic biofuel facilities that currently exist or plan to complete construc tion by the end of 2012 are small research and development or pilot facilities not designed for the commercial production of fuel.

Two notable exceptions, both located in Cana da, are Enerkem and Iogen. Enerkem has a currently existing commercial pr oduction facility in Westbury, Quebec and is expecting to complete construction on a sec ond facility in Edmonton, Alberta in late 2011. Iogen has a small demonstration facility in Ottawa and is currently exploring the possibility of building its first commercial facility near Prince Albert, Saskatchewan. The la rge expected production volumes and relatively small distance this fuel would have to be transported to reach the United States make these facilities the most likely candidates to import cellulosic biofuel into the United States. In conversations with EPA, however, bot h companies indicated that they had no current intentions of importing fuel from their Canadian production facilities into the United States. On September 1, 2010 the government of Canada finalized regulations requiring all gasoline sold in

Canada to have a renewable conten t of 5% and all diesel fuel and heating oil to have a renewable content of 2%. These regulations will further increase local demand for any cellulosic biofuel produced from these two facilities and decrease the likelihood of an y of this fuel being exported

to the United States. For these reasons we ha ve not included any cellulosic biofuel production from foreign facilities in our projections of cellulosic biofuel availability in 2012.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 20 of 126 4. Projections from the Energy Information Administration

Section 211(o)(3)(A) of the Clean Air Act requires EIA to "...provide to the Administrator of the Environmental Protection Agency an estimate, with respect to the following calendar year, of the volumes of transportation fuel, bi omass-based diesel, and cellulosic biofuel projected to be sold

or introduced into commerce in the United Stat es." EIA provided these estimates to us on

DATE. 7 With regard to cellulosic biofuel, the EIA estimated that the available volume in 2012 would be 6.9 million gallons based on its assessment of the utiliza tion of production capacity. A summary of the commercial scale plants they co nsidered and associated production volumes is shown below in Table II.B.4.In addition to the facilities listed in this table EIA also projects that three pilot-scale facilities, those owned by American Process (Alpena, MI), KL Process Design (Upton, WY) and ZeaChem (Boardman, OR) will produce an additional 0.2 million gallons of

cellulosic biofuel and make it ava ilable for sale in the US in 2012.

7 Letter from Richard Newell, EIA Administrator to Lisa Jackson, EPA Administrator October XX, 2011.*** E.O. 12866 Review - Draft - Do Not Cite, Quote, or Release During Review ***Page 21 of 126Table II.B.4Commercial-scale cellulosic biofuel plants expectedto generate cellulosic biofuel RINs in 2012YearOnline Company Location ProductNameplateCapacity(milliongallons)ProjectedUtilization(%)ProjectedProduction(milliongallons)2011/12 Fiberight, LLC Blairstown, IA Ethanol 6.4 25% 1.62012 INP Bioenergy Vero Beach, FL Ethanol 8.0 25% 2.02012 KiOR Columbus, MS Liquids 12.2 25% 3.1Total26.6 25% 6.7*** E.O. 12866 Review - Draft - Do Not Cite, Quote, or Release During Review ***Page 22 of 126*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 23 of 126 EIA’s projections of cellulosic biofuel production in 2012 are very similar to EPA’s projections discussed above and summarized in Section II.B.6 below. The lists of companies that EIA and EPA expect to generate cellulosic biofuel RINS in 2012 are the same. There are, however, several small differences in the volumes of cellulosic biofuel expected to be produced at some of the production facilitie s listed. EPA has slightly higher projections of cellulosic biofuel production for Fiberight (2 million ga llons vs. 1.59 million gallons), INEOS Bio (3 million gallons vs. 2 million gallons), and Americ an Process Inc. (0.5 million gallons vs. less than 0.2 million gallons). These slight variations are a result of different methodologies used by EIA and EPA to project biofuel production in futu re years. Both Fiberight and INEOS Bio are commercial scale facilities that plan to begin pr oduction in 2012. As a result, EIA has used a standard utilization factor of 25% (used for the first year of production for all commercial scale facilities) along with the nameplate capacity of these facilities to project their production volumes for 2012. While this is a reasonable appr oach, EPA believes it is more appropriate to consider the timing of the anticipated start up of these facilities within 2012. Facilities planning to begin production early in the year should not have the same expected utilization factor as those planning to begin production near the end of the year. Both Fiberight and INEOS Bio plan to complete constructi on and begin the production of fuel in early 2012, and therefore EPA has projected production volumes from these facilitie s that correspond to utilization factors of slightly higher than 25%.

EIA’s projected production volume for American Process Inc. assumes a utilization factor of 10%, consistent with the factor that EIA uses for all demonstration scale facilities. While this may be reasonable in many cases as th e purpose of most pilot plants is not to produce fuel for commercial scale, American Process Inc. has communicated to EPA that it plans to produce volumes approaching its facility’s nameplate capacity in their first year. While EPA believes this is unlikely due to the challenges of starting up a facility utilizing a technology that has not been proven at commercial scale, we be lieve a volume corresponding to a utilization rate higher than 10%, but at the low end of Ameri can Process Inc’s target production range is appropriate. While th e production volumes of the other co mpanies listed in EIA and EPA’s projected available volume tables are not identical the differences are very small and their impact on the overall volume projection is negligible.

While the cellulosic biofuel volume proj ections for 2012 provided by EIA are not identical to those being finalized in this rule EPA believes that they ar e similar enough to support the volumes we are finalizing. Where differences exist they are primarily due to EPA’s consideration of facility specific situations rather than use of uniform utilization factors. As discussed above, EPA belie ves this is appropriate , and that wherever possible these facility specific factors should be taken into account. CA A 211(o)(7)(D) vests the authority for making the projection with EPA, since it provides that th e projection is “determined by the Administrator based on the estimate provided [by EIA].” If Congress intended that EPA simply adopt EIA’s projection without an independent evaluation, it would not have sp ecified that the projection is “determined by the [EPA] Administrator”. Alt hough the statute provides that our determination must be “based on the estimate provided” by EIA, we believe that our consideration of EIA’s estimate in deriving our own projection as descri bed above satisfies this statutory requirement.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 24 of 126 5. Comments on the Proposed Rule

EPA received comments on our proposed rule recommending various methodologies or suggested volumes for the final rule. Severa l parties supported our projected volumes and emphasized the importance of main taining a consistent policy suppor ting growth in the cellulosic biofuel industry. Other comments we receiv ed recommended that the volume we set for cellulosic biofuel be based only on the demonstrat ed production rates of fa cilities that have been in production for at least three months. EPA belie ves this approach is inconsistent with the requirement that the mandated volume of cellu losic biofuel be based on the projected, not demonstrated, volume for any given year. Usin g the approach recommended by the commenters would effectively project no market growth fr om the end of 2011 through 2012, and would lead

to no 2012 market demand for a dditional cellulosic biofuel capacity that comes on line during the course of 2012, hindering industry growth. As a result, the incentives for the cellulosic biofuels industry to grow, which are one of the primary purposes of the RFS program and which are consistent with Executive Order 13563, would be compromised.

Several other commenters claime d that cellulosic biofuel t echnology was not yet capable of producing the volumes of fuel indicated in our proposal and that the proposed range of cellulosic biofuels was too high. Chevron sugge sted that EPA finalize the lower end of the proposed range (3.55 million ethanol-e quivalent gallons). After r eassessing the state of the cellulosic biofuel industry and tracking the pr ogress being made towards the production of

cellulosic biofuels at commerc ial scale facilities, EPA believe s the industry is capable of exceeding the lower end of the range of projecte d volume from our proposed rule. In order to provide the appropriate economic conditions for the cellulosic biofuel industry to grow in accordance with the objectives of the statute, it is important that these fuels, once produced, have a viable market. EPA believes that setting the 2012 standard for cellulosic biofuels at the low end of the proposed range, or some lower volume, could potentially result in a depressed market for cellulosic biofuel and would discourage cellulosic biofuel pr oducers from producing quantities of fuel in 2012 that are actually attainable.

Alternatively, we also received comments re questing that EPA finalize the high end of the proposed volume (15.7 ethanol-e quivalent gallons). While th is approach would provide a strong incentive for potential cellulosic biofue l producers to maximize their production of fuel,

EPA does not believe it would be consistent with the requirement that the volume mandate be based on the projected production volume. As discussed above, seve ral companies have experienced delays in their construction plans since the proposed rule has been published, and others have lowered their producti on targets or indicated that they no longer intend to generate RINs for the cellulosic biofuel they produce. While it is possible that one or more of the companies for whom we have included volumes in our 2012 projection may produce a greater volume of fuel than we currently anticipate, EPA does not believe it would be appropriate to rely on such speculation in setting the applicable vol ume of cellulosic biofue l for 2012. We believe that the 2012 cellulosic biofuel applicable volume of 8.65 million gallons (10.45 million ethanolequivalent gallons) finalized in this rule is a reasonable projection of the volume of cellulosic biofuel that will be produced and made available for RFS co mpliance in 2012. While this volume is slightly higher than the volume projected by EIA we be lieve this is a ppropriate based on the consideration of company specific factors such as when in the year the companies*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 25 of 126 anticipate the start of fuel produc tion and production targets shared with EPA. The difference in the methodologies used for EIA and EPA’s projecti ons is discussed in fu rther detail in Section

II.B.4.

The Consumers Energy Alliance, in addition to suggesting that the range of cellulosic biofuel production in our proposed rule was too hi gh, also requested that EPA perform a costbenefit analysis to determine the implications of our proposed standards. The Clean Air Act clearly states that in the even t that the projected volume of cellulosic biofuel production for the following year is less than the applicable volum e shown in Table II.A-1, EPA is to reduce the applicable volume of cellulosic biofuel to the projected volume availabl e during that calendar year. Since the mandated volume for any given y ear is to be based solely on the projected volume available for that year, a cost-benefit analysis is not necessary.

Two cellulosic biofuel companies, American Process Inc. and ZeaChem, commented on the volume of cellulosic biofuels they expect to produce in 2012 and requested that EPA’s projections of available volume s of cellulosic biofuel be adjusted accordingly. After

consideration of these comment s and additional information pr ovided by these two companies EPA agrees that the adjustments they suggeste d are appropriate. As a result a volume of 500,000 gallons of cellulosic ethanol from American Proc ess Inc., a volume representing the lower end of their production target for 2012, has been include d in our projected available volume. The volume of fuel projected from ZeaChem’s fac ility has been changed to 50,000 gallons of cellulosic ethanol in 2012 to more accurately reflect their current expectati ons for their facility.

Finally, EPA received several comments from obligated parties requesting that in any year in which actual annual production of cellulo sic biofuel falls below the applicable volume used to set the annual standard, that EPA use its waiver authority to waive a volume of cellulosic biofuel equal to the shor tfall in February of the following year, prior to the February 28 deadline for submission of compliance demonstration reports by obligated parties. This approach, these commenters argued, would ensure that their oblig ations match the number of cellulosic biofuel RINs that are available in the market. These comments deal with EPA’s general waiver authority under CAA 211(o)(7)(A), and thus are not directly related to the annual standard setting process or the waiver authority that is specific to cellulosic biofuel under 211(o)(7)(D). At this time EPA has received no petitions for a waiver of the 2011 cellulosic biofuel volume under 211(o)(7)(A) due to inadequate domestic supply, and thus we are not considering at this time whether and how any portion of the 2011 cellu losic biofuel applicable volume should be

waived.

6. Summary of Volume Projections

The information EPA has gathered on the potential cellulosic biofuel producers in 2012, described above, allows us to project facility-specific volumes of cellulosic biofuel production

for 2012. This information is summarized in Table II.B.6-1 below.*** E.O. 12866 Review - Draft - Do Not Cite, Quote, or Release During Review ***Page 26 of 126Table II.B.6-1Cellulosic Biofuel 2012 Projected Available VolumeCompany NameLocationFeedstockFuelCapacity(MGY)EarliestProduction2012 ProjectedAvailable Volume(MG)EthanolEquivalentGallons (MG)American Process Inc. Alpena, MI Waste Wood Ethanol 0.9 Early 2012 0.5 0.5Fiberight Blairstown, IA MSW Ethanol 6 Early 2012 2.0 2.0INEOS BioaVero Beach, FL Ag Residue, MSW Ethanol 8 May 2012 3.0 3.0KiOR Columbus, MS Pulp Wood Gasoline, Diesel 10 Mid 2012 3.0 4.8KL Energy Upton, WY Wood Waste Ethanol 1.5 Online 0.1 0.1ZeaChem Boardman, OR Planted Trees Ethanol 0.25 Early 2012 0.05 0.05Total 8.65 10.45aThis facility is listed as INP Bioenergy in EIA’s projections*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 27 of 126 While the production volumes in Table II.B.6-1 have some uncertainty , we believe that a total volume of 8.65 million gallons (10.45 million ethanol-equivalent ga llons) is reasonably attainable. By basing the 2012 cellulosic biofue l standard on the reasonably attainable volumes rather than proven production vol umes, we aim to avoid a scenar io in which cellulosic biofuel production exceeds the mandated volume; no mechanism exists for this standard to be raised should cellulosic biofuel production exceed the 2011 standard. Such a scenario would result in

weak demand for cellulosic biofuels and RINs. More over, the standard that we set determines in large part the volumes of cellulosic biofuel that will be produced. The intent of Congress in establishing the RFS program through EISA was to provide a reliable market for renewable fuels and in doing so to spur growth in the cellulosi c biofuels industry. EPA believes the projected

available volume finalized in this ru le best reflects these intentions.

Based on our assessment of the potential production capabilities of individual companies as described above, EPA is finalizing the ce llulosic biofuel standard for 2012 at 10.45 million ethanol-equivalent gallons of ce llulosic biofuel. This number represents the volume of RINgenerating cellulosic biofuel that we believe can be made available for use as transportation fuel, heating oil, or jet fuel in 2012. It incorporat es reductions from the annual production capacity of each facility based on when fuel production can begin and assumptions regarding a ramp-up period to full production. We believe that a producti on volume of 10.45 million ethanolequivalent gallons is reasonably attainable despite the uncertainties. Moreover, by setting the

standard for cellulosic biofuel based on the volumes that are reasonably attainable, we are providing incentives for producers to overcome uncertainties and great er opportunities for funding based on an established demand.

There are also a variety of factors that could lead to production volumes greater than those listed in Table II.B.6-1 and make up for potential shortfalls elsewhere. For instance:

• For each of the facilities listed, we are pr ojecting that their production will be some volume less than the capacity of their facility. It is possible, however, that these companies could produce a greater volume of fuel than they are currently anticipating or has been projected by EPA. • It is possible that companies that are currently targeting 2013 for commercial production may produce cellulosic biofuel ahead of sche dule and generate RINs in 2012. None of this volume was included in our projection for 2012. • A high demand for cellulosic biofuels may be sufficient to cause companies to import fuel into the United States, even if they curre ntly have no plans to do so. As described in Section II.B.3 above, there are several fore ign producers that are either producing cellulosic biofuel now, or could potentially produce some cellulosic biofuel volume in

2012.

Finally, we note that if the actual volume of cellulosic biofuel RINs that are available in 2012 falls short of the 10.45 million gallon RINs used to derive the 2012 cellulosic biofuel standard, obligated partie s have other recourses:*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 28 of 126 • Purchase cellulosic biofuel waiver credits from the EPA (see further discussion in Section VI.A)

• Carry over a deficit from 2012 into 2013 according to §80.1427(b) under certain

conditions

C. Advanced Biofuel and Total Renewable Fuel in 2012

Under CAA 211(o)(7)(D)(i), EPA has the disc retion to reduce the applicable volumes of

advanced biofuel and tota l renewable fuel in the event that the projected volume of cellulosic biofuel production is deter mined to be below the applicable vol ume specified in the statute. As

described in Section II.B above , we are indeed projecting th e volume of cellulosic biofuel production for 2012 at significantly below the statutory applicable volume of 500 million gallons. Because cellulosic biofuel is used to satisfy the cellulosic biofuel standard, the advanced biofuel standard, and the total renewable fuel standard, an y reductions in the applicable volume of cellulosic biofuel will also affect the means through which obligated parties comply

with the advanced biofuel standa rd and the total renewable fuel standard. Therefore, we have considered whether and to what degree to lowe r the advanced biofuel a nd total renewable fuel applicable volumes for 2012.

If the required volume of cellulosic biofue l for a given year is less than the volume specified in the statute, it is important to ev aluate whether there woul d be sufficient volume of advanced biofuels to satisfy th e applicable volume of advanced biofuel volume set forth in the

statute. Even with a reduced volume of cellulo sic biofuel, other advanced biofuels, such as biomass-based diesel, sugarcane ethanol, or ot her biofuels, may be available in sufficient volumes to make up for the shortf all in cellulosic biofuel.

Several commenters stated their belief that the applicable volume of advanced biofuel should always be lowered concurrently, and to th e same degree, that the applicable volume of cellulosic biofuel is lowered from the levels set forth in the statute. Since we are finalizing a cellulosic biofuel applicable volume today that is approximately 490 million gallons below the 500 mill gal applicable volume specified in the statut e, this approach would lead to a reduction in

the advanced biofuel standard of 490 million gallons as well, from 2,000 mill gallons to 1,510 mill gallons. However, as described in the NPRM, we believe that it would not be consistent with the energy security and greenhouse gas re duction goals of the statute to reduce the applicable volume of advanced biofuel set forth in the statute if there are sufficient volumes of advanced biofuels available, even if those volumes do not include the amount of cellulosic biofuel that Congress may have desired. Our author ity to lower the advanced biofuel and/or total renewable fuel applicable volumes is discretionary, and in genera l we believe that actions to lower these volumes should only be taken if insu fficient volumes of qua lifying biofuel can be made available, based on such circumstances as insufficient production capacity, insufficient feedstocks, competing markets, constrained infrastr ucture, or the like. As discussed below, we project that sufficient volumes of advanced biofuel can be made available in 2012 such that the 2.0 bill gallon advanced biofuel re quirement need not be reduced.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 29 of 126 If we were to maintain the advanced biof uel, biomass-based dies el, and total renewable fuel volume requirements at the levels specified in the statute, while also lowering the cellulosic

biofuel standard to 10.45 milli on ethanol-equivalent gallons, then 1,510 million gallons of the 2.0 billion gallon advanced biofue l mandate would be satisfied automatically through the

satisfaction of the cellulosic and biomass based diesel sta ndards. An additional 490 million ethanol-equivalent gallons of additional advanced biofuels would be needed. See Table II.C-1.

Table II.C-1 Projected Fuel Mix in 2012 Assuming No Change in Advanced Biofuel or Total Renewable Fuel Volume Requirements (mill gallons)

Ethanol-Equivalent

Volume Physical Volume

Total renewable fuel

Conventional renewable fuel a 15,200 13,200 14,535 - 14,698 13,200 Total advanced biofuel 2,000 1,335 - 1,498

Cellulosic biofuel

Biomass-based diesel

Other advanced biofuel b 10.45 1,500

490 8.65 1,000

326 - 490 c

a Predominantly corn-starch ethanol

b Rounded to nearest million gallons for simplicity

c Physical volume is a range because other advan ced biofuel may be ethanol, biodiesel, or some

combination of the two

The most likely sources of additional adva nced biofuel would be imported sugarcane

ethanol and additional bi omass-based diesel, though there may also be some volumes of other types of advanced biofuel availabl e as discussed below. To determine if there are likely to be

sufficient volumes of these biof uels to meet the need for 490 million gallons of other advanced biofuel, we first examined hi storical data on ethanol imports and projections from EIA and USDA for 2012. Brazilian imports have made up a sizeable portion of total ethanol imported into the U.S. in the past, and these volumes were predominantly produced from sugarcane. Ethanol imports averaged about 380 million gallons pe r year over the last five years, and reached an all-time high of 730 million gallons in 2006 8 . However, ethanol impor ts were significantly lower in 2010 than in previous years, and conti nue to be low in the first half of 2011. This decline in imports may be related to the cessation of the duty drawback that became effective on October 1, 2008, to changes in world sugar pri ces, and increases in demand within Brazil. 9
Several commenters cited these lower import volumes in the last two years as evidence that importation of sugarcane ethanol will be low in 2012 as well.

However, we believe that the broader view of historical data on sugarcane ethanol imports supports our view that Brazil has si gnificant export potentia l under the appropriate economic circumstances. Monthly ethanol imports in June and Ju ly of 2011 were significantly higher than during any of the previous 16 m onths, at 71 and 305 thousand barrels, respectively. 10

Moreover, Brazil continues to be second worl dwide in the production of ethanol, producing a

8 "Monthly U.S. Imports of Fuel Ethanol," EIA, released 3/30/2011

9 Lundell, Drake, “Brazilian Ethanol Export Surge to End; U.S. Customs Loophole Closed Oct. 1,” Ethanol and Biodiesel News, Issue 45, November 4, 2008.

10 Monthly U.S. Imports of Fuel Ethanol, Energy Information Administration, Release Date 9/29/2011*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 30 of 126 total of 6.9 bill gallons in 2009. 11 By establishing an increased U.S. demand for 490 million gallons of other advanced biofuel in 2012, we wo uld be re-establishing an export market for Brazilian sugarcane ethanol that could compete w ith the use of sugarcane to produce sugar, and thus Brazilian producers will have an incentive to export higher volumes of sugarcane ethanol to

the U.S. California's Low Carbon Fuel Standard also went into effect in 2010, and may result in some refiners importing additiona l volumes of sugarcane ethanol from Brazil into California in

2012. These same volumes would count toward s the federal RFS2 program as well.

Projections from other sources also suggest that a large portion of the 490 million gallons

of advanced biofuel needed coul d be supplied by imported sugarcane ethanol. For instance, in its Annual Energy Outlook 2011, EIA projects ethanol imports of approximately 300 million gallons for 2012 12 . More significantly, the university-based Food and Agricultural Policy Research Institute (FAPRI) released its 2011 U.S. and World Agricultural Outlook report in which it projects 2012 ethanol imports of 728 million gallons. 13 This is a substantial increase compared to FAPRI's previous projection of 317 mill gallons as cited in our NPRM. According to the FAPRI report, this increase in imports into the U.S. would be concurrent with reductions in imports into other countries rather than an increase in exports of sugarcane ethanol from

Brazil.

We also examined the potential for excess bi odiesel to help meet the need for 490 million gallons of advanced biofuel. The applicable vol ume of biomass based diesel established in the statute for 2012 is 1.0 billion gallons (which corresponds to 1.5 billion ethanol-equivalent gallons). As discussed more fully in Section II .D below, we believe that the biodiesel industry has the potential for producing volumes above 1.0 billion gallons if demand for such volume

exists.

There are also other potential sources of ad vanced biofuels. Based on RIN generationreports collected via the EPA-Moderated Transaction System (EMTS), 32 million ethanolequivalent gallons of advanced biofuel with a D code of 5 were produced in the first half of

2011 14 . Extrapolated to the end of the year, it woul d be reasonable to expect a total of over 60 million ethanol-equivalent gallons of such advanced biofuel to be produced in 2011. Production Outlook Reports also provided some insight in to producers' expectations for 2012. For 2012, producers of advanced biofuel projected th at they would produce about 80 million ethanolequivalent gallons, composed of some combination of ethanol, rene wable diesel, and heating oil.

Another potential source of advanced biofuels is electri city generated from renewable biomass that is used as a transportation fuel. EIA data indicates that in 2009, the most recent year for which data is available, 35.6 million me gawatt-hours of electricity was generated from wood and wood derived fuels, and an additi onal 18.4 million megawatt- hours was generated

11 Portal Brasil, Energy Matrix for Ethanol, http://www.brasil.gov.br/sobre/economy/energymatrix/ethanol/br_model1?set_language=en

12 Table 11 of AEO2011, Report Number DOE/EIA-0383(2011). http://www.eia.doe.gov/forecasts/aeo/tables_ref.cfm

13 Table "Ethanol Trade", Commodity Outlook/Biofuels, FAPRI-ISU 2011 World Agricultural Outlook. http://www.fapri.iastate.edu/outlook/2011/

14 RFS2 EMTS Informational Data, updated on August 18, 2011. http://www.epa.gov/otaq/fuels/renewablefuels/compliancehelp/rfsdata.htm*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 31 of 126 from other biomass in the United States 15 . This is significantly more than the 6.8 million megawatt-hours of electric ity used in the transportation sector in 2009 16 , equivalent to about 300 mill ethanol-equivalent gallons. While not all the feedstocks used to generate the electricity

included in these totals would meet the RFS2’s renewable biomass definiti on, this remains a very large potential source of advanced biofuel RINs.

Currently, there are no valid pathways in Table 1 to §80.1426 for the generation of RINs representing electricity used as transportati on fuel. However, several companies have approached EPA with requests for such a pathwa y, and investigations are underway. It is possible that one or more new pathways for electricity may be available for use in 2012.

In addition to verifying that the feedstocks used to generate renewable electricity meet the renewable biomass definition, producers woul d also be required to document that the electricity they produce is used as a transportation fu el in order to be eligib le to generate RINs. Until recently there were very few vehicles capable of using electricity as a transportation fuel, limited mainly to electric trains and trolley cars. Expected increases in the number of vehicles with this capability, such as electric vehicles and plug in hybrids, has the potential to dramatically increase the degree to which electricity is able to be used as a transportation fuel. Verifying that the renewable electricity produced is used as a transportation fuel would still remain a challenge, however the potential fo r capitalizing on the RIN value, without the necessity of making major changes in the areas of fuel production, distribution, or end use, may be a large enough incentive to overcome this challenge. While the uncertainties associated with the generation of advanced bi ofuel RINs representing renewable electricity used as transportation fuel prevent EPA from making a quantitative projection for 2012, such RINs may nevertheless play a role in meeting the advanced biofuel standard. In light of the potential volumes of importe d sugarcane ethanol, excess biodiesel, and other sources of advanced biofuel, we continue to believe that there will likely be sufficient

volumes of advanced biofuels to meet the ne ed for 490 million ethanol-equivalent gallons. As a result, the applicable volume of advanced biofuel set forth in the statute need not be lowered. A number of commenters on the NPRM agreed w ith this assessment. However, several

commenters raised a concern about the ethanol ble ndwall, saying that the volume of ethanol that can be legally and practically consumed in 2012 is a limiting factor in how much advanced biofuel can be consumed. We disagree. Ba sed on gasoline energy demand projections from

EIA 17 , a total of about 14.3 bill gallons of ethanol could be consumed in 2012 if all gasoline contained 10% ethanol. Under the requirements of the RFS program, however, the total volume

of ethanol that would need to be consumed to meet the RFS standards would be no more than 13.7 bill gallons in 2012 18 . This assumes an extreme case in which all renewable fuel that is not

advanced biofuel is assu med to be ethanol, and all advanced biofuel ot her than biomass-based

diesel is also assumed to be ethanol.

15 Table ES1 of Electric Power Industry 2009: Year in Review. Available online: http://www.eia.doe.gov/cneaf/electricity/epa/epayir.pdf

16 Table 46 of AEO2011, Report Number DOE/EIA-0383(2011). http://www.eia.doe.gov/forecasts/aeo/tables_ref.cfm

17 Total energy demand for light-duty vehicles, motorcycles, and nonroad per AEO 2011 Tables 10, 45, and 46.

18 From Table II.C-1, sum of ethanol-equivalent gallons of conventional renewable fuel, cellulosic biofuel, and other

advanced biofuel.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 32 of 126 It is possible that more ethanol may be produced/imported in 2012 than is necessary to meet the RFS requirements, and such circumstances could accelerate the arrival of the blendwall. However, this would only occur if market forces favored the consumption of higher volumes of ethanol, and we canniot ma ke reliable predictions of such mark et forces. Since the applicable standards are set before a given compliance year begins, obligated partie s should be coordinating with producers, distributors, and blenders of the various forms of ethanol (e.g. cellulosic ethanol, corn-ethanol, sugarcane ethanol) to ensure that all RFS standards are met by the end of the compliance period.

Based on our assessment of the availability of volumes of advanced biofuel beyond those required to meet the cellulosic bi ofuel and biomass- based diesel standards, we do not believe that

the advanced biofuel standard need be lowered below the 2.0 billion gallon level specified in the Act. Thus, we are not reducing the appli cable volume of advanced biofuel for 2012.

A number of parties that commented on the NP RM requested that the applicable volume

for total renewable fuel in 2012 be reduced. Ho wever, all such commenters tied the reduction in

total renewable fuel to a reducti on in the advanced biofuel standa rd. Since we are not lowering the advanced biofuel standard for 2012, and there ar e expected to be suffi cient volumes of cornethanol to meet the need for 13.2 bill gallons of conventional renewable fu el (see Table II.C-1),

we do not believe that there is a need to lower the total renewable fuel standard.

D. Biomass-Based Diesel in 2012

Unlike for cellulosic biofuel, the statute does not require EPA to project available volumes of biomass-based diesel for years up through 2012 and to base the standard on the projected available volume. Instead, the standa rd for 2012 is to be based on the statutory applicable volume of 1.0 bill gallons. However, the statute does include waiver provisions that allow for lowering the applicable volume of biom ass-based diesel under ce rtain circumstances. Moreover, as described more fu lly in Section II.C above, we must determine whether the required volumes of advanced biof uel and/or total renewable fuel should be reduced if we reduce the required volume of cellulosic biofuel. Sin ce biomass-based diesel is also an advanced biofuel, the amount of biomass- based diesel that is consumed in 2012 directly affects our consideration of adjustments to the volumetric requirements fo r advanced biofuel and total renewable fuel. We therefore investigated whet her the applicable volume of 1.0 bill gallons for

biomass-based diesel is achiev able in 2012, and whether additiona l volumes are also feasible.

We examined recent production rates, production capacity of the industry, and projections for future production from a variety of sources. Although there are several different fuel types that can qualify as biomass-based dies el, biodiesel is by far the predominant type. Thus, our assessment focused primarily on biodi esel, though we also investigated potential

volumes of renewable diesel.

According to information from the EPA-Moderated Transaction System (EMTS) and RIN generation reports submitted to EPA from producers, we estimate that the volume of biomass-based diesel produced in 2010 was about 380 mill gallons. A number of commenters*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 33 of 126 pointed to this low volume as an indication th at the volume requirements of 800 mill gallons in 2011 and 1.0 bill gallons in 2012 are not achievable. However, many of the activities of the biodiesel industry in 2010 were due to unique ci rcumstances that may not apply in 2012. It is likely that a contributing factor to the lower production volumes in 2010 was the expiration of

the biodiesel tax credit at the end of 2009 and its absence throughout 2010, and the fact that the RFS program effectively created a demand for about 345 mill gallons in 2010. 19 A more comprehensive view of historical biodiesel production levels strongly indicates that the U.S. biodiesel industry has produced higher volumes wh en demand for it existed, and that as a result the industry has the capability to produce greater volumes than it did in 2010 under the appropriate circumstances. This point is illustrated in Figure II.D-1 below.

19 See question 6.7 in EPA's "Questions and Answers on Changes to the Renewable Fuel Standard Program (RFS2)", http://www.epa.gov/otaq/fuels/renewablefuels/compliancehelp/rfs2-aq.htm#6*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 34 of 126 Figure II.D-1

Historical Domestic Production of Biodiesel

0 100 200 300 400 500 600 700 800



### 2006 2007 2008 2009 2010Mill gallons

Source: EIA Annual Energy Outlook 2011 Early Release*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 35 of 126 The biodiesel industry's production potential supports the view that it can more than satisfy the applicable volume of biomass based diesel specified in the statute for 2012. As of August, 2011, the aggregate production capacity of bi odiesel plants in the U.S. was estimated at 2.4 billion gallons per year across 148 facilities. 20 We expect the time and reinvestment required to ramp up production at existing facilities to be less than the time required to build and begin production at new plants, which takes about a year on average. 21 Thus, restarting idled plants will not be a hindrance to meeting the applicable volumes for biomass-based diesel in 2011 or

2012.

Additionally, information from the U.S. Cens us Bureau indicates that monthly production volumes of biodiesel have increased steadily in the first half of 2011, reaching about 78 mill gallons by July 22 . See Figure II.D-2.

Figure II.D-2

2011 Domestic Production of Biodiesel

20 Figures taken from National Biodiesel Board's Member Plant List as of August 22, 2011. Some plants did not report production capacity. http://biodiesel.org/buyingbiodiesel/plants/showall.aspx

21 Based on construction times for new plants listed in Biodiesel Magazine from July 2006 through May 2009.

22 U.S. Census Bureau, Fats and Oils, Production, Consumption, and Stocks, Survey M311K. http://www.census.gov/manufacturing/cir/historical_data/m311k/index.html. Assumes 7.68 lb/gal conversion.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 36 of 126 Over the seven months shown in this figure, biodiesel production increased by an average of

about 16% each month. This trend demonstrates that the industry is responding to the higher demand created by the 800 mill gal biomass-ba sed diesel volume requirement under the RFS program in 2011. Biodiesel production will only need to increase at a more modest rate of about 3% each month after July in order for the total 2011 production volume to reach 800 mill gallons. Moreover, further increases in mont hly production volumes would not be necessary after December 2011 for the industry to reach a total production volume of 1.0 bill gallons in 2012. We believe, therefore, that the 1.0 bill ga llon requirement for biom ass-based diesel in 2012 can be met. Moreover, given the increases in monthly production volumes that occurred in the first half of 2011 and the significant amount of underutilized production capacity that exists within the biodiesel industry, there is also reason to believe that monthly production volumes will increases after July 2011 at more than need ed to meet the statut ory volume requirements, providing additional volumes that can be used to meet the advanced biofuel standard.

Projections from other sources provide add itional support to our c onclusions that 1.0 bill gal biomass-based diesel can be produced in 2012. For instance, the U.S. Department of Agriculture projects that over 400 mill gallons of biodiesel will be produced from soybean oil in 2012, and adds that "Although some other first-us e vegetable oils are also used to produce biodiesel, most of the remaining biodiesel production needed to reach the 1-billion-gallon mandate of the 2007 Energy Act uses animal fats or recycled vegetable oil as the feedstock." 23
This projection is further supported by the Agricult ural Marketing Resource Center at Iowa State University, which projects that soy-oil biodiesel production may reach as high as 470 mill gallons and that non-soy biodiesel may reach as high as 460 mill gallons. 24 Both of these sources project more growth in non-soy oil feedstock volumes than soy oil. Finally, EIA projects that the total volume of biodiesel in 2012 would be about 830 mill gallons. 25 While all of these projections suggest that volumes of biodiesel may fall short of 1.0 bill gallons, they do not take into account the increase in monthly producti on volumes as noted above, nor sources of

renewable diesel that will also be available. For instance, Dynamic Fuels has constructed one plant in Geismar, Louisiana that started pr oduction of renewable diesel in November, 2010. 26 In the final RFS2 rule, we projected that annual renewable diesel production could reach 150 mill gallons based on feedstock availability. Since re newable diesel can also be produced at existing

refineries with little or no modifi cation to processing equipment, we believe that 150 mill gallons of renewable diesel could be produced in 2012 considering the potential for refinery-based production as well as the Dynamic Fuels facilities. Thus, we curr ently believe that the total production volume of biomass-based diesel can readily reach 1.0 bill gal in 2012.

We also reviewed information submitted by registered producers of biomass-based diesel under the requirements of §80.1449 for Production Ou tlook Reports. Of the 65 facilities that submitted a report, the total projected 2012 volume of biomass-based diesel was 937 mill

23 USDA Agricultural Projections to 2020, Long-Term Projections Report OCE-2011-1, February 2011. See Table 24. Assumes 7.68 lb/gal.

24 Soybean Oil and Biodiesel Usage Projections and Balance Sheet, updated 2/18/2011. A version made available on 8/1/2011 shows similar volumes of soybean oil for biodiesel use, but does not provide information about non-soy oil sources of biodiesel. http://www.extension.iastate.edu/agdm/crops/outlook/soybeanbalancesheet.pdf. Values cited are for the "High" case.

25 Short-Term Energy Outlook, August 2011. Table 8.

26 Project status updates are available via the Syntroleum website, http://dynamicfuelsllc.com/wp-news/*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 37 of 126 gallons. We believe that this projection is i ndicative of the industry's expectation that the applicable volume requirement for 2012 will be 1.0 bill gallons and its intention to meet that requirement. Moreover, the projection provided in these reports likely underestimates the actual expectations and capabilities of the industry, si nce the number of facilitie s that submitted a report

is far less than the total number of facilities capable of producing biodiesel and re newable diesel.

In additional to production capacity and pr ojections of 2012 production volume, we also investigated feedstocks used to produce biomass-based diesel. We believe that there will be sufficient sources of qualifying renewable biomass to more than meet the needs of the biodiesel industry in 2012. The largest sources of feedstoc k for biodiesel in 2012 are expected to be soy oil, canola oil, rendered fats, and corn oil ex tracted during production of fuel ethanol. In response to the NPRM, the National Biodiesel Bo ard (NBB) cited historically high soybean production rates for 2011 as evidence that there will be ample volumes of soybean oil available for biodiesel production. Likewise, the Renewa ble Energy Group (REG) provided information on significant increases in the availability of inedible corn oil from ethanol producers that it believes will occur in the next 1-2 years.

While commenters did not provide any inform ation suggesting that the applicable volume of 1.0 bill gallons cannot be reac hed, some raised concerns about impacts on other industries and feedstock price. For instance, the American Trucking Association (ATA) stated that feedstocks

will need to be diverted from other uses in or der to meet the 1.0 bill gallon requirement, and the American Cleaning Institute (ACI) provided inform ation about how such a diversion could affect the oleochemical industry. We address concer ns about price in more detail below in our discussion of ATA's request for a waiver of th e 2012 applicable volume of 1.0 bill gallons.

While we agree that the total volume of animal fats is largely inelastic and is unlikely to grow significantly due to the presence of the increasing market for biomass-based diesel, we also agree with the statement from ACI that "there is nothing in EISA or the proposed rule that limits

the amount of animal fats that can be used to me et the mandate." Under the statutory definition of renewable biomass, valid feedstocks include animal waste material and animal byproducts. We believe that animal fats fall into these categories, and as a result we do not have the authority to exclude or limit volumes of animal fats that are used for production of biomass-based diesel. Such wastes could potentially be considered “bio genic waste oils/fats/grea ses” or “non-cellulosic portions of separated food waste” under the RI N-generating pathways listed in Table 1 to §80.1426, and thus eligible for the produc tion of RIN-generating biofuel.

In response to the NPRM, we received co mments both in support of and opposed to our proposal to maintain the statute's applicable vol ume of 1.0 bill gallons for biomass-based diesel in 2012. In general, producers of biodiesel and crop-based feedstocks were supportive, citing the sufficiency of available feedstocks and producti on capacity. Several supporters indicated that historically low biodiesel produc tion volumes are not an appropria te reference point on which to base the capabilities of the industry for the fu ture, since the higher biomass-based diesel mandates established by Congre ss for 2011 and 2012 are expected to drive production volumes more than any other factor.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 38 of 126 Parties opposed to maintaining the statutor y applicable volume of 1.0 bill gallons for 2012 were primarily obligated partie s, as well as representatives of diesel trucking companies and the oleochemical industry. To a large de gree, these commenters pointed to historical biodiesel production levels in support of thei r belief that 1.0 bill gallons in 2012 is not achievable. As described above, we do not agree with this conclusion.

One party opposed to maintaining the 1.0 bill gal requirement for 2012 also raised

concerns about infrastructure. Comments about potential biom ass-based diesel distribution

infrastructure constraints a ssociated with meeting both the 2012 and 2013 standards are

addressed in Section IV.B .5 of today’s preamble. As discusse d in that section, we continue to believe that there will be sufficient biomass-based diesel distribution infrastructure in place to support the use of the required volumes.

Of the parties that requested a reduction in the applicable volume of 1.0 bill gallons for 2012, the American Trucking Association (ATA) a nd Chevron explicitly appealed to the waiver mechanism provided at 211(o)(7)(E). The full text of this statutory provision is shown below:

(E) BIOMASS-BASED DIESEL.—

(i) MARKET EVALUATION.—The Administrator, in consultation with the Secretary of Energy and the Secretary of Agriculture, shall periodically evaluate the impact of the biomass-based diesel requirements established under this paragraph on the price of diesel fuel.

(ii) WAIVER.—If the Administrator determines that there is a significant renewable feedstock disruption or other market circumstances that would make the price of biomass-based diesel fuel increase significantly, the Administrator, in consultation with the Secretary of Energy and the Secretary of Agriculture, shall issue an order to reduce, for up to a 60- day period, the quantity of biomass-based diesel required under subparagraph (A) by an appropriate quantity that does not exceed 15 percent of the applicable annual requirement for biomass-based diesel. For any calendar year in which the Ad ministrator makes a reduction under this subparagraph, the Administrator may al so reduce the applicable volume of

renewable fuel and advanced biofuels requirement established under paragraph (2)(B) by the same or a lesser volume.

(iii) EXTENSIONS.—If the Administrator determines that the feedstock disruption or circumstances described in cl ause (ii) is continuing beyond the 60- day period prescribed in clause (ii) or this clause, the Administrator, in consultation with the Secretary of Energy and the Secretary of Agriculture, may issue an order to reduce, for up to an additional 60-day period, the quantity of biomass-based diesel required under subpar agraph (A) by an appropriate quantity that does not exceed an additional 15 percen t of the applicable annual requirement

for biomass-based diesel.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 39 of 126 The waiver authority provided in paragra ph (ii) is based on an EPA determination that there “is” a feedstock disruption or other mark et circumstance that would make the price of biomass-based diesel rise signifi cantly. The authority to extend a temporary waiver in paragraph (iii) is based on an EPA determination that such disruption or circumstance “is continuing." Thus, we believe that any waiver of the 2012 biomass-based diesel requirements under this statutory provision must be based on an ev aluation of feedstock conditions or other circumstances that exist currently and “would ma ke” the price of biomass based diesel rise significantly in 2012. If Congress had intended that we project future market circumstances that might lead to significant prices increases, it could have used "will be" in place of "is" in paragraph (ii). Thus, we believe that any waiver of the bioma ss-based diesel requirements for

2012 must be based on an evaluation of the mark et that occurs on or after January 1, 2012.

We do not believe that the information provi ded by Chevron and ATA warrants a waiver

of the 2012 biomass-based diesel volume at this time. While ATA provided some information on the relative price of biodiesel and conventiona l diesel, it did not demonstrate how this price difference represented a price incr ease as required under the statute. Also, they did not cite any particular renewable feedstock disruption or other market circ umstance to demonstrate how the difference in price between conventional diesel fu el and biomass-based dies el meets the statutory criterion for a significant increase in the price of biomass-based diesel.

Both Chevron and ATA cite an expected expiration of the biodiesel tax credit at the end of 2011 as a reason that prices will increase sign ificantly. EPA has not determined whether the expiration of a tax credit should be considered a “market circumstance” within the meaning of CAA 211(o)(7)(E)(ii), and is making no determin ation regarding that matter at this time. Whether or not such a development would be a “mar ket circumstance,” it is clear that it is not an existing circumstance, and conjecture that the tax credit may not be continued in the future does not provide an appropriate basis for a waiv er under 211(o)(7)(E)(ii). Apart from possible consideration under the statutory waiver provisi ons, however, we note that the applicable volumes set by Congress must be met regardless of the status of federal or state tax credits, subsidies, incentives, and the like.

One commenter requested a cost-benefit analysis in the context of determining the appropriate volume for biomass-ba sed diesel in 2012. Under the statute, we are to set the percentage standard for biomass-based diesel for 2012 based on the applicable volume of 1.0 bill gallons specifically set forth in the statute in CAA 211(o)(2)(B)(IV). While the statute does provide limited mechanisms for waiving all or a portion of any annual biomass-based diesel standard in 2012 under CAA 211(o)(7), the statute doe s not require a cost-benefit analysis either in setting a standard based on the statutory applicab le volume or in considering whether or not to issue a waiver. For instance, under 211(o)(7)(A ), waivers can be granted based on an EPA finding of severe harm to the economy or environm ent of a state, region, or the United States, or inadequate domestic supply. Under 211(o)(7)(E) waivers can be granted based on significant increases in the price of biomass-based diesel. Neither of these statutory provisions provides for a comparison of the costs associated with mee ting the biomass-based diesel standard to the benefits of meeting that standard. Therefore, we do not be lieve that cost-benefit analyses are necessary or appropriate in the context of c onsidering the 2012 biomass-based diesel volume of 1.0 bill gallons.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 40 of 126 Based on our review of the production potentia l of the biodiesel industry, projections from several sources, and our assessment of ava ilable feedstocks, we believe that the 1.0 billion gallons needed to satisfy the applicable volume of biomass-based diesel sp ecified in the statute can be produced in 2012, and that more than 1.0 bill gallons of production is possible. Moreover, we do not believe that waiving a por tion of the 2012 biomass-based diesel volume of 1.0 bill gallons under the provisions of 211(o )(7)(E) is appropriate at this time.

III. Final Percentage Standards for 2012

A. Background

The renewable fuel standards are expressed as a volume percentage, and are used by each refiner, blender or importer to determine their renewable volume ob ligations (RVO). Since there are four separate standards under the RFS2 program, there are likewise four separate RVOs applicable to each obligated party. Each standard applies to the sum of all gasoline and diesel produced or imported. The applicable percentage standards are set so that if each regulated party meets the percentages, then the amount of renewable fuel , cellulosic biofuel, bi omass-based diesel, and

advanced biofuel used will meet the vol umes required on a nationwide basis.

As discussed in Section II.B.6, we are fina lizing a required volume of cellulosic biofuel for 2012 of 8.65 million gallons (10.45 million ethanol equivalent gallons). The advanced biofuel and total renewable fuel volumes will not be reduced below the applicable volumes specified in the statute. The final 2012 volumes used to determine the four percentage standards

are shown in Table III.A-1.

Table III.A-1

Final Volumes for 2012

Actual Volume Ethanol Equivalent

Volume Cellulosic biofuel 8.65 mill gal 10.45 mill gal Biomass-based diesel 1.0 bill gal 1.5 bill gal Advanced biofuel 2.0 bill gal 2.0 bill gal Renewable fuel 15.2 bill gal 15.2 bill gal

The formulas used in deriving the annual re newable fuel standards are based in part on estimates of the volumes of gasoline and diesel fuel, for both highway and nonroad uses, that will be used in the year in which the standa rds will apply. Producers of other transportation fuels, such as natural gas, propane, and electri city from fossil fuels, are not subject to the standards, and volumes of such fuels are not used in calculating the annual standards. Since the standards apply to producers and importers of gasoline and diesel , these are the transportation fuels used to set the standards, and then again to determine the annual volume obligations of an individual gasoline or diesel producer or importer.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 41 of 126 B. Calculation of Standards

1. How Are the Standards Calculated?

The following formulas are used to calculate the four percentage standards applicable to producers and importers of gaso line and diesel (see §80.1405):

i i i i i i i i i i DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × = ) ( ) ( ) ( ) ( RFV % 100 Std i CB,

i CB,

i i i i i i i i i i DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × × = ) ( ) ( ) ( ) ( 5

. 1 RFV % 100 Std i BBD,
i BBD,

i i i i i i i i i i DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × = ) ( ) ( ) ( ) ( RFV % 100 Std i AB,

i AB,

i i i i i i i i i i DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × = ) ( ) ( ) ( ) ( RFV % 100 Std i RF,
i RF,

Where

Std CB,i = The cellulosic biofuel standard for year i, in percent.

Std BBD,i = The biomass-based diesel st andard (ethanol-equiva lent basis) for year i, in percent.

Std AB,i = The advanced biofuel standard for year i, in percent.

Std RF,i = The renewable fuel standard for year i, in percent.

RFV CB,i = Annual volume of cellulosic biofuel requi red by section 211(o) of the Clean Air Act for year i, in gallons.

RFV BBD,i = Annual volume of biomass-based diesel required by section 211(o) of the Clean Air Act for year i, in gallons.

RFV AB,i = Annual volume of advanced biofuel requi red by section 211(o) of the Clean Air Act for year i, in gallons.

RFV RF,i = Annual volume of renewable fuel require d by section 211(o) of the Clean Air Act for year i, in gallons.

G i = Amount of gasoline projected to be used in the 48 contiguous states and Hawaii, in year i, in gallons.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 42 of 126 D i = Amount of diesel projected to be used in the 48 contiguous states and Hawaii, in year i, in gallons.

RG i = Amount of renewable fuel blended into ga soline that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.

RD i = Amount of renewable fuel ble nded into diesel that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.

GS i = Amount of gasoline projected to be used in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.

RGS i = Amount of renewable fuel blended into gasoline that is projected to be consumed in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.

DS i = Amount of diesel projected to be used in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.

RDS i = Amount of renewable fuel blended into di esel that is projected to be consumed in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.

GE i = The amount of gasoline projected to be produced by exempt small refineries and small refiners in year i, in gallons, in any year they are exempt per §§80.1441 and 80.1442, respectively.

DE i = The amount of diesel projected to be produced by exempt small refineries and small refiners in year i, in gallons, in any year they are exempt per §§80.1441 and 80.1442, respectively.

The four separate renewable fuel standards for 2012 are based in part on the gasoline and diesel consumption volumes proj ected by EIA. The Act requires EPA to base the standards on an EIA estimate of the amount of gasoline and di esel that will be sold or introduced into commerce for that year. EIA estimates 136 billion gallons of gasoline and 52 27 billion gallons of transportation diesel will be sold or introduced into commerce in 2012. These gasoline and diesel volumes are adjusted to account for renewable fuel volumes – ethanol (estimated by EIA) and biodiesel (based on EIA’s Short-Term Energy Outlook (STEO ). For 2012, these values are 13 billion gallons and 0.8 billion gallons, respectively.

2. Small Refineries and Small Refiners

In CAA section 211(o)(9), enacted as part of the Energy Policy Act of 2005, Congress provided a temporary exemption to small refineries (thos e refineries with a crude throughput of no more than 75,000 barrels of crude per day) through December 31, 2010. In RFS1, we

27 Excluding diesel used by ocean-going vessels.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 43 of 126 exercised our discretion under section 211(o)(3)(B ) and extended this temporary exemption to the few remaining small refiners that met the Small Business Administration’s (SBA) definition of a small business (1,500 employees or less comp any-wide) but did not m eet the statutory small refinery definition as noted above. Because EISA did not alter the small refinery exemption in any way, the RFS2 program regulations exempt ed gasoline and diesel produced by small

refineries and small refiners in 2010 from the re newable fuels standard (unless the exemption was waived), see 40 CFR §80.1141.

Under the RFS program, Congress provided two ways that small refineries can receive a temporary extension of the exemption beyond 20 10. One is based on the results of a study conducted by the Department of Energy (DOE) to determine if small refineries would face a disproportionate economic hard ship under the RFS program. The other is based on EPA determination of disproportiona te economic hardship on a case-by-case basis in response to refiner petitions.

In January 2009, DOE issued a study which did not find that small refineries would face a disproportionate economic ha rdship under the RFS program. 28 The conclusions were based inpart on the expected robust availability of RINs and EPA’s ability to grant relief on a case-bycase basis. As a result, beginning in 2011 small refiners and small refine ries were required to participate in the RFS program as obligated pa rties, and there was no small refiner/refinery volume adjustment to the 2011 standard as there was for the 2010 standard.

Following the release of DOE's 2009 small re finery study, Congress directed DOE to complete a reassessment and issue a revised report. DOE recently re-evaluated the impacts of the RFS program on small entities and concluded that 14 small refineries would suffer a disproportionate hardship if require d to participate in the program 29 . As a result, these refineries will be exempt from being obligated parties for a minimum of two additional years, 2011 and

2012. 30 The 2012 standards reflect the exemption of these refineries. In addition, and separate from the DOE determination, EPA may extend the ex emption for individual small refineries on a case-by-case basis if they demonstrate di sproportionate economic hardship.

In the NPRM, we stated that “requests for exemptions that are approved after the release

of the final 2012 RFS standards will not affect th e 2012 standards.” This position is unchanged

from that set in the final rule establishing the 2011 standards 31 . At that time, we stated, “EPA believes the Act is best interpreted to require i ssuance of a single annual standard in November that is applicable in the following calendar ye ar, thereby providing adva nce notice and certainty to obligated parties regarding their regulatory re quirements. Periodic revisions to the standards

to reflect waivers issued to small refineries or refiners would be inconsistent with the statutory text, and would introduce an undesira ble level of uncertainty for obligated parties.” However, a few commenters took issue with this approach. Specifically, these commenters maintain that

28 DOE report “EPACT 2005 Section 1501 Small Refineries Exemption Study”, (January, 2009).

29 "Small Refinery Exemption Study: An Investigation into Disproportionate Economic Hardship," U.S. Department of Energy, March 2011.

30 Since the standards are applied on an annual basis, the ex emptions are likewise on an annual basis even though the determination of which refineries would receive an extension to their exemption did not occur until after January 1,

2011.

31 See 75 FR 76805, December 9, 2010.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 44 of 126 EPA did not provide notice and comment opportun ities regarding the extensions of the small refinery exemptions for the current complian ce period (2011), and that EPA cannot grant such extensions (mid-year) without modifying the standa rds because such authority is not provided in the statute. In addition, these commenters ex tend the application of their comments to any extensions of exemptions that may occur af ter issuance of the final 2012 standards. Commenters suggested requiring petitions to be submitted in time to be considered in the annual standard-setting process. One commenter also suggested that the volumes waived in 2011 as a result of the small refiner waivers be “made up ” in setting the 2012 standards. EPA understands

the desire of the commenters to have the annual required volumes of renewable fuels realized. However, while the statute requires EPA to pub lish the standards for the following year by November 30 of the preceding year, there is no provision for changing the percentage standards once they are set outside of the waiver provisi ons of CAA 211(o)(7). In addition, we are not required to ensure that the biofuel volumes in th e statute are precisely met. We are required to use the specified volumes to set the percenta ge standards, but there are no provisions for ensuring that the percentage standards actuall y result in the specified volumes actually being consumed. This outcome is evidenced by the fact that we use projections of gasoline and diesel volume for the next year which might turn out to be too high or too low. Insofar as those projections are wrong, the percentage standa rds will not produce a demand for biofuels that exactly corresponds to the volumes in the statut e. Thus Congress allowed for some imprecision

to exist in the actual volumes of renewable fuel that are consumed as a result of the percentage

standards that we set each Nove mber, and did not provide a mean s for correcting the percentage standards after November to ensure that the applicable volumes of renewable fuel are exactly met in a given compliance year.

3. Final Percentage Standards

As finalized in the March 26, 2010 RFS2 rule, the standards are expressed in terms of energy-equivalent gallons of renewable fuel, with the cellulosic biofuel, advanced biofuel, and

total renewable fuel standard s based on ethanol equivalence and the biomass-based diesel standard based on biodiesel equivalence. Ho wever, all RIN generati on is based on ethanolequivalence. More specifically, the RFS2 re gulations provide that production or import of a gallon of biodiesel will lead to the generation of 1.5 RINs. In order to ensure that demand for 1.0 billion physical gallons of biomass-based diesel will be created in 2012, the calculation of the

biomass-based diesel standard provides that the required volume be multiplied by 1.5. The net

result is a biomass-based diesel gallon being worth 1.0 gallons toward the biomass-based diesel standard, but worth 1.5 gallons toward the other standards. 32

The levels of the percentage standards woul d be reduced if Alaska or a U.S. territory chooses to participate in the RFS2 program, as gasoline and diesel produced in or imported into that state or territory would then be subject to th e standard. Neither Alaska nor any U.S. territory has chosen to participate in the RFS2 program at this time, and thus the value of the related terms

in the calculation of the standards is zero.

32 75 FR 14716, March 26, 2010.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 45 of 126 Note that the terms for proj ected volumes of gasoline and diesel use include gasoline and

diesel that has been blended with renewable fuel. Because the gaso line and diesel volumes estimated by EIA include renewable fuel use, we must subtract the total renewable fuel volume from the total gasoline and diesel volume to get total non-renewable gasoline and diesel

volumes. The values of the variables desc ribed above are shown in Table III.B.3-1. 33 Terms not

included in this table have a value of zero.

Table III.B.3-1 Values for Terms in Calculation of the Standards (bill gal)

Term Value

RFV CB

, 2012 0.01045

RFV BBD

, 2012 1.0

RFV AB

, 2012 2.0

RFV RF

, 2012 15.20

G 2012 139.98

D 2012 44.47

GE 2012 3.27

DE 2012 1.48

RG 2012 14.17

RD 2012 0.83

Using the volumes shown in Table III.B.3-1, we have calculated the percentage standards

for 2012 as shown in Table III.B.3-2.

Table III.B.3-2 Final Percentage Standards for 2012

Cellulosic biofuel 0.006%

Biomass-based diesel 0.89%

Advanced biofuel 1.19%

Renewable fuel 9.03%

33 To determine the 49-state values for gasoline and diesel, the amounts of these fuels used in Alaska is subtracted from the totals provided by DOE. The Alaska fractions are determined from the most recent (2009) EIA State Energy Data, Transportation Sector Energy Consumption Es timates. The gasoline and transportation distillate fuel oil fractions are approximately 0.2% and 0.8%, respectively. Ethanol use in Alaska is estimated at 8.4% of its gasoline consumption (based on the same State data), and biodiesel use is assumed to be zero.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 46 of 126 IV. Biomass-Based Diesel Volume for 2013

In today's action we are finalizing an app licable volume for biomass-based diesel for 2013 in accordance with the statutory requirement in CAA 211(o)(2)(B)(ii) to establish the applicable volume of biomass-ba sed diesel for years after 2012 no later than 14 months before the first year for which the applicable volume will apply. To do this, we have reviewed RFS program implementation to date and analyzed a number of factor s specified in the statute as part of this effort. This included an investigati on into the demand for biomass-based diesel in 2013 under the applicable advanced biofuel volume specifi ed in the statute, analyses we conducted in the RFS2 final rulemaking, biodiesel producti on, consumption, and infrastructure issues, and comments received in response to the NPRM. In these investigations, biodiesel was the primary focus since it is expected to be the predominant ty pe of biomass-based diesel through at least the next few years. However, renewable diesel may also play a role in meeting the biomass-based diesel standard. When appropr iate, we have discussed rene wable diesel separately from

biodiesel.

Note that, in setting the 2013 applicable vol ume of biomass-based di esel, we are not at this time setting the percentage standards that wo uld apply to obligated parties in 2013. Instead, the percentage standards will be determined after projections of gasoline and diesel volume are provided by the Energy Information Administr ation (EIA) in the fall of 2012, and will be announced by November 30, 2012. Moreover, in t oday's action we are not addressing potential exemptions for small refineries and/or small refiners in 2013, since such exemptions are only relevant in the context of specifying the percentage standards and their applicability. Finally, we are not specifying any applicable volumes of bi omass-based diesel for 2014 or later years in today's action.

A. Statutory Requirements

Section 211(o)(2)(B)(i) of the Clean Air Act specifies the applicable volumes of renewable fuel on which the annual percentage st andards must be based, unless the applicable volumes are waived or adjusted by EPA in accordance with specific authority and directives specified in the statute 34 . Applicable volumes are provided in the statute for years through 2022 for cellulosic biofuel, advanced biofuel, and to tal renewable fuel. For biomass-based diesel, applicable volumes are provided through 2012. For ye ars after those specified in the statute (i.e.

2013+ for biomass-based diesel a nd 2023+ for all others), EPA is required under 211(o)(2)(B)(ii) to determine the applicable vol ume, in coordination with the Secretary of Energy and the Secretary of Agriculture, based on a review of the implementation of the program during calendar years for which the statute specifies the applicable volumes, and an analysis of the following:

• The impact of the production and use of re newable fuels on the environment, including on air quality, climate change, conversion of wetlands, ecosystems, wildlife habitat, water quality, and water supply;

34 For example, EPA may waive a given standard in whole or in part following the provisions at 211(o)(7).*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 47 of 126 • The impact of renewable fuels on the energy security of the United States;

• The expected annual rate of future comme rcial production of renewable fuels, including

advanced biofuels in each category (cellulosic biofuel and biomass-based diesel);

• The impact of renewable fuels on the infras tructure of the United States, including deliverability of materials, goods, and produc ts other than renewable fuel, and the sufficiency of infrastructure to deliver and use renewable fuel;

• The impact of the use of renewable fuels on th e cost to consumers of transportation fuel and on the cost to transport goods; and

• The impact of the use of renewable fuels on other factors, including job creation, the price and supply of agricultural commoditie s, rural economic development, and food prices.

While EPA is given the authority to determine the appropriate volume of renewable fuel for those years that are not specified in the statut e based on a review of pr ogram implementation and analysis of the factors listed above, the statute also specifies that th e applicable volume of

biomass-based diesel cannot be less than the applicable volume for calendar year 2012, which is 1.0 bill gallons.

It is useful to note that the statutory provisions described above are silent in two important areas. For instance, the statute does not provide numerical criteria or thresholds that must be attained when EPA determines the app licable volume of biomass-based diesel for years after 2012 (other than specifying a minimum volum e of 1.0 bill gal), nor does it describe any overarching goals such as maximizing GHG benefits or energy security benefits, maximizing or minimizing supply of renewable fuel, or minimizing cost. Despite this ambiguity in the statute, commenters differed in their perspectives on the intent of Congress in allowing EPA to determine the appropriate applicable volume fo r biomass-based diesel for years after 2012. Some expressed their belief that Congress in tended for the statutory minimum volume of 1.0 bill gallons to be used to set the applicable vol ume for all years after 2012, with higher volumes being required only if EPA could demonstrate th at those higher volumes were already being produced. Others expressed the belief that Co ngress intended the required volumes of biomassbased diesel to increase every year, with EPA's ro le being that of determining an achievable size of that increase. However, since the statute is silent with regard to Congressional intent, we believe that EPA, in coordina tion with DOE and USDA, is simply charged with making a determination of the applicable volumes based on a judgment of their reasonableness in the context of a review of program implementation and analysis of th e factors described above. This is the approach we proposed in the NPRM and are using in today's final rule.

We also note that the statute does not provide authority to ra ise the applicable volumes of

advanced biofuel or tota l renewable fuel above those specified in the statute for years up to and including 2022. Thus, any increase in the bioma ss-based diesel volume re quirement above that specified for 2012 would not have any impact on th e advanced biofuel or total renewable fuel volume requirements. While increasing the biom ass-based diesel volume requirement above the*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 48 of 126 1.0 bill gallons minimum value specified in the statute could result in a change in the makeup of

biofuels used to meet the advanced biofuel a nd the total renewable fuel standards, doing so would not change the total required volumes of those fuels (in terms of ethanol-equivalent gallons).

Finally, the statute also specifies the timeframe within which these volumes must be promulgated: the rules establishing the applicab le volumes must be finalized no later than 14 months before the first year for which such applicable volume will apply. For the biomass-based diesel volume that would apply beginning on January 1, 2013, then, we must finalize the applicable volume by November 1, 2011.

B. Factors Considered in Assessing 2013 Biomass-Based Diesel Volumes

As described in Section IV.A, we are requi red to review the implementation of the RFS program for years prior to 2013, and to use inform ation from this review in determining the applicable volume of biomass-base d diesel for 2013. In the NPRM we indicated our belief that this review is of limited value due to the short history of the RFS program. Not only did the RFS1 program have no volume re quirement specific to biomass- based diesel, but even in 2010 under the RFS2 program severa l unique factors hindered biodi esel production volumes from increasing substantially above hi storical levels. These factor s included the availability of carryover RINs from 2008 and 2009 and the expira tion of the biodiesel tax credit (which was reinstituted at the end of 2010).

Since release of the NPRM, however, some information has become available on the implementation of the RFS progra m in 2011. While the available data covers only the first half of 2011, it does provide some indica tion as to how the biomass-base d diesel standard for 2011 is affecting the market for biodiesel. As describe d more fully in Section II.D, reported biodiesel production has increased significan tly between January and July of 2011, and is on track to meet the applicable volume of 800 mill gallons for 2011. Based on these results, we believe that the RFS program is working as intended, and that ther e is reason to believe that higher applicable volumes in future years would likewise drive incr eases in production volumes. A review of the operation of the RFS program during the re mainder of 2011 and 2012 will provide more complete information for purposes of helping us to evaluate how the industry, as well as feedstock supplies and infrastructure, can res pond to potential requirements in 2014 and beyond.

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

moderate increases in biomass-based diesel a bove the statutory minimum of 1.0 bill gallons. We

cited the annual increments in bi omass-based diesel volumes speci fied in the statute for years 2009 through 2012, and conveyed our belief that our proposed applicable volume of 1.28 bill gallons for 2013 was not a dramatic change from th e trend in increments in the statute. In addition, since this biomass-base d diesel volume had already been partially evaluated in the RFS2 rule, we decided to eval uate the appropriatene ss of setting an applicable volume of 1.28 bill gallons for 2013 by considering whether 1.28 b ill gal of biomass-based diesel was reasonable given likely market demand, availability of feed stocks, production capacity , limitations related to*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 49 of 126 storage and consumption, infrastruct ure, and the impacts of biomass- based diesel in a variety of areas as required under the statute.

In responding to the NPRM, some commenters took issue with our characterization of the proposed volume of 1.28 bill gallons as a "mode rate" increase consistent with the annual

increments in biomass-based di esel volumes specified in the statute for years 2009 through 2012. These commenters also suggested that any compar ison to volume requirements in the statute is not appropriate. However, as described in the NPRM, we did not base our proposed volume of 1.28 bill gallons on this comparison, but only used it to make a judgment regarding whether the 0.28 bill gal increment above the statutory min imum of 1.0 bill gallons could reasonably be

considered moderate. We continue to believe that this is the case, and that a comparison to the statutory volumes is appropriate for this limited purpose. Other commenters agreed with the comparison and agreed that the 0.28 bill gallons in crement can appropriately be characterized as

moderate.

In some cases commenters who were opposed to the proposed volume requirement of 1.28 bill gallons cited concerns that the 2012 a pplicable volume of 1.0 bill gallons is not

achievable. As described more fully in Section II.D, our evaluation, based in part on biodiesel production in the first half of 2011, has led us to conclude that the 1.0 bill gallon applicable volume for 2012 is indeed achievable. Therefore, we believe that concer ns about the industry's ability to meet the applicable volume in 2012 ar e not a reasonable basis for concerns about achieving 1.28 bill gallons in 2013. Other comment ers agreed with our assessment of 2012 and agreed that an increase of 0.28 bill gallons ove r the statutory minimum is moderate given the capabilities of the industry.

Several commenters suggested that 1.28 bill ga llons is an infeasible target for 2013, and requested that we set the biom ass-based diesel standard at the statutory minimum of 1.0 bill gallons. Commenters taking this view generally did not offer any data or information to support their belief that 1.28 bill gal is not achievable in 2013 beyond references to historical biodiesel productions rates. As described in Section II.D, we believe that the use of biodiesel production

data from 2010 and earlier is of limited value, and production capaci ty as well as more recent data on actual production volumes does in fact de monstrate that the industry is capable of significant increases in production when demand for it exists. As described more fully in Sections IV.B 1 through 5 below, we continue to believe that 1.28 bill gallons is achievable based on production capacity, availa bility of feedstocks, recent trends in production volumes, and efforts to update infrastructu re for storage, transport, and blending. Our consideration of other impacts, such as fuel cost s, can be found in Section IV.C.

1. Demand for Biomass-Based Diesel

In the NPRM we described why we believe d that the applicable volume of advanced biofuel would likely create a demand for biomass-ba sed diesel in excess of 1.0 bill gallons. We continue to believe that this is the case. A summary in this regard follows.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 50 of 126 The demand for biomass-based diesel in 2013 will be a function of not only the biomassbased diesel standard, but also the advanced bi ofuel standard, since the standards under the RFS2 program are nested. There are currently only a sm all number of biofuels that are likely to be available for meeting the advanced biofuel standard. In addition to biomass-based diesel, these would include cellulosic biofuel, coprocessed renewable diesel, imported sugarcane ethanol, and other advanced biofuels. As described in Section II.B, cellulosic biofuels will be a very small fraction of the 2.0 bill gallon advanced biofuel re quirement in 2012, and we expect the same to be true in 2013 with respect to the 2.75 bill gal ad vanced biofuel requireme nt. We are not aware of any facilities intending on producing renewable diesel through co-processing with petroleum in 2012, though several have expr essed interest. Regarding ot her advanced biofuels, as described in Section II.C, vol umes are expected to reach around 60 mill gallons in 2011 and 80 mill gallons in 2012. As a result, we expect volumes of cellulosic biofuel, coprocessed renewable diesel, and other advanced biofuels to be small in comparison to volumes of imported sugarcane ethanol. Thus, to the degree that there are limits in the volumes of sugarcane ethanol that can be imported into the U.S., additional bi omass-based diesel would be needed to ensure

the advanced biofuel standard of 2.75 bill gallons can be met.

Between years 2000 and 2009, the volume of s ugarcane ethanol imported into the U.S. from Brazil ranged from 46-730 million gallons per year, or on average, approximately 200 million gallons per year. However, imports of ethanol have been much lower since 2010 for a variety of reasons, including:

• Extremely wet weather in 2009/10 and dr y conditions in 2010/11 which cut into Brazilian supplies of sugarcan e and reduced sugar content

• The international price of sweetener wa s so attractive in 2010 that mills may have given greater priority to sugar

• Expanding sales of flex fuel vehicles in Brazil, which has continued to increase

Brazilian domestic ethanol demand

• Demand for Brazilian ethanol in other countries

Nevertheless, recent market pr ojections suggest that the volum e of sugarcane ethanol that can be imported into the U.S. from Brazil in 2013 will be on the order of historical import volumes prior to 2010, with the potential to reach the historical maximum. For instance, one source that evaluates trends and issues for U.S. energy markets is the U.S. Energy Information Administration's (EIA) Annual Energy Outlook (AEO). 35 This report projects U.S. net ethanol imports in 2013 to be 306 million gallons. Another source for U.S. and world commodity projections is the Food and Agricultural Policy Research Institute's (FAPRI) U.S. and World Agricultural Outlook. The most current vers ion of the outlook, the FAPRI 2011 Agricultural Outlook, projects for the year 2013 that the U.S. will have net ethanol imports of 768 million

35 U.S. Energy Information Administration (EIA). “AEO2011,” April 2011. http://www.eia.doe.gov/forecasts/aeo/index.cfm*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 51 of 126 gallons. 36 The only next ethanol exporters tracked in the FAPRI report are Brazil and China, with Brazil export volumes totally nearly 20 times those from China. Therefore, all ethanol imports into the U.S. can reasonably be considered to be from Brazil.

As we stated in the NPRM, then, we believe that the total volume of advanced biofuel other than biomass-based diesel will likely be less than about 1 billion gallons in 2013 37 . In order to meet an advanced biofuel volume requi rement of 2.75 billion gallons, then, it is likely that more than 1.0 bill gallons of biomass-ba sed diesel (representing more than 1.5 billion ethanol-equivalent gallons) will be needed. The volume of biomass-based diesel that may be needed in excess of 1.0 bill gallons could potentia lly be on the order of hundreds of millions of gallons.

Among the parties that submitted comments in response to the NPRM, none contested our assessment of the volumes of sugarcane ethano l that might be expected to be imported into the U.S. from Brazil in 2013. Nevertheless, par ties that were opposed to setting the biomassbased diesel applicable volume at 1.28 bill ga llons in 2013 raised doubts about the projected

demand for biomass-based diesel in 2013. In some cases commenters ignored the driving nature

of the advanced biofuel standard or implicitly assumed that EPA w ould waive some portion of it. The American Trucking Association (ATA) explicitly requested that we lower the 2013

advanced biofuel standard in or der to ensure that demand for biomass-based diesel would not exceed 1.0 bill gallons in 2013. As described in the NPRM, we have assumed for the purposes of this rulemaking that the applicable volume of 2.75 bill gallons of advanced biofuel specified in the statute for 2013 will be used in setting the 2013 advanced biofue l standard. We will investigate the need to lower some portion of the advanced biofuel volume for 2013 when we set the annual 2013 percentage standards in Novemb er, 2012. In addition, we have authority to waive all or a portion of the standards after they are initially set.

The American Petroleum Institute cited pr ojections from AEO 2011 in support of their argument that biodiesel volumes will not reach 1.28 bill gallons in 2013. For instance, Table 11 of AEO 2011 projects a total biodiesel consump tion of 1.04 bill gal in 2013. However, we do not believe that the projections provided in AEO 2011 can be used in this way, since EIA assumes that the required volume of advanced biofuel in any given year will be reduced concurrently with reductions in the required volume of cellulosic biofuel 38 . As a result, the total projected volume of biodiesel a nd imported ethanol in the 2013 EIA projections falls far short of what would be necessary to meet the applicable volume 2.75 bill gallons of advanced biofuel set

forth in the statute.

Some parties that were oppos ed to setting the biomass-based diesel applicable volume at 1.28 bill gallons in 2013 did recognize the driving na ture of the advanced biofuel standard, but questioned the need to set the biomass-based di esel standard above the statutory minimum of 1.0 bill gallons. They argued that the market should be allowed to determine the relative volumes of

36 Table "Ethanol Trade", Commodity Outlook/Biofuels, FAPRI-ISU 2011 World Agricultural Outlook. http://www.fapri.iastate.edu/outlook/2011/

37 Including some small contributions from cellulosic biof uel, coprocessed renewable diesel, and other advanced

biofuels.

38 Communication with W. Brown, Energy Information Administration*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 52 of 126 biomass-based diesel, imported s ugarcane ethanol, and other advan ced biofuels needed to meet

the advanced biofuel standard of 2.75 bill gallons. This approac h, they argued, could potentially minimize the overall cost of compliance with the advanced biofuel standard in 2013. However, as described in the NPRM, the st atute does not provide any overarc hing goals for EPA to achieve in setting the applicable volumes for biofuels in years after those specifically set forth in the statute. Thus, the statute doe s not indicate that EPA should ma ximize GHG benefits or energy security benefits, maximize or minimize supply of renewable fuel, or minimize cost. Instead, the statute provides a list of factors we must consid er. While one of those factors is cost, other factors must also be considered. For instance, setting the biomass-based diesel standard at 1.28 bill gallons instead of at the statutory minimum of 1.0 bill gallons will provide more certainty that the applicable volume of advanced biofuel set forth in the statute will not need to be reduced. This, in turn, means that there w ill be more certainty of reduced GHG emissions through the use of more advanced biofuels, and increased certainty of energy security benefits in

terms of reduced reliance on fossil fuels.

As described above, we believe that there are limits in the volumes of sugarcane ethanol that can be imported in 2013, that advanced biofuels other than sugarcane ethanol and biomassbased diesel will not be produced in significant qu antities, and that as a result it is likely that more than 1.0 bill gallons of biomass-based diesel will be needed in order to meet an advanced biofuel volume requirement of 2.75 billion gallons. However, if we do not set the biomass-based diesel standard above 1.0 bill gallons, biodiesel producers will be less ce rtain of the mandated demand for their product given the opportunities that are also created by the advanced biofuel standard for imported sugarcane ethanol. Due to this uncertainty, the biodiesel industry is less likely to make preparations to increase produc tion above 1.0 bill gallons. In the event that imported sugarcane ethanol volumes fall short of wh at is needed to meet the advanced biofuel standard in 2013, as we project, th e biodiesel industry would not be in an ideal position to make up the difference. A waiver of the advanced bi ofuel standard would then become more likely due to insufficient supply. If we did waive a portion of the advanced biofuel standard for 2013, obligated parties that had acquire d sufficient RINs to comply with the RFS mandates would be left holding more RINs than they need.

In setting the biomass-based diesel volume re quirement at 1.28 bill gallons rather than at the statutory minimum of 1.0 bill gallons, then, we are creating greater certainty for both producers of biomass-based diesel and obligated parties, and increasing certainty that the intended GHG emissions reductions and energy secu rity benefits associated with the use of advanced biofuels will be realized. It is possible that there may be some additional cost for compliance with the advanced biofuel require ment of 2.75 bill gallons under a biomass-based diesel requirement of 1.28 bill gallons, as compared to setting the biomass-based diesel requirement at the statutory minimum of 1.0 bill ga llons and allowing the market to determine the relative volumes of each type of advanced biofuel that will be produced in 2013 to meet the

advanced biofuel standard of 2.75 bill gallons. However, we ha ve balanced the potential for somewhat increased costs against the additiona l certainty of GHG reductions and enhanced energy security provided by the advanced bi ofuel volume requirement of 2.75 bill gallons. Therefore, after consideration of all the factors required under the statute, we believe that setting

the biomass-based diesel standa rd at 1.28 bill gallons in 2013 is a reasonable exercise of the authority provided EPA by Congress.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 53 of 126 2. Availability of Feedstocks to Produce 1.28 Billion Gallons of Biodiesel

In the NPRM, we provided our assessment of the types and amounts of feedstocks that could be used to produce 1.28 bill gallons of bi omass-based diesel in 2013. This assessment

included references both to the work that had been done in the RFS2 final rule as well as a recent report released by IHS Global Insight 39 . The feedstock estimates from these two sources are

shown in Table IV.B.2-1.

Table IV.B.2-1 Feedstocks That May Contribute to 2013 Volume of 1.28 bill gal (mill gal)

Source RFS2 Final Rule IHS Global Insight

Grease and rendered fats 380 272

Corn oil 300 185 Soybean oil 600 624

Canola oil 0 68

Palm oil 0 7

Other 0 185 Total 1,280 1,340

As some commenters pointed out, these two source s used fundamentally different approaches. In the case of the RFS2 final rule, projections of feedstock volumes were determined first, and then summed to conclude that 1.28 bill gal is a reasonable volume of biom ass-based diesel that could be achieved in 2013. In contrast, the IH S Global Insight report began with the aim of reaching 1.3 bill gallons in 2013, and then conducte d modeling to determine the likely mix of feedstocks that would support that volume. Neve rtheless, we believe that these sources suggest two similar ways that the market could meet the demand for feedstocks under a required volume of 1.28 bill gallons of biomass-based diesel.

One commenter stated that we relied too heavily on these sources without additional analysis. We did in fact conduct a more up-to-date analysis of these feedstocks and, as described below, the updated analysis conf irms our belief that the proj ections in Table IV.B.2-1 are reasonable projections for the mix of feedstocks that could be used to reach 1.28 bill gallons of biomass-based diesel. Other commenters agreed w ith our assessment of av ailable feedstocks and

our conclusions that there would be sufficient volumes to meet a biom ass-based diesel volume requirement of 1.28 bill gallons. A summary of our updated assessment of feedstocks is

included below.

a. Grease and Rendered Fats

39 Table 2, "Biodiesel Production Prospects for the Next Decade," IHS Global Insight, March 11, 2011*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 54 of 126 According to the U.S. Census Bureau, the total volume of yellow grease and other greases (most likely trap grease) produced in 2010 was about 340 mill gallons 40 . In the first half of 2011, production of greases was about 10% higher than for the same period in 2010, suggesting that total 2011 production could re ach 370 mill gallons or more, similar to the production rates in 2008 and 2009.

With regard to inedible tallow, the volume produced in 2010 was about 440 mill gallons,

and indications from the first half of 2011 are th at a similar volume will be generated in 2011 as

well.

Taken together, the total volume of grease and rendered fats that is produced annually is over 800 mill gallons. This is significantly more th an was estimated in the RFS final rule and the report from IHS Global Insight for use in the production of biomass-based diesel in 2013. Moreover, we have not included in our estimate other potential sources, such as edible tallow, lard, and poultry fats. While thes e other potential feedstocks curre ntly having existing markets, it may become economical for them to be used in the production of biomass-based diesel.

In their comments on the NPRM, the America Cleaning Institute raised concerns about

the diversion of animal fats from the oleochemic al industry for the production of biofuels. We

noted in Section II.D that we do not have the authority to prevent feedstocks that meet the statutory definition of renewable biomass to be used in the produc tion of renewable fuel. While

the choice of which feedstocks will be used to produce biomass-based dies el will be determined by the market, based on our assessment, it is po ssible that the 1.28 bill gall requirement could be

met without the use of animal fats given the available volume of gr eases, corn oil, and vegetable oils as described more fully below.

b. Corn Oil

The RFS2 final rule projected that by 2013, 34% of all dry mill et hanol facilities would extract corn oil from the by-products of ethanol production using advanced extraction technologies. This estimated extrac tion rate led us to c onclude that the volume of corn oil could reach 300 mill gallons in 2013. While currently ava ilable technologies have not been able to reach the oil extraction rates that we assumed in the RFS2 final rule, these lower extraction rates have been offset by a higher number of ethanol plants utilizing some form of extraction technology. For instance, according to a recent article in Ethanol Producer Magazine, up to 55 percent of plants may be extrac ting corn oil by the end of 2012. 41 Similarly, in an article in Biodiesel Magazine Dave Elsenbast, vice presiden t of supply chain management for REG stated that as of July 2011 about 35% of U.S. corn et hanol plants had implemented corn oil extraction and that he expected that number to double within the next couple of years 42 . In the NPRM we

40 Current Industrial Reports, U.S. Census Bureau, M311K - Fats and Oils: Production, Consumption, and Stocks, Table 2b. Assumes 7.5 lb/gal. http://www.census.gov/manufacturing/cir/historical_data/m311k/index.html

41 Joseph Riley, "Customized Coproducts Needed as Industry Matures," June 6, 2011. Ethanol Producer Magazine.

42 Dave Elsenbast quoted in Ron Kotrba, “Biodiesel from corn oil: a growing force,” July 6, 2011. Biodiesel Magazine.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 55 of 126 stated our expectation that the percentage of dry mill ethanol facilities using some form of corn oil extraction technology will increase to 60% by 2013. Given the information from Ethanol Producer Magazine and Biodiesel Magazine, this estimate appears reasonable.

If 60% of all dry mill corn ethanol facilities were extracting corn oil at rates capable with current technology, the amount of corn oil av ailable for biodiesel production would be approximately 270 million gallons. However, we expect that by 2013 technology improvements will increase corn oil production levels to the 300 million gallons projected in the RFS2 rule. Additional corn oil could come from ethanol production facilities using corn fractionation or wet milling technology. This corn oil was not consider ed as a biodiesel feedst ock in the RFS2 rule, but market conditions may result in its availability to the biodiesel industry. The higher adoption rate of corn oil extraction in comparison to our projections from the RFS final rule, and the promise of ever increasing oil extraction yields , indicate that the 300 million gallons of corn oil extraction projected in the RFS2 rule in 2013 remains a reasonable projection. Comments from the Renewable Energy Group support this view.

c. Soybean Oil

While a number of parties commented on the use of soybean oil for the production of biomass-based diesel, none pr ovided data or information s uggesting that there would be insufficient supplies to meet the need for 1.28 b ill gallons of biomass-based diesel as well as other traditional markets for soybeans. Inst ead, comments on the use of soybean oil were

focused on costs. We have addressed these comme nts separately in Secti on IV.C.5. The rest of this section summarizes our assessment of soybean oil availability, updated since the NPRM.

We examined recent and historical soybean oil production and consumption volumes to verify that the volumes shown in Table IV.B.2- 1 are achievable in 2013. As shown in Figure IV.B.2.c-1, soy oil production has increased stead ily over the last 30 years. While the trend suggests that domestic soy oil production coul d reach nearly 2.9 bill gal by 2013, production has

fallen short of this trend in the la st few years at around 2.5 bill gallons.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 56 of 126 Figure IV.B.2.c-1

Historical Domestic Pr oduction of Soybean Oil

1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 3,000

1980 1985 1990 1995 2000 2005 2010 2015Million gallons of soybean oil

Source: Oil Crops Yearbook 2011, U.S. Department of Agriculture, Economic Research Service, Appendix Table 5. Assumes 7.68 lb/gal.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 57 of 126 To determine what portion of domestically produced soy oil could be available for use in the production of biomass-based diesel in 2013, we also examined recent historical trends for domestic consumption and exports. Domestic consumption of soy oil for purposes other than biofuel has also increased steadily over the last 30 years, but was notably lower in the period2007 - 2010 compared to previous years, averaging about 1.9 bill gallons. See Figure IV.B.2.c2.

Figure IV.B.2.c-2

Historical Non-Biofuel Domestic Consumption of Soybean Oil

1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 3,000

1980 1985 1990 1995 2000 2005 2010 2015Million gallons of soybean oil

Source: Oil Crops Yearbook 2011, U.S. Department of Agriculture, Economic Research Service, Appendix Table 5. Assumes 7.68 lb/gal.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 58 of 126 If production of soybean oil in 2013 was 2.5 bill gal and domestic consumption was 1.9 bill gal, consistent with trends in the last several years, then the volume of soy oil that could be available for the production of biomass-based diesel in 2013 would be about 600 million gallons. This is

consistent with the volumes estimated to be available in both the RFS2 final rule and the IHS Global Insight report.

d. Other Vegetable Oils

Although the modeling we conducted for the R FS2 final rule assumed that the only form of vegetable oil used to make biomass-based diesel would be fro m soybeans, in fact other seed oils may contribute meaningful volumes to th e pool. For instance, on September 28, 2010 we approved a RIN-generating pathway for biodiesel made from canola oil 43 . The volume of biodiesel made from canola oil was 96 mill gallons in 2008 44 . In addition, we are evaluating other pathways for the production of biodiesel from oilseeds, such as camelina, which could potentially be approved for RIN generation by 20 13. Algal oil could also provide additional feedstocks if promising technologie s for production are commercialized.

Nevertheless, even if none of these other s ources of vegetable oil were available, we

believe that the total volume of grease, fats, corn oil, and soybean oil would be sufficient to produce 1.28 bill gallons of bi omass-based diesel in 2013.

3. Production Capacity

Total production capacity of the biodiesel industry has exceeded 1.28 bill gallons for a number of years. As of August 2011, total produ ction capacity was more than 2.8 bill gallons for 179 plants 45 . According to the National Biodiesel Bo ard, 113 of these plants have registered with the EPA under the RFS2 program as of August 27, 2011, up from 90 in February 2011, and these plants have a combined production capacity of over 2.0 bill gallons. Plants that are currently not registered under RFS2 are either producing extremely low volumes that fall under the regulatory threshold for RIN generation, are producing products other than biodiesel such as soaps or cosmetics, or have shut down until such time as the demand for biodiesel rises.

While commenters generally did not disagree that sufficient production capacity exists to reach 1.28 bill gallons in 2013, some questioned how quickly idled plants can be brought back online. We note that most of the production capacit y exists at plants that are already producing some volume, and that many operating biodiesel pl ants are currently producing at less than their

43 75 FR 59622

44 EPA memorandum, "Summary of Modeling Input Assumptions for Canola Oil Biodiesel for the Notice ofSupplemental Determination for Renewable Fuels Produced Under the Final RFS2 Program," Document # EPAHQ-OAR-2010-0133-0049

45 USA Plants, biodieselmagazine.com, as of August 18, 2011.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 59 of 126 full capacity. As a result, these facilities typically do not need to go through the additional steps that are associated with starting up an idled plant, such as securing new financing, establishing contracts with feedstock suppliers and customers, hiring and retraining employees, and testing and proving the equipment. Nevertheless, since many new plants can be built and started within

a year or so 46 , we also believe that pre-existing but idle d plants can be restarted in considerably

less time. Given that there will be more than a year between the time that the 1.28 bill gall requirement is finalized and the beginning of the 2013 compliance year, there is no reason to believe that idled plants cannot be restarted in time to contribut e meaningfully to total volumes

in 2013.

4. Consumption Capacity

Biodiesel is registered with the EPA under 40 CFR Part 79 as a legal fuel for use in highway vehicles. Under this registration, it can legally be used at any blend level, from 1% (B1) to 100% (B100) in highway diesel fuel . As there are no equivalent registration requirements for non-highway fuels, biodiesel can legally be used at any blend level in nonroad diesel and heating oil. However, other factors typically limit the concentration of biodiesel in

conventional diesel fuel. To the extent that th e consumption of biodiesel occurs only at lower blend levels, the geographic areas where biodies el must be marketed would correspondingly be higher, impacting both how much biodiesel can be consumed in the U.S. as a whole as well as how the infrastructure may need to change to accommodate 1.28 bill gallons in 2013.

Most engine manufacturers have explicit statements in their engine warranties regarding acceptable biodiesel blend levels . Although a few permit B100 to be used in their engines without any adverse impact on their warranties, most limit biodiesel blends to B20 or less, and of those, about half allow no more than B5 47 . For specific applications where a party knows which engines will be using biodiesel blends, higher concentrations of biodiesel may be possible. However, for general distribution such as at re tail facilities, these warran ty conditions create a disincentive to blend or sell biodiesel at higher concentrations, and would tend to drive most

blends towards low concentrations of biodiesel such as B5. Those parties that commented on this issue agreed with this assessment.

Cold weather operability represents another reason for preferential use of B5 and even

B2. The most common measure of cold weather operability is the fuel cloud point. The cloud point is the temperature at which gelling begins (as indicated by solid crystals beginning to form in the fuel), and thus is an indicator of when potential engine filter plugging issues could arise. The higher the cloud point temperature of the fu el, the more likely such problems are to be experienced in cold weather. Biodiesel gene rally has a higher cloud point than conventional, petroleum-based diesel fuel, with fat-based biodiesel such as ta llow having a higher cloud point than virgin oil-based biodiesel such as a fuel made with soybean and canola oil. While cloud point issues with conventional, petroleum-based diesel are ge nerally mitigated through blending with lighter grades (i.e. #1 diesel fuel), th e cloud point of biodiesel generally requires more dramatic interventions such as heated storage ta nks, lines, and blending equipment, as well as

46 Based on construction times for new plants listed in Biodiesel Magazine from July 2006 through May 2009.

47 "Automaker's' and Engine Manufacturers' Positions of Support for Biodiesel Blends," Biodiesel.org*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 60 of 126 heating rail cars and tank trucks. However, some of these biodiesel cloud point mitigation efforts may be reduced through the use of low bi odiesel blend levels such as B2 or B5, since cloud point is strongly correlated with biodiesel concentration in the final blend. Insofar as

biodiesel is blended into conventi onal diesel before being transpor ted to its final destination for sale, low biodiesel blend levels may reduce th e need for heated equipment at the final

destination.

Based on highway and nonroad diesel consum ption projections for 2013 from the EIA, a biodiesel volume of 1.28 bill gallons would represent about 2.8% of all diesel fuel 48 . If all biodiesel were to be blended as B5, just over ha lf of the diesel fuel consumed nationwide in 2013 would contain biodiesel. However, today some bi odiesel is blended at concentrations higher than B5, and we expect that some blending at th ese higher concentrations would continue in the future. One commenter disagreed that blends higher than B5 will be marketed in any but niche markets. We agree with this comment. However, since there has been a cost difference between biodiesel and conventional diesel in the recent pa st, and yet blends above B5 have in fact been sold, we believe that the existing markets for blends such as B20 are niche markets that will

continue into the future. The sale of biodiesel blends higher than B5 will reduce the total amount of diesel fuel that will contain some biodiesel. Directionally, then, this will also reduce the geographical areas to which biodiesel must be dist ributed. Based on the number of retail stations offering different biodiesel bl end levels in 2010, we estimate that about 30% of biodiesel was

sold at retail in blends with biodiesel concentra tions as high as 20%. Another 17% of biodiesel

was sold in blends with biodiesel concentrations between 10% and 20%. 49 If such trends continued, more than half of all biodiesel would be sold in blends higher than B5. However, since even these niche markets may change und er a nationwide volume requirement for 1.28 bill gallons, we have declined to quantify the volume of biodiesel that is likely to be sold in blends higher than B5 in 2013 for use in highway and nonroad engines.

Heating oil represents another opportunity for large volumes of biodiesel to be consumed. Moreover, some of the practical issues leading to warranty limits on engines regarding the use of

biodiesel are less of a concern wh en burning biodiesel for home heating purposes. As a result, significant volumes of biodiesel can be cons umed as heating oil and count for compliance purposes under the RFS program.

We believe that distributing and consu ming 1.28 bill gallons of biodiesel in 2013 is achievable. A number of states already have mandates for the use of biodiesel in 2013 50 , and efforts are underway by the production and distribu tion industries to meet these mandates. These include Minnesota, Oregon, Washington, Pennsyl vania, New Mexico, and Louisiana. Collectively, these states currently account for approximately 13 percent of the nationwide consumption of diesel. Other st ates have implemented other forms of incentives as shown in

Table IV.B.4-1.

48 Assumes total diesel volume consumed in 2013 is 46.65 bill gal, per Annual Energy Outlook (AEO) 2011, Table

10.

49 National Biodiesel Board, Retailing Fueling Sites, as of February 17, 2011. http://biodiesel.org/buyingbiodiesel/retailfuelingsites/default.shtm

50 As one commenter pointed out, some of these mandates have not yet taken effect as in-state production volumes have not yet reached specified thresholds. Nevertheless, the state mandates represent incentives within those states to increase production.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 61 of 126 Table IV.B.4-1 States with Rebates, Ref unds, Reduced Tax Rates, or Credits for Biodiesel Production or Blending 51

Illinois

Indiana

Kansas Kentucky

Maine Maryland Michigan

Montana

North Dakota

Oklahoma

Rhode Island

South Carolina

South Dakota

Texas Virginia Washington

* Conditions and exemptions for all incentive programs vary by state

Collectively, the states listed in Table IV.B.4- 1 currently account for approximately 37% of the nationwide consumption of biodiesel . A variety of states also ha ve requirements for the use of biodiesel in state fleets, provisions that allow biodiesel to be used as an alternative to meeting alternative fuel vehicle mandates, and credits/rebates for the installation of biodiesel dispensing and blending equipment. Altogether, therefore, mo re than half of the states in the U.S. have

mandates and/or incentives that will induce them to address biodiesel infrastructure issues.

One commenter pointed out th at state-specific eco nomic incentives for the production of biodiesel do not necessarily eliminat e cost differences between biodi esel and conventional diesel. We agree with this comment. Nevertheless, e fforts to incentivize biodiesel production and use in

individual states will directiona lly help the nation to meet a 1.28 bill gal biomass-based diesel requirement in 2013.

5. Biomass-Based Diesel Di stribution Infrastructure

The National Petroleum Refiners Association (NPRA) stated that an analysis of the feasibility of meeting increased biodiesel us e requirements should be based on a maximum

biodiesel blend ratio of 5%. 52 This is consistent with our analysis of the additional biodiesel distribution infrastructure that will be needed. NPRA commented that the required increase in

51 U.S. Department of Energy, Alternative Fuels and Advanced Vehicles Data Center

52 NPRA acknowledged that higher biodiesel blend ratios ar e sometimes used but that this would not substantially increase the capacity of the market to absorb additional biodiesel volume.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 62 of 126 the use of biodiesel will necessitate numerous inst allations of biodiesel storage tanks (possibly heated) as well as the installation of biodiesel recei ving and blending capaci ty at the diesel fuel distribution terminals throughout the U.S. markets. This is also consistent with our analysis. In the proposal, we noted that some terminals may be able to avoid or de lay the installation of additional biodiesel storage facilities by storing 50/50 biodiesel/diesel fuel blends that are then

further blended with diesel fuel to produce a finished fuel. However, we assumed that all biodiesel blending facilities would install segregated (heated and insulated) biodiesel storage facilities in our infrastructure analysis. We further noted that some terminals may delay the installation of biodiesel in-line blending equipment by splash blending biodiesel. 53 However, we stated that we expect that this approach would be temporary due to the heightened concerns over achieving a correct blend ratio and a fully mixed biodiesel blend that accompanies splash blending. We assumed that ter minals would install in-line biodies el blending equipment in our infrastructure analysis.

The proposed rule concluded that there will be sufficient fuel dist ribution infrastructure available to support the use of 1 bill gal of biomass-based diesel in 2012 and 1.28 bill gal in 2013. NPRA stated that the rapid expansion in B5 blending capability in the marketplace necessary to support the use of the envisione d volumes of biodiesel is unrealistic and unachievable. NPRA did not further support th is statement. The National Biodiesel Board (NBB) stated that there will be sufficient biodiesel distribution infrastructure available to

facilitate the use of the envisioned volumes of biodiesel. 54 NBB further stated that in most markets, terminals can treat 5% biodiesel blends as a fungible commodity like diesel fuel and that they believe that many terminals may be storing B5 blends. To the extent terminals store a finished B5 blend, it would obviate the need for much of the segregated biodiesel storage and blending capability that is assumed in our infrastructure analysis. The Iowa Biodiesel Board stated that claims that industry cannot accommoda te the distribution of the target gallons are baseless and cited various examples of recent biodiesel blending in itiatives at Iowa terminals.

We acknowledge that the required expansi on of the biodiesel handling capacity at terminals will represent a significan t challenge to industry. However, we continue to believe that industry can respond effectively to this challe nge to support the use of the envisioned 2012 and 2013 biodiesel volumes. Industry activities are cu rrently progressing to ramp up biodiesel consumption from the approximately 380 mill gallons estimated to be used in the U.S. in 2010 to

the volumes that will be needed in 2011 to meet the biomass-based dies el volume requirement. For example, Kinder Morgan and the Renewable Energy Group opened a substantial biodiesel distribution facility to serve the Chicago area in December of 2010. 55 Magellan also recently announced that it plans to complete its biodiesel blending facility in Sioux Falls Minnesota in

2011. 56 In June of this year, Sunoco Logistic s and Sprague Energy opened a new terminal

53 In-line blending refers to the process of blending biodiesel into petroleum-based diesel fuel in the delivery line that feeds into the tank truck from the terminal storage tanks. Splash blending refers to the process of first loading petroleum-based diesel fuel into a tank truck followed by biodiesel so that the final blend meets the desired blend

ratio.

54 NBB did not provide an analysis regarding the addition of new biodiesel distribution facilities.

55 Biodiesel Magazine, November 17, 2010. http://www.biodieselmagazine.com/articles/4568/chicago-areaterminal-soon-to-offer-biodiesel

56 Report to the Legislature, Annual Report on Biodiesel, Minnesota Department of Agriculture, January 15, 2011. http://www.mda.state.mn.us/en/news/government/~/media/Files/news/govrelations/legrpt-biodiesel2011.ashx*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 63 of 126 facility to supply of biodiesel blended trans portation fuel and heating fuel to New Jersey 57 These new terminal facilities employ segregated biodiesel storage and blending capability. Just as there has been considerable biodiesel production capacity idled due to lack of demand which will be brought back on line as biodiesel volumes ramp up, we believe that there may also be

substantial idled biodiesel distribu tion assets that could be brought back into service. It seems

reasonable to assume that at least some of the distribution assets used previously to deliver biodiesel manufactured at now idled produc tion plants would still be available.

Our evaluation of the changes to the fuel distribution infrastructure that will be needed to support the use of 920 million gallons/yr of biodiesel in 2012 and 1,200 million gallons/yr in 2013 is based on the analysis conducted for the RFS2 final rule. 58 See Table IV.B.5-1.

Table IV.B.5-1

Additional Infrastructure Needed to Distribute Biodiesel in 2012 and 2013

Additional

Distribution

Assets Needed in

2012 Relative to

2011 Additional

Distribution

Assets Needed in 2013 (with 1.28 bill gal) Relative

to 2012 Total

Distribution

Assets Needed to Support the 2012

Biodiesel

Volume Total

Distribution

Assets Needed to Support 1.28 bill

gal Biodiesel

Volume

Petroleum

Product

Terminals with

Biodiesel Blending Capability * 74 130 428 558

Rail Cars 131 230 754 984

Tank Trucks 14 25 83 108 Barges 4 7 23 29
*There are approximately 853 petroleum terminals that offer diesel fuel in the U.S.

The American Trucking Association (ATA) stated that EPA should have provided a

discussion of the costs of the infrastructure chan ges contained in the above table. These costs

were accounted for in the discussion of the overa ll impacts on transportation fuel costs contained

in Section IV.C.5. It was estimated that the unsubsidized fuel cost would be 0.2 cents per gallon. Accounting for the subsidy, we estimated a cost savings to consumers of diesel fuel of 1.7 cents per gallon compared to pe troleum-based diesel fuel. Th e reader was referred to the RFS2 final rule Regulatory Impact Analysis fo r details on the projected costs of the additional

distribution infrastructure projected to be needed. The RFS2 final rule projected that a new 8,000 gallon tank truck to transport biodiesel would cost $198,000, a new 25,600 gallon rail car to transport biodiesel would cost $99,000, and a new 10,000 barrel barge to transport biodiesel
would cost $1.54 million. The cost to install new se gregated biodiesel storag e, blending, receipt,

57 http://www.tankterminals.com/news_detail.php?id=1284

58 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA), EPA-420-R-10-006, February 2010. We are projecting that 80 million gallons per year of the biomass-based diesel standard would be satisfied by

renewable diesel fuel. The distribution of renewable diesel fuel is discussed later in this section.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 64 of 126 and other miscellaneous biodiesel handling equipment was estimated at $1.6 million per

terminal. The estimated total cost of the additional biodiesel di stribution assets needed in 2012
relative to 2011 is $140.3 million. The estimated to tal cost of the additional biodiesel
distribution assets needed in 2013 relative to 2012 is $246.5 million.

ATA commented that EPA underestimated the numb er of tank trucks needed to distribute

the additional amount of biodiesel in 2013 relative to volume used in 2012. ATA stated that the assumed 6 trips per tank truck per day that EPA used in estimating the number of tank trucks that would be needed was unrealistically high. AT A stated that one large ATA member that transports biofuels reports that the average length of haul (one way) is 141 miles. Based on this, ATA stated that 2 loads per day would be a more accurate estimate considering loading and unloading times.

ATA assumed a single shift tank truck delivery operation. Our estimated number of tank trucks was based on a two shift ope ration. We continue to believe that a two shift truck delivery model of operation is appropriate to maximize the utilization of distribution system resources. Given time for loading and unloading and lunch breaks for 2 shifts, our assumed 6 deliveries per day equates to an average one way truck shipping distance of 40 miles. We project that number of additional biodiesel plants w ill be brought into production to m eet the 2013 biodiesel volume. Biodiesel production plants tend to be geogra phically dispersed. Hence, the opening of additional plants will tend to reduce the averag e shipping distance from the biodiesel production plant to the terminal compared to today. We also project that the production volume will increase at a number of existing biodiesel plants. This will facilitate the shipment by rail of biodiesel volumes that previously were shipped by truck long di stances. Thus, we believe that biodiesel trucking distances will be substantially reduced in the future.

Nevertheless, we acknowledge th at uncertainty exists regarding what biodiesel shipping distances will be in the future. Therefore, we believe that it is useful to evaluate the potential impacts of longer shipping distances on the number of additional tank trucks that will be needed to transport biodiesel. If we were to assume a 141 mile average truck shipping distance per ATA and a two-shift operation, this would translate to 4 loads per day per tank truck. At 4 loads per day, 38 additional number of ta nk trucks would be needed in 2013 relative to 2012 (as opposed to the 25 that we projected). If we were to assume only 2 deliveries per day as ATA did, an

additional 75 trucks would be needed for the 2013 case. Even under this extreme case, the

addition of 75 tank trucks would represent less than 0.3% of the total U.S. fleet of petroleum products tank trucks (estimated at 27,000). 59 Consequently, that the possibility that biodiesel shipping distances might be longer than we projec ted would not materially affect our conclusions about the ability to accommodate the add itional tank trucks and drivers needed.

In the proposal, we estimated that a total of 5 tank trucks will be needed to transport 80 mill gallons/yr of renewable diesel that we proj ected would be used annually in 2012 and 2013 to the locations where it is blended with petroleum- based diesel fuel. This is based on each tank

59 Department of Transportation, Hazar dous Materials, Safety Requirements for External Product Piping on Cargo Tanks Transporting Flammable Liquids, Notice of Proposed Rulemaking, 76 FR 4847, January 27, 2011. http://www.gpo.gov/fdsys/pkg/FR-2011-01-27/pdf/2011-1695.pdf*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 65 of 126 truck carrying 7,800 gallons of renewable diesel fu el making 6 deliveries per day. We estimate that the production facility that will account fo r the renewable diesel produced through 2013 will ship its product 20 miles or less by tank truck to facilities that produce blends with petroleumbased diesel fuel. Shipment of the projected re newable diesel volume such short distances could likely be achieved by making 6 deliveries durin g without the need for a second shift. We anticipate that the renewable diesel fuel will be blended directly into storage tanks containing petroleum-based diesel fuel. C onsequently, we continue to be lieve that the distribution of

renewable diesel fuel could be acco mplished without undue difficulty.

C. Impacts of 1.28 billion gallons of Biomass-Based Diesel

In order to evaluate the impacts of a biom ass-based diesel volume of 1.28 bill gal in the areas required under the statute (s ee Section IV.A), we first cons idered what the appropriate reference would be. Since the statute requires th at the biomass-based diesel volume we set for 2013 be no lower than 1.0 bill gal, we believe that this is a reasonable reference point. Therefore, in the discussion that follows, we have focused on either a volume of 1.28 bill gal biomass-based diesel, or an increment of 0.28 bill gal biomass-based diesel, depending on the specific sources of information and analyses available.

As described in Section IV.B.1 above, even if we set the applicab le volume for biomassbased diesel at 1.0 bill gal, the demand for biom ass-based diesel in 2013 is likely to be on the order of 1.28 bill gal or more due to the limited projected availabilit y of other advanced biofuels (including cellulosic biofuel, imported sugarcane ethanol, and others). Since the actual demand for biomass-based diesel would likely be 1.28 bill ga l or higher regardless of whether we set the biomass-based diesel requirement at 1.0 or 1.28 bill gal, the net impact of setting the biomassbased diesel volume requirement at 1.28 bill gallons in 2013 could be seen as zero.

We recognize that this conclusion is based on an applicable advanced biofuel volume of 2.75 bill gallons. While we will be considering the possibility of lowering the 2013 advanced biofuel applicable volume below 2.75 bill gal in next year's rule making, we have not presumed any such reduction in today's final rule. Such re ductions in advanced biofuel must occur in the context of determining the a pplicable volume of cellulosic biofuel for 2013, and using information available at that time regarding advanced biofuel volumes that are projected to be

available in 2013.

Nevertheless, the statute re quires that we analyze specifi ed environmental and other impacts in deriving an applicable biomass-base d diesel volume for 2013 and other years. These analyses can be conducted for 1.28 bill gal biomass-based diesel or an increment of 0.28 bill gal. Most of the areas we are required to analyze were covered in the RFS2 final rule in some form,

and we believe that we can use this information in satisfying our statutory obligations to analyze specified factors in determining the applicab le volume of biomass-based diesel for 2013.

Some of the analyses presented in the RFS2 final rule were for the specific case of 1.28 bill gallons in 2013. These analyses included an investigation of the ex pected annual rate of commercial production of biom ass-based diesel in 2013, impact s on agricultural commodity*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 66 of 126 supply and price, and the cost to consumers of tr ansportation fuel. Some of these were discussed in Section IV.B above. Most of the analyses in the RFS2 final rule, however, were conducted to represent full implementation ofthe RFS2 program in 2022. In these analyses, the biomassbased diesel volume was estimated to be 1.82 bill ga llons, and was compared to a reference case in which biodiesel volume was 380 mill gallons. These cases are shown in Table IV.C-1.

Table IV.C-1 Primary Reference and Control Cases from RFS2 Final Rulemaking (billion gallons)

Advanced Biofuel NonAdvanced

Biofuel Total

Renewable

Fuel Cellulosic Biofuel Biomass-Based

Diesel Other Advanced

Biofuel

Cellulosic

Ethanol Cellulosic

Diesel FAME a

Biodiesel NCRD b Other

Biodiesel c Imported

Ethanol Corn

Ethanol

Reference 0.25 0 0.38 0 0 0.64 12.29 13.56

Control 4.92 6.52 0.85 0.15 0.82 2.24 15.00 30.50

a Fatty acid methyl ester (FAME) biodiesel

b Non-Co-processed Renewable Diesel (NCRD)

c Other Biodiesel is biodiesel produced in addition to the am ount needed to meet the biomass-based diesel standard.

The biomass-based diesel volume of 1.82 bill gallons analyzed for 2022 in the RFS2 final rule is higher than the 1.28 bill gallons we chose to evaluate for today's final rule for 2013. More importantly, the change in biodiesel producti on in 2022 due to the statutory mandates for biomass-based diesel plus other diesel anticipated to meet the advanced biofuel volume (a total increase of 1.44 billion gallons compared to the reference case without the EISA mandates) is much larger than the change we are evaluating for 2013 (0.28 billion gallons). Many of the impacts analyzed for the RFS2 final rule reflected the whole biofuel mandate, not the relatively smaller portion just due to biodiesel.

In response to the NPRM, the American Petroleum Institute (API) commented that comparing the analyses conducted in the RFS2 final rule for the fully implemented RFS2 program in 2022 to a biodiesel increment of 0.28 bill gal occurring in 2013 was misleading. They cited the fact that the 2022 analysis betw een the control and reference cases accounts for agricultural and market conditions that develop over multiple years, while the proposed biomassbased diesel requirement of 1.28 bill gallons in 2013 would require those changes to occur over a single year. They also cited the fact that the annualized growth rate in the RFS final rule (1.44 bill gal increase over ten years, or about 0.14 b ill gal per year) is about twice as high as the single-year growth from 2012 to 2013 that would occur under a requirement for 1.28 bill gallons (0.28 bill gallons in one year).

As described in Section IV.B , we believe that the industry can increase production to at least 1.28 bill gallons by 2013, that sufficient fe edstocks will be available, and that the

infrastructure will be able to accommodate these higher volumes. Therefore, we do not believe that API's concern about the different annual pr oduction growth rates in the RFS2 final rule compared to our proposal for 2013 is warranted.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 67 of 126 With regard to concerns about agricultura l and market conditions, we agree that the positive impacts of yield growth and foreign crop production increases that may be reflected in our 2022 analysis, and which devel op over multiple years, may not be representative of a singleyear increase in biomass-based diesel of 0.28 b ill gallons in 2013. However, we do not believe that this difference makes the application of the 2022 analysis to our proposal for 2013 misleading. Our intent in using the analyses from the RFS2 final rule was only to determine if

an increase in biomass-based diesel of 0.28 bill gallons is reasonable given the potential impacts. Given that the RFS2 final rule analyzed the impacts of an increase in biomass-based diesel that was about five times larger than the volume in crement we proposed for 2013, we continue to believe that the impacts of 1.28 bill gallons 2013, compared to the statutory minimum of 1.0 bill gallons, will likely be similar to or sma ller than those we estimated for 2022.

1. Climate Change

Since biodiesel has a GHG benefit exceeding 50% compared to the petroleum-based diesel it is replacing, an in crease in biomass-based diesel of 0.28 Bill gal from 2012 to 2013 would lead to a displacement of conventional diesel fuel, with corresponding GHG emissions reductions. This increased use of biomass-based diesel will contribute to lower climate change impacts in comparison to the petroleum-based diesel it is replacing.

However, due to the nested nature of the RF S2 standards, biomass-based diesel is also

used to meet the advanced biof uel standard. Moreover, both biom ass-based diesel and advanced

biofuel must meet a GHG reduction threshold of 50%. If the 2013 advanc ed biofuel standard were to remain at the 2.75 bill gal specified in the statute, an increase in the biomass-based diesel volume requirement from 1.0 to 1.28 bill gal would not change the total volume of advanced biofuel, and thus the total volum e of biofuels that must meet a 50% reduction in GHGs would remain unchanged. Under such circumstances, a standard of 1.28 bill gal of biomass-based diesel would have essentially no impact on climate change in the context of the full mix of biofuels used to meet the RFS2 requirements. However, increasing the biomass-based diesel standard provides additiona l certainty that the total advanced biofuel standard would be met and provides more justification for keeping the a dvanced biofuel standard at the 2.75 bill gal specified in the statute. Not lowering the advanced standard means greater certainty that the

GHG benefits of the advanced standard will be achieved.

One commenter suggested this would not be the case and that increased biodiesel use would reduce GHG emissions compared to sugarcan e ethanol, an alterna tive advanced biofuel

that would be used to meet the mandate. This is based on the specific GHG reductions that we estimated in our lifecycle analysis for differen t biofuels. However, there is a range of GHG impacts associated with different biofuels that could go towards meeting the advanced mandate

and the biomass-based diesel st andard, and there is no indicati on that setting the biomass-based diesel standard at 1.28 would impact the overall cl imate change emissions in the context of the full mix of biofuels used to meet the RFS2 requirements.

One commenter also suggested that by requiri ng 0.28 bill gallons of biomass-based diesel above the statutory minimum of 1.0 bill gallons, e ffectively shifting the biodiesel used for the*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 68 of 126 “other” advanced biofuel category to biomass

‐ based diesel, EPA w ould actually promote increased volumes of renewable fuels (rather than ethanol

‐ equivalent gallons based on the 1.5 equivalence value), allowing for the greater displacement of fossil fuels. However, this is not the case. Although the requirement for a physical volume of biomass-base d diesel will be 1.28 bill gallons, the contribution of this volume to compli ance with the advanced biofuel requirement is based on energy-equivalence with respect to ethano l, not physical volumes. Thus there would be no additional quantities of other advanced fuels produced.

2. Energy Security

An analysis of the energy security impacts of the increased use of renewable fuels was conducted in support of the RFS2 rulemaking. Based on that analysis, increasing usage of renewable fuels including bioma ss-based diesel helps to reduce U.S. petroleum imports. A reduction of U.S. petroleu m imports reduces both fi nancial and strategic risks associated with a potential disruption in supply or a spike in cost of a particular energy source. This reduction in risks is a measure of improved U.S. energy security.

One commenter questioned whether a pot ential increase of 300-500 million gallons of ethanol imported from Brazil as a result of this rule would improve the energy security position of the U.S. by displacing diesel fuel (i.e., hy drocarbons). Another commenter suggested that the location of the source of ethanol is required to co nduct an energy security impact analysis. The analysis of the energy security impacts of the RFS2 rule showed that increased use of ethanol, regardless of where it was produced, provides energy security benefits to the U.S. by reducing the macroeconomic and adjustment costs associat ed with potential future disruptions in U.S. petroleum imports. In other words, diversifying transportation fuel supply sources to the U.S. improves the energy security position of the U.S.

Another commenter also suggested that an increase in biodiesel for the mandate is statistically insignificant. EPA understands this to mean that the increas e in biodiesel production due to this rule would not add significantly to the energy security of the U.S. However, EPA believes that any reduction in U. S. petroleum imports could re sult in a reduction of risk associated with those petroleum imports.

3. Agricultural Commodities and Food Prices

For the RFS2 rule, we examined the impact s of increased renewable fuels production on commodity prices, food prices and trade in agricu ltural products. This analysis considered the impacts of all the biofuel feedstock sources anticipated to meet the 2022 biofuel volume requirements, not just biodiesel. For the RFS2, EPA used two primary models for its agricultural economic impacts analysis, the Food and Agricultu re Sector Optimization Model (FASOM), and the Food and Agricultural Policy Research In stitute-Center for Agriculture and Rural Development (FAPRI-CARD) models. The FASO M model is a long-term economic model of the U.S. forest and agriculture sectors that maximizes the net present value of the sum of producer and consumer surplus across the two s ectors over time subject to market, technology,*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 69 of 126 and other constraints. The FAPRI-CARD models are a system of econom etric models covering many agricultural commodities in the U.S. and internationally. They are based on historical data analysis, current academic research, and a reliance on accepted economic, agronomic, and biological relationships in ag ricultural production and markets. 60

To meet the RFS2 renewable fuel volumes, a number of price effects on the agricultural

commodities were estimated for 2022. For instan ce, FASOM estimates that an increase in

renewable fuel volumes to meet the RFS2 would result in an increase in the U.S. soybean prices of $1.02 per bushel (10.3 percen t) above the Reference Case price in 2022. FASOM also projected the price of soybean oil would incr ease by $183 per ton (37.9 percent) over the 2022 Reference Case price (all prices are in 2007$). Most of the additional soybeans needed for increased biodiesel production ar e diverted from U.S. exports to the rest of the world. In FASOM, soybean exports decrease by 135 million bushels (-13.6 percent) in 2022 relative to the AEO2007 Reference Case. This change represents a decrease of $453 million (-4.6 percent) in the total value of U.S. soybean exports in 2022. However, these price eff ects are not attributed

to the demand for biodiesel feed stocks alone, rather the compounding affect of all changes in feedstock demand estimated to result from the total biofuel mandate in 2022. Since the impact on soybeans due to biodiesel demand was only a por tion of this total feedstock impact and since the impact in 2013 will be less than considered in 2022 (since the 2013 biodiesel volumes anticipated are less than those for 2022), the impact on soybean prices and exports from an increase to 1.28 bill gall in 2013 could also be less.

A recent report by IHS Global Insight 61 also discusses potential agricultural and economic impacts from increasing vegetable oil de mand for biodiesel production. According to this study, existing soybean yield technologies ar e expected to be applied increasingly across the U.S., resulting in roughly a 10% higher growth rate in soybean yields than USDA’s projections from 2010-2016 which were used by EPA in its RFS2 analyses. Similarly, Global Insight predicts these higher yield technologies would be implemented in othe r large soybean-producing countries, such as Brazil and Argentina. If hi gher yields than modeled for RFS2 indeed are realized, then it is likely the price increases for soybean oil will be less than estimated for RFS2. Likewise, other price impacts, such as those on food prices, would still move in the same direction (i.e., an increase in price resulting from an increase in demand) but could be smaller than in the RFS2 analysis.

One commenter suggested that the biodiesel mandate for 2013 will re sult in an increase of soybean oil prices. However, as shown in Section IV.B.2.c, EPA estimates that soybean production will outpace non-biofuel de mand in 2013. Therefore, EPA does not project that the price of soybean oil should increase as a result of this rule.

For the analyses performed for the RFS2 final rule, EPA estimated a $10 per person per year increase in food costs due to the tota l annual impact of the RFS2 program by 2022 compared to a Reference case that assumed no R FS2 renewable fuel requirements. Again, the biodiesel impacts would represent only a small portion of these overall impacts and would like

be even smaller in 2013 due to the smaller volume of feedstock required. One commenter

60 (add reference to FAPRI description document used in RFS2 FRM)

61 "Biodiesel Production Prospects for the Next Decade," IHS Global Insight, March 11, 2011.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 70 of 126 suggested that EPA should conduct a more thorough analysis of food price impacts of this rule. However, since the volume of feedstock require d in 2013 is considerably less than what is required by the RFS2 program in the year 2022, we can reasonably expect that the impact on food prices should be comparably small relative to that estimated in the RFS2 final rule. Thus, we did not conduct an analysis of food price impacts for the 2013 biomass-based diesel volume requirement of 1.28 bill gallons given that the imp acts would likely be substantially less than the impacts on food prices of the whole RFS2 program in 2022.

4. Air Quality

As described in the NPRM, we are relying on the analyses of renewable fuel impacts conducted in support of the RFS2 rule 62 to qualitatively discuss the expected air quality impacts of a biomass-based diesel volume of 1.28 bill gall ons. The RFS2 analyses reflect EPA’s most current assumptions regardin g biodiesel emission impacts. 63

In the RFS2 rule, we analyzed both changes in pollutant emissions (measured in tons) and changes in ambient air quality associated with the changes in pollutant emissions. The changes in pollutant emissions were calculat ed by comparing the 2022 RFS2 renewable fuel volumes to volumes if the RFS2 mandate was not in place (the reference scenario). 64 The analysis reflected full implementation of the RFS2 program in 2022 and accounted for impacts from multiple types of renewable fuels, of which biodiesel was only one type. Specifically, the RFS2 emissions inventory analysis assumed 1.82 bill gal of biodiesel in the RFS2 scenario compared to 0.38 bill gal of biodiesel in the refe rence scenario, reflecting a 1.44 bill gal increase in biodiesel with the rule in place.

Biodiesel emission impacts from the RFS2 ru le emissions inventory analysis are presented in Table IV.C.4-1. A complete di scussion of the emissions inventory analysis conducted for the RFS2 rule can be found in Chapte r 3 of the RFS2 Regulatory Impact Analysis (RIA). 65 These biomass-based diesel emission impacts, which reflect a 1.44 bill gal increase in biodiesel, are all less than 1% of the total U. S. emissions inventory for each pollutant. We expect the impacts of the 1.28 bill gal of biomass-based diesel, as compared to the 1.0 bill gal statutory minimum volume, to be smaller.

62 75 FR14670, March 26, 2010

63 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332. Section 3.1.1.2.4

64 In the RFS2 Regulatory Impact Analysis, we analyzed the mandated 2022 RFS2 renewable fuel volumes relative to volumes required by two reference scenarios: RFS1 mandate (7.1 billion gallons of renewable fuels) and AEO 2007 (13.6 billion gallons of renewable fuels). Both reference scenarios assumed the same volume of biodiesel, so the emission and air quality impacts described in this section are the same for both reference scenarios.

65 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 71 of 126 Table IV.C.4-1 Biodiesel Emission Impacts of the RFS2 Renewabl e Fuel Volumes (1.82 bill gal) Relative to the Reference Case (0.38 bill gal)

Biodiesel Impacts of RFS2 Rule Emissions Inventory Analysis ( Δ 1.44 bill gal Biodiesel) Percent RFS2 Total U.S. Inventory Upstream a

(tons) Downstream b
(tons) Total (tons)

VOC -1,049 -2,422 -3,471 -0.03%

CO 913 -4,104 -3,191 -0.01%

NOx -290 1,346 1,056 0.01%

PM10 4,268 -569 3,699 0.10%

PM2.5 632 -315 317 0.01%

SO2 1,580 0 1,580 0.02%

NH3 4,171 0 4,171 0.10%

Benzene 10 -30 -20 -0.01%

Ethanol 0 0 0 0.00%

1,3-Butadiene 0 -16 -17 -0.10%

Acetaldehyde 2 -66 -65 -0.14%

Formaldehyde 1 -182 -181 -0.21%

Naphthalene -1 0 -1 -0.01%

Acrolein 63 -9 54 0.84%

a U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332. Table 3.2-

11. Note: units in Table 3.2-11 were mislabeled as tons/mmBTU. Actual units are tons.

b U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis.
EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332. Table 3.2-9

.

The air quality analysis for the RFS2 rule us ed photochemical modeling to characterize primary pollutants that are emitted directly into the atmosphere and secondary pollutants that are formed as a result of complex chemical reactions within the atmosphere. Included in the air quality modeling scenarios for the RFS2 rule were large volumes of ethanol as well as other renewable fuels, and the nature of these complex chemical interactions makes it difficult to determine the air quality impacts of biodiesel alone. Specifically, the RFS2 air quality analysis reflects a roughly 21 bill gal increase in ethanol, far outweighing the volume increase in biodiesel (0.43 bill gal). A complete discussi on of the RFS2 air quality analysis and its limitations can be found in Chapter 3 of the RFS2 Regulatory Impact Analysis (RIA). 66

The RFS2 air quality analysis was completed earlier than the final emissions inventory analysis because of the length of time needed to conduct photochemical modeling. 67,68 The air

66 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332.

67 Emissions serve as inputs to the air quality modeling analysis. However, the final fuel volume assumptions (upon which the emission estimates were based) increased between the time that emissions were estimated to support the air quality modeling analysis and the time emissions were estimated to reflect the final rulemaking.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 72 of 126 quality analysis assumed 0.81 bill gal of biodiesel in the RFS2 scenario compared to 0.38 bill gal

of biodiesel in the reference s cenario, reflecting a 0.43 bill gal increase in biodiesel use with the rule in place. The difference between the RFS2 modeling scenarios is the basis for this analysis thus the 0.43 bill gal increase in biodiesel is wh at we use to qualitatively discuss the potential impacts of a 0.28 bill gal increase in biodiesel from this rule.

Given the small emissions impact of a 0.43 bill ga l increase in biodiesel on the total U.S. emissions inventory (the basis for our air quality modeling scenarios), we would expect the portion of air quality impacts attributable to a move from 1.0 to 1.28 bill gal (a 0.28 bill gal biodiesel increase) to be small enough that on a nationwide basis the air quality impact would likely not be noticeable.

We note that Clean Air Act section 211(v) re quires EPA to analyze and mitigate, to the greatest extent achievable, adverse air quality impacts of the renewable fuels required by the

RFS2 rule. We intend to addr ess any potential adverse impacts from increased renewable fuel use through that study and will promulgate appropriate mitigation measures separate from today's final rule.

5. Transportation Fuel Cost

In the NPRM, we cited cost estimates that we had developed in the RFS2 final rule. For instance, we estimated the year-by-year per-gallon costs for diesel fuel due to the RFS2 biofuel requirements. For 2013, we based our diesel fu el cost estimate on the production and use of biodiesel, renewable diesel fuel and some cellulosic diesel fuel. The unsubsidized cost increase is 0.2 cents per gallon, but accounting for the subsid y, we estimated a cost savings to consumers for diesel fuel of 1.7 cents per gallon. This a ssumes a crude oil price of 81 dollars per barrel, which is within the range of crude oil prices ove r the last several years which have ranged from $35 per barrel to $147 per barrel.

Another way to estimate the possible effects of today's rule on transportation fuel costs isto compare the price of total diesel fuel (representing a nationwide average blend of petroleumbased diesel and biodiesel) under a 1.0 bill gallon ma ndate with the price of total diesel fuel under a 1.28 bill gallon mandate. Effec tively, this is the price incr ement associated with adding 280 million gallons of biodiesel to the nationwide diesel pool.

The most recently released Annual Energy Outlook from EIA, AEO 2011, projects that 1.07 billion gallons of biodiesel 69 and 46.85 billion gallons of total diesel 70 will be produced in 2013. Furthermore, AEO estimates that the price of total, highway and nonroad diesel will be $2.97 per gallon (2009$) in 2013. Although the AE O does not include price projections for biodiesel, the 2011 FAPRI Outlook estimates the pr ice of biodiesel to be $3.72 per gallon

68 The RFS2 air quality analysis reflects EPA’s most recent air quality analysis applicable to changes in renewable fuel types and volumes.

69 AEO 2011: Liquid Fuels Supply and Disposition Table.

70 AEO 2011: Energy Consumption by Sector and Source Table.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 73 of 126 (2009$) in 2013. 71 This price would reflect all co sts components, including production, collection, and delivery of the feedstock to th e biodiesel production facility, production of the biodiesel, and infrastruct ure changes needed to store, ble nd, and transport biodiesel to retail stations. Using this biodiesel price allows us to determine that the 2013 price of petroleum-based diesel would be $2.95 per gallon. Tabl e IV.C.5-1 illustrates the calculation.

Table IV.C.5-1

Estimate of Biodiesel Price and Volume under AEO 2011
Volume (bill gallons) Price ($/gal)

Biodiesel 1.07 3.72

Petroleum-based diesel 45.78 2.95

Total 46.85 2.97

If an additional 280 million gallons of biodiesel enters the market in 2013 at $3.72 per gallon, displacing the same amount of petroleum-based diesel, the price for total, highway and nonroad diesel increases by less than $0.01 per gallon. For the nation as a whole, this represents a total cost of $215 million in 2013 (2009$).

Similarly, IHS Global Insight’s analysis also includes diesel and bi odiesel prices of $3.48 and $3.70 per gallon, respectively in 2009$. Using th ese prices, the impact on transportation fuel cost of an increase of 280 million gallons of biodiesel that displaces the same volume of petroleum-based diesel is negligible - the over all price of total dies el remains $3.48 per gallon when rounded to the nearest $0.01, though the total cost to the consumer would be $63 million in

2013.

Several parties commented that the analysis of the cost impacts of 1.28 bill gallons of

biomass-based diesel must take into account the biodiesel tax subsidy, currently scheduled to expire at the end of 2011. Fuel taxes and tax subsidies function to change the manner in which society pays for transportation fuel through redi stribution of costs, but they do not change the total cost to society. For this reason we ge nerally do not quantify the impact of taxes or tax subsidies on price, but instead focus on the cost s to produce and distribute transportation fuel. Moreover, the impact of the biodiesel tax subsidy on the market price of biodiesel is a complex relationship that can be difficult to assess. Fo r instance, Figure IV.C.5-1 shows the price of biodiesel over the period January 2008 through July 2011. While the biodiesel tax credit was not effective during 2010, the price of biodiesel was not substantially higher than it was in 2009. Moreover, after the tax credit was reinstated for 2011, including retroactive credits for biodiesel produced in 2010, the price of biodiesel in 2011 did not decrease substantially in 2011 compared to 2010. These results illustrate the difficulty in correlating biodiesel price with tax policies, and as a result we have not made an effort to project biodiesel prices in the future under different tax policy scenarios.

71 FAPRI-ISU 2011 World Agricultural Outlook. http://www.fapri.org/outlook/2011/*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 74 of 126 Figure IV.C.5-1 Nationwide Average Biodiesel Prices

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00

J a n u a r y 2 0 0 8

A p r i l 2 0 0 8

J u l y 2 0 0 8

O c t o b e r 2 0 0 8

J a n u a r y 2 0 0 9

A p r i l 2 0 0 9

J u l y 2 0 0 9

O c t o b e r 2 0 0 9

J a n u a r y 2 0 1 0

A p r i l 2 0 1 0

J u l y 2 0 1 0

O c t o b e r 2 0 1 0

J a n u a r y 2 0 1 1

A p r i l 2 0 1 1

J u l y 2 0 1 1 B 1 0 0 p r i c e p e r g a l l o n Biodiesel tax credit not available

Source: DOE Alternative Fuels & Advanced Vehicles Data Center, Alternative Fuel Price Report. http://www.afdc.energy.gov/afdc/price_report.html

In their comments on the 2012 Renewable Fu el Standards, the American Trucking Association (ATA) suggested that production of biomass-based biodiesel from yellow grease and other rendered fats may not be economically practi cal due to the diffuse nature of the feedstock supply chain. Specifically, ATA ar gues that the cost of collec tion of often sm all quantities of this feedstock dispersed over a wide geographic area and their transport to biofuel producers may be cost-prohibitive.

The transportation costs associated with the collection of yellow grease and other rendered fats are likely greater than the cost of collection for biomass-base d biodiesel feedstocks such as soybean oil. However, the actual deliv ered cost of feedstocks for use in producing biodiesel consists of two components: the cost of production and the cost of transportation. For soybean oil, the cost of production (i.e. planting, fertilizing, harvesting, expelling, etc.) is relatively large compared to the cost of tran sportation to centralized biofuel producers. However, the cost of production for yellow grease and other rendered fats is zero, as they are considered wastes or byproducts. When comb ining both cost components (i.e. production and transportation) for each respective feedstock from USDA’s National Weekly Agricultural Energy Round-Up (www.ams.usda.gov/LSMarketNews), the total delivered costs for yellow grease and other rendered fats (approximately 44¢ per pound ) is less that the total delivered costs for soybean oil (approximately 57¢ per pound). As such, we believe that the ATA concerns regarding the feedstock supply chain are not warranted.

6. Deliverability and Transport Costs of Ma terials, Goods, and Products Other Than

Renewable Fuel*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 75 of 126 EPA evaluated in the RFS2 final rule the impacts on the U.S. transportation network from

the distribution of the total additional volume of bi ofuels that would be used to meet the RFS2 standards. Oakridge Nati onal Laboratory (ORNL) conducte d an analysis of biofuel transportation activity from production plants to petroleum terminals by rail, barge, and tank truck to identify potential distribution constraint s to help support the assessment in the RFS2

final rule. 72 The ORNL analysis concluded that the increase in biofuel shipments due to the RFS2 standards would have a minimal impact on U.S. transportation infrastructure. The majority of biofuel transportati on is projected to be accomplishe d by rail. Nevertheless, it was

estimated that the biofuels tran sport would constitute only 0.4% of the total freight tonnage for all commodities transported by the rail system through 2022. 73 Given the small increase in freight shipments due to the trans port of biofuels to meet the RFS2 standards, we believe that the distribution of biofuels will not adversely impact the deliverability and transport costs of materials, goods, and products other than re newable fuels. There were no comments on the proposed rule to contradict this assessment.

7. Wetlands, Ecosystems, and Wildlife Habitats

As directed by CAA section 211(o)(2)( B)(ii), in setting the 2013 biodiesel volume requirements, EPA is to consider the impact s of biodiesel production and use on wetlands, ecosystems and wildlife habitat. No specific publ ic comments on these impacts were received so the following updates the largely qualitativ e analyses provided in the proposal.

The most complete and up-to-date assessment of these impacts is contained in the draft analysis prepared by EPA in response to the requirements set out in CAA section 204. This report has been released in draft form in order to allow interested par ties to provide comments on the analyses and policy implications. Based on comments received including a peer review, updates are being made to the re port, and then the final repor t will be published in 2011 on the

EPA Biofuels web site. This report does not attempt to qua ntify the impacts of biofuel production and use as these impacts are dependent on local or regional conditions. Nevertheless the analyses contained in the report provide qualitative assessments and reasonable expectations

of trends which can be used to consider the environmental impacts of increases in biodiesel production and use. These trends are only summa rized here while the fi nal report (as was the case in the publically released draft) will provide extensive detail. 74

72 “Analysis of Fuel Ethanol Transportation Activity and Potential Distribution Constraints”, Oakridge National Laboratory, March 9, 2009. To simplify the ORNL analysis, biomass-based diesel volumes were assumed to originate at the same points of production and to be shipped to the same petroleum terminals as the ethanol projected to be used to meet the RFS2 standards. This may tend to overstate the potential impact on the transportation system from the shipment of biomass-based diesel fuels since biomass-based diesel production plants were projected to be more geographically dispersed than ethanol production facilities. In any event, the simplifying assumption was assessed to have little impact on the results from the anal ysis given that biomass-based diesel represented only 8% of the total projected biofuel volumes under the RFS2 final rule.

73 See sections 1.6.4 and 1.6.5 of the RFS2 RIA.

74 U.S. EPA (Environmental Protection Agency). 2011. Biofuels and the Environment: First Triennial Report to Congress. Office of Research and Development, Washington, DC.

EPA/600/R-10/183F*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 76 of 126 The draft assessment focuses on the use of oil from soy beans as the feedstock for biodiesel production. Other oil seed feedstock so urces represent a very small portion of biofuel production in 2013 so would be expected to have mu ch less of an impact than soy oil. Corn oil extracted during the ethanol production process is increasing, adds a small increment of supply for biofuel production by 2013 that will offset de mands for soy and other oil seed crops, thus reducing potential agricultural impact of biodiesel production. Corn as a feedstock for biofuel production is driven primarily by the demand fo r corn ethanol, not the demand for the corn ethanol co-product of extracted, non-food grade corn oil. Therefore the impact of the relatively small supply of extracted corn oil is not consider ed here. Finally, waste fats, oils and greases would be expected to have negligible envir onmental impact as a feedstock since they do not impact agricultural land use and would otherwis e be used for some lower value purpose or simply discarded.

Wetlands can be adversely affected by ag ricultural production through runoff that can result in nutrient loading (particularly from fer tilizers) or from sediment ation (from erosion). Soy production tends to use less fe rtilizer than corn production (the most likely alternative crop) and can reduce the amount of fertilizer required for corn when planted in rotation with corn. However, compared to other crops, erosion can be higher from fields planted in row crops such as corn and soy beans. While the impacts of nutri ent loading and erosion tend to be site specific, good farming practices including the optimum fer tilizer use and the set aside of sensitive lands via the CRP program can significantly help control these adverse affects. Wetlands can also be adversely affected through diversion of surface and ground water for agricultural irrigation. Soy bean production less frequently relies on irrigatio n than corn and some other crops. More discussion on water usage is included below in the section on water use and water quality impacts.

Ecosystems and wildlife hab itat can be adversely affected if CRP lands are converted to crop production, if row crops such as soy beans re place grassy crops and in general if new lands with diverse vegetation are converted to crop prod uction. As noted in the RFS2 rule, we do not expect the RFS program production to result in an increase in total acres of agricultural land under production in the US compared to a refe rence case without the impact of the RFS2 volumes. The relatively small increase of 0.28 b ill gall should not appreciably affect the amount of land devoted to oil seed production. Further, since soy beans are traditionally planted in rotation with other crops such as corn, this small increase in soy oil demand for biodiesel production is unlikely to replace grassy crops or result in the indirect increase in land under crop production. Additionally, the USDA commitment to support the CRP program should minimize the likelihood of any significant change in the am ount of CRP land. Therefore, while some very local changes may result due to individual farm er’s planting decisions, since no new crop land are expected in the U.S. due to this increase in biodiesel production a nd sensitive lands will be protected via programs such as CRP, no measureable impact in aggregate ecosystems or wildlife habitat is expected.

8. Water Quality and Quantity*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 77 of 126 The water quality and quantity impacts of biodies el are primarily related to the type of feedstock and the production practices used to both produce the feedstock and to convert the feedstock into biodiesel. Soybeans are the prin cipal feedstock used fo r biodiesel production and are predicted to account for 600 million gallons of the 1.28 billion gallons evaluated for 2013. Non-food grade corn oil extracted during etha nol production, animal fats and recycled fats account for most of the remaining biodiesel feed stock. Since these fats and greases are the byproduct of another use and are not produced specifically for biodies el manufacture, their production and primary use is not re lated to the level of biodiesel so their indirect impacts are not considered here. While non-food grade corn oil is extracted for its use as a feedstock for biodiesel production, it is a by-product of corn ethanol production. The corn used for biofuel production is primarily grown for the purpose of producing ethanol, not as a source of extracted non-food grade oil so the water impacts of corn production are primarily a concern for ethanol produced from the corn starch, not the by-product of extracted corn oil. Thus, this analysis will focus on soybeans as a primary source of vegetabl e oil used in biodiesel production. No specific public comments on these impacts were received so the following updates the largely qualitative analyses provided in the proposal.

From a water quality perspective, the pr imary pollutants of concern from soybean production are fertilizers (nitroge n and phosphorus) and sediment . There are three major pathways for these potential pollutants to reach water from agricultural lands: runoff from the land’s surface, subsurface tile drains, or leachi ng to ground water. C limate, hydrological, and management factors influence the potential for these contaminants to reach water from agricultural lands.

a. Impacts on Water Quality and Water Quantity Associated with Soybean

Production

After corn, soybeans are the second largest ag ricultural crop in terms of acreage in the U.S. In 2010, American farmers planted 77.7 milli on acres of soybeans and harvested 3.4 billion bushels. As with the production of any agricu ltural crop, the impact on water quality depends on a variety of factors including production prac tices, use of conservation practices and crop rotations by farmers, and acreage and intensity of tile drained lands. Additional factors outside agricultural producers’ control include soil characteristics, climate, and proximity to water

bodies.

Soybeans are typically grown in the same locations as corn since farmers commonly rotate between the two crops.

Nutrients are applied to fewer soybean acres than corn and at much lower rates because soybean is a legume. 75 Legumes have associations in their r oots with bacteria that can acquire atmospheric nitrogen and convert it into bioava ilable forms, reducing the need for external addition of nitrogen fertilizer . However, losses of nitrogen and phosphorus from soybeans can

75 U.S. EPA (United States Environmental Protection Agency). Renewable fuel standard program (RFS2) regulatory impact analysis. EPA-420-R-10-006. Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

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Page 78 of 126 occur at quantities that can degrade water quality. 76 In 2006, USDA’s NASS estimated that nitrogen and phosphorus fertilizer s were applied to 18 percen t and 23 percent of soybean acreage, respectively, with an average of 16 pounds of nitrogen and 46 pounds of phosphate applied per acre fertilized (NASS, 2007). 77 The quantity of nitrogen fertilizer applied to soybean fields ranged from 0 to 20 pounds per acre, while the quantity of phosphate ranged from 0 to 80 pounds per acre. As with corn, the conversion of idled acreage to soybeans is estimated to result in losses of nitrogen and phosphorus from the soil through cultivation. 78

Agricultural conservation systems can redu ce the impact of soybean production on the environment. The systems components include 1) controlled applica tion of nutrients and pesticides through proper rate, timing, and method of application, 2) controlling erosion in the field (i.e., reduced tillage, terraces, or grassed waterways), and 3) trapping losses of soil and fertilizer runoff at the edge of fields or in fiel ds through practices such as cover crops, riparian buffers, controlled drainage for tile drains, and constructed/restored wetlands. 79

The effectiveness of conservation practi ces, however, depends upon their adoption. The USDA‘s Conservation Effects Assessment Project (C EAP) quantified the ef fects of conservation practices used on cultivated cropland in the Uppe r Mississippi River Basin. It found that, while erosion control practices are commonly used, th ere is considerably less adoption of proper nutrient management to mitigate nitrogen loss to water bodies. 80 However, as noted above, the relatively low amount of fertilizer used for soy bean production tends to lessen the potential for nitrogen loss to water bodies. Additionall y, soybean production can reduce the amount of biomass left on the field compared to a corn case where much of the stover is left to protect the soil and enhance biomass content. In such a case, there could be more soil erosion with soybean production compared to corn production and poten tially greater nutrient runoff. Proper soil management can reduce this erosion concern. This is also the case for a ssuring that the amount of corn stover or other crop residue removed to provide feedstock for cellulosic biofuel production is sustainable and does not result in critical loss of soil cover and subsequent soil erosion. In the case of corn stover, the tre nd to more dense crop and hence greater stover per acre will help in providing a sustainable source of feedstock. Indeed, when EPA assessed corn stover as a potential feedstock, we took into accoun t the need to leave an appreciable amount of

76 Dinnes, DL; Karlen, DL; Jaynes, DB; Kaspar, TC; Hatfield, JL; Colvin, TS; Cambardella, CA. 2002. Nitrogen management strategies to reduce nitrate leaching in tile -drained midwestern soils. Agronomy Journal 94(1): 153-

171.

77 NASS (United States Department of Agriculture, National Agricultural Statistics Service). 2007. Agricultural chemical usage 2006 field crops summary. Ag Ch 1 (07)a. Available at: http://usda.mannlib.cornell.edu/usda/nass/AgriChemUsFC//2000s/2007/AgriChemUsFC-05-16- 2007_revision.pdf

.

78 Simpson, TW; Sharpley, AN; Howarth, RW; Paerl, HW; Mankin, KR. 2008. The new gold rush: Fueling ethanol production while protecting water quality. Journal of Environmental Quality 37(2): 318-324.

79 Dinnes, DL; Karlen, DL; Jaynes, DB; Kaspar, TC; Hatfield, JL; Colvin, TS; Cambardella, CA. 220 2002. Nitrogen management strategies to reduce nitrate leaching in tile-drained 221 midwestern soils. Agronomy Journal 94(1): 153-171.

80 U.S. Department of Agriculture, National Resources Conservation Service. 2010. Assessment of the effects of conservation practices on cultivated cropland in the Upper Mississippi River Basin. Available at: http://www.nrcs.usda.gov/technical/NRI/ceap/umrb/index.html

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Page 79 of 126 stover for land cover and soil enrichment. Good fa rming practices can allow for corn stover and other crop residue removal wit hout necessarily increasing soil erosion or nutrient runoff.

Water for soybean cultivation predominat ely comes from rainfall, although about 11 percent of soybean acres in the U.S. are irrigated. 81 Water use for irrigated soybean production in the U.S. varies from 0.2 acre-feet per acre in Pennsylvania to about 1.4 acre-feet per acre in Colorado, with a national averag e of 0.8 acre-feet of water. 82

There is some concern that the demand for co rn and soybeans as biofuel feedstocks may lead to high prices of these commodities, i nducing farmers with land currently enrolled in USDA’s CRP to return to intensive agricu ltural production (e.g., Secchi et al., 2009). 83 The CRP provides farmers with financial incentives to set aside a certain portion of their cropland in order to conserve or improve wildlife habitat, reduce erosion, protect water quality, and support other environmental goals. Biomass produced from the cultivation and harvesting of corn, corn stover, or soybeans on CRP lands is considered a renewa ble source of energy as defined in RFS2. The Food, Conservation, and Energy Act of 2008 (known as the Farm Bill) capped CRP acreage at 32 million acres, reducing enrollment by 7.2 milli on acres from the 2002 Farm Bill with the potential for making more acreage available for the production of row crops. Historically, land entering and exiting the CRP program has been more vulnerable to erosion than other cultivated land, but also less productive. 84 So while the conversion of CRP land to intensive feedstock production is possible, the likelihood of such a la nd use conversion is uncertain given practical economic and agronomic considerations.

b. Impacts on Water Quality and Water Quantity Associated with Biodiesel

Production

Biological oxygen demand (BOD), total suspended solids, and glycerin pose the major water quality concerns in wastewater discharged from biodiesel facilities. Actual impacts depend on a range of factors, including the type of feed stock processed, biorefiner y technology, effluent controls, and water re-use/recycling practices, as well as the facility location and source and receiving water. Discharge water quality requirements of local and regional governments can help assure best control practices and reduce water quality concerns.

Despite the existing commercial market for glycerin and the likely expanded uses for glycerin as discussed in the RFS2 final rule, th e rapid development of the biodiesel industry has caused a temporary glut of glycerin production, re sulting in some instances of facilities disposing

81 U.S. Department of Agriculture. 2010. 2007 Census of agriculture, Farm and ranch irrigation survey (2008). http://www.agcensus.usda.gov/Publications/2007/Online_Highlights/Farm_and_Ranch_Irrigation_Survey/fris08.pdf

82 U. S. Department of Energy. 2006. Energy demands on water resources: Report to Congress on the interdependency of energy and water. Available at: http://www.sandia.gov/energy-water/docs/121-RptToCongressEWwEIAcomments-FINAL.pdf

83 Secchi, S; Gassman, PW; Williams, JR; Babcock, BA. 2009. Corn-based ethanol production and environmental quality: A case of Iowa and the conservation reserve program. Environmental Management 44(4): 732-744.

84 ERS (United States Department of Agriculture, Economic Research Service). 2008. 2008 farm bill side-by-side.

Available at: http://www.ers.usda.gov/Fa rmBill/2008/Titles/TitleIIConservation.htm#conservation

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Page 80 of 126 glycerin. Glycerin disposal may be regulate d under several EPA programs, depending on the practice. However, there have been incidences of glycerin dumping, including an incident in Missouri that resulted in a large fish kill. 85 Some biodiesel facilities discharge their wastewater to municipal wastewater treatment systems for tr eatment and discharge. Th ere have been several cases of municipal wastewater treatment plant ups ets due to high BOD loadings from releases of glycerin. 86 To mitigate wastewater issues, some production systems reclaim glycerin from the wastewater. Closed-loop systems in which water a nd solvents can be recycled and reused can reduce the quantity of water that must be pretreated before discharge.

Biodiesel can also impact water bodies as a re sult of spills. However, biodiesel degrades approximately four times faster than petroleum diesel including in aquatic environments. 87
Results of aquatic toxicity testing of biodiesel indicate that it is less toxic than regular diesel. 88
Biodiesel does have a high oxygen demand in aquatic environments, and can cause fish kills as a result of oxygen depletion. Water quality impacts associated with spills at biodiesel facilities generally result from discharge of glycerin, rather than biodiesel itself.

Biodiesel facilities use much less water than ethanol facilities to produce biofuel. The primary consumptive water use at biodiesel plants is associated with washing and evaporative processes. Water use is variable, but is usually less than one gallon of water for each gallon of biodiesel produced; some facilities recycle wash water, which reduces overall water consumption. 89

9. Job Creation and Rura l Economic Development

In the RFS2 final rule, we anticipated employment to increase and income to expand in rural areas and farming communities. Income expansion in rural areas from renewable fuel production will contribute to rural economic de velopment. As mentioned above, industry activities are currently progressing to ramp up biodiesel production from the approximately 380 mill gallons estimated to be used in the U.S. in 2010 to the 800 mill gallons that is estimated to

be used in 2011 to meet the RFS2 biomass-base d diesel volume requirement. In addition, it is anticipated that biodiesel production capacity idle d due to lack of demand will be brought back on line as biodiesel volumes ramp up. Expansions to the fuel distribu tion infrastructure (i.e., more fuel terminals, rail cars, tank trucks, barges etc.) will be needed to support the use of 1 bill gal/yr of biodiesel in 2012 and 1.28 bill gal/yr in 2013 based on the analysis conducted for the

85 U.S. EPA. 2010b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA-420-R-10-006.

Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

.. 86 U.S. EPA. 2010b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA-420-R-10-006.

Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

.. 87 Kimble, J. n.d. Biofuels and emerging issues for emergency responders. U.S. EPA. Available at: http://www.epa.gov/oem/docs/oil/fss/fss09/kimblebiofuels.pdf

. 88 Kahn, N; Warith, MA; Luk, G. 2007. A comparison of acute toxicity of biodiesel, biodiesel blends, and diesel on aquatic organisms. Journal of the Air and Waste Management Association 57(3): 286-296.

89 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA). EPA-420-R-10-006. Available

at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

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Page 81 of 126 RFS2 final rule. 90 We expect that bringing idle biodiesel plants back online and expanding

biodiesel distribution infra structure in the U.S. will increase employment in the renewable fuels

and related industries an d promote rural economic development. These increases in employment are similar to what EPA anticipated when it analyzed the RFS2 rule.

One commenter stated that expanding biodi esel production in the U.S. would result in significant employment gains in the biodiesel industry. Another commenter raised the issue of the impacts of the potential increased use of animal fats to produce biodiesel under a 1.28 bill gallon requirement on employment within the oleochemical industry. According to the commenter, with renewable fuel production consuming an increasingly significant amount of the total supply of animal fats produced in the U.S., this may limit the availability of animal fats for oleochemical production. According to the commen ter, the price of animal fats recently exceeded the price of Malaysian palm oil. If the oleochemical industry switched to palm oil as a feedstock to make its products and located near palm oil supply, there could be a possible loss of U.S. employment in this industry.

As the commenter pointed out, we cannot preven t any feedstocks from being used to produce RIN-generating renewable fuel if they meet the re gulatory definition of renewable biomass and are otherwise valid. Nevertheless, we noted in Section IV.B.2 that there would be sufficient sources of feedstock to produce 1.28 bill gallons of biomass-based diesel without using any animal fats. Moreover, as described in Section IV.B.1, we believe it is likely that the advanced biofuel standard of 2.75 bill gallons would drive demand for biomass- based diesel above 1.0 bill gallons, potentially to as high as 1.28 bill gal. Under such circumstances, the requirement for 1.28 bill gallons would have little or no effect on the production of bioma ss-based diesel, and thus on the consumption of animal fats, than if the requirement was set at 1.0 bill gallons. Given these same circumstances, we would not expect significant impacts on the domes tic oleochemical industry of the biomass-based diesel standard of 1.28 bill gallons.

D. Final 2013 Volume for Biomass-Based Diesel

We are finalizing an applicable volume of 1.28 bill gal biomass-based diesel for 2013, consistent with our proposal. We received comments both in support of and opposed to an increase above the statutory minimum of 1.0 bill gallons. We have determined that 1.28 bill gallons is achievable in 2013, and after analyzing the factors required under the statute, we have determined that setting the applicable volume of biomass-based diesel at 1.28 bill gallons is a reasonable exercise of our authority under 211(o)(2)(B)(ii).

As noted in Section IV.B, because we have made no decision with regard to whether to reduce any portion of the 2013 advanced biofuel app licable volume in this rulemaking, we have used the 2.75 bill gallon applicable volume for the analyses in today’s final rule. Given an advanced biofuel applicable volume of 2.75 bill gallons for 2013, the 1.28 bill gal biomass-based diesel volume requirement is not expected to force any additiona l biomass-based diesel volumes

into the market in 2013 than would have occurr ed under a requirement for 1.0 bill gallons. As a result, the increase in biomass-based diesel from the statutory minimum of 1.0 bill gal to 1.28

90 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA), EPA-420-R-10-006, February

2010. Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

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Page 82 of 126 bill gal could be seen as not having any impact beyond what is anticipated to result from meeting the current 2.75 bill gal advanced biofuel applicable volume.

E. 2014 and Beyond

EPA is directed under CAA 211(o)(2) to de termine the required biomass-based diesel volumes no less than 14 months ahead of the first y ear that they would be applicable. We did not propose biomass-based diesel standards for 2014 a nd beyond in the NPRM since we believe we will be in a better position in the future to evaluate all of the factors related to establishing an applicable volume for 2014 and later years.

In response to the NPRM, two parties co mmented that EPA should set the required volumes of biomass-based diesel through at l east the year 2017. We agree that specifying the required volumes of biomass-base d diesel for more than one compliance year would provide greater certainty for both biofuel producers and oblig ated parties, stability for future investments and contracts, and could potentially reduce the need to waive a portion of the advanced biofuel requirement in future years, thus furthering the goals of the statute to re quire increasing volumes of advanced biofuel through 2022. However, we will have more informat ion on the operation of the RFS program and on the industry's response to higher mandates after 2011. Therefore, we will take these comments into consideration in future rulemakings.

V. Changes to RFS2 Regulations

As the RFS2 program got underway in the second half of 2010, we discovered that a number of regulatory provisions were causing conf usion among regulated par ties. In some cases the confusion was due to a lack of specificity in terms, while in othe rs it was due to unique circumstances that were not sufficiently addresse d in the RFS2 regulations. A few amendments are being finalized in order to correct these pr oblems and to amend regulatory language that inadvertently misrepresented our intent as re flected in the preamble to the final RFS2 regulations. In addition, as we have worked w ith regulated parties to ensure that the RFS program is operating as intended, we identified areas in the regulations that could benefit from streamlining. We also identified one provision in the gasoline benzene regulations that misrepresented our intent as stated in the preamb le. As a result, we are finalizing a number of amendments to the RFS regulations, and one amendment to the gasoline benzene regulations, in

40 CFR Part 80.

A. Summary of Amendments

Below is a table listing the provisions that we are amending in today’s action. We have provided additional explanation fo r several of these amendments in Sections V.B through V.F

below.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 83 of 126 Table V.A-1 Summary of Technical Amendments Section Description

80.1275(d)(3) Removed to allow for the inclusion of transferred blendstocks in the calculation of benzene early credits.

80.1401 Amended definition of "annual cover crop" to clarify that the crop has no existing market to which it can be sold except for its use as feedstock for the production of renewable fuel.

80.1401 Amended definition of “naphtha” to clarify that it applies to hydrocarbons only, must be commonly or commercially known as naphtha, and is used for producing gasoline.

80.1405(a), (b), and (d) Amended to state the standards fo r 2012 and the date of the annual

standards calculation.

80.1405(c) Amended terms “GE i ” and “DE i ” to reference the amount of gasoline and/or diesel produced by small refi neries and small refiners that are exempt pursuant to §§80.1441 and 80.1442.

80.1415(c)(2) Amended to state the specific re quirements needed for technical justifications for applicati ons for Equivalence Values.

80.1426, Table 1 Amended to add ID letters to pathways to facilitate references to specific pathways and to change the reference to “canola” to “canola/rapeseed”.

80.1426(f)(1) Corrected typographical error in cross reference to paragraph (f)(6) of §80.1426.

80.1426(f)(5)(ii) Amended requirements so that th e separated yard waste plans and separated food waste plans need not be approved by EPA, but instead only need to be accepted by EPA under the registration provisions.

80.1429(b)(2) Amended to clarify that "fossil-base d” diesel fuel is different from

renewable diesel fuel.

80.1429(b)(9) Amended to include RIN separation limitations on parties whose non-export RVOs are solely related to imports of gasoline and diesel or the use of blendstocks to produce gasoline or diesel.

80.1449(a) Amended Production Outlook Report due date; added allowance for unregistered renewable fuel pr oducers and importers to submit Production Outlook Reports.

80.1450(d)(1)-(d)(3) Amended to add more specificity on when updates, addenda, or resubmittals are required for engineering reviews and to include references to foreign ethanol producers.

80.1451(a)(1)(xi) Amended to clarify that this secti on references RFS1 RINs retired for compliance. 80.1452(b)(2) Corrected typographical error.

80.1452(b)(4) Amended to clarify that a RIN-generating importer must submit to EMTS the EPA facility registration number of the facility at which the renewable fuel producer or fore ign ethanol producer produced the

batch.

§80.1452(b)(5) Amended to clarify that for imports of renewable fuel, the RINgenerator must submit to EMTS the EPA facility registration number*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 84 of 126 of the importer that imported the batch.

§80.1454(e)(3) Amended to require submission of additional evidence as part of registration to verify eligibility for exemptions in §80.1403(c) or (d).

80.1460(b)(6) Adds the existing prohibition against generating a RIN for fuel for which RINs have previously been generated. 80.1464(a)(2)(iii), (a)(2)(iv), (b)(2)(iii), (b)(2)(iv), (c)(1)(iii), and (c)(1)(iv) Added to clarify that auditors mu st verify that product transfer

documents for RIN transactions cont ain the required information for obligated parties/exporters and for renewable fuel producers/importers. 80.1464(a)(2)(i), (a)(3)(ii), (b)(2)(i), (b)(3)(ii) Amended to clarify that auditors must validate RIN separations for obligated parties/exporters and for renewable fuel producers/importers; amended to correct typographical error. 80.1465(h)(2); 80.1466(h)(2); and 80.1467(e)(1), (e)(2), and (g)(2) Amended to remove the option of using an alternative commitment in lieu of paying a bond and to clarify the amount of bond a foreign entity must post.

B. Technical Justification for Equivalence Value Application

A producer or importer of renewable fuels is required to submit an equivalence value (EV) application in accordance with §80.1415(c) for any renewable fuel that does not have an EV listed in §80.1415(b). In addition, a producer or importer could apply fo r an alternative EV if the producer or importer has reason to believe that a different EV than that listed in §80.1415(b) is warranted. Secti on 80.1415(c) provides the calculation equation for the EV of the renewable fuel and the requirements for the technical justification to be submitted in the EV application.

We have received many inquiries from pr oducers and importers of renewable fuels requesting clarification of the specific requirements for the technical justification listed in §80.1415(c). In addition, based on the many EV app lications we have ev aluated, we have found that we needed to request additional inform ation from producers a nd importers to better understand the composition of the renewable fuel th ey produced, such as intermediate steps and energy inputs in production process, sources of renewable and non-renewable feedstock, and so forth, to better evaluate and assign the correct EV to the producer or importer’s renewable fuel.

Therefore, we are finalizing in this rule making amendments to §80.1415(c)(2) to clarify the current requirements and to include additional requirements for the technical justification to be submitted in the EV application. Th e final amendments to §80.1415(c)(2) include: - A calculation for the requested equivalence value according to the equation in §80.1415(c)(1), including supporting documentation for the energy content (EC) of the renewable fuel such as a certificate of analysis from a laboratory that verifies the lower heating value in Btu per gallon of the renewable fuel produced. - For each feedstock, component or additive us ed to make the renewable fuel, provide a description, the percent input and identify whet her or not it is renewable biomass or is

derived from renewable biomass.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 85 of 126 - For each feedstock that could independently qualify as a renewable fuel, state whether or not RINs have been previously generated for the feedstock. - A description of renewable fuel and the production process, including a block diagram that shows quantities of all inputs and output s required at each step of the production process for the production of one batch of renewable fuel.

We received no adverse comments on our pr oposed changes to §80.1415(c)(2), and so are finalizing the changes as proposed.

C. Changes to De finitions of Terms

1. Definition of Annual Cover Crop

As explained in the preamble of the RFS2 final rulemaking, EPA extended modeling for

cellulosic biofuel made from corn stover and biodiesel/renew able diesel made from waste oils/fats/greases to certain fuels made from annual cover crops, based on the expectation that cultivation of annual cover crops, as defi ned in §80.1401, will have little impact on the agricultural commodity markets and therefore little or no land use impact associated with them. Therefore, certain fuels (as specified in Table 1 to §80.1426) derive d from annual cover crop feedstocks qualify for D-codes under the advanced biofuel, biom ass-based diesel, and cellulosic renewable fuel categories.

Section 80.1401 of the final RFS2 rule defi nes “annual cover crop.” We proposed to

amend the definition of annual cove r crop in order to more clearly define those feedstocks that meet the intent of including cover crops in several pathways in Table 1 to §80.1426.

As explained in the proposal, in order to exte nd our modeling to cover crops, we used the

rationale that annual cover cr ops would have no land use impact since they are planted on land otherwise used for crop production. Greenhouse ga s emissions would only be associated with growing, harvesting and transporting the cover cro p, and then processing into biofuel. (See 75 FR 14794 col. 3.) Thus, we assumed that no a dditional land would be re quired to plant annual cover crops, that cover crops would not displace primary crop production, and that the use of the cover crop as a feedstock for renewable fuel s would not have secondary impacts on other agricultural commodity markets. This implies th at annual cover crops would not be planted and harvested for the purpose of being sold to exis ting markets. If a cover crop already had an existing market, then the increased use of c over crops as feedstocks for renewable fuel production could potentially impact the existing mark ets. Therefore, we proposed to amend the current definition for “annual cover crop” to clar ify that for purposes of the RFS program the term only includes crops that have no existing mark et to which they can be sold except for the

use of the feedstock for renewable fuel. This will ensure that no unintended land use or significant indirect effects result from the use of annual cover crops as feedstocks for renewable fuel production.

Several parties commented against this change, stating that it is too restrictive and thus would prevent some crops they considered cove r crops from qualifying as eligible feedstock*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 86 of 126 under the RFS2 program. While this change clarifies that crops having existing market impacts would not qualify as cover crops, such exclusion is consistent with the basis for including the cover crop provision. EPA determined that crops with no market value could be planted on land without any expected impact on other crops and t hus no expected indirect land use impact. This amendment clarifies that only crops with no ma rket impact can qualify as cover crops and is consistent with the underlying analysis. However, even if a crop does not qualify under this revised cover crop definition, that does not pr event it from being included as an eligible feedstock under the RFS2 program. As stated in the proposal, EPA recognizes that there may be additional fuel pathways requiring lifecycle greenhouse gas (GHG) assessments and the assignment of appropriate RIN D- Codes, including those using f eedstocks that do not meet the proposed amended definition of annual cover crop . For further guidance on the process for requesting EPA evaluation of new fuel pathwa ys, please refer to the following sites:

http://www.epa.gov/otaq/fuels/renewablefu els/compliancehelp/rfs 2-lca-pathways.htm

http://www.epa.gov/otaq/fuels/renewablefuels/ compliancehelp/lca-petition-instructions.htm#1

2. Definition of "Naphtha"

In the RFS2 final rule, we included seve ral RIN-generating pathways in Table 1 to §80.1426 for naphtha made from renewable biomass. We also provided a definition of naphtha in §80.1401. However, the definition we finalized was overly broad and did not adequately represent our intent to limit naphtha to gasoline bl endstocks. As a result, some biofuel producers have expressed interest in interpreting the term "naphtha" to include materials that, while falling within the boiling range of gasoline, are not used as a blendstock to produce gasoline.

To remedy this situation, we proposed to revi se the definition of naphtha to also specify that it applies only to blendstocks which are co mposed of only hydrocarbons, are commonly or commercially known as naphtha, a nd are used to produce gasoline. We received no adverse comments on this proposal, and so are finalizing it as proposed.

D. Technical Amendments Related to RIN Generation and Separation

1. RIN Separation Limit for Obligated Parties

We proposed to amend section §80.1429(b)(9) to limit the amount of RINs a company who is an obligated party solely by virtue of im portation of obligated fuel can separate to meet their Renewable Volume Obligation (RVO). This proposal was designed to prevent abuse of the obligated party RIN separation provision by a comp any that imports a relatively small amount of an obligated volume, but then separates a large am ount of RINs. It was also designed to help prevent hoarding of RINs by parties that do not need them for compliance purposes, and to generally increase the liquidity of RINs. EP A structured the original RFS1 separation regulations around facilitating compliance by obligat ed parties who must acquire RINs to meet*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 87 of 126 their RVOs. This change is consistent with the original design and also ensures that importers can separate enough RINs to meet their obligations. Overall, commenters were against this amendment with many companies indicating that they are currently taking advantage of the ability to separate all RINs in their possession if they are an obligated party solely related to their gasoline and/or diesel imports, and that they wish to continue to do so.

One commenter opposed this change, statin g that the RIN life limitation would prevent hoarding. EPA does not agree with this; the life of a RIN prevents use for compliance after a designated amount of time, see §80.1447(a)(6), this does not provide an adequate mechanism to prevent hoarding of RINs.

Several commenters stated that the carryove r provisions prevent RIN hoarding. EPA does not agree; the carryover provisions, §80.1428(a)(5), refer only to the ratio of assigned RINs

to volumes of renewable fuel owned at the e nd of a quarter. There is no limit on the amount of separated RINs that a party may own at the end of a quarter.

Several commenters stated that market liquidi ty would decrease if obligated importers could not separate all RINs that they own. They also stated that RINs will be held by fewer obligated parties. We believe that market liquidity would not be decreased; RIN separation would still occur according to §80.1429 and obligated parties would still have access to the separated RINs needed for compliance. In fact , to the extent that the provision prevents RIN hoarding, as intended, it should increase RIN liqui dity.EPA has determined that this will not change or limit who can participate in the RFS program or become an obligated party; it will only limit the number of RINs that certain importers can separate. In addition, these obligated importers and any other RIN owning party can se parate RINs without being subject to the limitation in §80.1429(b)(9) for any of the reasons outlined in §80.1429(b)(2)-(b)(5) and (b)(8).

One commenter was concerned about how an obligated importer would know how many RINs they could separate for “receipt of fuel by an obligated party” noting that they will not know their exact RVO until the end of the comp liance year. EPA believes that obligated importers should separate RINs on the basis of “recei pt of fuel by an obligated party” only to the extent necessary to meet their existing obligation.

One commenter felt that the proposed amendm ent would limit the actual capacity of an importer to introduce a volume of renewable fuel into the marketplace. EPA does not agree with this statement and believes that limiting RIN separa tion using the reason “receipt of fuel by an obligated party” would not reduce the amount of renewable fuel that is in demand and may be

sold.

One commenter requested conf irmation of the following statement: “this change would, in no way, limit the right of a company to separate RINs from renewable fuel if that entity is acting as a blender and blending renewable fuel in to transportation, heating fuel or jet fuel.” EPA confirms the previous statement with one clarification. Amende d §80.1429 applies “except as provided in paragraphs (b)(2) through (b)(5) an d (b)(8).” Since the oblig ation for blenders to separate Ins for renewable fuel that they blend to produce a transportation fuel, heating oil or jet fuel appears in (b)(2), the limitations in (b)(9) are not applicable to RIN separations pursuant to*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 88 of 126 that provision. We clarify, however, that (b)(2) ap plies to blending “to produce” a transportation fuel, heating oil or jet fuel. For example, blending biodiesel at a rate of 5% into motor vehicle diesel fuel would produce a transportation fuel.

One commenter indicated that this method of separation helped companies that did not

want to be involved with the RF S program; allowing obligated im porters to transfer renewable fuel without RINs and not violating the quart erly check outlined in §80.1428(a)(5). EPA notes that all parties have the ability to separate up to 2.5 RINs per gallon pursuant to §80.1429. This amendment, which will limit obligated importers’ ability to separate RINs, would not change this feature. This provision could facilitate the transf er of fuel with separated RINs to parties not wishing to receive RINs. Also, small blenders have the ability to delegate all RIN related responsibilities to the party directly upstream as long as they are blending less than 125,000 gallons of renewable fuel per year (§80.1440). In addition to separating up to their RVO, obligated importers and any other RIN owning party can separate for any of the reasons outlined in §80.1429(b)(2)-(b)(5) and (b)(8) without bein g subject to the limitation in (b)(9).

One commenter argued that the ability to separate as an obligated importer allowed them more flexibility with RIN transfer dates. EPA believes that this implies that the party uses its ability to separate to avoid the requirement in §80.1428(a)(3) “an assigned RIN cannot be transferred to another person wit hout simultaneously transferring a volume of renewable fuel to that same person.” The commenter indicated that a reason for becoming an obligated importer is to be able to separate all RINs and avoid the previously referenced regulatory requirement. This also allows them to remain in compliance with the EMTS transaction reporting time frames laid out on §80.1452(c). EPA believes that transfer date and the ability to transfer separated RINs

without renewable fuel are not relevant to th is amendment. The commenter’s use of the provision is counter to how the pr ogram was set up to ensure the distribution of RINs and could be used not only to slow the transfer of RINs downstream to the blender or final user of the renewable fuel, but also allow hoarding. The comme nter also stated that there is no requirement to report physical fuel inventory and numbe r of assigned RINs (§80.1428(a)(5)). EPA has determined that this statement is not accurate pursuant to §80.1451. Currently, §80.1451(c)(2)(xiv), requires the volume of renewable fuel owned at the end of the quarter. This volume must meet the requi rements of §80.1428(a)(5).

EPA believes that while commenters were mainly against the amendment, specific arguments presented supported EPAs reason for the amendment. For the reasons stated above, we are finalizing the regulatory changes as proposed.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 89 of 126 

### 2 . RIN Retirement Provision for Error Correction

As we stated in the proposal, in some in stances, renewable fuel producers or importers may improperly generate RINs in EMTS as a resu lt of calculation errors, meter malfunctions or clerical errors. Pursuant to §80.1431(a), imprope rly generated RINs are invalid, and cannot be used to achieve compliance with any Renewable Volume Obligations (RVOs).

EPA sought comment on the possibility of amending §80.1431 to provide the regulated community with limited flexibility to allow certain RINs that were improperly generated to

nevertheless be transferred and used for co mpliance, provided the RIN-generator retires equivalent RINs (the same quan tity and fuel category (D-code) of RINs with the same RIN year)

in order to make the market whole.

We sought comment on whether EPA should amend the regulations to include the flexibility for EPA to allow improperly generated RINs to be used for compliance, whether the conditions set forth in the proposal were appr opriate, and whether there are additional or

alternative conditions that should be imposed if the flexibility were to be granted. We proposed that the following general limitations should apply to any flexibility to allow improperly generated RINs to be transferred and used fo r compliance: 1) the RINs must have been improperly generated as a result of an inadverten t error, 2) the improperly generated RINs must have the correct D code, 3) the RIN generator must correct the information submitted to EMTS and retire an equivalent number and type of any excess RINs that were generated as a result of the error within a fixed time period of 60 days, 4) the flexibility to allow improperly generated RINs to be used for compliance would only appl y if the number of excess RINs generated for a particular batch exceeds the number of RINs that should have been generated by no more than two percent, and 5) the flexibility to allow improperly generated RINs to be used for compliance

should be limited to a certain number of times per year per RIN generator.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 90 of 126 We received several comments in support of pr oviding EPA with some sort of flexibility to allow improperly generated RINs to be used for compliance, and a few comments that did not support EPA providing any flexibility of this type. Supporters of the flexibility believe that this flexibility is necessary for good faith RIN generato rs who have made inadvertent mistakes. They argue that the flexibility will avoid time spent by both EPA and regulated parties tracking invalidly generated RINs to their current owner wh en equivalent RINs coul d be retired to make the system whole. Commenters believe EPA’s time is better spent investigating more egregious violations. Many supporters of the flexibilit y, however, believe that, given the proposed limitations, the proposed flexibility would be t oo narrow. Commenters believe that EPA should take into consideration the totality of the circum stances, including the number of RINs/percent of the batch that are invalid, the frequency of imp roper generation on the part of the producer and indications of good faith mistake when deter mining whether to allow the flexibility for improperly generated RINs to be used for compliance, rather than imposing strict limitations on the use of the flexibility.

EPA believes that providing this type of flexibility will reduce disruptions to the RIN market while continuing to appl y appropriate pressure on parties that generate, transfer and use RINs to comply with the regulations. However, EPA disagrees with the commenters that advocated that the flexibility should be unlimited. EPA believes that by limiting the use of this flexibility, RIN generators are provided an incentive to implement and utilize measures and controls to ensure the validly of information sent to EMTS in a more timely manner. Therefore, in today’s rule in 80.1431(c) and (d), EPA is fina lizing an approach that provides flexibility to RIN generators to retire equivalent RINs in situ ations where they have over-generated RINs on a batch due a broken meter, an in advertent temperature correction error, or an inadvertent administrative error. This flexibility may only be used under certain conditions, though, in order to mitigate harm to the RIN market, as specified in the regulations and discussed in detail below.

Some commenters supported the proposed 60-day time allowance for a RIN generator to correct RIN generation information submitted to EMTS. The commenters believe 60 days is sufficient to identify and correct inadvertent mistakes, and the time limit provides an incentive for the regulated community to regularly verify that RINs have been correctly generated. On the other hand, another commenter thought that the co rrection period should be longer than 60 days. One commenter suggested 18 months for RIN gene rators to notify EPA of improperly generated RINs at which point EPA would de termine whether to allow those invalid RINs to be used for compliance. The commenter believed this would a llow invalid RINs to be discovered during the

attest audit conducte d each year concerning the renewable fu el producer’s compliance records.

Additionally, commenters generally disagreed with EPA’s proposal to limit the flexibility to situations where the number of excess RINs generated for a particular batch exceeds the number of RINs that should have been generate d by no more than 2%. Commenters argued that a simple typing error in any digit can easily result in an over-generation that far exceeds 2%. One commenter suggested that the number of RINs eligible for the flexibility be limited to no more than 2% of a specific RVO category (e.g. Ce llulosic Biofuel, Advanced Biofuel, etc.) for any given year. Another suggested that there is no reason to limit the flexibility this way, and

that EPA should maintain discretion to dete rmine when invalid RINs can be used for compliance, regardless of what percentage of th e RIN batch is invalid. The commenter states*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 91 of 126 that there is no reasonable equitable basis for limiting the availability of the flexibility to situations involving an error of no more than 2% , since there can be significant variability in the size of renewable fuel batches; for example, 2% of a large batch could consist of more RINs than an entire batch for a smaller facility.

In today’s final rule, EPA did not limit the ability to use the flexibility to a certain number of RINs or percentage of a batch as proposed because we agree with commenters’ suggestion that a simple typing or meter error may result in a large number of excess RINs just as easily as it could result in an error that constitutes only a small number of RINs. EPA’s decision to eliminate the two percent limitation may result in more regulated parties taking advantage of the flexibility created by this rule. Nevertheless, EPA is limiting the use of the flexibility to situations in which RIN generato rs who improperly over-generated RINs on a batch fit certain criteria, including taking remedial ac tion to retire equivalent RINs within 30 days of the original invalid RIN generation submission in EMTS, as specified in 80.1431(c)(7). EPA believes that it is appropriate to require RIN generators to correct the information submitted to EMTS within 30 days to encourage the regulate d community to take prompt corrective action, which will aid in maintaining ma rket integrity. EPA believe s that limiting the amount of time that RIN generators are afforded to avail themselves of this flexibility is necessary to provide an incentive to RIN generators to conduct timely in ternal inspections of their RIN generation

activities in order to ensure that RINs are properly generated and the accuracy of RIN

information in EMTS.

We also sought comment on the possibility of establishing a limit on the number of times this flexibility could be requested within a compliance period by a given RIN generator. We stated that we believe such a limitation could encourage RIN generators to take appropriate measures to avoid generating invalid RINs, and limit the possibility that RIN generators would intentionally generate invalid RINs to take advantage of short term RIN price spikes. Some commenters argued that there should not be a limit on the number of times a RIN generator can request EPA allow them to use the flexibility, but that if a particular company regularly generates RINs improperly, that company should be penalized on a case-by-case basis, taking into account whether the error was truly a mistake made in good faith.

EPA disagrees with commenters’ belief that RIN generators should have unlimited access

to these flexibilities. EPA believes that the fl exibility should be limited to a set number (namely, five) of improperly generated batc hes per year and is finalizing regulations to that effect in 80.1431(c)(6). By limiting the number of times a RIN generator may utilize the flexibility to retire equivalent RINs, the regulations will en courage RIN generators to implement robust measures and controls to prevent errors from occurring, knowing that the flexibility is only available to them for five batches each compliance year. Additionally, limiting the number of batches to which this flexibility can be applied restricts the ability of RIN generators that might otherwise intentionally ge nerate invalid RINs to take advantage of short term RIN price spikes.

Finally, EPA is finalizing a provision info rming the regulated community that EPA intends to publicly post information concerning RIN generators utilizing this flexibility in 80.1431(c)(7)(B). By posting this information, EP A is assisting obligated and other regulated*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 92 of 126 parties in their due diligence to ensure complian ce with all RFS2 regulations. EPA believes that posting information concerning the use of this flexibility will incentivize proper RIN generation

in the future.

Further, EPA may remove improperly generated RINs from EMTS if the RIN generator has failed to properly meet the remedial action requirements stated in the regulations, as specified in 80.1431(d). EPA believes this will prevent invalid RINs that do not meet the requirements in 80.1431(c) from propagating throug h the market and being used for compliance purposes, thus preventing additional violations. While EPA is aware that the proposal did not include the ability to remove improperly generated RINs, EPA believes this ability is a logical outgrowth from the comments that EPA should spend more time investigating egregious violations. This provision will allow EPA to quickly remove from the market those RINs reported by the RIN generator to be invalid due to reasons in 80.1431(c)(2), thus affording EPA more time to spend investigating egregious violations.

Finally, a number of commenters noted that good faith purchasers and the ultimate users of the RINs, the obligated parties, should not be subject to a violation for unwittingly buying and/or retiring invalid RINs for compliance. EPA disagrees, and believes that the “buyer beware” aspect of the RIN trading program is one of the cornerstones of the program. It provides an important incentive for the regulated community to comply with the regulations and mandates due diligence on the part of all RIN buyers. It encourages self-policing on the part of RIN generators, owners and users in order to keep the program functioning smoothly. EPA is not making any changes to the liability sections of RFS2 as a result of these comments and although today’s rule will allow obligated parties to use some invalid RINs for compliance, the obligated parties and any intermediary party are still liable for buying and/or transferring invalid RINs.



### 3 . Production Outlook Reports Submission Deadline

In the final RFS2 regulations, in §80.1449(a) , EPA set the annual deadline for submitting Production Outlook Reports as March 31 of each y ear. However, EPA has determined that, in

order for the information contained in the Produc tion Outlook Reports to be most useful when setting the RFS2 volume requirements and associated percentage standards for the following calendar year, the reports should contain the mo st accurate projections possible. Since the accuracy of projections tends to increase the closer those projections are made to the following calendar year, we proposed that the March 31 dead line should be moved to June 1. This revised

deadline would still allow the information cont ained in the Production Outlook Reports to be used in the development of the final rulemaking setting the standards for the following year.

We received one comment on the proposed Pr oduction Outlook Reports deadline of June 1 that suggested August 31, or as late as possible that still ensures the information is useful in the development of the final RFS standards for the fo llowing year. EPA believes, however, that if the deadline is set later in the year, there w ould be insufficient opportunity for EPA to quality check the incoming data prior to incorporating it into the analysis for developing the RFS2 volume requirements and associate percentage st andards for the following calendar year. EPA*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 93 of 126 strives to make the most accurate projections possi ble, so without time to check the data quality, there could be inaccuracies in the volume requi rements that lead to market disruption.

Another commenter suggested that having the Production Outlook Reports deadline immediately after the May 31 attest engagement deadline would place a significant burden on regulated parties at that time, and suggests a deadline of June 30 for the Production Outlook Reports. EPA believes that it is not a significant burden for regulated parties to submit the Production Outlook Report at the sa me time as the attest enga gement report, especially considering the attest audit and report are typically conducte d by independent third-party auditors, rather than the regulated parties themselves.

For the reasons stated above, EPA believe s that the proposed June 1 deadline for Production Outlook Reports is r easonable and should not be m oved to later in the year. Therefore, EPA is finalizing the June 1 deadline for Production Outlook Reports.



### 4 . Attest Procedures

In the final RFS2 regulations, EPA require d in §80.1464(c)(1)(i) and (c)(2)(ii) that RIN owners conduct attest procedures for RIN transa ction and RIN activity reports that involve RIN separations. This requirement wa s intended to be included in the attest procedures for obligated parties and exporters as well as for renewable fuel producers and RIN-generating importers, in order to confirm that RINs are being properly separated by all parties participating in the RIN market. Thus, we proposed amendments to §80.1464( a)(2)(i) and (a)(3)(ii) for obligated parties and exporters as well as to §80.1464(b)(2)(i) and (3)(ii) for renewable fuel producers and RINgenerating importers to include attest procedures concerning verification of RIN separation.

Additionally, in the final RFS2 regulati ons, EPA required in §80.1464 that auditors of RIN generation reports verify that product tran sfer documents (PTDs) include the required

information. EPA believes it would be beneficial for auditors to verify the required information is present on PTDs for RIN transactions for all parties, including obligat ed parties, renewable fuel producers and importers and RIN owne rs. Thus, we proposed amendments to §80.1464(a)(2), (b)(2) and (c)(1) to require auditors to verify that the PTDs for a representative sample of RINs sold and purchased c ontains the information required in §80.1453.

We received one comment that stated that the attestation procedures should be comparable for all reporting activities of all regulated parties. EPA believes, however, that the proposed regulatory changes to the attest enga gement procedures appl y consistently to all regulated parties in that all par ties are responsible for ensuring that RINs that they separate, purchase or use for compliance have been properly separated and that they have associated PTDs with all of the required informa tion. Another commenter states th at obligated parties should not be required to audit RIN separation activities in addition to RIN purchases. Again, EPA feels this additional check on RIN separation activities will ensure that the RINs are properly separated and that renewable fuel is actually be ing blended for use as transportation fuel, heating oil or jet fuel. Therefore, EPA is finalizing the amendments to the attest engagement procedures as proposed.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 94 of 126 

### 5 . Treatment of Canola and Rapeseed

On September 28, 2010, EPA published a “Suppl emental Determina tion for Renewable Fuels Produced Under the Final RFS2 Progra m from Canola Oil” (FR Vol. 75, No. 187, pg 59622-59634). In the NPRM we proposed to cl arify two aspects of the supplemental determination. First we proposed to amend the regulatory language in Table 1 to §80.1426 to clarify that the currently-approved pathway for canol a also applies more ge nerally to rapeseed. While “canola” was specifically described as the feedstock evaluated in the supplemental determination, we had no t intended the supplemental determina tion to cover just those varieties or sources of rapeseed that are identified as ca nola, but to all rapesee d. As described in the NPRM, we currently interpret the reference to “canola” in Table 1 to §80.1426 to include any rapeseed. To eliminate ambiguity caused by th e current language, however, we proposed to replace the term “canola” in that table with the term “canola/rapeseed”. Canola is a type of rapeseed. While the term “canola” is often used in the American continent and in Australia, the term “rapeseed” is often used in Europe and ot her countries to describe the same crop. We received no adverse comments on our proposal, a nd thus are finalizing it as proposed. This change will enhance the clarity of the regulations regarding the feedstocks that qualify under the approved canola biodiesel pathway.

Second, we wish to clarify that although the GHG emissions of producing fuels from canola feedstock grown in the U.S. and Canada was specifically modeled as the most likely source of canola (or rapeseed) oil used for biodiesel produced for sale and use in the U.S., we also intended that the approved pathway cover can ola/rapeseed oil from other countries, and we interpret our regulations in that manner. We expe ct the vast majority of biodiesel used in the U.S. and produced from canola/rapeseed oil will come from U.S. and Canadian crops. Incidental amounts from crops produced in other nations will not impact our average GHG emissions for two reasons. First, our analyses consider ed world-wide impacts and thus considered canola/rapeseed crop production in other countries . Second, other countries most likely to be exporting canola/rapeseed or biodiesel product from canola/rapeseed are likely to be major producers which typically use similar cultivars and farming techniques. Therefore, GHG emissions from producing biodiesel with canola/ra peseed grown in other countries should be very similar to the GHG emissions we modeled for Canadian and U.S. canola, though they could be slightly (and insignificantly) higher or lower. At any rate, even if there were unexpected larger differences, EPA believes the small amounts of feedstock or fuel potentially coming from other countries will not impact our threshold anal ysis. Therefore, EPA interprets the approved canola pathway as covering canola/rape seed regardless of country origin.

E. Technical Amendments Related to Registration & Recordkeeping

1. Construction Discontinuance & Completion Documentation

The registration requirements in §80.1450(b)(1)(v i) state that for facilities claiming the exemption described in §80.1403(c) or (d), eviden ce must be submitted demonstrating the date*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 95 of 126 that construction commenced. However, the re gistration requirements do not explicitly require the submission of evidence demonstrating that th ey meet the other requirements described in §80.1403(c)(1) and (2) or (d)(1), (2) and (3).

In order to verify that facilities whic h claim to qualify for an exemption under §80.1403(c) or (d) in fact meet all of the qualific ation requirements for such an exemption, we proposed to amend §80.1450(b)(1)(vi) to include requirements that the owner or operator of facilities claiming exemption unde r §80.1403(c) submit evidence demonstrating that construction was not discontinued for a period of 18 months after construction began, and that construction was completed by December 19, 2010. Similarly, we proposed that for facilities claiming the exemption under §80.1403(d), evidence be submitted demonstrating that construction was not discontinued for a period of 18 months after construction began and that construction was completed within 36 months of th e commenced construction date .

We received comments that EPA should not adopt these proposed amendments because the requirements would be overly burdensome and unn ecessary due to the fact that the majority

of all facilities that ha ve claimed the exemption under §80.1403 ha ve already been registered and therefore these amended requirements would ha ve no effect on these facility’s registration. Secondly, the commenter stated that the pr oposed requirement to submit evidence that construction was not discontinued for a period of 18 months is unreasonable because it is unclear how a facility could prove a lack of construction activity. Thirdly, the commenter stated that the proposed amendment to submit evidence that construction was time ly completed was unnecessary because a facility’s operation activity such as production of fuel was enough to serve as evidence that construction was completed. The commenter suggested that EPA only request evidence to demonstrate that these requirements are met from facilities that EPA believes did not rightly claim the exemption under §80.1403.

In order to fully assess the concerns rais ed by the commenters, EPA has decided to investigate this issue in more detail and analyze some additional options. Therefore, at this time, EPA is not taking final action with re spect to this proposed amendment.

2. Third-Party Engineering Reviews

The regulations stipulate that producers of renewable fuels and foreign ethanol producers are required to update their registration inform ation, and submit an upda ted independent thirdparty engineering review, every 3 years after their initial registration in accordance with §80.1450(d)(3). We have received many inquiries re garding the start date that EPA uses to determine the 3 year period after which the pr oducer must submit an upda ted independent third party engineering review (such as the registra tion acceptance date, the third-party professional engineer’s signature date on the engineering re view report, or the due date for engineering

reviews.

Given the lack of clarity in the current re gulations, we proposed amendments to specify

the time frame for submission of updated independent third-party engineering reviews which*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 96 of 126 included a simplified method that would group pro ducers according to the calendar year they were or will be registered, and set a fixed time frame for registration updates for each group. We proposed to amend §80.1450(d)(3) to stipulate th at for all producers of renewable fuel and foreign ethanol producers for which registra tion was accepted by EPA in calendar year 2010, that the updated registration information and inde pendent third-party engineering review would be submitted to EPA within the three months pr ior to January 1, 2014, and within three months prior to January 1 of every third calendar year th ereafter. For all producers of renewable fuel and foreign ethanol producers registered in any calendar year after 2010, the updated registration information and independent third-party engineering review would be submitted to EPA within three months prior to January 1 of every third calendar year after the first year the producer’s registration was accepted by EPA. For exam ple, a producer registered in 2011 would be required to submit an updated independent third-party engine ering review by January 1, 2015, and by January 1 every three calendar years thereafter.

We received comments that supported the a doption of the proposed amendments for a simplified method of grouping producers according to the calendar year that they were or will be registered to determine the due date for sub mission of the updated regi stration information and independent third-party engineering review. The commenter suggested that we provide a clear

method to determine the due date for individual facilities to fu rther help with the compliance of this requirement. We agree with the commenter that providing more clarity and guidance would help facilities comply with this requirement. Therefore, in the near future and well before the due date for any updated engineering reviews, we plan to compile and publish a guidance document that will provide the date in whic h each facility’s registration was accepted, the calendar year in which each facility will be gr ouped, and the corresponding triennial due dates for the updated engineering review for each cale ndar year group. This guidance document will be published on the RFS public webs ite. Parties must also comply with all other applicable requirements in 40 CFR Part 80, Subpart M. Th is guidance does not, in any way, alter the requirements of the renewable fuel program regu lations, and does not establish or change legal rights or obligations.

In addition, we are removing from the final rule the proposed 3 months allowance period prior to triennial due date. The reason we include d a 3 months allowance was to ensure that the updated engineering reviews were not submitted so early as to not provide appropriately updated information as of the three-year submission dead line. We believed at the time of the proposal

that the inclusion of the 3 month window would ensure that facilities conduct their engineering review closer to the end of the 3 year period, which we assumed would provide the most up-todate information. However, now we believe that the inclusion of this 3 month period is unnecessary since the owners or operators of a f acility can determine for themselves when it is appropriate to coordina te and conduct the engineering review for their facility and that the regulatory requirement for “up-dated” engineer ing reviews provide sufficient clarity that the information submitted to EPA must reflect the up-to-date information

Therefore, we are finalizing in this rule making the proposed simplified method to group

facilities based on the cale ndar year in which their facility’s registration was accepted by EPA with the due date for the updated registration and independent thir d party engineering review to be submitted to EPA by January 31 st of every 3 calendar years, starting from the acceptance date*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 97 of 126 of the facility’s initial registration. We are allo wing the engineering reviews to be submitted at the end of January due to possible schedu ling concerns during the holiday season.

3. Foreign Ethanol Producers

We proposed that the amendments to the re gistration requirements in §80.1450 also apply to foreign ethanol producers. As defined in §80.1401, foreign ethanol producers are foreign producers that produce ethanol for use in transpor tation fuel, heating oil or jet fuel but who do not add denaturant to their product. Therefor e, foreign ethanol producers do not technically produce ‘‘renewable fuel’’ as defined in our regu lations. As discussed in the preamble to the Direct Final Rule published on May 1, 2010 (see 75 FR 26032), the result of the amendments made in the Direct Final Rule is to require foreign ethanol facilities that produce ethanol that ultimately becomes part of a renewable fuel for which RINs are generated to provide EPA the same registration information as foreign renewabl e fuel facilities that export their product to the United States. In both cases the required regist ration information is important for enforcement purposes, including verifying the use of renewabl e biomass as feedstock and the assignment of appropriate D codes. Therefore, we believe amendments to the registration requirements that we

make in this final rule should also be applicable to foreign ethanol producers for the same

reasons. We did not receive comments on this proposed change, so we are finalizing the amendment as proposed.

F. Additional Amendmen ts and Clarifications

1. Third-Party Engineering Review Addendum

We have received many inquires as to whet her an addendum to the existing independent third-party engineering review is sufficient to meet the requirement that all producers of renewable fuel and foreign ethanol producer s submit an updated inde pendent third-party engineering review if they make changes to their facility that will qualify the renewable fuel that is produced for a renewable fuel category or D code that is not already reflected in the producer’s registration information. In some circumstances the majority of the information verified in the existing independent third-party engineering revi ew would remain the sa me, and duplicating the entire effort does not appear necessary. We believe the concept of allowing the submission of an addendum in lieu of a updated i ndependent third-party engineer ing review is reasonable and therefore we are finalizing to amend the requi rements in §80.1450(d)(1) to state that a producer of renewable fuel or foreign ethanol produc er may submit an addendum to the existing independent third-party engineering review on file with EPA provided the addendum meets all the requirements in §80.1450(b)(2) and verifies for EPA the most up-to-date information at the producer’s existing facility. The updated inde pendent third-party engineering review or

addendum shall be submitted at l east 60 days prior to producing the new type of renewable fuel and must meet all the same requirements sti pulated in §80.1450(b)(2) for the independent thirdparty engineering review, including a new site vi sit conducted by the third-party to verify any changes to the facility that allows it to produce a different renewable fuel that is not currently reflected in their registration on file with EPA.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 98 of 126 2. RIN Generation for Fuel Imported from a Registered Foreign Producer

In RFS2, EPA finalized provisions allowing importers to generate RINs for renewable fuel imported from a foreign producer only under cer tain circumstances. The importer may only generate RINs for fuel imported from a foreig n renewable fuel producer or foreign ethanol producer if that producer is registered with EPA and has received EPA company and facility identification numbers pursuant to §80.1450. Pursuant to §80.1426(c)(4), the importer is prohibited from generating RINs for fuel imported from a foreign producer that is not registered with EPA. In the proposed rulemaking, EPA pr oposed to clarify that when an importer is generating RINs for fuel imported from a register ed foreign renewable fuel producer or foreign ethanol producer, the importer must submit to EPA via EMTS the importer’s company identification number, the facility identification number of the import facility where the batch was imported, and the facility identification numbe r for the foreign renewable fuel or ethanol producer that produced the batch of fuel for whic h the importer is generating RINs. EPA did not receive comments on these clarifications, and is therefore finalizing them as proposed in §§80.1452(b)(4) and (5).

3. Bond Posting

We proposed to amend paragraphs (e)(1), (e)(2) and (g)(2) of §80.1467 to make them consistent with §80.1467(g)(1). These proposed ame ndments were intended to clarify that the amount of the posted bond must cover the numbe r of gallon RINs that are sold and/or transferred, and also those RINs held and/or obtai ned by the foreign entity, including those held and/or obtained to comply with a foreign impor ter's RVO requirements. We also proposed to amend §§80.1465-80.1467 by striking §§80.1465(h)(2)(iii), 80.1466(h)(2)(iii) and 80.1467(e)(2)(iii), which allowed en tities to make alte rnative commitments in lieu of posting

bonds. EPA believes that this method is va gue, unnecessary, and unenforceable.

One commenter at the hearing is against the removal of the regulation allowing foreign producers to make alternative commitments as it may discourage foreign renewable fuel producers from entering the U.S. market. EPA di sagrees as no foreign producer has used an

alternative commitment to date, and most foreign renewa ble fuel producers do not post bonds and instead rely on the renewable fuel importers to generate RINs for renewable fuel that is imported. For those reasons and the reasons de scribed above, we are finalizing the proposed changes to the bond posting regulations as proposed.

4. Prohibition Against Repeat Generation of RINs

We are finalizing our proposal to add a ne w paragraph (b)(6) to the prohibited acts of §80.1460 to specify in this section of the regulations that RINs may not be generated for any fuel for which RINs have previously been generated. Pursuant to §80.1401, a RIN is a unique number generated to represent a volume of renewabl e fuel. If more than one RIN is generated*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 99 of 126 for a particular volume, the RIN will no longer be unique, and is therefore improperly generated and cannot be used to demonstrate compliance with the renewable volume obligations. While generating RINs for a particular volume of fuel for which RINs have already been generated is already prohibited, we are amending the regula tions to include this prohibition in § 80.1460 for clarity.

5. Acceptance of Separated Yard Waste and Food Waste Separation Plans

We proposed to amend §80.1426(f)(5)(ii)(A) to remove the requirement that the separated yard waste plan and se parated food waste plan must be approved by EPA, and instead only require that these two plans be submitte d and accepted by EPA under the registration procedures specified in §80.1450(b)(1)(vii). The de tails and information re quired to be submitted in the separated yard waste plan and separate d food waste plan are not overly burdensome or complex, and therefore we belie ve it does not warrant a specifi c EPA approval, but that EPA acceptance of these plans through the re gistration procedures is sufficient.

We received comments that supported the adop tion of this amendment for separated food waste plan and separated yard waste plan. We also received comments suggesting that we also adopt this amendment for the separated MSW pl an. The commenter stated that although the separated MSW plan requires so mewhat more information than the separated yard and food waste plans, the same logic applies in that the separated MSW plan will also be subject to EPA review as part of the producer’s registration pr ocess and therefore requiring a separate duplicate approval for the separated MS W plan is not necessary.

First, we would like to clarify that there is not a duplicate approval process for the separated MSW plan that serves as a separa te additional requireme nt for the producer’s registration. Similar to the proposed acceptance process for the producer’s separated yard and food waste plan, the approval process for the prod ucer’s separated MSW plan will equally serve as verification of compliance as part of the produ cer’s registration. Secondly, we disagree with the commenter that the separated MSW plan only requires somewhat more information than the separated yard and food waste plan s, and that the same logic a pplies in terms of the review process. For the separated MSW plan, producer s are required to provide ongoing verification that there is separation of recyclable paper, car dboard, plastics, rubber, te xtiles, metals, and glass wastes to the extent reasonably practicable, including: the extent and nature of the recycling that occurred prior to receipt of th e waste material, identification of available recycling technology and practices that are appropriate for removing recycling materials from the waste stream, and identification of the technology or practices selected for implementation, including an explanation for such selection, and reasons wh y other technologies or practices were not implemented. In addition, producers are also required to provide c ontracts relevant to materials recycled from municipal waste streams and certif ication that recycling is conducted in a manner consistent with goals and requirements of applicable State and local laws relating to recycling and waste management as part of their registra tion process. For the separated yard and food waste plan, the producers are only required to pr ovide ongoing verification that the separated yard waste or food waste was kept separate since generation from other waste materials, and for food waste, contain only incidental amounts of other components. We believe the information*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 100 of 126 submitted in the separated MSW plan will be considerably more complex than information submitted in the separated yard and food waste plans, and theref ore, will require EPA conduct a much more comprehensive review and also consid er many additional factors to ensure that the producer has met the all the requirements stipulat ed. Based on the factors discussed, we believe that it is not reasonable to apply the same pr oposed acceptance process for separated yard and food waste plan to the separated MSW plan.

Therefore, we are finalizing in this rulema king only for separated yard waste plan and separated food waste plan to am end the requirement that the plans must be approved by EPA, and instead only require that the plans will be ac cepted by EPA under the registration procedures specified in §80.1450(b)(1)(vii).

6. Transferred Blendstocks in Early Benzene Credit Generation Calculations

Today’s rule also finalizes one minor corr ection to the gasoline benzene regulations which would clarify how refiners should account for transferred blendstocks in their early benzene credit generation calculations. Under curre nt rules, refineries which generated early benzene credits are required to reduce gasoline benzene during an early credit generation period by at least 10% compared to the refinery’s be nzene baseline, and are also required to make specific operational changes and/or improvement s in benzene control technology to reduce gasoline benzene levels. 91 Refineries which reduce their ga soline benzene by at least 10%, in part by transferring reformate to another refi nery, could also generate early benzene credits, provided the transferee refinery treated the re formate in specific benzene-reduction processing

units. 92 See 72 FR 8486-87 (Feb. 26, 2007). However, the gasoline benzene regulations also contain an additional provision that requires all blendstock st reams transferred to, from or

between refineries to be excluded from a refine ry’s early credit generation calculations (except for reformate as described previously). This le d to an inconsistent comparison of a refinery’s benzene during an early credit generation period with a refinery’s benzene baseline (which

included blendstocks transferred to the refinery), which was not EPA’s intent.

As described in the preamble of the gaso line benzene final rule, EPA intended that refineries not be allowed to generate early benzene credits exclusively through blendstock trading, without making any other qualifying re ductions (see 72 FR 8487), but that refineries could generate early benzene credits in part th rough qualifying reductions and “in part” through

other means such as blendstock transfers (see 72 FR 8496-97). However, the current regulations do not allow this approach, and this inconsistency has caused c onfusion among refiners about how to calculate the amount of early credits ge nerated. Refiners have generally followed the approach set out in the preamble (as EPA in fact intended), and included all blendstocks transferred to a refinery in the refinery’s earl y credit generation calculations. Refiners typically

91 Early credit generation periods were July 1, 2007 thro ugh December 31, 2 007, and calendar years 2008, 2009 and

2010.

92 Refineries produce gasoline by combining several different blendstocks produced by various refinery processing units. Reformate is a blendstock which contains approximately 80% of all benzene found in gasoline, per the MSAT2 regulatory impact analysis.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 101 of 126 keep records on transferred blendstocks for 1-2 ye ars, and thus do not have sufficient data to exclude transferred blendstocks from their early credit generation calculations.

EPA recently became aware of this inconsistency and is amending the regulations to

make them consistent with EPA’ s intent as described in the pr eamble. This rule amends the gasoline benzene regulations at 40 CFR 80.1275(d)(3) by deleting that provision. This will allow a refinery to include blendstocks transferred to the refinery in the refinery’s early benzene credit generation calculations (all other conditions , including treatment which removes benzene in transferred reformate streams still applying, of course). Consistent with EPA’s original intent, today’s rule also allows a refinery to includ e transferred blendstocks in past early credit generation calculations, provided the refinery me t all of the other requirements for generating early benzene credits. EPA is finalizing this chan ge to include transferred blendstocks in past early credit generation calculation not only because this was EPA’s intent at the time of the benzene gasoline rulemaking, but because some re finers have reasonably relied upon that stated intent in devising their compliance strategies.

All of the comments received on this change to the regulations were in support of this change. Commenters generally noted that the chan ge was needed in order to align the language in the regulations with the intent stated in the preamble.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 102 of 126 VI. Annual Administrative Announcements

In the RFS2 final rule, we stated our in tent to make two announcements each year:

• Set the price for cellulosic biofuel waiver credits that will be made available to obligated parties in the event that we reduce the volume of cellulosic biofuel below the applicable volume specified in the Clean Air Act (CAA), and

• Announce the results of our annual assessment of the aggregate compliance approach for U.S. planted crops and crop residue.

The biofuel waiver credit price being announced today was calculated in accordance with the specifications in §80.1456(d). Since the manner in which EPA calculates the waiver credit price is precisely set forth in EPA regulations (whi ch were issued through a notice-and-comment process), and since some of the variables nece ssary to compute the price have only recently become available, EPA did not propose a waiver credit price for comment. Similarly, because EPA’s assessment of the aggregate compliance approach announced today was conducted using data sources, methodology, and crite ria that were identified and ex plained in the preamble to the RFS2 final rule, it was not necessary to presen t a preliminary annual asse ssment for comment in

the NPRM.

A. 2011 Price for Cellulosic Biofuel Waiver Credits

Section 211(o)(7)(D) of the CAA requires that whenever EPA sets the applicable volume of cellulosic biofuel at a level lower than that sp ecified in the Act, EPA is to provide a number of cellulosic credits for sale that is no more than the EPA-determined applicable volume. Congress also specified the formul a for calculating the price for such wa iver credits: adjusted for inflation, the credits must be offered at the price of th e higher of 25 cents per gallon or the amount by which $3.00 per gallon exceeds the average wholesale price of a gallon of gasoline in the United

States. 93 The inflation adjustment is for years after 2008. EPA regulations provide that the inflation adjustment is calculated by comparing the most recent Consumer Price Index for Al Urban Consumers (CPI-U) for the “All Items” expe nditure category as provided by the Bureau

of Labor Statistics that is available at the time EPA sets the cellulosic biofuel standard to the comparable value that was reported soonest after December 31, 2008. 94

In contrast to its directions to EPA for setting the price of a cellulosic biofuel waiver credit, Congress afforded the Agency considerable flexibility in designing regulations specifying

93 More information on wholesale gasoline prices can be found on the Department of Energy's (DOE), Energy Information Administration's (EIA) Web site at: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMA_EPM0_PBR_NUS_DPG&f=M

94 See U.S. Department of Labor, Bureau of Labor Statistics (BLS), Consumer Price Index Web site at: http://www.bls.gov/cpi/*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 103 of 126 the permissible uses of the credits. The CAA st ates that EPA regulations “shall include such provisions, including limiting the credits’ uses and useful life, as the Administrator deems appropriate to assist market li quidity and transparency, to provide appropriate certainty for regulated entities and renewable fuel producers, and to limit any potential misuse of cellulosic

biofuel credits to reduce the use of other renewa ble fuels, and for such other purposes as the

Administrator determines will he lp achieve the goals of this subsection.” The final RFS2 provides a detailed discu ssion of how we designed the provisi ons for cellulosic biofuel waiver credits in keeping with the statutory language. In short, 2012 cellulosic biofuel waiver credits (or ”waiver credits”) are only available for the 2012 compliance year. Waiver credits will only be made available to obligated parties, and they are nontransfera ble and nonrefundable. Further, obligated parties may only purchase waiver credits up to the level of their cellulosic biofuel RVO

less the number of cellulosic biofuel RINs that they own. A company owning cellulosic biofuel RINs and cellulosic waiver credits may use both types of credits if desired to meet their RVOs, but unlike RINs obligated parties are not permitted to carry waiver credits over to the next calendar year. Obligated parties may not use wa iver credits to meet a prior year deficit obligation. Finally, unlike cellulosic biofuel RINs which may also be used to meet an obligated party's advanced and total renewable fuel obligati ons, waiver credits may only be used to meet a cellulosic biofuel RVO. An obligated party will still need to additionally and separately acquire

RINs to meet their advanced biofuel and total renewable fuel obligations.

For the 2012 compliance period, since the applicab le volume of cellulosic biofuel used to

set the annual cellulosic biofuel standard is lower than the vol ume for 2012 specified in the CAA, we are making cellulosic waiver credits available to obligated parties for end-of-year compliance should they need them at a price of $0.78 per credit. To calculate this price, EPA first determined the average wholesale (refinery gate) price of gasoline using the most recent 12

months of data available from the EIA website on September 30, 2011. Ba sed on this data, we calculated an average price of gasoline for the period July 2010 to June 2011 of $2.44. In accordance with the Act, we then calculated the difference of the inflation-adjusted value of $3.00, or $3.22, and $2.44, which yielded $0.78. Next, we compared the value of $0.78 to the inflation-adjusted value of $0.25, or $0.27. The Act requires EPA to use the greater of these two values as the price for cellulosic biofuel waiver credits.

The derivation of this value is more full y explained in a memorandum submitted to the docket for this rulemaking, 95 and a more complete description of the statutory requirements and their application can be found in the RFS2 final rule. 96 The price for the 2013 compliance period, if necessary, will be set when we announce the 2013 cellulosic biofuel standard.

B. Assessment of the Domestic Aggregate Compliance Approach

The RFS2 regulations contain a provision fo r renewable fuel producers who use planted crops and crop residue from U.S. agricultural land that relieves th em of the individual recordkeeping and reporting requirements con cerning the specific land from which their

95 See memo to docket number EPA-HQ-OAR-2011-XXX from Scott Christian, on the subject of “Calculating the price for cellulosic biofuel waiver credits,” dated October XX, 2011.

96 75 FR 14726 - 14728*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 104 of 126 feedstocks were harvested. To enable this a pproach, EPA established a baseline number of acres for U.S. agricultural land in 2007 (the year of EI SA enactment) and determined that as long as this baseline number of acres was not exceeded, it was unlikely that new land outside of the 2007

baseline would be devoted to crop production based on histor ical trends and economic considerations. We therefore pr ovided that renewable fuel produ cers using planted crops or crop

residue from the U.S. as feedstock in renewa ble fuel production need not comply with the individual recordkeeping and repor ting requirements related to docum enting that their feedstocks are renewable biomass, unless EP A determines through annual evaluations that the 2007 baseline acreage of agricultural land has been exceeded.

In the final RFS2 regulations, EPA committed to make an annual finding concerning whether the 2007 baseline amount of U.S. agricult ural land has been exceeded in a given year and publish this finding in the Federal Register by November 30 of the same year. If the baseline is found to have been exceeded, then producers using U.S. planted crops and crop residue as feedstocks for renewable fuel productio n would be required to comply with individual recordkeeping and reporting require ments to verify that their feed stocks are renewable biomass.

Based on data provided by the USDA Farm Service Agency (FSA) and Natural Resources Conservation Service (NRCS), we have estimated that U.S. agricultural land reached approximately 396 million acres in 2011, and thus did not exceed the 2007 baseline acreage. This acreage estimate is based on the same methodology used to set the 2007 baseline acreage for U.S. agricultural land in the RFS2 final rulemaking. Specifically, we started with FSA crop history data for 2011, from which we derived a total estimated acreage of 396million acres. We then subtracted the amount of land estimated to be participating in the GRP and WRP by the end of Fiscal Year 2011, XX million acres, to yield an estimate of approxima tely XX million acres of U.S. agricultural land in 2011. The USDA data used to make this calculation can be found in the

docket to this rule.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 105 of 126 VII. Comments Outside the Scope of This Rulemaking

In their comments responding to the NPRM, a number of parties used the opportunity to raise concerns that were not directly related to the issues and provisions we were addressing in the NPRM, such as the proposed standards for 2012, the applicable volume of biomass-based diesel for 2013, and the various proposed changes to the regulations designed to clarify intent and streamline implementation. Neither did these comments address setting the price for

cellulosic biofuel credits or EPA’s annual evalua tion of the U.S. aggregate compliance approach for renewable biomass. In some cases, comment ers requested EPA action in some other area, such as the following:

• Request for EPA to implement a more robust biofuel quality assurance program

• Request for EPA to prohibit increases in biomass-based diesel above 1.0 billion gallons in 2013

• Request for EPA to mandate that 50% of all vehicles be E100 capable by 2017

• Request for EPA to encourage legisla tion that allows corn ethanol to be categorized as advanced biofuel

• Request for EPA to pursue changes to the statute that would make valid

renewable fuels feedstock-neutral

In other cases, commenters raised issues related to other areas not addressed in our NPRM, such as the following:

• Other state and federal fuel regulations

• Retail dispensing requirements and misfu eling of E15 in non-flexible fueled

vehicles

• Need for continuing federal incentives for biofuels, such as tax subsidies

• Relative energy security implications of imported petroleu m versus imported

biofuels

• Delayed RINs

• Definition of heating oil

While we are taking these comments under consider ation as we continue to implement the RFS2 program, these comments are outside the scope of today’s action. In some cases, they are also outside our authority. Thus, we are not providi ng substantive responses to them at this time.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 106 of 126 One commenter provided a copy of a copyri ghted report, "Energy Life-Cycle Assessment Of Soybean Biodiesel Revisited". Similarly, both Monsanto and RFA provided comments on the lifecycle GHG impacts of corn ethanol, indicating that it should be a higher GHG reduction than what was calculated by EPA as part of the RFS2 final rule and that we should reevaluate corn ethanol lifecycle emissions based on new studies that are available. We will consider the information and analyses provided as part of an y future updates to our lifecycle evaluations of

these biofuels.

Another commenter urged EPA to quickly ce rtify additional feedstocks for cellulosic biofuels under the RFS. We are moving forwar d responding to a series of petitions requesting EPA approval of other pathways, including both feedstock-specific pathways (e.g., palm oil and sorghum) and company- or process-specific pathwa ys. A discussion of the process involved and a list of the current pathways we are currently evaluating can be found at:

http://www.epa.gov/otaq/fuels/renewablefu els/compliancehelp/rfs2-lca-pathways.htm

We appreciate that multiple stakeholders are highly interested in the timeline on which EPA is conducting these analyses. We note that the analysis required for the RFS fuel pathway determinations as required under CAA 211(o) are comprehensive in nature, and EPA is committed to ensuring they are conducted in an appropriately rigorous fashion.

Some commenters noted that regulated parties are having difficulty complying with the requirement that the RIN transfer date in EM TS and on product transfer documents (PTDs) be the actual title transfer date. Some of these commenters requested EPA enforcement discretion to allow biofuel producers and firs t purchasers to update their electr onic systems in order to be in compliance with the title transfer date regulatory requirement. Two commenters specified that

this enforcement discretion should be issued for six months in order to provide these companies with sufficient time to update their systems. EPA believes that th e proposed enforcement discretion would likely introduce confusion for anyone who attempts to review and match

transactions with records.

In contrast, several commente rs requested that EPA reconsider its position that the RIN transfer date reported to EMTS and identified on PTDs must be the actual title transfer date. One commenter requested that EPA allow invoice dates to be used in lieu of title transfer dates as title transfer does not usually coincide with customer payments and ultimately place a burden on the selling company’s cash flow. While we understand that some part ies would prefer to use a date other than the true title transfer date for purpos es of EMTS reporting and PTDs, we believe this would violate the clear language and intent of the regulations.

One commenter requested that EPA provide adjustment mechanisms to allow corrections in EMTS after noting that EMTS is a “for ward looking” system, meaning that EMTS

transactions cannot be modified once submitted. EP A is looking at several ways and has updated the RFS2 remedial action webpage since the comment period closed. EPA will continually update its guidance for regulated parties to correc t violations that true mistakes on the following webpage:*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 107 of 126 http://www.epa.gov/otaq/fuels/renewablefuel s/compliancehelp/rfs2r emedialactions.htm

Additionally, in this final rule, EPA is finaliz ing a regulation amendment giving EPA discretion to allow invalidly generated RINs to be used for compliance purposes on a case-by-case basis (Please see Section V of the preamble).

Several commenters requested that EPA edit Q&As 7.8 and 10.6 as they conflict with the regulations. EPA will review and make edits to the RFS2 Q&As in order to ensure agreement with the regulations as appropriate at a later date.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 108 of 126 VIII. Public Participation

Many interested parties participated in the rulemaking process that culminates with this final rule. This process pr ovided opportunity for submitting wr itten public comments following the proposal that we published on July 1, 2011 (76 FR 38844), and we considered these comments in developing the final rule. Comments and responses for issues raised in the public comments are included throughout this preamble.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 109 of 126 IX. Statutory and Execu tive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulati on and Regulatory Review

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is a "significant regulatory action” because it raises novel legal or policy issues. Accordingly, EPA

submitted this action to the Office of Mana gement and Budget (OMB) for review under Executive Orders 12866 and 13563 (76 FR 3821, Janua ry 21, 2011) and any changes made in response to OMB recommendations have been documented in the docket for this action.

The economic impacts of the RFS2 program on regulated parties, including the impacts of the required volumes of rene wable fuel, were already addressed in the RFS2 final rule promulgated on March 26, 2010 (75 FR 14670). This action finalizes the percentage standards applicable in 2012 based on the volumes that were analyzed in the RFS2 final rule. This action is also finalizing technical amendments to the RFS2 regulations that have been determined to have no adverse economic impact on regulated pa rties since they generally clarify existing requirements.

B. Paperwork Reduction Act

This action does not impose any new inform ation collection burden. While there are three regulatory amendments in today's rule th at affect the recordkeeping and reporting burdens for regulated parties, we believe that the info rmation collections already approved for the RFS2 program's general recordkeeping and reporting requirements, or the information collection already under review, would also cover the these technical amendments.

The regulatory changes are listed in Table IX.B-1.

Table IX.B-1

Technical Amendments Affectin g Recordkeeping and Reporting Section Description

80.1449(a) Amended Production Outlook Report due date; added allowance for unregistered renewable fuel producers and importers to submit Pr oduction Outlook Reports.

80.1450(b)(1)(vi) Amended to require submission of additional evidence as part of registration to verify eligibility for exemptions in §80.1403(c) or (d).

80.1450(d)(1)-(d)(3) Amended to add more specifici ty on when updates, addenda, or resubmittals are required for engineering reviews and to include references to foreign ethanol producers.

With regard to Production Outlook Reports, the change in due date is not expected to have any impact on the reporting burden. In addition, EPA recently prepared an Information Collection*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 110 of 126 Request (ICR) document to per mit the submission of voluntary Production Outlook Reports by domestic and foreign renewable fuels producers. The parties affected by the ICR are not regulated parties under the RFS2 program. The ICR has been submitted for approval to OMB under the Paperwork Reduction Act , 44 U.S.C. 3501 et seq . and may be identified by EPA ICR

number 2409.01. Documents related to the ICR ha ve been placed in docket number EPA-HQOAR-2005-0161, which is accessible at http://www.regulations.gov

.

On October 14, 2010, EPA published a notice in the Federal Register announcing our intent to submit the proposed ICR for voluntary Production Outlook Reports to OMB for approval. (See 75 FR 63173). The 60-day co mment period closed on December 14, 2010. No comments were received. On February 8, 2011, EPA published a Federal Register notice announcing submission of the ICR to OMB. Additional comments we re solicited via an additional comment peri od through March 10, 2011. 97

The Office of Management and Budget (O MB) has previously approved the information collection requirements contained in the existin g regulations at 40 CFR Part 80, Subpart M under the provisions of the Pa perwork Reduction Act , 44 U.S.C. 3501 et seq . This would include the following approved information collections (w ith OMB control numbers and expiration dates listed in parenthesis): “Renewable Fuels Standard Program: Petition and Registration” (OMB Control Number 2060-0367, expires March 31, 2013) ; “Renewable Fuels Standard (RFS2)” (OMB Control Number 2060-0640, expires July 31, 2013); “Regulations of Fuels and Fuel

Additives: 2011 Renewable Fuels Standard – Pe tition for International Aggregate Compliance Approach” OMB Control Number 2060-0655, expi res February 28, 2014). Detailed and

searchable information about these and other a pproved collections may be viewed on the Office of Management and Budget (OMB) Paperwork Reduction Act website, wh ich is accessible at http://www.reginfo.gov/public/do/PRAMain . With regard to the technical amendments in §80.1450, we believe that these inform ation collections already approved for the RFS2 program's general recordkeeping and reporting requirements would also cover the amendments in today's

final rule.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administra tive Procedure Act or any other statute unless the agency

certifies that the rule will not have a significant economic imp act on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions.

For purposes of assessing the impacts of today's rule on small entities, small entity is

97 See “Agency Information Collection Activities; Submission to OMB for Review and Approval; Comment Request; Production Outlook Reports for Un-Registered Renewable Fuel Producers (New Collection),” 76 FR 6781 (February 8, 2011). The document identification number for this notice is EPA-HQ-OAR-2005-0161-3221. The document identification number for the supporting statement is EPA-HQ-OAR-2005-0161-3222.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 111 of 126 defined as: (1) a small business as defined by the Small Bu siness Administration’s (SBA) regulations at 13 CFR 121.201; (2) a small governme ntal jurisdiction that is a government of a city, county, town, school district or special di strict with a population of less than 50,000; and (3) a small organization that is any not-for-profit enterprise which is i ndependently owned and operated and is not dominant in its field.

After considering the economic impacts of today’s final rule on small entities, we certify that this action will not have a significant economic impact on a substa ntial number of small entities. The impacts of the RFS2 program on small entities were already addressed in the RFS2 final rule promulgated on Marc h 26, 2010 (75 FR 14670). This rule simply finalizes the annual

standard for cellulosic biofuels for 2012 and biomass-based diesel for 2013, regulatory provisions for new RIN-generating pathways, an d clarifying changes and minor technical amendments to the regulations. Therefore, this action will not impose any additional requirements on small entities.

D. Unfunded Mandates Reform Act

This rule does not contain a Federal mand ate that may result in expenditures of $100 million or more for State, local, and tribal governments, in the aggregate, or the private sector in

any one year

. This rule simply finalizes the annual standard for cellulosic biofuels for 2012 and biomass-based diesel for 2013, regulatory provi sions for new RIN-generating pathways, and clarifying changes and minor technical amendments to the regulations. Thus, this action is not subject to the requirements of sections 202 or 205 of UMRA.

This action is also not subject to the re quirements of section 203 of UMRA because it contains no regulatory requirements that mig ht significantly or uniquely affect small

governments.

E. Executive Order 13132: Federalism

This action does not have federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities am ong the various levels of government, as specified in Executive Order 13132

. This action only applies to gasoline, diesel, and renewable fuel producers, importers, distributors and market ers and makes relatively minor corrections and modifications to the RFS2 regulations. A lthough section 6 of Executive Order 13132 does not apply to this action, EPA did consult with State a nd local officials in developing this action. A summary of the concerns raise d, and EPA’s response to those concerns, is provided in this preamble.

In the spirit of Executive Order 13132, and consistent with EPA policy to promote

communications between EPA and State and lo cal governments, EPA specifically solicited comment on the proposed action fro m State and local officials.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 112 of 126 F. Executive Order 13175: Co nsultation and Coordination with Indian Tribal

Governments

This action does not have tribal implicati ons, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000)

. This rule will be implemented at the Federal level and impose compliance costs only on transportation fuel re finers, blenders, marketers, distributors, importers, exporters, and renewable fuel producer s and importers. Tribal governments would be affected only to the extent they purchase and use regulated fuels. Thus, Executive Order 13175 does not apply to this action.

G. Executive Order 13045: Protection of Children from Envi ronmental Health Risks and Safety Risks

EPA interprets EO 13045 (62 FR 19885, April 23, 1997) as applying only to those regulatory actions that concern health or safety risks, such that the analysis required under section 5-501 of the EO has the potential to influence the regulation. This action is not subject to

EO 13045 because it does not establish an environm ental standard intended to mitigate health or safety risks and because it implements specific st andards established by Congress in statutes.

H. Executive Order 13211: Ac tions Concerning Regulati ons That Significantly Affect Energy Supply, Distribution, or Use

This rule is not a “significant energy action” as defined in Executive Order 13211, “Actions Concerning Regulations That Significan tly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)) because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy. This ac tion simply finalizes the annual standards for

cellulosic biofuels for 2012 and biomass-ba sed diesel for 2013, provisions for new RINgenerating pathways, and clarifying changes and minor technical amendments to the regulations.

I. National Technology Transfer Advancement Act

Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (‘‘NTTAA’’), Public Law 104–113, 12(d) (15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Volunt ary consensus standards are technical standards (e.g., materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus st andards bodies. NTTAA directs EPA to provide Congress, through OMB, explanations when th e Agency decides not to use available and applicable voluntary consensus standards.

This action does not involve t echnical standards. Therefor e, EPA did not consider the use of any voluntary consensus standards.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 113 of 126 J. Executive Order 12898: Federal Action s to Address Envi ronmental Justice in Minority Populations and Low-Income Populations

Executive Order (EO) 12898 (59 FR 7629 (Feb. 16, 1994)) establishes federal executive policy on environmental justice. Its main provi sion directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as a ppropriate, disproportionately high and adverse human health or environmental effects of their programs, polic ies, and activities on minor ity populations and lowincome populations in the United States.

EPA has determined that this final rule will not have dispr oportionately high and

adverse human health or environmental effects on minority or low-income populations because it does not affect the level of prot ection provided to human health or the environment. This action

does not relax the control measures on sources re gulated by the RFS2 regulations and therefore

will not cause emissions increases from these sources.

K. Congressional Review Act

The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, gene rally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptr oller General of the United States prior to publication of the rule in the Federal Register. A major rule cannot take effect until 60 days after it is published in the Federal Register. This action is not a “maj or rule” as defined by 5 U.S.C. 804(2). Therefore, this rule will be effective on the date of publication.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 114 of 126 X. Statutory Authority

Statutory authority for the rule finalized t oday can be found in section 211 of the Clean Air Act, 42 U.S.C. 7545. Additional support for th e procedural and comp liance related aspects of today's rule, including the recordkeepin g requirements, come from sections 114, 208, and 301(a) of the Clean Air Act, 42 U.S.C. sections 7414, 7542, and 7601(a).

List of Subjects in 40 CFR Part 80

Environmental protection, Administrative prac tice and procedure, Air pollution control, Confidential Business Information, Diesel fuel, Fuel additives, Gasoline, Imports, Labeling, Motor vehicle pollution, Penaltie s, Petroleum, Reporting and recordkeeping requirements.

Dated:

Lisa P. Jackson,

Administrator.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 115 of 126 For the reasons set forth in the preamble, 40 CFR part 80 is amended as follows:

PART 80—REGULATION OF FUELS AND FUEL ADDITIVES

1. The authority citation for part 80 continues to read as follows: Authority: 42 U.S.C. 7414, 7542, 7545, and 7601(a).

§80.1275—[Amended] 2. In §80.1275, remove paragraph (d)(3).

Subpart M—[Amended] 3. Section 80.1401 is amended by revising th e definitions of “Annual cover crop” and “Naphtha” to read as follows:

§ 80.1401 Definitions.

* * * * * Annual cover crop means an annual crop, planted as a rota tion between primary planted crops, or between trees and vines in orchards and vineyard s, typically to protect soil from erosion and to improve the soil between periods of regular crops . An annual cover crop has no existing market to which it can be sold except for its use as feedstock for the production of renewable fuel.

* * * * * Naphtha means a blendstock falling within the boiling range of gasoline which is composed of only hydrocarbons, is commonly or commerciall y known as naphtha, and is used to produce gasoline.

* * * * *

4. Section 80.1405 is amended by revising paragr aphs (a) through (c) to read as follows:

§ 80.1405 What are the Renewable Fuel Standards? (a) (1) Renewable Fuel Standards for 2011. (i) The value of the cellulosic biofuel standard for 2011 shall be 0.003 percent. (ii) The value of the biomass-based dies el standard for 2011 shall be 0.69 percent. (iii) The value of the advanced biofuel standard for 2011 shall be 0.78 percent. (iv) The value of the renewable fuel standard for 2011 shall be 8.01 percent. (2) Renewable Fuel Standards for 2012. (i) The value of the cellulosic biofuel standard for 2012 shall be 0.006 percent. (ii) The value of the biomass-based dies el standard for 2012 shall be 0.89 percent. (iii) The value of the advanced biofuel standard for 2012 shall be 1.19 percent. (iv) The value of the renewable fuel standard for 2012 shall be 9.03 percent. (b) EPA will calculate the value of the annua l standards and publish these values in the Federal Register by November 30 of the year preceding the compliance period. (c) EPA will calculate the annual renewable fuel percentage standards using the following equations:*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 116 of 126 Where:

Std CB,i = The cellulosic biofuel standard for year i, in percent.

Std BBD,i = The biomass-based diesel standa rd for year i, in percent.

Std AB,i = The advanced biofuel standard for year i, in percent.

Std RF,i = The renewable fuel standard for year i, in percent.

RFV CB,i = Annual volume of cellulosic biofuel requi red by 42 U.S.C. 7545(o)(2)(B) for year i, or volume as adjusted pursuant to 42 U.S.C. 7545(o)(7)(D), in gallons.

RFV BBD,i = Annual volume of biomass-based diesel required by 42 U.S.C. 7545 (o)(2)(B) for year i, in gallons.

RFV AB,i = Annual volume of advanced biofuel require d by 42 U.S.C. 7545(o)(2)(B) for year i, in gallons.

RFV RF,i = Annual volume of renewable fuel required by 42 U.S.C. 7545(o)(2)(B) for year i, in gallons.

G i = Amount of gasoline projected to be used in th e 48 contiguous states and Hawaii, in year i, in gallons.

D i = Amount of diesel projected to be used in the 48 contiguous states and Hawaii, in year i, in gallons.

RG i = Amount of renewable fuel blended into gasolin e that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.

RD i = Amount of renewable fuel blende d into diesel that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.

GS i = Amount of gasoline projected to be used in Al aska or a U.S. territory, in year i, if the state or territory has opted-in or opts-in, in gallons.

RGS i = Amount of renewable fuel blended into gaso line that is projected to be consumed in Alaska or a U.S. territory, in year i, if the state or territory opts-in, in gallons.

DS i = Amount of diesel projected to be used in Alaska or a U.S. territory, in year i, if the state or territory has opted-in or opts-in, in gallons.

RDS i = Amount of renewable fuel blende d into diesel that is projected to be consumed in Alaska or a U.S. territory, in year i, if th e state or territory opts-in, in gallons.

GE i = The amount of gasoline projected to be produ ced by exempt small refineries and small refiners, in year i, in gallons in any year they are exempt per §§80.1441 and 80.1442.

DE i = The amount of diesel fuel pr ojected to be produced by exem pt small refineries and small refiners in year i, in gallons, in any year they are exempt per §§80.1441 and 80.1442.

* * * * **** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 117 of 126 5. Section 80.1415 is amended by revising paragraph (c)(2) to read as follows:

§ 80.1415 How are equivalence values a ssigned to renewable fuel?

* * * * * (c) * * * (2) The application for an equivalence value shall include a technical justification that includes all the following: (i) A calculation for the requested equivalence value according to the equation in paragraph (c)(1) of this section, including supporting docum entation for the value of EC used in the calculation such as a certificate of analysis from a laboratory that verifies the lower heating value in Btu per gallon of the renewable fuel produced. (ii) For each feedstock, component, or additive that is used to make the renewable fuel, provide a description, the percent input, and identify whether or not it is renewable biomass or is

derived from renewable biomass. (iii) For each feedstock that also qualifies as a renewable fuel, state whether or not RINs have been previously generated for such feedstock. (iv) A description of the renewable fuel a nd the production process, including a block diagram that shows all inputs and outputs at each step of the production process with a sample quantity of all inputs and outputs for one batch of renewable fuel produced.

* * * * *

6. Section 80.1426 is amended as follows: a. By revising paragraph (f)(1). b. By revising Table 1 to §80.1426. c. By revising paragraphs (f)(5)(ii)(A) and (f)(5)(ii)(B).

§ 80.1426 How are RINs generated and assigned to batches of renewable fuel by renewable fuel producers or importers?

* * * * * (f) * * * (1) Applicable pathways. D codes shall be used in RINs generated by producers or importers of renewable fuel according to the pathways liste d in Table 1 to this section, paragraph (f)(6) of this section, or as approved by the Administrator . In choosing an appropr iate D code, producers and importers may disregard any incidental, de minimis feedstock contaminants that are impractical to remove and are related to custom ary feedstock production and transport. Tables 1 and 2 to this section do not apply to, and impose no requirements with respect to, volumes of fuel for which RINs are generated pursuant to paragraph (f)(6) of this section.

Table 1 to §80.1426—Applicable D Codes for Each Fuel Pathway for Use in Generating

RINs

Fuel type Feedstock Production process requirements DCode*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 118 of 126 A Ethanol Corn starch All of the following: Dry mill process, using natural gas, biomass, or biogas for process energy and at least two advanced technologies

from Table 2 to this section 6

B Ethanol Corn starch All of the following: Dry mill process, using natural gas, biomass, or biogas for process energy

and at least one of the advanced technologies from Table 2 to this section plus drying no more than 65% of the distillers grains with solubles it markets annually 6

C Ethanol Corn starch All of the following: Dry mill process, using natural gas, biomass, or biogas for process energy and drying no more than 50% of the distillers grains with solubles it markets annually 6

D Ethanol Corn starch Wet mill process using biomass or biogas for process energy 6

E Ethanol Starches from crop residue and annual

covercrops Fermentation using natural gas, biomass, or biogas for process energy 6

F Biodiesel,

and

renewable

diesel Soy bean oil; Oil from annual covercrops; Algal oil; Biogenic waste oils/fats/greases; Non-food grade corn oil One of the following:

Trans-Esterification Hydrotreating Excluding processes that co-process renewable biomass and petroleum 4

G Biodiesel Canola/Rapeseed oil Trans-Esterification using natural gas or biomass for process energy 4

H Biodiesel,

and

renewable

diesel Soy bean oil; Oil from annual covercrops; Algal oil; Biogenic waste oils/fats/greases; Non-food grade corn oil One of the following:

Trans-Esterification HydrotreatingIncludes only processes that coprocess renewable biomass and petroleum 5

I Ethanol Sugarcane Fermentation 5 J Ethanol Cellulosic Biomass from crop residue, slash, pre-commercial thinnings and tree residue, annual covercrops, switchgrass, and miscanthus; cellulosic components of separated yard waste; cellulosic components of separated food waste; and cellulosic components of separated MSW Any 3

K Cellulosic Diesel, Jet

Fuel and Heating Oil Cellulosic Biomass from crop residue, slash, pre-commercial thinnings and tree residue, annual covercrops, switchgrass, and miscanthus; cellulosic components of separated yard waste; cellulosic components of separated food waste; and cellulosic components of separated MSW Any 7

L Butanol Corn starch Fermentation; dry mill using natural gas, biomass, or biogas for process

energy 6

M Cellulosic Cellulosic Biomass from crop residue, Fischer-Tropsch process 3*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 119 of 126 Naphtha slash, pre-commercial thinnings and tree residue, annual covercrops, switchgrass, and miscanthus; cellulosic components of separated yard waste; cellulosic components of separated food waste; and cellulosic components of separated MSW N Ethanol,

renewable diesel, jet fuel, heating oil, and naphtha The non-cellulosic portions of separated

food waste Any 5

O Biogas Landfills, sewage waste treatment plants, manure digesters Any 5

* * * * * (5) * * * (ii) (A) A feedstock qualifies under paragraph (f)(5)(i)(A) or (f)(5)(i)(B) of this section only if it is collected according to a plan submitted to and accepted by U.S. EPA under the registration procedures specified in §80.1450(b)(1)(vii). (B) A feedstock qualifies under paragraph (f)(5)(i )(C) of this section only if it is collected according to a plan submitted to and approved by U.S. EPA.

* * * * *

7. Section 80.1429 is amended by revising paragrap hs (b)(2) and (b)(9) introductory text to

read as follows:

§ 80.1429 Requirements for separating RINs from volumes of renewable fuel.

* * * * * (b) * * * (2) Except as provided in paragraph (b)(6) of th is section, any party that owns a volume of renewable fuel must separate any RINs that ha ve been assigned to that volume once the volume is blended with gasoline or fossil- based diesel to produce a transpor tation fuel, heating oil, or jet fuel. A party may separate up to 2.5 RINs per gallon of blended renewable fuel.

* * * * * (9) Except as provided in paragraphs (b)(2) thro ugh (b)(5) and (b)(8) of this section, parties whose non-export renewable volume obligations are solely related to eith er the importation of products listed in §80.1407(c) or §80.1407(e) or to the addition of blendstocks into a volume of finished gasoline, finished diesel fuel, RBOB, or CBOB, can only separate RINs from volumes of renewable fuel if the number of gallon-RINs se parated in a calendar year is less than or equal

to a limit set as follows:

* * * * *

8. Section 80.1449 is amended by revising para graph (a) introductory text to read as

follows:

§ 80.1431 Treatment of invalid RINs.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 120 of 126 * * * * * (c) Notwithstanding paragraph (b) of this sec tion, improperly generated RINs may be used for compliance [providing that all of the following conditions and requirements are satisfied] [if the renewable fuel producer or impor ter who improperly generated the RINs demonstrates through the reporting and recordkeeping requi rements set forth below, that]: (1) The number of RINs generated for a batc h exceeds the number of RINs that should have been properly generated; (2) The RINs were improperly generated as a result of a broken meter, an inadvertent temperature correction error, or an inadvertent administrative error; (3) The renewable fuel producer or importer ha d in place at the time the RINs were improperly generated a quality assurance / quality control plan designed to ensure that process measuring equipment such as meters and temperature probes are properly maintained and to prevent

inadvertent administrative errors. (4) The renewable fuel producer or importer has ta ken any appropriate additional steps to prevent similar violations from occurring in the future; (5) The improperly generated RINs have been transferred to another party, (6) The renewable fuel producer or importer has not improperly generated RINs for the reasons described in paragraph (c)(2) on more than five batches during any calendar year; and (7) The following remedial actions have been implemented within 30 days of the EMTS submission date of the improper RIN generation: (A) The renewable fuel producer or importer retir es an equal number of valid RINs with the same D Code and RIN year as the properly genera ted RINs, using an EMTS retire code of 110; (B) The renewable fuel producer or importer reports the following information to EPA via EMTS, which EPA may make publicly available: (i) Company name (ii) Company ID (iii) Facility name (iv) Facility ID (v) The date the renewable fuel was produced (vi) The date the RINs were originally generated (vii) The number of RINs generated (vii) The number of RINs improperly generated (ix) RIN year (x) D codes of generated RINs (xi) Batch numbers (xii) EMTS Transaction ID of the original generation (xiii) An explanation of how the violation occurred, and why the improperly generated RINs meet the criteria in paragraph (c)(2) of this section (xiv) Steps taken to prevent similar violations from occurring in the future (xv) Information under (c)(3), (c)(4), (c)(5) of th is section (xvi) Any additional information the Administrator may require.

(8) The renewable fuel producer or importer maintains all records relating to the improper RIN generation and the associated remedial actions taken, including but not limited to:*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 121 of 126 (A) All information regarding the generation of invalid RINs, including information that is sufficient to demonstrate that the improperly generated RINs meet the criteria in paragraph (c)(2) of this section; (B) Documents demonstrating that the renewable fuel producer or importe r has implemented the quality control / quality assurance plan required in paragraph (c)(3) of this section, and has taken all appropriate additional steps to prevent similar violations from occurring in the future; (C) All correspondence with EPA; (D) All EMTS transactions (Gener ation, Buy, Sell and Retire); and (E) All Product Transfer Documents (PTDs).

(d) If EPA determines that a renewable fuel producer improperly generated RINs, but did not meet the requirements set forth in paragraph (c), then the requirements of paragraph (b) apply from the moment that the invalid RINs were ge nerated in EMTS. Once the RIN generator has identified improperly generated RINs to EPA, th en EPA may remove these improperly generated

RINs from EMTS.

§ 80.1449 What are the Production Outlook Report requirements? (a) By June 1 of each year (September 1 for the report due in 2010), a registered renewable fuel producer or importer must submit and an unregistered renewable fuel producer may submit all of the following information for each of its facilities, as applicable, to EPA:

* * * * *

9. Section 80.1450 is amended by revising para graphs (d)(1)-(d)(3) to read as follows:

§ 80.1450 What are the registration requirements under the RFS program?

* * * * * (d) * * * (1) Any producer of renewable fuel, and any fo reign ethanol producer who makes changes to his facility that will allow him to produce rene wable fuel, as defined in §80.1401 that is not reflected in the producer's registration informatio n on file with EPA must update his registration information and submit a copy of an updated independent third-party engineering review on file with EPA at least 60 days prior to producing th e new type of renewable fuel. The producer may also submit an addendum to the independent thir d-party engineering review on file with EPA provided the addendum meets all the requirements in paragraph (b)(2) of this section and verifies for EPA the most up-to-date information at the producer’s existing facility. (2) Any producer of renewable fuel and any foreign ethanol producer who makes any other changes to a facility that will affect the producer's registration information but will not affect the renewable fuel category for which the producer is registered per paragraph (b) of this section must update his registration information 7 days prior to the change. (3) All producers of renewable fuel and fore ign ethanol producers must update registration information and submit an updated independent third-party engineering review according to the schedule in paragraph (d)(3)(i) or (d)(3)(ii) of this section, and including the information specified in paragraph (d)(3)(iii) of this section:*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 122 of 126 (i) For all producers of renewable fuel and fo reign ethanol producers registered in calendar year 2010, the updated registration information an d independent third-party engineering review shall be submitted to EPA by January 31, 2013, and by January 31 of every third calendar year thereafter; or (ii) For all producers of renewable fuel and foreign ethanol producers registered in any calendar year after 2010, the updated registrati on information and inde pendent third-party engineering review shall be submitted to EPA by January 31 of every third calendar year after the first year of registration. (iii) In addition to conducting the engineerin g review and written re port and verification required by paragraph (b)(2) of this section, th e updated independent third-party engineering

review shall include a detailed review of the renewable fuel producer's calculations used to

determine V RIN of a representative sample of batches of each type of renewable fuel produced since the last registration. The representative sample shall be selected in accordance with the sample size guidelines set forth at §80.127.

* * * * *

10. Section 80.1451 is amended by revising pa ragraph (a)(1)(xi) to read as follows:

§ 80.1451 What are the reporting requirements under the RFS program? (a) * * * (1) * * * (xi) A list of all RINs generated prior to July 1, 2010 that were retired for compliance in the reporting period.

* * * * *

11. Section 80.1452 is amended revisi ng paragraphs (b)(2), (b)(4), and (b)(5) to read as

follows:

§ 80.1452 What are the requirements related to the EPA Moderated Transaction System (EMTS)?

* * * * * (b) * * * (2) The EPA company registration number of the renewable fuel producer or foreign ethanol producer, as applicable.

* * * * * (4) The EPA facility registration number of the facility at which the renewable fuel producer or foreign ethanol producer produced the batch, as applicable. (5) The EPA facility registration number of the importer that imported the batch, if applicable.

* * * * **** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 123 of 126 13. Section 80.1460 is amended by adding a ne w paragraph (b)(6) to read as follows:

§ 80.1460 What acts are prohibit ed under the RFS program?

* * * * * (b) * * * (6) Generate a RIN for fuel for which RI Ns have previously been generated.

* * * * *

14. Section 80.1464 is amended as follows: a. By revising paragraphs (a)(2) introductory text and (a)(2)(i). b. By adding paragraphs (a)(2)(iii) and (a)(2)(iv). c. By revising paragraph (a)(3)(ii). d. By revising paragraphs (b)(2) introductory text and (b)(2)(i). e. By adding paragraphs (b)(2)(iii) and (b)(2)(iv). f. By revising paragraph (b)(3)(ii). g. By revising paragraph (c)(1) introductory text. h. By adding paragraphs (c)(1)(iii) and (c)(1)(iv).

§ 80.1464 What are the attest engagement requirements under the RFS program?

* * * * * (a) * * * (2) RIN Transaction Reports a nd Product Transfer Documents. (i) Obtain and read copies of a representative sample, selected in accordance with the guidelines in §80.127, of each RIN transaction type (RINs purchased, RINs sold, RINs retired, RINs separated, RINs reinstated) included in the RIN transaction reports required under §80.1451(a)(2) for the compliance year.

* * * * * (iii) Verify that the product transfer documents for the representative samples under paragraph (a)(2)(i) of this section of RINs sold and the RINs purchased contain the applicable information required under §80.1453 and report as a finding any product transfer document that does not contain the required information. (iv) Verify the accuracy of the information contained in the product transfer documents reviewed pursuant to paragraph (a)(2)(iii) of this section and report as a finding any exceptions. (3) * * * (ii) Obtain the database, spreadsheet, or other documentation used to generate the information in the RIN activity reports; comp are the RIN transaction samples reviewed under paragraph (a)(2) of this section with the correspon ding entries in the database or spreadsheet and report as a finding any discrepancies; compute th e total number of current-year and prior-year RINs owned at the start and end of each qua rter, purchased, separa ted, sold, retired and reinstated, and for parties that reported RIN activity for RINs assi gned to a volume of renewable fuel, the volume and type of renewable fuel (a s defined in §80.1401) owned at the end of each quarter; as represented in these documents; and state whether this information agrees with the party's reports to EPA. (b) * * **** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 124 of 126 (2) RIN Transaction Reports a nd Product Transfer Documents. (i) Obtain and read copies of a representative sample, selected in accordance with the guidelines in §80.127, of each transaction type (R INs purchased, RINs sold, RINs retired, RINs separated, RINs reinstated) included in the RIN transaction reports required under §80.1451(b)(2) for the compliance year.

* * * * * (iii) Verify that the product transfer documents for the representative samples under paragraph (b)(2)(i) of this section of RINs sold and the RINs purchased contain the applicable information required under §80.1453 and report as a finding any product transfer document that does not contain the required information. (iv) Verify the accuracy of the information contained in the product transfer documents reviewed pursuant to paragraph (b)(2)(iii) of this section and report as a finding any exceptions. (3) * * * (ii) Obtain the database, spreadsheet, or other documentation used to generate the information in the RIN activity reports; comp are the RIN transaction samples reviewed under paragraph (b)(2) of this section with the correspon ding entries in the data base or spreadsheet and report as a finding any discrepancies; report th e total number of each RIN generated during each quarter and compute and report th e total number of current-year and prior-year RINs owned at the start and end of each quarter, purchased, se parated, sold, retired a nd reinstated, and for parties that reported RIN activity for RINs assign ed to a volume of renewa ble fuel, the volume of renewable fuel owned at the end of each quarter , as represented in these documents; and state whether this information agrees with the party's reports to EPA.

* * * * * (c) * * * (1) RIN Transaction Reports a nd Product Transfer Documents.

* * * * * (iii) Verify that the product transfer documents for the representative samples under paragraph (c)(1)(i) of this section of RINs so ld and RINs purchased contain the applicable information required under §80.1453 and report as a finding any product transfer document that does not contain the required information. (iv) Verify the accuracy of the information contained in the product transfer documents reviewed pursuant to paragraph (c)(1)(iii) of this section and report as a finding any exceptions.

* * * * *

15. Section 80.1465 is amended by revising paragraph (h)(2) to read as follows:

§ 80.1465 What are the additional requirements under this subpart for foreign small refiners, foreign small refineries, and importers of RFS–FRFUEL?

* * * * * (h) * * * (2) Bonds shall be posted by any of the following methods: (i) Paying the amount of the bond to the Treasurer of the United States. (ii) Obtaining a bond in the proper amount from a third party surety agent that is payable to satisfy United States administrative or judicial judgments against the foreign refiner, provided EPA agrees in advance as to the third part y and the nature of the surety agreement.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 125 of 126 * * * * *

16. Section 80.1466 is amended by revising paragraph (h)(2) to read as follows:

§ 80.1466 What are the additional requirements under this subpart for RINgenerating foreign producers and importers of renewable fuels for which RINs have been generated by the foreign producer?

* * * * * (h) * * * (2) Bonds shall be posted by any of the following methods: (i) Paying the amount of the bond to the Treasurer of the United States. (ii) Obtaining a bond in the proper amount from a third party surety agent that is payable to satisfy United States administrative or judicial judgments against the foreign producer, provided EPA agrees in advance as to the third party and the nature of the surety agreement.

* * * * *

17. Section 80.1467 is amended by revising paragrap hs (e)(1), (e)(2), and (g)(2) to read as

follows:

§ 80.1467 What are the additional requirement s under this subpart for a foreign RIN

owner?

* * * * * (e) * * * (1) The foreign entity shall post a bond of the amount calculated using the following equation:
Bond = G * $ 0.01

Where:

Bond = Amount of the bond in U.S. dollars. G = The total of the number of gallon-RINs the foreign entity expects to obtain, sell, transfer or hold during the first calendar year that the fo reign entity is a RIN owner, plus the number of gallon-RINs the foreign entity expects to obtain, sell, transfer or hold during the next four calendar years. After the first calendar year , the bond amount shall be based on the actual number of gallon-RINs obtained, so ld, or transferred so far during the current calendar year plus the number of gallon-RINs obtained, sold, or transferred during the four calendar years immediately preceding the current calendar year. For any year for which there were fewer than four preceding years in which the foreign entit y obtained, sold, or transferred RINs, the bond

shall be based on the total of th e number of gallon-RINs sold or transferred so far during the current calendar year plus the number of gallon- RINs obtained, sold, or transferred during any immediately preceding calendar years in which the foreign entity owned RINs, plus the number of gallon-RINs the foreign entity expects to obt ain, sell or transfer during subsequent calendar years, the total number of years not to exceed four calendar years in addition to the current calendar year. (2) Bonds shall be posted by any of the following methods: (i) Paying the amount of the bond to the Treasurer of the United States.*** E.O. 12866 Review - Draft - Do Not Cite , Quote, or Release During Review ***

Page 126 of 126 (ii) Obtaining a bond in the proper amount from a third party surety agent that is payable to satisfy United States administrative or judicial judgments against the foreign RIN owner, provided EPA agrees in advance as to the third party and the nature of the surety agreement.

* * * * * (g) * * * (2) Any RIN that is obtained, sold, transferred, or held that is in excess of the number for which the bond requirements of this section have been satisfied is an invalid RIN under §80.1431.

* * * * *