RFA Analysis of EPA’s Proposed RVO for Conventional (D6) Renewable Fuel in 2014

In its recent proposed rule for 2014

- 2016 Renewable Volume Obligations (RVOs), EPA states that its

intent is to base the 2014 RVO requirement on the “number of RINs supplied in 2014 that are expected to be available for use in complying with the standards.” 1 EPA explains that the number of RI Ns expected to be available for compliance is determined by:

1) Starting with total RINs that were “generated for renewable fuel produced or imported in 2014 as

recorded in the EPA

- Moderated Transaction System (EMTS)” ; 2) S ubtracting RINs “that have already been retired for non

- compliance reasons”; 3) S ubtracting RINs that “would be expected to be retired to cover exports of renewable fuels.” 2

According to EPA, this three

- step process results in a determination of the “net supply” of RINs that are

“available for use” in complying with the 2014 standards. Table II.C.1

- 1 in the proposal presents EPA’s

math for arriving at “ net supply

. ” 3 Because the focus of this analysis is on conventional ethanol and D6

RINs

, only the D6 RIN figures from Table II.C.1

- 1 are reproduced below.

TABLE II.C.1

- 1

— 2014 Actual Supply

[Million RINs]

D code Domestic production Imports Exports Net supply

6........................... 13,759 336 846 13,250

Further details of this calculation are provided in a one

- page document posted to the RFS docket (“docket

worksheet ”)

. 4 The docket worksheet shows gross domestic D6 RIN generation of 14,008 million RINs

and “corrections” of 249 million RINs . P resumably

, “corrections” refers to RINs retired for a variety of

non

- compliance purposes that are thus unavailable for compliance

.

Subtracting the 249 million RIN “corrections ” from domestic generation of 14,008 mi llion RINs results in a supply of 13,759 million RINs

. This corresponds with the “domestic production” figure in Table II.C.1

- 1 . EPA shows that 336 million D6 RINs came from imports, meaning the total RIN supply (net

“ corrections ” ) is 14,095 million RINs. EPA then subtracts total 2014 ethanol exports of 846 million gallons , as reported by the E nergy I nformation A dministration

, to derive its final “net supply” estimate of 13,250 million RINs. This represents EPA’s idea of “the number of RINs supplied in 2014 that are

exp ected to be available for use in complying with the standards. ” T hus

, the RVO propose d for

undifferentiated “renewable fuel” is 13.25 billion gallons.

There appear to be several important inconsistencies and errors associated with EPA’s calculation of net supply of 2014 RINs “that are expected to be available for use in complying with the standards.” These miscalculations, which are described in more detail below, result in the significant underestimation of 2014 RINs available for compliance.

1) EPA mis takenly assumes RINs will be retired for every gallon of ethanol exported in 2014

, even though RINs were never generated for nearly half of 2014 ethanol exports . EPA incorrectly subtracts the total volume of 2014 exports from gross RIN generation, when in fact

1 80 Fed. Reg. 33,121 (emphasis added)

2 Id

. 3 80 Fed. Reg. 33,122

4 Docket Id. No.: EPA

- HQ

- OAR

- 2015

- 0111

- 0004RINs were not generated

— an d thus cannot be retired

— for a minimum of 370 million gallons of exported ethanol (and a maximum of 393 million gallons ) . The RFS regulations require that

ethanol must be denatured in order to generate a RIN and qualify as “renewable fuel.” 5 Further, exporters of undenatured ethanol do not incur an exporter RVO because they are not exporting

“ renewable fuel ” as defined by 40 CFR 80.1401.

According to the U.S. Census Bureau, 836 million gallons of ethanol for fuel use and industrial use were exported from the United States in 2014. Of this amount, 370.2 million gallons of fuel

and indus trial ethanol exports were undenatured, and thus did not ever generate a RIN. Moreover

, 12.5 million gallons of denatured industrial ethanol were exported , and it is unlikely that RINs were ever generated on this product (i.e., because it is not used as transportation fuel, heating oil, or jet fuel)

. Denatured fuel ethanol exports tot aled 452.99 million gallons in 2014 and it is safe to assume the RINs generated on this volume have been, or will be, retired and unavailable for compliance.

Notably, the export data reported by EIA (and relied upon by EPA) come from the same Census

Bureau data set cited here. How ever, the EIA figures are presented as “ lump sums ” that also include beverage ethanol exports (explaining the 10 mg difference between EPA’s figure of 846 mg and the 836 mg figure cited above).

2014 U.S. Ethanol Exports by Category, U.S. Census Bureau
Ethanol End Use (HTS Code) Million Gallons Generated a RIN?

Denatured Fuel Ethanol (2207200010) 452.99 Yes

Undenatured Fuel Ethanol (2207106010) 357.44 No
Denatured Ethanol, Industrial (non

- fuel) (2207200090) 12.46 Not Likely Undenatured Ethanol, Industrial (non

- fuel) (2207106090) 12.75 No

Undenatured Ethanol, for Beverage Purposes (22071030000) ~10.25 No

TOTAL 845.89

Because only denatured fuel ethanol exports ever gen erated a RIN

, EPA should only be subtracting denatured fuel ethanol ex ports from the gross RIN supply for its determination of net supply of RINs available for 2014 compliance

.

2) The data presented on EPA’s EMTS web site for 2014 net RIN generation and retirement

are inconsistent with the data presented in the proposal and in the docket memo. The EMTS web site shows total D6 RIN generation of 14,353 million RINs, compared to 14,345 million

RINs shown in the docket worksheet

. 6 Further, it is unclear what RIN retirements may be

included in the category labeled as “corrections ” in the docket worksheet

. The docket worksheet shows 249 million RINs being unavailable due to “corrections,” yet the EMTS web site shows just 14 million D6 RINs in the “RIN generation error corrections” category.

3) EPA’s proposal and docket memo appear to overlook RINs retired for other non

compliance purposes, which would not be available for compliance with 2014 standards.

The EMTS web site shows 273 million D6 RINs were retired for various non

- compliance purposes other than error corrections. 7 It is unclear how EPA handled these unavailable RINs in

the calculations for the proposed rule. The docket worksheet suggests EPA may have lumped

5 The definition for “renewable fuel ” in 40 CFR 80.1401 specifies that “ Ethanol covered by this definition shall be denatured as required and defined in 27 CFR parts 19 through 21. ”

6 See http://www.epa.gov/otaq/fuels/rfsdata/2014emts.htm , viewed 6/15/2015.

7 Id

.these other RIN retirements together with error corrections in the “corrections” category. But

while total non

- export retirements from the EMTS web site (286 million) and “corrections” from

the docket worksheet (249 million) are close, they do not match up exactly.

Proper accounting of RIN retirem ents for exported ethanol and non

- compliance purposes leads to a significantly higher RVO for 2014. When the errors identified in this analysis are corrected, EPA’s determination of 2014 RINs “available for compliance” with the 2014 standards should increase to approximately 13,614 million RINs

— nearly 370 million RINs above the proposed RVO of 13,250 million gallons. The table below compares the mis calculations from EPA’s proposal to the corrected calculations of the net supply of D6 RINs available for complian ce with 2014 standards.

EPA Proposal[1] Corrected [2]

Domestic D6 RIN Generation 14,008 14,017

Importer D6 RIN Generation 336 79

Foreign D6 RIN Generation

-- 257

Total D6 RIN Generation (Gross) 14,345 14,353

D6 RINs Retired for Error Corrections (2 49) (14)

D6 RINs Retired for Renewable Fuel Used or Designated to be Used in Any Application that is Not Transportation Fuel, Heating Oil, or Jet Fuel -- (254)

D6 RINs Retired for Remedial Action Pursuant to 80.1431c

-- (11)

D6 RINs Retired for Remediation of Invalid RIN Use for Compliance

-- (7)

D6 RINs Retired for Denatured Fuel Ethanol Exports ( 846 ) (453)

T otal D6 RINs Unavailable for 2014 Compliance (1,095) (739)

Net D6 RINs Available for 2014 Compliance 13,250 13,614

[1] From EPA Proposal and Docket Worksheet [2] From EPA EMTS Web site (viewed 6/15/2015), wit h exception of denatured fuel ethanol exports (U.S. Census Bureau)

Implications for D6 RIN Stocks

. It is clear that EPA intended for all D6 RINs that were generated in
2014 to be used for compliance, net of those RINs that are unavailable due to retirement for export and

non

- compliance purposes. This approach would keep D6 RIN stocks in equilibrium, with no net additions

to or subtractions from existing RIN stoc k levels. However

, EPA ’ s miscalculations in the proposal, if

finaliz ed, would inadvertently lead to the addition of some 370 million D6 RINs to existing stocks. This

would immediately increase estimated D6 RIN stocks by roughly one

- third, resulting in much lower
prices for D6 RINs and a wider price spread between D5 and D6 RINs. The wider R IN spre ad , in turn,

encourages increased importation of sugarcane ethanol and inefficient “ ethanol shuffling

. ” 8

If it becomes widely known that shifts in the marketplace and increased ethanol imports occurred
pri marily because of EPA accounting errors in the RVO proposal , a significant controversy could result

. As such, EPA should move quic k ly to rectify this error and clarify the proposed D6 RVO for 2014.

8 There is evidence that this market beh avior is already beginning as a result of RIN price changes. See Reuters, “U.S. buyers scoop up Brazilian ethanol amid RIN revival. ” http://www.reuters.com/article/2015/06/15/usa

biofuels

- imports

- idUSL1N0YR1XO20150615