MEMORANDUM

Subject: Statutory basis of the RFS program and development of the regulatory program

From: Madison Le , U.S. EPA, Office of Transportation and Air Quality

To: EPA Air Docket EPA

- HQ

- OAR

- 201 5

- 0111

Congress established the RFS program in the Energy Policy Act (EPAct) of 2005 and significantly expanded it in 2007 with passage of the Energy Indepe ndence and Security Act (EISA). Congress’ primary objectives for the expanded program were to increase U.S. energy security and decrease GHG emissi ons from transportation fuel by (1) increasing the volumes of renewable fuel used in transportation fuel and (2) requiring an increasing percentage of those renewable fuels to result in significantly lower lifecycle GHG emissions than 2005 baseline petrole um fuels. 1

Congress prescribed many aspec ts of the RFS program in EPAct. Specifically, Congress established a program requiring increasing use of renewable fuel 2 as transportation fuel in the contiguous 48 states , with an opportunity for opt

- in to the p rogram by noncontiguous States and

Territories. Congress established a schedule for adding more renewable fuel each year until a

total of 7.5 billio n gallons was achieved in 2012. It also required EPA to set standards for future years based on factors incl uding the impact of the use of renewable fuels on the environment, air quality, energy security, job creation, rural economic development and the expected annual rate of future production of renewable fuels, including cellulosic ethanol, and allowed EPA to waive the statutory volume targets in specified circumstances.

Congress directed EPA to establish a regulatory system that holds refiners, importers and blenders, “as appropriate,” responsible for adding the requisite amount of renewable fuel to the

t ransportation fuel supply. Congress also required that EPA each year issue the renewable fuel requirements for the following year and express those requirements as a percentage calculated by dividing the renewable fuel volume requirement for the year by th e amount of gasoline that the Energy Information Agency (EIA) projects will be sold that year.

Congress prescribed that EPA’s regulations include several mechanisms for providing compliance flexibility to obligated parties (as EPA’s implementing regula tions refer to the parties responsible fo r meeting volume requirements). Among them is a credit program that allows any party to earn credits for exceeding their renewable volume obligations. Those credits can be used for compliance in a subsequent year or traded or sold to others who may nee d them for compliance purposes. EPA has implemented the statutory credit program through a system of renewable identification numbers (or RINs) that are assigned to every gallon of produced or imported renewable fuel, a nd which are used by obligated parties to show compliance wit h the RFS percentage standards. RINs may be traded and an obligated party may carry over an amount

1 See EISA, Pub. L. No. 110

- 140, 121 Stat. 1492 (20067).

2 Renewable fuel is defined as fuel produced from renewable biomass and used to replace or reduce the amount of

fossil fuel in transportation fuel. CAA section 211(o)(1)(F).equal to 20% of the next year’s volume requirements for use in the next compliance year. As a

g eneral matter, the RIN system allows obligated parties to find the lo west cost means of compliance. More specifically, it allows obligated parties who do not have the ability to blend renewable fuels into their product, and do not wish to develop that abil ity, to comply with RFS requirements through the acquisition of RINs to the extent RINs are made available by other obligated p arties or market participants. The RIN system is compatible with the biofuel production and distribution system as it existed pri or to the RFS program (and exists today), with the renewable fuel industry generally producing and distributing renewable fuel, and refiners, importers or independent blenders generally adding the renewable fuel to petroleum products.

The RINs that initia lly accompany the renewable fuel ultimately are used by obligated parties to demonstrate compliance with their RFS obligations. 3

Congress provided further compliance flexibility by allowing an obligated party to carry forward a compliance deficit for o ne year as long as it pays back the balance the following year and meets the applicable standards for that year. Congress also addressed the possibility that more systemic issues may warrant reducing the statutory volume targe ts themselves. For that purpose, Congress authorized EPA to waive the statutory volume s in whole or in part in response to petitions by one or more States if EPA found, after public notice and opportunity for comment, that implementation of the requirement would “severely harm th e economy or environment of a State, a region, or the United States” or “there is an inadequate domestic supply.”

Two years after EPAct’s enactment, Congress passed EISA, which expanded the RFS program by significantly increasing the amounts and types of renewable fuels to be added not only to gasoline but to other types of transportation fuel, including on

- road diesel and non

- r oad gasoline and diesel fuels. It also allowed renewable fuel added to or used as heating oil and jet

fuel to count towards RFS compliance.

EISA established four categories of renewable fuels, each with a specified required reduction in lifecycle GHG emissions as compared with a 2005 baseli ne from petroleum

- based

fuels. Those categories are (1) cellulosic biofuel with at least 6 0% lower GHG emissions, (2)

biomass

- based diesel with at least 50% lower GHG emissions, (3) other advanced biofuel with at least 50% lower GHG emissions, and (4) a general category of renewable fuel (referred to as “total renewable fuel” in EPA’s regulatio ns) that has a minimum 20% lower GHG emissions unless exempted under the grandfathe ring provision of the statute. The four categories are nested so that meeting volume requirements for fuels with larger specified GHG reduction requirements generally count toward meeting volume requirements for fuels with lower specified lifecyc le GHG reduction requirements. For example, a gallon of cellulosic biofuel counts toward meeting the requirements for cellulosic biofuel, advanced biofuel and total renewa ble fuel. Ot her than the

biomass

- based diesel category, the categories for renewable fuels are fuel

- neutral in that they can be met by any renewable fuel so long as the fuel meets the applica ble GHG reduction requirement. Even within the biomass

- based diesel category, a variety of fuels may be used for compliance.

3 Further explanation of the RIN system can be found in the preamble of the RFS1 proposed rule (72 FR 23904, May 1, 2007).While in EPAct Congress called for 7.5 billion gallons of renewable fuel by 2012, in

EISA it specified that the total volume of renewable fuel reach 36 billion gallons by 2022 and

that the advanced biofuel category (which includes renewable fuels providing at least 50% lifecycle GHG reduction) grow as a share of the total from about 13% in 2006 to close to 21% i n 2014 and nearly 60% by 2022. In particular, Congress sought a rapid and significant expansion

of cellulosic biofuel from 0.1 billion gallons in 2010 to 16.0 billion gallons in 2022. It also specified a ramp

- up of biomass

- based diesel t o 1.0 billion gallons in 2012. As in EPAct, Congress called on EPA to establish standards for years in which volumes were not specified in

the statute. For that purpose, Congress expanded on the list of factors in EPAct (noted above) to also include a review of the program’s implementation to date; more specific environmental impacts; and other impacts, including on the infrastructure of the U.S., the cost to consumers of transportation fuel, the cost to transport goods, the price and supply of agricultural commodities, and food prices.

With the addition of new, more ambitious volume requirements, Congress provided E PA with additional authority for waiving the statutory volume requirements. Perhaps in recognition that significant advances were still needed in the development and production of cellulosic biofuels at commercial scale, Congress added a specific cellulos ic biofuel waiver provision that requires EPA to project cellulosic biofuel production for the coming year and, if that projection is lower than the applicable volume in the statute, to use the projected volume as the cellulosic

biofuel re quirement for tha t year. For any year that EPA reduces the cellulosic biofuel volume requirement, the provision also authorizes EPA to reduce the applicable volume of total renewable fuel and advanced biofuels by the same or a lesser volume and grants EPA broad

discretion in deciding whether to make an adjustment. 4 Moreover, when EPA reduces the cellulosic biofuel requirement below the volume specified in the statute, the Act requires EPA to make available for sale cellulosic biofuel waiver credits at a price specified by t he statute that may be used by obligated parties in lieu of acquiring cellulosic biofuel RINs. 5

Congress also provided specific waiver authority for the statutory biomass

- based diesel volume requirements if EPA determines that there is a significant renewable feedstock disruption or other market circumstances that would significantly increase the pri ce of that fuel. Like its cellulosic biofuel counterpart, the biomass

- based diesel waiver provision allows EPA, in the event it reduces the statutory volu me requirement for that fuel, to reduce the applicable volume

of total renewable fuel and advanced biofuels b y the same or a lesser amount. For all categories of renewable fuel, Congress amended the “general” waiver authority established by EPAct for

addre ssing “severe economic or environmental harm” or “inadequate domestic supply” to allow waivers to be sought by obligated parties or EPA on its own motion, in addition to States.

All told, with EPAct and then EISA, Congress created an ambitious but flex ible program calling for substantial use of conventional biofuels (generally satisfied by corn starch

- based ethanol to date), significant use of biomass

- based diesel, and rapid development and deployment

4 See Monroe Energy v. EPA , No. 13

- 1265, 2014 750 F.3d 909 (D.C. Cir. May 6, 2014).

5 Whenever the Administrator reduces the minimum cellulosic biofuel volume under this subparagraph, the Administrator shall make available for sale cellulosic biofuel credits at the higher of $0.25 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. Such amounts shall be adjusted for inflation by the Administrator for years after 2008. CAA section 211(o)(7)(D)(ii).of a new generation of biofuels having much lower li fecycle GHG emissions t han 2005

petroleum

- based fuel. The program is designed to help improve the nation’s energy security by reducing its reliance on petroleum products. Moreover, since the transportation sector has historically contributed about one

- thir d of the total U.S. inventory of GHGs, the program has the potential to make a significant contribution to reducing that inventory in tandem with the GHG and fuel economy standards issued by EPA and NHTSA for on

- road vehicles.

At the same time, the sta tutory design of the RFS program also reflects two important

realities

- that the transportation fuel market has many different participants that contribute to and control different aspects of supply, and that the statutory volumes, particularly for cellul osic biofuel, necessitate scientific, technological

, and infrastructure developments to bring renewable

fuels that co nsumers can use to the market. Congress required a credit program that, as implemented through the RIN provisions, allows other participant s in the fuel market to continue to play a vital role in bringing renewable fuels to consumers. Congress also prescribed other means of facilitating compliance (e.g., deficit carryover) to help obligated parties address challenges, including thos e beyond t heir direct control. While Congress set very ambitious volume requirements for obligated parties to meet, it provided mechanisms in the form of waiver authorities in case EPA reduced volume requirements for cellulosic biofuel, in instances where compliance with the statutory volumes would severely harm the economy or environment or there is an inadequate domestic supply, or, in the case of biomass

- based diesel, where a feedstock or other market disruption causes a significant increase in fuel price.