EO12866_RFS standards 2060

- AR43 NPRM FRN_2012 0523 .docx

*** E.O. 12866 Review

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- Do Not Cite, Quote, or Release During Review ***

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA

- HQ

- OAR

- 2010

- 0133; FRL

- 9678

- 8]

RIN 2060

- AR43

Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

SUMMARY: Under section 211(o) of the Clean Air Act, the Environmental Protection Agency is required to set the renewable fuel standards each November for the following year. In general

the st andards are designed to ensure that the applicable 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 cellul osic biofuel standard on that projected volume if it is less than the applicable volume set forth in the Act. EPA is today proposing a projected cellulosic biofuel volume for 2013 that is below the applicable volume specified in the Act. Today's action a lso proposes annual percentage standards for cellulosic biofuel, biomass

- based diesel, advanced biofuel, and renewable fuels that would apply to all gasoline and diesel produced or imported in year 2013. Finally, today's action proposes an applicable volu me of biomass

- based diesel that would apply in 2014.

DATES: Comments must be received on or before [ insert date 45 days after date of publication in the Federal Register ].

Hearing: If we receive a request for a public hearing on or before [ insert date 7 days after date of publication in the Federal Register ], we will hold the hearing on XXXdateXXX at XXXlocationXXX, beginning at 9:00am local time. If we do not receive a request for a public hearing by the deadline, the hearing will be cancelled through an announcement in the Federal Register

.

ADDRESSES: Submit your comments, identified by

Docket ID No. EPA

- HQ

- OAR

- 2010

- 0133, by one of the following methods:

• www.regulations.gov : Follow the on

- line instructions for submitting comments.

• Email: a

- and

- r

- docket@epa.gov

.

• Mail: Air and Radiation Docket and Information Center, Environmental Protection Agency, Mailcode: 2822T, 1200 Pennsylvania Ave., NW., Washington, DC 20460.

• Hand Delivery: EPA Docket Center, EPA West Building, Room 3334, 1301 Constitution Ave., NW., Washington, DC 20460. Such deliveries are only accepted during the Docket’s normal hours of operation, and special arrangements should be made for

deliveries of b oxed information.*** E.O. 12866 Review

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Instructions: Direct your comments to Docket ID No. EPA

- HQ

- OAR

- 2010

- 0133. EPA's policy is that all comments received will be included in the public docket without change and may be made available online at www.regulations.gov, including any personal information provided, unless the comment includes information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Do not submit information that you consider to be CBI or other wise protected through www.regulations.gov or e

- mail. The www.regulations.gov website is an “anonymous access” system, which means EPA will not know your identity or contact information unless you provide it in the body of your comment. If you send an e

- mail comment directly to EPA without going through www.regulations.gov your

e

- mail address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the Internet. If you submit an electron ic comment, EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD

- ROM you submit. If EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, EPA may not be able to consider your comment. Electronic files should avoid the use of special characters, any form of encryption, and be free of any defects or viruses. For additional information about EPA’s public

docket visit the EPA Docket Center ho mepage at http://www.epa.gov/epahome/dockets.htm. For additional instructions on submitting comments, go to Section I.B of the SUPPLEMENTARY

INFORMATION section of this document.

Docket: All documents in the docket are listed in the www.regulations.gov in dex. Although listed in the index, some information is not publicly available, e.g., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, will be publicly available only in hard copy. Publicly available docket materials are available either electronically in www.regulations.gov or in hard copy at the Air and Radiation Docket and Information Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW, Washington, DC. The Public Read ing 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 CONT ACT: Julia MacAllister , Office of Transportation and Air Quality, Assessment and Standards Division, Environmental Protection Agency, 2000 Traverwood Drive, Ann Arbor MI 48105 ; Telephone number: 734

- 214

- 4131 ; Fax number: 734

- 214

- 4816 ; E

- mail address: macal lister.julia@epa.gov, or the public information line for the Office of Transportation and Air Quality; telephone number (734) 214

- 4333; E

- mail address OTAQ@epa.gov.

SUPPLEMENTARY INFORMATION:

I. General Information

A. Does this Action Apply to Me?

E ntities potentially affected by this proposed rule are those involved with the production, distribution, and sale of transportation fuels, including gasoline and diesel fuel or renewable fuels such as ethanol and biodiesel. Potentially regulated categorie s include:*** E.O. 12866 Review

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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 stations and terminals Petroleum and petroleum products merchant

wholesalers

Other fuel dealers

1 North American Industry Classification System (NAICS)

2 Standard Industrial Classification (SIC) system code.

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

B. What Should I Consider as I Prepare My Comments for EPA?

1. Submitting CBI

Do not submit confidential business information (CBI) to EPA through www.regulations.gov or e

- mail. Clearly mark the part or all of the information that you claim to

be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI. In addition to one complete versi on of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance w ith procedures set forth in 40 CFR part 2.

2. Tips for Preparing Your Comments

When submitting comments, remember to:

• Identify the rulemaking by docket number and other identifying information (subject heading, Federal Register date and page number).

• Follow directions

- The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

• Explain why you agree or disagree, suggest alternatives, and substitute language for your requested changes.

• Describe any assumptions and provide any technical information and/or data that you

used.*** E.O. 12866 Review

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• If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reprod uced.

• Provide specific examples to illustrate your concerns, and suggest alternatives.

• Explain your views as clearly as possible, avoiding the use of profanity or personal

threats.

• Make sure to submit your comments by the comment period deadline iden tified.

Outline of this preamble

I. Executive Summary

................................ ................................ ................................ ................ 7

A. Purpose of This Proposed Action

................................ ................................ ....................... 8

B. Summary of Major Provisions in This Notice

................................ ................................ .... 9

1. Cellulosic Biofuel Volume for 2013

................................ ................................ ............... 9

2. Advanced Biofuel and Total Renewable Fuel in 2013

................................ ................. 11

3. Proposed Standards for 2013

................................ ................................ ........................ 12

4. Biomass

- Based Diesel for 2014

................................ ................................ .................... 13

C. Impacts of Proposed Actions

................................ ................................ ............................ 13

II. Projection of Cellulosic Volume for 2013

................................ ................................ ............ 15

A. Statutory Requirements

................................ ................................ ................................ ..... 16

B. Status of the Cellulosic Biofuel Industry

................................ ................................ .......... 16

C. Cellulosic Biofuel Volume Assessment for 2013

................................ ............................. 19

1. Cellulosic Biofuel Facilities Considered in the 2012 Projections

................................ 20

2. Facilities not Included in 2012 Projections

................................ ................................ ... 24

3. Other Potential Sources of Domestic Cellulos ic Biofuel

................................ .............. 25

4. Imports of Cellulosic Biofuel

................................ ................................ ........................ 26

5. Summary of Volume Projections

................................ ................................ .................. 27

D. Proposed Cellulosic Biofuel Volume for 2013

................................ ................................ . 29

III. Assessment of Advanced Biofuel and Total Renewable Fuel for 2013

............................... 30

A. Statutory Requirements

................................ ................................ ................................ ..... 30

B. Assessment of Available Volumes of Advanced Biofuel

................................ ................. 31

1. Biodiesel

................................ ................................ ................................ ....................... 32

2. Imported Sugarcane Ethanol

................................ ................................ ......................... 33

3. Domestic Production of Other Advanced Biofuel

................................ ........................ 34

C. Proposed Volume Requirements for Advanced Biofuel and Total Renewable Fuel in

2013

................................ ................................ ................................ ................................ ........... 36

IV. Proposed Percentage Standards for 2013

................................ ................................ ......... 38

A. Background

................................ ................................ ................................ ....................... 38

B. Calculation of Standards

................................ ................................ ................................ ... 38

1. How Are the Standards Calculated?

................................ ................................ ............. 38

2. Small Refineries and Small Refiners

................................ ................................ ............ 41

3. Proposed Standards

................................ ................................ ................................ ....... 42

V. Proposed Volume Requirement for Biomass

- Based Diesel in 2014

................................ .... 44

A. Statutory Requirements

................................ ................................ ................................ ..... 44

B. Factors Considered in Assessing 2014 Biomass

- Based Diesel Volumes

......................... 46

1. Demand for Biomass

- Based Diesel

................................ ................................ .............. 47*** E.O. 12866 Review

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2. Availability of Feedstocks

................................ ................................ ............................ 48

a. Waste Fats, Oils, and Greases

................................ ................................ ................... 48

b. Corn Oil

................................ ................................ ................................ .................... 49

c. Soybean Oil

................................ ................................ ................................ ............... 49

d. Effects on Food Prices

................................ ................................ .............................. 50

3. Production Capacity

................................ ................................ ................................ ...... 51

4. Consumption Capacity

................................ ................................ ................................ .. 52

5. Biomass

- Based Diesel Distribution Infrastructure

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

C. Impacts of 1.39 billion gallons of Biomass

- Based Diesel

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

1. Climate Change

................................ ................................ ................................ ............. 57

2. Energy Security

................................ ................................ ................................ ............. 60

3. Air Quality

................................ ................................ ................................ .................... 62

4. Consideration of Costs and Benefits

................................ ................................ ............. 65

a. Monetized Quantifiable Costs

................................ ................................ ................... 66

b. Transportation Fuel Costs

................................ ................................ ......................... 69

c. Monetized Quantifiable Benefits

................................ ................................ .............. 69

i. Greenhouse Gas Impacts

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

ii. Energy Security

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

iii. Air Quality

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

5. Deliverability and Transport Costs of Materials, Goods, and Products Other Than

Renewable Fuel

................................ ................................ ................................ ..................... 74

6. Wetlands, Ecosystems, and Wildlife Habitats

................................ .............................. 74

7. Water Quality and Quantity

................................ ................................ .......................... 76

a. Soybean Production

................................ ................................ ................................ .. 76

b. Biodiesel Production

................................ ................................ ................................ . 78

8. Job Creation and Rural Economic Development

................................ .......................... 79

VI. Public Participation

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

A. How Do I Submit Comments?

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

B. How Should I Submit CBI to the Agency?

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

VII. Statutory and Executive Order Reviews

................................ ................................ ........... 84

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

................................ ................................ ........ 84

B. Paperwork Reduction Act

................................ ................................ ................................ . 84

C. Regulatory Flexibility Act

................................ ................................ ................................ 84

D. Unfunded Mandates Reform Act

................................ ................................ ...................... 85

E. Executive Order 13132: Federalism

................................ ................................ ................. 85

F. Executive Order 13175: Consultation and Coordination with Indian Tribal Governments

85

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

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

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

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

I. National Technology Transfer and Advancement Act

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

J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low

- Income Populations

................................ ................................ ............... 87

VIII. Statutory Authority

................................ ................................ ................................ ........... 88*** E.O. 12866 Review

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I. Executive Summary

The Renewable Fuel Standard (RFS) program began in 2006 pursuant to the requirements in Clean Air Act (CAA) section 211(o) which were add ed through the Energy Policy Act of 2005 (EPAct). The statutory requirements for the RFS program were subsequently modified through the Energy Independence and Security Act of 2007 (EISA), resulting in the promulgation of major revisions to the regulatory requirements on March 26, 2010 1

.

The volumes of renewable fuel to be used under the RFS program each year (absent an adjustment or waiver by EPA) are specified in CAA 211(o)(2). The volumes for 2013 are shown

in Table I

- 1.

Table I

- 1

Required Applica ble Volumes in the Clean Air Act for 2013 (bill gal)

Cellulosic biofuel 1.0 a

Biomass

- based diesel ≥1.0 b

Advanced biofuel 2.75 a

Renewable fuel 16.55 a

a Ethanol

- equivalent volume

b Actual volume

Under the RFS program, EPA is required to determine and publish annual percentage standards for each compliance year by November 30 of the previous year. The percentage standards are used by obligated parties to calculate their individual compliance obligations. The percentage standards are applied to the vol ume of gasoline and/or diesel fuel that each obligated party produces or imports during the specified calendar year to determine the volumes of renewable fuel that they must cause to be used as transportation fuel, heating oil, or jet fuel. The

percentage standards are calculated so as to ensure use in transportation fuel of the “applicable volumes” of four types of biofuel (cellulosic biofuel, biomass

- based diesel, advanced biofuel, and total renewable fuel) that are either set forth in the Clean Air Act or established by EPA in accordance with the Act’s requirements.

The cellulosic biofuel industry is transitioning from research and development (R&D) and pilot

- scale to commercial scale facilities, leading to substantial increases in production capacity. Construction has begun on several facilities, and there is a high likelihood that cellulosic biofuel will be produced in 2012. Based on detailed information from production companies and a consideration of various potential uncertainties, we are project ing that 33 million gallons of cellulosic biofuel will be available in 2013.

We have evaluated the types of advanced biofuels that can be produced or imported in 2013 and have determined that there will be sufficient volumes to meet the statutory applica ble volume of 2.75 billion gallons. Combined with the availability of conventional biofuels such as corn ethanol, there will also be sufficient total renewable fuels available in 2013 to meet the statutory applicable volume of 16.55 billion gallons.

1 75 FR 14670*** E.O. 12866 Review

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In a separate action we are finalizing an applicable volume requirement of 1.28 billion gallons of biomass

- based diesel for 2013. We have determined that there are sufficient feedstocks and production capacity to permit a small increase in the applicable vol ume requirement for biomass

- based diesel in 2014, and in the longer term the benefits of increased

volumes of biomass

- based diesel are expected to exceed the costs. We are proposing to increase

the biomass

- based diesel applicable volume requirement to 1.3 9 billion gallons in 2014.

A. Purpose of This Proposed Action

EPA is today proposing volume requirements for cellulosic biofuel, advanced biofuel,

and total renewable fuel for 2013 and for biomass

- based diesel in 2014. Table I.A

- 1 lists the

statutory provisions and associated criteria relevant to determining the applicable volumes in today’s proposal. We are also proposing percentage standards for all four categories of

renewable fuel for 2013.

Table I.A

- 1

Statutory Provisions for Determination of Proposed Applicable Volumes Applicable volumes Clean Air Act

reference Criteria provided in statute for determination

of applicable volume

Cellulosic biofuel in

2013 211(o)(7)(D)(i) Mandatory determination. Required volume

must be lesser of volume specified in CAA 211(o)(2)(B)(i)(III) or EPA’s projected

volume.

Advanced biofuel in

2013 211(o)(7)(D)(i) If applicable volume of cellulosic biofuel is reduced to the projected volume, EPA may reduce advanced biofuel by the same or

lesser volume. No ot her criteria specified.

Total renewable fuel in

2013 211(o)(7)(D)(i) If applicable volume of cellulosic biofuel is reduced to the projected volume, EPA may reduce total renewable fuel by the same or lesser volume. No other criteria specified.

Biomass

- based diesel in

2014 211(o)(2)(B)(ii) Mandatory determination for years after 2012. Required volume must be based on review of program implementation to date and analysis of a number of factors such as costs, feedstock supply, infrastructure, etc.

EPA must coordinate with DOE and USDA

EPA must annually determine the projected volume of cellulosic biofuel production for the following year. If the projected volume of cellulosic biofuel production is less than the applicable volume specified in section 211(o)(2)(B)(i)(III) of the statute, EPA must lower the applicable volume used to set the annual cellulosic biofuel percentage standard to the projected volume of production. In today's proposal, we present our analysis of cellulosic biofuel produ ction and proposed projected volume for 2013. The analyses that led to the proposed 2013*** E.O. 12866 Review

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applicable volume requirement were based on our evaluation of individual producers’ production plans and progress to date. For the final rule, we will also consider comments received in response to this notice of proposed rulemaking, the estimate of projected biofuel volumes that the Energy Information Administration (EIA) is required to provide to EPA by October 31, information from Production Outlook Reports, and ot her information that becomes available.

When we lower the applicable volume of cellulosic biofuel below the volume specified in CAA 211(o)(2)(B)(i)(III), we also have the authority to reduce the applicable volumes of

advanced biofuel and/or total renewab le fuel by the same or a lesser amount. Today's proposal includes our consideration of the 2013 volume requirements for these biofuels.

Based on the applicable volumes for cellulosic biofuel, biomass

- based diesel, advanced biofuel, and total renewable f uel presented in today's proposal, we have calculated proposed percentage standards that would apply to all producers and importers of gasoline and diesel in 2013. The proposed percentage standards are based on an early projection of volumes of gasoline a nd diesel consumption in 2013 from the Energy Information Administration (EIA). EPA intends to use updated EIA projections of gasoline and diesel consumption in 2013 in calculating the final percentage standards.

While section 211(o)(2)(B) specifies the volumes of biomass

- based diesel through year 2012, it directs the EPA to establish the applicable volume of biomass

- based diesel for years after 2012 no later than 14 months before the first year for which the applicable volume will apply. EPA proposed a n applicable volume of biomass

- based diesel for 2013 on July 1, 2011, and is issuing a final rule establishing that applicable volume in a separate notice. In today's notice we are proposing an applicable volume of biomass

- based diesel for 2014.

B. Summary of Major Provisions in This Notice

1. Cellulosic Biofuel Volume for 2013

The cellulosic biofuel industry in the United States continues to make significant advances in its progress towards large scale commercial production. Ongoing research an d development work has resulted in increasing product yields, while at the same time lowering enzyme and catalyst costs. New supply chains have been developed, and several companies have reached contract agreements to provide the necessary feedstock for l arge scale cellulosic biofuel production facilities. Companies are continuing to invest significant sums of money to further refine cellulosic biofuel production technology and to construct the first commercial

scale facilities. From 2007 through the sec ond quarter of 2011over $2.4 billion was invested in advanced biofuel production companies by venture capitalists alone. 2 For more information on the current status of the cellulosic biofuel industry in the United States and the advances being made, see S ection II.B.

2 Solecki M, Rickey D, Epstein B. Advanced Biofuel Market Report 2011: Meeting the California LCFS. Environmental Entrepreneurs. August 22, 2011.

< http://www.e2.org/ext/doc/E2%20Advanced%20Biofuel%20Mkt%20Report%202011.pdf >.*** E.O. 12866 Review

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Page 10 of 89 2013 is also expected to be a year of transition for the cellulosic biofuel industry, as many companies are shifting their focus from technology development to commercialization. This transition began in 2012 with the first commercial produ ction facilities from INEOS Bio and KiOR scheduled to come online, and will continue throughout 2013. Two of the largest producers of ethanol in the United States, Abengoa and Poet, are planning to begin producing

cellulosic ethanol at commercial scale in 2013. Several others companies, including BP and DuPont, will be constructing their first commercial scale facilities in 2013, with the intention of beginning production in 2014. If these facilities are able to operate as anticipated, the uncertainty as sociated with commercial

- scale cellulosic biofuel production will be significantly decreased, and the expansion of the industry could be rapid.

To estimate the volume of cellulosic biofuel that can be made available in the U.S. in 2013, we researched all potential 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 ethanol, cellulosic diesel, or some othe r type of cellulosic biofuel. Facilities primarily focused on research and development were not the focus of our assessment; however their production volumes were considered in aggregate. From this universe of potential cellulosic biofuel sources we iden tified the subset that had a possibility of producing commercial volumes of qualifying cellulosic biofuel for use as transportation fuel in 2013. To arrive at this proposed projected volume, we took into consideration factors such as the current and expec ted state of funding, the status of the technology utilized, progress towards construction and production goals, and other significant factors that could potentially impact fuel production or the ability of the produced fuel to generate cellulosic Renewabl e Identification Numbers (RINs) in 2013. Further discussion of these factors can be found in Section II.B.

In our assessment we focused on domestic sources of cellulosic biofuel. We are not aware of any internationally

- based cellulosic biofuel producti on facilities with the intention of exporting their fuel into the U.S. in 2013. Of the domestic sources, we estimated that five

facilities can make commercial

- scale volumes of cellulosic biofuel available for transportation

use in the U.S. in 2013. These facilities are listed in Table I.B.1

- 1 along with our estimate of the projected 2013 volume for each. The table also includes an estimate of the total RIN

- generating volume of cellulosic biofuel that will be produced from the many small research and

deve lopment and demonstration facilities in the United States in 2013.*** E.O. 12866 Review

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Page 11 of 89 Table I.B.1

- 1 Projected Available Cellulosic Biofuel Plant Volumes for 2013

Company Location Fuel type Capacity (million gallons per year) Projected

Start

- Up

Date Projected available

volum e a

Abengoa Hugoton, KS Ethanol 26 3Q 2013 4 Fiberight Blairstown, IA Ethanol 3.8 1 st Half 2013 1

INEOS Bio Vero Beach, FL Ethanol 8.0 2Q 2012 8

KiOR Columbus, MS Gasoline and

Diesel 11 2 nd Half 2012 18

Poet

- DSM Emmetsburg, IA Ethanol 25 2 nd Half 2013 1

Various Pilot/

Demo Plants N/A N/A N/A N/A 1

Total 73.8 33

a Volumes listed in million ethanol

- equivalent gallons

The variation in expected start

- up times, along with the facility production capacities, company production plans, and a variety of other factors have all been taken into account in projecting the

available volume of cellulosic biofuel.

2. Advanced Biofuel and Total Renewable Fuel in 2013

The statute indicates that we may reduce the applicable volume of advanced biofuel and total renewable fuel specified in the statute if we determine that the projected volume of cellulosic biofuel production for 2 013 falls short of the statutory volume of 1.0 billion gallons.

As shown in Table I.B.1

- 1, we have proposed a finding that this is the case. Therefore, we have also evaluated whether to propose lowering the applicable volumes for advanced biofuel and

tot al renewable fuel. Since the statute provides no criteria or direction for making this determination, we have focused our evaluation on the availability of renewable fuels that would qualify as advanced biofuel.

The CAA specifies an applicable volume of 2.75 billion gallons of advanced biofuel for 2013. To determine whether to lower this volume, we first considered the contribution that

biomass

- based diesel will make to the advanced biofuel requirement. We have finalized a volume of 1.28 bill gal in a separate action. Since biodiesel has an Equivalence Value of 1.5, 1.28 billion physical gallons of biodiesel would provide 1.92 billion ethanol

- equivalent gallons that could be counted towards the advanced biofuel standard of 2.75 billion gallons. Of the remaining 830 mill gallons, we project that 33 mill gallons would be met with cellulosic biofuel.

There are three primary sources of other advanced biofuels that, considered together, are projected to have the potential to provide significantly more t han the approximately 800 mill gal needed to meet the statutory 2.75 bill gal advanced biofuel applicable volume, after cellulosic

biofuel and biomass

- based diesel are taken into account. As described in more detail in Section III, these sources include d omestic advanced biofuels which are expected to grow steadily through 2013, imports of sugarcane ethanol, and biodiesel production in excess of 1.28 bill gal. In addition, we believe there will be sufficient volumes of conventional renewable fuel to satis fy the 16.55 billion gallon applicable volume of total renewable fuel specified in the Act. Since*** E.O. 12866 Review

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Page 12 of 89 there appears to be adequate supply, we are not proposing to reduce either the advanced biofuel volume requirement of 2.75 bill gal, nor the total renewable fuel volume requirement of 16.55 bill gal.

3. Proposed Standards for 2013

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

ap plicable percentages are set so that if each regulated party meets the percentages, and if EIA projections of gasoline and diesel use for the coming year are accurate, then the amount of renewable fuel, cellulosic biofuel, biomass

- based diesel, and advance d biofuel actually used will meet the volumes required on a nationwide basis.

To calculate the percentage standards for 2013, we have used the proposed projected

volume of 33 million ethanol

- equivalent gallons of cellulosic biofuel and the volume of bi omass

based diesel of 1.28 bill gal that we have finalized in a separate action. The applicable volumes used in this proposal for advanced biofuel and total renewable fuel for 2013 are those specified

in the statute. These volumes are shown in Table I.B.3

- 1.

Table I.B.3

- 1 Proposed Volumes Used to Determine the Proposed 2013 Percentage Standards a

Cellulosic biofuel 33 mill gal

Biomass

- based diesel 1.28 bill gal

Advanced biofuel 2.75 bill gal

Renewable fuel 16.55 bill gal

a All volumes are ethanol

- equivalent, except for biomass

- based diesel which is

actual.

Four separate standards are required under the RFS program, corresponding to the four separate volume requirements shown in Table I.B.3

- 1. The specific formulas we use to calculate the renewable fuel percentage standards are contained in the regulations at §80.1405 and repeated in Section IV.B.1. The percentage standards 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 calculate the standards in today's proposed rule was derived from available EIA projections. We expect to base the final renewable fuel percentage standards on updated projections provid ed by EIA. At this time EPA has not approved any small refinery or small refiner exemptions for 2013, and thus no adjustment has been made to the proposed standards to account for such exemptions. The proposed standards for 2013 are shown

in Table I.B.3

- 2. Detailed calculations can be found in Section IV.*** E.O. 12866 Review

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Page 13 of 89 Table I.B.3

- 2 Proposed Percentage Standards for 2013

Cellulosic biofuel 0.020%

Biomass

- based diesel 1.18%

Advanced biofuel 1.69%

Renewable fuel 10.15%

4. Biomass

- Based Diesel for 2014

While section 211(o)(2)(B) specifies the volumes of biomass

- based diesel through year 2012, it directs the EPA to establish the applicable volume of biomass

- based diesel 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 proposing an applicable volume of 1.39 bill gallons for biomass

based diesel for 2014. We are proposing to increase the biomass

- based diesel standard for 2014 beyond the 1.28 bill gal requirement established fo r 2013 based on consideration of the factors specified in the statute including biodiesel production capacity, consumption, and infrastructure capabilities, as well as impacts on emissions, costs, energy security, and other factors. Section V provides add itional discussion of our assessment of the proposed volume of 1.39 bill gal of

biomass

- based diesel for 2014.

C. Impacts of Proposed Actions

The anticipated increase in cellulosic biofuel in comparison to the 2012 volume requirement will have directi onally beneficial GHG impacts as cellulosic biofuels in general have at least a 60 percent GHG emissions improvement compared to the gasoline and diesel fuel they will replace. Analyses for the March 26, 2010 RFS2 final rule indicated the GHG benefits

fro m cellulosic biofuels compared to the petroleum

- based fuels they displace could likely range well above the 60 percent threshold.

We are proposing to increase the volume of biomass

- based diesel in 2014 to 1.39 bill gal. This volume would be 110 mill g allons above the 2013 required volume of 1.28 bill gal that we are finalizing in a separate action. The statute requires EPA to consider a number of factors when setting the biomass

- based diesel mandate for years after 2012. These include

environmental i mpacts (e.g. air quality, climate change, conversion of wetlands, etc), energy security impacts, impacts on rural development, impacts on job creation, and several other categories. The statute does not require EPA to consider these impacts quantitatively . However we have chosen to provide quantified estimates for certain impacts for illustrative purposes. We estimate that the quantifiable costs of the proposed increase of 110 mill gal of biomass

- based diesel are between $112 and $188 million in 2014 and are approximately $45 million in 2022. We estimate that the quantifiable benefits from decreased GHG emissions stemming from this rule are between $6 million and $63 million. The estimated benefits of increased energy security are about $19 million. Th e estimated benefits from improved air quality are about $6 million. Benefits increase over time because of the increasing value of the social cost of carbon.*** E.O. 12866 Review

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Page 14 of 89 Simultaneously, costs decrease over time because of increasing oil prices and decreasing

biodie sel feedstock prices.

For advanced biofuel and total renewable fuel, we are not proposing to reduce the applicable volumes below the volumes required in the statute. All of the impacts of the biofuel volumes specified in the statute were addressed in th e RFS2 final rule published on March 26, 2010. Today's rulemaking simply proposes the standards for 2013 advanced biofuel and total renewable fuel whose impacts were previously analyzed.*** E.O. 12866 Review

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Page 15 of 89 II. P rojection of Cellulosic Volume for 2013

In order to project the available production volume of cellulosic biofuel in 2013 for use in setting the percentage standard, we collected information on individual facilities that have the potential to produce qua lifying volumes for consumption as transportation fuel, heating oil, or jet fuel in the U.S. in 2013. This section describes the volumes that could be produced or imported

in 2013 as well as some of the uncertainties associated with those volumes.

In the past several years the cellulosic biofuel industry has made many significant advances. The production cost of cellulosic biofuels continues to fall as a result of ongoing technology development and operating experience gained from many research and de velopment

and demonstration

- scale facilities across the country. These important advances include higher biofuel yields per ton of feedstock as well as lower enzyme and catalyst costs. As a result of these yield increases, the projected capital costs and energy costs to produce a gallon of cellulosic biofuel have decreased. New feedstock supply chains, which will be necessary to provide the raw materials for the first commercial facilities, have been established, and in several cases companies have signe d contracts to obtain significant quantities of feedstocks for their first commercial facilities. These developments, along with the increased availability of project financing, have resulted in the construction of the first commercial

- scale cellulosic bi ofuel production facilities. Two commercial

- scale facilities are on schedule to begin producing fuel in 2012. Three more have plans to start

- up in 2013, with several more planning construction in

2013 and start

- up in 2014. If these first facilities are successful and operate as designed it will significantly decrease the perceived risk associated with similar future facilities and could potentially lead to the rapid deployment of cellulosic biofuel production facilities around the

United States.

Despite significant advances in cellulosic biofuel production technology in recent years,

RIN

- generating cellulosic biofuel production in 2010 and 2011 was zero despite our projections that the industry was positioned to produce about 6 million gallons in each of those years. 3 A discussion of the reasons for this disparity is provided in Section II.B below.

In today's NPRM we are proposing a volume for 2013 cellulosic biofuel that is based on discussions with individual producers. By the time we announce the final 2013 volumes and percentage standards in November 2012, we will have additional information. First, in addition to comments in response to today's proposal, we will have updated and more detailed information about how the industry is progressing in 2012. Second, all registered producers and importers of renewable fuel must submit Production Outlook Reports by June 1 describing their expectations for new or expanded biofuel supply for the next five years, according to §80.1449. Finally, by October 31, 2012, the Energy Information Administration (EIA) is required by statute to provide EPA with an estimate of the volumes of transportation fuel, biomass

- based diesel, and cellulosic biofuel that they project will be sold or introduced into commerce in t he U.S. in 2013. All of this information will be used in setting the final cellulosic biofuel applicable volume and percentage standard for 2013.

3 In the first half of 2010 when the RFS1 program was still effective, some cellulosic b iomass ethanol was produced. However, this biofuel was not made from cellulosic feedstocks, but rather was categorized as cellulosic under the limited provisions of §80.1101(a)(2).*** E.O. 12866 Review

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Page 16 of 89 A. Statutory Requirements

The volumes of renewable fuel to be used under the RFS program each year (abse nt an adjustment or waiver by EPA) are specified in CAA 211(o)(2). For 2013, the statute specifies a cellulosic biofuel applicable volume requirement of 1.0 bill gal. The statute requires that if EPA determines that the projected volume of cellulosic bio fuel 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 cellulosic biofuel to the projected 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 volumes of advanced biofuels and total renewable fuel by the same or a lesser volume. Our consideration of

the 201 3 volume requirements for advanced biofuels and total renewable fuel is presented in

Section III.

B. Status of the Cellulosic Biofuel Industry

As in previous years, cellulosic biofuel production in the United States in 2011 was

limited to small

- scale research and development, pilot, and demonstration

- scale facilities. Companies such as Abengoa, BP, Coskata, DuPont Danisco, KL Energy, KiOR, Poet, and others successfully operated small

- scale facilities in 2011. Several of these facilities, including al l that were part of our 2012 volume projections, are discussed in more detail in Section II.C below.

While there were numerous small

- scale facilities producing cellulosic biofuel in 2011, the total volume of fuel produced was very small. Because of the R &D nature of these small facilities they are neither designed to produce fuel for commercial sale nor required to report the small volumes of fuel they produced. No RINs were generated for volumes that were produced in 2011, despite all of the companies i ncluded in the 2011 projections expressing interest and/or intent in doing so. Although EPA has not attempted to accurately assess production volumes, based on generally available information we believe that total production in the United States in

2011 w as likely less than one million gallons of cellulosic biofuel across the industry.

Each of the companies included in our 2011 projections for cellulosic biofuel production had different reasons for not generating cellulosic RINs in 2011. DuPont had conce rns about their ability to retain the R&D status of their Vonore, TN facility if they generated RINs and sold the cellulosic ethanol they produced from this facility. Fiberight was unable to secure the funding required to complete the modifications to the ir facility to allow for cellulosic ethanol production. KL Energy finalized an agreement with Petrobras in the second half of 2010 and changed the direction of their facility to focus on using bagasse as a primary feedstock. Finally, after completing ini tial production of cellulosic ethanol Range Fuels shut down operations in January 2011 and eventually declared bankruptcy.

While cellulosic biofuel production in the United States remains limited, the industry continues to make significant progress tow ards producing cellulosic biofuel at prices competitive*** E.O. 12866 Review

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Page 17 of 89 with petroleum fuels. From 2007 through the second quarter of 2011 venture capitalists invested over $2.4 billion in advanced biofuel companies in North America 4 . Recent advancements in enzyme and c atalyst technologies are allowing cellulosic biofuel producers to achieve greater yields of biofuel per ton of feedstock. These advancements have led to lower operational costs as they have driven down the cost for feedstock, energy, and other important i nputs on a per gallon basis. For example, the estimated cost of cellulosic ethanol production using an enzymatic hydrolysis process has decreased from $4

- $8 per gallon in 2007 to $2

- $3.50 per gallon by 2012 5 . NREL similarly reports that advancements in c ellulosic ethanol technology have resulted in a decrease in modeled costs from more than $6.50 per gallon in 2001 to less than $2 per gallon in 2010. 6 The same technological advances have also lowered the capital costs of cellulosic biofuel production fac ilities per gallon of annual fuel production, as more gallons of biofuel can be produced at a facility without additional equipment or increased feedstock requirements.

As cellulosic biofuel producers gain experience and continue to progress towards

comm ercial

- scale biofuel production, it is reasonable to expect that the production costs and capital costs will continue to decline. This is a pattern shown by many new technologies, including renewable and emerging energy technologies. One example which ha s several similarities to the cellulosic biofuel industry is the experience with the dry mill corn ethanol industry. From 1983, the year in which the first commercial volumes of dry mill ethanol were produced, to 2005 the processing cost of corn ethanol d ecreased by 45%, while the capital costs of a dry mill ethanol facility decreased by 88%. 7 Many of the drivers for this cost reduction, such as higher ethanol yields, reduced enzyme costs, and better fermentation technologies 8 are also expected to be fact ors in the lower cellulosic biofuel costs expected in the future. While the cost reduction percentages observed in the dry mill corn ethanol industry are not directly applicable to the cellulosic biofuel industry, the trend of decreasing production and ca pital costs over time is expected to hold true.

Another area where significant progress has been made is that of feedstock supply for

commercial

- scale cellulosic biofuel production facilities. This issue has often been raised as a

factor that could hind er the development of the cellulosic biofuel industry as many of the proposed facilities rely on feedstocks, such as agricultural residues or energy crops, for which supply chains have not previously existed. BP Biofuels has begun work to establish energy crop plantations to provide the necessary feedstock for their first two commercial

- scale production facilities. Over the past several years both Abengoa and Poet have been reaching out to farmers

4 Solecki M, Rickey D, Epstein B. Advanced Biofuel Market Report 2011: M eeting the California LCFS. Environmental Entrepreneurs. August 22, 2011. Available Online

< http://www.e2.org/ext/doc/E2%20Advanced%20Biofuel%20Mkt%20Report%202011 .pdf >.

5 Nielsen, Peder Holk. “The Path to Commercialization of Cellulosic Ethanol

– A Brighter Future.” PowerPoint Presentation. Conference Call. February 22, 2012. Available Online <http://www.novozymes.com/en/investor/events

- presentations/Documents/ Cellic3_conf_call_220212.pdf>.

6 NREL. Cellulosic Ethanol Technology on Track to being Competitive With Other Transportation Fuels. February

2011. NREL/FS

- 2700

- 50846. Available Online <http://www.nrel.gov/science_technology/pdfs/50846.pdf>.

7 Hettinga WG, Junginger HM, Dekker SC, Hoogwijk M, McAloon AJ, Hicks KB. Understanding the reductions in US corn ethanol production costs: An experience curve approach. Energy Policy 37 (2009): 190

- 203. Available Online <http://ddr.nal.usda.gov/bitstream/10113/22 550/1/IND44146988.pdf>.

8 IBID*** E.O. 12866 Review

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Page 18 of 89 in the regions surrounding their first commercial

- scale fa cilities to ensure the availability of the necessary feedstock. Because corn cobs and stover are only seasonally available, using them as a feedstock for a cellulosic biofuel production facility would require significant feedstock storage

facilities. In the last two years Abengoa and Poet completed construction of large

- scale feedstock storage facilities to ensure adequate supply to their cellulosic biofuel production facilities throughout the year. Both companies successfully completed fall biomass harv ests in 2011 and have contracted with local farmers to provide feedstock for their cellulosic ethanol facilities. This supply chain will not only provide feedstock for their first commercial

- scale facilities, but also a model that can be re

- created at fut ure production facilities.

Several cellulosic biofuel producers are planning to use slash, forest thinnings, and forest product residue or the cellulosic portions of yard waste as feedstock. This material has many qualities that make it desirable as a c ellulosic biofuel feedstock. It is generally inexpensive and is readily available in some regions of the United States. It is also available year round rather than seasonally, significantly reducing the need for large

- scale feedstock storage facilities. Securing a sufficient quantity of this feedstock for a commercial

- scale facility, however, can be challenging. In the summer of 2011 KiOR announced it had signed a feedstock agreement with Catchlight Energy to provide all the necessary slash, forest thin ning, and forest product residue

for their first commercial

- scale facility. While KiOR plans to transition to planted trees for future facilities, KiOR now has secured sufficient feedstock such that they can produce cellulosic

biofuel and cellulosic RINs using an existing pathway at their first commercial

- scale facility. INEOS Bio also has a long term agreement with Indian River County to provide vegetative waste which will serve as the feedstock for their first facility.

Another appealing feedstock for cellulosic biofuel production is separated municipal solid waste (MSW). MSW is already being collected and transported to a centralized facility, is consistently available throughout the year, and can be obtained for a very low, or even negative

cost. M SW often contains contaminants, however, that may make it challenging to process for some cellulosic biofuel technologies. EPA also requires that waste separation plans be submitted and approved prior to any company generating RINs using separated MSW as a feedstock. Near the end of 2011 EPA received the first waste separation plan for Fiberight’s facility in Blairstown, Iowa. This plan is currently being evaluated, and we anticipate that a decision will be made on Fiberight’s separation plan by the time of the final rule.

Significant progress has also been made by some companies towards funding the

construction of their first commercial

- scale facilities. In the early years of the cellulosic biofuel industry several small start

- up companies announced p lans to build large commercial

- scale facilities that were scheduled to begin production in the past few years. The construction of many of these facilities was dependent on the companies raising additional funding, either from venture capitalists, governm ent grants, or loans backed by government guarantees. So far few of the companies that made these early announcements have been able to successfully raise the necessary funds and begin construction. Securing this funding proved difficult, and when it did not materialize the projects were delayed or cancelled.

The funding profiles of the companies included in our proposed volume for 2013, as well as for many of the companies targeting production in 2014, are markedly different. Many of*** E.O. 12866 Review

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Page 19 of 89 these projects ha ve already received, and in several cases have closed on loan guarantees offered by DOE or USDA. Other companies have filed for and successfully executed IPOs. Several cellulosic ethanol projects are being self

- financed by large companies such as Abengoa , BP, and Poet with significant experience in the biofuel, petrochemical, and specialty chemical markets. This solid financial backing has allowed these companies to proceed with construction. With the exception of Fiberight, which is retrofitting an exi sting corn ethanol facility, all of the facilities included in our proposed volume for 2013 have already begun the construction of their first commercial production facilities. The next section provides additional details on the funding and

construction s tatus of the projects included in our projected cellulosic biofuel production

volumes for 2013.

If these first commercial

- scale cellulosic biofuel production facilities are successful, the potential exists for a rapid expansion of the industry in subseq uent years. Having successful

commercial

- scale facilities would not only provide useful information to help maximize the efficiency of future facilities, but would also significantly decrease the technology and scale

- up risks associated with cellulosic bi ofuel production facilities and could lead to increased access to project funding. Fiberight and ZeaChem both plan to build larger

- scale facilities (~25 mill gal per year) as soon as they are able to raise the necessary funds. INEOS Bio plans to expand

p roduction by building additional units near sources of inexpensive feedstock ranging in size from 8 to 50 million gallons of ethanol per year. They are currently exploring expansion possibilities in the United States and internationally. KiOR has plans f or a second commercial

scale facility to be built in Natchez, MS, that will be approximately three times larger (~30 mill gal per year) than their Columbus, MS, plant and plans to break ground at their second facility after their first is fully operational . Abengoa currently anticipates construction of additional cellulosic ethanol facilities at multiple locations, likely including co

- locating with some of their existing starch facilities in the US. Poet has a similar expansion strategy to build cellulosi c ethanol plants at their grain ethanol facilities, license their technology for use at other grain ethanol facilities, and build cellulosic ethanol facilities that use feedstocks such as rice straw, rice hulls, woody biomass, or energy crops as a feedstoc k. Poet’s goal is to be involved in the production of 3.5 billion gallons of cellulosic ethanol per year by 2022. Several other companies, such as BP, DuPont, and Enerkem are also targeting 2014 for the start

- up of cellulosic biofuel production facilitie s and would likely look to build additional facilities relatively quickly if successful. While many of these expansion plans are still in the early stages and are subject to change, they do point to the potential for cellulosic biofuel production to

incre ase rapidly in future years.

C. Cellulosic Biofuel Volume Assessment for 2013

In 2011 no cellulosic biofuel RINs were generated, though some small volumes were produced. Announcements of new projects and project funding, changes in project plans, proj ect delays, and cancellations occur. Biofuel producers faced not only the challenge of the scale

- up of innovative, first

- of

- a

- kind technology, but also the challenge of securing funding in a difficult economy. The cellulosic biofuel industry also is infl uenced by various tax credits and subsidies, and uncertainty about these programs may have had an impact on cellulosic biofuel production in

2011.*** E.O. 12866 Review

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Page 20 of 89 Despite these challenges, there are several factors indicating that significant volumes of

cellulosic biofue l can be produced in 2013. Commercial

- scale cellulosic biofuel projects from INEOS Bio and KiOR are expected to begin fuel production in 2012 and plan to produce fuel at volumes near their capacities in 2013. Two more commercial

- scale facilities backed by large companies with significant experience in biofuel production, Abengoa and Poet, are also scheduled to begin producing cellulosic biofuel in 2013. These facilities are indicative of a shift across the cellulosic biofuel industry from small

- scale R& D and demonstration facilities operated by small start

- up companies to large commercial

- scale facilities backed by large companies, many of which have substantial experience in related industries.

In order to project cellulosic biofuel production for 2 013, we have tracked the progress of more than 100 biofuel production facilities. From this list of facilities we used publically available information, as well as information provided by DOE and USDA, to make a preliminary determination of which faciliti es are the most likely candidates to produce cellulosic biofuel and generate cellulosic biofuel RINs in 2013. Each of these companies was investigated further in order to determine the current status of their facilities and their likely cellulosic biofuel production and RIN generation volumes for the coming years. Information such as the funding status of these facilities, current status of the production technologies, announced construction and production rampup periods, and annual fuel production target s were all considered when we met with senior level representatives of each company to discuss cellulosic biofuel target production levels for 2013. Our projection of the cellulosic biofuel production in 2013 is based on the individual production targets that emerged from these discussions. A brief description can be found below for each of the companies we believe will produce cellulosic biofuel and make it commercially available in 2013. We will continue to gather more information to help inform our

de cision regarding the final cellulosic biofuel volume to be required for 2013, and we will specify the final volume in the final rule to be released by November 31, 2012.

In the sections that follow, we first discuss the cellulosic production facilities t hat were part of our volume projections for the 2012 compliance year and the progress that they have made. Then we present our consideration of additional facilities that we believe will also produce cellulosic biofuel in 2013.

1. Cellulosic Biofuel Fa cilities Considered in the 2012 Projections

In the January 9, 2012, final rule that established the required 2012 cellulosic biofuel volume, we identified six production facilities that we projected would produce cellulosic biofuel

and make that fuel comm ercially available in 2012. Two of these production facilities are currently structurally complete, three are currently under construction, and one is planning to retrofit an existing corn ethanol plant with construction beginning in the second half of 20 12. None of the facilities have completed the registration process for the RFS program, and they will be unable to generate cellulosic RINs until this process is completed. The current status of each of these facilities, including target production level s for each facility in 2013, is discussed below.

API*** E.O. 12866 Review

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Page 21 of 89 American Process Inc. (API) is developing a project in Alpena, Michigan capable of producing up to 900,000 gallons of cellulosic ethanol per year from woody biomass. This facility will use a technology developed by API called GreenPower+TM. This technology extracts the hemicellulose portion of woody biomass using hot water and hydrolyzes it into sugars. These sugars are then converted to ethanol or other alcohols, while the remaining portion of the woody biomass, containing mostly cellulose and lignin, is processed into wood paneling at

a co

- located facility. At future, larger

- scale facilities API anticipates burning the residual biomass in a boiler to produce renewable steam and electricity as well as cellulosic biofuel. In January 2010 API received a grant from DOE for up to $18 million for the construction of their demonstration facility. Construction of the Alpena, Michigan facility began in March 2011 and API anticipates beginning the p roduction of cellulosic ethanol at this site in the first half of 2012. API plans to switch fuel production at their Alpena facility from ethanol to butanol in late 2012 or early 2013. API is also developing a list of projects and is currently in the pro cess of screening for locations for their next project, which will likely produce 10 million gallons of cellulosic biofuel per year and be co

- located with a biomass pellet or biomass

- to

- electricity facility. Production from API’s Alpena facility has been included in our proposed volume as one contributor to the one million gallons from various pilot and demonstration plants in 2013.

Fiberight

Fiberight uses an enzymatic hydrolysis process to convert the biogenic portion of separated MSW and other waste f eedstocks into ethanol. They have successfully completed five years of development work on their technology at their small pilot plant in Lawrenceville, Virginia. This facility is currently in the process of being upgraded to an integrated

demonstration plant with initial production of cellulosic ethanol expected in July 2012. In 2009 Fiberight purchased an idled corn ethanol plant in Blairstown, Iowa with the intention of making modifications to this facility to allow for the production of 3.8 million g allons of cellulosic ethanol per year from separated MSW and industrial waste streams. These modifications were scheduled to be completed in 2011, but difficulties in securing funding have resulted in construction at this facility being delayed. In Janua ry 2012 Fiberight was offered a $25 million loan guarantee from USDA. Closing on this loan would provide substantially all of the remaining funds required for Fiberight to complete the modifications necessary to allow for the production of cellulosic etha nol at their Blairstown facility. Construction will begin as soon as Fiberight has secured the necessary funds and will take approximately 6 months to complete. While this is a much shorter timeline that most cellulosic biofuel production facilities, it is reasonable as Fiberight is retrofitting an existing corn ethanol plant and will be able to use much of the existing equipment. Additionally, we have received a waste separation plan from Fiberight for this facility that if approved would allow Fiberigh t to generate RINs for the production of cellulosic ethanol using MSW as a feedstock. Fiberight plans to produce 1 million gallons of cellulosic ethanol in 2013. Fiberight is also currently developing a second

commercial

- scale project based on their MSW “hub and spoke” concept. They anticipate that this facility will begin fuel production in 2014 and will produce approximately 25 million gallons of cellulosic ethanol per year when fully built out.

INEOS Bio*** E.O. 12866 Review

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Page 22 of 89 INEOS Bio has developed a process for produci ng cellulosic ethanol by first gasifying cellulosic feedstocks 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 fi rst commercial facility to be built in Vero Beach, Florida. This was in addition to the grant of up to $50 million INEOS Bio received from DOE in December 2009. When completed, this facility will be capable of producing 8 million gallons of cellulosic

bi ofuel as well as 6 megawatts (gross) of renewable electricity from a variety of feedstocks including yard, agricultural, and wood waste. The facility is also permitted to use a limited quantity of separated MSW as a feedstock and plans to do so by late 20 12. Their ability to generate RINs for any fuel generated using separated MSW would be dependent on having an approved waste separation plan.

On February 9, 2011, INEOS Bio broke ground on this facility. Since then significant progress has been made, an d INEOS Bio remains on target to complete construction on this facility in April 2012. Commercial production of cellulosic ethanol is expected to begin soon after construction and commissioning of the facility. INEOS Bio has reported that they plan to

be producing cellulosic ethanol at levels near the facility’s capacity of 8 million gallons per year by the end of 2012. For this proposal we project 8 million gallons of cellulosic ethanol from INEOS Bio in 2013. INEOS Bio is also exploring several opport unities for additional cellulosic biofuel production facilities, both in the United States and internationally. INEOS Bio is targeting sources of inexpensive feedstock and see a market for plants with production capacities ranging from 8 to 50 million gal lons per year.

KiOR

KiOR is working to commercialize a technology capable of converting biomass to a low

oxygen biocrude using a process they call Biomass Fluid Catalytic Cracking (BFCC). BFCC uses a catalyst developed by KiOR in a process similar to Fl uid Catalytic Cracking currently used in the petroleum industry. The first stage of this process produces a renewable crude oil with an oxygen content of approximately 10%. This bio

- crude is then upgraded to produce primarily gasoline, diesel, and jet fu el as well as a small quantity of fuel oil, all of which are nearly identical to those produced from petroleum.

KiOR’s first commercial

- scale facility is located in Columbus, Mississippi and is capable of producing approximately 11 million gallons of ga soline, diesel, and jet fuel per year. Construction on this facility began in May 2011. KiOR expects production of cellulosic biofuel from this facility in the 2 nd half of 2012. This facility is funded, in large part, with funds from KiOR’s $150 million IPO in June 2011. They expect to be producing biofuel at a rate consistent with the capacity of the Columbus facility by the end of 2012. KiOR has feedstock supply agreements in place to supply all of the required feedstock for their Columbus facility w ith slash and pre

- commercial thinning. They also have off

- take agreements with several companies for all of the fuel that will be produced. KiOR has also announced plans to begin work on their second

commercial

- scale biofuel production facility in Natche z, Mississippi upon the successful start

- up of their first facility. It is unlikely this second facility will begin production of biofuel in 2013.*** E.O. 12866 Review

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Page 23 of 89 For 2013 our proposed production projection is for 11 million gallons (18 million ethanol

equivalent gallon s) of cellulosic biofuel from KiOR’s Columbus facility.

KL Energy

KL Energy has developed a process to convert cellulose and hemicellulose into sugars and ethanol using a combined chemical/thermal

- mechanical pretreatment process followed by enzymatic hyd rolysis, co

- fermentation of C5 and C6 sugars, and distillation to fuel

- grade ethanol. This production process is versatile enough to allow for a wide variety of cellulosic feedstocks to be used, including woody biomass and herbaceous biomass such as sugar cane bagasse. In August 2010 KL Energy announced a joint development agreement with Petrobras America Inc. As part of the agreement Petrobras has invested $11 million to modify KL Energy’s 1.5 million gallons per year demonstration facility in Upton, Wyo ming to allow it to process bagasse and other biomass feedstocks. The modifications to KL Energy’s facility were completed in the spring of 2011. KL Energy is currently producing small volumes of cellulosic ethanol from a bagasse feedstock at this facili ty and plans to continue to do so throughout 2012 and into 2013. The main purpose of the Upton, Wyoming facility is to further refine KL Energy’s technology in preparation for their first commercial facilities which may be located in

the Brazil or the Uni ted States. Cellulosic ethanol production from KL Energy in 2013 has been included as a contributor to the one million gallons from various pilot plants and demonstration

facilities.

ZeaChem

ZeaChem successfully completed construction of the core compon ents of their

demonstration

- scale facility in Boardman, Oregon, in January 2012, allowing for the production of ethyl acetate from sugars derived from cellulose and hemi

- cellulose. When fully operational, ZeaChem expects this facility will be capable of p roducing 250,000 gallons of cellulosic ethanol per year. ZeaChem’s production process uses a combination of biochemical and thermochemical technologies to produce ethanol and other renewable chemicals from cellulosic materials. The

feedstock is first frac tionated into two separate streams, one containing sugars derived from cellulose and hemicellulose and the other containing lignin. The sugars are fermented into an intermediate chemical, acetic acid, using a naturally occurring acetogen. The acetic acid is then converted into ethyl acetate, which can then be hydrogenated into ethanol. The hydrogen necessary for this process is produced by gasifying the lignin stream from the cellulosic biomass. Construction is currently underway to add the front

- end op erations, the conversion of cellulosic biomass to sugars, and the back

- end process, the upgrading of the chemicals produced to transportation fuel, to the existing core facility. ZeaChem plans to begin the production of

ethanol from cellulosic biomass at this facility by the end of 2012. Work is currently underway to add additional process modules that will enable ZeaChem to convert the cellulosic ethanol to jet and diesel fuel beginning in 2013.

ZeaChem’s process is flexible and is capable of producing a wide range of renewable chemicals and fuels from many different feedstocks. They plan to use both agricultural residues and wood waste at their demonstration facility and have contracts in place for these feedstocks, as well as purpose

- grown wood, at t heir first commercial

- scale facility. In January 2012*** E.O. 12866 Review

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Page 24 of 89 ZeaChem announced that they had received a $232.5 million conditional loan guarantee offer

from USDA for the construction of their first commercial

- scale facility, which will have a capacity of at leas t 25 million gallons per year. ZeaChem currently has agreements in place to provide all of the necessary feedstock for this facility. This facility, however, is not expected to begin producing cellulosic biofuel until late 2014 at the earliest. ZeaChem’ s only cellulosic biofuel production in 2013, therefore, will be from their demonstration

- scale facility and has been included as a contributor to the one million gallons we are proposing for 2013 from various pilot and demonstration

- scale facilities.

2. Facilities not Included in 2012 Projections

In addition to the facilities that were included in our cellulosic biofuel volume projections for the 2012 compliance year, there are two additional facilities that we believe will produce

volumes in 2013. These facilities are owned by Abengoa and Poet.

Abengoa

Abengoa, a large international biofuels company, is one of two new cellulosic biofuels producers expected to begin the production of cellulosic biofuels and RINs from a commercial

scale facility in 2013. Abengoa plans to use an enzymatic hydrolysis technology to convert corn stover and other agricultural waste feedstocks into ethanol. After successfully testing and refining their technology at a pilot

- scale facility in York, Nebraska as well as in a demonstration

scale facility in Salamanca, Spain, Abengoa is now working towards the completion of their first

commercial

- scale cellulosic ethanol facility in Hugoton, Kansas. Abengoa has contracts in place to provide the majority of feedstocks necessar y for this facility for the next 10 years and successfully completed their first biomass harvest in the fall of 2011. Construction at this facility, which began in September 2011, is expected to take 24 months and be completed in the fourth quarter of 201 3. All of the major process equipment for this project has been purchased and all of the required permits for construction have been approved. Abengoa’s Hugoton facility is being partially funded by a $132 million Department of Energy (DOE) loan guarante e.

When completed, the Hugoton plant will be capable of processing 700 dry tons of corn stover per day, with an expected annual ethanol production capacity of approximately 26 million gallons. Abengoa plans to begin ramping up production at the facility shortly after completing construction in late 2013 and to be producing fuel at rates near the nameplate capacity by the end of the year. After successfully proving their technology at commercial

- scale in Hugoton, Abengoa currently plans to construct addit ional similar cellulosic ethanol production facilities, either on greenfield sites or co

- locating these new facilities with their currently existing starch ethanol facilities around the United States. We propose that for 2013 cellulosic ethanol production from Abengoa’s Hugoton facility could be as much as 4 million gallons.

Poet

Poet has also developed an enzymatic hydrolysis process to convert cellulosic biomass into ethanol. Poet has been investing in the development of cellulosic ethanol technolog y for*** E.O. 12866 Review

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Page 25 of 89 more than a decade and began producing small volumes of cellulosic ethanol at pilot

- scale at their plant in Scotland, SD in late 2008. In January 2012, Poet formed a joint venture with Royal

DSM of the Netherlands called Poet

- DSM Advanced Biofuels t o commercialize and license their cellulosic ethanol technology.

The joint venture’s first commercial

- scale facility, called Project LIBERTY, will be located in Emmetsburg, Iowa. This facility is designed to process 770 dry tons of corn cobs, leaves, h usks, and some stalk per day into cellulosic ethanol. The facility is projected to have an annual production capacity beginning at approximately 20 million gallons per year, increasing over time to 25 million gallons per year. In anticipation of the sta rt

- up of this facility, Poet

constructed a 22

- acre biomass storage facility and had its first commercial harvest in 2010, collecting 56,000 tons of biomass.

Site prep work for Project LIBERTY began in the summer of 2011, and vertical

construction of the facility is scheduled to begin in the spring of 2012. Poet was awarded a $105 million loan guarantee offer for this project from DOE in July 2011, but with the joint venture decided to proceed without the loan guarantee. This project is expected to be c ompleted and produce commercial volumes of cellulosic ethanol in the second half of 2013. For 2013 we project that Project LIBERTY will produce up to 1 million gallons of cellulosic ethanol. After the completion of Project LIBERTY, Poet plans to build ce llulosic ethanol facilities at all of their existing corn ethanol plants. They are also planning to license their technology for use at other grain ethanol plants, as well as build additional plants that will process wheat straw, rice hulls, woody biomass or herbaceous energy crops. By 2022 Poet has a goal of producing 3.5 billion gallons of cellulosic ethanol per year.

Other companies

There are several more companies planning to begin producing cellulosic biofuel from

commercial

- scale facilities in 201 4. Companies such as BP, Coskata, DuPont, Enerkem, and several others are all currently targeting 2014 for the start

- up of their first commercial facilities. These facilities represent approximately 100 million gallons of additional cellulosic biofuel

pr oduction capacity. As with the companies discussed above, most of these companies have already begun to develop plans for their successive facilities after the successful completion of their initial projects. While they will not contribute any volume in 2013, and have therefore not been included in our proposed volume, they are a further indication of the potential for the significant growth of the cellulosic biofuel industry in the United States in the near future.

3. Other Potential Sources of Domest ic Cellulosic Biofuel

Each of the companies listed in the previous two sections is planning to generate cellulosic biofuel RINs using one of the valid RIN

- generating pathways listed in Table 1 to §80.1426. We are also aware of several companies who may be in a position to produce cellulosic biofuel in 2013 but intend to use a production pathway that is not currently approved for RIN generation. Three pathways that are currently under evaluation by EPA include the following:*** E.O. 12866 Review

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Page 26 of 89 • Compressed natural gas (C NG) derived from biogas, where the biogas is produced from the cellulosic portion of MSW

• Cellulosic ethanol produced from corn kernel fiber

• Fuel oil produced from woody biomass

If these or other cellulosic biofuel pathways are approved by EPA, they ma y be used to generate cellulosic biofuel RINs in 2013. Because a final determination on these pathways has not been made, however, no volume of cellulosic fuel from these pathways has been included in our proposed 2013 cellulosic biofuel projection. The status of these pathways will be reevaluated at the time of the final rule and volumes from these pathways may be included in our final projection if appropriate.

4. Imports of Cellulosic Biofuel

While domestically produced cellulosic biofuels are the most likely source of cellulosic biofuel available in the United States in 2013, imports of cellulosic biofuel produced in other countries may also generate RINs and participate in the RFS program. While the RFS 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 biofuel has resulted in no cellulosic biofuel being imported

to th e United States thus far. We believe this situation is likely to continue in the near future and has not included any cellulosic biofuel imports in our projections of available volume in 2013.

As in the United States, the production of cellulosic biofu els internationally is currently

limited to small

- scale research and development, pilot, and demonstration facilities. This is likely to continue to be the case throughout 2013. Two notable exceptions are facilities currently being built by Chemtex and E nerkem. Chemtex is planning to complete construction of their

first commercial

- scale facility located in Crescentino, Italy in the summer of 2012. When completed, this facility will be capable of producing approximately 12 million gallons of

cellulosic e thanol per year. Chemtex uses an enzymatic hydrolysis process to produce ethanol from local agricultural residues and herbaceous energy crops.

Enerkem is also in the process of building their first commercial

- scale facility in Edmonton, Alberta and pla ns to begin operations in early 2013. Enerkem’s facility will use a thermochemical process to produce syngas from MSW and then catalytically convert the syngas to methanol. The methanol can then be sold directly or upgraded to ethanol or other chemical

p roducts. At full capacity this facility will be capable of producing 10 million gallons of cellulosic ethanol per year. Neither Chemtex nor Enerkem, however, have plans to import

cellulosic biofuel into the United States from their first commercial

- scale facilities. Both are planning to locate additional plants in the United States in the future and are likely to generate RINs for production from domestic facilities in future years.*** E.O. 12866 Review

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Page 27 of 89 5. Summary of Volume Projections

The information we have gathered on the potential cellulosic biofuel producers in 2013, described above, allows us to project volumes that are reasonably likely to be produced by each facility in 2013. For the purposes of this proposed rulemaking we have focused on commercial

scale cellulo sic biofuel production facilities. In 2013 we expect cellulosic biofuel production

from five commercial

- scale facilities. Each of these facilities is discussed above, and the facility production targets for each are summarized in Table II.C.5

- 1 below. W e believe our focus on

commercial

- scale facilities is appropriate as the industry transitions from small

- scale R&D and pilot facilities to large

- scale commercial production. It is likely that several small

- scale facilities such as API, KL Energy, ZeaChem, and others will also produce some cellulosic biofuel in 2013. The volume of fuel produced by each individual facility, however, is expected to small, especially in relation to that from the five facilities listed in Table II.C.5

- 1 below. A combined

volu me of one million gallons from the various pilot and demonstration

- scale facilities in 2013 has been included in this proposal.

When added together, the total projected production volume from commercial

- scale production facilities in the United States in 2013 is 26 million gallons (33 million ethanol

equivalent gallons). This number represents the expected fuel production from each facility, taking into account the potential for project delays, difficulty in start

- up, and the various other

factors discus sed above. As such, we believe it is an appropriate number for the projected available volume in 2013 for this proposal.*** E.O. 12866 Review

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Page 28 of 89 Table II.C.5

- 1 Potentially Available Cellulosic Biofuel for 2013

Company

Name Location Feedstock Fuel Capacity (MGY) Production

Start

- Up 2013 Potentially

Available Volume (MG) Ethanol

Equivalent Gallons (MG) Abengoa Hugoton, KS Corn Stover Ethanol 26 3 rd Quarter 2013 4 4 Fiberight Blairstown, IA MSW Ethanol 3.8 1 st Half 2013 1 1

INEOS Bio Vero Beach, FL Vegetative Waste Ethanol 8.0 2 nd Quarter 2012 8 8

KiOR Columbus, MS Wood Waste Gasoline

and Diesel 11 2 nd Half 2012 11 18

Poet

- DSM Emmetsburg, IA Corn Stover Ethanol 25 2 nd Half 2013 1 1

Various

Pilot/ Demo

Plants N/A N/A N/A N/A N/A 1 1

Total 73.8 26 33*** E.O. 12866 Review

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Page 29 of 89 D. Proposed Cellulosic Biofuel Volume for 2013

In today’s NPRM we are proposing a volume for the 2013 cellulosic biofuel standard that is based on production targets developed in consultation with the five companies we expect to produce cellulosic biofuel from commercial

- scale facilities in 2013. Many factors have been taken into consideration in developing these production targets, such as the current status of project funding, the status of the productio n facility, anticipated construction timelines, the anticipated start

- up date and ramp

- up schedule, feedstock supply and many others. We believe the sum of these individual production targets (33 million ethanol

- equivalent gallons) is a reasonable represe ntation of likely production at these. Moreover, all of the companies included in our 2013 volume projections have invested a significant amount of time and resources developing their technologies at R&D and demonstration

- scale facilities prior to the des ign and

construction of their first commercial

- scale facilities. The projects have solid financial backing, and in the case of Abengoa, Fiberight, and INOES Bio are backed by federal loan guarantees. By the time of our final rule the facilities owned by KiOR and INEOS Bio are scheduled to have already begun fuel production. These two facilities make up a significant majority of the cellulosic biofuel in our 2013 projection, and their progress towards meeting their production goals will be an important pi ece of information as we consider the appropriate level of the

cellulosic biofuel standard to finalize.

It is important to note that the final cellulosic biofuel standard for 2013 may be set at a volume that differs from the proposed volume. This could h appen for a variety of reasons, including unexpected project modifications or cancellations or the inclusion of volumes of cellulosic biofuel from sources other than those listed above. For example, the proposed projected available volume of cellulosic bi ofuel in 2013 discussed above (33 million ethanol

equivalent gallons) does not include potential contributions from cellulosic biofuel produced from corn fiber, renewable heating oil, or landfill biogas that is converted to transportation fuel. Together, these pathways could generate several tens of millions of gallons of ethanol

- equivalent renewable fuel. However, since they are currently undergoing an evaluation to determine whether they are valid for the generation of cellulosic RINs, we have not inclu ded their volumes in our 2013 projection in this NPRM. If any of these pathways are approved, additional volume from these sources may be added to the target production volumes listed in Table II.C.5

- 1 for the

final rule.

We will continue to monitor the progress of the cellulosic biofuel industry, in particular the progress of the companies which form the basis of our 2013 volume projection. As time progresses and we are able to track whether or not the cellulosic biofuels producers are able to

meet the construction and ramp

- up schedules they have presented, as we consider public comments on this proposal, and as we consider the EIA estimated 2013 volume of cellulosic biofuel production that they are required to provide to us by October 31 of this year, we will have a clearer idea of the appropriate volume of fuel that we can reasonably expect to be produced and made commercially available in 2013.*** E.O. 12866 Review

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Page 30 of 89 III. Assessment of Advanced Biofuel and Total Renewable Fuel for 2013

As described in Sec tion I, 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). For 2013, the applicable volume of advanced biofuel is 2.75 bill gal and the applicable volume of

tot al renewable fuel is 16.55 bill gal. However, the statute gives EPA the discretion to reduce one or both of these volume requirements in the event that the cellulosic biofuel volume requirement is reduced. This section discusses our evaluation of these t wo volume requirements.

A. Statutory Requirements

According to CAA 211(o)(7)(D)(i), if EPA determines that the projected volume of cellulosic biofuel production for the following year is less than the applicable volume provided in the statute, then EP A must reduce the applicable volume of cellulosic biofuel to the projected volume available during that calendar year. Under such circumstances, EPA also has the discretion to reduce the applicable volumes of advanced biofuel and total renewable fuel by a n amount not to exceed the reduction in cellulosic biofuel.

Since cellulosic biofuel is also used to satisfy the advanced biofuel standard and the total renewable fuel standard, any reductions in the applicable volume of cellulosic biofuel will also

af fect the means through which obligated parties comply with these two other standards. Congress presumably established the volume requirements for advanced biofuel and total renewable fuel under the assumption that the specified cellulosic biofuel volumes would be produced and thus available to help meet these two standards. It is therefore logical to consider a possible reduction in the advanced biofuel and total renewable fuel applicable volumes when EPA reduces the cellulosic biofuel volume below the ap plicable volume for cellulosic biofuel set

forth in the statute.

In 2013 the applicable volume of cellulosic biofuel specified in the statute represents more than a third of the advanced biofuel volume (1.0 bill gal out of 2.75 bill gal), a higher

frac tion than in any previous year. A substantial reduction in the applicable volume of cellulosic biofuel could potentially also have a substantial impact on the sufficiency of volumes to meet the

advanced biofuel and total renewable fuel standards. As desc ribed in Section II.D above, we are indeed proposing a projected available volume of cellulosic biofuel for 2013 at significantly below the statutory applicable volume of 1.0 billion gallons. If we were to finalize a cellulosic biofuel applicable volume o f 33 mill gallons for 2013, we would have the discretion to reduce the advanced biofuel and total renewable fuel applicable volumes by up to 967 mill gallons (ethanol

- equivalent). Therefore, we believe that an investigation into the need for a reduction i n the applicable volumes of advanced biofuel and/or total renewable fuel is warranted.

The statute does not provide any criteria that must be met or factors that must be considered when making a determination as to whether and to what degree to reduce th e advanced biofuel and/or total renewable fuel applicable volumes when we have the discretion under CAA 211(o)(7)(D)(i) to do so. However, in general we believe that it would not be consistent with the energy security and greenhouse gas reduction goals of the statute to reduce*** E.O. 12866 Review

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Page 31 of 89 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. And, if we do not lower the advanced biofuel standard, then our reduction of cellulosic biofuel applicable volume has no impact on the amount of non

advanced biofuel that could be used in attaining the total renewable fuel standard set forth in the

Act. Therefore, we believe as a general matter that, when we do not exercise our discretion to lower the applicable volume of advanced biofuel under CAA 211(o)(7)(D)(i), our action in reducing the cellulosic biofuel applicable volume should not in itself justif y a modification of the total renewable fuel applicable volume.

B. Assessment of Available Volumes of Advanced Biofuel

Renewable fuels that can be used to meet the standard for advanced biofuel include those with Renewable Identification Number (RIN) codes of 3, 4, 5, or 7. Table III.B

- 1 shows the number of each of these types of RIN that was generated in 2011.

Table III.B

- 1 2011 RINs That Qualified to Meet the Advanced Biofuel Standard 9

(million ethanol

- equivalent gallons)

D

code Category Ethanol Biodiesel Renewable

diesel Biogas and

heating oil

3 Cellulosic biofuel 0 0 0 0

4 Biomass

- based

diesel 0 1,600 76 0

5 Advanced biofuel 186 0 27 8

7 Cellulosic diesel 0 0 0 0

Total 1,895

The total of 1,895 mill ethanol

- equivalent gallons is significantly higher than the 1,350 mill gal required in 2011 and nearly as high as the 2012 advanced biofuel requirement of 2,000 mill gal. This result supports our projection in the rulemaking setting the 2012 standards 10 that there was

no need to reduce the 2012 advanced biofuel requirement despite the significant reduction in the applicable volume of cellulosic biofuel.

The statutory volume requirement for advanced biofuel in 2013 is 2,750 mill gal, an increase of 750 mill gal over the 2012 requiremen t of 2,000 mill gal. In order to determine the sufficiency of advanced biofuel volumes to meet a requirement for 2,750 mill gal in 2013, we

first accounted for biomass

- based diesel and cellulosic biofuels that would be required under the

standards we are proposing today. As shown in Table III.B

- 2, the result is that there would need

to be about 800 mill ethanol

- equivalent gallons of other advanced biofuels in order to meet the total advanced biofuel requirement of 2,750 mill gal.

9 2011 data from the EPA

- Moderated Transaction System (EMTS)

10 77 FR 1320, published on January 9, 2012*** E.O. 12866 Review

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Page 32 of 89 Table III.B

- 2 Necessary Volume of Advanced Biofuel (mill gal ethanol

- equivalent) 2013 Advanced biofuel applicable volume 2,750 Cellulosic biofuel requirement 33

Biomass

- based diesel requirement 1,920 a
Necessary volume of excess biodiesel, other domestic advanced biofuels, and/or imported sugarcane ethanol 797

a In 2011, a substantial majority of biomass

- based diesel was biodiesel. Moreover, we expect further increases in biomass

- based diesel to be met primarily with expanded biodiesel. Therefore, for this analysis we ha ve assumed that the 1.28 bill gal requirement is composed entirely of biodiesel with an equivalence value of 1.5.

We have identified a variety of sources of advanced biofuel that could meet the need for about 800 mill gal of additional advanced biofuel, including the following:

• Biodiesel in excess of that required to meet the volume requirement of 1.28 bill gal

• Imported sugarcane ethanol

• Domestically produce advanced biofuels such as renewable diesel, heating oil, and ethanol from separated food wa stes

We have investigated each of these sources as discussed below.

1. Biodiesel

In a separate action, we are finalizing a biomass

- based diesel volume of 1.28 bill gal for 2013. However, we believe that biomass

- based diesel volumes above 1.28 bill gal are possible.

Insofar as other sources of advanced biofuel fall short of what is needed to meet the advanced biofuel volume requirement, the biodiesel industry has the potential to fill much if not all of the gap. As of February 2012, the aggregate p roduction capacity of biodiesel plants in the U.S. is estimated to be 2.5 billion gallons per year across 191 facilities. 11 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. 12
Thus, restarting idled plants is likely to be a cost

- effective way of exceeding the applicable volumes of 1.28 bill gal in 2013 if a demand for such production exists.

Moreover, the biodiesel industry has demonstrated that it can increase production quickly under appropriate circumstances. Total production of biomass

- based diesel in 2011 exceeded 1.0 bill gal, compared to a 2010 production of about 380 mill gallons. 13 In response to the NPRM

11 Figures taken from National Biodiesel Board's Member Plant List as of February 7, 2012.

12 Based on construction time s for new plants listed in Biodiesel Magazine from July 2006 through May 2009.

13 All values from EMTS. 2010 estimate consists of approximately 209 mill gallons as recorded through EMTS for volume produced under the RFS2 regulations in July through Decembe r of 2010, and approximately 171 mill*** E.O. 12866 Review

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Page 33 of 89 published on July 1, 2011, some stakeholders expressed doubts that such increases could occur by 2012. 14 Nevertheless, based on the single

- year increase of more than 600 mill gal in 2011 and the total capacity of existing plants described abov e, we believe it is reasonable that the industry could achieve increases in production of both the 280 mill gallon increment that is reflected in

the biomass

- based diesel requirement for 2013 and an additional "excess" production of several

hundred million gallons or more.

2. Imported Sugarcane Ethanol

From the supply perspective, recent production of sugarcane in Brazil has been lower than normally expected due to two factors. First, adverse weather conditions have reduced production. 15 Since the ad verse weather conditions are estimated to have reduced cane production by about 4%, a return to normal weather conditions should alone restore approximately 4% of production. Second, the general economic downturn made credit harder to get, delaying the re planting of existing fields. Normally sugarcane fields are replanted every five or six years to maximize yield. However, the lack of available credit caused some growers to delay the expense of this replanting, with the older fields losing production. 16 Nevertheless, in 2011 Brazil exported around 520 million gallons of which approximately 173 million gallons were shipped to the U.S.

The outlook for 2012 and future years suggests a more typical trend in sugarcane ethanol with replanted fields beginning to boost sugarcane production in existing plantations and, in response to increased worldwide demand, a growth in the acres planted with sugarcane. UNICA, a trade association for the sugarcane ethanol industry in Brazil, projects that over the next four years, the return to a normal replanting schedule combined with normal weather conditions will boost production by 30%. They project that by 2015/2016, ethanol production in Brazil will exceed 12 billion gallons of which over 3 billion gallons could be av ailable for export. Even assuming only modest increases in 2012 production due to the need to replant fields, using the UNICA projection for 2015/2016 and assuming a linear increase in export volumes from 2012 to 2016, 2013 sugarcane ethanol export volume s could easily double to over 1 billion gallons in 2013. Increased production is supported by the Brazilian government which announced in February 2012 support for a plan to invest over $8 billion annually to boost cane and ethanol production. 17 Private i nvestment in Brazil is also increasing. For example, Usina de Acucar

gallons as recorded through RIN generation reports submitted by producers for volume produced under the RFS1 regulations in January through June of 2010.

14 See comments in docket EPA

- HQ

- OAR

- 2010

- 0133 from the American Petroleum Institute, Marathon Petroleum Company, and the National Petrochemical Refiners Association.

15 Gain Report BR110016, October 3, 2011, USDA Agricultural Service. See http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Sugar%20Semi

annual_Sao%20Paulo%20ATO_Brazil_10

- 3

- 2011.pdf

16 On the margin, the high sugar prices may have also encouraged some growers to divert their cr op from ethanol production to sugar production. But most cane growers do not have this flexibility with sugarcane mills designed for fixed amounts of refined sugar or ethanol so high sugar prices was likely a contributing factor but not a major

cause of r educed sugarcane ethanol production in Brazil.

17 See http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/8987702*** E.O. 12866 Review

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Page 34 of 89 Santa Terezinha, a Brazilian ethanol producer, recently announced plans to invest almost $300 million in a new mill and sugarcane plantation. 18

Brazil’s sugarcane ethanol production serves both its domestic market as well as the export market. The government of Brazil sets a minimum ethanol concentration for its gasoline. In 2011, the Brazilian government lowered this concentration to 20%, reflecting the decrease in domestic product ion. Projecting this Brazilian domestic demand into the future can be uncertain since the government can reset the minimum ethanol content at any time; in the past this adjustment has largely been influenced by the price of ethanol (high prices leading to a reduction in the minimum percent). However, these historical changes have typically varied by a few percent and have only occurred periodically. Assuming continued tight supplies of sugarcane ethanol, we would not expect a near

- term increase in the minimum concentration of ethanol in gasoline in Brazil and no significant change in demand for ethanol within Brazil over the next couple of years.

Aside from production capability and domestic demand within Brazil, market conditions generally determine the availability of sugarcane ethanol imported into the U.S. from Brazil. Approved as an advanced biofuel pathway, ethanol produced from sugarcane benefits from the RIN value associated with advanced biofuel but also has to compete with other sources of ethanol used for blending with gasoline, most notably ethanol made from corn starch (which does not qualify as an advanced biofuel). However, the expiration of the tariff applicable to imported ethanol has also helped make imported sugarcane ethanol more cost competitive.

As a result of this investigation, we have concluded that there are no definite barriers to the importation of sugarcane ethanol up to the volumes required (considering the availability of other advanced biofuels) to meet an advanced biofuel requirement of 2.75 bill gal.

3. Domestic Production of Other Advanced Biofuel

Pathways that have been approved for the generation of RINs are provided in the regulations in Table 1 to §80.1426. Apart from ethanol made from sugarcane which is permitted

to gene rate advanced biofuel RINs, there are currently three pathways through which advanced biofuel RINs can be generated. These three are shown in Table III.B.3

- 1.

18 See http://www.bloomberg.com/news/2012

- 03

- 08/santa

- terezinha

- invests

- 283

- million

- in

- brazil

- ethanol

projects.html*** E.O. 12866 Review

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Page 35 of 89 Table III.B.3

- 1 Pathways for Advanced Biofuel Fuel type Feedstock Production process requiremen ts

Biodiesel,

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 Includes only processes that

co

- process renewable biomass and petroleum
Ethanol, renewable diesel, jet fuel, heating oil, and naphtha The non

- cellulosic portions of

separated food waste Any

Biogas Landfills, sewage waste treatment

plants, manure digesters Any

In addition to producers of biomass

- based diesel and cellulosic biofuel, there are many companies either producing or developing technologies to produce "other advanced biofuels." In order to estimate the volumes of other advanced biofuels that could be produced by these companies in 2013, we inv estigated three sources of data:

Production Outlook Reports . Required under §80.1449 for all registered producers, these reports contain projections of renewable fuel production for each of the next five years. 19

2011 producers . Data from the EPA

- Modera ted Transaction System (EMTS) was reviewed to identify parties that produced some RIN

- generating advanced biofuel in 2011. Insofar as such parties did not provide a projected 2013 volume in a Production Outlook Report, they were contacted to update their 2013 projected production volume.

Additional registered producers . We identified parties that were registered as producers of advanced biofuel under the RFS program, but neither produced RIN

- generating volume in 2011 nor provided a projection of 2013 pro duction volume in a Production Outlook Report. We contacted such parties to determine what, if any, volume could be expected in 2013.

Based on these investigations, we identified twenty domestic companies that are expected to produce some other advanced biofuel in 2013. The total projected production volume for these companies in 2013 is about 115 mill actual gallons, or 150 million ethanol

- equivalent gallons, as

shown in Table III.B.3

- 2.

19 While the individual reports have not been published since they include company

- specific information that could impact the competitive nature of the industry, we are providing aggregate results in this NPRM.*** E.O. 12866 Review

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Page 36 of 89 Table III.B.3

- 2 Projected Domestic Production of Other Advanced B iofuel in 2013

(million ethanol

- equivalent gallons)

Ethanol Renewable

diesel Heating oil CNG Total

Production Outlook Reports 31 35 4 0 70

2011 producers 18 18 0 5 41 Other registered producers 0 15 15 9 39

Total 49 68 19 14 150

A projected volume of 150 mill ethanol

- equivalent gallons of other advanced biofuel in 2013 is also consistent with a 2011 report released by E2/Environmental Entrepreneurs 20 which estimated that the production capacity of domestic advanced biofuels in 2012 would be ab out 180 mill gal.

We are also currently investigating a variety of other potential RIN

- generating pathways for advanced biofuel that could result in additional volumes in 2013. In addition to potential new pathways for cellulosic biofuel that would also count as advanced biofuel as discussed in Section II.D, new pathways for advanced biofuel could include certain butanol processes from corn and certain ethanol processes from sorghum. We have not yet determined, either through rulemaking or approval of a n industry petition, whether the pathways are valid for the generation for advanced biofuel RINs. However, approval of such advanced biofuel pathways could potentially

result in 200 million additional ethanol

- equivalent gallons of advanced biofuel being q ualified to participate in the RFS program. Insofar as any of these pathways are approved in time to be used in 2013, we may include projected volumes for them as we prepare the final rulemaking setting

standards for 2013.

C. Proposed Volume Requirement s for Advanced Biofuel and Total Renewable Fuel

in 2013

As shown in Table III.B

- 2, in order for an advanced biofuel requirement of 2.75 bill gal to be met, there would need to be about 800 mill gal of advanced biofuels in addition to the volumes that would need to be produced to meet the biomass

- based diesel an d cellulosic biofuel requirements. After reviewing the projected availability of advanced biofuel volumes from various sources, we have determined that there will be more than sufficient volumes available to produce or import this 800 mill gal. Given our estimate of about 150 mill gal of domestic "other" advanced biofuel, the remaining volume of about 650 mill gal would likely need to come from imported sugarcane ethanol and/or biodiesel in excess of 1.28 bill gal. As discussed above,

we believe that thi s volume is achievable through a combination of these sources or potentially even through one of these individual sources. Therefore, we believe that there is no reason to

20 Solecki, Mary et al, "Advanced Biofuel Market Report 2011, Meeting the California LCFS" August 22, 2011. E2/Environmental Entrepreneurs.*** E.O. 12866 Review

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Page 37 of 89 reduce the required volume of 2.75 bill gal advanced biofuel on the basis of availa ble volumes. As noted above, maintaining the 2.75 bill gal advanced biofuel volume set forth in the statute will result in the GHG emissions and energy security objectives that Congress envisioned in enacting this provision. We are not aware of any reaso ns why it should choose to forgo these benefits when they are physically achievable but we invite comment on this issue.

We also expect that there will be sufficient volumes of corn ethanol to meet the need for 13.8 bill gallons of conventional renewable fuel since domestic production of corn ethanol

reached this level in 2011. 21 Moreover, corn ethanol production capacity continues to increase. Since we are not proposing to lower the advanced biofuel standard for 2013, and the need for 13.8 bill gallons of conventional renewable fuel can be met, we are not proposing to lower the applicable volume of total renewable fuel below 16.55 bill gal.

21 EIA Monthly Energy Review, February 2012, Table 10.3.*** E.O. 12866 Review

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Page 38 of 89 IV. Proposed Percentage Standards for 2013

A. Backgro und

The renewable fuel standards are expressed as volume percentages and are used by each refiner, blender, or importer to determine their renewable volume obligations (RVO). Since there are four separate standards under the RFS2 program, there are lik ewise 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 every obligated party meets the percentages, then the am ount of renewable fuel, cellulosic biofuel, biomass

- based diesel, and advanced biofuel used will meet the volumes required on a nationwide basis.

As discussed in Section II.D, we are proposing a required volume of cellulosic biofuel for

2013 of 26 mill ion gallons (33 million ethanol

- equivalent gallons). The volume we select for the final rule will be used as the basis for setting the percentage standard for cellulosic biofuel for 2013. We are also proposing that the advanced biofuel and total renewabl e fuel volumes would not be reduced below the applicable volumes specified in the statute. The biomass

- based diesel volume for 2013 has been established at 1.28 billion gallons through a separate rulemaking. The volumes used to determine the four propos ed percentage standards are shown in Table IV.A

- 1.

Table IV.A

- 1 Proposed Volumes for Use in Setting the Applicable Percentage Standards for 2013 a

Cellulosic biofuel 33 mill gal

Biomass

- based diesel 1.28 bill gal

Advanced biofuel 2.75 bill gal

Renewable fuel 16.55 bill gal

a Due to the manner in which the percentage standards are calculated, all volumes are given in terms of ethanol

equivalent except for biomass

- based diesel which is given in terms of physical volume

As with previous years’ renewable fuels standards determination, the formulas used in deriving the annual standards are based in part on estimates of the volumes of gasoline and diesel fuel, for both highway and nonroad uses, that are projected to be used in the year in which the standards will apply. Producers of other transportation fuels, such as natural gas, propane, and electricity from fossil fuels, are not subject to the standards, and volumes of such fuels are not used in calculating the annual standards. Since the stand ards 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.

B. Calculatio n 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 gasoline and diesel (see §80.1405):*** E.O. 12866 Review

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Page 39 of 89 Where

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

Std BBD,i = The biomass

- based diesel standard (ethanol

- equivalent 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 required by section 211(o) of the Clean Air

Act for year i, in gallons.

RFV BBD,i = Annual volume of biomass

- b ased diesel required by section 211(o) of the Clean

Air Act for year i, in gallons.

RFV AB,i = Annual volume of advanced biofuel required by section 211(o) of the Clean Air

Act for year i, in gallons.

RFV RF,i = Annual volume of renewable fuel required b y 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.

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 gasoline that is projected to be consumed

in the 48 contiguous states and Hawaii, in year i, in gallons.*** E.O. 12866 Review

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Page 40 of 89 RD i = Amount of renewable fuel blended into diesel that is projected to be consum ed 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.

R DS i = Amount of renewable fuel blended into diesel 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 = 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. For 2013, this value is zero. See further discussion in

Section IV.B.2 below.

DE i = Amount of diesel projected to be produced by exempt small refin eries and small

refiners in year i, in gallons, in any year they are exempt per §§80.1441 and 80.1442, respectively. For 2013, this value is zero. See further discussion in

Section IV.B.2 below.

The four separate renewable fuel standards for 2013 are b ased on the 49

- state gasoline and diesel consumption volumes projected by EIA. The Act requires EPA to base the standards on an EIA estimate of the amount of gasoline and diesel that will be sold or introduced into commerce for that year. The projected v olumes of gasoline and diesel that will be used to calculate the final 2013 percentage standards will be provided to EPA by EIA by October 31, 2012. To estimate the gasoline and diesel projected volumes for the purposes of this proposal,

we have used EIA' s Short

- Term Energy Outlook (STEO) 22 for the gasoline projection and EIA's Annual Energy Outlook 2012 Early Release 23 for the diesel projection. Gasoline and diesel volumes are adjusted to account for renewable fuel contained in the EIA projections. The

pr ojected volumes of ethanol and biodiesel used to calculate the final percentage standards will be provided to EPA by EIA by October 31, 2012. To estimate the ethanol and biodiesel projected volumes for the purposes of this proposal, we have used the Febru ary 2012 values 24 for ethanol and biodiesel provided in the STEO. Using the most recent available EIA data for purposes of this proposal allows us to provide the affected industries with a reasonable estimate of the standards for planning purposes.

22 Energy Information Administration/Short

- Term Energy Outlook

- February 2012, Table 4a, “U.S. Crude Oil and Liquid Fuels Supply, Consumption, and Inventories.”

23 Energy Information Administration/Annual Energy Outlook 2012, Early Release (January 23, 2012 ), Table 2,

“ Energy Consumption by Sector and Source, United States, Reference case .”

24 Energy Information Administration/Short

- Term Energy Outlook

- February 2012, Table 8, “U.S. Renewable Energy Supply and Consumption (Quadrillion Btu).”*** E.O. 12866 Review

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Page 41 of 89 2. Sm all 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 (those refineries with a crude throughput of no more than 75,000 barrels of crude per day) through December 31, 2010. In our initial rulemaking to implement the new RFS program 25 , we 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 Admi nistration’s (SBA) definition of a small business (1,500 employees or less company

- wide) but did not meet the statutory small refinery definition as noted above. 40 CFR §§ 80.1141, 80.1142. Because EISA did not alter the small refinery exemption in any

w ay, the RFS2 program regulations maintained the exemptions for gasoline and diesel produced by small refineries and small refiners through 2010 (unless the exemption was waived). See 40 CFR §§ 80.1441, 80.1442.

Congress provided two ways that small ref ineries can receive a temporary extension of the exemption beyond 2010. One is based on the results of a study conducted by the Department of Energy (DOE) to determine whether small refineries would face a disproportionate economic hardship under the RFS program. The other is based on EPA determination of disproportionate 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 ec onomic hardship under the RFS program. 26 The conclusions were based in part on the expected robust availability of RINs and EPA’s ability to grant relief on a case

- by

case basis. As a result, beginning in 2011 small refiners and small refineries were req uired to participate in the RFS program as obligated parties, and there was no small refiner/refinery volume adjustment to the 2011 standards as there was for the 2010 standards.

Following the release of DOE's 2009 small refinery study, Congress directe d DOE to complete a reassessment and issue a revised report. In March of 2011 DOE re

- evaluated the impacts of the RFS program on small entities and concluded that some small refineries would suffer a disproportionate hardship. 27 As a result, EPA exempted these refineries from being obligated parties for two additional years, 2011 and 2012. 28 The 2012 standards established in the January 9, 2012, final rulemaking reflected the exemption of these refineries.

EPA may extend the exemption for individual s mall refineries or small refiners on a case

by

- case basis if they demonstrate disproportionate economic hardship. 40 CFR §§ 80.1441(e)(2), 80.1442(h). EPA has granted some exemptions pursuant to this process that apply in 2011 and 2012. However, at this time, no exemptions have been approved for 2013.

25 72 FR 23900, May 1, 2007.

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

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

28 Since the standa rds are applied on an annual basis, the exemptions 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.*** E.O. 12866 Review

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Page 42 of 89 Therefore, for this proposal we have calculated the proposed 2013 standards without a small refinery/small refiner adjustment.

However, if an individual small refinery or small refiner requests an exemption and is approved following the release of this NPRM, the final standards will be adjusted to account for the exempted volumes of gasoline and diesel. Any requests for exemptions that are approved

after the release of the final 2013 RFS standards will not affect the 2013 standards. As stated in the final rule establishing the 2011 standards, “EPA believes the Act is best interpreted to require issuance of a single annual standard in November that is applicable in the following calendar year, there by providing advance notice and certainty to obligated parties regarding their regulatory requirements. 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 undesirable level of uncertainty for obligated parties.” Thus, after the 2013 standards are finalized, any additional exemptions for small refineries or small refiners that are issued will not

affect those 2013 standards.

3. Proposed Standa rds

As specified in the March 26, 2010 RFS2 final rule 29 , the percentage standards are based

on energy

- equivalent gallons of renewable fuel, with the cellulosic biofuel, advanced biofuel, and total renewable fuel standards based on ethanol equivalence and the biomass

- based diesel standard based on biodiesel equivalence. However, all RIN generation is based on ethanol

equivalence. More specifically, the RFS2 regulations 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 1.28 billion physical gallons of biomass

- based diesel will be created in 2013, 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 gallon toward the biomass

- based diesel standard, but worth 1.5 gallons toward the other standards.

The levels of the percentage standards would 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 the 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.

Note that because the gasoline and diesel volumes estimated by EIA include renewable fuel use, we must subtract the total renewable fuel volumes from the total gasoline and diesel

volumes to get total non

- renewable gasoline and diesel volumes. The values of the variables

described above are shown in Table IV.B.3

- 1. 30 Terms not included in this table have a value of

zero.

29 75 FR 14716, March 26, 2010.

30 T o 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 (2010) EIA State Energy Data, Transportation Sector Energy Consumption Estimates. The gasoline and transportation distillate fuel oil fractions are approximately 0.2% and 0.8%, respectively. Ethanol use in Alaska is estimated at 11.2% of its gasoline consumption (based on the same State data), and biodies el use is assumed to be zero.*** E.O. 12866 Review

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Page 43 of 89 Table IV.B.3

- 1 Values for Terms in Calculation of the Standards (bill gal)

Term Value

RFV CB,2013 0.033

RFV BBD,2013 1.28

RFV AB,2013 2.75

RFV RF,2013 16.55

G 2013 132.94

D 2013 46.46

RG 2013 13.91

RD 2013 1.02

Using the volumes shown in Table IV.B.3

- 1, we have calculated the proposed percentage

standards for 2013 as shown in Table IV.B.3

- 2.

Table IV.B.3

- 2 Proposed Percentage Standards for 2013

Cellulosic biofuel 0.020%

Biomass

- based diesel 1.18%

Advanced biofuel 1.69%

Renewable fuel 10.15%*** E.O. 12866 Review

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Page 44 of 89 V. Proposed Volume Requirement for Biomass

- Based Diesel in 2014

In today's action we are proposing an applicable volume of 1.39 billion gallons biomass

based diesel for 2014 in accordance with the statutory requirement in CAA 211(o)(2)(B)(ii) to

establish t he applicable volume of biomass

- based diesel for years after 2012 no later than 14 months before the first year for which the applicable volume will apply. In the course of our investigations, biodiesel was the primary focus since it is expected to be the predominant type 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 appropriate, we have discussed renewable diesel separately from biodiesel.

In proposing the 2014 applicable volume of biomass

- based diesel, we are not at this time proposing the percentage standards that would apply to obligated parties in 2014. Nor will we adopt a final percentage standard when this rule is finalized in the fal l of 2012. Instead, the percentage standards for 2014 will be determined after projections of gasoline and diesel volume are provided by the Energy Information Administration (EIA) in the fall of 2013 and will be announced by November 30, 2013. We are al so not proposing any applicable volumes of

biomass

- based diesel for 2015 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 p ercentage standards must be based, unless the applicable volumes are waived or adjusted by EPA in accordance with specific authority and directives specified in the statute 31 . Applicable volumes are provided in the statute for years through 2022

for cellulosic biofuel, advanced biofuel, and total renewable fuel. For biomass

- based diesel, applicable volumes are provided through 2012. For years after those specified in the statute (i.e.

2013+ for biomass

- based diesel and 2023+ for all others), EPA is required under 211(o)(2)(B)(ii) to determine the applicable volume, 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 on analysis of the following:

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

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

• The expected annual rate of future commercial production of renewable fuels, including advanced biofuels in each category (cellulosic biofuel and biomass

- based diesel);

• The impact of renewable fuels on the infrastructure of the United States, including deliverability of materials, goods, and products other than renewable fuel, and the

31 For example, EPA may waive a given standard in whole or in part following the provisions at CAA 211(o)(7).*** E.O. 12866 Review

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Page 45 of 89 sufficiency of infrastructure to deliver and use renewable fuel;

• The impa ct of the use of renewable fuels on the 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 commodities, 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 statute based on a review of program implementation and analysis of the fact ors listed above, the statute also specifies that the applicable volume of

biomass

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

The statute envisions annual increases in applicable volumes of renewable fuels leading to 36 bill gallons by 2022. In considering potential increases in the applicable volume requirement for biomass

- based diesel, we believe that certain factors that we must consider under the statute are most appropriately analyzed i n the longer term, after the full build

- up of renewable fuel production and use envisioned by the statute are in place. Others factors are more appropriately analyzed for the near term, including production capacity, availability of feedstocks, and impact s on infrastructure. These are factors that could limit the successful implementation of any increment in required applicable volume. We believe that other factors are appropriately considered over a longer term, since full build

- up of the RFS program is expected to generate benefits over many years, and short

- term considerations should not impede attainment of long term goals and benefits. We believe that greenhouse gas emissions are one factor for which taking a long

- term view is appropriate. Finally, certain factors, such as energy security, may be evaluated for both near

- and long

- term benefits. Thus for this NPRM, we have not simply looked at the impacts of the program in any one year with near term implementation,

but have also looked at the evolvi ng pattern of impacts through time where it is appropriate to do

so.

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 applicable volume of biomass

- based diesel for years after 2012 (other than specifying a minimum volume 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. Since the statute is silent on these matters, we believe that EPA, in coordination 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 the factors described above.

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

advanced biofuel o r total renewable fuel above those specified in the statute for years up to and including 2022. Thus, any increase in the biomass

- based diesel volume requirement above the minimum of 1.0 bill gal would not have any impact on the advanced biofuel or total renewable*** E.O. 12866 Review

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Page 46 of 89 fuel volume requirements. While increasing the biomass

- based diesel volume requirement above the 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 and 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 est ablishing the applicable volumes must be finalized no later than 14 months before the first year for which such applicable volume will apply.

B. Factors Considered in Assessing 2014 Biomass

- Based Diesel Volumes

As described in Section V.A, we are re quired to review the implementation of the RFS program for prior years and to use information from this review in determining the applicable

volume of biomass

- based diesel for 2014. Ideally we would have information on the implementation of the program up through 2013 before determining the appropriate biomass

based diesel volume for 2014. However, since we are required to set the applicable volume 14 months in advanced, the most recent information we will have available by the time of the final

rule will be for the implementation of the program in the first half of 2012. For today's NPRM, the most recent information we currently have available is for 2011 and early 2012.

According to data collected through the EPA

- Moderated Transaction System (EMTS) and the National Biodiesel Board, production of biodiesel in 2011 exceeded 1.0 bill gal. 32 This demonstrates that the industry was able to meet and exceed the applicable 2011 volume requirement of 800 mill gal despite producing only half of this volume req uirement in the previous year. It also provides strong evidence that the industry will exceed 1.0 bill gal in 2012 when the applicable volume requirement is 1.0 bill gal, and additional volumes above 1.0 bill gal may be used to help meet the advanced biof uel standard. It also supports our finding, made in a separate rulemaking, that industry can achieve an applicable volume requirement of 1.28 bill gal in 2013. Further discussion of our reasons for finalizing a biomass

- based diesel volume of 1.28 bill ga l for 2013 can be found in the preamble to a separate final rule.

In order to investigate the potential for and impacts of volumes of biomass

- based diesel above 1.28 bill gal in 2014, we considered the volume of 1.39 bill gal that was projected in the

RF S2 final rule. This volume was based primarily on a projection of the qualifying feedstocks that could be available in 2014 and was part of efforts to develop renewable fuel volume scenarios for all years between 2010 and 2022. This biomass

- based diesel volume has already been partially evaluated in the RFS2 final rule. In keeping with the statutory provision regarding

biomass

- based diesel volumes in years after 2012, we considered whether 1.39 bill gal of

biomass

- based diesel was reasonable given likely market demand, availability of feedstocks, production capacity, and potential limitations related to blending and consumption, and also considered the impacts such a volume would have in terms of factors specified in the statute, GHG emissions, energy se curity, costs, impacts to wetlands and wildlife, and others.

32 Fuels and Fuel Additives 2011 EMTS Data, updated on January 27, 2012.*** E.O. 12866 Review

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Page 47 of 89 1. Demand for Biomass

- Based Diesel

The demand for biomass

- based diesel in 2014 will be a function of not only the biomass

based diesel standard, but also the advanced biofuel standard, since the standards under the RFS2 program are nested. The applicable volume of advanced biofuel specified in CAA 211(o)(2)(B)(i) for 2014 is 3.75 bill gal. While we have authority to reduce this advanced biofuel applicable volume if we reduce the cellulosic biofuel volume for 2014, we have assumed for the purposes of this proposed rulemaking that this 3.75 bill gal volume will be used in setting

the 2014 advanced biofuel standard.

To assess the demand for biomass

- based diesel in 2014, we first assumed tha t the

biomass

- based diesel volume requirement would be 1.39 bill gal and that the applicable volume of advanced biofuel would be 3.75 bill gal. After accounting for the required biomass

- based diesel volume (which represents about 2.09 bill gal ethanol

- equ ivalent), there would remain 1.66 bill gal of advanced biofuel that would be needed to meet the applicable volume of 3.75 bill gal. There are a limited number of biofuels that are likely to be available in 2014 to meet the need for 1.66 bill gal advanced biofuel. These include:

• Cellulosic biofuel

• Other domestically produced advanced biofuels, such as co

- processed renewable diesel, butanol, or CNG from landfill gas

• Imported sugarcane ethanol

We expect cellulosic biofuel volumes to fall substantiall y short of the 1.75 bill gal statutory applicable volume requirement for cellulosic biofuel in 2014, and thus these biofuels would only meet a small portion of the 1.66 bill gal of advanced biofuel needed. With regard to other domestically produced other advanced biofuels, we have projected about 150 mill gal for 2013. However, the ongoing investigation of additional RIN

- generating pathways for advanced biofuel

could result in additional volumes from these sources in 2014.

The demand for biomass

- based diesel in 2014 is also a function of the volumes of sugarcane ethanol that could be imported from Brazil. These import volumes are primarily a function of demand generated by RIN prices, and less a function of limitations imposed by

ethanol demand in Bra zil; the minimum legal demand for ethanol in Brazil is currently about 5 bill gal, considerably less than Brazilian production. Based on a comparison of production potential and the minimum legal demand in Brazil, imports into the U.S. of 1.0 bill gal of sugarcane ethanol are possible.

To the degree that limits arise in the volumes of sugarcane ethanol that are imported into the U.S. or other domestically

- produced advanced biofuels, additional biomass

- based diesel

would be needed to ensure the advanced biofuel standard of 3.75 bill gallons could be met. While we are not projecting specific volumes of cellulosic biofuel, imported sugarcane ethanol, and other domestically produced advanced biofuels in today's NPRM, it appears possible that the

advanced b iofuel volume requirement of 3.75 bill gal could drive the production of biodiesel higher than 1.39 bill gal.*** E.O. 12866 Review

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Page 48 of 89 2. Availability of Feedstocks

We do not anticipate any shortfall in biodiesel feedstock under a proposed applicable volume of 1.39 bill gal for biomass

- based diesel in 2014. In a separate action we have addressed feedstock availability under the 2013 requirement of 1.28 bill gal. We have assumed in our analysis of 1.39 bill gal that the additional 110 mill gal will be produced primarily fro m soybean oil, bringing total soybean

- based biodiesel production to 710 mill gal in 2014. We also project that 680 mil gal of biodiesel made from corn oil and waste fats, oils, and greases will enter the market and contribute to the 1.39 bill gal mandate in 2014 (see Table V.B.2

- 1).

Table V.B.2

- 1 Projected Volumes for Feedstock Contributing to the 2014 Biodiesel Mandate

Projected Feedstock Projected Volume (in million gallons)
Waste Fats, Oils, and Greases 380

Corn Oil 300 Soybean Oil 710

Total 1,390

a. Waste Fats, Oils, and Greases

Waste feedstocks such as oils, fats, and greases are not produced for the purpose of biodiesel production. As a result, an increase in the demand for biodiesel would not be expected to generate a corresponding increa se in their supply. Therefore, an increase in the required

volume of biomass

- based diesel from 1.28 bill gal in 2013 to 1.39 bill gal in 2014 is unlikely to cause the supply of these feedstocks to increase.

In our analysis for the 2013 biomass

- based diesel standard, we determined that the U.S. is likely to produce over 800 mill gal of potential waste feedstocks in 2013. There is no reason to believe that 2014 production levels will be lower. However, these potential feedstocks have

alternate uses in the oleochemical industry and others, leading us to conclude that a significant portion of available waste feedstocks will not be used for biodiesel production. Based on our RFS2 final rule analysis, we estimated 380 mill gal of biodiesel to come from wa ste feedstocks in 2013 and we anticipate this same volume of production in 2014.

It is possible that biodiesel production from waste feedstocks could be greater than 380 mill gal in 2014. Demand from alternate uses could decrease. The production of was te feedstocks could also increase for reasons other than demand from the biofuels industry. Further, EPA did not include several potential sources of waste feedstocks, such as edible tallow, lard, and poultry fats, in our 2013 estimate. While these other potential feedstocks have existing markets, it may become economical for them to be used in the production of biomass

- based diesel in 2014. However, these additional sources remain uncertain at best. Because of this, we*** E.O. 12866 Review

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Page 49 of 89 are making the conservative assum ption that they will not contribute to the 2014 biomass

- based

diesel volumes.

b. Corn Oil

Based on our analysis conducted for the 2013 biomass

- based diesel volume requirement of 1.28 bill gal, we expect 300 million gallons of biodiesel to be produced from corn oil in 2014.

Non

- food grade corn oil production may increase in 2014 relative to 2013. However, the installation rate of this technology has to date exceeded what we had anticipated, meaning that this rate may decrease by 2014. Therefore, we a re conservatively estimating the volume of biodiesel produced from corn oil to remain at 300 mill gal in 2014.

As with waste feedstocks, several factors could lead biodiesel production from corn oil to exceed 300 mill gal in 2014. Corn ethanol produce rs may increase their adoption of oil extraction technologies beyond our expectations for 2014. Extraction yields may also increase beyond our projections. Further, our 2013 analysis did not consider any corn oil from fractionation at dry mill plants or from any wet milling processes. Production of corn oil from these sources may also increase the amount available for biodiesel use. However, like additional potential sources of waste feedstocks, these additional sources of corn oil remain uncertain. EP A is therefore making the conservative assumption that they will not contribute to the 2014

biomass

- based diesel volumes.

c. Soybean Oil

The U.S. market for soybean oil biodiesel is significantly more mature than for biodiesel

made from other oilseeds. Because of this, we anticipate that soybeans will remain the primary source of U.S. biodiesel from oilseeds in 2014. It is possible that biodiesel production from other oilseeds with approved pathways, such as canola, could achieve a significan t level of production by 2014. If other oilseeds are able to contribute to the biodiesel volumes, achieving

the biomass

- based diesel mandate would be facilitated. For the purposes of this analysis, EPA is making the conservative assumption that there will be no biodiesel production from other

oilseeds in 2014.

We conclude that there will be sufficient supplies of soybean oil to meet the needs of both increased biodiesel production and other domestic uses in 2014. EPA is projecting that, under the propos ed 1.39 bill gal mandate, a total of 710 mill gal of soybean

- based biodiesel would be produced. This would require 5,361 mill pounds of soybean oil, 7.55 pounds for every gallon of soybean

- based biodiesel.

Table V.B.2

- 2 below lists U.S. Department of A griculture (USDA) historical data and current projections for U.S. supply and use of soybean oil from the 2006/2007 crop year to the 2014/2015 year. Since 2006/2007, domestic use of soybean oil for non

- biodiesel purposes has ranged from 14,134 million pou nds to 15,813 million pounds. USDA projects non

- biodiesel use will stay above 14,000 million lbs through the 2014/2015 year.*** E.O. 12866 Review

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Page 50 of 89 Table V.B.2

- 2 Historical Supplies and Use of Soybean Oil in the U.S. (in million lbs)

Year Starts

October 1 Total

Supplies Domestic

Use for Non

Biodiesel Purposes Available for

Biofuel

Feedstock

Use or Export Historical

Exports Historical

Biofuel

Feedstock

Use

2006/07 23,536 15,813 7,723 1,877 2,762

2007/08 23,730 15,089 8,641 2,911 3,245

2008/09 21,319 14,196 7,123 2,193 2,069

2009/10 22,578 14,134 8,444 3,359 1,680

2010/11 22,452 14,244 8,208 3,233 2,550

2011/12 a 21,215 14,100 7,115 * *

2012/13 a 21,075 14,200 6,875 * *

2013/14 a 21,290 14,400 6,890 * *

2014/15 a 21,565 14,675 6,890 * *

a Projected volumes.

Source: USDA, Agricultural Marketing Service, Oil Crops Outlook , February 10 th , 2012. USDA, Economic Research Service, Agricultural Long

- Term Projections , February 2012.

As shown in this table, USDA projects that 6,890 mill pounds of soybean oil will be available for biofuel feedstock use and/or export in the 2013/2014 and 2014/2015 crop years. This is considerably more than the 5,361 mill pounds needed to meet the proposed 1.39 bill gal biodiesel applicable volume requirement. For this reason, we do no t anticipate any shortage in availability of soybean oil feedstock for biodiesel production in 2014 under the proposed volume requirement of 1.39 bill gal.

d. Effects on Food Prices

In order to determine the likelihood of a substantial increase in fo od prices, EPA projected the effects of a 1.39 billion gallon mandate using the CARD stochastic modeling framework discussed in Section V.C.4. Assuming that the 110 mil gal increment is met entirely with soybean oil biodiesel in 2014, EPA projects that th e price of soybean oil will be approximately $0.47 per pound under the proposed mandate, compared to approximately $0.45 under a 1.28 bill gal volume requirement. We estimate that the real increase in price will be 1.5 cents, or about 3.4 percent. The increase in demand for soybean oil is also expected to have a small impact on the price of soybeans. EPA projects that th e price of soybeans will be $10.48 per bushel under this proposed mandate, compared to $10.39 per bushel under a 1.28 bill gal volume requirement. This represents a price increase of 9 cents or about 0.9 percent. These projections for soybeans and soybea n oil are within the recent historical range of price fluctuations (see Table V.B.2

- 3).

Table V.B.2

- 3

Historical and Projected Prices of Soybeans and Soybean Oil

(2010 dollars per lb)*** E.O. 12866 Review

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Page 51 of 89 Soybean Oil Soybeans

2007

- 2012 Low Annual Average Price $0.33 per lb $9.70 per bushel

2007

- 2012 High Annual Average Price $0.54 per lb $12.36 per bushel 2014 Projected Price $0.47 per lb $10.48 per bushel 2022 Projected Price $0.42 per lb $9.36 per bushel

Sources: USDA, Agricultural Marketing Service, Oil Crops Outlook , February 10 th , 2012. USDA, Economic Research Service, Agricultural Long

- Term Projections , February 2012.

The timeframe of this rulemaking did not permit large

- scale modeling of the impacts of this proposed mandate on the agricultural sector. We theref ore cannot predict the exact impact that these increases in soybean and soybean oil prices will have on food prices in general. However, given that projected prices for soybeans and soybean oil fall within the range of recent historical prices, EPA does n ot expect the proposed mandate to cause any significant variations in food prices. As noted above, these volume and price results assume that all 110 mill gal are soybean

- based. To the extent that this increment is met with other feedstocks, the overall effect of this mandate on the price of soybeans and soybean oil would be smaller. Further, USDA currently predicts a long

- run decline in soybean and soybean oil prices over the next decade. Soybean prices are predicted to decline from the historical peak of $12.36 per bushel in 2011 to $9.36 per bushel by the beginning of 2022 (in 2010 dollars). The price of soybean oil is predicted to decline from a 2010 peak of $0.54 per pound to $0.42 per pound by the beginning of 2022. EPA projections fit within thi s general decline in prices, further bolstering the assessment that the proposed mandate will not significantly affect food prices. Finally, as part of our analysis for the RFS2 final rule, EPA estimated that the total impact of the program on food prices from all sources would be about $10 per person. 33 Given that this proposed increase of 110 mill gal represents less than 1 percent of the 36 bill gal of biofuels analyzed for that rule, this analysis also indicates that the effects on food prices stemming from this proposed mandate will

be minimal.

3. Production Capacity

Total potential production capacity of the biodiesel industry has exceeded 1.28 bill gallons for a number of years. As of February 2012, total production capacity was more than 2.5 bill gallons for 191 companies 34 . According to EPA's registration database, 216 biodiesel production facilities have registered with the EPA under the RFS2 program as of March 15, 2012. Plants that are currently not registered under RFS2 are likely 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.

Most of the product ion capacity exists at plants that are already producing some volume, and many operating biodiesel plants are currently producing at less than their full capacity. As a result, if these facilities increased production volumes they typically would not need to go

33 Renewable Fuel Standard Program (RFS2) Regu latory Impact Analysis, Chapter 5: Economic Impacts and Benefits, Section 5.1 Agricultural Impacts, 2010.

34 Plant list from National Biodiesel Board, Feb 7, 2012.*** E.O. 12866 Review

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Page 52 of 89 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 new plants can be built and started within a year or so, we also believe that pre

- existing but idled plants can be restarted in considerably less time. Actual production of biodiesel in 2011 demonstrates how quickly unused capacity ca n be brought back online. In 2010, the biodiesel industry produced about 400 mill gal. In 2011, the volume requirement for biomass

- based diesel was 800 mill gal, but the industry produced over 1.0 bill gal. Given the time available between now and the

be ginning of the 2014 compliance year, there is no reason to believe that additional unused capacity cannot be put into production in time to contribute meaningfully to total volumes in

2014.

In 2011 just over 45 million gallons of non

- ester renewable dies el were produced in the United States. EPA projects that by 2014 renewable diesel production could increase to over 210 million gallons as Dynamic Fuels continues to increase annual production volumes and a second facility, Diamond Green Diesel progresses towards full

- capacity production. Dynamic Fuels, a joint venture between Tyson Foods and Syntroleum, is currently operating a renewable diesel facility in Geismar, Louisiana capable of producing 75 million gallons of renewable diesel per year from fats, greases, and vegetable oils. Fuel production at this facility started in November 2010 and continued throughout 2011. By the summer of 2011 production at this facility was approaching full capacity. EPA expects renewable diesel production from Dynamic F uels’ Geismar facility to be at or near 75 million gallons in 2014.

Diamond Green Diesel, a joint venture between Valero and Darling International, started site construction at their first commercial facility in Norco, Louisiana in January 2012. This

fa cility will be located adjacent to an existing refinery, and the construction will be funded by Valero. When completed, this facility will have a nameplate capacity of 137 million gallons of renewable diesel per year. Waste products from Darling’s render ing process will be provided as feedstock for this facility. Construction is expected to be completed in early 2013, which should allow Diamond Green Diesel to produce at or near their production capacity in 2014. At this time EPA is not aware of any oth er commercial

- scale renewable diesel production facilities with plans to produce fuel in 2014.

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 also legally be used at any blend level in nonroad diesel and heating oi l. However, other factors (such as engine warranties and the possibility of cold weather) typically limit the concentration of biodiesel in conventional diesel fuel. To the extent that these factors lead to the consumption of biodiesel at lower blend lev els, there would be a corresponding impact on how much biodiesel can be consumed in the U.S. as a

whole.*** E.O. 12866 Review

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Page 53 of 89 Most engine manufacturers have explicit statements in their engine warranties regarding acceptable biodiesel blend levels. Although a few permit B10 0 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 35 . For specific applications where a party is purchasing bulk quantities of diesel fuel for designated engines, purchasing fuel with relatively higher concentrations of biodiesel may be possible. However, for general distribution such as at retail facilities, these warranty conditions create a disincentive to blend or sell biodiesel at high er concentrations and would tend to drive most blends towards low concentrations of biodiesel such

as B5 or less.

Cold weather operability represents another reason for preferential use of B5 and even B2. The most common measure of cold weather operabil ity 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 cl oud point temperature of the fuel, the more likely such problems are to be experienced in cold weather. Biodiesel generally has a higher cloud point than conventional, petroleum

- based diesel fuel, with fat

- based biodiesel such as tallow having a higher cl oud 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 generally mitigated through blending with lighter grades (i.e., #1 diesel fuel), the cloud po int of biodiesel generally requires more dramatic interventions such as heated storage tanks, lines, and blending equipment, as well as heating rail cars and tank trucks. However, some of these biodiesel cloud point mitigation efforts may be reduced throu gh the use of low biodiesel 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 conventional diesel before being transported to its final destination for sale, low biodiesel blend levels may reduce the need for heated equipment at the final

destination.

Based on highway and nonroad diesel consumption projections for 2014 from the EIA, a biodiesel volume of 1.39 bill gallons would represent about 3% o f all diesel fuel 36 . If all biodiesel were to be blended as B5, about 60% of the diesel fuel consumed nationwide in 2014 would contain biodiesel. However, today some biodiesel is blended at concentrations higher than B5, and we expect that some blending a t these higher concentrations would continue in the future in certain markets. Blends above B5 have been sold in recent years despite the cost difference between biodiesel and conventional diesel. Thus 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 w hich biodiesel must be

distributed.

Based on the number of retail stations offering different biodiesel blend levels in 2010,

we estimate that about 30% of biodiesel was sold at retail in blends with biodiesel concentrations as high as 20%. Another 17 % of biodiesel was sold in blends with biodiesel concentrations

35 "Automaker's' and Engine Manufacturers' Positions of Support for Biodiesel Blends," Biodies el.org

36 Assumes total diesel volume consumed in the transportation sector in 2014 is 46.22 bill gal, per Annual Energy Outlook (AEO) 2012 Early Release, Table A2.*** E.O. 12866 Review

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Page 54 of 89 between 10% and 20%. 37 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 under a

nationwide volume requirement for 1.39 bill gallons, we have not quantified the volume of biodiesel that is likely to be sold in blends higher than B5 in 2014 for use in highway and nonroad engines. We expect that no more than about half of the diesel fuel consumed nationwide in 2014 as transportation fuel would contain biodiesel, but it could be less than half depending on the prevalence of blends with biodiesel concentrations higher than 5%.

Heating oil represents another opportunity for large volumes of biodiese l 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 when burning biodiesel for home heating purposes. Since there may be fewer issues associated with consumpt ion of biodiesel in heating oil in comparison to biodiesel used as a transportation fuel, significant volumes of biodiesel can be consumed in this way and count for compliance purposes under the RFS program.

5. Biomass

- Based Diesel Distribution Infrastr ucture

In a separate action, we have projected that sufficient distribution infrastructure could be put in place to support the use of 1.28 bill gal of biomass

- based diesel in 2013. The proposed renewable fuel volume requirements in today’s rule would result in the use of 1.39 bill gal of

biomass

- based diesel in 2014, an increase of 110 mill gal. We project that this increase in

biomass

- based diesel in 2014 from 2013 would be comprised of biodiesel.

Our evaluation of the changes to the fuel distribut ion infrastructure that would be needed to support the use of an additional 110 million gallons of biodiesel in 2014 is based on the analysis conducted for the RFS2 final rule. 38 See Table V.B.5

- 1.

Table V.B.5

- 1

Additional Infrastructure Needed to Distr ibute Biodiesel in 2014

Additional Distribution

Assets Needed in 2014

Relative to 2013 Total Distribution Assets

Needed to Support 1.39 bill gal of Biodiesel in 2014

Petroleum Product Terminals with Biodiesel Blending Capability a 50 610

Rail Cars 90 1,075

Tank Trucks 10 120 Barges 3 32

a There are approximately 853 petroleum terminals that offer diesel fuel in the U.S.

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

38 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 w ould be satisfied by

renewable diesel fuel. The distribution of renewable diesel fuel is discussed later in this section.*** E.O. 12866 Review

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Page 55 of 89 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. 39 The cost to install new segregated biodiesel storage, blending, receipt, and other miscellaneous biodiesel handling equipment was estimated at $1.6 million per terminal. The estimated total cost of the additional biodiesel distribution assets that would be needed in 2014 relative to 2013 is $95.51 million.

We believe that distributing the 1.39 bill gallons of biodiesel in 2014 is achievable. As described in a separate action finalizing an applicable volume requirement of 1.28 bill gal for 2013, a number of states already have mandates for the use of biodiesel, and efforts are underway by the production and dis tribution industries to meet these mandates. Other states have implemented other forms of incentives that will also help to increase demand for and marketability of biodiesel. A variety of states also have requirements for the use of biodiesel in

state f leets, 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, more than half of the states in the U.S. have mandates and/or incentives that will induce them to address biodiesel infrastructure issues. Consequently, we believe that the distribution infrastructure will be capable of accommodating 1.39 bill gal of biomass based

diesel in 2013 with the modest additions discussed above.

Our estimate of the number of additional tank trucks that would be needed is based on the assumption that each truck could make 6 deliveries per day. The estimate of biodiesel trucking distances assumes a mature biodiesel prod uction and distribution system. Under such a scenario, biodiesel production plants are projected to be more geographically dispersed and the volume of biodiesel produced at existing plants is projected to increase to allow the shipment by

rail of biodies el volumes that were previously shipped long distances by truck. It is possible that as biodiesel volumes ramp up the optimization of the biodiesel distribution system may lag behind. Under such a scenario, additional tank trucks may be needed to facilit ate the transport of the projected increase in biodiesel volume in 2014. To provide an outer

- bound estimate of the additional tank trucks that might be needed under such a scenario, we assumed that each truck could only make 2 deliveries per day. This co rresponds to an additional 20 tank trucks to facilitate the transport of the projected increase in biodiesel volume in 2014 relative to 2013. Even under this extreme case, the addition of 20 tank trucks would represent only 0.07% of the

total U.S. fleet o f petroleum products tank trucks (estimated at 27,000). Consequently, the possibility that biodiesel shipping distances might be longer than we projected would not materially affect our conclusions about the ability to accommodate the additional tank truc ks

needed.

C. Impacts of 1.39 billion gallons of Biomass

- Based Diesel

In the RFS program, Congress established a schedule of renewable fuel volumes that gradually increases over time. While the schedule in the statute for biomass

- based diesel ends in 2012, the schedule of increasing volumes for advanced biofuels continues through 2022. Subject to a consideration of a number of factors as described in Section V.A, we believe that it is

39 All costs are expressed in 2007 dollars as estimated in the RFS2 RIA.*** E.O. 12866 Review

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Page 56 of 89 appropriate to consider biomass

- based diesel as playing an incre asing role in supplying advanced

biofuels to the market between 2012 and 2022.

In today's NPRM we are proposing an applicable volume of 1.39 bill gal for biomass

based diesel in 2014. As described below, we are proposing findings that an increment of 1 10 mill gal of biodiesel over the 2013 applicable volume of 1.28 bill gal would help to support rural economic growth and job creation, increase energy security, and reduce emissions of GHGs. While the quantifiable benefits of an increase of 110 mill gal of biodiesel are unlikely to exceed the quantifiable costs in 2014, the benefits are more likely to exceed costs by 2022 and the years following, especially if future oil prices are high. Thus by establishing an applicable volume for

biomass

- based diesel in 2014 that exceeds the 2013 applicable volume of 1.28 bill gal, we would be helping to establish the industry as a substantial contributor to the required volumes of advanced biofuel anticipated after full implementation of the RFS program. A described above, we have also determined that there will be sufficient feedstock and production capacity to meet a 1.39 bill gal volume requirement, and there are no clear impediments to meeting this volume requirement in terms of distribution, blending, or dispensi ng infrastructure.

The CAA section 211(o)(2)(B)(ii) requires that we analyze specified environmental and other impacts in deriving an applicable biomass

- based diesel volume for years after 2012. Most of the areas we are required to analyze were already analyzed as part of the RFS2 final rule, so those analyses serve as the basis for assessing the impacts of biomass

- based diesel for 2014. Some of the analyses presented in the RFS2 final rule were for the specific case of 1.39 bill gallons in 2014. Thes e analyses included an investigation of the expected annual rate of commercial production of biomass

- based diesel in 2014, impacts on agricultural commodity supply and price, and the cost to consumers of transportation fuel. Some of these were discussed

i n Section V.B above. Many of the analyses in the RFS2 final rule were conducted to represent full implementation of the RFS2 program in 2022. In these analyses, the biomass

- based diesel volume was estimated to be 1.82 bill gallons and was compared to a r eference case in which biodiesel volume was 0.38 bill gallons. These cases are shown in Table V.C

- 1.

Table V.C

- 1 Primary Reference and Control Cases from RFS2 Final Rulemaking (billion gallons)

Advanced Biofuel Non

Advanced

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 amount 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 1.39 bill gallons we have evaluated in today's proposed rule for 2014. More importantly, the change in biodiesel production in 2022 due to the statutory mandates for

biomass

- based diesel plus other diesel anticipated to meet the advanced biofuel volume (a total*** E.O. 12866 Review

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Page 57 of 89 increase of 1.44 billion gallons compared to the reference case without the EISA mandates) is much larger than the change we are evaluat ing for 2014 (0.11 bill gal increment above the 2013 applicable volume of 1.28 bill gal). Many of the impacts analyzed for the RFS2 final rule reflected the whole biofuel mandate, not the relatively smaller portion just due to biodiesel.

However, as i n the rulemaking establishing the 1.28 bill gal applicable volume for

biomass

- based diesel in 2013, we continue to believe that it is appropriate to use the analyses in the RFS2 final rule for 2022 in evaluating the impacts of an additional increment of 0. 11 bill gal in 2014. Our intent in using the analyses from the RFS2 final rule is only to determine whether

an increase in biomass

- based diesel of 0.11 bill gal is reasonable given the magnitude of the potential impacts. Given that the RFS2 final rule an alyzed the impacts of an increase in

biomass

- based diesel that was about thirteen times larger than the volume increment we are proposing for 2014, we continue to believe that the impacts of increasing the biomass

- based diesel standard from 1.28 bill gallo ns in 2013 to 1.39 bill gallons in 2014 will likely be similar to or smaller than the impacts we estimated for the much larger change in biomass

- based diesel in

the RFS2 final rule.

1. Climate Change

EPA estimates the social benefits of regulatory a ctions that have a small or “marginal” impact on cumulative global CO 2 emissions using the social cost of carbon dioxide (SC

- CO 2 ).

The SC

- CO 2 is an estimate of the net present value of the flow of monetized damages from a one

metric ton increase in CO 2 em issions in a given year. Alternatively, this represents the benefit to society of reducing CO 2 emissions by one ton. 40 The SC

- CO 2 includes, but is not limited to, climate damages due to changes in net agricultural productivity, human health, property damag es from flood risk, and ecosystem services.

The SC

- CO 2 estimates currently used by the Agency were developed through an interagency process that included EPA and other executive branch entities and concluded in February 2010. The Technical Support Doc ument: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 for the final joint EPA/Department of Transportation Rulemaking to establish Light

- Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Sta ndards provides a complete discussion of the methods used to develop the SC

- CO 2 estimates (Interagency Working Group on Social Cost of Carbon, 2010) (hereafter, “2010 TSD”).

To monetize global social benefits of reduced CO 2 emissions, the interagency g roup selected four SC

- CO 2 estimates for use in regulatory analyses. In 2014, these are: $6, $24, $39, and $74 per metric ton of CO 2 emissions (in 2010 dollars). The first three values are based on the average SC

- CO 2 from three integrated assessment model s, at discount rates of 5, 3, and 2.5 percent, respectively. SC

- CO 2 s at several discount rates are included because the literature

shows that the SC

- CO 2 is quite sensitive to assumptions about the discount rate, and because no consensus exists on the appr opriate rate to use in an intergenerational context. The fourth value is

40 In the absence of direct model estimates of the social cos t of non

- CO 2 GHGs, the social cost of CO 2 can be used to

estimate those benefits on a CO 2 - e basis, as discussed further below.*** E.O. 12866 Review

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Page 58 of 89 the 95th percentile of the SC

- CO 2 from all three models at a 3 percent discount rate. It is included to represent higher

- than

- expected impacts from temperature change further out in the

tails of the SC

- CO 2 distribution. The “central value” is the average SCC across models at the 3 percent discount rate. For purposes of capturing the uncertainties involved in regulatory impact analysis, we emphasize the importance and value of conside ring the full range. Low

- probability, high

- impact events are incorporated into all of the SC

- CO 2 values through explicit consideration of their effects in two of the three models as well as the use of a probability density function for equilibrium climate sensitivity. Treating climate sensitivity probabilistically allows the exploration of the full range of uncertainty over future temperature changes, which generally results in higher damages estimates than when the SC

- CO 2 is evaluated only at the mean cl imate sensitivity.

The 2010 interagency SCC technical support report discusses a number of important limitations for which additional research is needed. In particular, the document highlights the incomplete way in which the integrated assessment models capture catastrophic and non

catastrophic impacts, their incomplete treatment of adaptation and technological change, uncertainty in the extrapolation of damages to high temperatures, and assumptions regarding risk

aversion. The limited amount of research linking climate impacts to economic damages makes this modeling exercise even more difficult. The interagency group recommended that the SCC estimates used for regulatory analysis by the Federal government be revisited and continue to evolve with improveme nts in modeling.

The SC

- CO 2 increases over time because future emissions are expected to produce larger incremental damages as physical and economic systems become more stressed in response to greater climatic change. For example, by 2022 the four estim ates increase to $8, $29, $45, and $88 per metric ton of CO 2 emissions (in 2010 dollars). Note that the interagency group estimated the growth rate of the SCC directly using the three integrated assessment models rather than assuming a constant annual gro wth rate. This helps to ensure that the estimates are internally consistent with other modeling assumptions. The table below presents the four estimates for the years 2014 through 2022.

Table V.C.1

- 1 Benefit per Metric Ton of CO 2 Reduced, 2014

- 2022 ($201 0) a

Y EAR Discount Rate (Statistic)

5% (Avg) 3% (Avg) 2.5% (Avg) 3% (95th %ile)

2014 $6 $24 $39 $74

2015 $6 $25 $40 $76

2016 $6 $25 $41 $78

2017 $6 $26 $42 $79

2018 $7 $26 $42 $81

2019 $7 $27 $43 $83

2020 $7 $28 $44 $84

2021 $7 $28 $45 $86

2022 $8 $29 $45 $88

a The SC

- CO 2 values vary depending on the year of CO 2 emission and are defined in real terms. The change from year to year is not obvious in this table because estimates are rounded to the nearest dollar.*** E.O. 12866 Review

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Page 59 of 89 Today’s rulemaking also analyzes reductions in non

- CO 2 GHGs. The 2010 interagency group, however, did not directly estimate the social cost of non

- CO 2 GHGs. In the absence of direct model estimates from the interagency analysis, EPA has used a “global warming potential (GWP) approach” to estimate the dollar value of this rule’s non

- CO 2 GHG benefits. Specifically, EPA converted methane and nitrous oxide to CO 2 equivalents using the GWP of these gases, then multiplied these CO 2 - equivalent emission reductions by the interagency social

cos t of carbon dioxide estimates. Furthermore, EPA has used the 100

- year GWP estimates from the IPCC Second Assessment Report (SAR) to estimate the methane and nitrous oxide benefits for this proposed rule. The use of the SAR GWP values allows comparability of data collected in this final rule to the national GHG inventory that EPA compiles annually to meet U.S. commitments to the United Nations Framework Convention on Climate Change (UNFCCC).

EPA established in the RFS2 final rule that a gallon of soybea n

- based biodiesel results in an annualized GHG emission reduction of approximately 57 percent compared to the 2005 petroleum baseline (approximately 0.0065 tons of CO 2 equivalent per gallon). This GHG reduction is calculated by estimating the annualized emissions streams over 30 years, starting in 2022, (the year when the RFS2 program will be fully implemented). For this reason, it may not be appropriate to include an y benefits from GHG reductions in our 2014 calculations. This is not because EPA believes that the GHG benefits in 2014 will be zero, but rather because it may not be consistent to cite them for an interim year of the program using lifecycle biofuel asses sments based on a 2022 analyses.

To monetize the global SC

- CO 2 value, we use the same stream of emissions for both 2013 and 2022 that were estimated for the RFS2 final rulemaking. We then apply the appropriate SC

- CO 2 dollar values to each year (i.e., we apply the 2015 SC

- CO 2 value to a stream in 2015, the 2028 value to a stream in 2028). These benefits are then totaled, discounted to net present value using the applicable discount rate, and divided by 30 to place the estimate back on a per gallon basi s. The resulting estimates are provided in the table below for 2014 and 2022. 41

Table V.C.1

- 2 Monetized per Gallon CO 2 - eq Annualized Benefits of Biomass

- Based Diesel in 2014 and 2022 ($2010)

Year Annualized

Emissions

reduction (Tons of

CO2

- eq/gallon) B enefits

5% (Avg) 3% (Avg) 2.5% (Avg) 3% (95th %ile)

2014 0.0065 $0.03 $0.12 $0.21 $0.38

2022 0.0065 $0.03 $0.14 $0.23 $0.43

41 Tables IV.A.1

- 1 and IV.A.1

- 2 provide summary details about the global SC

- CO 2 values and emissions streams

used in our calculati ons. Additional details are included in a Memorandum to the Docket, Docket ID XXX, Dated May XX, 2012.*** E.O. 12866 Review

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Page 60 of 89 Estimates represent the CO 2 - eq. estimate of carbon dioxide, methane, and nitrous oxide reductions multiplied by the SCC estimates (“GWP approach”). CO 2 - eq. for methane calculated using the GWP of 21 (SAR). These co

- benefit estimates are not the same as would be derived using a social cost of methane directly computed from integrated

assessment models. See Marten and Ne wbold (2011) for discussion of the limitations of the GWP approach.

2. Energy Security

An increase in the biomass

- based diesel volume requirement to 1.39 bill gal of biomass

based diesel from 1.28 billion gal in 2013 would help to reduce U.S. petrol eum imports by displacing about 100 mill gal of diesel fuel 42 . Reducing U.S. petroleum imports would lower both the financial and strategic risks caused by potential sudden disruptions in the supply of imported petroleum to the U.S. The economic value of reductions in these risks provides a measure of improved U.S. energy security. This section summarizes EPA’s estimates of U.S. oil import reductions and energy security benefits from this proposed rule.

Based on an analysis of historical and projected future variation in U.S. petroleum consumption and imports, we estimate that approximately 50 percent of the reduction in fuel consumption resulting from adopting renewable fuels is likely to be reflected in reduced U.S. imports of refined fuel, while the remaining 50 percent is expected to be reflected in reduced domestic fuel refining. Of this latter figure, 90 percent is anticipated to reduce U.S. imports of crude petroleum for use as a refinery feedstock, while the remaining 10 percent is expected to reduce U.S. domestic production of crude petroleum. Thus, on balance, each gallon of fossil

based fuel saved as a consequence of the renewable fuel standards is anticipated to reduce total U.S. imports of petroleum by 0.95 gallons. 43 Therefore, by raising the applicable volume requirement of biomass

- based diesel from 1.28 bill gal to 1.39 bill gal in 2014, petroleum imports into the U.S. would be reduced by 95 million gallons (95% x 100 mill gal increment).

Table V.C.2

- 1 Projected Import Reductions from This Proposed Rule and Total U.S. Petroleum

- Based

Imports in 2014 and 2022 (Millions of Barrels )

U.S. Petroleum

- Based Import Reductions from this Proposed Rule (million barrels/yr) U.S. Total Petroleum

Based Imports without this Proposed Rule (million ba rrels/yr)

2014 2.3 3,402

2022 2.3 2,964

In order to understand the energy security implications of reducing U.S. petroleum imports, EPA worked with Oak Ridge National Laboratory (ORNL), which has developed approaches for evaluating the economic costs and energy security implications of oil use. The energy security estimates provided below are based upon a methodology developed in a peer

-

42 100 mill gal diesel is roughly equivalent to 110 mill gal biodiesel on an energy

- equivalent basis.

43 This figure is calculated as 0.50 + 0.50*0.9 = 0.5 0 + 0.45 = 0.95.*** E.O. 12866 Review

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Page 61 of 89 reviewed study entitled, ” The Energy Security Benefits of Reduced Oil Use, 2006

- 2015 ,” completed in March 2008. Thi s study is included as part of the docket for this proposal. 44

, 45
When conducting its analysis, ORNL considered the full economic cost of importing petroleum

into the United States.

The economic cost of importing petroleum into the U.S. is defined to inc lude two components in addition to the purchase price of petroleum itself. These are: (1) the higher costs for oil imports resulting from the effect of increasing U.S. import demand on the world oil price and on the market power of the Organization of Pet roleum Exporting Countries (i.e., the “demand” or “monopsony” costs); and (2) the risk of reductions in U.S. economic output and disruption of the U.S. economy caused by sudden disruptions in the supply of imported petroleum to the U.S. (i.e., “macroecono mic disruption/adjustment costs”).

An often

- identified component of the full economic costs of U.S. oil imports is the costs to the U.S. taxpayers of existing U.S. energy security policies. The two primary components of this cost are likely to be (1) t he expenses associated with maintaining a U.S. military presence

– in part to help secure a stable oil supply

– in potentially unstable regions of the world; and (2) costs for maintaining the U.S. Strategic Petroleum Reserve (SPR). The SPR is the largest stockpile of government

- owned emergency crude oil in the world.

The EPA recognizes that potential national and energy security risks exist due to the possibility of tension over oil supplies. Much of the world’s oil and gas supplies are located in countries facing social, economic, and demographic challenges, thus mak ing them even more vulnerable to potential local instability. Because of U.S. dependence on oil, the military could be called on to protect energy resources through such measures as securing shipping lanes from foreign oil fields. Thus, to the degree to which this proposed rule would reduce reliance upon imported energy supplies, the United States could expect benefits related to national security and increased energy supply.

Although the Agency recognizes that there clearly is a benefit to the United States from reducing dependence on foreign oil, the Agency has been unable to calculate the monetary benefit that the United States will receive from the improvements in national security expected to result from this program. Also, while the costs of buil ding and maintaining the SPR are clearly related to U.S. oil use and imports, these costs have not varied historically in response to U.S. oil import levels. Thus, the costs of maintaining the SPR are excluded from this analysis. In addition, given the red istributive nature of this monopsony effect from a global perspective, it is excluded in the energy security benefits calculations for this proposal. In contrast, the other portion of the energy security premium, the U.S. macroeconomic disruption and adju stment cost that arises from U.S. petroleum imports, does not have offsetting impacts outside of the U.S. and, thus, is included in the energy security benefits estimated for this proposal. To summarize, EPA

44 Leiby, Paul N., " Estimating the Energy Security Benefits of Reduced U.S. Oil Imports " Oak Ridge National Laboratory, ORNL/TM

- 2007/028, Final Report, 2008. (Docket EPA

- HQ

- OAR

- 2010

- 0162)

45 The ORNL study “ The Energy Security Benefits of Reduced Oil Use, 2006

- 2015 ," completed in March 2008, is an update version of the approach used for estimating the energy security benefits of U.S. oil import reductions. developed in an ORNL 1997 Report by Leiby, Paul N., Donald W. Jones, T. Randall Curle e, and Russell Lee,

entitled “ Oil Imports: An Assessment of Benefits and Costs. " (Docket EPA

- HQ

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- 2010

- 0162)*** E.O. 12866 Review

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Page 62 of 89 has included only the macroeconomic disruption portion of the energy security benefits to estimate the monetary value of the total energy security benefits of this program.

The energy security premiums for the year 2014 and 2022 are presented in Table V.C.2

- 2 as well as a breakdown of the component s of the energy security premiums for each year. These energy security premiums are recorded on a dollar per barrel of oil imported reduced from this rule. However, on a gallon of biodiesel fuel basis, these translate into a $0.15/gallon benefit in

2014 a nd a $0.16/gallon benefit in 2022 (in 2010$).

Table V.C.2

- 2 Energy Security Premium in 2014 and 2022 (2010 $/Barrel)

Monopsony Macroeconomic

Disruption/Adjustment Costs Total Mid

- Point

2014 $11.60

($3.91

- $19.74) $7.29 ($3.49

- $10.58) $18.90 ($10.26

- $27.26)

2022 9.82

($3.27

- $16.77) 7.84 ($3.80

- $11.30) 17.66 ($9.88

- $24.99)

Note: Values in parentheses represent a 90% confidence interval around the central value.

Using EPA’s fuel consumption analysis in conjunction with ORNL’s energy security premium estimates, the agency has developed estimates of the total energy security benefits for the years 2014 and 2022 in Table V.C.2

- 3.

Table V.C.2

- 3 Energy Security Benef

its in 2014 and 2022 (2010$)

U.S. Oil Imports

Reduced (million barrels/yr) Benefits

($Millions)

2014 2.3 $17

2022 2.3 $18

3. Air Quality

We are relying on the analyses of renewable fuel impacts conducted in support of the

RFS2 final rule 46 to qualitatively discuss the expected air quality impacts of a biomass

- based diesel volume of 1.39 bill gallons. The RFS2 analyses reflect EPA’s most current assumptions regarding biodiesel emission impacts. 47

In the RFS2 final rule, we analyzed both ch anges in pollutant emissions (measured in tons) and changes in ambient air quality associated with the changes in pollutant emissions. As

46 75 FR14670, March 26, 2010

47 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA

- 420

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- 10

- 006. February 2010. Docket EPA

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- 2009

- 0472

- 11332. Section 3.1.1.2.4*** E.O. 12866 Review

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Page 63 of 89 described in the introduction to Section V.C above, the changes in pollutant emissions were calculated by comparing t he 2022 RFS2 renewable fuel volumes to volumes if the RFS2 mandate was not in place (the reference scenario). 48 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 b iodiesel in the RFS2 scenario compared to 0.38 bill gal of biodiesel in the reference scenario, reflecting a 1.44 bill gal increase in biodiesel with the rule in place.

Biodiesel emission impacts from the RFS2 final rule emissions inventory analysis are presented in Table IV.C.3

- 1 . A complete discussion of the emissions inventory analysis conducted for the RFS2 final rule can be found in Chapter 3 of the RFS2 Regulatory Impact Analysis (RIA). 49 The 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. 50 We expect the impacts of the 1.39 bill gal of biomass

- based diesel volume relative to the 1.28 bill gal applicable volume established in a separate action for 2013 (which reflect a 0.11 bill gal increase) to be considerably smaller.

48 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 renewabl e 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.

49 U.S. EPA 2010, Re newable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA

- 420

- R

- 10

- 006. February 2010. Docket EPA

- HQ

- OAR

- 2009

- 0472

- 11332.

50 While the national

- level emissions and air quality impacts may be small, there may still be local and regional impacts th at are larger in percentage terms. Our analysis is unable to capture this local and regional variability.*** E.O. 12866 Review

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Page 64 of 89 Table V.C.3

- 1 Biodiesel Emission Impacts of the RFS2 Renewable Fuel Volumes (1.82 bill gal) Relative to the Reference Case (0.38 bill gal)

Biodiesel Impacts of RFS2 final rule Emissions Inventory Analysis (Δ 1.44 bill gal Biodiesel) Percent RFS2 Total U.S. Inventory c 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. EP A 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

.

c While the national

- level emissions and air quality impacts may be small, there may still be local a nd regional impacts that are larger in percentage terms. Our analysis is unable to capture this local and regional variability.

The air quality analysis for the RFS2 final rule used photochemical modeling to characterize primary pollutants that are emit ted 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 final rule were large volumes of

ethanol as well as othe r 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 outwei ghing the volume increase in biodiesel (0.43 bill gal). A complete discussion of the RFS2 air quality analysis and its limitations can be found in Chapter 3 of the RFS2 Regulatory Impact Analysis (RIA). 51

51 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA

- 420

- R

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Page 65 of 89 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. 52

, 53 The air quality analysis assumed 0.81 bill gal of biodiesel in the RFS2 scenario compared to 0.38 bill gal

of biodiesel in the r eference scenario, reflecting a 0.43 bill gal increase in biodiesel use with the rule in place. We use the 0.43 bill gal increase in biodiesel assumed in the RFS2 air quality analysis to qualitatively discuss the potential impacts of a 0.11 bill gal incre ase in biodiesel from

this rule.

Given the small emissions impact of a 0.43 bill gal 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 attribu table to a move from 1.28 to 1.39 bill gal (a 0.11 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) requires EPA to analyze and mit igate, to the greatest extent achievable, adverse air quality impacts of the renewable fuels required by the RFS2 final rule. We intend to investigate any potential adverse impacts from increased renewable fuel use through that study and will promulgate a ppropriate mitigation measures separate from today's proposed rule.

4. Consideration of Costs and Benefits

Many of the impacts of this rule are difficult to fully quantify, which makes any comprehensive consideration of costs and benefits difficult t o undertake. In spite of these data limitations, EPA has analyzed some of the costs and has estimated the monetary value of some of the benefits of the program to provide interested parties with more information on this proposed rulemaking.

In this sect ion, we provide general estimates of some costs and benefits for the year 2022, when the RFS2 legislative requirements are fully implemented and the RFS2 is a fully mature program. We also provide general estimates of the costs and benefits of the 1.39 bi ll gal volume requirement for the year 2014, the year in which we are proposing that a 1.39 bill gal volume requirement for biomass

- based diesel would be implemented. The statute is forward

- looking in its emphasis on achieving environmental and energy goal s and we believe it is appropriate under the Act to consider the results of the program when it is fully implemented. To evaluate the program on the basis of only one early year’s impacts, as part of near

- term implementation, would be to paint an unbalan ced and incomplete picture. As we examine the costs of the program through time, we see that these costs fall steadily. This is due to two key factors: the cost of petroleum, the basic raw material of diesel fuel, rises through time. Meanwhile, the princ ipal cost of soybean

- based biodiesel, the soybean oil feedstock, tends to fall though time.

52 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 ana lysis and the time emissions were estimated to reflect the final rulemaking.

53 The RFS2 air quality analysis reflects EPA’s most recent air quality analysis applicable to changes in renewable fuel types and volumes.*** E.O. 12866 Review

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Page 66 of 89 For example, the AEO 2012 Early Release (AEO12 ER) projects that oil prices will rise from roughly $110 per barrel in 2014 to $129 per barrel in 2022, a 7 percent increase. 54 The AEO 2011 High Oil Price case (AEO11 HOP), projects that oil prices will increase to about $179 per barrel, a 62 percent increase. 55 According to EPA’s projections performed for this rule and USDA long

- term projections, soy oil prices will d ecrease from $0.47/lb in 2014 to $0.42/lb in 2022, a 9 percent decrease. 56 As a result, the relative cost difference between diesel and biodiesel fuel tends to narrow through time as the program reaches maturity. Thus, we do not just look at the impacts o f the program in any one year, but also look at the impacts at a point of greater program maturity.

a. Monetized Quantifiable Costs

Our analysis of costs focuses on the sector most likely to be impacted by an increase in

biomass

- based diesel volumes

– the agricultural commodity market. A similar analysis was

conducted for the final 2013 biomass

- based diesel volume requirement in response to comments received. This analysis uses a stochastic economic model developed by the Center for Agricultural and Rural Development (CARD) at Iowa State University. The CARD stochastic model approximates U.S. and Brazilian biofuel production, consumption, and trade. The model provides the probability of different outcomes by running 500 different potential scenarios . This modeling approach provides a range of estimates which helps bound the uncertainty about possible impacts on the biofuels sector.

Producing an additional 110 mill gal of biodiesel would displace approximately 100 mill gal of petroleum

- based diesel. Since biodiesel costs more to produce in the U.S. than diesel, there are costs associated with this displacement. For the final rule setting the 2013 biomass

based diesel volume requirement of 1.28 bill gal, we compared the cost of biodiesel and petrodi esel at the wholesale stage on an energy equivalent basis, since that is when the two fuels are blended together. To form our basic estimate for this proposed rule, we modified this analysis to project the impact of a 1.39 bill gal volume requirement on b iodiesel and fuel costs.

As we outline in Section V.B.2 of this proposed rule, EPA assumes that 680 mill gal of biofuel feedstock comes from corn oil and waste oils, fats, and greases. The remaining 710 mill gal of feedstock needed to meet the 1.39 bill gal volume requirement in 2014, including the 110 mil gal of additional biodiesel we are proposing to mandate under this rule, is assumed to be soy oil. Because soybean oil feedstocks are more expensive than corn oil or waste feedstocks, the cost impact of the extended volume requirement would decrease if biodiesel production from these other sources expands. We therefore consider the cost projections presented below to be potentially high estimates.

54 U.S. Department of Energy, Energy Info rmation Administration. 2012. Annual Energy Outlook 2012 (Early Release). Available at: http://www.eia.gov/forecasts/aeo/er/

. 55 U.S. Department of Energy, Energy Information Administration. 2011. Annu al Energy Outlook 2011. Available

at: http://www.eia.gov/forecasts/aeo/data.cfm#enprisec

. 56 U.S. Department of Agriculture, Economic Research Service, Agricultural Long

- Term Projections , February

2012.*** E.O. 12866 Review

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Page 67 of 89 The main component of the increase in fuel costs as sociated with extending the biomass

based diesel mandate comes from an increase in the price of soybean oil. We project the price of soybean oil would be approximately $0.47 per pound (in 2010 dollars) under the proposed 1.39 billion gallon volume require ment, compared to prices of approximately $0.45 under a 1.28 billion gallon volume requirement (see Section V.B.2 for further discussion of feedstock availability and prices). A gallon of soybean

- based biodiesel requires 7.55 pounds of soybean oil, meanin g that this projected increase in the price of soybean oil increases the feedstock costs of soybean

- based biodiesel by about $0.12/gallon in 2014.

Given that the CARD stochastic model is not designed to estimate long

- run impacts, we did not attempt to estimate the impacts of the 2014 biomass

- based biodiesel volume requirement on the price of soybean oil in 2022. In Section V.B.2.d we estimate that this proposed mandate will raise soybean oil prices by approximately 3.4 percent in 2014. The internation al market for vegetable oils is large and diverse, with considerable capacity to absorb short

- term demand increases. It is therefore unlikely that an increase in U.S. demand for soybean oil of this size in 2014 would significantly affect prices eight year s in the future. Therefore, in lieu of projecting soybean oil prices in 2022, we are instead utilizing USDA’s 2012 Long

- Term Agricultural Projections of soybean oil prices to estimate the cost of the extended mandate in 2022. This is

consistent with our analysis for the 2013 biomass

- based diesel volume requirement final rule. USDA estimates that the price of soybean oil would be $0.42 per pound (in 2010$) for the 2021/2022 crop year (the last year for which USDA provides estimates in their long

- term proj ections as of this writing).

Estimating the cost to produce biodiesel and transport it to the blender presents considerable uncertainties, even in the near term. Unforeseen fluctuations in the prices of oil, for example, could have a very significant eff ect. Therefore, instead of presenting a point estimate, EPA has chosen to present a range of estimates for 2014 and 2022 that bounds uncertainty about oil and feedstock prices at the 1.39 bill gal level that we are proposing.

Table V.C.4

- 2 presents our estimates for the increase in the cost of incremental volumes of biodiesel resulting from a proposed volume requirement of 1.39 bill gal. Using the same methodology utilized in the final rulemaking for the 2013 biomass

- based diesel mandate, we

estimate th e increase in the cost for the additional 110 million gallons of biodiesel in 2014 would be between $1.02 and $1.48 per gallon compared to the petroleum

- based diesel that would otherwise be consumed. The range of cost increases in 2014 represents differen t estimates of oil prices. In 2014, costs are on the low

- end of the range if we use the wholesale diesel estimate

from DOE’s most recent Short

- Term Energy Outlook (STEO). 57 The high

- end estimate utilizes

DOE’s AEO12 ER wholesale diesel estimate. 58 This tra nslates into total cost estimates of $112 million to $162 million from increased fuel cost in 2014.

Table V.C.4

- 2 Estimated Increase in Wholesale Cost of Biodiesel in Comparison to Petrodiesel (2010 dollars)

57 U.S. Department of Energy, Energy Information Administration. 2012. Short Term Energy Outlook, March

2012. Available at: http://www.eia.gov/forecasts/steo/index.cfm

. 58 U.S. Dep artment of Energy, Energy Information Administration. 2012. Annual Energy Outlook 2012 (Early Release). Available at: http://www.eia.gov/forecasts/aeo/er/

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Page 68 of 89 Estimate for 2014 Estimate for 2022

Differenc e in biodiesel production cost (per gallon) $1.02

- $1.48

- $0.70

- $0.41

Cost of 110 million gallons $112

- $162 million

- $77

- $45 million

We also present a range of cost estimates for the year 2022. Similar to our 2014 analysis, the high

- end of our cost estimates utilizes the AEO 2012 ER. The low end of this range utilizes the AEO 2011 High Oil Price (HOP) case’s wholesale diesel estimate. The STEO does not provide projections out through 2022 and the AEO 2012 Early Release does not include the hi gh oil price case (at the time of this writing the full AEO 2012 has not been released). Therefore, the AEO 2011 HOP is the best available estimate of a higher diesel cost in 2022. Based on this range of diesel costs and on USDA’s long

- term projection of soybean oil prices, we estimate the incremental increase in biodiesel costs associated with an increase of 110 mill gal of biodiesel

would be between

- $0.70 and $0.41 per gallon in 2022. This translates to a cost of

- $77 million to $45 million in 2022. The low end of this estimate is negative because with higher crude oil costs, biodiesel is less expensive than petrodiesel.

Consistent with our previous work in this area, EPA’s quantifiable cost methodology is a

“bottom

- up” engineering cost analysis that estimates the cost to produce a gallon of soybean

based biodiesel and then compares that cost to the production cost of an energy

- equivalent gallon of petroleum

- based diesel. In certain situations, it may also be useful to use a “top down” analyses to es timate the potential cost of a program to society. In the case of the biomass

- based diesel standard, one suggestion was to look at the RIN price as a proxy for the societal cost of the

program.

However, we have numerous concerns with using RIN prices t o estimate the costs to society of the biomass

- based diesel RFS2 requirement. First of all, RIN prices are more representative of marginal costs. If producers have different costs of production, as they do in the biodiesel market, using the marginal cost of compliance as a proxy for cost of production will significantly overestimate the cost to society. Second, the commodity traded, biomass

- based diesel, has one overall price, but has two components (the RIN component and the liquid volume component). Th e relative magnitude of these two components can vary depending on their individual markets, making it difficult to have confidence in the RIN value as a representation of

the full cost of the biomass

- based diesel fuel. Third, it is difficult to have conf idence in the use of historical RIN price trends as an indicator of future program cost given observed instability and uncertainties in U.S. tax policy, import tariff policies, and the level of RFS standard itself. Finally, other factors, such as the exis tence of multiple RIN vintages in any given year and the aforementioned uncertainties, can create significant incentives for potential speculation in the RIN markets, further undermining confidence in the effectiveness of RIN prices as a proxy for

true soc ial costs of the biodiesel program. In their 2011 report on RINs, USDA observed that this speculation results in RIN prices that are somewhat higher than the cost of biodiesel, though the exact amount of this increment is extremely difficult to quantify. 59

59 McPhail, L, P Westcott, and H Lutman, The Re newable Identification Number System and U.S. Biofuel Mandates

, United States Department of Agriculture, November 2011.*** E.O. 12866 Review

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Page 69 of 89 Some general equilibrium effects that will result from this proposal are not captured in a partial equilibrium framework such as the CARD stochastic model. Since the proposed increase

in the biomass

- based diesel volume requirement is fairly modest comp ared to increases in previous years, these impacts will likely be modest and represent various transfers in different markets. For example, the price of soybean oil, both for biodiesel production and in food products, will increase as a result of the dema nd for an additional 110 mill gal biodiesel. In addition, as soybean prices increase moderately, soybean growers will likely spend more of their revenues on key inputs such as labor and fertilizers. Increasing payments to labor and fertilizer producers w ill results in further spending with impacts primarily in rural areas of the U.S. that supply the soybeans.

On the petroleum side of the market, a modest decline in diesel fuel demand will result in lower payments to diesel fuel suppliers and to refiner ies that produce diesel fuel. In turn, diesel fuel suppliers and refineries will spend less on key inputs such as refinery equipment used to produce diesel fuel. Given the small volumes of diesel fuel involved, it is not likely that there

will be discern able impacts on the overall market price for diesel fuel, which is set by a combination of world, national, regional and local markets and conditions.

b. Transportation Fuel Costs

The estimates described in Section V.C.4.a above represent the quanti fiable costs to society as a whole stemming from our proposed increase in the biomass

- based diesel volume requirement from 1.28 bill gal to 1.39 bill gal. These estimates do not include certain transfers, such as those between buyers and sellers of diesel fuel. For this reason, the increase in the cost of transportation fuel from a societal perspective is different from the increase from the perspective of individual buyers and sellers. However, these costs do impact the retail price of

diesel.

To estimate the increase in the cost of transportation fuel associated with today's proposed mandate for 1.39 bill gal in 2014 and 2022, we took our projections for the quantifiable program costs reported in Section V.C.4.a and compared them to projected fuel consumption. The AEO projects that the U.S. transportation sector will consume approximately 46.3 bill gal of blended diesel in 2014 and 50.3 bill gal in 2022. 60 Averaged over the transportation diesel pool, the quantifiable costs of the 1.39 bill gal ma ndate translate into a per gallon cost of between $0.002 and $0.004 in 2014 and between

- $0.002 and $0.001 in 2022. 61

c. Monetized Quantifiable Benefits

60 U.S. Department of Energy, Energy Information Administration. 2012. Annual Energy Outlook 2012 (Early Release). Available at: http://www.eia.gov/forecasts/aeo/er/

. 61 The actual change in retail diesel prices may vary since myriad other factors influence the price of diesel. EPA does not generally estimate price impacts in our rules b ecause it is so difficult to properly account for these complexities.*** E.O. 12866 Review

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Page 70 of 89 Many of the benefits and impacts that Congress asked EPA to examine when evaluating

whether to inc rease the volume requirement for biomass

- based biodiesel are difficult to fully quantify. In this section, we present a selection of quantifiable benefits from increased biodiesel production, including increased energy security, improved air quality, and reduced greenhouse gas emissions. We are proposing to increase the biodiesel volume requirement to 1.39 bill gal in the year 2014, but this extended volume requirement would continue to provide benefits throughout the life of the program. For this reason , we present benefits for 110 mill gal of additional biodiesel in the year 2014, when the volume requirement goes into effect, as well as benefits in the year 2022, when the program comes to full fruition.

i. Greenhouse Gas Impacts

EPA established in the RFS2 final rule that a gallon of soybean

- based biodiesel results in an annualized GHG emission reduction of approximately 57 percent compared to the 2005 petroleum baseline. This GHG reduction calculation is based on the annualized emissions

stream ov er a 30 year period, starting in 2022 (the year when the RFS2 program will be fully implemented). As described in Section V.C.1 of this final rulemaking, it may not be appropriate to include these GHG benefit reductions in our 2014 calculations. Again, this is not because EPA believes that the GHG benefits in 2014 will be zero, but rather because it may not be consistent to cite them for an interim year of the program using lifecycle biofuel assessments based on a 2022 analyses. As a sensitivity, howeve r, if we were to apply the 2022 GHG emissions reductions to the 1.39 bill gal biomass

- based diesel mandate, the GHG benefits would be up to $42 million in 2014, depending on the assumed discount rate (b ased on the Social Cost

of Carbon value for 2014 cited in Section V.C.1 of this rulemaking) . Also on this basis, we estimate that benefits of the proposed mandate will be between $3 and $47 million in 2022.

ii. Energy Security

Quantified energy security benefits were taken from the estimates reported in Section V.C.2 of this proposed rule. As noted there, we consider only the macroeconomic disruption and adjustment effect in its estimates of energy security benefits. We estimate that the energy security benefits of the additional 110 mill gal increment of biodiesel are $0.15 per gallon in 2014 and $0.16 per gallon in 2022. This translates to a total program benefit of about $16 million in 2014 and $18 million in 2022.

iii. Air Quality

We discuss air quality impacts qualitatively in Section V.C.3 of this proposal and expect an additional 110 mill gal of biodiesel (in years 2014 and 2022) will have a relatively small impact on ambient air quality. That said, we do expect the production and combustion of biodiesel to have a slightly different emissions impact relative to petroleum

- based diesel. As presented in Table V.C.3

- 1, we estimated that in 2022, the increased production of biodiesel related to the RFS2 mandate would impact both downstream and upstream emissions, with increases in some pollutants and decreases in others.*** E.O. 12866 Review

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Page 71 of 89 Ideally, the monetized impacts of changes in air quality related to the proposal would be estimated based on changes in ambient pollution concentrations and population exposure, as determined by complete air quality and exposure modeling. However, conducting such detailed modeling was not possible within the timeframe for this proposal.

Instead, our analysis of PM 2.5 - related health impacts associated with 110 additional gallons of biodiesel (in both 2014 and 2022) uses a “doll ar

- per

- ton” method to estimate selected

PM 2.5 - related health impacts. These PM 2.5 - related dollar

- per

- ton estimates provide the total monetized human health impacts (the sum of premature mortality and premature morbidity) of reducing one ton of directly em itted PM 2.5 , or one ton of a pollutant that contributes to secondarily

- formed PM 2.5 (such as NOx, SOx, and VOCs) from a specified source. 62 The dollar

per

- ton technique has been used in previous analyses, including the 2012

- 2016 Light

- Duty

Greenhouse Gas R ule, 63 the Ozone National Ambient Air Quality Standards (NAAQS) RIA, 64

the Portland Cement National Emissions Standards for Hazardous Air Pollutants (NESHAP)
RIA, 65 and the final NO 2 NAAQS. 66

The analysis of the proposed 2014 fuel mandate did not estimate t he direct emissions impacts to which we could apply the “dollar

- per

- ton” estimates. Instead, we converted “dollars

per

- ton” to “dollars

- per

- gallon” by transferring the biodiesel tons

– to

- emissions relationship observed in the RFS2 analysis to the current analysis (dividing emissions in Table V.C.3

- 1 by 1.44 bill gallons of biodiesel) and multiplying that by each pollutant

- specific dollar

- per

- ton
estimate.

The dollar

- per

- ton estimates used to monetize the emissions impacts from each gallon of

biodiesel are provided in Table V.C.4

- 3.

Table V.C.4

- 3

Benefits

- per

- ton Values (2010$) Derived Using the American Cancer Society Cohort Study for

PM

- related Premature Mortality (Pope et al., 2002) a

62 Due to analytical limitations, the estimated dollar

- per

- ton values do not include comparable impacts related to reductions in other ambient concentrations of criteria pollutants (such as ozone, NO2 or SO2) or toxic air pollutants, nor do they monetize all of the potential health and welfare effects associated with PM2.5 or the other criteria pollutants.

63 U.S. Environmental Protection Agency (U.S. EPA), 2010. Regulatory Impact Analysi s, Final Rulemaking to Establish Light

- Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards. Office of Transportation and Air Quality. April. Available at http://www.epa.gov/otaq/climate/regulations/420r10009.pdf . EPA

- 420

- R

- 10

- 009

64 U.S. Environmental Protection Agency (U.S. EPA). 2008. Regulatory Impact Analysis, 2008 National Ambient Air Quality Standards for Ground

- level Ozone, Chapter 6. O ffice of Air Quality Planning and Standards, Research Triangle Park, NC. March. Available at <http://www.epa.gov/ttn/ecas/regdata/RIAs/6

- ozoneriachapter6.pdf>.

EPA

- HQ

- OAR

- 2009

- 0472

- 0238

65 U.S. Environmental Protection Agency (U.S. EPA). 2010. Regulator y Impact Analysis: National Emission Standards for Hazardous Air Pollutants from the Portland Cement Manufacturing Industry. Office of Air Quality Planning and Standards, Research Triangle Park, NC. August. Available on the Internet at < http://www.epa. gov/ttn/ecas/regdata/RIAs/portlandcementfinalria.pdf >. EPA

- HQ

- OAR

- 2009

- 0472

- 0241

66 U.S. Environmental Protection Agency (U.S. EPA). 2010. Final NO2 NAAQS Regulatory Impact Analysis (RIA). Office of Air Quality Planning and Standards, Research Triangle P ark, NC. April. Available on the Internet

at http://www.epa.gov/ttn/ecas/regdata/RIAs/FinalNO2RIAfulldocument.pdf . Accessed March 15, 2010. EPA

- HQ

OAR

- 2009

- 04 72

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Page 72 of 89 Year All Sources c Upstream (Non

- EGU)

Sources d Mobile Sources

SO 2 VOC NO X Direct

PM2.5 NO X Direct

PM2.5 Estimated Using a 3 Percent Discount Rate b

2015 $30,000 $1,200 $4,900 $230,000 $5,100 $280,000

2020 $33,000 $1,400 $5,400 $250,000 $5,600 $310,000

Estimated Using a 7 Percent Discount Rate b

2015 $27,000 $1,100 $4,500 $210,000 $4,600 $250,000

2020 $30,000 $1,200 $4,900 $230,000 $5,100 $280,000

a The benefit

- per

- ton estimates presented in this table are based on an estimate of premature mortality derived from the ACS study (Pope et al., 2002). If the benefit

- per

- ton estimates were based on the Six

- Cities study (Laden et al., 2006), the values woul d be approximately 245% (nearly two

- and

- a

- half times larger).

b The benefit

- per

- ton estimates presented in this table assume either a 3 percent or 7 percent discount rate in the valuation of premature mortality to account for a twenty

- year segmented cessation lag.

c Note that the benefit

- per

- ton value for SO2 is bas ed on the value for Stationary (Non

- EGU) sources; no SO2 value

was estimated for mobile sources. The benefit

- per

- ton value for VOCs was estimated across all sources.

d Non

- EGU denotes stationary sources of emissions other than electric generating units (E GUs).

For certain PM 2.5 - related pollutants (such as direct PM 2.5 and NOx), EPA estimates different per

- ton values for reducing mobile source emissions than for reductions in emissions of the same pollutant from stationary sources such as fuel refineries and storage facilities. These reflect differences in the typical geographic distributions of emissions of each pollutant by different sources, their contributions to ambient levels of PM 2.5 , and resulting changes in population exposure. We apply these se parate values to estimates of changes in emissions from vehicle use and from fuel production and distribution to determine the net change in total economic impacts from emissions of those pollutants. Total monetized PM2.5

- related health impacts associated with the proposal can be found in Table V.C.4

- 4 and per gallon impacts can

be found in Table V.C.4

- 5.

Table V.C.4

- 4

Total Ambient PM2.5

- related Monetized Health Impacts (millions 2010$; based on Pope et al., 2002) a 2014 Monetized Impacts (7%

Discount Ra te

– 3% Discount

Rate) 2022 Monetized Impacts (7%

Discount Rate

– 3% Discount

Rate)

Downstream $5.8

- $6.4 $6.4

- $7.1
Upstream

- $13

- - $15

- $14

- - $16
Net Impacts

- $7.3

- - $8.1

- $7.9

- - $8.7

a Note: Negative values indicate disbenefits associated with decrements in ambient air quality.

Table V.C.4

- 5

Per Gallon Ambient PM2.5

- related Monetized Health Impacts (2010$ per gallon; based on Pope et al., 2002) a
2014 Monetized Impacts (7%

Discount Rate

– 3% Discount

Rate) 2022 Monetized Impacts (7%

Discount Rate

– 3% Discount

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Page 73 of 89 Downstream $0.05

- $0.06 $0.06 b

Upstream

- $0.12

- - $0.13

- $0.13

- - $0.14
Net Impacts

- $0.07 b

- $0.07

- - $0.08

a Note: Negative values indicate disbenefits associated with decrements in ambient air quality.

b Variations in this category are less than one cent per gallon.

The method used in this analysis to estimate the monetized PM2.5

- related impacts of an increase in biodiesel production are subject to a number of assumptions and uncertainties.

The method does not reflect local variability in population density, meteorology, exposure, baseline health incidence rates, or other local factors that might lead to an overestimate or underestimate of the actual benefits of controlling fine particulates in specific locations. This is particularly a problem for the monetization of upstream emissions since those have a very specific geographic profile different to that associated with mobile source emissions.

Transferring the biodiesel tons

- to

- emissions relationship derived from the RFS2 mandate in 2022 to the current analysis (in both 2014 and 2022) assumes that the incremental production of biodiesel associated with the 2014 mandate (of 110 million gallons) will yield the same relative emissions impacts, which we cannot say with ce rtainty.

This analysis assumes that all fine particles, regardless of their chemical composition, are equally potent in causing premature mortality. PM 2.5 produced via transported precursors emitted from stationary sources may differ significantly

from d irect PM 2.5 released from engines and other industrial sources. At the present time, however, no clear scientific grounds exist for supporting differential effects estimates by particle type.

This analysis assumes that the health impact function for fin e particles is linear within the range of ambient concentrations under consideration. Thus, the estimates include health benefits from reducing fine particles in areas with varied

initial concentrations of PM 2.5, including both regions that are in attainm ent with fine particle standard and those that do not meet the standard, down to the lowest modeled concentrations. This is an appropriate assumption because the scientific literature provides no evidence of a threshold below which health effects

associat ed with exposure to fine particles

– including premature death

-- would

not occur.

There are several health benefits categories that we are unable to quantify due to limitations associated with using dollars

- per

- ton estimates, several of which could

be su bstantial. Because NO X and VOC emissions are also precursors to ozone, changes in NO X and VOC would also impact ozone formation and the health effects associated with ozone exposure. Dollars

- per

- ton estimates for ozone do

not exist due to issues associa ted with the complexity of the atmospheric air chemistry and nonlinearities associated with ozone formation. The PM

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Page 74 of 89 benefits

- per

- ton estimates also do not include any human welfare or ecological

benefits.

5. Deliverability and Transport Costs of Materials, Goods, and Products Other Than

Renewable Fuel

EPA evaluated in the RFS2 final rule the impacts on the U.S. transportation network from

the distribution of the total additional volume of biofuels that would be used to meet the RFS2

standards. Oak Ridge National Laboratory (ORNL) conducted an analysis of biofuel transportation activity from production plants to petroleum terminals by rail, barge, and tank truck to identify potential distribution constraints to help support the assessment in th e RFS2

final rule. 67 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 transportation is projected to be accomplished by rail. Nevertheless , it was estimated that the biofuels transport would constitute only 0.4% of the total freight tonnage for all commodities transported by the rail system through 2022. 68 Given the small increase in freight shipments due to the transport 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 renewable fuels.

6

. Wetlands, Ecosystems, and Wildlife Habitats

As direct ed by CAA section 211(o)(2)(B)(ii), in setting the 2014 biodiesel volume requirements, EPA is to consider the impacts of biodiesel production and use on wetlands, ecosystems and wildlife habitat.

The most complete and up

- to

- date assessment of these impacts is contained in the analysis prepared by EPA in response to the requirements set out in CAA section 204. This report to congress considers a range of impacts but the focus of the discussion here is on wetlands, ecosystems and wildlife habitats as directed by the CAA amendments. This report does not attempt to quantify the impacts of biofuel production and use as these impacts are dependent on local or regional conditions. Nevertheless the analy ses contained in the report provide qualitative assessments and reasonable expectations of trends which can be used to

67 “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 p roduction 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 analysis given that biomass

- b ased diesel represented only 8% of the total projected biofuel volumes under the RFS2 final rule.

68 See sections 1.6.4 and 1.6.5 of the RFS2 RIA.*** E.O. 12866 Review

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Page 75 of 89 consider the environmental impacts of increases in biodiesel production and use. These trends are only summarized here while the final r eport provides extensive detail. 69

This assessment focuses on the use of oil from soybeans as the feedstock for biodiesel production. Other oil seed feedstock sources represent a very small portion of biofuel production in 2014 so would be expected to h ave much less of an impact than soy oil. Corn oil extracted during the ethanol production process is increasing, and adds a small increment of supply for biofuel production by 2014 that will offset demands for soy and other oil seed crops, thus reducing p otential agricultural impact of biodiesel production. Corn oil as a feedstock for biofuel production is driven primarily by the demand for corn ethanol, not the demand for the

corn ethanol co

- product of extracted, non

- food grade corn oil. Therefore the i mpact of the relatively small supply of extracted corn oil is not considered here. Finally, waste fats, oils and greases would be expected to have negligible environmental impact as a feedstock since they do not impact agricultural land use and would othe rwise be used for some lower value purpose or simply discarded.

Wetlands can be adversely affected by agricultural production through runoff that can result in nutrient loading (particularly from fertilizers) or from sedimentation (from erosion). Soybe an production tends to use less fertilizer 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 f ields planted in row crops such as corn and soybeans. While the impacts of nutrient loading and erosion tend to be site specific, good farming practices including optimum fertilizer use and the set aside of sensitive

lands via the Conservation Reserve Pro gram (CRP) can significantly help control these adverse affects. Wetlands can also be adversely affected through diversion of surface and ground water for agricultural irrigation. Soybean production less frequently relies on irrigation 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 habitat can be adversely affected if CRP lands are converted to crop production, if row crops such as soybean s replace grassy crops and in general if new lands with diverse vegetation are converted to crop production. As noted in the RFS2 final rule, we do not expect the RFS program production to result in an increase in total acres of agricultural land under pr oduction in the U.S. compared to a reference case without the volumes required under the RFS2 program. The relatively small increase of 0.11 billion gallons should not appreciably affect the amount of land devoted to oil seed production. . Additionally, the USDA commitment to support the CRP program should minimize the likelihood of any significant change in the amount of CRP land. Therefore, while some very local changes may result due to individual farmer’s planting decisions, since no new crop land a re expected in the U.S. due to this increase in biodiesel production and sensitive lands will be protected via programs such as CRP, no measureable impact in aggregate ecosystems or wildlife habitat due to cropland expansion is expected.

69 U.S. EPA (Environmental Protection Agency). February 2012. “Biofuels and the Environment: First Triennial Rep ort to Congress.” Office of Research and Development, Washington, DC. EPA/600/R

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Page 76 of 89 Increased water withdrawals for soy biodiesel production can lead to more frequent low

flow conditions that reduce the availability for aquatic habitat. Additionally, waste water from biodiesel production can adversely affect surface water quality if not properly treated

.

7

. Water Quality and Quantity

The water quality and quantity impacts of biodiesel are primarily related to the type of feedstock and the production practices used both to produce the feedstock and to convert the feedstock into biodiesel. Soybeans a re the principal feedstock used for biodiesel production today. They are predicted to account for 710 million gallons of the 1.39 billion gallons evaluated for 2014 and all of the 110 mill gal increment in biodiesel production above the 1.28 bill gal

volu me requirement for 2013. Non

- food grade corn oil extracted during ethanol production, animal fats and recycled fats account for most of the remaining biodiesel feedstock.

From a water quality perspective, the primary pollutants of concern from soybean production are fertilizers (nitrogen 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 leaching to ground water. Climate, hydrological, and management factors influence the potential for these contaminants to reach water from agricultural lands.

a. Soybean Production

After corn, soybeans are the second largest agricultural crop in terms of acreage in the

U.S. In 2010, American farmers planted 77.7 million acres of soybeans and harvested 3.4 billion bushels. As with the production of any agricultural crop, the impact on water quality depends on a variety of factors including production practices, use of conserv ation 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. Legumes have associations in their roots with bacteria that can acquire atmospheric nitrogen and convert it into bio

- available forms, reducing the need for external addition of nitrogen fertilizer. However, losses of nitrogen and phosphorus from soybeans can occur at quantities that can deg rade water quality. 70 In 2006, USDA’s NASS estimated that nitrogen was applied to 18 percent of the 2006 soybean planted acres in the Program States at an average rate of 16 pounds per acre per year. Phosphate was applied to 23

70 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

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Page 77 of 89 percent of the planted acr es, at an average rate of 46 pounds per acre (NASS, 2007). 71 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

conversio n of idled acreage to soybeans is estimated to result in losses of nitrogen and phosphorus from the soil through cultivation. 72

Agricultural conservation systems can reduce the impact of soybean production on the environment. The systems components include 1) controlled application 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 fields through practices such as cover crops, riparian buffers, controlled drainage for tile drains, and constructed/restored wetlands. 73

The effectiveness of conservation practices, however, depends upon their adoption . The USDA‘s Conservation Effects Assessment Project (CEAP) quantified the effects of conservation practices used on cultivated cropland in the Upper Mississippi River Basin. It found that, while erosion control practices are commonly used, there is consi derably less adoption of proper nutrient management to mitigate nitrogen loss to water bodies. 74 However, as noted above, the relatively low amount of fertilizer used for soybean production tends to lessen the potential for nitrogen loss to water bodies. A dditionally, 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 prod uction compared to corn production and potentially greater nutrient runoff. Proper soil management can reduce this erosion concern.

Water for soybean cultivation predominately comes from rainfall, although about 11 percent of soybean acres in the U.S . are irrigated. 75 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 average of 0.8 acre

- feet of water. 76 Water used for irrigation is at l east temporarily not available for other uses and if pumped from deep aquifers, may not return to those aquifers for centuries

71 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

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

- 324.

73 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.

74 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

. 75 U.S. Department of Agriculture. 2010. 2007 Census of agriculture, Farm and ranch irrigation survey (2 008). http://www.agcensus.usda.gov/Publications/2007/Online_Highlights/Farm_and_Ranch_Irrigation_Survey/fris08.pdf

76 U. S. Departmen t 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

- RptToCongress

EWwEIAcomments

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Page 78 of 89 There is some concern that the demand for corn and soybeans as biofuel feedstocks may lead to high prices of these commodities, inducing farmers with land currently enrolled in USDA’s CRP to return to intensive agricultural production (e.g., Secchi et al., 2009). 77 The CRP provides farmers with financial incentives to set aside a certain portion of their cropland in order

to conse rve or improve wildlife habitat, reduce erosion, protect water quality, and support other environmental goals. Biomass produced from CRP lands is considered “renewable biomass” as defined under the RFS regulations and is therefore eligible for use in th e production of renewable fuel under the RFS program. 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 million acres from the 2002 Farm Bill with the potential for m aking more acreage available for the production of row crops. As noted earlier, the USDA’s position is to support maintaining 32 million acres of CRP protected lands so in aggregate we do not expect significant changes in the

amount of land in CRP. Howev er, individual farmers have the opportunity to move specific land in and out of CRP such that the specific lands in the program do not necessarily remain fixed. Historically, land entering and exiting the CRP program has been more vulnerable to erosion

th an other cultivated land, but also less productive. 78 So while the conversion of CRP land to intensive feedstock production is possible, the likelihood of such a land use conversion is uncertain given practical economic and agronomic considerations.

b. 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 feedsto ck processed, bio

- refinery 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 co ntrol 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, the rapid development of the biodiesel industry has caused a temporary gl ut of glycerin production, resulting in some instances of facilities disposing glycerin. 79 Glycerin disposal may be regulated under several EPA programs, depending on the practice. However, there have been incidences of glycerin dumping, including an inci dent in Missouri that resulted in a large fish kill. 80 Some biodiesel facilities discharge their wastewater to municipal wastewater treatment systems for treatment and discharge. There have been several cases of municipal wastewater treatment plant upsets due to high BOD loadings from releases of

77 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.

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

- by

- side.

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

. 79 Research continues on alternative, higher value uses of glycerin, so this excess supply may be reduced or perhaps

not exist in 2014.

80 U.S. EPA. 2010b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA

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

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Page 79 of 89 glycerin. 81 BOD can lead to methane emissions during the water treatment process. To mitigate wastewater issues, some production systems reclaim glycerin from the wastewater. Closed

- loop systems in which water an d solvents can be recycled and reused can reduce the quantity of water that must be pretreated before discharge. Others employ anaerobic digesters to mitigate the release of methane to the atmosphere.

Biodiesel can also impact water bodies as a result of spills. However, biodiesel degrades approximately four times faster than petroleum diesel including in aquatic environments. 82
Results of aquatic toxicity testing of biodiesel indicate that it is less toxic than regular diesel. 83

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.

Biodies el 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 fo r each gallon of biodiesel produced; some facilities recycle wash water, which reduces overall water consumption. 84

8

. Job Creation and Rural Economic Development

In the RFS2 final rule, we anticipated employment to increase and income to expand in rural areas and farming communities as a result of the increased use of renewable fuel. Income expansion in rural areas from renewable fuel production will contribute to rural economic development. As mentioned above, industry activities are currently progressing, ramping up biodiesel production from the approximately 0.38 bill gallons estimated to have been used in the U.S. in 2010 to over 1.0 bill gallons that was prod uced in 2011. This increase in biodiesel production was in large part due to bringing on line existing capacity idled due to lack of demand, a trend that we expect will continue into the near future.

Employment impacts of federal rules are of particul ar concern in the current economic climate of sizeable unemployment. The recently issued Executive Order 13563, “Improving Regulation and Regulatory Review” (January 18, 2011), states, “Our regulatory system must protect public health, welfare, safety, an d our environment while promoting economic growth, innovation, competitiveness, and job creation ” (emphasis added). EPA is accordingly providing estimates of the effects of this proposal on domestic employment.

81 U.S. EPA. 201 0b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA

- 420

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- 10

- 006.

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

.. 82 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

. 83 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.

84 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA). EPA

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

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Page 80 of 89 When the economy is at full employment, an environmental regulation is unlikely to have much impact on net overall U.S. employment; instead, labor would primarily be shifted from one sector to another. These shifts in employment impose an opportunity cost on society, approximated by the wages of the employees, as regulation diverts workers from other activities in the economy. In this situation, any effects on net employment are likely to be transitory as workers change jobs (e.g., some workers may need to be retrained or require time to search f or new jobs, while shortages in some sectors or regions could bid up wages to attract workers).

On the other hand, if a regulation comes into effect during a period of high unemployment, a change in labor demand due to regulation may affect net overall U.S. employment because the labor market is not in equilibrium. Schmalansee and Stavins point out that net positive employment effects are possible in the near term when the economy is at less than full employment due to the potential hiring of idle labo r resources by the regulated sector to meet new requirements (e.g., to install new equipment) and new economic activity in sectors related to the regulated sector. 85 In the longer run, the net effect on employment is more difficult to predict and will depe nd on the way in which the related industries respond to the regulatory requirements. For this reason, they urge caution in reporting partial employment effects since it can “paint an inaccurate picture of net employment impacts if not placed in the broad er economic context.”

This proposal is expected to primarily affect employment in the United States through the biodiesel plants and distributors, and through several related sectors, specifically, industries that supply inputs in the production of biodi esel. Assuming the current average of 30 to 40 people to operate a biodiesel plant of 30 million gallons (a typical capacity for a standalone transesterification plant), an expansion of 110 million gallons is the equivalent of adding about 4 plants represe nting the addition of around 138 direct jobs for biodiesel production 86

. Expansions to the fuel distribution infrastructure (i.e., more fuel terminals, rail cars, tank trucks, barges etc.) would also be needed to support the use of an additional 110 mill ion gallon increase in the 2014 volume requirement for biomass

- based diesel. This would require an estimated 47 additional truck trips per day or an addition of 47 delivery drivers per day assuming one trip per delivery truck per day to account for drivin g and loading / unloading time. 87 Necessary support to a functioning biodiesel plant such as the delivery of methanol to allow processing of vegetable oil into biodiesel as well as additional handling at biodiesel distribution centers will also add

directl y to the employment impacts.

Most large biodiesel plants in the U.S. are located in rural communities near feedstock (soybean or corn oil) sources. Urban biodiesel plants tend to be smaller with more diffuse feedstock suppliers. In 2011, approximatel y 71 percent of biodiesel producers were located in rural areas, defined as towns of less than 50,000. A 30 million gallon per year (MGY) biodiesel plant will spend nearly $140 million on goods and services with feedstocks accounting for more

85 Schmalensee, Richard, and Robert N. Stavins. “A Guide to Economic and Policy Analysis of EPA’s Transport Rule.” White paper co mmissioned by Excelon Corporation, March 2011 ( Docket EPA

- HQ

- OAR

- 2010

- 0799 ).

86 Presentation from National Biodiesel Board, “Biodiesel Forecasts, Infrastructure, and Economic Impacts”, February 14, 2012.

87 Ibid.*** E.O. 12866 Review

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Page 81 of 89 than 80 perc ent of expenditures. 88 The size of the economic impact on the local economy of spending by an individual biodiesel plant will depend on location (e.g., State) and how much feedstock is sourced locally. Indirect employment is also expected to increase in rural areas as idled plants are brought on line and the general economy improves in response to this increase in production.

In addition to the employment effects from increased biodiesel production, this proposal

would also result in reductions in di esel fuel use, which could affect employment in the diesel fuel supply chain. The loss of expenditures to diesel fuel suppliers throughout the diesel fuel supply chain, from the petroleum refiners to diesel fuel distributors, is likely to result in some

l oss in employment in these sectors. The potential impacts on the diesel industry and other sectors of the economy are outside the scope of this analysis.

To summarize, we anticipate that bringing idle biodiesel plants back online and expanding biodiesel distribution infrastructure in the U.S. will increase employment in the renewable fuels and related industries and promote rural economic development. These increases in employment are similar to what we anticipated when we analyzed the volume requirements in RFS2 final rule.

88 Ibid.*** E.O. 12866 Review

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Page 82 of 89 VI. Public Participation

We request comment on all aspects of this proposal. This section describes how you can participate in this process.

A. How Do I Submit Comments?

We are opening a formal comment period by publishing this document. We will accept comments during the period indicated under the DA TES section above. If you have an interest in the proposed standards, we encourage you to comment on any aspect of this rulemaking. We also request comment on specific topics identified throughout this proposal.

Your comments will be most useful if yo u include appropriate and detailed supporting rationale, data, and analysis. Commenters are especially encouraged to provide specific suggestions for any changes that they believe need to be made. You should send all comments, except those containing pro prietary information, to our Air Docket (see ADDRESSES section above) by the end of the comment period.

You may submit comments electronically, by mail, or through hand delivery/courier. To ensure proper receipt by EPA, identify the appropriate docket i dentification number in the subject line on the first page of your comment. Please ensure that your comments are submitted within the specified comment period. Comments received after the close of the comment period will be marked “late.” EPA is not req uired to consider these late comments. If you wish to submit Confidential Business Information (CBI) or information that is otherwise protected by statute, please follow the instructions in Section VI.B below.

B. How Should I Submit CBI to the Agency?

Do not submit information that you consider to be CBI electronically through the electronic public docket, www.regulations.gov, or by e

- mail. Send or deliver information identified as CBI only to the following address: U.S. Environmental Protection Agency

, Assessment and Standards Division, 2000 Traverwood Drive, Ann Arbor, MI, 48105, Attention

Docket ID EPA

- HQ

- OAR

- 2010

- 0133. You may claim information that you submit to EPA as CBI by marking any part or all of that information as CBI (if you submit CBI on disk or CD ROM, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is CBI). Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

In addition to one complete version of the comments that include any information claimed as CBI, a copy of the comments that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. If you submi t the copy that does not contain CBI on disk or CD ROM, mark the outside of the disk or CD ROM clearly that it does not contain CBI. Information not marked as CBI will be included in the public docket without*** E.O. 12866 Review

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Page 83 of 89 prior notice. If you have any questions about CBI or the procedures for claiming CBI, please consult the person identified in the FOR FURTHER INFORMATION CONTACT section.*** E.O. 12866 Review

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Page 84 of 89 VII. Statutory and Executive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation 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 iss ues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. Accordingly, EPA submitted this action to the Office of Management and Budget (OMB) for review under Executive Orders 12866 and 13563 (76 FR 3821, January 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 renewable fuel, were already addressed in the RFS2 final rule promulgated on March 26, 2010 (75 FR 14670). With the exception of cellulosic biofuel, this action proposes the percentage standards applicable in 2013 based on the volumes that were analyzed in the RFS 2 final rule.

B. Paperwork Reduction Act

This action does not impose an information collection burden under the provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. Burden is defined at 5 CFR 1320.3(b). This proposed rule does not impose any additional reporting requirements on regulated parties beyond those already required under the RFS program; therefore, there will not be any additional reporting burdens on entities impacted by this regulation. This action merely proposes, as required by section 211(o) of the Clean Air Act, the RFS annual standards for 2013.

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 Administrative Procedure Act or any other statute unless the agency certifies that the rule will not have a significant economic impact on a substantial

number of small entities. Small entiti es 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 defined as: (1) a small business as defined by the Small Business Administration’s (SBA) regulations at 13 CFR 121.201; (2) a small governmental jurisdiction that is a government of a city, county, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not

- for

profit enterprise which is independently owned and operated and is not dominant in its*** E.O. 12866 Review

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Page 85 of 89 field.

After considering the economic impacts of today’s proposed rule on small entities, we certify that this proposed action w ill not have a significant economic impact on a substantial number of small entities. This rule proposes the annual standard for

cellulosic biofuels for 2013 and biomass

- based diesel for 2014. The impacts of the RFS2

program on small entities were alread y addressed in the RFS2 final rule promulgated on March 26, 2010 (75 FR 14670), and this proposed rule will not impose any additional requirements on small entities. However, w e continue to be interested in the potential impacts of t he proposed rule on small entities and welcome comments on issues related to such impacts.

D. Unfunded Mandates Reform Act

This proposed action contains no Federal mandates under the provisions of Title II of the Unfunded Mandates Reform Act of 1995 ( UMRA), 2 U.S.C. 1531

- 1538 for State, local, or tribal governments or the private sector. This action implements mandate(s) specifically and explicitly set forth by the Congress in Clean Air Act section 211(o) without the exercise of any policy discretion by EPA. Therefore, this action is not subject to the requirements of sections 202 or 205 of the UMRA.

This action is also not subject to the requirements of section 203 of UMRA because it contains no regulatory requirements that might significantly or u niquely affect small governments. This proposed rule only applies to gasoline, diesel, and renewable fuel producers, importers, distributors and marketers and merely proposes the 2013 annual standards for the RFS program.

E. Executive Order 13132: Fede ralism

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 among the vari ous levels of government, as specified in Executive Order 13132. This action proposes the 2013 annual standards for the RFS program and only applies to gasoline, diesel, and renewable fuel producers, importers, distributors and marketers. Thus, Executive Order 13132 does not apply to this rule.

In the spirit of Executive Order 13132, and consistent with EPA policy to promote communications between EPA and State and local governments, EPA specifically solicits comment on this proposed rule from State a nd local officials.

F. Executive Order 13175: Consultation and Coordination with Indian

Tribal Governments*** E.O. 12866 Review

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Page 86 of 89 This action does not have tribal implications, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This proposed rule will be implemented at the Federal level and affects transportation fuel refiners, blenders, marketers, distributors, importers, exporters, and renewable fuel producers 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.

EPA specifically solicits additional comment on this proposed action from tribal

officials.

G. Executive Order 13045: Protection of Children from Environmental

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 reg ulation. This action is not subject to EO 13045 because it does not establish an environmental standard intended to mitigate health or safety risks and because it implements specific standards established by Congress in statutes (section 211(o) of the Clean Air Act).

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

This action is not a “significant energy action” as defined in Executive Order 13211, “Actions Concerning Regulations That Significantly A ffect 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 action simply proposes the annual standards for renewable fuel for 20 13.

I. National Technology Transfer and 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. Voluntary consensus standards are technical standards (e.g., materials specifications, test methods, sampling procedures, and business practices) tha t are developed or adopted by voluntary consensus standards bodies. NTTAA directs EPA to provide Congress, through OMB, explanations when the Agency decides not to use available and applicable voluntary consensus standards.

This proposed rulemaking does not involve technical standards. Therefore, EPA is not considering the use of any voluntary consensus standards.*** E.O. 12866 Review

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Page 87 of 89 J. Executive Order 12898: Federal Actions to Address Environmental 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 provision 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 appropriate, disproportionately high and adverse human health or environmental effects of their programs, policies, and activities on minority populations and low

- income populations in the United States.

EPA ha s determined that this proposed rule will not have disproportionately high and adverse human health or environmental effects on minority or low

- income populations because it does not affect the level of protection provided to human health or

the environmen t. This action does not relax the control measures on sources regulated by the RFS regulations and therefore will not cause emissions increases from these sources.*** E.O. 12866 Review

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Page 88 of 89 VIII. Statutory Authority

Statutory authority for this action comes from section 211 of the Clean Air Act, 42 U.S.C. 7545. Additional support for the procedural and compliance related aspects of today’s proposal, 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

Administrative practice and procedure, Air pollution control, Diesel fuel, Environmental protection, Fuel additives, Gasoline, Imports, Oil imports, Petroleum.

Dated:

Lisa P. Jackson,

Administrator.*** E.O. 12866 Review

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Page 89 of 89 For the reasons set forth in the preamble, 40 CFR part 80 is proposed to be amended as follows:

PART 80

— REGULATION OF FUELS AND FUEL ADDITIVES

1. The authority citation for part 80 continue s to read as follows: Authority: 42 U.S.C. 7414, 7542, 7545, and 7601(a).

2. Section 80.1405 is amended by adding paragraph (a)(4) to read as follows:

§ 80.1405 What are the Renewable Fuel Standards? (a) * * * (4) Renewable Fuel Standards for 2013. (i) The value of the cellulosic biofuel standard for 2013 shall be 0.020 percent. (ii) The value of the biomass

- based diesel standard for 2013 shall be 1.18 percent. (iii) The value of the advanced biofuel standard for 2013 shall be 1.69 percent. (iv) The value of the renewable fuel standard for 2013 shall be 10.15 percent.