EO12866_RFS standards 2060

- AR43 NPRM FRN_2012 062 8 .docx

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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 coproposes two options for the applicable volume 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 b efore [ 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 b e 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 boxed 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.reg ulations.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 con sider to be CBI or otherwise 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 com ment. 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. I f you submit an electronic 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 contac t 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 homepage 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 th e www.regulations.gov index. 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 availa ble 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, Washingt on, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566

- 1744, and the telephone number for the Air Docket is (202) 566

- 1742.

FOR FURTHER INFORMATION CONTACT: Julia MacAllister , Office of Transportation and Air Quality, Assessment and Standards Division, Environmental Protection Agency, 2000 Traverwood Drive, Ann Arbor MI 48105 ; Telephone number: 734

- 214

- 4131 ; Fax number: 734

- 214

- 481 6 ; E

- mail address: macallister.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?

Entities 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. Potenti ally regulated categories 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 pro posed 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 hav e 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 version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the

infor mation claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with 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 refere ncing 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 th at you
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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 reproduced.

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

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

threats.

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

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

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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

................................ ................ 56

1. Climate Change

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

2. Energy Security

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

3. Air Quality

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

4. Consideration of Applicable Statutory Econom ic Factors

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

a. Monetized Quantifiable Costs

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

b. Transportation Fuel Costs

................................ ................................ ......................... 71

c. Monetized Quantifiable Benefits

................................ ................................ .............. 72

i. Greenhouse Gas Impacts

................................ ................................ ....................... 72

ii. Energy Security

................................ ................................ ................................ ..... 72

iii. Air Quality

................................ ................................ ................................ ............ 72

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

Renewable Fuel

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

6. Wetlands, Ecosystems, and Wildlife Habitats

................................ .............................. 77

7. Water Quality and Quantity

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

a. Soybean Production

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

b. Biodiesel Production

................................ ................................ ................................ . 81

8. Job Creation and Rural Economic Development

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

D. Coproposal for 1.28 and 1.39 Billion Gallons

................................ ................................ .. 83

VI. Public Participation

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

A. How Do I Submit Comments?

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

B. How Should I Submit CBI to the Agency?

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

VII. Statutory and Executive Order Reviews

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

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

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

B. Paperwork Reduction Act

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

C. Regulatory Flexibility Act

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

D. Unfunded Mandates Reform Act

................................ ................................ ...................... 88

E. Executive Order 13132: Federalism

................................ ................................ ................. 88

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

88

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

................................ ................................ ................................ .............................. 89

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

................................ ................................ ......................... 89

I. National Technology Transfer and Advancement Act

................................ ..................... 89

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

- Income Populations

................................ ................................ ............... 89*** E.O. 12866 Review

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VIII. Statutory Authority

................................ ................................ ................................ ........... 91*** 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 A ir Act (CAA) section 211(o) which were added 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 promulg ation 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 Applicable 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

p ercentage standards are applied to the volume 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 sub stantial 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 vario us potential uncertainties, we are projecting 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 suffic ient volumes to meet the statutory applicable 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 applica ble 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. In today's NPRM we present additional analysis suggesting that there may be sufficient feedstocks and production capacity to permit a small increase in the applicable volume requirement for biomass

- based diesel in 2014 above 1.28 billion gallons. Moreover, in the longer term the benefits of increased volumes of biomass

- based diesel are exp ected to exceed the costs. Nevertheless, it may be prudent to maintain the 2014 volume requirement at 1.28 billion gallons in order to provide some additional time to evaluate how the market is responding. Therefore, we are coproposing both an increase i n the biomass

based diesel applicable volume requirement to 1.39 billion gallons in 2014 and maintaining the 2014 volume requirement at 1.28 billion gallons.

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 proposin g 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 app licable 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 other 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 p rogram 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 fol lowing year. If the projected volume of cellulosic biofuel production is less than the*** E.O. 12866 Review

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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 st andard to the projected volume of production. In today's proposal, we present our analysis of cellulosic biofuel production and proposed projected volume for 2013. The analyses that led to the proposed 2013 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 Informatio n Administration (EIA) is required to provide to EPA by October 31, information from Production Outlook Reports, and other 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 renewable 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 fuel presented in today's proposal, we have calculated proposed percentage standards that would apply to all producers and importers of ga soline and diesel in 2013. The proposed percentage standards are based on an early projection of volumes of gasoline and diesel consumption in 2013 from the Energy Information Administration (EIA). EPA intends to use updated EIA projections of gasoline a nd 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 yea rs after 2012 no later than 14 months before the first year for which the applicable volume will apply. EPA proposed an 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 coproposing two options for the 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 and 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 large scale cellulosic biofuel production facilities. Companies are continuing to inv est significant sums of money to further refine cellulosic biofuel production technology and to construct the first commercial

scale facilities. From 2007 through the second quarter of 2011over $2.4 billion was invested in*** E.O. 12866 Review

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Page 10 of 92 advanced biofuel production comp anies 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 Section II.B.

2013 is also expected to be a year of transition for the cellulosic bi ofuel industry, as many companies are shifting their focus from technology development to commercialization. This transition began in 2012 with the first commercial production 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 associated with commercial

- scale cellulosic biofuel production will be significantly

de creased, 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 wer e 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 other type of cellulosic biofuel. Facilities primarily focused on research and developme nt were not the focus of our assessment; however their production volumes were considered in aggregate. From this universe of potential cellulosic biofuel sources we identified the subset that had a possibility of producing commercial volumes of qualifyin g 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 expected state of funding, the status of the technology utilized, progress towards

constru ction and production goals, and other significant factors that could potentially impact fuel production or the ability of the produced fuel to generate cellulosic Renewable 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 production facilities with the intention of exporting their fuel into the U.S. in 2013. Of t he 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 development and demonstration facilities in the United States in 2013.

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 11 of 92 Table I.B.1

- 1

Pro jected Available Cellulosic Biofuel Plant Volumes for 2013

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

Start

- Up

Date Projected available

volume 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 2013 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 applicabl e volumes for advanced biofuel and total 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 fin alized 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 sta ndard 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 pot ential to provide significantly more than 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 i n Section III, these sources include domestic 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 o f conventional renewable fuel to satisfy 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 92 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 applicable percentages are set so that if each regulated party meets the percenta ges, 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 advanced 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 biomass

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 Perce ntage 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 provided 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 92 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 coproposing an applicable volume of either 1.28 bill gal lons or 1.39 bill gallons for biomass

- based diesel for 2014. We have analyzed the impacts of increasing

the biomass

- based diesel standard for 2014 beyond the 1.28 bill gal requirement established for 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. However, the statute also indicates that we should take into

account a review o f the implementation of the program for years prior to 2013. While the industry is on track to meet the 1.0 bill gal applicable volume requirement for 2012, and may produce a total annual volume of around 1.3 bill gallons in 2012, the market has little ex perience at these production levels. Thus, it may be prudent to leave the 2014 volume requirement at 1.28 bill gal before considering volume increases in subsequent years. Section V provides additional 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 directionally beneficial GHG impacts as cellulosic biofuels in gene ral 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 from cellulosic biofuels compared to the petroleum

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

We are coproposing to either leave the 2014 volume requirement for biomass

- based diesel at 1.28 bill gal, or to increase it to 1.39 bill gal. A volume requirement of 1.39 bill gal

w ould be 110 mill gallons above the 2013 required volume of 1.28 bill gal that we are finalizing in a separate action. The RFS program established by Congress is a long

- term program aimed at replacing fossil fuels used in the transportation sector with low

- GHG renewable fuels over time. In the RFS2 final rule, EPA assessed the costs and benefits of this program as a whole when the program would be fully mature in 2022. We continue to believe this is the appropriate approach to examining the costs and bene fits of a long

- term program like the RFS2. However, we have estimated costs and benefits in 2014 where such estimates can reasonably be made and have*** E.O. 12866 Review

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Page 14 of 92 provided trends and other information on likely impacts where quantification for just 2014 is not possibl e or would not reflect the continually progressive nature of the program.

The statute requires EPA to consider a number of factors when setting the biomass

- based diesel mandate for years after 2012. These include environmental impacts (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.

If the 110 million gallon increment over the 2013 biomass

- based diesel standard is met solely with soybean oil, we estimate that soybean prices could increase up to 1.5 cent s per pound in 2014, and that the cost of producing this increment in biodiesel would range from $112 to $162 million in 2014. Illustrative of the changing impacts over the duration of the RFS program, the cost of this amount of soy

- based biodiesel in 202 2 would be between

- $77 and $45 million. Adding the estimate of 2014 costs to the total 2014 fuel pool would suggest a diesel fuel cost increase of less than half of 1 cent per gallon. Of course, if less expensive feedstock is used, then the cost impacts would be smaller still

.

We estimate that the quantifiable benefits from decreased GHG emissions stemming from this rule are up to $42 million for the emissions stream beginning in 2014 and between $3 million and $47 million for the emissions stream begin ning in 2022. The estimated benefits of increased energy security are about $16 million in 2014 and about $18 million in 2022. The estimated air quality disbenefits are between $7.6 and $ 21 million in 2014 and between $8.3 and $ 22 million in 2022. Benef its increase over time because of the increasing value of the social cost of carbon. Simultaneously, costs decrease over time because of increasing oil prices and decreasing biodiesel feedstock prices.

For advanced biofuel and total renewable fuel, we a re 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 the RFS2 final rule published on March 26, 2010. Today's rulemaking simply p roposes the standards for 2013 advanced biofuel and total renewable fuel whose impacts were previously analyzed.*** E.O. 12866 Review

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Pag e 15 of 92 II. Projection 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 qualifying volumes for consumption as transpo rtation 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 biof uel 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 development

and demonstration

- scale faciliti es 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

cellu losic 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 signed contracts to obtain significant quantiti es 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 biofuel production facilities. Two commerci al

- 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 biofue l 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 reason s 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 standar ds 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 a nd 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 Administr ation (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 the 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 biomass ethanol was produced. However, this biofuel was not made from cellulosic feedsto cks, but rather was categorized as cellulosic under the limited provisions of §80.1101(a)(2).*** E.O. 12866 Review

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Pag e 16 of 92 A. Statutory Requirements

The volumes of renewable fuel to be used under the RFS program each year (absent an adjustment or waiver by EPA) are spe cified 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 biofuel production for the following year is less than the applicable volume shown in Table II.A

- 1, then EPA is to reduce the applicable volume of 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 2013 volume requirements for advanced biofuel s 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 demon stration

- 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 all that were part of our 2012 volume projec tions, 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 a re 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 included 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 was 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 concerns 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 their facility to allow for cellulosic ethano l 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 initial production of cellulosic ethanol Rang e 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 towards producing cellulosic biofuel at prices competitive*** E.O. 12866 Review

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Pag e 17 of 92 with petroleum fuels. From 2007 through the second quarter of 2011 ven ture capitalists invested over $2.4 billion in advanced biofuel companies in North America 4 . Recent advancements in enzyme and catalyst technologies are allowing cellulosic biofuel producers to achieve greater yields of biofuel per ton of feedstock. Thes e advancements have led to lower operational costs as they have driven down the cost for feedstock, energy, and other important inputs on a per gallon basis. For example, the estimated cost of cellulosic ethanol production using an enzymatic hydrolysis pr ocess has decreased from $4

- $8 per gallon in 2007 to $2

- $3.50 per gallon by 2012 5 . NREL similarly reports that advancements in cellulosic 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 facilities per gallon of annual fuel production, as more gallons of biofuel can be produced at a facility without additional equip ment or increased feedstock requirements.

As cellulosic biofuel producers gain experience and continue to progress towards

commercial

- scale biofuel production, it is reasonable to expect that the production costs and capital costs will continue to declin e. This is a pattern shown by many new technologies, including renewable and emerging energy technologies. One example which has 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 decreased by 45%, while the capital costs of a dry mill ethanol facility decreased by 88%. 7 Many of the drivers for this cost r eduction, such as higher ethanol yields, reduced enzyme costs, and better fermentation technologies 8 are also expected to be factors in the lower cellulosic biofuel costs expected in the future. While the cost reduction percentages observed in the dry mil l corn ethanol industry are not directly applicable to the cellulosic biofuel industry, the trend of decreasing production and capital costs over time is expected to hold true.

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

commercial

- scale cellulosic biofuel production facilities. This issue has often been raised as a factor that could hinder the development of the cellulosic biofuel industry as many of the proposed facilities rely on feedstocks, such as agricultur al 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: Meeting the California LCFS. Environmental Entrepreneurs. August 22, 2011. Available O nline

< 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 reduct ions in US corn ethanol production costs: An experience curve approach. Energy Policy 37 (2009): 190

- 203. Available Online <http://ddr.nal.usda.gov/bitstream/10113/22550/1/IND44146988.pdf>.

8 IBID*** E.O. 12866 Review

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Pag e 18 of 92 in the regions surrounding their first commercial

- scale facilities to ensure the availability of the necessary feedstock. Because corn cobs and stover are only seasonally available, us ing 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 suppl y to their cellulosic biofuel production facilities throughout the year. Both companies successfully completed fall biomass harvests 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 future production facilities.

Several cellulosic biofuel producers are planning to use slash, forest thinnings, and forest produ ct residue or the cellulosic portions of yard waste as feedstock. This material has many qualities that make it desirable as a cellulosic 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 thinning, and forest product residue

for their first commercial

- scale facility. While KiOR plans to transition to planted trees fo r 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 c entralized facility, is consistently available throughout the year, and can be obtained for a very low, or even negative cost. MSW 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 plans to build large commercial

- scale facilities that were scheduled to begin production in the past few years. The constructio n of many of these facilities was dependent on the companies raising additional funding, either from venture capitalists, government grants, or loans backed by government guarantees. So far few of the companies that made these early announcements have bee n 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 volum e 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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Pag e 19 of 92 these projects have already received, and in several cases have closed on loan guarantees offered by DOE or USDA. Other companies have filed fo r 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 existing 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 status of the projects included in our projected cellulosic biofuel production

volumes for 2013.

If these first commercial

- sc ale cellulosic biofuel production facilities are successful, the potential exists for a rapid expansion of the industry in subsequent years. Having successful

commercial

- scale facilities would not only provide useful information to help maximize the

effic iency of future facilities, but would also significantly decrease the technology and scale

- up risks associated with cellulosic biofuel production facilities and could lead to increased access to project funding. Fiberight and ZeaChem both plan to build la rger

- scale facilities (~25 mill gal per year) as soon as they are able to raise the necessary funds. INEOS Bio plans to expand production by building additional units near sources of inexpensive feedstock ranging in size from 8 to 50 million gallons of et hanol per year. They are currently exploring expansion possibilities in the United States and internationally. KiOR has plans for a second commercial

scale facility to be built in Natchez, MS, that will be approximately three times larger (~30 mill gal p er 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 includi ng co

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

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

C. Cellulosic Biofuel Volume Assessment for 2013

In 2011 no cellulosic biofuel RINs were gener ated, though some small volumes were produced. Announcements of new projects and project funding, changes in project plans, project 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 influenced by various tax credits and subsidies, and uncertainty about these programs may have had an impact on cellulosic biofuel production in

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Pag e 20 of 92 Despite these challenges, there are several factors indicating that significant volumes of cellulosic biofuel can be produced in 2013. Commercial

- scale cellulosic biofuel projects from INEOS Bio and KiOR are expected to begin fuel pr oduction 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 c ellulosic 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

compan ies, many of which have substantial experience in related industries.

In order to project cellulosic biofuel production for 2013, we have tracked the progress of more than 100 biofuel production facilities. From this list of facilities we used publica lly available information, as well as information provided by DOE and USDA, to make a preliminary determination of which facilities are the most likely candidates to produce cellulosic biofuel and generate cellulosic biofuel RINs in 2013. Each of these co mpanies 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, curre nt status of the production technologies, announced construction and production rampup periods, and annual fuel production targets were all considered when we met with senior level representatives of each company to discuss cellulosic biofuel target produc tion 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 decision 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 that 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 Facilities 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 commercially 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 2012. None of the facilities have completed the registration process for the RFS program, and they will be unable to generate c ellulosic RINs until this process is completed. The current status of each of these facilities, including target production levels for each facility in 2013, is discussed below.

API*** E.O. 12866 Review

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Pag e 21 of 92 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 a nd 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, lar ger

- 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

demon stration facility. Construction of the Alpena, Michigan facility began in March 2011 and API anticipates beginning the production of cellulosic ethanol at this site in the first half of 2012. API plans to switch fuel production at their Alpena facility f rom ethanol to butanol in late 2012 or early 2013. API is also developing a list of projects and is currently in the process 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.

Fib eright

Fiberight uses an enzymatic hydrolysis process to convert the biogenic portion of separated MSW and other waste feedstocks 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 gallons of cellulosic ethanol per year from separated MSW and industrial waste streams. These modifications were scheduled to be comple ted in 2011, but difficulties in securing funding have resulted in construction at this facility being delayed. In January 2012 Fiberight was offered a $25 million loan guarantee from USDA. Closing on this loan would provide substantially all of the

rema ining funds required for Fiberight to complete the modifications necessary to allow for the production of cellulosic ethanol at their Blairstown facility. Construction will begin as soon as Fiberight has secured the necessary funds and will take approxima tely 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. Addi tionally, we have received a waste separation plan from Fiberight for this facility that if approved would allow Fiberight 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 milli on gallons of cellulosic ethanol per year when fully built out.

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Pag e 22 of 92 INEOS Bio has developed a process for producing 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 first 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 biofuel 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 2012. Their ability to generate RINs for any fuel generated using separated MSW would be dependent on having an approved waste separatio n plan.

On February 9, 2011, INEOS Bio broke ground on this facility. Since then significant progress has been made, and 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 propos al we project 8 million gallons of cellulosic ethanol from INEOS Bio in 2013. INEOS Bio is also exploring several opportunities 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 gallons per year.

KiOR

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

oxygen biocrude using a proc ess they call Biomass Fluid Catalytic Cracking (BFCC). BFCC uses a catalyst developed by KiOR in a process similar to Fluid Catalytic Cracking currently used in the petroleum industry. The first stage of this process produces a renewable crude oil

with a n oxygen content of approximately 10%. This bio

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

KiOR’s first commerc ial

- scale facility is located in Columbus, Mississippi and is capable of producing approximately 11 million gallons of gasoline, 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 2 012. KiOR has feedstock supply agreements in place to supply all of the required feedstock for their Columbus facility with slash and pre

- commercial thinning. They also have off

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

commercial

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

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

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Pag e 23 of 92 For 2013 our proposed production projection is for 11 million gallons (18 million ethanol

equivalent gallons) 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 hydrolysis, co

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

- grade ethanol. This production process is versatile eno ugh to allow for a wide variety of cellulosic feedstocks to be used, including woody biomass and herbaceous biomass such as sugarcane bagasse. In August 2010 KL Energy announced a joint development agreement with Petrobras America Inc. As part of the agr eement Petrobras has invested $11 million to modify KL Energy’s 1.5 million gallons per year demonstration facility in Upton, Wyoming 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 facility 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 United 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 components of their

demonstration

- scale facility in Boardman, Oregon, in January 2012, allowing for the production of ethyl acetate f

rom sugars derived from cellulose and hemi

- cellulose. When fully operational, ZeaChem expects this facility will be capable of producing 250,000 gallons of cellulosic ethanol per year. ZeaChem’s production process uses a combination of biochemical and the rmochemical technologies to produce ethanol and other renewable chemicals from cellulosic materials. The feedstock is first fractionated into two separate streams, one containing sugars derived from cellulose and hemicellulose and the other containing lig nin. 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 operations, 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 con vert 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 their first commercial

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

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Pag e 24 of 92 ZeaChem announced that they had received a $232.5 million conditional lo an guarantee offer

from USDA for the construction of their first commercial

- scale facility, which will have a capacity of at least 25 million gallons per year. ZeaChem currently has agreements in place to provide all of the necessary feedstock for this fa cility. 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 volu me 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 cel lulosic 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 in to 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

- scal e cellulosic ethanol facility in Hugoton, Kansas. Abengoa has contracts in place to provide the majority of feedstocks necessary for this facility for the next 10 years and successfully completed their first biomass harvest in the fall of 2011. Construct ion at this facility, which began in September 2011, is expected to take 24 months and be completed in the fourth quarter of 2013. 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 guarantee.

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 t he year. After successfully proving their technology at commercial

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

- locating these new facilities with thei r 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 technology for*** E.O. 12866 Review

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Pag e 25 of 92 more than a decade and began producing small volumes of cellulosic ethanol at pilot

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

DSM of the Netherlands called Poet

- DSM Advanced Biofuels to 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, husks, 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 start

- up of this facility, Poet

constructed a 22

- acre biomass storage facility and had its first commercial harvest in 2010,

collec ting 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 fr om DOE in July 2011, but with the joint venture decided to proceed without the loan guarantee. This project is expected to be completed and produce commercial volumes of cellulosic ethanol in the second half of 2013. For 2013 we project that Project LIBE RTY will produce up to 1 million gallons of cellulosic ethanol. After the completion of Project LIBERTY, Poet plans to build cellulosic ethanol facilities at all of their existing corn ethanol plants. They are also planning to license their technology fo r 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 2014. Companies such as BP, Coskata, DuPont, Enerkem, and several others are all currently targeting 2014 for the start

- up of th eir first commercial facilities. These facilities represent approximately 100 million gallons of additional cellulosic biofuel production capacity. As with the companies discussed above, most of these companies have already begun to develop plans for the ir 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 sign ificant growth of the cellulosic biofuel industry in the United States in the near future.

3. Other Potential Sources of Domestic 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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Pag e 26 of 92 • Compressed natural gas (CNG) derived from biogas, where the biogas is produced from the cellulosic portion of MSW

• Cellulosic ethanol produced from co rn kernel fiber

• Fuel oil produced from woody biomass

If these or other cellulosic biofuel pathways are approved by EPA, they may be used to generate cellulosic biofuel RINs in 2013. Because a final determination on these pathways has not been made, how ever, 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 oth er 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 the United States thus far. We believe this situation is likely to continue in the near future and has not included any cellulo sic biofuel imports in our projections of available volume in 2013.

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

limited to small

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

first commercial

- scale facility located in Crescentino, Italy i n the summer of 2012. When completed, this facility will be capable of producing approximately 12 million gallons of cellulosic ethanol per year. Chemtex uses an enzymatic hydrolysis process to produce ethanol from local agricultural residues and herbace ous energy crops.

Enerkem is also in the process of building their first commercial

- scale facility in Edmonton, Alberta and plans to begin operations in early 2013. Enerkem’s facility will use a thermochemical process to produce syngas from MSW and the n catalytically convert the syngas to methanol. The methanol can then be sold directly or upgraded to ethanol or other chemical products. At full capacity this facility will be capable of producing 10 million gallons of cellulosic ethanol per year. Neit her 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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Pag e 27 of 92 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 cellulosic biofuel production facilities. In 2013 we expect cellulosic biofuel production

from five commercial

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

- 1 below. We believe our focus on

commercial

- scale facilities is appropriate as the industry transitions from small

- scale R&D and pilot f acilities 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, howev er, is expected to small, especially in relation to that from the five facilities listed in Table II.C.5

- 1 below. A combined volume 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 discussed 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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Pag e 28 of 92 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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Pag e 29 of 92 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 con sideration in developing these production targets, such as the current status of project funding, the status of the production facility, anticipated construction timelines, the anticipated start

- up date and ramp

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

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

- scale facilities prior to the design and

construction of their first commercial

- scale facilities. The projects have solid financial backing,

and in the case of Abe ngoa, 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 piece of information as we consider the appropriate level of the

cellulosic biofuel standard to finalize.

It is important to note th at the final cellulosic biofuel standard for 2013 may be set at a volume that differs from the proposed volume. This could happen for a variety of reasons, including unexpected project modifications or cancellations or the inclusion of volumes of

cellulos ic biofuel from sources other than those listed above. For example, the proposed projected available volume of cellulosic biofuel in 2013 discussed above (33 million ethanol

equivalent gallons) does not include potential contributions from cellulosic biof uel 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 cu rrently undergoing an evaluation to determine whether they are valid for the generation of cellulosic RINs, we have not included 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 p rojection. 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 EI A 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 av ailable in 2013.*** E.O. 12866 Review

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Page 30 of 92 III. Assessment of Advanced Biofuel and Total Renewable Fuel for 2013

As described in Section I, the volumes of renewable fuel to be used under the RFS2 program each year (absent an adjustment or waiver by EPA) are speci fied in CAA 211(o)(2). For 2013, the applicable volume of advanced biofuel is 2.75 bill gal and the applicable volume of total renewable fuel is 16.55 bill gal. However, the statute gives EPA the discretion to reduce one or both of these volume requireme nts in the event that the cellulosic biofuel volume requirement is reduced. This section discusses our evaluation of these two volume requirements.

A. Statutory Requirements

According to CAA 211(o)(7)(D)(i), if EPA determines that the projected volum e of cellulosic biofuel production for the following year is less than the applicable volume provided in the statute, then EPA 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 an

amount not to exceed the reduction in cellulosic biofuel.

Since cellulosic biofuel is also used to satisfy the advanced biofu el standard and the total renewable fuel standard, any reductions in the applicable volume of cellulosic biofuel will also affect the means through which obligated parties comply with these two other standards. Congress presumably established the volume r equirements 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 applicable 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 fraction 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 described in Section II.D above, we are indeed proposing a projected available volume of cellulosic biofuel for 2013 at significantly

b elow the statutory applicable volume of 1.0 billion gallons. If we were to finalize a cellulosic biofuel applicable volume of 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 in 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 the 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 92 the applicable volume of advanced biofuel set forth in the statute if there are sufficient volumes

of advanc ed 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 b iofuel under CAA 211(o)(7)(D)(i), our action in reducing the cellulosic biofuel applicable volume should not in itself justify 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 sta tutory volume requirement for advanced biofuel in 2013 is 2,750 mill gal, an increase of 750 mill gal over the 2012 requirement of 2,000 mill gal. In order to determine the sufficiency of advanced biofuel volumes to meet a requirement for 2,750 mill gal i n 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 o f 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 (EM TS)

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

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Page 32 of 92 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 have 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 wastes

We have investigated each of these sources as discussed below.

1. Biodiesel

In a separate action, we are finaliz ing 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 vo lume requirement, the biodiesel industry has the potential to fill much if not all of the gap. As of February 2012, the aggregate production 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 prod uction 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 times for new plants listed in Biodiesel Magazine from July 2006 through May 2009.

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

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Page 33 of 92 published on July 1, 2011, some stakeholders expressed doubts that such increases could occur by 2012. 14 Nevert heless, based on the single

- year increase of more than 600 mill gal in 2011 and the total capacity of existing plants described above, 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 adverse weather conditions are estimated to have reduced cane production by about 4%, a return to normal weather conditions sh ould alone restore approximately 4% of production. Second, the general economic downturn made credit harder to get, delaying the replanting of existing fields. Normally sugarcane fields are replanted every five or six years to maximize yield. However, t he 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%. The y project that by 2015/2016, ethanol production in Brazil will exceed 12 billion gallons of which over 3 billion gallons could be available for export. Even assuming only modest increases in 2012 production due to the need to replant fields, using the

UNI CA projection for 2015/2016 and assuming a linear increase in export volumes from 2012 to 2016, 2013 sugarcane ethanol export volumes could easily double to over 1 billion gallons in 2013. Increased production is supported by the Brazilian government whic h announced in February 2012 support for a plan to invest over $8 billion annually to boost cane and ethanol production. 17 Private investment 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%20P ublications/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 crop from ethanol production to sugar production . B ut 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 reduced sugarcane ethanol production in Brazil.

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

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Page 34 of 92 Santa Terezinha, a Brazilian ethanol producer, recentl y 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 production. Projecting this Brazilian domestic demand into the future can be uncertain since the government can reset the minimu m 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 o nly 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

th e 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 b iofuel). 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 92 Table III.B.3

- 1 Pathways for Advanced Biofuel Fuel type Feedstock Production process requirements

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 i n 2013, we investigated 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

- Moderated 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 projecti on of 2013 production 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 co mpany

- 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 92 Table III.B.3

- 2 Projected Domestic Production of O ther Advanced Biofuel 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 about 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

o r approval of an 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 qualified 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 Vol ume Requirements 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 and cellulosic biofuel requirements. After reviewing the projected availability of advanced biofuel volumes from various sources, we have determined that there will be more than suffi cient 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 biod iesel in excess of 1.28 bill gal. As discussed above, we believe that this 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/Environment al Entrepreneurs.*** E.O. 12866 Review

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Page 37 of 92 reduce th e required volume of 2.75 bill gal advanced biofuel on the basis of available 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 Cong ress envisioned in enacting this provision. We are not aware of any reasons 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 cor n 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 t he 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 92 IV. Proposed Percentage Standards for 2013

A. Background

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). Sin ce there are four separate standards under the RFS2 program, there are likewise four separate RVOs applicable to each obligated party. Each standard applies to the sum of all gasoline and diesel produced or imported. The applicable percentage standards a re set so that if every obligated party meets the percentages, then the amount 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 million 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 renewable 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 thr ough a separate rulemaking. The volumes used to determine the four proposed 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 fue ls are not used in calculating the annual standards. Since the standards apply to producers and importers of gasoline and diesel, these are the transportation fuels used to set the standards, and then again to determine the annual volume obligations of an individual gasoline or diesel producer or importer.

B. Calculation of Standards

1. How Are the Standards Calculated?

The following formulas are used to calculate the four percentage standards applicable to producers and importers of gasoline and die sel (see §80.1405):*** E.O. 12866 Review

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Page 39 of 92 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

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

Air Act for year i, in gallons.

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

Act for year i, in gallons.

RFV RF,i = Annual volume of renewable fuel required by section 211(o) of the Clean Air Act

for year i, in gallons.

G i = Amount of gasoline projected to be used in the 48 contiguous states and Hawaii, in

year i, in gallons.

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 92 RD i = Amount of renewable fuel blended into diesel that is projected to be consumed in

the 48 contiguous states and Hawaii, in year i, in gallons.

GS i = Amount of gasoline projected to be used in Alaska or a U.S. territory in year i if

the state or te rritory opts

- in, in gallons.

RGS i = Amount of renewable fuel blended into gasoline that is projected to be consumed

in Alaska or a U.S. territory in year i if the state or territory opts

- in, in gallons.

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

state or territory opts

- in, in gallons.

RDS i = Amount of renewable fuel blended into 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 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.

The four separate renewable fuel standards for 2013 are based 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 volumes 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 gasoli ne 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 projected 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 b iodiesel projected volumes for the purposes of this proposal, we have used the February 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 i ndustries 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 92 2. Small Refineries and Small Refiners

In CAA section 211(o)(9), enacted as part of the Energy Policy Act of 2005, Congress provided a temporary exemption to small refineries ( 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 temp orary exemption to the few remaining small refiners that met the Small Business Administration’s (SBA) definition of a small business (1,500 employees or less 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 way, the RFS2 program regulations maintained the exemptions for gasoline and diesel produced by small refineries and small refiners through 2010 (unless the exemption was wa ived). See 40 CFR §§ 80.1441, 80.1442.

Congress provided two ways that small refineries 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 whe ther 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 issu ed a study which did not find that small refineries would face a disproportionate economic 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 required 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 stan dards.

Following the release of DOE's 2009 small refinery study, Congress directed 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 sma ll 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 t he exemption of these refineries.

EPA may extend the exemption for individual small 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 som e 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 Ec onomic Hardship," U.S. Department of Energy, March 2011.

28 Since the standards 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 di d not occur until after January 1,

2011.*** E.O. 12866 Review

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Page 42 of 92 Therefore, for this proposal we have calculated the proposed 2013 standards without a small refinery/small refiner adjust ment.

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 annua l standard in November that is applicable in the following calendar year, thereby providing advance notice and certainty to obligated parties regarding their regulatory requirements. Periodic revisions to the standards to reflect waivers issued to small

r efineries 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 refi ners that are issued will not

affect those 2013 standards.

3. Proposed Standards

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, advance d 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 stand ard 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 s tandards 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

ha s 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 o f

zero.

29 75 FR 14716, March 26, 2010.

30 To determine the 49

- state values for gasoline and diesel, the amounts of these fuels used in Alaska is subtracted from the totals provided by DOE. The Alaska fractions are determine d 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 biodiesel use is assumed to be zero.*** E.O. 12866 Review

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Page 43 of 92 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 92 V. Proposed Volume Requirement for Biomass

- Based Diesel in 2014

In today's action we are coproposing an applicable volume of 1.28 or 1.39 billion gallons

biomass

- based diesel for 2014 in accordance with the statutory requirement in CAA 211(o)(2)(B)(ii) 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 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 coproposing 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 at the end of 2012. Instead, the percentage standards for 2014 will be determined after projections of gasoline and diesel volume are provided by the Energy Information Administrat ion (EIA) in the fall of 2013 and will be announced by November 30, 2013. We are also 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 percentage standards must be based, unless the applicable volumes are waived or adjusted by EPA in accordance with specific authority and directives specified in the statu te 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 impl ementation 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 92 su fficiency of infrastructure to deliver and use renewable fuel;

• The impact 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 st atute based on a review of program implementation and analysis of the factors 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 ga llons.

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 in 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 t erm, including production capacity, availability of feedstocks, and impacts on infrastructure. These are factors that could limit the successful implementation of any increment in required applicable volume. We believe that other factors are appropriatel y 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 evolving 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 ins tance, 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 n ot provide authority to raise the applicable volumes of advanced biofuel or 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 o f 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 92 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 t he timeframe within which these volumes must be promulgated: the rules establishing 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 required 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 re cent 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 v olume requirement of 800 mill gal despite producing only half of this volume requirement 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 biofuel 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. Indeed current production rates in the biodiesel industry are consistent with a total production volume of around 1.3 bill gal for 2012. Further discussion of our reasons for finalizing a biomass

- based diesel volume of 1.28 bill gal for 2013 can be found in the preambl e 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

RFS2 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 eval uated 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 feedst ocks, production capacity, and potential limitations related to blending and consumption, and also

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

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Page 47 of 92 considered the impacts such a volume would have in terms of factors specified in the statute, GHG emissions, energy security, costs, impacts to wetlands and wildlife, and others.

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 during next year's rulemaking process 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,*** E.O. 12866 Review

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Page 48 of 92 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.

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 would be produced primarily fr om 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 would enter the market and contribute to the 1.39 bill gal mandat e 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 increase 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

alt ernate 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 t o come from waste 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 pro duction of waste 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. Whi le these other potential feedstocks have existing*** E.O. 12866 Review

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Page 49 of 92 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 are making the cons ervative assumption 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 t o 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. T herefore, we are 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 e thanol producers 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 m ill 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. EPA is therefore making the conservative assumption that they will not contribute to the 2014

biomass

- based diesel volumes.

c. Soybean Oil

Since the RFS2 program began, other oilseeds (e.g., canola oil) have emerged as potential

sources of biodiesel feedstock. However, 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 significant level of production by 2014. If other oilseeds with approved pathways are able to contribute to the biodiesel volum es, 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 suffi cient 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 proposed 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 Agriculture (USDA) historical data and current projections for U.S. supply and use of soybean oi l from the 2006/2007 crop year to the*** E.O. 12866 Review

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Page 50 of 92 2014/2015 year. Since 2006/2007, domestic use of soybean oil for non

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

- biodiesel use will stay above 14,000 million l bs through the 2014/2015 year.

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.

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 (see Table V.B.2

- 2). 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 not anticipate any shortage in availability of soybean oil feedstock for biodie sel 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 food prices, EPA projected the effects of a 1.39 billion gallon mandate using t he 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, we project that the price of soybean oil would be approximately $0.47 per pound under a volume re quirement of 1.39 bill gal, compared to approximately $0.45 under a 1.28 bill gal volume requirement. We estimate that the real increase in price would 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. We project that the price of soybeans would be $10.48 per bushel under a volume requirement of 1.39 bill gal, 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 soy beans and soybean oil are within the recent historical range of price fluctuations (see Table V.B.2

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

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Page 51 of 92 Table V.B.2

- 3 Historical and Projected Prices of Soybeans and Soybean Oil

(2010 dollars per lb)

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 a volume requirement of 1.39 bill gal on the agricultural sector. We therefore cannot predict the exact impact that these increases in soybean and soybean oil prices would have on food prices in general. However, given that projected prices for soybe ans and soybean oil fall within the range of recent historical prices, we do not expect a volume requirement of 1.39 bill gal to cause any significant variations in food prices. As noted above, these volume and price results assume that all 110 mill gal a re soybean

- based. To the extent that this increment was met with other feedstocks, the overall effect of a volume requirement of 1.39 bill gal 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. Our projections fit within this general decline in prices, further bolstering the assessment that a volume requirement of 1.39 bill gal would not significantly affec t food prices. Finally, as part of our analysis for the RFS2 final rule, we estimated that the total impact of the program on food prices from all sources would be about $10 per person. 33 Given that an increase of 110 mill gal represents less than 1 perce nt of the 36 bill gal of biofuels analyzed for that rule, this analysis also indicates that the effects on food prices stemming from a volume requirement of 1.39 bill gal would 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 prod ucts other than biodiesel such as soaps or cosmetics, or have shut down until such time as the demand

for biodiesel rises.

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

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

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Page 52 of 92 Most of the production capacity exists at plants that are already producing some volume, and many operating biodiesel plants are cu rrently producing at less than their full capacity. As a result, if these facilities increased production volumes they typically would not need to go through the additional steps that are associated with starting up an idled plant, such as securing

new fi nancing, 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 can be brought back online. In 2010, the biodiesel industry produced about 400 mill gal. In 2011, the volume req uirement 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 beginning 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 diesel were produced in the United States. We project that by 2014 renewable diesel production could increase to ov er 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 currentl y 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 2 011. By the summer of 2011 production at this facility was approaching full capacity. EPA expects renewable diesel production from Dynamic Fuels’ Geismar facility to be at or near 75 million gallons in 2014.

Diamond Green Diesel, a joint venture betwee n Valero and Darling International, started site construction at their first commercial facility in Norco, Louisiana in January 2012. This facility will be located adjacent to an existing refinery, and the construction will be funded by Valero. When comp leted, this facility will have a nameplate capacity of 137 million gallons of renewable diesel per year. Waste products from Darling’s rendering process will be provided as feedstock for this facility. Construction is expected to be completed in early 20 13, 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 other 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 equ ivalent registration requirements for non

- highway fuels, biodiesel can also legally be used at any blend level in nonroad diesel and heating oil. However, other factors (such as engine warranties and the possibility of cold weather) typically limit the co ncentration of biodiesel in conventional diesel fuel. To the extent that these factors lead to the consumption of biodiesel at lower blend levels,*** E.O. 12866 Review

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Page 53 of 92 there would be a corresponding impact on how much biodiesel can be consumed in the U.S. as a

whole.

Most e ngine manufacturers have explicit statements in their engine warranties regarding acceptable biodiesel blend levels. Although a few permit B100 to be used in their engines without any adverse impact on their warranties, most limit biodiesel blends to B20 or less, and of those, about half allow no more than B5 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. How ever, for general distribution such as at retail facilities, these warranty conditions create a disincentive to blend or sell biodiesel at higher

concentrations and would tend to drive most blends towards low concentrations of biodiesel such

as B5 or less.

Cold weather operability represents another reason for preferential use of B5 and even B2. The most common measure of cold weather operability is the fuel cloud point. The cloud point is the temperature at which gelling begins (as indicated by solid c rystals beginning to form in the fuel) and thus is an indicator of when potential engine filter plugging issues could arise. The higher the cloud point temperature of the fuel, the more likely such problems are to be experienced in cold weather. Biodiese l generally has a higher cloud point than conventional, petroleum

- based diesel fuel, with fat

- based biodiesel such as tallow having a higher cloud point than virgin oil

- based biodiesel such as a fuel made with soybean and canola oil. While cloud point iss ues with conventional, petroleum

- based diesel are generally mitigated through blending with lighter grades (i.e., #1 diesel fuel), the cloud point 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 through the use of low biodiesel blend levels such as B2 or B5, since cloud point is strongly correlated with biodiese l 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% of 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 at 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 r educe the total amount of diesel fuel that will contain some biodiesel. Directionally, then, this will also reduce the geographical areas to which biodiesel must be

distributed.

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

36 Assumes total diesel volume consumed in the transportation sector in 2014 is 46.22 bill gal, per Annual Energy Outlook (AEO) 201 2 E arly Release , Table A2

.*** E.O. 12866 Review

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Page 54 of 92 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

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 sol d 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 th e prevalence of blends with biodiesel concentrations higher than 5%.

Heating oil represents another opportunity for large volumes of biodiesel to be consumed. Moreover, some of the practical issues leading to warranty limits on engines regarding the use of biodiesel are less of a concern when burning biodiesel for home heating purposes. Since there may be fewer issues associated with consumption 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 Infrastructure

In a separate action, we have projected that sufficient distribution infrastructure could be put in pl ace 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 either 1.28 bill gal (no change from 2013), or 1.39 bill gal of biomass

- based diesel in 201 4, an increase of 110 mill gal. We project that an increase of 110 mill gal of biomass

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

Our evaluation of the changes to the fuel distribution infrastructure that would be needed

to support t he 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.

37 National Biodiesel Board, Retailing Fueling Sites, as of February 17, 2011. http://biodiesel.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 would 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 92 Table V.B.5

- 1

Additional Infrastructure Needed to Distribute Biodiesel in 2014

Additional Distribution

Assets Needed in 2014 Relative to 2013 to Support 1.39 bill gal of Biodiesel Total Distribution Assets Needed in 2014 to Support 1.39 bill gal of Biodiesel

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.

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 es timated 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 to support an additional 110 mill gal of biodiesel is $95.51 million.

We believe that distributi ng 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

underw ay by the production and distribution 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 fleets, provisions that allow biodiesel to be used as an alternative to meeting alternative fuel vehicle mandates, and credits/rebates for the installation of biodiesel dispensing and blending equipment. Altogether, more than ha lf 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 would be capable of accommodating 1.39 bill gal of biomass based

d iesel 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 production and distribution syste m. 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 biodiesel volumes that were previous ly 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 facilitate the transport of

a volume requirement of 1.39 bill gal 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

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 92 could only make 2 deliveries per day. This corresponds 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 of 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 trucks

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 increasin g 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 appropriate to consider biomass

- based diesel as playing an increasing role in supplying advanced

b iofuels to the market for years after 2012.

In today's NPRM we are coproposing an applicable volume of either 1.28 bill gal or 1.39 bill gal for biomass

- based diesel in 2014. As described below, we are proposing findings that an increment of 110 mill ga l of biodiesel over the 2013 applicable volume of 1.28 bill gal could 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 biodies el 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 th at 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 dispensing

infrast ructure.

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. These 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

in 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 reference c ase in which biodiesel volume was 0.38 bill gallons. These cases are shown in Table V.C

- 1.*** E.O. 12866 Review

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Page 57 of 92 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 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 would 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

Since biodiesel has a GHG benefit compared to th e petroleum

- based diesel it is replacing,

an increase in biomass

- based diesel of 0.11 bill gal from 2013 to 2014 would lead to a displacement of conventional diesel fuel, with corresponding GHG emissions reductions. This

increased use of biomass

- based die sel would contribute to lower climate change impacts in comparison to the petroleum

- based diesel it is replacing.

EPA estimates the social benefits of regulatory actions 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 emissions in a given year. Alternatively, this represents the benefit to*** E.O. 12866 Review

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Page 58 of 92 society of reducin g 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 damages 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 Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 fo r the final joint EPA/Department of Transportation Rulemaking to establish Light

- Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards 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 group

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 2013 (in 2010 dollars). The first three values are based on the average SC

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

- CO 2 s at several d iscount 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 appropriate rate to use in an intergenerational context. The

fourth value is 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 acro ss 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 considering the full range. Low

- probability, high

impact events are incorporated into al l 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 explorati on 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 climate 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 a daptation 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 improvements in modeling.

The SC

- CO 2 increases over time because future emissions are exp ected to produce larger incremental damages as physical and economic systems become more stressed in response to

40 In the absence of direct model estimates of the social cost 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 59 of 92 greater climatic change. For example, by 2022 the four estimates increase to $8, $29, $45, and $88 per metric ton of CO 2 emissions (in 2010 do llars). 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 growth rate. This helps to ensure that the estimates are internally consistent with o ther modeling assumptions. The table below presents the four estimates for the years 2014 through 2050, with a conservative EPA estimate of the value in the year 2051.

Table V.C.1

- 1

Benefit per Metric Ton of CO 2 Reduced, 2014

- 2051 ($2010) 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

2023 $8 $29 $46 $90

2024 $8 $30 $47 $92

2025 $9 $31 $48 $94

2026 $9 $31 $49 $96

2027 $9 $32 $50 $98

2028 $10 $33 $50 $100

2029 $10 $33 $51 $102

2030 $10 $34 $52 $104

2031 $10 $35 $53 $106

2032 $11 $35 $54 $108

2033 $11 $36 $55 $110

2034 $11 $37 $56 $112

2035 $12 $37 $56 $114

2036 $12 $38 $57 $116

2037 $12 $39 $58 $118

2038 $13 $39 $59 $120

2039 $13 $40 $60 $122

2040 $13 $41 $61 $124

2041 $14 $41 $62 $126

2042 $14 $42 $62 $128

2043 $14 $43 $63 $130

2044 $14 $43 $64 $131

2045 $15 $44 $64 $133*** E.O. 12866 Review

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Page 60 of 92 2046 $15 $44 $65 $135

2047 $15 $45 $66 $137

2048 $16 $46 $66 $138

2049 $16 $46 $67 $140

2050 $16 $47 $68 $142

2051 b $16 $47 $68 $142

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.

b The Interagency Working Group on Social Cost of Carbon did not estimate SCC

- CO 2 values beyond 2050. However, to estimate the monetized impact of a 30 year stream of emissions beginning in 2022, we must have some estimate for the year 2051. SCC

- CO 2 values increase incrementally every year under the projections presented above. However, since monetized i mpacts for the year 2051 have not yet been established by the Interagency Working Group, we assume for the purposes of this analysis that they are equal to the 2050 impacts to avoid

overestimation.

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. 41 This approach is consistent with the methodology used in the final RFS2 rulemaking, which was finalized prior to the 2010 interagency work group process. Specifically, EPA converted

methane and nitrous oxide t o CO 2 equivalents using the GWP of these gases, then multiplied

these CO 2 - equivalent emission reductions by the interagency social cost of carbon dioxide estimates. Furthermore, EPA has used the 100

- year GWP estimates from the IPCC Second Assessment Repor t (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).

As discussed in a recent working paper (Marten and Newbold, 2011) 42 , the GWP

weighted benefit estimates for methane and nitrous oxide are likely to be lower than those that

would be der ived using a directly modeled social cost of the non

- CO 2 GHGs for a variety of

reasons. 43 In sum, the authors find that an integrated assessment model produces higher estimates of the social cost of methane and nitrous oxide than the GWP approach because t he model captures the effect of temperature changes on economic output over time, whereas GWP is based only on physical impacts.

41 For a longer discussion of the GWP approach, see the Regulatory Impact Analysis associated with the New

Source Performance Standards and Amendments to the National Emissions Standards for Hazardous Air Pollutants for the Oil and Natural Gas Industry , issue d on April 17, 2012. See http://www.epa.gov/airquality/oilandgas/actions.html

. 42 Marten, A. and S. Newbold. 2011. “Estimating the Social Cost of Non

- CO 2 GHG Emissions: Methane and

Nitrous Oxide.” NCEE Working Paper Series # 11

- 01. http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2011

- 01?opendocument

43 As discussed in Marten and Newbold, the discount rate influences whether directly modeled social cost e stimates are higher than those estimated with the GWP approach. Methane is a short

- lived gas and therefore direct modeling results in higher social costs at higher discount rates than the GWP approach.*** E.O. 12866 Review

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Page 61 of 92 We established in the RFS2 final rule that a gallon of soybean

- based biodiesel results in

an annualized GHG emission reduct ion 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 wh en the RFS2 program will be fully implemented). For this reason, it may not be appropriate to include any benefits from GHG reductions in our 2014 calculations. This is not because we believe 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. 44

To monetize the global SC

- CO 2 value, we use the same stream of emissions for both 2014 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 basis. The resulting estimates are provided in the table below for 20 14 and 2022. 45

Table V.C.1

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

- Based Diesel in 2014 and 2022 ($2010) a

Year Annualized

Emissions

reduction (Tons of

CO2

- eq/gallon) Benefits

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

2014 0.0065 $0.03 $0.12 $0.21 $0.38

2022 b 0.0065 $0.03 $0.14 $0.23 $0.43

a 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 Newbold (2011) for discussion of the limitations of th e GWP approach.

b We estimate monetary values for the years 2022

- 2051 based on the values established by the Interagency Working Group on Social Cost of Carbon. See Table IV.A.1

- 1 for further details.

44 We analyzed the GHG benefits of the renewable fue ls in the context of full implementation of the RFS2 program

in 2022

. The 2022 analysis represents a n assumption for the purposes of modeling, to best capture the lifecycle GHG emissions for the required volumes of renewable fuel at full implementation. Emissions in other years will differ; for example, our analysis for 2022 assumes that soybean yields will continue to increase from today’s levels because of technological innovation

. 45 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 calculations. Additional details are included in a Memorandum to the Docket, Do cket ID XXX, Dated May XX, 2012

.*** E.O. 12866 Review

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Page 62 of 92 2. Energy Security

Increasing the biomass

- based diesel mandate to 1.39 bill gal would help to ensure an

increased use of biomass

- based diesel in the U.S. and help to improve U.S. energy security. Reducing U.S. petroleum imports and increasing the diversity of U.S. liquid fuel supplies lo wers 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 summarize s EPA’s estimates of U.S. oil import reductions and energy security benefits from this proposed rule

.

In 2010, U.S. petroleum import expenditures represented 14 percent of total U.S. imports of all goods and services. 46 These expenditures rose to 18 pe rcent by April of 2011. 47 In 2010, the United States imported 49 percent of the petroleum it consumed 48 , and the transportation sector accounted for 71 percent of total U.S. petroleum consumption. This compares to approximately 37 percent of total U.S. petr oleum supplied by imports and 55 percent of U.S. petroleum consumption in the transportation sector in 1975. Requiring higher volumes of renewable fuels to be used in the U.S. is expected to lower U.S. oil imports.

An increase in the biomass

- based dies el volume requirement to 1.39 bill gal of biomass

based diesel from 1.28 billion gal in 2013 would help to reduce U.S. petroleum imports by displacing about 100 mill gal of diesel equivalent. 49 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

feedsto ck, 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. 50 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 below compares EPA’s estimates of the reduction in imports of U.S. crude oil and petroleum

- based products from this program to projected total U.S. imports for the years 2014 and 2022

.

46 http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WTTIMUS2&f=W

47 http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_a.htm

48 http://www.eia.gov/dnav/pet/pet_pri_rac2_dcu_nus_m.htm

49 100 mill gal diesel is roughly equivalent to 110 mill gal biodiesel on an energy

- equivalent basis.

50 This figure is calculat ed as 0.50 + 0.50*0.9 = 0.50 + 0.45 = 0.95.*** E.O. 12866 Review

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Page 63 of 92 Table V.C.2

- 1 Projected Import Reductions from 1.39 B ill Gal Biomass

- Based Diesel and Total U.S.

Petroleum

- Based Imports in 2014 and 2022 (Millions of Barrels )

U.S. Petroleum

- Based Import Reductions

from 1.39 Bill Gal

Biomass

- Based Diesel (million barrels/yr) U.S. Total Petroleum

Based Imports without

1.39 Bill Gal Biomass

Based Diesel (million barrels/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

reviewed study entitled, ” The Energy Security Benefits of Reduced Oil U se, 2006

- 2015 ,” completed in March 2008. This study is included as part of the docket for this proposal. 51

, 52
When conducting its analysis, ORNL considered the full economic cost of importing petroleum

into the United States.

The economic cost of import ing petroleum into the U.S. is defined to include 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 o n the market power of the Organization of Petroleum 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 impor ted petroleum to the U.S. (i.e., “macroeconomic 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 c omponents of this cost are likely to be (1) the 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 Petr oleum 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 wo rld’s oil and gas supplies are located in countries facing social, economic, and demographic challenges, thus making them even more vulnerable to potential local instability. Because of U.S. dependence on oil, the military could be called on to protect en ergy resources through such measures as securing shipping lanes from

51 Leiby, Paul N.

, " Estimating the Energy Security Benefits of Reduced U.S. Oil Import s " Oak Ridge National Laboratory, ORNL/TM

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

- HQ

- OAR

- 2010

- 0162)

52 The ORNL study “ The En ergy 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 Curlee, and Russell Lee,

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

- HQ

- OAR

- 20 10

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

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Page 64 of 92 foreign oil fields. Thus, to the degree to which this proposed rule increases the diversity of sources of liquid fuel for U.S. consumption and/or reduces reliance upon imported energy

su pplies, 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 unab le 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 building 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 analys is. In addition, given the redistributive 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. ma croeconomic disruption and adjustment 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 has

included onl y the macroeconomic disruption portion of the energy security benefits to estimate the monetary value of the total energy security benefits of this program.

The U.S. is projected to be a net exporter of diesel fuel in 2014. 53 Increased biodiesel product ion would likely result in less domestic consumption of petroleum

- based diesel fuel in the U.S., which in turn may be reflected in increased exports of diesel by the U.S. However, regardless of the incremental effect of this rule on net imports, increasin g the diversification of the U.S. and global diesel fuel pools would likely confer some reduction in the severity of a future potential disruption in the world oil market.

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 components 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 an estimated $0.15/gallon benefit in 2014 and a $0.16/gallon benefit in 2022 (in 2010$).

Table V.C.2

- 2 Energy Security Premiums in 2014 and 2022 (2010$/Barrel) Based on ORNL Methodology
Monopsony Macroeconomic

Disruption/Adjustment Costs T otal 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.

53 U.S. Energy Information Administration (EIA). “ Short

- Term Energy Outlook”, Table 4a, June 2012

. http://205.254.135.7/forecasts/steo/tables/pdf/4atab.pdf*** E.O. 12866 Review

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Page 65 of 92 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 Estimated Energy Secu rity Benefits in 2014 and 2022 for 1.39 Bill Gal Biomass

- Based Diesel (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 54 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. 55

In the RFS2 final rule, we analyzed both changes in pollutant emissions (measured in tons) and changes in ambient air quality associated with the changes in pollutant emissions. As described in the introduction to Section V.C above, the changes in pollut ant emissions were calculated by comparing the 2022 RFS2 renewable fuel volumes to volumes if the RFS2 mandate was not in place (the reference scenario). 56 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). 57 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

54 75 FR14670, March 26, 2010

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

- 420

- R

- 1 0

- 006. February 2010. Docket EPA

- HQ

- OAR

- 2009

- 0472

- 11332. Section 3.1.1.2.4

56 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 billio n gallons of renewable fuels) and AEO 2007 ( 13.6 billion gallons of renewable fuels). Both reference scenarios assumed the same volume of biodiesel, so the emission and air quality impacts described in this section are the same for both reference scenarios

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

- 420

- R

- 10

- 006. February 2010. Docket EPA

- HQ

- OAR

- 2009

- 0472

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

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Page 66 of 92 pollutant. 58 We expect the impacts of a 1.39 bill gal volume requirement of biomass

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

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

58 While the national

- level emissions and air quality impacts may be small, there may still be local and regional impacts that 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 67 of 92 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). 59

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. 60

, 61 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 that

would result from 1.39 bill gal of biomass

- based diesel

.

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 exp ect the portion of air quality impacts attributable 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 mitigate, 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 fue l use through that study and will promulgate appropriate mitigation measures separate from today's proposed rule.

4. Consideration of Applicable Statutory Economic Factors

The RFS program established by Congress is primarily a long

- term program aimed at replacing substantial volumes of fossil

- based transportation fuels with low GHG renewable fuels

over time. Congress established a list of factors to be considered in setting the annual biomass

diesel mandate, and these factors include consideration of some aspects of economic costs and some aspects of economic benefits (among other impacts and factors), though there is no explicit net benefit criterion required by the statute. In the final rulemaking establishing the RFS2 program, EPA assessed the cost s and benefits of this program as a whole when the program was fully mature, which we continue to believe is the appropriate approach to examining the costs and benefits of a long term program like RFS2. However, the annual standard

- setting process is

par t of the program, and it encourages consideration of the program on a piecemeal (i.e., year to year) basis, which may not reflect the long

- term economic effects of the program.

In this section, we provide general estimates of some costs and benefits of 1.39 bill gal of

biomass

- based diesel for the year 2022, when the RFS2 legislative requirements are fully

59 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.

60 Emissions serve as inputs to the air quality modeling analysis. However, the final fuel volume assumpt ions (upon which the emission estimates were based) increased between the time that emissions were estimated to support the air quality modeling analysis and the time emissions were estimated to reflect the final rulemaking.

61 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 68 of 92 implemented and the program is more mature. We also provide estimates of the costs and benefits of 1.39 bill gal for the year 2014, the year in whic h such a requirement could be implemented. The statute is forward

- looking in that it created a program whose energy and environmental benefits are intended to grow over time; to evaluate the program on the basis of only one early year’s impacts, as part o f near

- term implementation, would be to paint an unbalanced and incomplete picture. For example, 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 principal cost of soybean

- based biodiesel, the soybean oil feedstock, tends to fall though time. For example, the AEO 2012 Early Release (AEO2012 ER) projects that oil prices will rise from roughly $110 per barrel in 2014 to $129 per barrel in 2022, a 7 percent increase. 62 The AEO 2011 High Oil Price case (AEO2011 HOP), projects that oil prices will increase to about $179 per barrel, a 62 percent increase. 63 According to EPA’s projections performed for this rule and USDA long

- term projections, soy oil prices will decrease from $0.47/lb in 2014 to $0.42/lb in 2022, a 9 percent decrease. 64 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 of the program in any one year, but also look at the impacts at a point of greater program maturity.

a. Monetized Quantifiable Costs

Our analy sis 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 co mments 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.

Producin g 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 th e 2013 biomass

based diesel volume requirement of 1.28 bill gal, we compared the cost of biodiesel and petrodiesel 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 biodiesel and fuel costs.

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

. 63 U.S. Department of Energy, Energy Information Administration. 2011. Annual Energy Outlook 2011. Available

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

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

- Term Projections , February

2012.*** E.O. 12866 Review

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Page 69 of 92 As we outline in Section V.B.2 of this proposed rule, we assume that 680 mill gal of

biofuel feedstock would come from corn oil and waste oils, fats, and greases. The remaining 710 mill gal of feedstock needed to meet a 1.39 bill gal volume requirement in 2014, including the 110 mil gal of additional biodiesel we are coproposing to mandate under this rule, is assumed to

b e 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 pro jections presented below to be potentially high estimates.

The main component of the increase in fuel costs associated with extending the biomass

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

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

- based biodiesel by about $0.12/gallon in 20 14.

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

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

- based biodiesel volume requirement of 1.39 bill gal on the price of soybean oil in 2022. In Section V.B.2.d we estimate that 1.39 bill gal would raise soybean oil prices by approximately 3.4 percent in 2014. The international market for vegetable oils is large and diverse, with considerable capacity to absorb short

- term demand

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

- Term Agricu ltural Projections of soybean oil prices to estimate the cost of an additional 110 mill gal 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 projections as of this writing).

Estimating the cost to produce biodiesel and transport it to the blender presents

considerable u ncertainties, even in the near term. Unforeseen fluctuations in the prices of oil, for example, could have a very significant effect. Therefore, instead of presenting a point estimate, we have chosen to present a range of estimates for 2014 and 2022 tha t bounds uncertainty about oil and feedstock prices if we were to establish a biomass

- based diesel volume requirement of 1.39 bill gal in 2014.

Table V.C.4

- 2 presents our estimates for the increase in the cost of incremental volumes of biodiesel resulting from a 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 the increase in the cost for an additional 110 million gallons of biodiesel in 2014 would be be tween $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 different estimates of oil prices. In 2014, costs are on the low

- end of the range if we use the whole sale diesel estimate from DOE’s*** E.O. 12866 Review

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Page 70 of 92 most recent Short

- Term Energy Outlook (STEO). 65 The high

- end estimate utilizes DOE’s

AEO12 ER wholesale diesel estimate. 66 This translates 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 in 2014 and 2022(2010 dollars)

Estimate for 2014 Estimate for 2022

Petroleum Assumption STEO March

2012 AEO 2012

Early Release AEO 2011

High Oil Price AEO 2012

Early Release

Difference in biodiesel production cost (per gallon) $1.02 $1.48

- $0.70 $0.41

Cost of 280 million gallons $112 million $162 million

- $77 million $45 million

We also present a range of cost estimates for the year 2022. Similar to our 2014 analysis, the upper estimate utilizes the AEO 2012 ER. The lower estimate 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 high 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

- ter m 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 mil lion 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, our 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”

a nalyses to estimate 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.

RIN prices reflect the incremental private mar ginal cost of blending BBD into the diesel fuel pool. As noted by Professor Bruce Babcock, of the Iowa State University:

“The market for RINs is an effective and efficient way to enforce the mandates. Motor fuel producers who find that biofuel is too dif ficult to access or to blend buy RINs instead. Fuel producers who have ready access to biofuels and find it profitable to blend

65 U.S. Department of Energy, Energy Information Administration. 2012. Short Term Energy O utlook, March

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

. 66 U.S. Department of Energy, Energy Information Administration. 2012. Annual Energy Outlook 2012 (Early Release). A vailable at: http://www.eia.gov/forecasts/aeo/er/

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Page 71 of 92 biofuels sell their excess RINs. By making RINs tradable, the mandates are met at the lowest possible cost.” 67

However, we have concerns with using RIN prices to estimate the costs to society of the

biomass

- based diesel RFS2 requirement. First, RIN prices are more representative of marginal costs. If producers have different costs of production, as they do in the biodiesel m arket, using the marginal cost of compliance as a proxy for cost of production will significantly overestimate the cost to society. Second, it is difficult to have confidence in the use of historical RIN price trends as an indicator of future program cost . Key factors limiting EPA’s confidence in RIN price as a proxy measure for social cost include the effect of observed instability and uncertainties in U.S. tax policy, import tariff policies, and other possible inefficiencies in RIN

markets. 68 Finally, o ther factors, such as the existence of multiple RIN vintages in any given year and the aforementioned uncertainties, can create significant incentives for potential speculation in the RIN markets. In their 2011 report on RINs, USDA observed that this

spec ulation 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. 69

b. Transportation Fuel Costs

The estimates described in Section V.C.4.a above represe nt the quantifiable costs to society as a whole stemming from an 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 die sel 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 and

ass ociated economic impacts for fuel consumers

.

To estimate the increase in the cost of transportation fuel associated with a 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. 70 Averaged over the transportation diesel pool, the quantif iable costs of a 1.39 bill gal mandate translate into a per gallon cost of between $0.002 and $0.004 in 2014 and between

- $0.002 and $0.001 in 2022. 71

67 Babcock, B, Mandates, Tax Credits, and Tariffs: Does the U.S. Biofuels Industry Need Them All? Iowa State University, Center for Agricultural and Rural Development, Policy Brief 10

- PB

- 1, March 2010. p. 4

- 5

69 McPhail, L, P Westcott, and H Lutman, The Renewable Identification Number System and U.S. Biofuel Mandates

, United States Department of Agriculture, November 2011.

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

. 71 If current RIN prices were used to gauge social cost in lieu of the bottom

- up engineering cost approach applied herein, the estimate of transportation fuel costs would be higher.*** E.O. 12866 Review

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Page 72 of 92 c. Monetized Quantifiable Benefits

Many of the benefits and impacts that Congress asked EPA to exami ne when evaluating whether to increase 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 sec urity, improved air quality, and reduced greenhouse gas emissions. We are proposing to either leave the 2014 biomass

- based diesel volume requirement at 1.28 bill gal in 2014, or to increase it to 1.39 bill gal, but this extended volume requirement would c ontinue to provide benefits throughout the life of the program. As observed above, it is most appropriate to consider these benefits within the context of full program implementation (i.e., the year 2022). However, we also present benefits for 110 millio n gallons of additional biodiesel produced in the year 2014 for comparison purposes.

i. Greenhouse Gas Impacts

In the RFS2 final rule we determined that a gallon of soybean

- based biodiesel results in an annualized GHG emission reduction of approximat ely 57 percent compared to the 2005 petroleum baseline. This GHG reduction calculation is based on the annualized emissions stream over a 30 year period, starting in 2022 (the year when the RFS2 program will be fully implemented). On this basis, we estim ate that the GHG benefits of 1.39 bill gal will be between $3 and $47 million in 2022 depending on the assumed discount rate. 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, however, if we were to apply the 2022 GHG emissions reductions to a 1.39 bill gal biomass

based diesel mandate, the monetized GHG benefits would be from $3 million up to $42 million

in 2014..

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. Based on application of the ORNL methodology, we estimate that the energy security benefits of an 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 $1 8 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) would 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, increased production of biodiesel would*** E.O. 12866 Review

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Page 73 of 92 impact both downstream and upstream emissions, with increases in some pollutants and

decreases in others.

Ideally, the monetized impacts of changes in air quality related to 1.39 bill gal of

biomass

- based diesel would be estimated based on changes in ambient pollution concentrations and population ex posure, 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 additiona l gallons of biodiesel (in both 2014 and 2022) uses a “dollar

- 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 emitted PM 2.5 , or one ton of a pollutant that contributes to secondarily

- formed PM 2.5 (such as NOx and SOx) from a specified source. 72 The dollar

- per

- ton technique has been used in previous analyses, including the 2012

- 2016 Light

- Duty Greenhouse Gas Rule, 73 the Ozone National Ambient Air Quality Standards (NAAQS) RIA, 74 the Portland Cement National Emissions Standards for Hazardous Air Pollutants (NESHAP) RIA, 75 and the

final NO 2 NAAQS. 76

The analysis of 1.39 bill gal of biomass

- based diesel did not estimate the 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.

72 Due to analytical limitations, the estimated dollar

- per

- ton values do not include comparable impacts related t o 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.

73 U.S. E nvironmental Protection Agency (U.S. EPA), 2010. Regulatory Impact Analysis, 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

74 U.S. Environmental Protection Agency (U.S. EPA). 2008. Regulatory Impact Analysis, 2008 Na tional Ambient Air Quality Standards for Ground

- level Ozone, Chapter 6. Office 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

75 U.S. Environmental Protection Agency (U.S. EPA). 2010. Regulatory Impact Analysis: National Emission Standards for Hazardous Air Pollutants from the Portland Cement Manufacturing Industry. Office of Air Quality Planning and Standards, Research T riangle Park, NC. August. Available on the Internet at < http://www.epa.gov/ttn/ecas/regdata/RIAs/portlandcementfinalria.pdf >. EPA

- HQ

- OAR

- 2009

- 0472

- 0241

76 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 Park, NC. April. Available on the Internet

at http://www.epa.gov/ttn/ecas/regdata/RIAs/FinalNO2RIA fulldocument.pdf . Accessed March 15, 2010. EPA

- HQ

OAR

- 2009

- 0472

- 0237*** E.O. 12866 Review

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Page 74 of 92 The dollar

- per

- ton estimates used to moneti ze the emissions impacts from each gallon of biodiesel are provided in Table V.C.4

- 3.

Table V.C.4

- 3

PM 2.5 - related Dollar

- per

- ton Values (2010$) a

Year All

Sources c Upstream (Non

- EGU)

Sources d Mobile Sources

SO 2 NO X Direct

PM2.5 NO X Direct

PM2.5

Dollar

- per

- ton Derived from American Cancer Society Analysis (Pope et al.,

2002) Using a 3 Percent Discount Rate b

2015 $30 ,000 $4,9 00 $230,000 $5,1 00 $280,000

2020 $33 ,000 $5,4 00 $250,000 $5,6 00 $31 0,000

Dollar

- per

- ton Derived from American Cancer Society Analysis (Pope et al.,

2002) Estimated Using a 7 Percent Discount Rate b

2015 $27,000 $4,5 00 $210,000 $4,600 $250,000

2020 $30 ,000 $4,9 00 $23 0,000 $5,1 00 $280,000

Dollar

- per

- ton Derived from Six Cities Analysis (Laden et al., 2006) Estimated

Using a 3 Percent Discount Rate b

2015 $73,000 $12,000 $560,000 $12,000 $680,000

2020 $80,000 $13,000 $620,000 $14,000 $750,000

Dollar

- per

- ton Derived from Six Cities Analysis (Laden et al., 2006) Estimated

Using a 7 Percent Discount Rate b

2015 $66,000 $11,000 $510,000 $11,000 $620,000

2020 $72,000 $12,000 $560,000 $12,000 $680,000

a Total dollar

- per

- ton estimates include monetized PM2.5

- related premature mortality and morbidity endpoints

. Range of estimates are a function of the estimate of PM2.5

- related premature mortality derived from either the ACS study (Pope et al., 2002) or the Six

- Cities study (Laden et al., 2006).

b The dollar

- 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 dollar

- per

- ton value for SO2 is based on the val ue for Stationary (Non

- EGU) sources; no SO2 value

was estimated for mobile sources.

d Non

- EGU denotes stationary sources of emissions other than electric generating units (EGUs).

For certain PM 2.5 - related pollutants (such as direct PM 2.5 and NOx), we estimate 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 g eographic 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 separate 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 imp acts can be found in Table

V.C.4

- 5.

Table V.C.4

- 4

Total Ambient PM2.5

- related Monetized Health Impacts (millions 2010$) a*** E.O. 12866 Review

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Page 75 of 92 2014 Monetized Impacts (7%

Discount Rate

– 3% Discount

Rate) 2022 Monetized Impacts (7%

Discount Rate

– 3% Discount

Rate) Using Doll ar

- per

- ton Derived from American Cancer Society Analysis (Pope et al., 2002)

Downstream $5.6

- $6. 2 $6.2

- $6.8
Upstream

- $13

- - $1 5

- $14

- - $16
Net Impacts

- $7.6

- - $8. 4

- $8.3

- - $9.1

Using Dollar

- per

- ton Derived from Six Cities Analysis (Laden et al., 2006)

Downstream $14

- $15 $15

- $17
Upstream

- $32

- - $36

- $35

- - $39
Net Impacts

- $19

- - $21

- $20

- - $22

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) a
2014 Monetized Impacts (7%

Discount Rate

– 3% Discount

Rate) 2022 Monetized Impacts (7%

Discount Rate

– 3% Discount

Rate) Using Dollar

- per

- ton Derived from American Cancer Society Analysis (Pope et al., 2002)

Downstream $0.05

- $0.06 $0.06 b

Upstream

- $ 0.12

- - $0.13

- $ 0.13

- - $0.14
Net Impacts

- $ 0.07

- - $0.08

- $ 0.08

- - $0.08 b

Using Dollar

- per

- ton Derived from Six Cities Analysis (Laden et al., 2006)

Downstream $0.12

- $0.14 $0.14

- $0.15
Upstream

- $0.29

- - $0.33

- $0.32

- - $0.35
Net Impacts

- $0.17

- - $0.19

- $0.18

- - $0.20

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

moneti zation 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 anal ysis (in both 2014 and 2022) assumes that the incremental production of biodiesel associated with a 2014 increase of 110 million gallons would yield the same relative emissions impacts, which we cannot say with certainty.*** E.O. 12866 Review

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Page 76 of 92 This analysis assumes that all fi ne 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 direct 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 fine particles is linear within the range of a mbient 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 attainment with fine particle standard and those t hat 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 associated with exposure to fine particles

- includ ing 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 substantial. Because NO X and VOC emissions a re 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 associated with the complexity of the atmospheric a ir chemistry and nonlinearities associated with ozone formation. The PM

- related

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) condu cted 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 the RFS2

final rule. 77 The ORNL analysis concl uded 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

77 “Analysis of Fuel Ethanol Transportation Activity and Potential Distribution Constraints”, Oakridge National Laboratory, March 9, 2009. To simplify the ORNL analysis, biomass

- based diesel volumes were assumed to originate at the same points of production and to be shipped to the same petroleum terminals as the ethanol projected to be used to meet the RFS2 standards. This may tend to overstate the potential impact on the transportation system from the shipment of biomass

- based diesel fuels since biomass

- b ased 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

- based dies el represented only 8% of the total projected biofuel volumes under the RFS2 final rule

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Page 77 of 92 estimated that t he biofuels transport would constitute only 0.4% of the total freight tonnage for all commodities transported by the rail system through 2022. 78 Given the small increase in freight shipments due to the transport of biofuels to meet the RFS2 standards, we b elieve 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 directed by CAA section 211(o)( 2)(B)(ii), in setting the 2014 biomass

- based diesel volume requirements, EPA is to consider the impacts of 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 amendme nts. 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 analyses contained in the report provide qualitative assessments and reasonable expec tations of trends which can be used to consider the environmental impacts of increases in biodiesel production and use. These trends are only summarized here while the final report provides extensive detail. 79

This assessment focuses on the use of oil f rom 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 have 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 potential agricultural impact of biodiesel production. Corn oil as a feedstock f or 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 impact of the relatively small supply of extracted corn oil is not considered her e. 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 otherwise 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). Soybean 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 fields planted in row crops such as corn and soybeans. While the impacts of nutr ient loading and erosion tend to be site specific, good farming practices including optimum fertilizer use and the set aside of sensitive

78 See sections 1.6.4 and 1.6.5 of the RFS2 RIA.

79 U.S. EPA (Environmental Protection Agency). February 2012. “Biofuels and the Environment: First Triennial Report to Co ngress.” Office of Research and Development, Washington, DC. EPA/600/R

- 10/183F*** E.O. 12866 Review

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Page 78 of 92 lands via the Conservation Reserve Program (CRP) can significantly help control these adverse

affects. Wetlands can a lso 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 o n 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 soybeans replace grassy crops and in general if new lands with diverse vegetation are c onverted 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 production in the U.S. compared to a reference case without the volumes required u nder 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 a ny 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 are 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 would be expected.

Increased water withdrawals for soy biodiesel production can lead to more frequent low

flow c onditions 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 are the principal feedstock used for b iodiesel 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 volume requirement for 2013. Non

- food gr ade 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*** E.O. 12866 Review

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Page 79 of 92 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 conservation practices and crop rotations by farmers, and acreage and intensity of tile drained lands. Additional factors outside agricultural producers’ control include soil characteristics, climate, and proximity to water

bodies.

Soybeans are typically grown in the same locations as corn since farmers commonly rotate between the two crops. Nutrients are applied to fewer soybean acres than corn and at much lower rates because soybean is a legume. 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. 80 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 percent of the planted acr es, at an average rate of 46 pounds per acre (NASS, 2007). 81 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. 82

Agricultural conservation systems can reduce the impact of soybean production on the environment. The systems components includ e 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 runof

f 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. 83

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 considerabl y less adoption of proper

80 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 mid western soils. Agronomy Journal 94(1): 153

- 171.

81 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

.

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

- 324.

83 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

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Page 80 of 92 nutrient management to mitigate nitrogen loss to water bodies. 84 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. Additio nally, soybean production can reduce the amount of biomass left on the field compared to a corn case where much of the stover is left to protect the soil and enhance biomass content. In such a case, there could be more soil erosion with soybean production compared to corn production and 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. 85 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. 86 Water used for irrigation is at least

t emporarily not available for other uses and if pumped from deep aquifers, may not return to those aquifers for centuries

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). 87 The CRP provides farmers with financial incentives to set aside a certain portion of their cropland in order

to conser ve 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 the 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 ma king more acreage available for the production of row crops. However, even if the aggregate total of CRP protected lands does not change significantly, 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 than other cultivated land, but also less productive. 88 So while the conversion of CRP land to

intensive fee dstock production is possible, the likelihood of such a land use conversion is uncertain given practical economic and agronomic considerations.

84 U.S. Department of Agriculture, National Resources Conservation Service. 2010. Assessment of the effects of

conserv ation practices on cultivated cropland in the Upper Mississippi River Basin. Available at: http://www.nrcs.usda.gov/technical/NRI/ceap/umrb/index.html

. 85 U.S. Department of Agricultu re. 2010. 2007 Census of agriculture, Farm and ranch irrigation survey (2008). http://www.agcensus.usda.gov/Publications/2007/Onli ne_Highlights/Farm_and_Ranch_Irrigation_Survey/fris08.pdf

86 U. S. Department of Energy. 2006. Energy demands on water resources: Report to Congress on the interdependency of energy and water. Available at: http://www.sandia.gov/energy

- water/docs/121

- RptToCongress

EWwEIAcomments

- FINAL.pdf

87 Secchi, S; Gassman, PW; Williams, JR; Babcock, BA. 2009. Corn

- based ethano l production and environmental quality: A case of Iowa and the conservation reserve program. Environmental Management 44(4): 732

- 744.

88 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

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Page 81 of 92 b. Biodiesel Production

Biological oxygen demand (BOD), total suspended solids, and glycerin pose the major

w ater quality concerns in wastewater discharged from biodiesel facilities. Actual impacts depend on a range of factors, including the type of feedstock 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 control practices and reduce water quality concerns.

Despite the existing commercial market for glycerin and the likely expanded uses for glycerin as discussed in the RFS2 final rule, the rapid development of the biodiesel industry has caused a temporary glut of glycerin production, resulting in some instances of facilities disposing glycerin. 89 Glycerin disposa l may be regulated under several EPA programs, depending on the practice. However, there have been incidences of glycerin dumping, including an incident in Missouri that resulted in a large fish kill. 90 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 glycerin. 91 BOD can lead to methane emissions during the water t reatment process. To mitigate wastewater issues, some production systems reclaim glycerin from the wastewater. Closed

- loop systems in which water and solvents can be recycled and reused can reduce the quantity of water that must be pretreated before disch arge. 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 a quatic environments. 92
Results of aquatic toxicity testing of biodiesel indicate that it is less toxic than regular diesel. 93
Biodiesel does have a high oxygen demand in aquatic environments, and can cause fish kills as a result of oxygen depletion. Water quality impacts associated with spills at biodiesel facilities generally result from discharge of glycerin, rather than biodiesel itself.

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

consum ption. 94

89 Research continues on alternative, higher value uses of glycerin, so this excess supply may be reduced or perhaps

not exist in 2014.

90 U.S. EPA. 2010b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA

- 420

- R

- 10

- 006.

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

.. 91 U.S. EPA. 2010b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA

- 420

- R

- 10

- 006.

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

.. 92 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/kimbl ebiofuels.pdf

. 93 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.

94 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA). EPA

- 420

- R

- 10

- 006. Available

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

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Page 82 of 92 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.

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. 95 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.”

An increase in the volume requirement for biomass

- based diesel would be expected to primarily affect employment in the United States through the biodiesel plants and distributors, and through several related sectors, specifically, i ndustries that supply inputs in the production of

biodiesel. Assuming the current average of 30 to 40 people to operate a biodiesel plant of 30

95 Schmalensee, Richard, and Robert N. Stavins. “A Guide to Economic and Policy Analysis of EPA’s Transport Rule.” White paper commissioned by Excelon Corporation, March 2011 ( Docket EPA

- HQ

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- 0799 )

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Page 83 of 92 million gallons (a typical capacity for a standalone transesterification plant), an expansion of 110 million gal lons is the equivalent of adding about 4 plants representing the addition of around 138 direct jobs for biodiesel production 96 . 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 million 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 on e trip per delivery truck per day to account for driving and loading / unloading time. 97 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 directly 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 m ore diffuse feedstock suppliers. In 2011, approximately 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 se rvices with feedstocks accounting for more than 80 percent of expenditures. 98 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 locall y. 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 producti on, this proposal would also result in reductions in diesel 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 loss 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 idl e 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.

D. Coproposal for 1.28 and 1.39 Billion Gallons

The discussion above considers various impacts from increasing the volume requirement

for biomass

- based diesel to 1.39 bill gal in 2014 . For example, t here are likely to be sufficient feedstocks and production capacity to permit an increase of 110 mill gal over the 2013 volume requirement of 1.28 bill gal, and in the longer term the benefits of increased volumes of biomass

-

96 Presentation from National Biodiesel Board, “Biodiesel Forecasts, Infrastr ucture, and Economic Impacts”, February 14, 2012.

97 Ibid.

98 Ibid.*** E.O. 12866 Review

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Page 84 of 92 bas ed diesel are expected to exceed the costs. Other impacts that we evaluated would be expected to be small. Moreover, current production rates in the biodiesel industry are consistent with a total production volume of around 1.3 bill gal for 2012.

How ever, the statute also indicates that we should take into account a review of the implementation of the program in setting future standards. While the biodiesel industry has clearly demonstrated that it can produce the increasing volumes of biomass

- based diesel up to and beyond that required by the statute, we nevertheless have limited experience at these productions levels in terms of impacts on various markets. For instance, the collection of facilities that have produced biodiesel has been highly varia ble over the few years since the start of the RFS2 program. Data collected through EMTS indicates that fourteen facilities that were producing biodiesel in the second half of 2010 stopped producing biodiesel by the end of 2011, despite the fact that natio nwide production volume was increasing over this timeframe. Twenty

six facilities produced biodiesel sporadically between July 2010 and May 2012, while another 34 facilities had gaps in their production that lasted for 3 months or more. If this variabili ty continued, it is unclear how it would affect markets for biodiesel.

The impacts on food prices is another area that may benefit from additional experience prior to raising the volume requirement of biomass

- based diesel above 1.28 bill gal. While we

p rojected in Section V.B.2 that the impact of an additional 110 mill gal of biodiesel on soybean prices would be small , soybean prices were signifi c antly higher in 2011 than in 2010 and 2009, and have been steadily increasing in the first few months of 2012 . Many different factors are known to influence food prices. However, the actual conditions of the markets for soybean oil and other biodiesel feedstocks under the 2012 and 2013 volume requirements of 1.0 and 1.28 bill gal, respectively, could be an impo rtant consideration in determining whether it is appropriate to

increase the biomass

- based diesel volume requirement above 1.28 bill gal.

It may also be beneficial to gain additional experience in how the infrastructure is responding to an increasing demand for biodiesel. While we do not have concrete concerns about the ability of the system to distribute, store, blend, and dispense biodiesel, it is possible that as biodiesel volumes ramp up the optimization of the biodiesel distribution system may la g behind. If so, additional time may be needed for the industry to find the most cost

- effective

solutions.

For these reasons, it may be prudent to leave the 2014 volume requirement at 1.28 bill gal before considering volume increases in subsequent year s. Therefore, we are coproposing both an

increase in the biomass

- based diesel applicable volume requirement to 1.39 billion gallons in 2014 and maintaining the 2014 volume requirement at 1.28 billion gallons. The 1.39 bill gal

level would reflect a view that the implementation issues noted above are likely to be minor concerns for the 2014 year, while the 1.28 bill gal level would reflect a view that a more cautious approach is warranted before increasing levels above 1.28 bill gal. With regard to impac ts,

a lthough we have estimated the impacts of increasing the volume requirement by 110 mill gal in 2014, we would expect that there would be no attributable impacts in 2014 if we left the volume requirement at 1.28 bill gal. We request comment on both of these volume requirements for

2014.*** E.O. 12866 Review

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Page 85 of 92 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 S ubmit Comments?

We are opening a formal comment period by publishing this document. We will accept comments during the period indicated under the DATES 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 you include appropriate and detailed supporting rationale, data, and analysis. Commenters are especially en couraged to provide specific suggestions for any changes that they believe need to be made. You should send all comments, except those containing proprietary 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 identification number in the subject line on the first page of your comment. Please ensure that your comme nts are submitted within the specified comment period. Comments received after the close of the comment period will be marked “late.” EPA is not required to consider these late comments. If you wish to submit Confidential Business Information (CBI) or i nformation 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 a s 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 submit the copy that does not contain CBI on disk or CD ROM, mark the outside of the disk or CD ROM clearly tha t 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 86 of 92 prior notice. If you have any questions about CBI or the procedures for claiming CBI, please consult the person identified in the FOR FURTHER INFORMATI ON CONTACT section.*** E.O. 12866 Review

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Page 87 of 92 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 issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Execut ive 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 RFS2 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 alre ady 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 entities include small businesses, small organizations, and small governmental jurisdictions.

For purpo ses 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 governme nt 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 field.*** E.O. 12866 Review

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Page 88 of 92 After co nsidering the economic impacts of today’s proposed rule on small entities, we certify that this proposed action will not have a significant economic impact on a substantial number of small entities. This rule proposes the annual standard for cellulosic bi ofuel for 2013

and biomass

- based diesel for 2014. The impacts of the RFS2 program on small entities were already addressed in the RFS2 final rule promulgated on March 26, 2010 (75 FR 14670), and this proposed rule will not impose any additional requiremen ts on small entities. However, w e continue to be interested in the potential impacts of the proposed rule on small entities and welcome comments on issues related to such impacts.

D. Unfunded Mandates Reform Act

This proposed ac tion 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 exp licitly 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 uniquely affect small governments. This proposed rule only applies to gasoline, diesel, and renewable fuel producers, importers, distributors an d marketers and merely proposes the 2013 annual standards for the RFS

program.

E. Executive Order 13132: Federalism

This action does not have federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various 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 131 32 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 and local o fficials.

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

Governments

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*** E.O. 12866 Review

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Page 89 of 92 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 additi onal 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 regulation. This action is not subject to

EO 13045 because it does not establish an environmental standard intend ed 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 Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)) because it is n ot 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 2013.

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) that 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.

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

- Income Populations*** E.O. 12866 Review

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Page 90 of 92 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 has 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 environment. This action

does no t 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 91 of 92 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 92 of 92 For the reasons se t 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 continues to read as follows: Authority: 42 U.S.C. 7414, 7542, 7545, and 7601(a).

2. Secti on 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.