Document ID: EPA-HQ-OAR-2005-0161-0001
Agency: epa
Document Type: Proposed Rule
Title: Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Requirements for 2006
Posted Date: 2005-12-30T13:49:01Z

[Federal Register: December 30, 2005 (Volume 70, Number 250)]
[Proposed Rules]               
[Page 77351-77363]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de05-21]                         

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-OAR-2005-0161; FRL 8016-9]

 
Regulation of Fuels and Fuel Additives: Renewable Fuel Standard 
Requirements for 2006

AGENCY: Environmental Protection Agency (EPA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: EPA is proposing to interpret and clarify the 2006 default 
standard applicable under the Renewable Fuel Program set forth in the 
Energy Policy Act of 2005. The Act requires that 2.78 volume percent of 
gasoline sold or dispensed to consumers in the U.S. in 2006 be 
renewable fuel if EPA does not promulgate comprehensive regulations to 
implement the Renewable Fuel Program by August 8, 2006. Given the short 
timeframe available and the need to provide certainty to the regulated 
community, the Agency is proposing a limited set of regulations for the 
default standard for 2006 that will provide for collective compliance 
by refiners, blenders, and importers to meet the 2.78 volume percent 
requirement, with compliance determined by looking at the national pool 
of gasoline sold in 2006. The Agency will develop and promulgate the 
comprehensive program subsequent to this action.

DATES: Comments: Comments must be received on or before January 30, 
2006.
    Hearings: If EPA receives a request from a person wishing to speak 
at a public hearing by January 17, 2006, a public hearing will be held 
on January 30, 2006. If a public hearing is requested, it will be held 
at 10 a.m. at the EPA Office Building, 2000 Traverwood, Ann Arbor, MI 
48105, or at an alternate site nearby. To request to speak at a public 
hearing, send a request to the contact in FOR FURTHER INFORMATION 
CONTACT.

ADDRESSES: Submit your comments, identified by Docket ID No. OAR-2005-
0161, by one of the following methods:
     http://www.regulations.gov: Follow the on-line instructions for 

submitting comments.
     E-mail: macallister.julia@epa.gov.
     Fax: (734) 214-4816.
     Mail: U.S. Environmental Protection Agency, EPA West (Air 
Docket), 1200 Pennsylvania Ave., NW., Room B108, Mail Code 6102T, 
Washington, DC 20460, Attention Docket ID No. OAR-2005-0161. Please 
include a total of 2 copies.
     Hand Delivery: EPA Docket Center, EPA/DC, EPA West, Room 
B102, 1301 Constitution Ave., NW., Washington, DC. Such deliveries are 
only accepted during the Docket's normal hours of operation, and 
special arrangements should be made for deliveries of boxed 
information.
    Instructions: Direct your comments to Docket ID No. OAR-2005-0161. 
EPA's policy is that all comments received will be included in the 
public docket without change and may be made available online at http://www.regulations.gov
, including any personal information provided, 

unless the comment includes information claimed to be Confidential 
Business Information (CBI) or other information whose disclosure is 
restricted by statute. Do not submit information that you consider to 
be CBI or otherwise protected through http://www.regulations.gov or e-mail. 

The http://www.regulations.gov Web site is an ``anonymous access'' system, 

which means EPA will not know your identity or contact information 
unless you provide it in the body of your comment. If you send an e-
mail comment directly to EPA without going through http://www.regulations.gov 

your e-mail address will be automatically captured and included as part 
of the comment that is placed in the public docket and made available 
on the Internet. If you submit an 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 contact you for 
clarification, EPA may not be able to consider your comment. Electronic 
files should avoid

[[Page 77352]]

the use of special characters, any form of encryption, and be free of 
any defects or viruses.
    Docket: All documents in the docket are listed in the 
http://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 available only in hard copy. 
Publicly available docket materials are available either electronically 
in http://www.regulations.gov or in hard copy at the EPA Docket Center, 

EPA/DC, EPA West, Room B102, 1301 Constitution Ave., NW., Washington, 
DC. This Docket Facility is open from 8:30 a.m. to 4:30 p.m., Monday 
through Friday, excluding legal holidays. The Docket telephone number 
is (202) 566-1742. The telephone number for the Public Reading Room is 
(202) 566-1744.

FOR FURTHER INFORMATION CONTACT: Julia MacAllister, U.S. EPA, National 
Vehicle and Fuel Emissions Laboratory, 2000 Traverwood, Ann Arbor, MI 
48105; Telephone (734) 214-4131, FAX (734) 214-4816, E-mail 
macallister.julia@epa.gov.

SUPPLEMENTARY INFORMATION: We are proposing a limited set of 
regulations to interpret and clarify the default renewable fuel 
standard for 2006 that will go into effect pursuant to the Energy 
Policy Act of 2005. In the ``Rules and Regulations'' section of the 
Federal Register, we are issuing these regulations as a direct final 
rule without prior proposal because we view this as a noncontroversial 
action and anticipate no adverse comment. We have explained our reasons 
for this action in the preamble to the direct final rule. If we receive 
no adverse comment, we will not take further action on this proposed 
rule. If EPA receives adverse comment on one or more distinct sections 
of this proposal we will publish a timely withdrawal in the Federal 
Register indicating which provisions of the direct final rule will 
become effective and which provisions are being withdrawn due to 
adverse comment. Any distinct section of this proposal for which we do 
not receive adverse comment will become effective on the date set out 
in the direct final rule, notwithstanding any adverse comment on any 
other distinct section of today's proposal. We will not institute a 
second comment period on this action. Any parties interested in 
commenting must do so at this time.

I. General Information

A. Does This Action Apply to Me?

    Entities potentially affected by this proposed action include those 
involved with the production, distribution and sale of gasoline motor 
fuel or renewable fuels such as ethanol and biodiesel. Regulated 
categories and entities include:

----------------------------------------------------------------------------------------------------------------
                                                 NAICS \1\     SIC \2\       Examples of potentially regulated
                   Category                        codes        codes                    entities
----------------------------------------------------------------------------------------------------------------
Industry......................................       324110         2911  Petroleum Refiners, Importers.
----------------------------------------------------------------------------------------------------------------
\1\ North American Industry Classification System (NAICS).
\2\ Standard Industrial Classification (SIC) system code.

    This table is not intended to be exhaustive, but provides a guide 
for readers regarding entities likely to be regulated by this action. 
This table lists the types of entities that EPA is now aware could 
potentially be affected by this proposed action. Other types of 
entities not listed in the table could also be affected. To decide 
whether your organization might be affected if this proposed action is 
finalized, you should carefully examine today's notice and the existing 
regulations in 40 CFR part 80. If you have any questions regarding the 
applicability of this action to a particular entity, consult the 
persons listed in the preceding FOR FURTHER INFORMATION CONTACT 
section.

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

    1. Submitting CBI. Do not submit this information to EPA through 
http://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 information 
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 referencing a Code of 
Federal Regulations (CFR) part or section number.
     Explain why you agree or disagree; suggest alternatives 
and substitute language for your requested changes.
     Describe any assumptions and provide any technical 
information and/or data that you used.
     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 views as clearly as possible, avoiding the 
use of profanity or personal threats.
     Make sure to submit your comments by the comment period 
deadline identified.
    3. Docket Copying Costs. A reasonable fee may be charged by EPA for 
copying docket materials, as provided in 40 CFR part 2.

Table of Contents

I. Overview
    A. What Is Proposed for 2006?
    B. Why Is EPA Taking This Action?
    C. When Will EPA Take Action for 2007 and Beyond?
II. Statutory Requirements for the Renewable Fuel Standard Program
    A. What Is the Renewable Fuels Standard Program?
    B. What Is the Default Standard for 2006?
    C. What Happens if EPA Does Not Promulgate Default Regulations 
for 2006?
III. Collective Renewable Fuel Use and the Default Standard
    A. Liability Under the Default Standard
    1. Who should be liable?
    2. What is collective liability?
    B. Why We Believe That the Default Standard Will Be Met 
Collectively
IV. Our Proposed Program for 2006
    A. Liable Parties
    B. How Would Compliance Be Determined?
    1. Activities required of liable parties

[[Page 77353]]

    2. Renewable fuels accounting for compliance purposes
    3. EPA determination of collective compliance with the default 
standard
    C. No Role for Credit Trading
V. Public Participation
VI. Administrative Requirements
    A. Executive Order 12866: Regulatory Planning and Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act (RFA), as Amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), 5 
U.S.C. 601 et. seq
    D. Unfunded Mandates Reform Act
    E. Executive Order 13132: Federalism
    F. Executive Order 13175: Consultation and Coordination With 
Indian Tribal Governments
    G. Executive Order 13045: Protection of Children From 
Environmental Health and Safety Risks
    H. Executive Order 13211: Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use
    I. National Technology Transfer Advancement Act
VII. Legal Authority

I. Overview

    Section 1501 of the Energy Policy Act of 2005 (Energy Act or the 
Act) amended the Clean Air Act by adding a new provision establishing a 
national renewable fuel program (also commonly known as the Renewable 
Fuel Standard program, or RFS program). This program is designed to 
significantly increase the volume of renewable fuels that are blended 
into gasoline, starting with calendar year 2006. The Act calls on EPA 
to issue implementing regulations by August 8, 2006, and provides that 
if EPA has not adopted such regulations by that date then 2.78 percent 
of the gasoline sold or dispensed to consumers for calendar year 2006 
must be renewable fuel.
    EPA does not believe that it can meet the August, 2006, statutory 
deadline. The issues that need to be resolved in adopting regulations 
to establish the comprehensive compliance and credit trading program 
are complex, making it important for EPA to receive input from the 
various stakeholders. This effort will require significant amounts of 
time and effort. In addition, a comprehensive set of regulations 
implementing the RFS would constitute a major rulemaking effort, which 
typically requires a significant amount of analysis of important issues 
such as emissions inventory impacts, costs, feasibility, and benefits. 
This work cannot be completed in the context of a final rulemaking by 
August, 2006, which must be preceded by a notice and comment process. 
At the same time, it is critical that industry be informed of how to 
demonstrate compliance prior to August, 2006, since the program defined 
by the Act begins in January 2006. The default provisions in the Act 
are not self explanatory, neither identifying the responsible parties 
nor the method by which they must demonstrate compliance. EPA is 
therefore proposing a limited set of regulations that would interpret 
and clarify the statutory default provision for 2006. The rule would 
provide certainty to the parties involved as to their responsibilities 
for 2006, and will help to provide a smooth transition to the long-term 
RFS program. This section summarizes the regulatory approach we propose 
taking for 2006.

A. What Is Proposed for 2006?

    The Energy Policy Act of 2005 anticipated the possibility that a 
full RFS program might not be promulgated by the start of 2006, and so 
provided a default standard applicable to 2006 only. The default 
standard specifies that 2.78 volume percent of gasoline sold or 
dispensed to consumers in the U.S. in calendar year 2006 must be 
renewable fuel. The default standard is applicable if the Agency does 
not promulgate regulations to implement the full RFS program.
    The Agency proposes to interpret the default standard for 2006 with 
regulations identifying the liable parties as refiners, importers, and 
blenders. Compliance with the default standard, however, would be 
determined on a collective, rather than an individual, basis. Under 
this approach, refiners, blenders, and importers would together be 
responsible for meeting the default 2.78 percent standard, and 
compliance with this standard would be calculated over the pool of 
gasoline sold to consumers. An individual refiner, blender, or importer 
would not be responsible for meeting the 2.78 percent standard for the 
specific gasoline it produces. The Agency would determine compliance 
following 2006 using data on gasoline and renewable fuel consumption 
available from the Energy Information Administration, supplemented by 
other readily available information. If we determine that the default 
standard has not been met in 2006 on this collective basis, any deficit 
would be carried forward and applied as an adjustment to the standard 
for 2007. The regulations implementing the default standard for 2006 
would not include any provisions for credit generation or trading, 
given the collective nature of the obligation.

B. Why Is EPA Taking This Action?

    The rulemaking required to implement the full RFS program, 
including both program design and the various analyses necessary, will 
require a substantial effort involving many stakeholders. For instance, 
it will require the Agency to undertake an analysis of small business 
impacts under the Small Business Regulatory Enforcement Flexibility Act 
(SBREFA), provide public notice through a proposed rule and an 
opportunity for comment including an opportunity for a public hearing, 
a Regulatory Impact Analysis, and ultimately produce a final rule. This 
process cannot occur by the time the RFS program begins in January 
2006, nor does EPA anticipate that it can be completed by the one year 
deadline set in the Act. Therefore, we believe the default standard of 
2.78 percent will apply to calendar year 2006.
    However, the default standard provided in the Act will be difficult 
for the regulated community to interpret and implement without 
additional guidance from the Agency. Although the Act provided that the 
default standard of 2.78 percent would apply in 2006 in the event that 
the Agency did not promulgate regulations implementing the full 
renewable fuels program, the default standard provision does not 
specify the liable parties and the specific nature of their obligation. 
It also does not discuss compliance mechanisms, reporting requirements, 
or credit trading. The resulting uncertainty associated with the 
default standard will create confusion and risks a problematic initial 
implementation of the RFS program. In the extreme, allowing the default 
standard to go into effect without EPA guidance could result in 
significant disruptions in the gasoline and renewable fuel production, 
blending, and distribution systems.
    The goal of today's action is to provide certainty to parties 
involved in the production and distribution of gasoline and renewable 
fuels regarding the Agency's approach to determining compliance with 
the default standard for 2006. Today's action proposes a compliance 
mechanism that is simple and straightforward to implement, explains 
that the default standard would be applied on a collective basis, and 
can be finalized expeditiously.
    In addition to meeting the need for clarity in the limited 
timeframe available, we believe that the collective approach to 
compliance for 2006 is reasonable given our expectation that the 
default standard would be met on a collective basis in 2006 even 
without imposition of any RFS obligations. Not only has the U.S. 
Department of Agriculture projected total ethanol production for 2006 
to be above 4.0 billion gallons, but the Renewable Fuel

[[Page 77354]]

Association has indicated that total ethanol production capacity 
already exceeds 4.1 billion gallons and that additional production 
capacity currently under construction exceeds 1.2 billion gallons. 
Production of biodiesel and cellulosic ethanol, as well as imports of 
ethanol, increase these estimates even further. It's clear that 
capacity in 2006 will be adequate to produce the renewable fuel needed 
to meet the 2.78 percent default standard. In addition, sustained high 
gasoline prices, state bans on MTBE, and continued gasoline demand 
growth in the face of limited refining capacity all support our 
conclusion that the default standard for 2006 will be met on a 
collective basis based on market forces alone. Section III.B provides 
more details regarding these projections. In the unlikely event that 
the default standard is not met on a collective basis for 2006, a 
proposed deficit carryover provision would allow us to make up for any 
shortfall by adjusting the applicable standard in 2007 commensurately.

C. When Will EPA Take Action for 2007 and Beyond?

    The default standard of 2.78 percent provided in the Act applies 
exclusively to calendar year 2006, and the collective compliance 
approach we are proposing in today's action would likewise apply only 
to 2006. For 2007 and beyond, the Agency will not only need to 
determine and publish the applicable renewable fuel standard for each 
year, but will also need to specifically identify liable parties, lay 
out the compliance program including recordkeeping and reporting 
requirements, and delineate all elements of the credit trading program 
including how credits are generated, how they can be transferred, and 
how they can be used for compliance purposes. All these and many other 
issues impacting the full RFS program will be addressed in a subsequent 
Agency action and are not discussed in today's notice of proposed 
rulemaking (NPRM).

II. Statutory Requirements for the Renewable Fuel Standard Program

    This section describes the Act's provision regarding the long-term 
RFS program, and the default standard that goes into effect 
automatically in the event that the Agency does not promulgate 
regulations before August 8, 2006 implementing the long-term program. 
It also describes the problems that may occur if the Agency does not 
clarify such things as liable parties, compliance mechanisms, and the 
role of credit trading under the default standard.

A. What Is the Renewable Fuels Standard Program?

    Section 1501 of the Energy Policy Act of 2005 (the Act) describes 
the renewable fuel program, also known as the Renewable Fuel Standard 
(RFS) program. This provision was added to the Clean Air Act as Section 
211(o), and requires EPA to establish a program to ensure that U.S. 
gasoline contains specific volumes of renewable fuel for each calendar 
year 2006 through 2012, as shown in Table II.A-1 below.

    Table II.A-1.--Applicable Volumes of Renewable Fuel Under the RFS
------------------------------------------------------------------------
               Calendar year                       Billion gallons
------------------------------------------------------------------------
2006......................................  4.0
2007......................................  4.7
2008......................................  5.4
2009......................................  6.1
2010......................................  6.8
2011......................................  7.4
2012......................................  7.5
------------------------------------------------------------------------

Starting with 2013, EPA is required to establish the applicable 
national volume which must require at least the same overall volume 
percentage of renewable fuel as was required in 2012.
    In order to ensure the use of the renewable fuel volume specified 
for each year, the Agency must set a percentage standard for each year 
representing the percentage of gasoline sold or introduced into 
commerce which must be renewable fuel. The standard is to be set based 
on the renewable fuel volumes shown in Table II.A-1 and gasoline volume 
projections provided by the Energy Information Administration (EIA). 
The standard for each year must be published in the Federal Register by 
November 30 of the previous year.
    Renewable fuels are defined in the Act primarily on the basis of 
the feedstock. In general, renewable fuels must be produced from plant 
or animal products or wastes, as opposed to fossil fuel sources. The 
Act specifically identifies several types of motor vehicle fuels as 
being encompassed by the definition, including cellulosic biomass 
ethanol, waste-derived ethanol, biogas, and biodiesel.
    The percentage standard is applicable to refineries, blenders, and/
or importers, as appropriate. The percentage standard must be adjusted 
such that redundant obligations are avoided, and must take into account 
the fact that small refineries are exempted from the program through 
2011\1\. For liable parties, the RFS standard must be met on an annual 
averaging basis and does not apply on a per-gallon basis.
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    \1\ Regulatory provisions promulgated by the Agency must also 
contain provisions allowing exempted small refineries to opt into 
the RFS program.
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    The Act requires the Agency to promulgate a credit trading program 
for the RFS program. The credit trading program will serve two 
purposes. First, it will allow parties who are liable for the standard 
to comply through the purchase of credits if they cannot or do not wish 
to blend renewable fuels into gasoline themselves. Second, it will 
permit renewable fuels that are not blended into gasoline, such as 
biodiesel and biogas, to participate in the RFS program. The Agency 
must also determine who can generate credits and under what conditions, 
how credits may be transferred from one party to another, and in 
certain cases the appropriate value of credits from different types of 
renewable fuel.
    The Agency envisions promulgation of facility registration, 
recordkeeping and reporting requirements, enforcement provisions, and 
various fuel tracking mechanisms to implement the program. These 
provisions will enable the credit trading program to function properly 
and will ensure adequate bases for Agency enforcement efforts.
    The Act also contains several other provisions that could affect 
the comprehensive RFS program. For instance, the Energy Information 
Administration (EIA) is required to determine whether there is a 
continuing pattern of less than 25 percent of the renewable fuel pool 
being used in either summer or winter periods. If so, then EPA is 
required to promulgate regulations establishing a requirement for such 
minimum seasonal use of renewable fuel. The Act also provides for 
several kinds of waivers, including one for the initial year of the 
program in which the Department of Energy (DOE) may recommend that EPA 
waive the RFS program in whole or in part. Another general waiver 
provision authorizes EPA to waive the program in whole or in part in 
response to a petition by a state or states.
    Thus, the long-term RFS program envisioned in the Act presents many 
complex and varied implementation issues. There are a large number of 
parties that could potentially be affected by the program, including 
the parties in the gasoline and renewable fuels production and 
distribution systems. Credit generation, trading and use will be an 
integral aspect of the program, and this credit program presents many 
unique issues to address, as most of the

[[Page 77355]]

blending and use of renewable fuels occurs by parties separate and 
distinct from the gasoline producers. Limited discussions with 
stakeholders have served to highlight the complexity. Because of the 
many disparate interests involved and the large potential impacts of 
the program, EPA wants to make sure that development of the long-term 
RFS program is done thoughtfully and with broad stakeholder 
involvement. In addition, significant actions such as this require us 
to perform analyses of cost, feasibility, emission inventory impacts, 
air quality, and impacts on small businesses. Consequently, EPA does 
not believe that it can meet the August 8, 2006 statutory deadline to 
issue final comprehensive regulations implementing the full program.

B. What Is the Default Standard for 2006?

    If EPA fails to publish final regulations establishing the full RFS 
program by August 8, 2006, Section 211(o)(2)(a)(iv) of the amended 
Clean Air Act provides that ``* * * the percentage of renewable fuel in 
gasoline sold or dispensed to consumers in the United States, on a 
volume basis, shall be 2.78 percent for calendar year 2006.'' However, 
the provision provides no details on how this requirement is to be 
implemented.
    For instance, the default standard provision does not identify what 
parties are subject to this statutory requirement. There is a large 
network of refiners, importers, blenders, distributors, and retailers 
who arguably could be held responsible to meet this requirement. The 
statutory language also does not indicate whether the default standard 
is to be applied to each gallon of gasoline sold or dispensed in 2006, 
if it is to represent the annual average renewable fuel content for the 
gasoline sold or dispensed by each responsible party, or if instead it 
is to be an annual average for all parties acting collectively in the 
fuel production and distribution system.
    Another aspect of the statutory language regarding the default 
standard that makes its implementation problematic is the absence of 
any explicit discussion of credit trading. Since producers of gasoline 
are generally not directly involved in the blending of renewable fuels, 
credit trading will be a critical component of the comprehensive RFS 
program. Without credit trading, if each party was individually liable 
to meet the default standard for their own gasoline, then a liable 
party would need to ensure that the gasoline it produces actually 
contains a minimum of 2.78 percent renewable fuel. This would be 
inconsistent with the direction provided in the Act for the long-term 
RFS program.
    Finally, both the default standard and the annual standard to be 
met under the long-term program are expressed in the statute in terms 
of percent renewable fuel in gasoline. Although the definition of 
renewable fuel includes biodiesel, this particular renewable fuel is 
not blended into gasoline. While the long-term program will allow for 
biodiesel integration in the program through credit trading, the 
default standard provision does not specify the manner in which use of 
biodiesel is to be counted towards compliance. However, for the 
purposes of this rule we believe it is appropriate to include biodiesel 
in the pool of renewable fuel used to determine compliance with the 
default standard.

C. What Happens if EPA Does Not Promulgate Default Regulations for 
2006?

    The statutory language regarding the default standard for 2006 is 
ambiguous and problematic in several respects. As a result, starting in 
January 2006 there could be a great deal of uncertainty among parties 
whose business involves gasoline or renewable fuels if the Agency does 
not provide clarity. These parties will not know whether they are 
liable for the default standard, and if they are liable how to comply 
with it. The concern over potential individual liability and the lack 
of a credit trading program could lead some parties to attempt to 
procure and blend renewable fuels themselves, when under normal 
circumstances the logistics and economics of doing so would make such 
activities prohibitive. Others might attempt to ensure that every 
gallon of gasoline contains at least 2.78 percent renewable fuel. Still 
others could ignore the requirement entirely in the absence of explicit 
descriptions of how the Agency would enforce it. All of these 
activities could significantly disrupt the supply and distribution 
system, potentially resulting in local supply shortages and/or price 
spikes, and yet provide no assurance that the desired amount of 
renewable fuel will be blended into gasoline.
    Due to these concerns, the Agency has determined that it would be 
in the public interest, and would further the goals of the Act, to 
issue regulations interpreting and clarifying liability, the mechanism 
of compliance, and the role of credit trading under the 2006 default 
standard.

III. Collective Renewable Fuel Use and the Default Standard

    This section describes our reasons for believing that a collective 
compliance approach is a reasonable interpretation of the default 
standard for the RFS program. We also describe our reasons for 
believing that the default standard of 2.78 percent will be met in 2006 
despite the absence of an RFS standard applicable to individual parties 
in the fuel production and distribution system.

A. Liability Under the Default Standard

1. Who should be liable?
    EPA proposes to identify parties who produce or import gasoline as 
the parties responsible for implementing the renewable fuel standard 
for 2006, including refiners, blenders, and importers, with an 
exemption for refiners that own only small refineries. The default 
provision itself is ambiguous with respect to liable parties, and could 
be interpreted as placing ultimate responsibility on a variety of 
parties in the gasoline production and distribution system, including 
the retailers who dispense gasoline to consumers. With respect to the 
long-term renewable fuel program, Congress directed EPA to establish 
regulations that make the renewable fuel obligation applicable to 
``refineries, blenders and importers, as appropriate,'' [see Clean Air 
Act Section 211(o)(2)(A)(iii)(I)], with an exemption until 2011 for 
``small refineries'' [see Clean Air Act Section 211(o)(9)(A)(i)]. Our 
proposed interpretation of the default standard for 2006 is consistent 
with these statutory provisions for the long-term renewable fuel 
program.
    EPA believes that refiners, blenders and importers are best 
positioned to ensure that an appropriate amount of renewable fuel is 
added to gasoline. Our proposed regulation identifies blenders as a 
subset of refiners, consistent with our regulatory definition of 
``refiner'' at 40 CFR 80.2(i).\2\ In addition, EPA believes that 
retailers are not in the best position to guarantee the renewable fuel 
content of the gasoline they sell, and placing this responsibility on 
the many thousands of retailers, many of whom are small businesses, 
would likely be very burdensome for them and economically disruptive.
---------------------------------------------------------------------------

    \2\ Parties whose only activity involves adding oxygenates to 
gasoline would not be considered refiners under this definition.
---------------------------------------------------------------------------

2. What is collective liability?
    EPA also proposes that the default provision for 2006 be 
interpreted as imposing a collective obligation on the

[[Page 77356]]

regulated parties. This means that if the average volume percent of 
renewable fuel used in 2006 meets or exceeds 2.78 percent, then the 
standard is satisfied for all responsible parties, regardless of their 
individual efforts towards that goal. In light of the fact that 
industry on average will very likely use more than 2.78 percent 
renewable fuel in 2006 based solely on market forces (see further 
discussion below), EPA does not believe that it is necessary or 
appropriate to interpret the default standard for 2006 as imposing any 
greater degree of individual responsibility for liable parties. Such a 
system would require complex credit trading, recordkeeping, and 
reporting provisions that are not consistent with a default standard 
that Congress envisioned going into effect without a detailed 
regulatory program.
    EPA is confident that its proposed approach will achieve the 
statutory objective of ensuring that 2.78 percent of gasoline sold in 
the United States in 2006 will be renewable fuel, and it will do so in 
an efficient manner that minimizes costs to industry and consumers. In 
the unlikely event that EPA's projections of renewable fuel use in 2006 
prove inaccurate and the default standard is not met, EPA proposes that 
the volume obligation for industry in 2007 be adjusted to reflect any 
volume deficit represented by the difference between the actual 
renewable fuel volume percentage in 2006 and 2.78 percent. This 
effectively means that if there is a deficit in renewable fuel use in 
2006, the applicable percent standard for 2007 could be higher than it 
would otherwise be. This deficit carryover provision is similar in 
concept to the provision required for the long-term renewable-fuel 
program, to allow individuals that cannot satisfy their renewable fuel 
obligation in a given year to fulfill any deficit in a subsequent year. 
See Clean Air Act (CAA) Section 211(o)(5)(D).
    Thus under today's proposed approach to compliance with the default 
standard, individual parties would still be considered to be in 
compliance even if they themselves blended little or no renewables, so 
long as the 2.78 percent requirement is met collectively nationwide in 
2006. The carryover of any volume deficit will ensure that compliance 
with the default standard is ultimately achieved.

B. Why We Believe That the Default Standard Will Be Met Collectively

    In proposing a collective compliance approach to meeting the 
default standard in 2006, we are doing so with the expectation that 
normal business practices will actually result in the default standard 
being met. While we are also proposing a deficit carryover provision to 
address the possibility of a failure to meet the default standard in 
2006, we have high confidence that such a provision would not have to 
be used. This section provides our reasons for believing that the 
default standard of 2.78 percent will be met in 2006 through existing 
market forces.
    Although the full RFS program specifies that EPA should set a 
percentage standard designed to ensure use of a renewable volume of at 
least 4.0 billion gallons, the provision describing the default 
standard directly sets the percentage as 2.78 percent and makes no 
reference to this volume. As a result, the actual volume of renewable 
fuel used in gasoline in 2006 could be greater than or less than 4.0 
billion gallons when the default standard of 2.78 percent is met. This 
potential result is illustrated in Figure III.B-1, where the shaded 
region represents cases in which the default standard of 2.78 percent 
has been met.
[GRAPHIC] [TIFF OMITTED] TP30DE05.143

    A recent projection of the total gasoline consumption volume for 
2006 is 141.6 billion gallons.\3\ With this gasoline volume, 3.94 
billion gallons of renewable fuel would need to be consumed in order 
for the default standard of 2.78 percent to be met. For simplicity we 
have focused in this section on our reasons for believing that a least 
4.0 billion gallons of renewable fuel will be sold in 2006.
---------------------------------------------------------------------------

    \3\ EIA Short-Term Energy Outlook, October 2005.
---------------------------------------------------------------------------

    Of all the renewable fuels that may play a role in meeting the 
default standard in 2006, ethanol is by far expected to represent the 
largest fraction. Therefore, our reasons for believing that at least 
4.0 billion gallons of renewable fuel will be blended into gasoline in 
2006 are based primarily on expectations regarding the production and 
sale of ethanol. Biodiesel volumes are also quickly rising and serve to 
provide added assurance that the default standard will be met in 2006. 
The recent excise tax credit for biodiesel

[[Page 77357]]

and its value as a lubricity agent in ultra-low sulfur diesel also add 
to the attractiveness of biodiesel.
    There are a variety of sources of information strongly suggesting 
that ethanol volumes will exceed 4.0 billion
gallons in 2006. These include recent production trends, evaluations of 
expanding ethanol production capacity, and analyses of future demand. 
Each of these information sources is discussed in this section.
    For instance, recent trends indicate that fuel-grade ethanol 
consumption has steadily increased since it was first introduced into 
the gasoline market in the early 1980s. The most recent consumption 
levels are shown in Figure III.B-2.

                               Figure III.B-2: Recent Ethanol Consumption Volumes

[GRAPHIC] [TIFF OMITTED] TP30DE05.144

    Some of the recent growth in ethanol consumption appears to have 
resulted from state bans on the use of the gasoline additive methyl 
tertiary butyl ether (MTBE). For areas required to use reformulated 
gasoline (RFG), ethanol often represents the most cost-efficient 
alternative to MTBE to meet the current RFG oxygen mandate.\4\ State 
bans on MTBE went into effect in 2004 for California, New York, and 
Connecticut, where approximately one-third of all RFG is sold. The 
amount of ethanol sold in these three states increased by approximately 
1 billion gallons between 2002 and 2004. But ethanol use has increased 
steadily over the last five years in other RFG areas and in 
conventional gasoline as well for reasons not associated with MTBE 
bans. We believe that these increases in ethanol use are due primarily 
to the beneficial economics of blending ethanol into gasoline as 
gasoline prices have risen. If the market forces that led to the rising 
demand for ethanol over the last several years continue into the 
future, ethanol consumption could easily reach 4.0 billion gallons in 
2006.\5\
---------------------------------------------------------------------------

    \4\ The Energy Act contains a provision requiring the Agency to 
promulgate regulations eliminating the oxygen mandate for RFG by May 
5, 2006.
    \5\ Data from EIA's Monthly Energy Review indicates that ethanol 
production in the first half of 2005 was 6.8% higher than the same 
period in 2004. Extrapolated through 2006, this trend would result 
in just over 4.0 billion gallons produced in 2006.
---------------------------------------------------------------------------

    In addition to ethanol consumption trends, import trends also 
suggest that the supply of ethanol will increase into 2006. According 
to EIA, imports of ethanol increased significantly in 2004, totaling 
nearly 150 million gallons.\6\ This volume represents a more than ten-
fold increase from each of the previous two years.
---------------------------------------------------------------------------

    \6\ Petroleum Supply Annual 2004, vol. 2. Table 20.
---------------------------------------------------------------------------

    Biodiesel production has also risen significantly in the last 
several years, and further supports our belief that total renewable 
fuel volumes in 2006 will exceed 4.0 billion gallons. Figure III.B-3 
shows the volumes of biodiesel production in the U.S. in recent years.

[[Page 77358]]

[GRAPHIC] [TIFF OMITTED] TP30DE05.145

    If the trends shown in Figure III.B-3 continue into 2006, there 
could be as much as 35 million gallons of biodiesel produced. If the 
ethanol import volumes of 150 million gallons per year continue into 
2006, then an additional total of nearly 0.2 billion gallons of 
renewable fuel may be consumed in the U.S. in 2006 in addition to the 
ethanol production estimates. Thus the total projected volume of 
renewable fuel consumed in 2006 would be about 4.2 billion gallons 
instead of the 4.0 billion gallons we estimated above.
    An evaluation of expanding ethanol production capacity also points 
towards 2006 ethanol volumes easily exceeding 4 billion gallons. For 
instance, Table III.B-1 shows data from the Renewable Fuels Association 
for existing and underway ethanol production capacity in the U.S. for 
the past several years.\7\
---------------------------------------------------------------------------

    \7\ 2003 source: Ethanol Industry Outlook 2004, RFA, February 
2004. 2004 source: Ethanol Industry Outlook 2005, RFA, February 
2005. 2005 source: ``U.S. Fuel Ethanol Production Capacity'', 
Renewable Fuels Association. Update September 2005. http://www.ethanolrfa/eth_prod_fnc.html
.

                                 Table III.B.--U.S. Ethanol Production Capacity
----------------------------------------------------------------------------------------------------------------
                                                    Number of production plants    Production capacity (million
                                                 --------------------------------          gal per year)
                                                                                 -------------------------------
                                                     Existing        Underway        Existing        Underway
----------------------------------------------------------------------------------------------------------------
2003 (December).................................              72              15           3,101             598
2004 (December).................................              81              16           3,644             754
2005 (October)..................................              89              21           4,159           1,249
----------------------------------------------------------------------------------------------------------------

    The average new ethanol plant or plant expansion takes about 14 
months to complete, though the time required can range from a few 
months to over two years.\8\ Based on target construction completion 
dates in Ethanol Producer Magazine, we estimate that, of the 1,249 mgpy 
of production capacity underway as of October of 2005, 232 mgpy will be 
online by the end of 2005. At least another 895 mgpy will be online 
sometime in 2006. However, accounting for the fact that different 
facilities will come online at different points throughout 2006, the 
total annual increase in capacity will be roughly 352 mgpy. The total 
amount of ethanol production capacity for 2006 is thus expected to be 
4,743 mgpy. Actual ethanol production has historically been a very 
large fraction of production capacity as demand increased, generally 
exceeding ninety percent. As a result these figures strongly suggest 
that production in 2006 is very likely to be greater than 4 billion 
gallons.
---------------------------------------------------------------------------

    \8\ ``Ethanol Plant Construction'', Ethanol Producer Magazine, 
October 2005. Page 30.
---------------------------------------------------------------------------

    Two other analyses support our expectation that 2006 ethanol 
production volumes will exceed 4 billion gallons. The EIA made its own 
projections of ethanol production in 2006 using its National Energy 
Modeling System, an annual forecasting tool.\9\ In addition to 
evaluating various versions of the RFS program prior to enactment of 
the Energy Policy Act of 2005, the EIA also modeled a case in which no 
RFS program existed. In that event, EIA projected that total annual 
ethanol consumption in 2006 would be 4.6 billion gallons.
---------------------------------------------------------------------------

    \9\ ``Renewable Fuels Legislation Impact Analysis'', Energy 
Information Administration, July 2005. http://www.eia.doe.gov/oiaf/servicerpt/jeffords/
.

---------------------------------------------------------------------------

    The U.S. Department of Agriculture has also made projections of 
ethanol production under a scenario in which no RFS program is assumed. 
Their most recent ``Baseline Projections'' apply to all years between 
2006 and 2014, and are based on an analysis of the major forces and 
uncertainties affecting future agricultural markets.\10\ This analysis 
included such factors as trade, farm income, food prices, weather, 
international developments, and other macroeconomic conditions 
affecting the production of corn and other crops used for the 
production of ethanol. In association with this analysis, total ethanol 
production in 2006 was projected to be 4.18 billion gallons. Again, 
considering ethanol imports and biodiesel production, actual renewable

[[Page 77359]]

fuel consumption could be as high as 4.4 billion gallons in this 
scenario.
---------------------------------------------------------------------------

    \10\ ``USDA Agricultural Baseline Projections to 2014,'' 
February 2005 (OCE-2005-1).
---------------------------------------------------------------------------

    There are other important, though less quantitative, indicators of 
growth in the ethanol industry. For instance, in response to increasing 
trading volume, the Chicago Board of Trade recently announced that it 
is expanding the number of ethanol futures contracts available.\11\ 
Also, the New York Mercantile Exchange will now offer a New York Harbor 
ethanol blendstock (RBOB) gasoline futures contract that will replace 
the MTBE-blended gasoline based contract.
---------------------------------------------------------------------------

    \11\ Renewable Fuel News, Hart Energy Publishing. Sept. 26, 
2005. Page 4.
---------------------------------------------------------------------------

    In addition to simple volume projections from past years, we also 
believe that ethanol production will exceed 4 billion gallons in 2006 
due to the favorable economics currently associated with it. 
Historically the 51[cent]/gal federal excise tax credit and various 
state and local credits have provided sufficient economic incentive to 
overcome the higher production costs of ethanol compared to the 
production costs of the gasoline it displaces. As a result, demand for 
ethanol has steadily increased over the years, aided by the RFG oxy 
mandate and state MTBE bans. However, the increase in crude oil prices 
in recent years has dramatically increased the production cost of 
gasoline. Although the price of natural gas used in ethanol production 
has also risen in recent years, ethanol production costs have remained 
relatively stable in comparison to gasoline and thus the economic 
incentive to blend ethanol into gasoline has risen significantly. A 
similar incentive also now exists for biodiesel in the wake of its 
recently enacted excise tax subsidy. As long as crude prices remain 
high, this incentive to blend ethanol and biodiesel into conventional 
fuels is anticipated to continue. Other factors that have historically 
been important such as octane, and even the RFG oxygen mandate, are 
expected to be much less important in 2006. Ethanol's value simply as a 
extender for gasoline volume is sufficient to keep demand high. Also, 
with refineries operating at or near capacity and the demand for 
gasoline increasing in the U.S., the phaseout of MTBE could result in a 
potential reduction of gasoline volume. We expect that many refiners 
will use ethanol to replace the lost octane and volume associated with 
the phaseout of MTBE.
    As a result of these favorable economics, despite the removal of 
the oxy mandate for RFG as required by the Act, we do not anticipate 
any overall reduction in demand for ethanol next year. The Act provides 
for immediate elimination in California of the statutory requirement 
for oxygen in RFG, and 270 days after enactment for the rest of the 
country.\12\ Although the elimination of the oxygen requirement has the 
potential to reduce ethanol use in some RFG areas, given the strong 
economic incentive to blend ethanol, its use is expected to rise in 
others, offsetting any impact. State-mandated ethanol requirements will 
only solidify this conclusion. Currently, three states mandate the use 
of ethanol in all gasoline through a state renewable fuels standard: 
Minnesota, Hawaii, and Montana. Other states may follow in the future--
currently state legislators in Illinois, Missouri and Michigan have 
been discussing introducing similar legislation in those states.
---------------------------------------------------------------------------

    \12\ Although the Act provides for the elimination of oxygen 
from RFG, EPA is still required to revise the appropriate sections 
of the CFR to allow RFG without oxygen to be sold. For purposes of 
this analysis, we are assuming that such regulatory revision would 
occur no later than March, 2006 for California, and by May, 2006 
(i.e., by 270 days from enactment) for the rest of the U.S. We 
expect to put out a rule in early 2006 adressing this issue.
---------------------------------------------------------------------------

IV. Our Proposed Program for 2006

    For calendar year 2006, we are proposing a collective approach to 
compliance that implements the default 2.78 percent standard. This 
section describes our proposed 2006 program in detail, including our 
proposed definition of liable parties under the standard and our 
proposed mechanism for addressing any potential failure to meet the 
2.78 percent collectively.

A. Liable Parties

    For calendar year 2006, the Act states that if EPA fails to issue 
comprehensive regulations establishing the renewable fuel program then 
``the percentage of renewable fuel in gasoline sold or dispensed to 
consumers in the United States on a volume basis, shall be 2.78 percent 
for calendar year 2006.'' The default standard goes into effect 
independently; that is, no regulations are required to implement the 
default standard. EPA believes, however, that regulations are 
nevertheless necessary to clarify how the standard is to be interpreted 
and implemented.
    While the Act provides that the renewable fuel obligation 
determined pursuant to the long-term RFS program shall ``be applicable 
to refineries, blenders, and importers, as appropriate,'' the Act does 
not provide this level of specificity for the default RFS standard for 
2006. We are proposing that compliance with the default standard be 
determined based on the efforts of the collective refining, importing 
and blending industries. Small refineries would be excluded from 
liability in the 2006 collective compliance determination. However, 
since the statutory language regarding the default standard indicates 
that compliance should be based on gasoline sold or dispensed to 
consumers in the United States, the gasoline produced by small refiners 
as well as the ethanol used in gasoline produced by small refineries 
would be counted in performing the compliance calculations.
    The regulations would provide that refiners, blenders and importers 
have collectively met the standard if the volume of renewable fuels 
used in gasoline sold in the U.S. in calendar year 2006 is equal to or 
greater than 2.78 percent. Thus if the standard is achieved 
collectively, then every individual refiner, blender or importer will 
be in compliance with the standard. This means that an individual 
refiner may use less than 2.78 percent in the gasoline it refines, 
imports or blends, but would not be in violation of the standard as 
long as the 2.78 percent is met or exceeded in the aggregate by all 
parties in these industries. If the 2.78 percent default standard is 
not met collectively, then our proposed regulations would provide for a 
deficit carryover to 2007 that would apply collectively to all liable 
parties in 2007. There would be no other consequence for collective 
failure to meet the 2.78 percent standard in 2006.

B. How Would Compliance Be Determined?

    This section describes the activities that would be required of 
liable parties under the default standard, the types of renewable fuels 
that would be counted, and the mechanism through which the Agency will 
determine compliance with the default standard for 2006.
1. Activities Required of Liable Parties
    For the collective compliance determination, EPA will calculate the 
actual volume percent of renewable fuel for 2006 using gasoline and 
ethanol consumption volumes reported by EIA for 2006, supplemented by 
readily available information on consumption volumes for other 
renewable fuels. Thus, individual refiners, importers and blenders will 
not be required to demonstrate compliance with the default standard. 
EPA will evaluate whether the default standard has been met 
collectively by use of readily available information. Individual 
companies will not be required to keep records of volumes of ethanol 
purchased

[[Page 77360]]

for purposes of compliance with this rule.
2. Renewable Fuels Accounting for Compliance Purposes
    Under our proposed regulations, EPA would calculate the total 
volume of renewable fuel to account for all ethanol and non-ethanol 
renewable fuels used in motor fuel in 2006, including ethanol made from 
cellulosic or waste feedstocks and biodiesel. We would use information 
on the volumes of these renewable fuels that can be obtained from 
available sources. We propose that one gallon of cellulosic biomass or 
waste-derived ethanol count as 2.5 gallons of renewable fuel, following 
the prescription in Section 211(o)(4) of the Clean Air Act as amended 
by the Energy Policy Act of 2005.
    Although the statutory language regarding the default standard 
indicates that compliance should be based on renewable fuel in 
gasoline, we believe that biodiesel should also be included even though 
it is not blended into gasoline. Not only is biodiesel included within 
the definition of renewable fuel, but in the context of the long-term 
RFS program biodiesel can be counted as a component of the renewable 
fuel pool for use in compliance calculations even though the RFS 
standard is also based on the percentage use of renewable fuel in 
gasoline. We further propose that one gallon of biodiesel be counted as 
one gallon of renewable fuel in the context of 2006 compliance with the 
default standard. We will revisit the credit value of biodiesel and 
other renewable fuels in the context of the comprehensive rulemaking 
implementing the full RFS program, and our approach in this rulemaking 
is not intended to establish a precedent for our decision there.
3. EPA Determination of Collective Compliance With the Default Standard
    We are proposing that the default standard has been met if the 
volume percent of renewable fuel used in gasoline sold in the U.S. in 
2006 is collectively greater than or equal to 2.78 percent. While small 
refineries are not considered liable parties under the collective 
compliance approach, we would include the volume of gasoline produced 
by small refineries as well as the amount of ethanol used in such 
gasoline in determining whether the 2.78 percent default standard has 
been met. We believe that including volumes of gasoline and ethanol 
from small refiners is consistent with the plain language of the 
default standard, which calls for 2.78 percent renewable fuel in 
``gasoline sold or dispensed to consumers.''
    We propose to primarily use data published by EIA in determining 
compliance with the default standard. We have identified the Monthly 
Energy Review as the most appropriate source.\13\ Ethanol is available 
in Table 10.1,\14\ while gasoline volumes are available under ``Product 
Supplied'' in Table 3.4. Volumes of other renewable fuels that may not 
be available through EIA publications will be estimated based on 
information from other readily available and reliable sources.
---------------------------------------------------------------------------

    \13\ The Monthly Energy Review for March 2007 is expected to 
contain data through December 2006.
    \14\ Fuel ethanol consumption in trillion Btu must be converted 
into gallons using the higher heating value of 3.539 million Btu per 
barrel, per Table A1.
---------------------------------------------------------------------------

    If the default standard has been met on a collective basis, all 
refiners, importers and blenders would be deemed to be in compliance 
whether or not they individually used 2.78 percent ethanol in gasoline. 
If the default standard has not been met on a collective basis, we 
propose that an appropriate volume of renewable fuel be carried forward 
to the 2007 volume obligation which would then be implemented and 
enforced under the full RFS rule. The additional renewable fuel that is 
carried forward is termed the ``deficit carryover''. In such an 
instance, no individual refiner, blender or importer is held liable for 
the default 2006 standard not being met. Rather, the RFS standard for 
2007 would be adjusted to account for any deficit carryover.
    Today's rule would provide that a deficit carryover will be 
required if the 2.78 percent standard is not met. The size of the 
deficit would be determined with respect to the 2.78 percent default 
standard. As a result, the minimum necessary volume of renewable fuel 
consumed in 2006 and the size of any deficit carryover volume will be 
dependent upon the volume of gasoline consumed. The following examples 
illustrate how the standard would work, and how the deficit carryover 
would be calculated.

          (A) Renewable volume percent is greater than 2.78%:
Actual 2006 gasoline volume:                        136.8 bill gal
Actual 2006 renewable volume:                       3.90 bill gal
Calculated percent:                                 Actual renewable
                                                     volume/actual
                                                     gasoline volume =
                                                     3.9/136.8 = 2.85%
Result:                                             Standard has been
                                                     met; no deficit
                                                     carryover to 2007

            (B) Renewable volume percent is less than 2.78%:
Actual 2006 gasoline volume:                        139.8 bill gal
Actual 2006 renewable volume:                       3.8 bill gal
Calculated percent:                                 Actual renewable
                                                     volume/actual
                                                     gasoline volume =
                                                     3.8/139.8 = 2.72%
Result:                                             Standard has not
                                                     been met. Amount of
                                                     renewable fuel
                                                     needed to achieve
                                                     2.78%: (2.78%-
                                                     2.72%) x (actual
                                                     gasoline used) =
                                                     0.06% x 139.8 bill
                                                     gallon = 0.08
                                                     billion gallons.
                                                     The 0.08 billion
                                                     gallons is added to
                                                     the RFS goal for
                                                     2007, resulting in
                                                     a modified goal of
                                                     4.78 billion gal/yr
                                                     of renewable fuel.

    Although the Act requires EPA to publish the standard applicable to 
2007 by November 30, 2006, the data on actual gasoline and renewable 
fuel volumes consumed in all of 2006 will not be available at that 
time. As a result, the addition of any deficit carryover to 2007, if 
one is necessary, could occur no sooner than early 2007. Under these 
circumstances, we expect that we would adjust the 2007 standard to 
account for a carryover from 2006, if necessary, at such time as the 
data for 2006 are available and in a manner consistent with the 
regulations that will apply to 2007.

C. No Role for Credit Trading

    The Act provides for the regulations implementing the long term RFS 
to allow for credit generation and trading, and we will develop a 
credit trading program under the full RFS program rule. Today's rule 
allows for the industry to comply with the default standard on a 
collective basis, providing no basis for setting up an individual 
credit generation and trading program, as will be done for the long 
term RFS program. For the default standard in

[[Page 77361]]

2006, companies do not have an individual standard to meet, so there is 
no basis for determining that they have done more or less than is 
required of them individually, which is the basis for generating or 
needing credits. Therefore, under today's rule, individual companies 
that exceed the 2.78 percent default standard do not generate credits, 
and there are no credits to trade or sell to other companies. Also, no 
credits are generated that can be used toward compliance with RFS 
requirements after 2006.

V. Public Participation

    We request comments on all aspects of this proposal. The comment 
period for this proposed rule will end 30 days after publication in the 
Federal Register.
    If you would like to speak at a public hearing on this proposed 
rule, please contact us within 15 days of publication of the proposal 
in the Federal Register, as described above in DATES. If a request to 
speak at a public hearing is received, we will hold the hearing on the 
30th day after publication of the proposal in the Federal Register. An 
announcement of the public hearing will be made on our Web site at 
http://www.epa.gov/otaq/renewablefuel.htm. The public hearing would 

start at 10 a.m. local time at the EPA Office Building, 2000 
Traverwood, Ann Arbor, MI 48105, or at an alternate site nearby.
    To contact us for updated information about the possibility of a 
public hearing, please see the FOR FURTHER INFORMATION CONTACT section.
    If you would like to present testimony at a public hearing, we ask 
that you notify the contact person listed above at least ten days 
beforehand. You should estimate the time you will need for your 
presentation and identify any needed audio/visual equipment. We suggest 
that you bring copies of your statement or other material for the EPA 
panel and the audience. It would also be helpful if you send us a copy 
of your statement or other materials before the hearing.
    We will arrange for a written transcript of the hearing and keep 
the official record of the hearing open for 30 days to allow for the 
public to supplement the record. You may make arrangements for copies 
of the transcript directly with the court reporter.

VI. Administrative Requirements

A. Executive Order 12866: Regulatory Planning and Review

    Under Executive Order 12866, [58 FR 51735 (October 4, 1993)] the 
Agency must determine whether the regulatory action is ``significant'' 
and therefore subject to OMB review and the requirements of the 
Executive Order. The Order defines ``significant regulatory action'' as 
one that is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
    (2) create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.''
    It has been determined that this rule will not have an annual 
effect on the economy of $100 million or more, and that it is not 
otherwise a ``significant regulatory action'' under the terms of 
Executive Order 12866 and is therefore not subject to OMB review. EPA 
has estimated that renewable fuel use in 2006 will be sufficient to 
meet the default standard of 2.78 percent. Therefore, individual 
refiners, blenders, and importers are already on track to meet rule 
obligations through normal market-driven incentives.

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. 
There would not be a burden on liable parties because the Agency would 
determine compliance immediately following 2006 using data on gasoline 
and renewable fuel consumption available from the Energy Information 
Administration and other information that may be readily available.
    Burden means the total time, effort, or financial resources 
expended by persons to generate, maintain, retain, or disclose or 
provide information to or for a Federal agency. This includes the time 
needed to review instructions; develop, acquire, install, and utilize 
technology and systems for the purposes of collecting, validating, and 
verifying information, processing and maintaining information, and 
disclosing and providing information; adjust the existing ways to 
comply with any previously applicable instructions and requirements; 
train personnel to be able to respond to a collection of information; 
search data sources; complete and review the collection of information; 
and transmit or otherwise disclose the information.
    An agency may not conduct or sponsor, and a person is not required 
to respond to a collection of information unless it displays a 
currently valid OMB control number. The OMB control numbers for EPA's 
regulations in 40 CFR are listed in 40 CFR part 9.

C. Regulatory Flexibility Act (RFA), as Amended by the Small Business 
Regulatory Enforcement Fairness Act of 1996 (SBREFA), 5 U.S.C. 601 et 
seq.

    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 purposes of assessing the impacts of today's rule on small 
entities, small entity is defined as: (1) A small business as defined 
by the Small Business Administration's (SBA) regulations at 13 CFR 
121.201; (2) a small governmental jurisdiction that is a government of 
a city, county, town, school district or special district with a 
population of less than 50,000; and (3) a small organization that is 
any not-for-profit enterprise which is independently owned and operated 
and is not dominant in its field.
    After considering the economic impacts of today's proposed rule on 
small entities, I certify that this action will not have a significant 
economic impact on a substantial number of small entities. EPA proposes 
that the default provision for 2006 be interpreted as imposing a 
collective obligation on the regulated parties. This means that if the 
average volume percent of renewable fuel used in 2006 meets or exceeds 
2.78 percent, then the standard is satisfied for all responsible 
parties, regardless of their individual efforts towards that goal. In 
light of the fact that refiners, blenders, and importers would together 
be responsible for meeting the default 2.78 percent standard and 
industry on average will very likely use more than 2.78 percent 
renewable fuel in 2006 based solely on market forces, there will be no 
significant economic impact on small entities. No individual refiner, 
blender, or importer would be responsible for establishing compliance 
with the default standard for the specific gasoline it produces in 
2006,

[[Page 77362]]

and any deficit carryover to 2007 would be minimal if there is one at 
all. We continue to be interested in the potential impacts of our 
proposed rules on small entities and welcome comments on issues related 
to such impacts. We 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

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, EPA 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures to State, local, and tribal governments, in 
the aggregate, or to the private sector, of $100 million or more in any 
one year. Before promulgating an EPA rule for which a written statement 
is needed, section 205 of the UMRA generally requires EPA to identify 
and consider a reasonable number of regulatory alternatives and adopt 
the least costly, most cost-effective or least burdensome alternative 
that achieves the objectives of the rule. The provisions of section 205 
do not apply when they are inconsistent with applicable law. Moreover, 
section 205 allows EPA to adopt an alternative other than the least 
costly, most cost-effective or least burdensome alternative if the 
Administrator publishes with the final rule an explanation why that 
alternative was not adopted.
    Before EPA establishes any regulatory requirements that may 
significantly or uniquely affect small governments, including tribal 
governments, it must have developed under section 203 of the UMRA a 
small government agency plan. The plan must provide for notifying 
potentially affected small governments, enabling officials of affected 
small governments to have meaningful and timely input in the 
development of EPA regulatory proposals with significant Federal 
intergovernmental mandates, and informing, educating, and advising 
small governments on compliance with the regulatory requirements.
    This rule contains no federal mandates for State, local, or tribal 
governments as defined by the provisions of Title II of the UMRA. The 
rule imposes no enforceable duties on any of these governmental 
entities. Nothing in the rule would significantly or uniquely affect 
small governments.
    EPA has determined that this rule does not contain a federal 
mandate that may result in expenditures of $100 million or more for the 
private sector in any one year. EPA has estimated that renewable fuel 
use in 2006 will be sufficient to meet the default standard of 2.78 
percent. Therefore, individual refiners, blenders, and importers are 
already on track to meet rule obligations through normal market-driven 
incentives. Thus, today's rule is not subject to the requirements of 
sections 202 and 205 of the UMRA.

E. Executive Order 13132: Federalism

    Executive Order 13132, entitled ``Federalism'' (64 FR 43255, August 
10, 1999), requires EPA to develop an accountable process to ensure 
``meaningful and timely input by State and local officials in the 
development of regulatory policies that have federalism implications.'' 
``Policies that have federalism implications'' is defined in the 
Executive Order to include regulations that 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.''
    This proposed rule 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. The rule reflects a nationwide 
program that does not impose directives specific to any particular 
State or region. Thus, Executive Order 13132 does not apply to this 
rule.

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

    Executive Order 13175, entitled ``Consultation and Coordination 
with Indian Tribal Governments'' (65 FR 67249, November 6, 2000), 
requires EPA to develop an accountable process to ensure ``meaningful 
and timely input by tribal officials in the development of regulatory 
policies that have tribal implications.''
    This proposed rule does not have tribal implications as specified 
in Executive Order 13175. This rule would be implemented at the Federal 
level and collectively apply to refiners, blenders, and importers. EPA 
expects these entities to meet the standards on a collective basis in 
2006 even without imposition of any RFS obligations on any individual 
party. Thus, Executive Order 13175 does not apply to this rule.

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

    Executive Order 13045: ``Protection of Children from Environmental 
health Risks and Safety Risks'' (62 FR 19885, April 23, 1997) applies 
to any rule that: (1) Is determined to be ``economically significant'' 
as defined under Executive Order 12866, and (2) concerns an 
environmental health or safety risk that EPA has reason to believe may 
have a disproportionate effect on children. If the regulatory action 
meets both criteria, the Agency must evaluate the environmental health 
or safety effects of the planned rule on children, and explain why the 
planned regulation is preferable to other potentially effective and 
reasonably feasible alternatives considered by the Agency.
    EPA interprets Executive Order 13045 as applying only to those 
regulatory actions that are based on health or safety risks, such that 
the analysis required under section 5-501 of the Order has the 
potential to influence the regulation. This proposal is not subject to 
Executive Order 13045 because it is not economically significant and is 
not based on health or safety risks.

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

    This rule is not a ``significant energy action'' as defined in 
Executive Order 13211, ``Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use'' (66 FR 28355 
(May 22, 2001)) because it is not likely to have a significant adverse 
effect on the supply, distribution, or use of energy. We believe that 
the normal practices of liable parties will result in the default RFS 
standard being met collectively.

I. National Technology Transfer Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (``NTTAA''), Public Law 104-113, 12(d) (15 U.S.C. 272 note) 
directs EPA to use voluntary consensus standards in its regulatory 
activities unless to do so would be inconsistent with applicable law or 
otherwise impractical. 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. The NTTAA directs EPA to provide 
Congress, through OMB,

[[Page 77363]]

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.

VII. Legal Authority

    Statutory authority for the rules proposed today can be found in 42 
U.S.C. 7401-7671q.

List of Subjects in 40 CFR Part 80

    Environmental protection, Fuel additives, Gasoline, Imports, 
Reporting and recordkeeping requirements.

    Dated: December 22, 2005.
Stephen L. Johnson,
Administrator.
    For the reasons set forth in the preamble, we propose to amend part 
80 of title 40 of the Code of Federal Regulations to read 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, 7545, and 7601(a).

    2. Subpart K is added to read as follows:

Subpart K--Renewable Fuel Standard

Sec.  80.1100  How is the statutory default requirement for 2006 
implemented?

    (a) Definitions. (1) Renewable fuel. (i) Renewable fuel means motor 
vehicle fuel that is used to replace or reduce the quantity of fossil 
fuel present in a fuel mixture used to operate a motor vehicle, and 
which
    (A) Is produced from grain, starch, oil seeds, vegetable, animal, 
or fish materials including fats, greases, and oils, sugarcane, sugar 
beets, sugar components, tobacco, potatoes, or other biomass, or
    (B) Is natural gas produced from a biogas source, including a 
landfill, sewage waste treatment plant, feedlot, or other place where 
decaying organic material is found.
    (ii) The term ``renewable fuel'' includes cellulosic biomass 
ethanol, waste derived ethanol, biodiesel, and any blending components 
derived from renewable fuel.
    (2) Cellulosic biomass ethanol means ethanol derived from any 
lignocellulosic or hemicellulosic matter that is available on a 
renewable or recurring basis, including dedicated energy crops and 
trees, wood and wood residues, plants, grasses, agricultural residues, 
fibers, animal wastes and other waste materials, and municipal solid 
waste. The term also includes any ethanol produced in facilities where 
animal wastes or other waste materials are digested or otherwise used 
to displace 90 percent or more of the fossil fuel normally used in the 
production of ethanol.
    (3) Waste derived ethanol means ethanol derived from animal wastes, 
including poultry fats and poultry wastes, and other waste materials, 
or municipal solid waste.
    (4) Small refinery means a refinery for which the average aggregate 
daily crude oil throughput for a calendar year (as determined by 
dividing the aggregate throughput for the calendar year by the number 
of days in the calendar year) does not exceed 75,000 barrels.
    (5) Biodiesel means a diesel fuel substitute produced from 
nonpetroleum renewable resources that meets the registration 
requirements for fuels and fuel additives established by the 
Environmental Protection Agency under section 211 of the Clean Air Act. 
It includes biodiesel derived from animal wastes (including poultry 
fats and poultry wastes) and other waste materials, or biodiesel 
derived from municipal solid waste and sludges and oils derived from 
wastewater and the treatment of wastewater.
    (b) Renewable Fuel Standard for 2006. The percentage of renewable 
fuel in the total volume of gasoline sold or dispensed to consumers in 
2006 in the United States shall be a minimum of 2.78 percent on an 
annual average volume basis.
    (c) Responsible parties. Parties collectively responsible for 
attainment of the standard in paragraph (b) of this section are 
refiners (including blenders) and importers of gasoline. However, a 
party that is a refiner only because he owns or operates a small 
refinery is exempt from this responsibility.
    (d) EPA determination of attainment. EPA will determine after the 
close of 2006 whether or not the requirement in paragraph (b) of this 
section has been met. EPA will base this determination on information 
routinely published by the Energy Information Administration on the 
annual domestic volume of gasoline sold or dispensed to U.S. consumers 
and of ethanol produced for use in such gasoline, supplemented by 
readily available information concerning the use in motor fuel of other 
renewable fuels such as cellulosic biomass ethanol, waste derived 
ethanol, biodiesel, and other non-ethanol renewable fuels.
    (1) The renewable fuel volume will equal the sum of all renewable 
fuel volumes used in motor fuel, provided that:
    (i) One gallon of cellulosic biomass ethanol or waste derived 
ethanol shall be considered to be the equivalent of 2.5 gallons of 
renewable fuel; and
    (ii) Only the renewable fuel portion of blending components derived 
from renewable fuel shall be counted towards the renewable fuel volume.
    (2) If the nationwide average volume percent of renewable fuel in 
gasoline in 2006 is equal to or greater than the standard in paragraph 
(b) of this section, the standard has been met.
    (e) Consequence of nonattainment in 2006. In the event that EPA 
determines that the requirement in paragraph (b) of this section has 
not been attained in 2006, a deficit carryover volume shall be added to 
the renewable fuel volume obligation for 2007 for use in calculating 
the standard applicable to gasoline in 2007.
    (1) The deficit carryover volume shall be calculated as follows:

DC = Vgas [middot] (Rs-Ra)

Where:

DC = Deficit carryover in gallons of renewable fuel

Vgas = Volume of gasoline sold or dispensed to U.S. 
consumers in 2006, in gallons
Rs = 0.0278
Ra = Ratio of renewable fuel volume divided by total 
gasoline volume determined in accordance with paragraph (d)(2) of this 
section.

    (2) There shall be no other consequence of failure to attain the 
standard in paragraph (b) of this section in 2006 for any of the 
parties in paragraph (c) of this section.

[FR Doc. 05-24610 Filed 12-29-05; 8:45 am]

BILLING CODE 6560-50-P