Reed Smith Client Alerts

Authors: Jennifer A. Smokelin Paul B. Turner

On May 29, 2015, the U.S. EPA proposed long-delayed biofuel targets for 2014 and 2015 through the renewable fuel standard (RFS) program, and issued a proposal setting the mandates for 2016. See press release here. EPA released this proposal as part of a consent decree in litigation brought against EPA by the American Petroleum Institute (API) and the American Fuel and Petrochemical Manufacturers (AFPM). These new proposed targets would significantly raise mandated levels of blending. The EPA's new proposed targets, however, are unlikely to be the last word, as various market participants with differing interests are likely to chime in during the comment period.

The RFS program was created under the Energy Policy Act (EPAct) of 2005, and established the first renewable fuel volume mandate in the United States. As required under EPAct, the original RFS program (RFS1) required 7.5 billion gallons of renewable fuel to be blended into gasoline by 2012. Under the Energy Independence and Security Act (EISA) of 2007, the RFS program grew in several key ways, called “RFS2.” Under RFS2, EISA expanded the RFS program to include diesel (in addition to gasoline), and increased the volume of renewable fuel required to be blended into transportation fuel from 9 billion gallons in 2008 to 36 billion gallons by 2022. Predating the recent shale boom, RFS2 lays the foundation for achieving significant reductions of greenhouse gas emissions through the use of renewable fuels, reducing imported petroleum, and encouraging the development and expansion of our nation's renewable fuels sector.

Each year, EPA must set biofuel targets, preferably for the year(s) to come. The biofuel targets for 2014 and 2015 through the RFS program have been long delayed – more than a year-and-a-half behind schedule because of controversy surrounding an earlier, initial proposal by EPA for 2014 and 2015. This initial proposal – issued and then withdrawn by EPA last fall – would have scaled back refiners' 2014 mandates to use both conventional ethanol and advanced biofuels to 16 percent of the levels that Congress wrote into the RFS under EISA. The EPA pulled back on the proposal after receiving significant criticism both from biofuels interests – which argued the cuts would undermine the industry – and from the oil industry, which said the reductions did not go far enough. In part, such pull back seemed to be aimed at addressing concerns with the technological practicality associated with current vehicles and infrastructure.

The proposal released May 29 would raise EPA’s previously proposed targets for the amount of biofuels to be mixed into motor fuel for the three years to 2016. However, the proposed goal was short of the aggressive targets set by EISA.

This increase in the 2014 – 2016 goal is likely to raise concern within the oil industry (already facing significant pricing pressures), which opposes more blending. The EPA proposed that 16.3 billion gallons of renewable fuels should be mixed into the country’s gasoline or diesel supply this year, increasing to 17.4 billion gallons next year. The proposal also revised the 2014 target up to 15.93 billion gallons, in line with actual consumption last year and up from the previous proposal of 15.21 billion. Going forward, the proposal would increase the required amount of cellulosic biofuels – fuels produced from wood, grasses or waste portions of plants – from 33 million gallons used in 2014 to 106 million by 2015, and 206 million gallons by 2016 –an increase of more than 600 percent in just two years. The required amount of advanced biofuels would go up to more than 3.4 billion gallons for 2016, a 27 percent increase from the amount used in 2014. The proposal would also increase the amount of conventional ethanol, or biofuel derived from corn, from 13.25 billion gallons used last year to 13.4 billion required in 2015, and 14 billion in 2016.

The retroactive target for 2014 remains significant because it affects efforts by refiners to comply with the standard. The delay in finalization continues to cause serious business issues for refiners, and both API and AFPM have sued the EPA over the delays in issuing rules.

From a market standpoint, in the immediate term, the new goals were seen as an easy-reach for oil companies and importers – the parties obligated to prove compliance with the RFS. And some view the RFS program in part as a boon to the agricultural industry in that the increased standards do little more than provide a subsidy to certain agricultural interests. In addition, there is a limit to how much ethanol can reasonably be blended into fuel because of infrastructure and mechanical limitations (the so-called “blend wall”) that EPA's new proposal may bump up against. This has many implications, including further downward pressure on prices of ethanol blending credits (RINs). Finally, it is a sure bet that the biofuel industry will comment and urge EPA to raise the standards higher, so we can expect that the fossil fuel industry will want to comment to produce a counterweight and to keep the standards lower.

If early reaction to the May 29 proposal is a harbinger, we can expect lively comment and debate leading up to Nov. 30, when EPA intends to finalize the proposal. EPA plans to hold one public hearing on the proposal in June in Kansas City, Kan., and to accept public comments through July 27. Refiners and all interested parties interested in scoping out comments should contact the Reed Smith attorney with whom they regularly work.

 

Client Alert 2015-153