EPA has completed the roll out of the complex RFS2 program by setting renewable fuel quantity requirements for 2011. EPA severely curtailed the cellulosic biofuels standard from 250 million gallons to six million gallons based on limited industry growth. Looking forward to 2012, however, the agency identified a potential surge to 300 million gallons of production. EPA held firm on both the overall renewable fuel standard at 14 billion gallons and advanced biofuels at 1.35 billion gallons despite the cellulosic cut. Other contentious RFS2 issues including retroactive Renewable Identification Numbers ("RINs") and foreign feedstock were also resolved. The 2011 Final Rule will have a substantial impact on the U.S. biofuels industry, and to a lesser extent, the global biofuels market. Under the Energy Independence and Security Act of 2007, Congress set the cellulosic biofuels quantity for 2011 at 250 million ethanol equivalent gallons ("Gallons"). EPA is authorized to modify this quantity based on various factors including industry projections and Energy Information Administration ("EIA") assessments. EPA utilized this authority to reduce the cellulosic biofuels standard to six million Gallons for 2011. In a related ruling, EPA set the price of a cellulosic biofuels credit at $1.13. These credits can be utilized by the RFS2 obligated parties to satisfy any shortfall that they have at the end of the compliance year. Obligated parties include petroleum refiners and importers who must acquire sufficient RINs to demonstrate compliance with the standard set by the Final Rule.

The Preamble to the Final Rule exhaustively describes EPA's methodology in determining the cellulosic biofuels quantity. The Preamble specifically references the five biofuels plants that EPA has identified as the likely cellulosic biofuels producers in 2011. The list includes DuPont Danisco, Fiberight, KL Energy Corporation, Range Fuels and KiOR. Overall, this group is anticipated to produce approximately six million Gallons of fuel: the first three will produce ethanol fuel; Range will produce methanol and ethanol; and KiOR will produce cellulosic diesel. The Preamble describes their processes in detail and provides a strikingly comprehensive assessment of the U.S. advanced biofuels industry. It includes descriptions of various production technologies and diagrams of processes such as the Cellulosic Ethanol Thermochemical Gasification Process.

In its proposed rule, EPA had proposed a range of cellulosic biofuels quantities between 6.5 and 25.5 million Gallons. Notably, the cellulosic biofuels industry was generally supportive of the EPA process and applied only limited pressure to EPA toward the higher quantity levels during the rulemaking. Groups such as the American Petroleum Institute applied downward pressure on the quantity. EPA's Final Rule quantity exceeded the assessment of EIA that placed the cellulosic biofuels production levels at 3.94 million Gallons in 2011 for U.S. production. Neither EPA nor EIA considered foreign imports of cellulosic biofuels to be likely in the coming year, though EPA forecasted two Canadian and one German company would achieve production.

The U.S. biofuels industry welcomed EPA's decision not to use the cellulosic biofuels waiver as the starting point for waivers downward in the advanced biofuels and total renewable fuel categories. The advanced biofuels category is an expansive category that encompasses cellulosic biofuels, biomass-based diesel and other biofuels that meet the standard of 50% greenhouse gas ("GHG") reduction relative to a petroleum baseline. Advanced biofuels need not meet the cellulosic content and the 60% GHG standard required in the cellulosic biofuels category. For 2011, EPA maintained the advanced biofuels standard at 1.35 billion Gallons. Biodiesel that meets both the biomass based definition and the advanced biofuels requirements is anticipated to supply 1.2 billion Gallons toward this requirement, though this will require only 800 million gallons of actual biodiesel fuel due to the fuel's high energy density. The remaining 144 million Gallons is anticipated to be met with the additional biodiesel as well as sugarcane ethanol likely sourced from Brazil.

The total renewable fuel standard set by the Final Rule is just shy of 14 billion Gallons. From a percentage standard, this constitutes a market penetration of over 8% into the U.S. transportation fuels market. 12.8 billion of these Gallons will likely be supplied by conventional corn ethanol, which provides the foundation for the biofuels industry. Under RFS2, corn ethanol continues to expand its market penetration until it reaches 15 billion Gallons in 2015. After 2015, all additional increases in RFS2 are satisfied solely by advanced biofuels.

In addition to setting these standards for 2011, EPA addressed two controversial and lingering RFS2 regulatory issues. At the time RFS2 became effective on July 1, 2010, EPA had not completed its lifecycle analysis of several feedstocks including canola, sorghum and palm oil. Under the prior rule, fuels produced from these feedstocks were not recognized as having established fuel pathways and therefore did not generate RINs. This had its most severe impact on canola biodiesel producers who suddenly lost the ability to compete with soy biodiesel that enjoyed a recognized pathway and generated valuable RINs. In the Final Rule, EPA rectified this issue by allowing the generation of retroactive or "Delayed RINs." To be eligible, fuel producers must meet certain requirements including having a commercialized production process that existed on July 1, 2010, and completing the EPA petition process no later than January 31, 2011.

The global biofuels market has emerged as a contentious area with countries establishing incentives to spur domestic biofuels production that sometimes raise trade issues. Under the prior RFS2 rulemaking, U.S. agricultural producers of planted crops and crop residues were successful in gaining general recognition of their feedstock's GHG characteristics. Under the RFS2 rules, typical feedstock tracking and certification requirements were waived for U.S. sourced material only. Foreign suppliers and notably Brazil objected to this practice. In the Final Rule, EPA created a petition process for foreign producers to establish that their particular feedstock's GHG performance is sufficiently predictable that they should also be entitled to forgo tracking and certification requirements. EPA noted several factors it will use in reviewing petitions, including the existence of a 2007 baseline, whether the same land will consistently be utilized or new clearing will occur, whether land use changes can effectively be monitored, the quality of data gathering, and whether the responsible foreign government supports the petition and will support the necessary land tracking process. This petition process presents an early stage example of the type of international standardization efforts necessary to support GHG programs in other sectors and likely represents the cutting edge of U.S. policy in this area.

For a full background on the RFS2 program, click here.