On August 6, 2013, EPA issued a prepublication copy of the final rule establishing the 2013 annual percentage standards for the Renewable Fuels Standard (RFS) program for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel. Under the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007, EPA must promulgate regulations to ensure that an increasing amount of the transportation fuel sold in the U.S. contains renewable fuel.

To achieve this goal, EPA is required to annually set the renewable fuel standards for the following year by no later than November 30. 42 U.S.C. § 7545(o)(3)(B). EPA did not meet this deadline in 2012 and instead published the notice of proposed rulemaking (NPR) in the Federal Register on February 7, 2013. See 78 Fed. Reg. 9,282 (Feb. 7, 2013). Despite missing the November 30, 2012 deadline, EPA claims in this final rule that the agency still has authority to issue a 2013 standard because the Clean Air Act does not specify a consequence for missing the deadline. The United States Court of Appeals for the District of Columbia has previously concurred with this position. See NPRM v. EPA, 630 F.3d 145, 152-58 (2010).

The Cellulosic Biofuel Standard

The cellulosic biofuel standard has been controversial since its inception. Cellulosic biofuel is an advanced biofuel created from sources of lignocellulose such as switchgrass and agricultural wastes. As shown in the table below, the final 2013 standard that EPA set for cellulosic biofuel is lower than that required under Section 211(o)(2) of the Clean Air Act and it is also lower than the volume that EPA originally proposed for 2013.

Click here to view table.

Actual cellulosic biofuel production has fallen far short of the volume specified in the Clean Air Act. When the cellulosic biofuel standard was introduced in 2007, cellulosic biofuel was not being commercially produced in the U.S. In 2010 and 2011, zero cellulosic biofuel was generated despite EPA’s projections that industry could produce approximately 6 million gallons in each of those years.

Congress anticipated that commercial production of renewable fuels might not meet the standards established in the statute, so it provided EPA with a mechanism to adjust the standard downward. Therefore, if the projected production of cellulosic biofuel is below the volume specified in Section 211(o)(2) of the Clean Air Act, EPA must lower the standard to the projected volume of cellulosic biofuel production.

The Fall of the 2012 Cellulosic Biofuel Standard

The process that EPA previously used to establish this projected production of cellulosic biofuel has not withstood judicial scrutiny. In January 2013, the United States Court of Appeals for the District of Columbia vacated the 2012 cellulosic biofuel standard published in 77 Fed. Reg. 1,320 (Jan. 9, 2013). See API v. EPA, No. 12-1139 (D.C. Cir. filed Jan. 25, 2013). The 2012 cellulosic biofuel standard was set at 8.65 million gallons (actual volume).[1] 77 Fed. Reg. 1,323. The Court struck down this standard “because EPA’s methodology for making its cellulosic biofuel projection did not take neutral aim at accuracy. . . .” API, No. 12-1139, slip op. at 4. Rather, “it was an unreasonable exercise of agency discretion,” id., that failed to rely upon “a prediction of what will actually happen” with regard to production. Id. at 10. The Court determined that “the most natural reading” of Section 211 of the Clean Air Act calls “for a projection that aims at accuracy, not at deliberately indulging a greater risk of overshooting than undershooting.” Id. at 11. When EPA set the cellulosic biofuel standard at an unachievable value, the agency placed industry “in an impossible position” where they were “forced to purchase volumes of cellulosic biofuel greater than total production, or pay fines for failing to do so.” Id.at 10.

After the Court issued this decision striking down the 2012 cellulosic standard, EPA notified all parties registered with the renewable fuels standard program, informing them that the 2012 standard was zero. Refunds were issued to companies that had already purchased cellulosic biofuel credits for 2012.

Changes Made in Response to API v. EPA

In response to the D.C. Circuit’s criticisms of the 2012 cellulosic biofuel standard, the 2013 standard does not include volumes from pilot and demonstration scale facilities or facilities with anticipated start-up dates near end of year 2013. Furthermore, EPA established benchmark rates for estimating how quickly new facilities will ramp up production and disregarded projections from companies that anticipated production at rates that exceed this benchmark. Based upon these changes, EPA believes that its 2013 cellulosic biofuel standard is based upon accuracy and does not overshoot actual projections.

The preamble to the 2013 standard projects that 6 million gallons of cellulosic biofuel will be generated in 2013. This value is below the 14 million gallons that EPA originally proposed for 2013 in the February NPR. EPA claims that this value was revised based on information from the Energy Information Administration, “detailed information from biofuel production companies,” and comments received on the NPR. EPA also explained that the “[t]wo commercial scale facilities that were expected to begin fuel production in 2012 experienced unexpected delays in commissioning, while a third was delayed due to difficulties raising required funds.” EPA now claims that “[t]he funding profiles of the companies included in [the] projected volume for 2013,” “are markedly different” than the companies projected to produce cellulosic biofuel in the past. According to EPA, “[m]any of these projects have already received, and in several cases have closed on loan guarantees and grants offered by [the U.S. Department of Energy] or [the U.S. Department of Agriculture].” In fact, both of the facilities that EPA relied upon in the 2013 standard have completed construction of their commercial facilities. KiOR began shipping cellulosic biofuel produced at its Columbus, Mississippi facility to customers in March 2013 and INEOS Bio started commercial production at its Vero Beach, Florida facility on July 31, 2013.

The 2013 Standards and Beyond

The final 2013 percentage standards apply to all companies that produce and import gasoline and diesel in the United States in 2013. Those companies use these percentage standards to calculate their individual compliance obligations. As shown in the table above, EPA did not adjust either the advanced biofuel or the renewable biofuel standards from the statutory volume. EPA justified retaining the 2.75 billion gallon statutory volume for advanced biofuels because the agency believes that “there is a high likelihood that the total volume of all advanced biofuels that can be produced or imported in 2013 is above the 2.75 billion gallons statutory volume. As to the total renewable fuels volume, EPA rationalized that 16.55 billion gallons was achievable because “a significant number of carryover RINs [will be] available from 2012 that can be used in lieu of actual volume in 2013.” This rule will become effective once it is published in the Federal Register and companies will have until June 30, 2014 to demonstrate compliance with the 2013 requirements.

Going forward, EPA acknowledges that “ethanol will likely continue to predominate in the renewable fuel pool in the near future.” Because EPA believes that the market’s ability “to consume ethanol as E15-E85 is constrained in a number of ways,” “it will be challenging for the market to consume sufficient quantities of ethanol sold in blends greater than E10 and to produce sufficient non-ethanol biofuels (biodiesel, renewable diesel, biogas, etc.) to reach the mandated 18.15 [billion gallon statutory standard] for 2014.” Thus, EPA anticipates that it will need to adjust the 2014 volume requirements. Factors that EPA will need to consider in setting the 2014 standard include: available supply of cellulosic biofuel, availability of advanced biofuel, the total volume of ethanol that can be consumed as either E10 or higher ethanol blends (i.e., the E10 blendwall), and current infrastructure and market-based limitations on consumption of ethanol in blends above E10.

Because of the problems EPA has had in the past projecting cellulosic biofuel production, at least one entity submitted a comment to EPA during the 2013 NPR comment period asking the agency to use its authority to modify the required future volume for cellulosic biofuel now. The commenter explained that modifying future cellulosic biofuel standards will provide more long-term certainty to the market; however, EPA declined to do so at this time. EPA rationalized that it does not believe that taking action sooner would provide long-term certainty because EPA “would still be required to reduce the applicable volume of cellulosic biofuel if the volume projected to be available for any one calendar year was less than the volumes for that calendar year as modified under [Section 211(o)(7)(F) of the Clean Air Act].”