The U.S. Environmental Protection Agency ("EPA") has released a series of proposed rules relating to the Renewable Fuel Standard ("RFS"). Originally enacted by Congress in the Energy Policy Act of 2005 and expanded by the Energy Independence Act of 2007, the RFS represents the country's most comprehensive and effective policy in the energy security and greenhouse gas ("GHG") sectors. The current RFS, often referred to as RFS2, contains four categories of fuel made from renewable biomass. EPA has the authority to set the mandate levels for these renewable fuels. U.S. petroleum refiners and importers are obligated parties under the program and must prove compliance by purchasing a sufficient quantity of these fuels. The EPA proposed an overall standard for 2012 for renewable fuel of 9.21% or 15.2 billion gallons of fuel and also proposed significant regulatory changes to the program.

The EPA's proposed rule covers multiple topics. By law, the EPA is required to annually assess and determine appropriate volumes for the various categories of fuel. The largest category, renewable fuel, encompasses all categories and is typically fulfilled with corn starch ethanol that reduces GHGs by a minimum of 20% compared to petroleum gasoline. The other three categories, advanced biofuel, biomass based diesel and cellulosic biofuel, must meet higher GHG reduction amounts of 50% to 60% relative to a fossil fuel baseline. On an annual basis, EPA assesses the commercialization of the cellulosic biofuel industry to determine the appropriate mandate to set for the coming year. The industry continues to fall short of Congressional goals with the EPA proposing to set a mandate level of 3.55 million to 12.9 million gallons for 2012. This range actually falls short of the range that EPA proposed of 6.5 million to 25.5 million gallons for 2011. However, despite the limited development in cellulosic biofuels, EPA has again proposed to maintain the overall advanced biofuel category at the Congressional level of 2.0 billion gallons. Notably, the EPA specifically requested comments regarding whether the cellulosic biofuel goal should be set more aggressively so as to further incentivize industry development. The EPA's commitment to progress in advanced biofuels that reduce GHGs by at least 50% is significant given that after 2015, all subsequent increases to the RFS mandate are to occur within the advanced biofuel sector with conventional corn ethanol reaching a plateau of 15 billion gallons.

In addition to setting proposed mandates for 2012, EPA addressed a wide range of RFS issues. The EPA proposed to reject a Petition for Reconsideration of RFS2 that was filed by the American Petroleum Institute ("API") and the National Petrochemical and Refiners Association ("NPRA"). Throughout and subsequent to the RFS2 rulemaking, API and NPRA have asserted procedural and substantive challenges but have continued to be unsuccessful in these efforts. In addition to proposing to deny the petition, EPA also took advantage of the rulemaking to address what the EPA described as inadvertent errors in the regulatory program as well as program modifications. Many of these regulatory changes involve the credits used in the system, known as Renewable Identification Numbers or RINs. The proposed changes include imposing limits on the number of RINs that importers can separate from the underlying renewable fuel, recognizing some small refinery hardships resulting in volume adjustments, expanding attestation requirements to include more focus on product transfer documents, changing the methodology for calculating benzene early credits, tightening the definitions of naphtha and annual cover crops, expanding the canola pathway to encompass all rapeseed and canola, addressing foreign ethanol production and denaturing issues, and eliminating an alternative to the foreign bond requirements. Most significantly for renewable fuel produces and obligated parties facing EPA notices of violation or requests for information under section 114 of the Clean Air Act, the EPA broadly proposed relaxing its rigid strict liability standard for invalid RINs. The EPA provided a proposed series of guidelines for allowing some compliance with invalid RINs by obligated parties operating in good faith so long as the RIN generator retires the appropriate number of RINs. This proposal is likely to be welcomed by renewable fuel producers and obligated parties alike who have struggled with the rigid RIN compliance system that has limited capabilities for remedial action.

Public comments on the rule must be received by August 11, 2011. These may be submitted through a variety of means, perhaps most conveniently through an email to asdinfo@epa.gov with reference to Docket ID No. EPA-HQ-OAR-2010-0133. Commenters are advised to carefully review confidential business information and other requirements related to comment submission. EPA's prior rulemakings in this area have drawn substantial comments, and these comments have often resulted in significant changes being integrated into the Final Rule. The EPA also announced its plan to hold a public hearing regarding the rule at the Washington Marriott at Metro Center, 775 12th Street NW., Washington, DC 20005 on July 12, 2011 beginning at 9:00 am.

Detailed analysis regarding the RFS program and the RFS2 revision is available at http://www.stoel.com/showarticle.aspx?Show=6483.