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Burning Down the Rumor Mill on 2014 RFS Requirements: RVOs Must Reflect Statutory Authority

October 10, 2013


EPA's proposed rule establishing 2014 renewable volume obligations (RVOs) under the Renewable Fuel Standard (RFS) is expected to be published soon. Many believe the 2014 RVO will, for the first time ever, require obligated parties to move beyond the status quo and blend volumes of renewable fuel above the so-called "E10 blend wall." In August, however, EPA signaled that it intends to exercise its authority in the 2014 RVO rule to adjust "...both the advanced biofuel and total renewable fuel categories." This announcement has sparked speculation, rumors, and questions about what adjustments EPA will make to the 2014 RVOs, what authority EPA has to make revisions, and what impacts any EPA action will have on the markets. Indeed, the market is already responding to a leaked draft document reflecting the ongoing debate within the Administration about the 2014 RVOs. Importantly, the leaked document does not represent a final determination and has not yet been subjected to interagency review. Moreover, the proposed 2014 RVOs will be subject to public review and comment. EPA's Statutory Authority to Adjust RFS Requirements

Section 211(o)(7) of the Clean Air Act provides EPA the authority to make adjustments to RFS blending requirements under specified conditions. Some stakeholders who have speculated on EPA's proposed 2014 RVOs have apparently misinterpreted EPA's waiver authorities, or are unaware of the specific conditions that must be present in order for a waiver to be effectuated.

Section 211(o)(7)(D) requires EPA to adjust, by November 30 of the preceding year, the volume requirements for cellulosic biofuel if production is likely to be less than the minimum applicable volume established under EISA. The statute directs EPA to reduce the applicable cellulosic biofuel volume to "the projected volume available during that calendar year." Importantly, if EPA reduces the cellulosic biofuel standard, it "...may also reduce the applicable volume of renewable fuel and advanced biofuels the same or a lesser amount." EPA was given this authority because the cellulosic biofuel requirement is nested within the advanced biofuel standard, which itself is nested within the total renewable fuel standard.

Thus, it is important to understand that EPA may not use Section 211(o)(7)(D) to adjust the requirements for advanced biofuel or total renewable fuel by an amount greater than the reduction of cellulosic biofuels. In other words, the difference between the total renewable fuel volume and the advanced biofuel standard (14.4 billion gallons in 2014) cannot be affected by any adjustments made by EPA under the waiver authority granted 211(o)(7)(D).

EPA also has "general" waiver authority under 211(o)(7)(A). This is the only waiver authority that would allow the Agency to reduce to the total required renewable fuel volume by an amount greater than the reduction of the cellulosic biofuel requirement. However, in order to effectuate such a waiver, EPA would have to determine, after public notice and comment, that implementation of the RFS would "...severely harm the economy or environment of a State, a region, or the United States." Alternatively, EPA may use this waiver authority if it determines, after public notice and comment, that there is "inadequate domestic supply" of renewable fuels to meet the RFS requirements. EPA has twice received petitions from states requesting waivers of the RFS under this provision. Both requests were ultimately denied because the Agency correctly determined that sufficient supplies of renewable fuel and RIN credits were available for obligated parties to meet their requirements.

The So-Called "Blend Wall" Is Not a Valid Basis for Adjusting the 2014 RVOs

Oil industry trade associations have argued that in setting the 2014 RVOs, EPA should account for the so-called E10 "blend wall." They have requested that EPA lower the 2014 RVOs to levels below the "blend wall," such that compliance could be achieved simply by blending E10. Curiously, EPA stated in August that, as part of its RVO rulemaking process, it plans to "...assess the E10 blendwall and current infrastructure and market-based limitations to the consumption of ethanol in gasoline-ethanol blends above E10." However, the "blend wall" and perceived "market-based limitations" are clearly not among the statutory criteria identified in Section 211(o)(7) for EPA to consider in adjusting the 2014 RVOs. As stated above, EPA's authority to waive the total renewable fuel volume by an amount greater than the reduction of cellulosic biofuels is limited to circumstances where it determines there is "inadequate domestic supply" of renewable fuel, or that enforcement of the statutory volumes would result in "severe harm" to the economy or environment. There is no basis to suggest that the strict criteria for a general waiver are met today:  there can be no showing that the statutorily-mandated renewable fuel volumes "would severely harm the economy or environment" of a State, region, or the country, or that there is an "inadequate domestic supply" of total renewable fuel that would prevent the oil industry from meeting its total RVOs.   As much as the oil industry might wish it to be true, the requirement to blend beyond the "blend wall" or purchase RINs to meet their obligations is not a basis for changing the law—it is the very point of the law.

The Existing Vehicle Fleet and Current Refueling Infrastructure Can Easily Absorb at Least 14.4 Billion Gallons of Ethanol in 2014

The oil industry has argued that the existing vehicle fleet and current refueling infrastructure are incapable of absorbing significant volumes of ethanol above the E10 "blend wall." This contention is completely false. EIA projects 2014 gasoline consumption will total 132.9 billion gallons, meaning 13.29 billion gallons of ethanol can be consumed via E10 blends. This leaves a need for 1.1 billion gallons of ethanol consumption above the E10 "blend wall" in order to fulfill the 14.4-billion-gallon difference between total renewable fuel and advanced biofuel.

The light-duty vehicle fleet has the capacity to consume significantly larger volumes of ethanol: By 2014, roughly 9% of the light-duty vehicle fleet will be comprised of flex-fuel vehicles (FFVs) that are capable of operating on gasoline blends containing up to 85% ethanol (E85). These vehicles alone would have the annual capacity to consume 8-9 billion gallons of ethanol above the E10 "blend wall." In addition, 80% of the fleet will be comprised of vehicles that were built in 2001 or later, meaning they are legally approved to consume E15. Further, roughly 45% of new vehicles sold in 2014 will be explicitly approved and warranted by the automakers to use up to E15. Overall, when FFVs and E15-approved vehicles are properly considered, the light-duty vehicle fleet will have the capacity to consume some 26-28 billion gallons of ethanol in 2014. Clearly, vehicles are not a limiting factor in meeting 2014 RFS requirements.

The oil industry says it has not invested in infrastructure to distribute larger volumes of ethanol because there are supposedly not enough FFVs or E15-warranted vehicles on the road to justify such investments. The fallacy of that argument is demonstrated by the fact that oil companies have invested substantial resources in diesel and premium gasoline infrastructure when only a small fraction of the fleet uses these fuels. For example, diesel fuel is sold at 52% of retail service stations, yet less than 3% of light-duty cars and trucks can operate on diesel. Similarly, premium gasoline is sold at 87% of gas stations, but the fuel is recommended or required for only 10-15% of the fleet.

Existing refueling infrastructure can easily distribute at least 14.4 billion gallons of ethanol: E85 is offered at approximately 3,190 retail gas stations nationwide. If E85 conservatively represents 25% of fuel sales at these stations in 2014, more than 950 million gallons of E85 will be sold (containing roughly 710 million gallons of ethanol). If E85 makes up 40% of fuel sales at these stations, more than 1.5 billion gallons of E85 would be consumed (containing more than 1.1 billion gallons of ethanol). Thus, increased E85 sales through existing stations could easily bridge the gap between the E10 blend wall and the 14.4-billion-gallon portion of the RFS open to non-advanced biofuels. A recent series of reports by the Center for Agriculture and Rural Development strongly supports the notion that E85 provides a ready option for RFS compliance in 2014 and beyond.

It is important to recognize that E85 infrastructure has been expanding rapidly in response to evolving market dynamics driven by the RFS. E85 has been added as a new fuel offering at 195 retail stations just since the beginning of the year.

E15 provides another readily available pathway to compliance with 2014 RFS blending requirements. Today, more than 40 stations in the Midwest are selling E15; growth in the number of stations offering the fuel can occur rapidly and at a low cost, provided the RFS sends the proper signals to do so.

There Will be Sufficient Surplus RINs Available to Bridge Any "Gap" Between RFS Requirements and Actual Volumes Blended

Approximately 2.5 billion surplus RINs generated in 2012 were carried forward and made available for compliance in 2013. Based on year-to-date RIN generation in 2013, it seems likely that 1.5-2.0 billion RINs generated this year will be carried into next year and made available for compliance with 2014 standards. EPA designed the RIN program to provide maximum compliance flexibility for obligated parties.

Adjusting the RFS to Accommodate the Failure of Obligated Parties to Prepare for Higher Ethanol Blends Would Set a Negative Precedent, Defeat the Purpose of the Program, and Have Unintended Economic Effects

The central purpose of the EISA was to expand the RFS and drive the usage of ethanol and other renewable fuels far beyond their historical role as low-level fuel additives (e.g., E10). The need to move beyond E10 in 2014 for the purposes of RFS compliance should hardly come as a surprise to obligated parties. When Congress expanded the RFS to 36 billion gallons as part of EISA, it was abundantly clear to regulated industries that such large volumes of renewable fuel could not be absorbed by the future gasoline market without incremental changes to the vehicle fleet and fuel distribution infrastructure. Whether it was foreseeable that gasoline demand would drop after passage of EISA in 2007 is irrelevant; there was absolutely an expectation that the RFS would soon push ethanol consumption well beyond the E10 level.

As highlighted above, we believe it would be unlawful for EPA to waive the RFS based on the "blend wall." But for the sake of argument, if EPA were to succumb to oil industry pressure and propose a waiver of the RFS requirements based on the so-called "blend wall," the Agency would eliminate the incentive created by the policy to expand renewable fuels distribution capabilities. In this way, the oil industry's argument that RFS requirements beyond the "blend wall" are unachievable would become a self-fulfilling prophecy and the long-term future of the RFS would be significantly undermined. A decision by EPA to adjust RFS requirements based on perceived "market constraints" would send devastating signals to the agriculture sector, investors in next-generation biofuels, automakers, fuel blenders, and other entities up and down the renewable fuels supply chain.