Written by: Amie Alexander, JD/MPS Candidate, William H. Bowen School of Law
The D.C. Circuit Court of Appeals recently ruled in favor of Americans for Clean Energy in holding that the Environmental Protection Agency (EPA) could not reduce the total renewable fuel volume requirements for the Renewable Fuel Program based on the “inadequate domestic supply” provision of the law. EPA decided in the 2015 Final Rule after considering constraints on demand of renewable fuel by consumers. Instead, the Court agreed, the “inadequate domestic supply” provision only authorizes the EPA to consider the factors on the supply side that affect the volume of renewable fuel available in order to meet statutory volume requirements. Based on this reasoning, the Court granted Americans for Clean Energy’s petition for review of the 2015 Final Rule and vacated the EPA’s decision to reduce renewable fuel volume requirements in 2016 using its waiver authority found in the inadequate domestic supply provision. The rule was remanded to EPA for further consideration. You can read the Court’s full opinion in Americans for Clean Energy v. EPA here.
Background on the Renewable Fuel Program
Congress mandated the replacement of an increasing proportion of fossil fuel with renewable fuel each year in the Clean Air Act’s Renewable Fuel Program (See 42 U.S.C. 7545 (o)). Congress vested the responsibility of implementing the program’s requirements to the EPA, which was directed to publish annual renewable fuel requirements that apply to a proportion of the transportation market. When EPA promulgated the Final Rule for requirements for 2014 through 2017, many of these affected participants challenged the action, either arguing these renewable fuel requirements were too high or too low.
There are six categories of actors in the renewable fuel market: refiners, producers, importers, blenders, retailers, and consumers. According to the Renewable Fuel Program statute, refineries, blenders, and importers are required to satisfy annual renewable fuel obligations as determined by the EPA, however, these obligations have only been applied to refineries and importers thus far. (See 42 U.S.C. § 7545 (o)(3)(B)(ii)).
The EPA promulgates rules to inform obligated parties – refiners and importers – of annual renewable fuel obligations they must follow. The EPA works with the Secretary of Energy and the Secretary of Agriculture to determine these volume requirements. Additionally, the EPA considers several factors set out by statute. The first factor is the general waiver provision, which allows the EPA to reduce the volume requirements if (1) it determines that “implementation of the requirement would severely harm the economy or environment of a State, a region, or the United States or (2) it determines that there is an inadequate domestic supply (See § 7545(o)(7)(A)). Another provision requires EPA to determine the projected volume of cellulosic biofuel produced in a given year. If the projection is less than the volume requirement, the EPA must reduce the cellulosic biofuel statutory volume requirement. This reduction triggers the “cellulosic waiver provision,” which allows the EPA to also reduce the advanced biofuel and total renewable fuel volume requirements by a comparable volume to the cellulosic biofuel reduction.
After volume requirements are determined, EPA translates these requirements into percentage standards. Obligated parties use these percentage standards to understand the levels of renewable fuel it must introduce into U.S. commerce in proportion to the volumes of fossil-based fuel it imports or produces. EPA issues a final rule informing obligated parties of their yearly percentage standards, and then obligated parties are responsible for compliance.
Background on this Action
EPA promulgated the Final Rule at issue in this case in December 2015. This rule established volume requirements and percentage standards for 2014 – 2016 for biofuels. After promulgating the rule, the EPA explained that the program’s requirements were achieved after the program was enacted – due to the current capacity of the industry to produce increasing ethanol quantities. However, after the ethanol industry was constrained by infrastructure and market factors – the supply of ethanol ran much greater than the demand as most U.S. vehicles do not run gasoline with more than 10% ethanol. The EPA explained the rule’s decreased requirements by citing these demand-related constraints as evidence that consistent volume requirements were infeasible.
Several parties filed petitions for review following the issuance of the Final Rule in December 2015. The petitions of the National Biodiesel Board and the Americans for Clean Energy challenged the rule on the grounds that the renewable fuel volume requirements were set at too low. Other petitioners, “Obligated Party Petitioners” as called by the Court, challenged the Rule for setting renewable fuel volume requirements too high, and “for refusing to address the proper point of obligation.”
The Court considers EPA’s Final Rule
The Court agreed with Americans for Clean Energy that EPA was incorrect in its interpretation of the “inadequate domestic supply” waiver provision. The Court explained that this provision refers to the supply of renewable fuel available to obligated parties, not the supply available to consumers. While the EPA may consider factors that affect the availability of renewable fuel of refiners, blenders, and importers, it may not consider factors affecting the availability of renewable fuel to market actors downstream from these obligated actors. Interpreting this provision to analyze “inadequate demand” exceeds EPA’s statutory authority according to the Court. The Court therefore vacated the EPA’s decision to reduce the fuel volume requirements for 2016 through use of the waiver provision and remanded the Final Rule back to the agency for further consideration.
The Americans for Clean Energy also argued that EPA was required to consider carryover Renewable Identification Numbers (RINs) as a supply source of renewable fuel in exercising the “inadequate domestic supply” waiver authority. RINs are credits established in order to assist in compliance with the Renewable Fuel Program’s requirements, so that obligated parties can both acquire and trade credits. Each batch of renewable fuel produced or imported has a unique set of RINs that follows the fuel; obligated parties are able to maintain possession of them or sell or trade them after purchase. Obligated parties comply with the program by purchasing and using the dictated number of RINs. If unused, these RINs can be carried over – if another obligated party has trouble accumulating the dictated RINs, it can purchase from a party who has a surplus or use carryover RINs or carry the deficient forward into the next year.
In analyzing this claim, the Court asked the following question: “when evaluating the available supply of renewable fuel for purposes of the inadequate domestic supply waiver provision, must EPA consider carryover RINs as a supply source of renewable fuel?” The Court ultimately agreed with the EPA that it does not, as this is not required based on a plain reading of the statute. While the EPA may consider carryover RINs on the market when determining whether it should exercise its inadequate domestic supply waiver, it is not required to count these RINs are part of the supply. Additionally, regulations specify that obligated parties may only use RINs for up to 20 percent of their obligations; therefore, there is little possibility that obligated parties will satisfy their obligations with large amounts of RINs.
The Court rejected other claims. First, the EPA was late in propagating its Final Rule. The National Biodiesel Board and Americans for Clean Energy challenged this lateness as a violation of statutory deadlines. However, the Court determined that case law authorizes EPA to issue late renewable fuel standards retroactively so long as EPA reasonably mitigates burdens imposed on obligated parties due to its lateness. Second, Obligated Party Petitioners challenged EPA’s liquid cellulosic biofuel projection, contending the methodology used in the projection “fails to take a ‘neutral aim at accuracy’ as required by American Petroleum Institute” (See 706 F.3d at 476), and additionally claimed the projection was arbitrary and capricious. The Court, however, did not agree and found the biofuel projection was reasonable and reasonably calculated. Next, the National Biodiesel Board challenged the EPA’s use of its cellulosic waiver authority, lowering the advanced biofuel volume requirements for 2014 – 2016. The Court did not agree with this argument and determined that EPA was within its statutory authority. Finally, Obligated Party Petitioners argued EPA was required to consider “the appropriateness of the current ‘point of obligation’ – that is, EPA’s choice to apply the statute’s renewable fuel requirements to refiners and importers, but not blenders – in the Final Rule.” The Court determined it need not further analyze the issue as the Court had already determined to send the decision back to the EPA for remand, where EPA could address the petitioner’s arguments on the point of obligation.
Conclusion
The Court ultimately found in favor of Americans for Clean Energy that EPA was outside of its authority in its interpretation of the “inadequate domestic supply” waiver provision. The Court granted the petition for review of the 2015 Final Rule under this claim, but rejected all others. Therefore, the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 in the Rule through the use of the “inadequate domestic supply” waiver authority was vacated and remanded to EPA for further consideration in light of this decision. Again, the full opinion is available here.