Energy Finance Report

Biofuel Mandates Escape Current EPA Scrutiny

Posted by Jerry Muys on 6/21/17 2:16 PM
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The Renewable Fuel Standard (RFS) is a regulatory program administered by EPA that requires petroleum-based transportation fuel sold in the U.S. to contain a minimum volume of various categories of biofuels. The program’s mandates are subject to a statutory waiver provision that may be exercised by EPA in the event that market conditions present an obstacle to meeting the minimum volumes. With the new administration’s continuing scrutiny of EPA’s numerous regulatory programs, there has been a great deal of uncertainty regarding the likely fate of the RFS Program.

Under the RFS program, biofuel must be blended into transportation fuel in increasing amounts each year, capping out at 36 billion gallons by 2022. Compliance with the blending obligations are imposed on petroleum importers and refiners, known as “obligated parties.” The annual amounts of the various categories of biofuels that must be blended are referred to as Renewable Volume Obligations (RVOs). Obligated parties can comply with the RFS program by either blending the requisite volume of renewable fuel into their transportation fuel or purchasing credits designated as Renewable Identification Numbers (RINs) to meet the RVO.

Although the Clean Air Act sets forth annual volumetric targets for certain biofuels, EPA is required to establish enforceable RVOs through a formal rule-making process. Separate quotas and blending requirements are determined for cellulosic biofuels, biomass-based diesel, advanced biofuels, and total renewable fuels. Refiners and importers must either blend the requisite amount of each of the four categories of biofuels, or acquire the necessary amount of RINs for each of the categories. Parties that purchase or sell RINs are required to enter the transaction information into the EPA Moderated Transaction System.

Initial uncertainty over the fate of the program began in 2015, when EPA exercised its statutory waiver authority for the first time and set an RVO lower than the benchmarks established by Congress. Litigation ensued, and many in the biofuel industry argued that EPA had abused its waiver authority by setting an RVO lower than the statutory minimums. As of the current date, the litigation remains unresolved.

In November of 2016, EPA set an RVO of 19.28 billion gallons of total biofuel for 2017; this was an increase from the 18.11 billion gallon figure adopted for 2016, but still below the statutory standard of 24 billion gallons. However, renewed uncertainty arose in January of 2017, when President Trump ordered a temporary freeze and review of thirty EPA regulations that had been issued between the time of the U.S. election and his inauguration, including the 2017-18 RVOs.  

To the industry’s relief, the regulatory freeze expired without the new administration making changes to the 2017-18 RVOs, and immediately thereafter RIN prices spiked for a period of time. However, overall RIN prices have dropped 19 percent since President Trump’s election, reflecting continued uncertainty about the future of the program.

Though the new administration did not revise the current RVOs, it is entertaining a policy initiative by Carl Icahn (an investor in the petroleum sector who also serves as a special adviser to President Trump) to shift responsibility for meeting RVO requirements away from refiners and importers to blenders and others in the chain of commerce. A ruling by EPA on the Icahn initiative may be several months away. The public comment period on the Icahn-backed measure ended February 22.

Despite uncertainties regarding the future of biofuel mandates in the U.S. and elsewhere, advancements within the industry continue to occur. The liquid biofuels industry now employs more than 1.7 million people globally, and recent technological developments have expanded the range of biofuel applications.

It has been reported that Cool Planet Energy Systems developed a technology that converts farm waste, wood chips, and nut shells into liquid jet fuel. The company has secured investments from three major oil companies, in addition to a $91 million grant from the Department of Agriculture, and is continuing to refine its process with the hopes that it will become a viable supplement or replacement for traditional jet fuel.

The U.S. Navy has also taken an active interest for a number of years in utilizing greater quantities of biofuel in order to reduce its dependency on fossil fuels. During the Obama Administration, the Navy conducted several training exercises in which a large number of the ships and planes participated using a fuel blend that was 10% biofuel. Those efforts appear to be continuing.

More significantly, on June 19, Exxon Mobil Corp. and Synthetic Genomics Inc. announced a possible breakthrough in biofuel technologies. Their scientists reportedly discovered a way to double the fatty lipids in algae, bringing them a step closer to being able to use algae as a biofuel feedstock, a potentially more sustainable alternative to the feedstocks currently utilized.

Jerry Muys is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Biofuels, Renewable Fuel Standard, Cellulosic biofuel, Biomass-based diesel, Renewable Volume Obligation, Advanced biofuel, Renewable Fuel, Renewable Identification Number

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