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Daily Rules, Proposed Rules, and Notices of the Federal Government

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2010-0133; FRL-9678-7]

RIN 2060-AR55

Regulation of Fuels and Fuel Additives: 2013 Biomass-Based Diesel Renewable Fuel Volume

AGENCY: Environmental Protection Agency (EPA).
ACTION: Final rule.
SUMMARY: Under the Clean Air Act Section 211(o), the Environmental Protection Agency is required to determine the applicable volume of biomass-based diesel to be used in setting annual percentage standards under the renewable fuel standard program for years after 2012. We proposed an applicable volume requirement for 2013 of 1.28 billion gallons on July 1, 2011. In order to sufficiently evaluate the many comments on the proposal from stakeholders as well as to gather additional information to enhance our analysis, we did not finalize this volume requirement in the January 9, 2012, rulemaking setting the 2012 percentage standards. In this action we are finalizing an applicable volume of 1.28 billion gallons of biomass-based diesel for calendar year 2013.
DATES: This final rule is effective on November 26, 2012.
ADDRESSES: EPA has established a docket for this action under Docket ID No. EPA-HQ-OAR-2010-0133. All documents in the docket are listed in the www.regulations.gov index. Although listed in the index, some information is not publicly available, e.g., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, will be publicly available only in hard copy. Publicly available docket materials are available either electronically inwww.regulations.govor in hard copy at the Air and Radiation Docket and Information Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave. NW., Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566-1744, and the telephone number for the Air Docket is (202) 566-1742.
FOR FURTHER INFORMATION CONTACT: Julia MacAllister, Office of Transportation and Air Quality, Assessment and Standards Division, Environmental Protection Agency, 2000 Traverwood Drive, Ann Arbor, MI 48105; Telephone number: 734-214-4131; Fax number: 734-214-4816; Email address:macallister.julia@epa.gov, or the public information line for the Office of Transportation and Air Quality; telephone number (734) 214-4333; Email addressOTAQ@epa.gov.
SUPPLEMENTARY INFORMATION: I. General Information A. Does this action apply to me?

Entities potentially affected by this rule are those involved with the production, distribution, and sale of transportation fuels, including gasoline and diesel fuel or renewable fuels such as ethanol and biodiesel. Potentially regulated categories include:

Category NAICS1codes SIC2codes Examples of potentially regulated entities Industry 324110 2911 Petroleum Refineries. Industry 325193 2869 Ethyl alcohol manufacturing. Industry 325199 2869 Other basic organic chemical manufacturing. Industry 424690 5169 Chemical and allied products merchant wholesalers. Industry 424710 5171 Petroleum bulk stations and terminals. Industry 424720 5172 Petroleum and petroleum products merchant wholesalers. Industry 454319 5989 Other fuel dealers. 1North American Industry Classification System (NAICS). 2Standard Industrial Classification (SIC) system code.

This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this final action. This table lists the types of entities that EPA is now aware could potentially be regulated by this final action. Other types of entities not listed in the table could also be regulated. To determine whether your activities will be regulated by this final action, you should carefully examine the applicability criteria in 40 CFR part 80. If you have any questions regarding the applicability of this final action to a particular entity, consult the person listed in the preceding section.

Outline of This Preamble I. Executive Summary A. Purpose of This Action B. Summary of Today's Action C. Impacts of This Action II. Statutory Requirements III. Factors Affecting Supply and Consumption A. Demand for Biomass-Based Diesel B. Availability of Feedstocks To Produce 1.28 Billion Gallons of Biodiesel 1. Grease and Rendered Fats 2. Corn Oil 3. Soybean Oil 4. Effects on Food Prices 5. Other Bio-Oils C. Production Capacity D. Consumption Capacity E. Biomass-Based Diesel Distribution Infrastructure IV. Impacts of 1.28 Billion Gallons of Biomass-Based Diesel A. Consideration of Statutory Factors 1. Climate Change 2. Energy Security 3. Agricultural Commodities and Food Prices 4. Air Quality 5. Deliverability and Transport Costs of Materials, Goods, and Products Other Than Renewable Fuel 6. Wetlands, Ecosystems, and Wildlife Habitats 7. Water Quality and Quantity a. Impacts on Water Quality and Water Quantity Associated With Soybean Production b. Impacts on Water Quality and Water Quantity Associated With Biodiesel Production 8. Job Creation and Rural Economic Development B. Consideration of Applicable Statutory Economic Factors 1. Monetized Quantifiable Costs a. Impact on the Cost of Soybean Oil b. Cost of Displacing Petroleum-Based Diesel With Soybean-Based Biodiesel c. Transportation Fuel Costs 2. Monetized Quantifiable Benefits a. Energy Security b. Air Quality 3. Quantifiable Benefits and Costs Compared V. Final 2013 Volume for Biomass-Based Diesel VI. Public Participation VII. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments G. Executive Order 13045: Protection of Children From Environmental Health Risks and Safety Risks H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use I. National Technology Transfer Advancement Act J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations K. Congressional Review Act VIII. Statutory Authority I. Executive Summary

The Renewable Fuel Standard (RFS) program began in 2006 pursuant to the requirements in Clean Air Act (CAA) section 211(o) which were added through the Energy Policy Act of 2005 (EPAct). The statutory requirements for the RFS program were subsequently modified through the Energy Independence and Security Act of 2007 (EISA), resulting in the promulgation of revised regulatory requirements on March 26, 2010.1 The transition from the RFS1 requirements of EPAct to the RFS2 requirements of EISA generally occurred on July 1, 2010.

175 FR 14670.

A. Purpose of This Action

While CAA section 211(o)(2)(B) specifies the volumes of biomass-based diesel to be used in the RFS program through year 2012, it directs the EPA to establish the applicable volume of biomass-based diesel for years after 2012 no later than 14 months before the first year for which the applicable volume will apply. On July 1, 2011, we proposed that the applicable volume of biomass-based diesel for 2013 would be 1.28 billion gal.2

276 FR 38844.

In a final rulemaking published on January 9, 2012, we specified the 2012 standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel. Although we had intended to also finalize the applicable volume of biomass-based diesel for 2013 in that rulemaking, we did not do so. In that final rule we explained that we were continuing to evaluate the many comments on the NPRM from stakeholders as well as fulfilling other analytical requirements. We indicated that we intended to gather additional information to enhance our analysis including consideration of costs and benefits. In today's notice we are finalizing the applicable volume of biomass-based diesel for 2013. We believe that the volume we are finalizing today is feasible and consistent with the overall analytic approach to the RFS2 program and also consistent with the overall intent of the Act to expand the use of renewable fuels through the year 2022.

While we did not finalize the 2013 applicable volume of biomass-based diesel within 14 months before the first year for which the applicable volume will apply as required by the statute, we do not believe that this will create a difficulty in the ability of obligated parties to meet the applicable volume that we are finalizing today. We are finalizing the 2013 applicable volume about three months before it will apply. As described in Section III.B, producers of biodiesel, the largest contributor to biomass-based diesel, have significantly greater production capacity than will be required by today's final rule, and in general it only requires a few months to bring an idled biodiesel facility back into production. Moreover, many facilities that are producing volume currently are underutilizing their capacity, and can ramp up production relatively quickly. Finally, the biodiesel industry is already producing at a rate consistent with an annual volume of about 1.3 billion gallons.

B. Summary of Today's Action

In today's action we are finalizing an applicable volume of 1.28 billion gallons for biomass-based diesel for 2013. This is the volume that was projected for 2013 in the March 26, 2010, RFS2 final rulemaking, and we are requiring it in 2013 based on consideration of the factors specified in the statute.

Today's final rule does not specify the percentage standard for biomass-based diesel in 2013, but only the applicable volume. The percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel that will be applicable in 2013 are being proposed in a separate Notice of Proposed Rulemaking.

C. Impacts of This Action

The RFS program established by Congress is a long-term program aimed at replacing fossil fuels used in the transportation sector with low-GHG renewable fuels over time. In the March 26, 2010 RFS2 final rule, EPA assessed the costs and benefits of this program as a whole when the program would be fully mature in 2022. While this is an appropriate approach to examining the costs and benefits of a long-term program like the RFS2, for this final rulemaking we have estimated costs and benefits in 2013 where such estimates can reasonably be made.

Quantified estimates of benefits include $41 million in energy security benefits and $19-52 million in air quality disbenefits. Other benefits include GHG emissions reduction benefits and both direct and indirect employment benefits in rural areas due to increased biodiesel production. Impacts on water quality, water use, wetlands, ecosystems and wildlife habitats are expected to be directionally negative but modest due to both the small impact on crop acres planted necessary to supply sufficient soy oil feedstock and due to the relatively small impact on these measures of soybean production compared to other potential crops.

Biodiesel is produced from a variety of feedstocks, including recycled cooking oil, agricultural oils such as soybean and canola oil, and animal fats. Most biodiesel producers can switch from one feedstock to another depending on price and availability. However, for the purpose of analyzing the impacts of this action, we have assumed that all of the 280 million gallon increment above the 2012 standard is met through increased demand for soy oil. Using this assumption, we estimate that soybean prices could increase up to 3 cents per pound in 2013 if all of the 280 million gallon increment above the 2012 standard is met through increased demand for soy oil. Using these assumptions, we estimate the cost of producing this increment in biomass-based diesel would range from $253 to $381 million in 2013.3 Adding the estimate of 2013 costs to the total 2013 fuel pool would suggest a diesel fuel cost increase of less than 1 cent per gallon.

3Cost estimates do not account for projections in recent trends in crop yields and grain prices resulting from drought conditions that are occurring in many areas of the country.

II. Statutory Requirements

Section 211(o)(2)(B)(i) of the Clean Air Act specifies the applicable volumes of renewable fuel on which the annual percentage standards must be based, unless the applicable volumes are waived or adjusted by EPA in accordance with specific authority and directives specified in the statute.4 Applicable volumes are provided in the statute for years through 2022 for cellulosic biofuel, advanced biofuel, and total renewable fuel. For biomass-based diesel, applicable volumes are providedthrough 2012. For years after those specified in the statute (i.e., 2013+ for biomass-based diesel and 2023+ for all others), EPA is required under section 211(o)(2)(B)(ii) to determine the applicable volume, in coordination with the Secretary of Energy and the Secretary of Agriculture, based on a review of the implementation of the program during calendar years for which the statute specifies the applicable volumes and an analysis of the following:

4For example, EPA may waive a given standard in whole or in part following the provisions at section 211(o)(7).

• The impact of the production and use of renewable fuels on the environment, including on air quality, climate change, conversion of wetlands, ecosystems, wildlife habitat, water quality, and water supply;

• The impact of renewable fuels on the energy security of the United States;

• The expected annual rate of future commercial production of renewable fuels, including advanced biofuels in each category (cellulosic biofuel and biomass-based diesel);

• The impact of renewable fuels on the infrastructure of the United States, including deliverability of materials, goods, and products other than renewable fuel, and the sufficiency of infrastructure to deliver and use renewable fuel;

• The impact of the use of renewable fuels on the cost to consumers of transportation fuel and on the cost to transport goods; and

• The impact of the use of renewable fuels on other factors, including job creation, the price and supply of agricultural commodities, rural economic development, and food prices.

While EPA is given the authority to determine the appropriate volume of renewable fuel for those years that are not specified in the statute based on a review of program implementation and analysis of the factors listed above, the statute also specifies that the applicable volume of biomass-based diesel cannot be less than the applicable volume for calendar year 2012, which is 1.0 billion gallons (see CAA 211(o)(2)(B)(v)).

It is useful to note that the statutory provisions described above are silent in two important areas. For instance, the statute does not provide numerical criteria or thresholds that must be attained when EPA determines the applicable volume of biomass-based diesel for years after 2012 (other than specifying a minimum volume of 1.0 billion gal), nor does it describe any overarching goals for EPA to achieve in setting the applicable volumes for biofuels in years after those specifically set forth in the statute. Instead, the statute provides a list of factors we must consider. Due to this ambiguity in the statute, commenters differed in their perspectives on the intent of Congress in allowing EPA to determine the appropriate applicable volume for biomass-based diesel for years after 2012.

Some expressed the belief that Congress intended the required volumes of biomass-based diesel to increase every year, with EPA's role being that of determining an achievable size of that increase. Others expressed their belief that Congress intended for the statutory minimum volume of 1.0 billion gallons to be used to set the applicable volume for all years after 2012, with higher volumes being required only if EPA could demonstrate that those higher volumes were already being produced. Given that all biomass-based diesel counts towards the advanced biofuel requirement, and that the statute requires annual increases in advanced biofuel through 2022, we believe that it is appropriate that biomass-based diesel play an increasing role in supplying advanced biofuels to the market between 2012 and 2022. However, the determination of whether to increase the volume requirement for biomass-based diesel in any given year is subject to a consideration of a number of factors in the statute as described above.

We also note that the statute does not provide authority to raise the applicable volumes of advanced biofuel or total renewable fuel above those specified in the statute for years up to and including 2022. Thus, any increase in the biomass-based diesel volume requirement above that specified for 2012 would not have any impact on the advanced biofuel or total renewable fuel volume requirements. While increasing the biomass-based diesel volume requirement above the 1.0 billion gallons minimum value specified in the statute could result in a change in the makeup of biofuels used to meet the advanced biofuel and the total renewable fuel standards, doing so would not change the total required volumes of those fuels (in terms of ethanol-equivalent gallons).

We received one comment in response to the NPRM requesting that we prohibit increases in biomass-based diesel above 1.0 billion gallons in years after 2012. We disagree. As described in this preamble, we believe it is appropriate to require 1.28 billion gal of biomass-based diesel in 2013, and that we should consider further increases in the future by evaluating the factors specified in the statute.

The statute also specifies the timeframe within which these volumes must be promulgated: the rules establishing the applicable volumes must be finalized no later than 14 months before the first year for which such applicable volume will apply. For the biomass-based diesel volume requirement applicable in 2013, the deadline for promulgation was November 1, 2011. As described in the January 9, 2012, final rule that set the applicable percentage standards for 2012, we delayed issuing this final rule to allow additional time to evaluate the many comments on the NPRM from stakeholders as well as to fulfill other analytical requirements. To this end, we did in fact gather additional information to enhance our analysis of the factors required in the statute, and we considered costs and benefits. Our assessment is provided in Sections III and IV. We do not believe that the delay in issuing this final rule will materially affect the regulated community, however, since we are setting the final volume requirement several months prior to the date when it will be applicable.

The statute requires that in evaluating and establishing renewable fuel volumes in years beyond those for which volumes are specified in the statute, that EPA must coordinate with the Departments of Agriculture and Energy. EPA has coordinated with these agencies in developing this final rule through a series of telephone exchanges and meetings. Consistent with the statute, EPA will coordinate with these agencies in future rules in setting fuel volumes.

III. Factors Affecting Supply and Consumption

As described in Section II, we are required to review the implementation of the RFS program for years prior to 2013 and to use information from this review in determining the applicable volume of biomass-based diesel for 2013. In the NPRM we indicated our belief that this review is of limited value due to the short history of the RFS program. Not only did the RFS1 program have no volume requirement specific to biomass-based diesel, but even in 2010 under the RFS2 program several unique factors hindered biodiesel production volumes from increasing substantially above historical levels. For instance, RFS1 RINs from both 2008 and 2009 could be carried over to 2010 and used to meet a combined 2009/2010 volume requirement for biomass-based diesel.

Since release of the NPRM, however, some information has become available on the implementation of the RFS program in 2011. The available data provide some indication as to how the biomass-based diesel standard for 2011is affecting the market for biodiesel. Based on information provided through the EPA-Moderated Transaction System (EMTS), reported biodiesel production increased significantly to about 1.07 billion gal in 2011. This is a significant increase over the 2010 production volume of about 400 mill gal and exceeds the applicable volume requirement of 800 mill gal for 2011. 2011 biomass-based diesel RINs were available to meet the higher advanced biofuel volume requirement. Based on these results, we believe that the RFS program is driving production of biomass-based diesel, and that higher applicable volume requirements in future years would likewise drive increases in production volumes.

In the NPRM we indicated that, based on the limited information available on the current and historical operation of the RFS program, it would be prudent for 2013 to consider only moderate increases in biomass-based diesel above the statutory minimum of 1.0 billion gallons. We cited the annual increments in biomass-based diesel volumes specified in the statute for years 2009 through 2012 and conveyed our belief that our proposed applicable volume of 1.28 billion gallons for 2013 was not a dramatic change from the trend in increments in the statute. In addition, since this biomass-based diesel volume had already been partially evaluated in the RFS2 rule, we decided to evaluate the appropriateness of setting an applicable volume of 1.28 billion gallons for 2013 by considering whether 1.28 billion gal of biomass-based diesel was reasonable given likely market demand, availability of feedstocks, production capacity, storage, distribution, and blending capacity, the capability of the existing diesel fleet to consume this volume of biodiesel, and the impacts of biomass-based diesel in a variety of areas as required under the statute.

In responding to the NPRM, some commenters took issue with our characterization of the proposed volume of 1.28 billion gallons as a “moderate” increase consistent with the annual increments in biomass-based diesel volumes specified in the statute for years 2009 through 2012. These comments also suggested that any comparison to volume requirements in the statute is not appropriate. However, we did not base our proposed volume of 1.28 billion gallons on this comparison but referred to past statutory increments to put our proposal in context. Regardless of the size of these past statutory increments, however, we find the final 280 mill gal increment to be moderate and achievable, as described below, especially in light of the substantial increases in production volume that occurred in 2011 which were approximately twice the amount of the 280 mill gal increase we are adopting for 2013. Other commenters agreed with the comparison and agreed that the 0.28 billion gallons increment can appropriately be characterized as moderate.

In some cases commenters opposed the proposed volume requirement of 1.28 billion gallons, citing concerns that the 2012 applicable volume of 1.0 billion gallons is not achievable. As noted above, our evaluation indicates that biodiesel production exceeded 1.0 billion gallons in 2011, confirming our projection that the 1.0 billion gallon applicable volume for 2012 is achievable. Therefore, concerns about the industry's ability to meet the applicable volume in 2012 are not a reasonable basis for concerns about achieving 1.28 billion gallons in 2013. Other commenters agreed with our assessment of 2012 and agreed that an increase of 0.28 billion gallons over the statutory minimum for 2013 is moderate given the capabilities of the industry.

Several commenters suggested that 1.28 billion gallons is an infeasible target for 2013 and requested that we set the biomass-based diesel standard at the statutory minimum of 1.0 billion gallons. Commenters taking this view generally did not offer any data or information to support their belief that 1.28 billion gal is not achievable in 2013 beyond references to historical biodiesel production rates. As described in the NPRM, we believe that the use of biodiesel production data from 2010 and earlier is of limited value, and production capacity as well as more recent data on actual production volumes does in fact demonstrate that the industry is capable of significant increases in production when demand for it exists. As described more fully in the sections below, we continue to believe that 1.28 billion gallons is achievable based on production capacity, availability of feedstock, recent trends in production volumes, and efforts to update infrastructure for storage, transport, and blending. We also believe that this volume is likely to encourage continued investment and innovation in the biodiesel industry. Our consideration of other impacts, such as fuel costs and environmental impacts, can be found in Section IV.

A. Demand for Biomass-Based Diesel

The demand for biomass-based diesel in 2013 will be a function of a number of factors, including not only the biomass-based diesel standard, but also the advanced biofuel standard, since the standards under the RFS2 program are nested. For purposes of the analysis and discussion in this rule, we have assumed that the applicable volume of advanced biofuel for 2013 will remain at the 2.75 billion gal level specified in the Act. While EPA is authorized to reduce the applicable volume of advanced biofuel pursuant to CAA section 211(o)(7)(D)(i) in years that it reduces the cellulosic biofuel applicable volume, any decision to do so will be made in the rule establishing the 2013 renewable fuel standards, and EPA is not currently in a position to pre-judge the results of that future rulemaking.

In addition to biomass-based diesel, biofuels that are likely to be available for meeting the advanced biofuel standard would include cellulosic biofuel, imported sugarcane ethanol, and other domestically produced advanced biofuels. As described in the January 9, 2012 rulemaking establishing the 2012 standards,5 cellulosic biofuels will be a very small fraction of the 2.0 billion gallon advanced biofuel requirement in 2012, and we expect the same to be true in 2013 with respect to the 2.75 billion gal advanced biofuel requirement. Regarding other domestically produced advanced biofuels, volumes reached about 60 mill gal in 2011, and we have projected for the applicable 2013 standards that they could reach 150 mill gal or more in 2013. As a result, most of the 2.75 billion gal advanced biofuel requirement will be met with biodiesel and imported sugarcane ethanol.

577 FR 1320.

Recent market projections suggest that the volume of sugarcane ethanol that can be imported into the U.S. from Brazil in 2013 could be on the order of historical import volumes prior to 2010, with the potential to reach the historical maximum or more. However, there is considerable variability in the projections for 2013. For instance, one source that evaluates trends and issues for U.S. energy markets is the U.S. Energy Information Administration's (EIA) Annual Energy Outlook (AEO).6 This report projects U.S. net ethanol imports in 2013 to be 306 million gallons. Another source for U.S. and world commodity projections is the Food and Agricultural Policy Research Institute's (FAPRI) U.S. and World Agricultural Outlook. The most current version of the FAPRI 2011 Agricultural Outlook projects for the year 2013 that the U.S. will have net ethanol importsof 768 million gallons.7 Based on historical trends, virtually all imported ethanol is expected to be sugarcane ethanol. As a result, while there is good reason to believe that there will be increased volumes of imported sugarcane ethanol in 2013 to help meet the advanced biofuel standard, there may also be a demand for volumes of biodiesel in excess of 1.0 billion gallons.

6U.S. Energy Information Administration (EIA). “AEO2011, Table 11” April 2011.http://www.eia.doe.gov/forecasts/aeo/index.cfm.

7Table “Ethanol Trade”, Commodity Outlook/Biofuels, FAPRI-ISU 2011 World Agricultural Outlook.http://www.fapri.iastate.edu/outlook/2011/.

If we do not set the biomass-based diesel standard above 1.0 billion gallons, biodiesel producers will be less certain of the demand for their product given the opportunities that are also created by the advanced biofuel standard for imported sugarcane ethanol. Despite the fact that monthly production rates in the middle of 2012 are consistent with an annual production volume of about 1.28 billion gal, the selection of facilities producing biodiesel at any given time is highly variable. Without a regulatory requirement for 1.28 billion gal, the biodiesel industry is less likely to maintain online production capabilities for this volume. Instead, many producers will wait until late in 2013 to determine if imported sugarcane ethanol volumes will fall short of what is needed to meet the advanced biofuel volume requirement of 2.75 billion gal in 2013. While much of the idled capacity in the biodiesel industry can be brought back online relatively quickly, waiting until the end of 2013 to do so may reduce the time available and could result in the biodiesel industry being unable to make up the difference between the advanced biofuel requirement and shortfalls in imported sugarcane ethanol.

Thus in setting the biomass-based diesel volume requirement at 1.28 billion gallons rather than at the statutory minimum of 1.0 billion gallons, we are creating greater certainty for both producers of biomass-based diesel and obligated parties and increasing certainty that the intended GHG emissions reductions and energy security benefits associated with the use of advanced biofuels will be realized. It is possible that there may be some additional cost for compliance with the advanced biofuel requirement of 2.75 billion gallons under a biomass-based diesel requirement of 1.28 billion gallons, as compared to setting the biomass-based diesel requirement at the statutory minimum of 1.0 billion gallons and allowing the market to determine the relative volumes of each type of advanced biofuel that will be produced in 2013 to meet the advanced biofuel standard of 2.75 billion gallons. However, setting the biomass-based diesel applicable volume requirement at 1.28 billion gallons will provide greater certainty that the 2.75 billion gal advanced biofuel applicable volume requirement can be achieved. We believe that the potential for somewhat increased costs is appropriate in light of the additional certainty of GHG reductions and enhanced energy security provided by the advanced biofuel volume requirement of 2.75 billion gallons.

Among the parties that submitted comments in response to the NPRM, none contested our assessment of the volumes of sugarcane ethanol that might be expected to be imported into the U.S. from Brazil in 2013. Nevertheless, parties that were opposed to setting the biomass-based diesel applicable volume at 1.28 billion gallons in 2013 raised doubts about the projected demand for biomass-based diesel in 2013. In some cases commenters ignored the fact that much of the advanced biofuel standard can be met with biomass-based diesel or implicitly assumed that EPA would waive some portion of the advanced biofuel requirement. The American Trucking Association (ATA) explicitly requested that we lower the 2013 advanced biofuel standard in order to ensure that demand for biomass-based diesel would not exceed 1.0 billion gallons in 2013. As described in a separate Notice of Proposed Rulemaking,8 we are proposing to not reduce the 2013 advanced biofuel requirement of 2.75 billion gal.

8This NPRM will propose the applicable 2013 percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel.

The American Petroleum Institute cited projections from AEO 2011 in support of their argument that biodiesel volumes will not reach 1.28 billion gallons in 2013. For instance, Table 11 of AEO 2011 projects a total biodiesel consumption of 1.04 billion gal in 2013. However, we do not believe that the projections provided in AEO 2011 can be used in this way, since EIA assumes that the required volume of advanced biofuel in any given year will be reduced concurrently with reductions in the required volume of cellulosic biofuel.9 As a result, the total projected volume of biodiesel and imported ethanol in the 2013 EIA projections falls far short of what would be necessary to meet the applicable volume of 2.75 billion gal of advanced biofuel set forth in the statute.

9Communication between D. Korotney of EPA and W. Brown of EIA, 8/25/2011.

Some parties that were opposed to setting the biomass-based diesel applicable volume at 1.28 billion gallons in 2013 did recognize that the advanced biofuel requirement of 2.75 billion gal could place pressure on the industry to produce volumes of biodiesel in excess of 1.0 billion gal but questioned the need to set the biomass-based diesel standard above the statutory minimum of 1.0 billion gallons. They argued that the market should be allowed to determine the relative volumes of biomass-based diesel, imported sugarcane ethanol, and other advanced biofuels needed to meet the advanced biofuel standard of 2.75 billion gallons. This approach, they argued, could potentially minimize the overall cost of compliance with the advanced biofuel standard in 2013. However, as noted above, the statute does not provide any overarching goals for EPA to achieve in setting the applicable volumes for biofuels in years after those specifically set forth in the statute. Instead, the statute provides a list of factors we must consider. While one of those factors is cost, other factors must also be considered as described in Section II. Additionally, setting the biomass-based diesel standard at 1.28 billion gallons instead of at the statutory minimum of 1.0 billion gallons will provide more certainty that the applicable volume of advanced biofuel set forth in the statute will not need to be reduced, since it guarantees that an additional 420 million ethanol-equivalent gallons of advanced biofuel will be available. This, in turn, means that there will be more certainty of reduced GHG emissions through the use of more advanced biofuels and increased certainty of energy security benefits in terms of reduced reliance on fossil fuels. In addition, increasing the biomass-based diesel volume requirement to 1.28 billion gal in 2013 provides an incentive for continued investment and innovation in the biodiesel industry and serves the long term goal of the statute to increase volumes of renewable fuels over time such that in the longer term they are more likely to be available to offset the need for crude oil.

B. Availability of Feedstocks To Produce 1.28 Billion Gallons of Biodiesel

In the NPRM, we provided our assessment of the types and amounts of feedstock that could be used to produce 1.28 billion gallons of biomass-based diesel in 2013. This assessment included references both to the work that had been done in the RFS2 finalrule as well as a recent report released by IHS Global Insight.10 The feedstock estimates from these two sources are shown in Table III.B-1.

10Table 2, “Biodiesel Production Prospects for the Next Decade,” IHS Global Insight, March 11, 2011.

Table III.B-1—Feedstock Sources (in Mill Gallons) That May Contribute to 2013 Volume of 1.28 Billion Gal Source RFS2
  • final rule
  • IHS global
  • insight
  • Grease and rendered fats 380 272 Corn oil 300 185 Soybean oil 600 624 Canola oil 0 68 Palm oil 0 7 Other 0 185 Total 1,280 1,340

    As some comments pointed out, these two sources used fundamentally different approaches. In the case of the RFS2 final rule, projections of feedstock volumes were determined first, and then summed to conclude that 1.28 billion gal is a reasonable volume of biomass-based diesel that could be achieved in 2013. In contrast, the IHS Global Insight report began with the aim of reaching 1.3 billion gallons in 2013, and then conducted modeling to determine the likely mix of feedstock sources that would support that volume. Nevertheless, we believe that these sources suggest two similar ways that the market could meet the demand for feedstock under a required volume of 1.28 billion gallons of biomass-based diesel. The actual mix of feedstock sources used to produce 1.28 billion gallons of biomass-based diesel could also differ substantially from the values shown in Table III.B-1 as the market adjusts to the new mandate.

    One commenter stated that we relied too heavily on these sources without additional analysis. We did in fact conduct a more up-to-date analysis of these feedstock sources and, as described below, the updated analysis confirms our belief that the projections in Table III.B-1 are reasonable projections for the mix of feedstock sources that could be used to reach 1.28 billion gallons of biomass-based diesel. We will continue to coordinate with USDA in the future on RFS related rulemakings. Other comments agreed with our assessment of available feedstock and our conclusions that there would be sufficient volumes to meet a biomass-based diesel volume requirement of 1.28 billion gallons. A summary of our updated assessment of feedstock sources is included below.

    It should be noted that the projections in Table III. B-1 do not account for recent trends in crop yields and grain prices resulting from drought conditions that are occurring in many areas of the country. Given the wide range of feedstocks from which biodiesel can be produced, the ultimate impact of these drought conditions on the mix of biodiesel feedstocks in 2013 is difficult to predict at this time.11

    11EPA has received requests for a waiver of RFS volumes under CAA section 211(o)(7) based on the impact of the drought, and has invited comment on the requests.

    1. Grease and Rendered Fats

    According to the U.S. Census Bureau, the total volume of yellow grease and other greases (most likely trap grease) produced in 2010 was about 340 mill gallons12 . In the first half of 2011, production of greases was about 10% higher than for the same period in 2010, suggesting that total 2011 production could reach 370 mill gallons or more, similar to the production rates in 2008 and 2009.

    12Current Industrial Reports, U.S. Census Bureau, M311K—Fats and Oils: Production, Consumption, and Stocks, Table 2b. Assumes 7.5 lb/gal.http://www.census.gov/manufacturing/cir/historical_data/m311k/index.html.The U.S. Census Bureau terminated collection of data for this report as of July 2011 so updated data is not available.

    With regard to inedible tallow, the volume produced in 2010 was about 440 mill gallons, and indications from the first half of 2011 are that a similar volume will be generated in 2011 as well.

    Taken together, the total volume of grease and rendered fats produced annually is over 800 mill gallons. This is significantly more than was estimated in the RFS final rule and the report from IHS Global Insight for use in the production of biomass-based diesel in 2013. Moreover, we have not included in our estimate other potential sources, such as edible tallow, lard, and poultry fats. While these other potential feedstocks currently have existing markets, it may become economical for them to be used in the production of biomass-based diesel.

    In their comments on the NPRM, the America Cleaning Institute raised concerns about the diversion of animal fats from the oleochemical industry for the production of biofuels. We do not have the authority to prevent feedstocks that meet the statutory definition of renewable biomass from being used in the production of renewable fuel. The choice of which feedstocks will be used to produce biomass-based diesel will be determined by the market. We also note that in responding to comments to the rule establishing the RFS2 program, we acknowledged that animal fat can be used in other markets such as the soap industry, but that the diversion of some portion of this feedstock to the biofuels industry was both not prohibited and would not significantly impact the GHG assessment of biofuel made from this feedstock.13 However, based on our assessment, it is possible that the 1.28 billion gall requirement could be met without the use of animal fats. As noted above, the total volume of grease and rendered fats is estimated at 800 mill gallons, far above the volumes listed in Table III.B-1. It is therefore possible that the industry may produce biodiesel predominately from waste grease instead of animal fats. Moreover, the volumes of other feedstock sources, such as corn oil and vegetable oils as described more fully below, may exceed the volumes needed to produce 1.28 billion gal biodiesel, further reducing the need to rely on animal fats for biodiesel production. Finally, EPA has received inquiries from industry regarding the use of additional sourcesof waste oils often from the food processing industry as biodiesel feedstock, indicating the sources of feedstock are likely to continue expanding, improving the availability of alternatives to animal fat as a biofuel feedstock.

    13“Renewable Fuel Standard Program (RFS2) Summary and Analysis of Comments,” February 2010, EPA-420-R-003, pages 6-15 and 7-304. Docket number EPA-HQ-OAR-2005-0161.

    Since the market will determine the specific amount of animal fats used in the production of biofuels, we cannot project how their availability for the production of oleochemicals might be affected. We agree with the American Cleaning Institute that increases in the use of animal fats to produce biofuel could increase the price of those animal fats and/or reduce their availability for the production of oleochemicals. Such circumstances could in turn compel the oleochemical industry to use a greater fraction of alternative feedstock sources such as cottonseed oil. However, as discussed in Section IV.A.8, there could be sufficient sources of other feedstocks to produce 1.28 billion gallons of biomass-based diesel without using any animal fats. Moreover, the cost of animal fat is dependent on the general demand for this material which is only in part impacted by its potential use as a biofuel feedstock. As a result, and as discussed more fully in Section IV.A.8, we do not believe oleochemical production facility location will be significantly impacted by the potential use of rendered fats as a biofuel feedstock if some portion of the 280 million gallon increase in the biomass-based diesel standard is produced from rendered fats.

    2. Corn Oil

    The RFS2 final rule projected that by 2013, 34% of all dry mill ethanol facilities in the U.S. would extract inedible corn oil from the by-products of ethanol production using advanced extraction technologies. This estimated extraction rate led us to conclude that the volume of corn oil could reach 300 mill gallons in 2013. While currently available technologies have not been able to reach the oil extraction rates that we assumed in the RFS2 final rule, these lower extraction rates have been offset by a higher number of ethanol plants utilizing some form of extraction technology. For instance, according to a recent article in Ethanol Producer Magazine, up to 55 percent of plants may be extracting corn oil by the end of 2012.14 Similarly, in an article in Biodiesel Magazine, Dave Elsenbast, vice president of supply chain management for REG stated that as of July 2011 about 35% of U.S. corn ethanol plants had implemented corn oil extraction and that he expected that number to double within the next couple of years.15 In the NPRM we stated our expectation that the percentage of dry mill ethanol facilities using some form of corn oil extraction technology will increase to 60% by 2013. Given the information from Ethanol Producer Magazine and Biodiesel Magazine, this estimate appears reasonable.

    14Joseph Riley, “Customized Coproducts Needed as Industry Matures,” June 6, 2011. Ethanol Producer Magazine.

    15Dave Elsenbast quoted in Ron Kotrba, “Biodiesel from corn oil: a growing force,” July 6, 2011. Biodiesel Magazine.

    If 60% of all dry mill corn ethanol facilities in the U.S. were extracting inedible corn oil at rates capable with current technology, the amount of corn oil available for biodiesel production would be approximately 270 million gallons. However, as described in the RFS2 final rule, we expect that by 2013 technology improvements will increase corn oil production levels to 300 million gallons. Additional corn oil could come from ethanol production facilities using corn fractionation or wet milling technology. This corn oil was not considered as a biodiesel feedstock in the RFS2 rule, but market conditions may result in its availability to the biodiesel industry. The higher adoption rate of corn oil extraction in comparison to our projections from the RFS final rule, and the promise of ever-increasing oil extraction yields, indicate that the 300 million gallons of corn oil extraction projected in the RFS2 rule in 2013 remains a reasonable projection. Comments from the Renewable Energy Group support this view.

    3. Soybean Oil

    While a number of parties commented on the use of soybean oil for the production of biomass-based diesel, none provided data or information suggesting that there would be insufficient supplies to meet the need for 1.28 billion gallons of biomass-based diesel as well as other traditional markets for soybeans. Instead, comments on the use of soybean oil were focused on costs. We have addressed these comments separately in Section III.B.3. The rest of this section summarizes our assessment of soybean oil availability, updated since the NPRM.

    Since the RFS2, other oilseeds (e.g., canola oil) have emerged as potential sources of biodiesel feedstock. However, the U.S. market for soybean oil biodiesel is significantly more mature than for biodiesel made from other oilseeds. Because of this, we anticipate that soybeans will remain the primary source of U.S. biodiesel from oilseeds in 2013. It is possible that biodiesel production from other oilseeds such as canola could achieve a significant level of production by 2013. If other oilseeds with approved pathways are able to contribute to the biodiesel volumes, achieving the biomass based diesel mandate would be facilitated. For the purposes of this analysis, EPA is making the conservative assumption that there will be no biodiesel production from other oilseeds in 2013.

    We examined historical and projected soybean oil supplies and use to verify that the volumes shown in Table III.B-1 are achievable in 2013. Our analysis concludes that there will be sufficient supplies of soybean oil to meet the needs of both biodiesel production and other domestic uses in 2013. Producing 600 million gallons of soybean-based biodiesel will require 4,530 million pounds of soybean oil.

    Table III.B.3-1 below lists U.S. Department of Agriculture (USDA) historical data and current projections for U.S. supply and use of soybean oil from the 2006/2007 crop year to the 2013/2014 year. Since 2006/2007, domestic use of soybean oil for non-biodiesel purposes has ranged from 14,134 million pounds to 15,813 million pounds. USDA projects non-biodiesel use will stay above 14,000 million lbs through the 2013/2014 year.

    Table III.B.3-1—Historical Supplies and Use of Soybean Oil in the U.S. [In million lbs] Year starts October 1 Total supplies Domestic use for non-biodiesel purposes Supplies available for biofuel feedstock use or export Historical
  • exports
  • Historical biofuel
  • feedstock use
  • 2006/07 23,536 15,813 7,723 1,877 2,762 2007/08 23,730 15,089 8,641 2,911 3,245 2008/09 21,319 14,196 7,123 2,193 2,069 2009/10 22,578 14,134 8,444 3,359 1,680 2010/11 22,452 14,244 8,208 3,233 2,550 2011/12a 21,215 14,100 7,115 2012/13a 21,075 14,200 6,875 2013/14a 21,290 14,400 6,890 aProjected. Sources: USDA, Agricultural Marketing Service,Oil Crops Outlook,February 10th, 2012. USDA, Economic Research Service,Agricultural Long-Term Projections,February 2012.

    Historical values for exports and biofuel feedstocks in the above table are provided for context only. The remaining values are related as follows:

    Total Supplies = Domestic Use for Non-Biodiesel Purposes + Supplies Available for Biofuel Feedstock Use or Export

    USDA projects that 6,875 million pounds of soybean oil will be available for biofuel feedstock use or export in the 2012/2013 crop year and that 6,890 million pounds will be available in the 2013/2014 year (see Table III.B.3-1). This is considerably more than the approximately 4,530 million pounds needed to meet the soybean-based biodiesel portion of the 1.28 billion gallon mandate.16

    16This calculation assumes a vegetable oil to biodiesel conversion rate of approximately 7.6 pounds of oil per gallon of biodiesel. Actual conversion rates vary depending on the technology used and the purity of the virgin oil. As a result, the actual amount of soybean oil required to produce 600 million gallons of biodiesel could be slightly higher or lower than the amount we have estimated in this rulemaking.

    4. Effects on Food Prices

    In order to determine the likelihood of a substantial increase in food prices, EPA projected the effects of a 1.28 billion gallon mandate using the CARD stochastic modeling framework discussed in Section IV.B.1. of this final rule. Assuming that the 280 million gallon increment is met entirely with soybean oil biodiesel in 2013, we project that the price of soybean oil will be $0.45 per pound under this mandate, compared to $0.42 under a 1.0 billion gal volume requirement. This represents a price increase of 3 cents per pound (about 7 percent). The increase in demand for soybean oil is also expected to have a small impact on the price of soybeans. We project that the price of soybeans will be $10.39 per bushel under this mandate, compared to $10.21 per bushel under a 1.0 billion gal volume requirement. This represents a price increase of 18 cents per bushel (about 1.8 percent). Both of these projections are within the recent historical range of prices (see Table III.B.4-1).

    Table III.B.4-1—Historical and Projected Prices of Soybeans and Soybean Oil [2010 dollars per lb] Soybean oil Soybeans 2006-2011 Low Annual Average Price $0.33 per lb $9.70 per bushel. 2006-2011 High Annual Average Price $0.54 per lb $12.36 per bushel. 2013 Projected Price $0.45 per lb $10.39 per bushel. Sources: USDA, Agricultural Marketing Service,Oil Crops Outlook,February 10th, 2012. USDA, Economic Research Service,Agricultural Long-Term Projections,February 2012.

    The timeframe of this rulemaking did not permit large-scale modeling of the impacts of this mandate on the agricultural sector. We therefore cannot predict the exact impact that these increases in soybean and soybean oil prices will have on food prices in general.

    As noted above, these results assume that 600 mill gal of this mandate is soybean-based. To the extent that this increment is met with other feedstocks, the overall effect of this mandate on the price of soybeans and soybean oil would be smaller.

    5. Other Bio-Oils

    Although the modeling we conducted for the RFS2 final rule assumed that the only form of bio-oil used to make biomass-based diesel would be from soybeans, in fact other seed oils may contribute meaningful volumes to the pool. For instance, on September 28, 2010, we approved a RIN-generating pathway for biodiesel made from canola oil.17 The volume of biodiesel made from canola oil was 96 mill gallons in 2008.18 In addition, we are evaluating other pathways for the production of biodiesel from oilseeds which could potentially be approved for RIN generation by 2013. On January 5, 2012 we proposed to include oil from camelina as an approved feedstock for producing biodiesel (77 FR 462). Algal oil could also provide additional feedstocks if promising technologies for production are commercialized.

    1775 FR 59622.

    18EPA memorandum, “Summary of Modeling Input Assumptions for Canola Oil Biodiesel for the Notice of Supplemental Determination for Renewable Fuels Produced Under the Final RFS2 Program,” Document # EPA-HQ-OAR-2010-0133-0049.

    Nevertheless, even if none of these other sources of bio-oil were available, we believe that the total volume of grease, fats, corn oil, and soybean oil would be sufficient to produce 1.28billion gallons of biomass-based diesel in 2013.

    C. Production Capacity

    Total production capacity of the biodiesel industry has exceeded 1.28 billion gallons for a number of years. As of February 2012, total production capacity was more than 2.5 billion gallons for 191 companies.19 According to the EPA registration database, 216 facilities have registered with the EPA under the RFS2 program as of March 15, 2012. Plants that are currently not registered under RFS2 are either producing extremely low volumes that fall under the regulatory threshold for RIN generation, are producing products other than biodiesel such as soaps or cosmetics, or have shut down until such time as the demand for biodiesel rises.

    19Plant list from National Biodiesel Board, 2/7/2012.

    While comments generally did not disagree that sufficient production capacity exists to reach 1.28 billion gallons in 2013, some questioned how quickly idled plants can be brought back online. We note that most of the production capacity exists at plants that are already producing some volume, and that many operating biodiesel plants are currently producing at less than their full capacity. As a result, these facilities typically do not need to go through the additional steps that are associated with starting up an idled plant, such as securing new financing, establishing contracts with feedstock suppliers and customers, hiring and retraining employees, and testing and proving the equipment. Nevertheless, since many new plants can be built and started within a year or so20 , we also believe that pre-existing but idled plants can be restarted in considerably less than a year. Given the time between release of this action and when the 1.28 billion gal requirement will become effective, there is no reason to believe that idled plants cannot be restarted in time to contribute meaningfully to total volumes in 2013.

    20Based on construction times for new plants listed in Biodiesel Magazine from July 2006 through May 2009.

    D. Consumption Capacity

    Biodiesel is registered with the EPA under 40 CFR Part 79 as a legal fuel for use in highway vehicles. Under this registration, it can legally be used at any blend level, from 1% (B1) to 100% (B100) in highway diesel fuel. As there are no equivalent registration requirements for non-highway fuels, biodiesel can legally be used at any blend level in nonroad diesel and heating oil. However, other factors typically limit the concentration of biodiesel in conventional diesel fuel. To the extent that the consumption of biodiesel occurs only at lower blend levels, the geographic area where biodiesel must be marketed would correspondingly be greater, impacting both how much biodiesel can be consumed in the U.S. as a whole as well as how the infrastructure may need to change to accommodate 1.28 billion gallons in 2013. As described below, we believe that there are no impediments to consuming an additional 280 mill gal of biodiesel.

    Most engine manufacturers have explicit statements in their engine warranties regarding acceptable biodiesel blend levels. Although a few permit B100 to be used in their engines without any adverse impact on their warranties, most limit biodiesel blends to B20 or less, and of those, about half allow no more than B5.21 For specific applications where a party knows which engines will be using biodiesel blends, higher concentrations of biodiesel may be possible. However, for general distribution such as at retail facilities, these warranty conditions create a disincentive to blend or sell biodiesel at higher concentrations and would tend to drive most blends towards low concentrations of biodiesel such as B5.