Daily Rules, Proposed Rules, and Notices of the Federal Government
Governors from several States have requested a waiver of the national volume requirements for the renewable fuel standard program (RFS or RFS program). Broadly summarized, the States requesting a waiver (requesting States) assert that the RFS program is having a negative impact on their respective State economies based on this period of severe drought conditions by diverting corn from other markets to production of ethanol to meet volumes required under the RFS, leading to increased corn prices and resultant negative impacts on the livestock industry and food prices. Other parties requested a waiver on similar grounds. On August 30, 2012, EPA published a
In determining whether these waiver requests should be granted or denied, our decision is based on the relevant criteria for a waiver set forth in CAA Section 211(o)(7)—whether implementation of the RFS volume requirements would severely harm the economy of a State, a region or the United States. In making its determination, EPA took into consideration all comments submitted as well as an analysis of relevant impacts of the drought on the crops that would be used as feedstock in the production of renewable fuel during the 2012/2013 corn marketing year (September 2012 through August 2013). EPA analyzed the impacts with and without a waiver, utilizing an updated version of an Iowa State University (ISU) model that was used in response to a Texas waiver request in 2008 (discussed further below) when analyzing this year's waiver requests. This analysis identified the extent to which, if any, implementation of the RFS volume requirements would affect ethanol production and thereby the price of corn and other products over the relevant time period. EPA also considered other empirical data including historical and current Renewable Identification Number (RIN) credit prices and the available quantity of carryover RINs.
After weighing all of the evidence before it, EPA found that the evidence does not support a determination that implementation of the RFS over the time period in question would severely harm the economy of a State, region, or the United States, the high statutory threshold for a waiver. The body of information shows that it is very likely that the RFS volume requirements will have no impact on ethanol production volumes in the relevant time frame, and therefore will have no impact on corn, food, or fuel prices. In addition, the body of the evidence also indicates that even in the unlikely event that the RFS mandate would have an impact on the corn and other markets during the 2012-2013 time frame, its nature and magnitude would not be characterized as severe. In the small percentage of modeled scenarios where a waiver of the RFS mandate would have any impact on the production of ethanol (11 percent of the cases), the decrease in ethanol production is small and the resulting reduction in corn prices is projected to be limited (on average $0.58 per bushel of corn).
EPA also received comment on issues related to, among other topics, the general impact of increased use of biofuels on the economy and global markets, on ethanol's characteristics as a transportation fuel, and on the RFS program in general. EPA recognizes that many parties, both those supporting the waiver and those opposing the waiver, have raised issues of significant concern to them and to others in the nation concerning the role of renewable fuels and the RFS program in our country. In particular, EPA recognizes comments that focus on the severity of the drought and its major impacts on multiple sectors across the country. Many commenters describe the dire economic impact that this year's drought has had on corn crops, corn prices and those industries that rely on corn as an input. EPA and its federal partners recognize the substantial negative economic impacts suffered as a result of this year's historic drought. The drought's impact on U.S corn and other crop production has been well documented and was reflected in increasing corn prices starting early this summer.
However, as was the case in 2008, the issue directly before the Agency is limited given EPA's authority under section 211(o)(7)(A) of the Act. After considering all of the public comments, both those in support of a waiver and those against, and consulting with the Secretaries of Agriculture and Energy, EPA has determined that the waiver requests should be denied because the evidence does not support making a determination that implementation of the RFS volume requirements during this time period would severely harm the economy of a State, region, or the United States.
It is important to note that this and other waiver decisions are based on current circumstances and market conditions. As indicated by EPA's modeling, the impact of the RFS volume requirements is highly dependent on the volumes at issue, the number of RINs carried over from prior years and the relevant market commodity prices, such as corn and crude oil prices, and other factors applicable during the time period analyzed.
The Energy Policy Act of 2005 (EPAct) amended the Clean Air Act to establish a Renewable Fuel Standard (RFS) Program and gave EPA responsibility for implementing it. EPAct required EPA to issue regulations ensuring that gasoline sold in the U.S., on an annual average basis, contained a specified volume of “renewable fuel.” The Energy Independence and Security Act of 2007 (EISA) amended the RFS program by, among other things, extending the program to cover transportation fuel, not just gasoline, extending the years in which Congress specified the required volume of renewable fuels by ten years, and increasing the required volumes of renewable fuels. EISA set the 2012 and 2013 RFS renewable fuel mandates as 15.2 billion gallons and 16.55 billion gallons respectively, and the mandate rises to 36.0 billion gallons by 2022. EISA also imposed additional requirements for the use of advanced biofuel, biomass-based diesel, and cellulosic biofuel, included within the
EPA published regulations for the RFS program as amended by EISA on March 26, 2010 (75 FR 14670), and the amended RFS program became effective starting July 1, 2010. Since that time more than 36 billion ethanol-equivalent gallons of renewable fuel have been produced under the RFS program.
In April 2008, EPA received a request from the Governor of the State of Texas for a fifty percent waiver of the national volume requirements for the RFS; we provide more detail on this request here due to the relevance of our response to that request to today's determination. Texas based its request on the assertion that the RFS mandate was having a negative impact on the economy of Texas, specifically in the form of increased corn prices negatively impacting the livestock industry and food prices. After considering all of the public comments, and consulting with the Secretaries of Agriculture and Energy, EPA denied the waiver request.
In this section we first provide background information concerning the waiver requests and EPA's public notice of, and solicitation of comment on those requests. We also address comments related to procedural issues concerning our consideration of the waiver requests.
Beginning in July 2012, EPA received a number of requests for it to exercise its authority under CAA 211(o)(7) to grant a waiver in whole or in part of the renewable fuel standard requirements. In addition, EPA received a number of petitions seeking the same or similar EPA action from a number of state Governors, including the Governors of Arkansas, North Carolina, New Mexico, Georgia, Texas, Virginia, Maryland, Delaware, Utah, and Wyoming. The Governor of Florida wrote in support of a waiver in an October 16, 2012 letter to the EPA.
All of the letters from State Governors discussed above, as well as the many letters EPA received supporting the waiver requests or asking EPA to waive the RFS volume requirements, cite the negative impact of this year's severe drought conditions, and most discuss the effect the drought has had on corn and feed prices, and the subsequent impacts being felt by the livestock, poultry, and other sectors.
On August 30, 2012, EPA published a
EPA requested comment from the public on any matter that might be
In response to requests for an extension of time for public comment, EPA extended the public comment period by 15 days to October 11, 2012.
Section 211(o)(7)(A) states, in relevant part, that “The Administrator * * * may waive [the RFS requirements] in whole or in part
EPA received comment that although EPA sought comment on all the waiver requests, the Administrator need only decide that
As mentioned above, as part of the 2008 waiver determination EPA provided guidance on what types of information and analysis should be submitted with future waiver requests. In response to this year's August 30 Notice, commenters argued that such guidance effectively established “completeness criteria” that petitioning States failed to meet, and that EPA failed to apply when initially evaluating the requesting letters.
EPA takes seriously its responsibility to evaluate whether circumstances warranting a waiver have arisen. EPA also recognizes the need to avoid the uncertainty to the renewable fuel and RIN markets that may be associated with unnecessarily frequent evaluations of whether issuing a waiver is appropriate. To help meet those objectives, EPA provided guidance in 2008 regarding expectations for future waiver requests, and today we repeat that such guidance should be followed in the future. At the same time, we explicitly stated in 2008 that the guidance provided “is not a rule, and therefore is not binding on the public or EPA. Any final decision on the sufficiency and merit of a petition will be made upon review of a petition by EPA in consultation with USDA and DOE.” We further stated that EPA would “review a request for a waiver and first determine whether to proceed with public notice and comment.”
EPA, in consultation with USDA and DOE, reviewed the waiver requests received in July and August. In light of the severe drought affecting much of the country, and the clearly expressed support for a waiver by a number of States, governmental representatives and industry trade groups, it was clearly appropriate to seek public comment on the requests before making a final decision. Such a step would be required before EPA could make a decision to grant a waiver, and it was clearly appropriate to do so in these circumstances involving severe drought
Section 211(o)(7) of the CAA provides that EPA may waive the mandated national RFS volume requirement in whole or in part based on a determination by the Administrator that: (i) “implementation of the requirement would severely harm the economy or environment of a State, a region, or the United States,” or (ii) “that there is an inadequate domestic supply.” The 2012 waiver requests are all based on claims of severe economic harm to states, regions and/or the country as a whole associated with implementation of the RFS requirements in light of the drought experienced in large agricultural production areas of the country this summer. Therefore, the relevant statutory provision authorizes a waiver if EPA determines that RFS implementation “would severely harm the economy of a State, a region or the United States.”
In the August 30 Notice, EPA sought public comment on its interpretation of this provision as discussed in the context of the 2008 Texas waiver determination. EPA's responses to the comments received are set forth in section VI of this determination. For reasons more fully described in that section, EPA continues to interpret this statutory provision as it did in 2008. Thus, it would not be sufficient for EPA to determine that there is severe harm to the economy of a State, region or the United States; rather, EPA must determine that RFS implementation would severely harm the economy. Furthermore, EPA interprets the word “would” as requiring a generally high degree of confidence that implementation of the RFS program would severely harm the economy of a State a region, or the United States. EPA interprets “severely harm” as specifying a high threshold for the nature and degree of harm. Although there are many factors that affect an economy, the RFS waiver provisions call for EPA to evaluate the impact of the RFS mandate itself. EPA does not evaluate the impact of the RFS volume requirements in isolation, but instead evaluates them in the context of all of the relevant circumstances, including in this case the impact of the drought. However the purpose of this analysis is to characterize the impact of the RFS mandate itself, within this context. Finally, because the statute specifies that EPA “may” grant a waiver if it determines that implementation of the RFS requirements would severely harm the economy of a State, a region or the United States, the statute provides EPA with discretion to decline to issue a waiver even if it finds that the severe harm test is satisfied. This discretion allows EPA to take into consideration the possible impacts of issuing a waiver that extend beyond the geographic confines of a particular State or region. EPA believes that such consideration is particularly appropriate in light of the statutory requirement that any RFS waiver be nationwide in scope.
To evaluate the impact that implementation of the RFS would have on the amount of ethanol produced and consumed over the relevant time period, and the resulting impacts, if any, on the agricultural and other industries, we applied the same analytical framework EPA used in evaluating the 2008 waiver request. We first assessed what impact implementation of the RFS program would have on ethanol production and consumption, and thus corn prices, by conducting our own analysis using a model developed by Iowa State University. We then evaluated the impacts such changes, if any, would have on a set of key factors, including corn prices, feed prices, food prices, and fuel prices. A number of commenters submitted analyses looking at similar issues, and we reviewed those studies as part of our overall evaluation. Throughout this section we also address various comments we received in response to the August 30 Notice.
To assess the impact of implementation of the RFS, EPA evaluated two scenarios: one in which no waiver is granted and another in which a waiver of the total renewable fuel mandate is granted, as discussed below. As we did in evaluating the 2008 Texas waiver request, EPA utilized an economic model developed by researchers at Iowa State University (ISU model). During development of the analytical framework used in 2008, EPA evaluated different models and modeling approaches, and we refer readers to that discussion for more detail.
EPA believes the ISU model continues to be the most appropriate choice for a number of reasons. First, as discussed in 2008, EPA believes it is critical to use a stochastic framework to capture a range of potential outcomes, rather than a point estimate, given potential variation in a number of critical variables associated with ethanol production (e.g., corn yields, gasoline prices). Second, the ISU model captures the interaction between agricultural markets and energy markets, and is able to examine the impacts of uncertainty in variables within both sectors. The ability of the ISU model to account for this variability across both sectors gives the model an advantage over other models that are locked into a single projected fuel price or corn crop estimate. Third, documentation for the ISU model is relatively straightforward and transparent compared to other options, and allows all interested parties to understand the assumptions that drive the results.
The ISU model is a stochastic equilibrium model that projects, among other outputs, the prices of corn, ethanol and blended fuel given uncertainty in six variables: U.S. corn yields, U.S., Brazilian, and Argentinean soybean yields, U.S. wholesale gasoline prices, and Brazilian ethanol production.
For the results described below, EPA made modifications to the model in preparation for the current analysis. At EPA's request, ISU researchers updated their model with data from the October WASDE and STEO reports. After consultation with DOE, we also modified the demand curve for ethanol to reflect our understanding of flexibility in refinery markets over the next twelve months. A full description of the ethanol demand curve developed in consultation with DOE can be found in the docket.
To analyze the impact of implementation of the RFS, our technical analysis focused on the volume of renewable fuel representing the difference in volume between the advanced biofuel requirement and the total renewable fuel requirement. This is the portion of the total volume requirement that is currently met almost exclusively with corn ethanol.
We note that several of the States requested a waiver of RFS requirements “in 2012 and 2013,” although the various waiver requests were not always specific with respect to the time period for which the waiver was requested. EPA focused its technical analysis on the 2012/2013 corn marketing year (which runs from September 1, 2012, to August 31, 2013) for a number of reasons. All of the petitioners referenced the serious drought conditions as the underlying reason for waiving the RFS volume requirements. The drought primarily affects the 2012/2013 corn marketing year, and the harm claimed by the requesters was the impact of taking corn from the reduced crop affected by the drought and using it to produce ethanol as a transportation fuel. The corn crop at issue is the 2012/2013 corn marketing year crop, and it is ethanol produced from this corn crop that was the overwhelming focus of the waiver requests. Focusing the technical analysis on the production of ethanol during this same 2012/2013 time period focused the analysis on the time period where implementation of the RFS volume requirements was claimed to be the source of the harm. In addition, focusing on the 2012/2013 marketing year is consistent with the petitioners request to waive the RFS requirements “in 2012 and 2013” since it would cover portions of both calendar years. Finally, while other time periods are possible to analyze, data is often reported on a marketing year basis, and analysis of commodity markets is frequently done similarly. The WASDE data used in our analysis, as well as all other USDA projections of U.S. corn yields, production, and prices, are done within this same time frame.
EPA received comment that a waiver granted for some or all of 2013 might have impacts on market dynamics in the 2013/2014 corn marketing year, and that EPA is not limited to assessing only a one-year impact.
To the extent parties believe that implementation of the RFS program would severely harm the economy in 2014 because of the production of renewable fuel from corn, then a future waiver request that focuses on the harm in that time period could present analysis and arguments addressing the impact of implementation of the RFS volume requirements during that time period. For example, the availability of rollover RINs in future time frames could be more limited, a fact which could impact the results of such an analysis. However as noted above assessing those issues now would involve a high degree of uncertainty. To the extent parties assert that implementation of the RFS volume requirements would severely harm the economy in 2014 because of market based limits on the volume of ethanol in gasoline (typically referred to as the blendwall, as blends greater than E10 or E15 may only be marketed to flexible fuel vehicles), then a future waiver request that focuses on this issue could present information and analysis addressing the relevant issues. However, it would be more appropriate to consider such issues in a future annual RFS rulemaking setting the volume requirements for years after 2013.
In a related vein, EPA also received comments related to EPA's ability to renew a waiver beyond a one-year time frame.
For these reasons, with respect to assessing the impact that implementation of the RFS will have on ethanol production levels, and to evaluating the impacts and potential degree of harm from implementation of the RFS on corn prices and other factors, EPA believes that it is appropriate in this case to focus its technical analysis on impacts that occur from the production of ethanol in the 2012/2013 corn marketing year.
EPA's technical analysis focuses on whether the RFS mandate has an effect on corn ethanol production and consumption over the 2012/2013 marketing year. EPA recognizes that the drought affecting much of the nation during 2012 has affected not only corn yields, but also other crops used in the production of renewable fuels, most notably soybeans, which are used as a feedstock in biomass-based diesel (BBD) production. EPA also received comment arguing that a waiver should analyze impacts on all potential feedstocks and volume standards under RFS.
At the same time, some of the requesting States mentioned the drought's impacts on soybean crops, and many of the requesting States requested a waiver of “applicable volumes” of renewable fuel.
Under the RFS program, RINs are valid for compliance purposes for both the calendar year in which they are generated and the following calendar year. By regulation, the amount of an obligated party's Renewable Volume Obligation (RVO) that can be met using previous-year, or “rollover,” RINs is capped at 20 percent. EPA explained our interpretation of the relevant statutory provisions, and our reason for establishing a cap of 20 percent, in the 2007 RFS final rulemaking on RFS.
The specific number of rollover RINs available for use in the 2012/2013 marketing year is an input into EPA's stochastic modeling. To the extent that the number of rollover RINs is greater, the RFS requirements could be met with less production and blending of ethanol in 2013. The converse is the case if the number of rollover RINs is less. As discussed in Section V.1.d, we believe that refiners and importers, the parties obligated to comply with a renewable volume requirement, at least in many cases, have reasons other than the RFS program for choosing to rely on ethanol blending for compliance purposes. However, to the extent that the RFS program also creates such pressure, rollover RINs reduce it in a given time period by increasing compliance flexibility for obligated parties. It also provides more flexibility for renewable fuel producers. From the perspective of the ISU model, one rollover RIN is equivalent to one liquid gallon of ethanol: both equally satisfy the RFS requirements, and thus both are sources of ethanol to draw upon in the model.
Based on the most current data available from the EPA Moderated Transaction System (EMTS), EPA
Based on total 2012 EMTS data available to date, we project for purposes of this analysis that D6 RIN rollover into the 2012/2013 marketing year period will exceed 2.0 billion. Total D6 RIN generation for 2012 has already exceeded 10.8 billion gallons. Monthly generation of D6 (general renewable fuel) RINs was approximately 1.05 billion in October of 2012, only slightly lower than the 1.1 billion RINs generated in October of 2011 and just below average for 2012 as a whole.
Several studies prepared by non-EPA researchers observe, and we agree, that the availability of rollover RINs can significantly affect the potential impact of implementation of the RFS volume requirements. Some studies have suggested that, in scenarios where rollover RINs are relatively scarce, waiving the effective conventional renewable fuel volume requirement might lead to a significant decrease in corn prices. However, if significant numbers of rollover RINs (i.e., 2.0 billion or more) are available, these studies suggest that the effect of a waiver is significantly smaller.
EPA recognizes that the estimate of rollover RIN availability used in the ISU model (and other models) can have a significant effect on the results of the modeling. For purposes of our analysis, EPA assumed that no more than 2.0 billion rollover RINs would be available for use in the 2012/2013 time period. As discussed above, current data suggest that RIN rollover is likely to be higher or even significantly higher than this. We believe 2.0 billion rollover RINs is a conservative analytical assumption.
Historically refiners and blenders have blended more ethanol than required due to its favorable economics, leading to the large carryover RIN balance discussed above. EPA received comment suggesting that even if the blending economics were not favorable for ethanol, refiners and blenders might look forward to future obligations and purposefully over-comply with the RFS requirements in 2013 to increase their “bank” of relatively low-cost RINs that could be carried into 2014, in case they anticipate RIN prices to be higher then. If such behavior were to take place, ethanol production in the 2012/2013 corn marketing year would be higher than the level projected in the ISU modeling results. The implication is that the waiver could have a slightly larger impact on ethanol production and corn prices than what is projected in the ISU modeling results. If this type of over-complying behavior were to take place, we would expect demand for ethanol to be right at the E10 blend wall limit in 2012 and 2013. However, the empirical data does not support the theory that obligated parties are over-complying to the maximum extent that they can bank RINs today, since there is still a small but significant gap between the volumes of ethanol consumption our modeling projects for next year and the estimated E10 blend wall. Even if parties were to engage in over-compliance for banking purposes in 2013, their desire to do so would likely be limited by their ability to blend ethanol into low level blends (i.e., E10). Therefore, we do not believe that this type of behavior would have any appreciable effect on our analysis for this waiver decision.
In assessing the impact of implementing the RFS volume requirements in the 2012/2013 time frame on ethanol production, a key consideration is the economic incentives for refiners to use ethanol during that time frame as well as the ability of refiners and fuel blenders to reduce, over that one-year timeframe, the quantity of ethanol currently being blended into the gasoline pool. As ethanol production and availability in the U.S. has increased over the past 10 years, the economics of blending ethanol into gasoline have been such that many refiners have transitioned from producing primarily finished gasoline to producing primarily blendstocks for oxygenate blending (BOBs) which require the addition of ethanol in order to meet the specifications of finished gasoline. However, assuming refiners wanted for business reasons to reduce the quantity of ethanol blended into the gasoline pool, refiners would have to seek alternative high octane blend stocks or significantly adjust refinery operations to make up for the volume and octane increase they currently receive from ethanol. Logistical challenges to the refined product distribution system would also have to be overcome in parallel with the necessary refinery operation changes.
As mentioned, currently most refiners produce a sub-octane unfinished gasoline lacking oxygenates called blendstocks for oxygenate blending (BOBs). These BOBs are transported through fuel pipelines or other modes to petroleum product terminals where they are then blended with ethanol and become finished gasoline. Since ethanol is generally not produced near large refineries and may absorb water and impurities that normally reside in petroleum product pipelines, a separate ethanol distribution system has been established to distribute and ultimately blend ethanol into BOBs at terminals to produce the finished fuel.
One reason refiners choose to blend ethanol into gasoline is for purposes of boosting gasoline octane levels. Ethanol has an octane value of 115 (R+M/2) while finished gasoline's pump octane value ranges from 87-93.
After consultation with DOE, review of comments, and analysis undertaken by EPA, we determined that, assuming refiners had an economic incentive to reduce ethanol blending, refiners have limited flexibility to make the necessary adjustments to reduce ethanol blending if a one year waiver of the RFS program were granted under projected scenarios for ethanol and gasoline prices. Our modeling inputs reflect this determination.
EPA also received comments from the American Petroleum Institute, Chevron, and Marathon Petroleum Company stating that a one year waiver would be unlikely to result in a significant decrease in ethanol blending.
Several commenters cited the challenges that refiners would face in reducing the quantity of ethanol blended into the gasoline pool in the near term as justification for a longer-term waiver.
We ran the ISU model with the updates and inputs described above and here describe the outputs. The ISU model projects that the average expected amount of conventional ethanol produced in the United States during the 2012/2013 corn crop year without a waiver will be 12.48 billion gallons. ISU's model predicts that for 89 percent of the simulated scenarios, waiving the RFS requirements would not change the overall level of corn ethanol production or overall U.S. ethanol consumption in 2012/2013 because in the event of a waiver the market would demand more ethanol than the RFS would require. For those 89 percent of the scenarios, waiving the RFS requirements would therefore have no impact on ethanol use, corn prices, ethanol prices, or fuel prices. We refer to that model result as an 89 percent probability that the RFS will not be “binding” in the 2012/2013 marketing year. Conversely, in 11 percent of the simulated ISU model runs the RFS would be binding. In those 11 percent of the random draws, the resulting market demand for ethan