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

ENVIRONMENTAL PROTECTION AGENCY

[FRL-9754-4]

Notice of Decision Regarding Requests for a Waiver of the Renewable Fuel Standard

AGENCY: Environmental Protection Agency (EPA).
ACTION: Notice.
SUMMARY: The Governors of several States requested that EPA waive the national volume requirements for the renewable fuel standard program (RFS or RFS program), pursuant to section 211(o)(7) of the Clean Air Act (the Act), based on the effects of the drought on feedstocks used to produce renewable fuel in 2012-2013. Several other parties submitted similar requests. Based on a thorough review of the record in this case, EPA finds that the evidence and information does not support a determination that implementation of the RFS program during the 2012-2013 time period would severely harm the economy of a State, a region, or the United States. EPA is therefore denying the requests for a waiver.
DATES: Petitions for review must be filed by January 28, 2013.
ADDRESSES: EPA has established a docket for this action under Docket ID No. EPA-HQ-OAR-2012-0632. All documents and public comment in the docket are listed on thewww.regulations.govWeb site. Publicly available docket materials are available either electronically throughwww.regulations.govor in hard copy at the Air and Radiation Docket in EPA Headquarters Library, EPA West Building, 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 Reading Room is (202) 566-1744. The Air and Radiation Docket and Information Center's Web site ishttp://www.epa.gov/oar/docket.html.The electronic mail (email) address for the Air and Radiation Docket is:a-and-r-Docket@epa.gov, the telephone number is (202) 566-1742, and the Fax number is (202) 566-9744.
FOR FURTHER INFORMATION CONTACT: Dallas Burkholder, Office of Transportation and Air Quality, Environmental Protection Agency, National Vehicle and Fuel Emissions Laboratory, 2565 Plymouth Road, MI 48105; telephone number: (734) 214-4766; fax number (734) (214-4050; email address:burkholder.dallas@epa.gov.
SUPPLEMENTARY INFORMATION:

I. Executive Summary

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 aFederal Registernotice inviting public comment on the waiver requests and other matters relevant to EPA's consideration of those requests.

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.1

1A RIN is unique number generated by the producer and assigned to each gallon of a qualifying renewable fuel under the RFS program, and is used by refiners and importers to demonstrate compliance with the volume requirements under the program.

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).2 These potential impacts from implementation of the RFS program would not be considered as meeting the high statutory threshold of severe harm to the economy set by the statute. It is worth emphasizing that the modeling shows that even this degree of impact is a very unlikely outcome. The most likely outcome is that implementation of the RFS program during this time frame would have no impact at all on ethanol production and corn prices.

2On average, across the 500 cases considered in the ISU analysis, a small $0.07 cent per bushel reduction on corn prices would be expected in the case of a waiver.

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.3 Crop growing regions across the country were affected, and the impacts of reduced crop production are far-reaching.

3See for example the World Agricultural Supply and Demand Estimates, select issues, prepared by the U.S. Department of Agriculture;http://www.usda.gov/oce/commodity/wasde.

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.

II. Overview of the Renewable Fuel Standard (RFS) Program

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 theoverall mandate of renewable fuel. As part of EISA, Congress required EPA to determine the life-cycle emissions of greenhouse gases associated with renewable fuels, and required a minimum level of greenhouse gas reduction to qualify as renewable fuel, advanced biofuel, cellulosic biofuel or biomass-based diesel. EPAct had the statutory goal of increasing the volume of renewable fuels that are required to be used in the transportation sector and Congress furthered that goal with the passage of EISA. In this context, implementation of EISA is aimed at reducing dependence on foreign sources of energy, increasing the domestic supply of energy, and reducing greenhouse gas emissions associated with the transportation sector.

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.4 EPA has also continued to update the RFS regulations through rulemaking actions to establish specific required renewable fuel volumes and annual percentage standards, as well as to identify additional qualifying renewable fuel production pathways. New pathways to produce renewable fuel for the RFS program, such as biomass-based diesel produced from canola oil have been approved as qualifying renewable fuels under RFS, and several others, such as ethanol produced from grain sorghum, are currently under evaluation. As new biofuel, feedstock, and fuel production technologies approach commercialization EPA will continue to review potential renewable fuel pathways for inclusion in the RFS program.5

4Data from EPA's Moderated Transaction System (EMTS) through September 2012. Retrieved November 8, 2012 from EMTS. See “RIN Rollover” memo in the docket for more information orhttp://www.epa.gov/otaq/fuels/rfsdata/index.htm.

5A renewable fuel “pathway” under the RFS program encompasses a feedstock, process, and fuel combination. For example, ethanol (fuel) produced through a dry-mill process (process) and derived from corn starch (feedstock).

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.6 In making this decision, and as discussed in more detail below, EPA interpreted the statutory provisions to require a determination based on the expected impact of the RFS program itself, a generally high degree of confidence that implementation of the RFS program would severely harm the economy of a State, region, or the United States, and a high threshold for the nature and degree of harm. After weighing all of the evidence before it, EPA determined that the evidence in 2008 did not support a finding that implementation of the RFS would severely harm the economy of a State, region, or the United States. First, the evidence indicated that the most likely result was that the RFS would have no impact on ethanol production volumes in the relevant time frame, and therefore no impact on corn, feed, food, or fuel prices. Second, EPA also determined that if the RFS volume requirements were to have an impact on the economy during the 2008/2009 corn marketing year, it would not be of the nature or magnitude that could be characterized as severe. As part of the determination, EPA also provided guidance on what types of information should be submitted in the case of future waiver requests under the same provision of the Act.

673 FR 47168 (August 13, 2008).

III. EPA's Administrative Process

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.

1. Letters Seeking an RFS Waiver and EPA's Request for Comment

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.7 8 9

7See, for example, the July 30, 2012 letter submitted by the National Pork Producers Council (NPPC), on behalf of several national regional livestock, poultry, and other organizations (“July 30 NPPC letter”) requesting a waiver, EPA-HQ-OAR-2012-0632-0012.

8The Governors' letters requesting a waiver are available at docket number EPA-HQ-OAR-2012-0632.

9In an August 9, 2012 letter, the Governors of Delaware and Maryland jointly wrote in support of the July 30 NPPC letter. The Governor of Delaware subsequently wrote in a September 25 letter asking that the August 9 letter “be formally considered a Petition for Waiver;” mentioned in EPA-HQ-OAR-2012-0632-1969. The Governor of Maryland also submitted a subsequent letter dated October 11, 2012 requesting a waiver, EPA-HQ-OAR-2012-0632-2259.

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.10 Several of the letters claim that the RFS program significantly increases demand for corn, thereby increasing corn prices and harming those sectors that use corn as a production input, such as the livestock and poultry industries. Many of the letters claim that a waiver of the RFS volume requirements would alleviate some of that harm. Though not all of the letters specify a time period for the waiver, many of them request a waiver of the RFS volume requirements in 2012 and 2013. While the contents of the letters described above vary in detail, each letter either requests that the Administrator grant a waiver of required RFS volumes or expresses support for the granting of such a waiver.

10This includes several letters EPA received from Members of Congress supporting a waiver, all of which are available in the docket.

On August 30, 2012, EPA published aFederal RegisterNotice providing notice of its receipt of the waiver petitions, letters of support for the waiver petitions, and requests that EPA grant a waiver and invited public input on those requests over a 30-day comment period.11 EPA stated in the Notice that any similar requests received by EPA after issuance of the Notice would be docketed and considered together with the requests already received (collectively, the “waiver requests”).

1177 FR 52715 (August 30, 2012) (“August 30 Notice”).

EPA requested comment from the public on any matter that might berelevant to EPA's review of and actions in response to the waiver requests, including but not limited to: (a) Whether compliance with the RFS would severely harm the economy of Arkansas, North Carolina, other States, a region, or the United States; (b) whether the relief requested will remedy the harm; (c) to what extent, if any, a waiver would change demand for ethanol and affect prices of corn, other feedstocks, feed, and food; (d) the amount of ethanol that is likely to be consumed in the U.S. during the relevant time period, based on its value to refiners for octane and other characteristics and other market conditions in the absence of the RFS volume requirements; and (e) if a waiver were appropriate, the amount of renewable fuel volume appropriate to waive, the date on which any waiver should commence and end, and to which compliance years it should apply.

In response to requests for an extension of time for public comment, EPA extended the public comment period by 15 days to October 11, 2012.12 EPA received in excess of 29,000 comments during the comment period; the majority of the comments were short statements generally in support of the requests for a waiver. EPA also received numerous comments from various trade organizations and businesses, Governors, Members of Congress and other elected officials, researchers, and environmental organizations either supporting or opposing a waiver. Many of the comments referenced various analyses which are discussed below. In addition, EPA received comments that either supported EPA's legal interpretation of section 211(o)(7) as described in the 2008 Texas waiver determination or suggested that different interpretations and applications were appropriate. EPA addresses these and other comments either in the discussion of our process, results and conclusions, or in section VI of this determination.

1277 FR 57566 (September 18, 2012).

2. EPA's Treatment of Petitions for a Waiver, Letters in Support of Petitions for a Waiver, Letters Requesting That EPA Act on its Own Authority To Issue a Waiver

Section 211(o)(7)(A) states, in relevant part, that “The Administrator * * * may waive [the RFS requirements] in whole or in parton petition by one or more States, by any person subject to the requirements of this subsection, or by the Administrator on his own motion * * * (i)based on a determination * * * that implementation of the requirement would severely harm the economy or environment of a State, a region or the United States, or (ii) based on a determination * * * that there is an inadequate domestic supply.” (Emphasis added). The statutory criteria that must be met to issue a waiver are the same regardless of whether EPA acts on its own motion or responds to a petition from a State or person subject to the RFS requirements. The only difference the statute draws between the Administrator acting on her own motion or in response to a petition submitted by the listed parties is the 90-day deadline for EPA action in the latter case, set by section 211(o)(7)(B). Therefore, EPA has given all waiver requests, whether received before or after the August 30 Notice, equal consideration. For the reasons described below, EPA is denying all of the waiver requests.

EPA received comment that although EPA sought comment on all the waiver requests, the Administrator need only decide thatoneof the requests meets the statutory requirements of CAA section 211(o)(7) in order to exercise her authority to waive the requirements of CAA section 211(o)(2) in whole or in part. This commenter noted that while EPA may consider the entirety of information and comments submitted on the various waiver requests, it need not decide that all, or several, of the requests have sufficient basis in order to grant a waiver. The commenter suggests that the waiver provision requires the Administrator to make individualized decisions with respect to “a State,” or “a region” of the United States that may be the subject of an individual request. EPA has considered all of the information and analysis submitted by the petitioners and parties who requested a waiver, as well as that submitted in comments. We have considered all information before us, including an analysis developed by EPA, as discussed below. Our technical analysis is relevant to all of the individual waiver requests. Based on the entire record before it, EPA has determined that each of the petitions and requests should be denied. In this decision EPA addresses each of the requests and petitions it has received to date. Therefore, EPA does not find itself in the situation posited by the commenters where some of the individual petitions are determined to satisfy the criteria for a waiver and other petitions do not. Rather, EPA has determined that each of the petitions should be denied.

3. Other Comments Related to EPA's Administrative Process

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.13 Commenters argue that had EPA applied such criteria, EPA “would not have even sought comment on the state petitions submitted this year.”14 Commenters further argued that because the petitions submitted in 2012 fail to meet the criteria put forth by EPA in 2008, EPA “may not grant a waiver as the public has been deprived of the opportunity to comment on the basis for granting a waiver” of the RFS.15

13EPA-HQ-OAR-2012-0632-2357, EPA-HQ-OAR-2012-0632-2218.

14EPA-HQ-OAR-2012-0632-2218.

15EPA-HQ-OAR-2012-0632-2218.

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 droughtconditions before making a decision to either grant or deny a waiver. The many important public submissions in response to EPA's solicitation of comment have affirmed the importance of addressing the waiver issue in a prompt and transparent fashion.

IV. Key Interpretive Issues

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.16 To the extent relevant to the waiver requests before it, EPA has applied this interpretation in reaching a decision on the waiver requests.

16Section 211(o)(7) reads, in relevant part, that the “Administrator * * * may waive the [RFS] requirements * * * by reducing thenational quantityof renewable fuel * * *”. Emphasis added.

V. Technical Analysis

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.

1. Methodology (a) Analytical Model

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.17

1773 FR 47173 (August 13, 2008).

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.18 Fourth, the ISU model was designed to be easily and regularly updated with the most recently available data, such as USDA's World Agricultural Supply and Demand Estimates (WASDE) and the Energy Information Administration's (EIA) Short Term Energy Outlook (STEO) reports, making it useful for analysis looking at fairly short time frames (e.g., within one year into the future).19, 20 Finally, we note that the ISU model has been used in analytical work conducted outside EPA; reports based on such work are and have been available in the public domain for review. We are using a model, in other words, that has been subjected to external scrutiny independent of our own analysis. By way of example, many commenters cited a non-EPA study that used the ISU model and same basic approach we adopt here to analyze potential impacts of a waiver in 2012.21 EPA is not aware

of any significant technical criticism of the ISU model itself.22

18For a recent example of this documentation, see: Babcock, B. “Updated Assessment of the Drought's Impacts on Crop Prices and Biofuel Production.” (“Babcock-Iowa State.”) Center for Agricultural and Rural Development, CARD Policy Brief 12-PB 8, August 2012, available in the docket and athttp://www.card.iastate.edu/policy_briefs/display.aspx?id=1169.

19 http://www.usda.gov/oce/commodity/wasde/.

20 http://www.eia.gov/forecasts/steo/.

21Babcock-Iowa State.

22The assumptions and inputs used within any model are of critical importance to modeled results, and we explain our selection of key inputs below.

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.23 The analysis simulates 500 scenarios, and for each one the model independently picks a value for each exogenous factor (such as U.S. corn yield) by randomly selecting from a probability distribution curve for that factor. Since the probability of the specific value of a given corn yield is built into the distribution curve for corn yields, the greater the probability of a certain corn yield, the more likely it is that the model will pick that value for any scenario. The result is that the distribution of the random draws for each exogenous factor fairly reflects the probability of the various uncertain variables. For each of the 500 scenarios, the model projects ethanol production and the prices of corn, ethanol, and blended fuel based on the values picked for the exogenous factors for that run. As mentioned above, we ran the model with and without a waiver, modeling 500 different scenarios, to assess the impact of a waiver.

23These variables are called exogenous factors, or uncertain variables. The gasoline price put into the model is a “petroleum only” price, meaning that it represents a gallon of gasoline that contains no ethanol.

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.24 We discuss the issue of refiner flexibility more fully in Section V.1.d below. Further, as detailed in Section V.1.c below, the model utilizes EPA estimates regarding excess, or “rollover” RINs, that will be available for use for compliance purposes in the 2012/2013 corn marketing year time period. The time period analyzed is discussed in Section V.1.b below. The estimates of rollover RINs are based on information submitted to EPA related to RIN generation. Additional details on the model changes and assumptions made for EPA's analysis are included in the docket.25

24See memo to the docket from the Department of Energy on ethanol demand for further information.

25See memos to the docket describing the ISU model (“Description of Iowa State University Stochastic Model”) and detailing EPA modeling results (“EPA Stochastic Modeling Results”) for more information.

(b) Scope of Technical Analysis

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.26 EPA compared circumstances with and without a waiver to identify the impact properly associated with the use of corn ethanol in the implementation of the RFS program for the 2012/2013 corn marketing year.27

26Note that the RFS program does not require that this volume of renewable fuel be met through use of corn based ethanol; any other renewable fuel can also satisfy the requirement.

27While some of the requests for a waiver do discuss a “whole or partial” waiver, our analysis focuses on a waiver of the full amount between the advanced biofuel requirement and the total renewable fuel requirement. Analyzing scenarios with and without the volume requirements in place helps evaluate the full impacts of the RFS program. Because we find that it is unlikely that the RFS requirements are having an impact in the time period analyzed, we do not address the question of a partial waiver. If waiving the entire volume requirement were to have no impact, then we would not expect waiving just a portion of the requirements to have an impact.

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.28 Commenters state that a waiver granted for some or all of the 2013 RFS compliance year would make more RINS available for use in 2014, when the RFS standards are higher, and that such a waiver would provide “relief” in 2013/2014. In considering the time frame used for this technical analysis, EPA recognizes that we have discretion in determining the appropriate time period to analyze. In this case, however, and as described above, we focus our analysis on the 2012/2013 corn marketing years as that is the time period where the requesters claim that implementation of the RFS volume requirements would severely harm the economy. Evaluating whether implementation of the RFS volume requirements would severely harm the economy after the end of the 2012/2013 corn marketing year would require a new set of assumptions regarding future crop yields, gasoline costs, refining market behavior, and other parameters, which can be projected but are less certain at this time.29 EPA believes that evaluating the potential impacts of implementation of the RFS volume requirements in 2013/2014 should take into account information on the 2013/2014 corn crop, as well as updates on other information used in the analysis. While it is possible to look over a longer time period, as some of the studiessubmitted to EPA attempt to do,30 assessing impacts over a longer time period introduces an additional set of variables that increase the uncertainty of any analytical results.

28For example, see comments submitted by National Pork Producers Council, available at EPA-HQ-OAR-2012-0632-2209, stating that “benefits of [a] waiver do not need to coincide with waiver period” at 26.

29For example, using gasoline prices for longer-term projections necessarily involves a higher degree of uncertainty. The same goes for projections related to crop yields.

30See, for example, “Renewable Fuel Standard Waiver Options during the Drought of 2012,” Food and Agricultural Policy Research Institute, University of Missouri, Report #11-12, October 12, (“FAPRI-Missouri”), available in the docket.

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.31 Other commenters suggested that EPA should grant a waiver for two years. The statute provides that a waiver granted under section 211(o)(7) of the Act “shall terminate after 1 year, but may be renewed by the Administrator after consultation with the Secretary of Agriculture and the Secretary of Energy.” EPA interprets this provision to mean that Congress intended the length of time for which a waiver should be granted to be one year, and that EPA may consider, in consultation with USDA and DOE, whether the period should be extended. Such consultation would be in the context of evaluating the economic impacts of the initial waiver as well as whether severe economic harm is still being caused by implementation of the RFS volume requirements. EPA does not need to decide now the scope of its authority for a renewal of a waiver, especially since EPA is denying the waiver requests that are before it. EPA clearly has authority to grant a waiver for a period of one year only, and any renewal would need to be the subject of a separate, if related, action.

31National Pork Producers Council comments at EPA-HQ-OAR-2012-0632-2209.

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.32 EPA chose to focus our technical analysis on conventional ethanol, corn prices, and related impacts primarily because the requesting States and other parties as well as commenters focused the overwhelming majority of their discussion on ethanol production, corn price changes, and subsequent impacts from those increased corn prices on industries that use corn as an input (e.g., feed, livestock, and poultry industries). These parties assert that the RFS is creating demand for corn for use in production of transportation fuel, and that reducing that demand via a waiver would result in making additional corn available for other end uses and reduce prices of corn. Because the focus of the requesting parties is on corn and corn ethanol, we believe it is reasonable to similarly concentrate our technical analysis on the impacts of a waiver affecting the portion of the total renewable fuel mandate that is currently satisfied with conventional renewable fuel RINs, the majority of which represent corn-based ethanol.

32See, for example, comment from Chevron at EPA-HQ-OAR-2012-0632-2306.

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.33 While EPA did not conduct its own technical analysis of these issues, EPA considered the technical analysis and other information submitted by commenters, and has determined that a waiver should not be granted for the RFS biomass-based diesel volumes. We discuss the biomass-based diesel and cellulosic volume requirements in section V.6.

33See, for example, the waiver request letter from the Governor of Utah, at EPA-HQ-OAR-2012-0632-2486, requesting a waiver “as to have the maximum impact on the price of corn and soybeans * * *”.

(c) Availability of Rollover RINs

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.34 For purposes of the current analysis, the number of rollover RINs available during the 2012/2013 marketing year affects the impact of implementation of the RFS volume requirements in 2013.

3472 FR 23935 (May 1, 2007).

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), EPAprojects that obligated parties will collectively be able to roll over 2 to 3 billion 2012 vintage RINs into the 2013 compliance period. EMTS currently reports that approximately 3.5 billion 2011 vintage D6 RINs are available for use towards 2012 compliance. As discussed above, no more than 20 percent of a given year's renewable fuel standard can be met with RINs from the previous year.35 That requirement is 15.2 billion gallons in 2012, meaning that as many as 3.04 billion 2011 RINs can be carried over for 2012 compliance.36 Since these 2011 vintage RINs expire at the end of the 2012 compliance period, obligated parties have a strong incentive to use these RINs first, carrying over any excess 2012 RINs into the 2013 compliance period. Based on this incentive and supported by conversations with industry and governmental stakeholders, EPA believes that obligated parties will utilize the maximum possible amount of 2011 RINs (i.e., 3.04 billion RINs out of a total 3.46 billion RINs available) for 2012 compliance and not let them expire.

3540 CFR 80.1427.

363.04 billion RINs is 20 percent of the total renewable fuel requirement for 2012 (i.e., 15.2 billion gallons).

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.37 If monthly RIN generation holds constant at October levels for the rest of 2012, rollover of 2012 vintage RINs to 2013 would likely exceed 2.6 billion. If RIN generation increases in November and December of 2012, as it did in both 2010 and 2011, rollover RIN availability would likely exceed 2.7 billion and could potentially be even higher. Thus in all of these scenarios, it is expected that at least 2.0 billion rollover RINs will be available for the 2013 compliance year. Further information on RIN rollover projections is also available in the docket.38

37Even if D6 RIN generation declines by 10 percent monthly in November and December of 2012, we expect that the number of 2012 vintage D6 RINs available after obligated parties fulfill their 2012 compliance obligations would still exceed 2 billion, and would likely exceed 2.5 billion. See “RIN Rollover” memo in the docket for more information.

38See “RIN Rollover” memo in the docket.

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.39

39See Babcock-Iowa State. See also Purdue University/Farm Foundation study,”Potential Impacts of a Partial Waiver of the Ethanol Blending Rules,” EPA-HQ-OAR-2012-0632-0025.

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.

(d) Flexibility in the Refining Sector

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.40

40See Department of Energy memo on ethanol demand, available in the docket, for further information. See also EPA memo, “Economics of Ethanol Blending and Refining Sector Flexibilities,” available in the docket.

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 87-93.41 Ethanol also has a value as a gasoline extender when blended into the gasoline pool. Other properties of ethanol, such as its volatility and low sulfur and benzene content, influence its value to refiners. Each refiner is expected to make decisions about ethanol blending independently, in light of the value they place on these factors and the complexity and uniqueness of each refinery. Where the blending of ethanol is profitable to refiners we expect that they would continue to blend ethanol into the gasoline pool even in the absence of a renewable fuel requirement.42

41Octane rating or octane number is a standard measure of the performance of a motor or aviation fuel. The higher the octane number, the more compression the fuel can withstand before detonating.

42EPA acknowledges that the blending economics for ethanol are significantly different for E10 and E85. Our ethanol demand curve takes these differences into consideration, resulting in large drop in the ethanol to gasoline price ratio at the volume of ethanol that corresponds to the E10 blendwall.

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.43 At current ethanol and crude oil prices, the blending of ethanol into gasoline is an economically beneficial practice for refiners, and based on EIA forecasts this is expected to continue through at least 2013. However if that were to change and blending ethanol into gasoline was no longer an economically beneficial practice for refiners, we believe that the challenges at both the refinery level and in the refined product distribution system would be significant deterrents to reductions in ethanol blending in response to a one-year waiver. Studies conducted by independent organizations such as Morgan Stanley and Hart Energy, among others, support our assumption that refiners would be limited in their ability to reduce ethanol blending if a one year waiver of the RFS requirements is granted under current economic circumstances.44 For example, Morgan Stanley argues that there would be significant impediments to moving away from ethanol because it is widely available and is the least expensive source of octane/oxygenates for most refineries. Similarly, Hart Energy estimates that ethanol's octane value and the cost of partially replacing ethanol use will limit the economic attractiveness to refiners of using less ethanol even with a waiver. They conclude that because an RFS waiver cannot force a reduction in domestic ethanol usage or exports, a waiver would likely have a small, if any, effect on reducing corn prices based on the continued demand for ethanol under current market economics.

43We note that our analysis does take into account different fuels where appropriate, including imported ethanol derived from sugarcane.

44Morgan Stanley, “Ethanol Demand a Function of Economics, Not RFS,” August 7, 2012. Hart Energy Special Report, “U.S.: RFS Waiver Unlikely to Affect Ethanol Use,” October 12, 2012. Both analyses are available in the docket.

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.45 Though we did receive some comment arguing that refiners could make operational changes quickly, commenters provided little evidence upon which to assess this claim. These comments are likely based on historical practices when splash blending of ethanol was much more prevalent and refining and distribution had not optimized toward the use of ethanol.

45Comments submitted by American Petroleum Institute, EPA-HQ-OAR-2012-0632-2240, Chevron, EPA-HQ-OAR-2012-0632-2306, and Marathon Petroleum Company, EPA-HQ-OAR-2012-0632-1968.

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.46 These commenters stated that doing so would allow the refining industry sufficient time to address the operational and logistical challenges mentioned in the previous paragraphs and be necessary to result in reduced ethanol demand and consequent relief from high corn prices to affected industries. While we recognize that analyzing a longer period could affect the results of our modeling, EPA did not conduct such an analysis here for the reasons discussed above, including the high uncertainty involved in projecting relevant conditions further into the future. As such our technical analysis is based on the impacts of implementation and a potential waiver over a period of one year.

46See for example National Chicken Council comments, EPA-HQ-OAR-2012-0632-1994 and Grocery Manufacturers Association comments, EPA-HQ-OAR-2012-0632-2341.

2. Projected Impact of Implementation of the Renewable Fuel Standard

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