By Jean-Cyril (JC) Walker and Adrienne M. Timmel
Over the past few weeks the U.S. Environmental Protection Agency (“EPA”) finalized several rules affecting its Renewable Fuel Standard (“RFS”) Program. On July 18, 2014, EPA finalized its rules concerning the Renewable Identification Number (“RIN”) Quality Assurance Program, which is intended to provide RIN purchasers an affirmative defense to civil liability should EPA determine that such RINs were invalidly generated. On the same day, EPA also approved additional feedstocks that will expand opportunities to produce cellulosic biofuel, but imposed more stringent eligibility criteria for certain existing feedstock categories. Lastly, on August 8, 2014, EPA issued an extension to the 2013 compliance reporting deadline, which will allow obligated parties time to consider 2014 needs before deciding how to allocate RINs to the 2013 compliance year.
I. Finalized Voluntary Quality Assurance Program
The Quality Assurance Program, promulgated on July 18, 2014, seeks to stabilize the RIN market following several massive RIN fraud cases by creating a third-party auditing scheme.1 Under this final rule, renewable fuel producers will have the option to sell any RINs generated after January 1, 2015, as verified pursuant to an EPA-approved third-party quality assurance plan (“QAP”). The benefit of these “Q-RINs” is that purchasers will be able to assert an affirmative defense should EPA subsequently determine that these RINs were invalidly generated. The ability to assert an affirmative defense is critical given the Agency’s long-standing buyer-beware policy with regards to RIN purchasers. Accordingly, the use of Q-RINs should provide obligated parties with a significant insurance policy against fraud, although such RINs will likely come at a premium.
As we discuss in greater detail here, the proposed rule had envisioned a two-tier QAP, whereby the most protective QAP would impose a RIN
replacement obligation on the auditing company subject to extensive monitoring requirements. The final rule provides for a less stringent third-party auditing program. It includes quarterly monitoring of production and RIN-generation data, and biannual site inspections that can be reduced to once a year through the use of continuous remote-sensor monitoring. During the proposed rulemaking, EPA had approved several QAPs as a stop-gap pending the final rule. The “A-RINs” and “B-RINs” verified under those interim QAPs will be afforded an affirmative defense through December 31, 2014.
Beginning January 1, 2015, the responsibility will fall on the obligated party to replace any invalid RINs used for compliance. However, for the years 2014, 2015, and 2016, EPA has excused obligated parties from replacing invalid RINs that represent the first two percent of a party’s renewable volume obligation (“RVO”). This limited exemption will apply separately to each of the four RFS categories (i.e., cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel) and is intended to make obligated parties more willing to buy Q-RINs from smaller, less well-known biofuel producers. EPA also relieved some of the time pressure associated with asserting an affirmative defense by extending the EPA notification deadline August 12, 2014 from one business day of discovering the invalid RINs to five business days.
This rule also makes critical changes to the structure of the RFS Program. First, the rule shields obligated parties from liability for using validly generated RINs that were improperly separated downstream of the producer to fulfil their RVO. Second, renewable fuel producers must now designate the intended use of the fuel at the point of RIN generation so that biofuels can only be used for purposes contemplated by the Clean Air Act. As a result, any person seeking to use renewable fuel other than as transportation fuel, heating oil or jet fuel will have to retire an appropriate number and type of RINs. Finally, companies must retire RINs generated for renewable fuel that is then exported from the U.S. to avoid inflation of the RIN market. Importantly, EPA decided not to finalize controversial amendments that would make certain RFS registration and reporting information public, accepting comments that such information may be proprietary and could result in harm to the competitive positions of individual companies.
II. Feedstocks Rulemaking
On July 18, 2014, EPA also promulgated a rule expanding the types of feedstocks that may be used to produce renewable fuel for which RINs can be generated.2 Under the final rule the Agency now recognizes biogas from landfills, municipal waste-water treatment facility digesters, agricultural digesters, and separated municipal solid waste digesters as suitable for producing compressed natural gas or liquefied natural gas. Companies can also use these feedstocks to produce renewable electricity for use in electric vehicles. In both cases, the fuel qualifies for cellulosic biofuel RINs.3
Although the Agency expanded the categories for acceptable cellulosic biofuel feedstocks, it raised the threshold for cellulosic biomass content to 75%. When cellulosic biofuel is made from feedstocks containing less than 75% cellulose, hemicellulose or lignin (measured on a dry mass basis), it is only eligible for a proportionate amount of RINs. Producers relying on biomass with less than 75% cellulosic content will have to comply with new registration, testing, recordkeeping and reporting requirements that allow EPA to verify the formula used to apportion RINs.
In addition, EPA revised the definition for “crop residue” as follows:
Crop residue means biomass left over from the harvesting or processing of planted crops from existing agricultural land and any biomass removed from existing agricultural land that facilitates crop management (including biomass removed from such lands in relation to invasive species control or fire management), whether or not the biomass includes any portion of a crop or crop plant. Biomass is considered crop residue only if the use of that biomass for the production of renewable fuel has no significant impact on demand for the feedstock crop, products produced from that feedstock crop, and all substitutes for the crop and its products, nor any other impact that would result in a significant increase in direct or indirect GHG emissions.4
It appears the Agency added the bolded language to address concerns raised by the agricultural industry regarding the RFS Program’s impact on food crop production. This rule further clarifies that crop residue is viewed as diverting waste from crop production. In EPA’s view, a crop residue “need not be completely devoid of value to meet these criteria,” but “there should be a notable difference in the value of the primary product and the value of the residue.”5 In addition, EPA has revised the RFS registration process to require producers to identify the specific crop material proposed fur use and record and report to EPA the quantities of each type of crop material used.
This rule also made structural changes to the RFS Program. First, it doubled the threshold for small blenders of renewable fuel to 250,000 gallons. The Agency also codified its long-standing enforcement policy that each day an invalid RIN remains available for use is a separate violation.
III. Extension of the 2013 Compliance Report Deadline
On August 8, 2014, EPA promulgated a direct final rule extending the September 30, 2014, deadline for submitting annual reports demonstrating compliance with the 2013 RFS.6 This rule is intended to provide relief to obligated parties until EPA issues a final rule establishing the 2014 renewable fuel percentage standards. The compliance report would have been due February 28, 2014, but because EPA is late in issuing the 2014 standards, it has extended the deadline. This is important because the RFS Program allows companies to roll RINs over to the next compliance year, so this extension will allow companies to make informed decisions about how to allocate their RINs between the 2013 and 2014 compliance years (e.g., whether to use banked RINs, purchase new RINs, or export fuel to avoid the RIN requirement, etc.). Once EPA promulgates the 2014 standards, companies will have 30 days to
submit their 2013 compliance report and 90 days to submit the associated attest engagement report.
This action also highlights EPA’s longstanding struggle in complying with the RFS Program requirements set forth in the Clean Air Act. Under the Act, the Agency is required to promulgate the renewable fuel percentage standards by November 30th of the year preceding their applicability.7 The Agency has repeatedly missed this deadline, and its persistent delays continue to contribute to significant market uncertainty.
To discuss these rules or any other aspect of EPA’s fuels regulations, please contact Jean-Cyril (JC) Walker (email@example.com, (202) 434-4181) or Adrienne M. Timmel (firstname.lastname@example.org, (202) 434-4164).
1 See “RFS Renewable Identification Number (RIN) Quality Assurance Program,” 79 Fed. Reg. 42,078 (Jul. 18, 2014).
2 See “Regulation of Fuels and Fuel Additives: RFS Pathways II, and Technical Amendments to the RFS Standards and E15 Misfueling Mitigation Requirements,” 79 Fed. Reg. 42,128 (Jul. 18, 2014).
3 Note that the Agency deferred making a final determination on whether to approve new feedstocks for
advanced butanol, as well as the production of renewable diesel, naphtha and renewable gasoline from biogas.
4 79 Fed. Reg. at 42,159 (emphasis added) (to be codified at 40 C.F.R. § 80.1401).
5 See 79 Fed. Reg. at 42,146.
6 See “Regulation of Fuels and Fuel Additives: Extension of Compliance and Attest Engagement Reporting Deadlines for 2013 Renewable Fuel Standards,” 79 Fed. Reg. 46,353 (Aug. 8, 2014).
7 42 U.S.C. § 7545(o)(3)(B ).
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