Renewable Fuel Standard Program: Standards for 2017 and Biomass-Based Diesel Volume for 2018

Federal RegisterDec 12, 2016

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2016-0004; FRL-9955-84-OAR]

RIN 2060-AS72

Renewable Fuel Standard Program: Standards for 2017 and Biomass-Based Diesel Volume for 2018

AGENCY:

Environmental Protection Agency (EPA).

ACTION:

Final rule.

SUMMARY:

Under section 211 of the Clean Air Act, the Environmental Protection Agency (EPA) is required to set renewable fuel percentage standards every year. This action establishes the annual percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel that apply to all motor vehicle gasoline and diesel produced or imported in the year 2017. Relying on statutory authority that is available when projected cellulosic biofuel production volumes are less than the applicable volume specified in the statute, the EPA is setting volume requirements for cellulosic biofuel, advanced biofuel, and total renewable fuel that are below the statutory applicable volumes, but which are nevertheless significantly higher than past requirements. The final rule also establishes the four percentage standards applicable to obligated parties, namely producers and importers of gasoline and diesel, based on the corresponding volume requirements. The final standards are expected to continue driving the market to overcome constraints in renewable fuel distribution infrastructure, which in turn is expected to lead to substantial growth over time in the production and use of renewable fuels. In this action, we are also establishing the applicable volume of biomass-based diesel for 2018.

DATES:

This final rule is effective on February 10, 2017.

ADDRESSES:

The EPA has established a docket for this action under Docket ID No. EPA-HQ-OAR-2016-0004. All documents in the docket are listed on the

http://www.regulations.gov

Web site. Although listed in the index, some information is not publicly available,

e.g.,

CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available electronically through

http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

Julia MacAllister, Office of Transportation and Air Quality, Assessment and Standards Division, Environmental Protection Agency, 2000 Traverwood Drive, Ann Arbor, MI 48105; telephone number: 734-214-4131; email address:

macallister.julia@epa.gov.

SUPPLEMENTARY INFORMATION:

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

Category

NAICS

codes

SIC

codes

Examples of potentially regulated entities

Industry

324110

2911

Petroleum Refineries.

Industry

325193

2869

Ethyl alcohol manufacturing.

Industry

325199

2869

Other basic organic chemical manufacturing.

Industry

424690

5169

Chemical and allied products merchant wholesalers.

Industry

424710

5171

Petroleum bulk stations and terminals.

Industry

424720

5172

Petroleum and petroleum products merchant wholesalers.

Industry

221210

4925

Manufactured gas production and distribution.

Industry

454319

5989

Other fuel dealers.

North American Industry Classification System (NAICS).

Standard Industrial Classification (SIC) system code.

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

FOR FURTHER INFORMATION CONTACT

section.

Outline of This Preamble

I. Executive Summary

A. Purpose of This Action

B. Summary of Major Provisions in This Action

1. Approach to Setting Volume Requirements

2. Cellulosic Biofuel

3. Advanced Biofuel

4. Total Renewable Fuel

5. Biomass-Based Diesel

6. Annual Percentage Standards

7. Assessment of Aggregate Compliance

II. Authority and Need for Waiver of Statutory Applicable Volumes

A. Statutory Authorities for Reducing Volume Targets

1. Cellulosic Waiver Authority

2. General Waiver Authority

3. General Comments Related to Waiver Authorities

B. Treatment of Carryover RINs

1. Updated Projection of Carryover RIN Volume

2. EPA's Decision

III. Cellulosic Biofuel Volume for 2017

A. Statutory Requirements

B. Cellulosic Biofuel Industry Assessment

1. Potential Domestic Producers

2. Potential Foreign Sources of Cellulosic Biofuel

3. Summary of Volume Projections for Individual Companies

C. Projection From the Energy Information Administration

D. Cellulosic Biofuel Volume for 2017

IV. Advanced Biofuel Volume for 2017

A. Volumetric Limitation on Use of the Cellulosic Waiver Authority

B. Determination of Reasonably Attainable and Appropriate Volumes

1. Imported Sugarcane Ethanol

2. Biodiesel and Renewable Diesel

3. Other Advanced Biofuel

4. Total Advanced Biofuel

V. Total Renewable Fuel Volume for 2017

A. Volumetric Limitation on Use of the Cellulosic Waiver Authority

B. Assessing Adequacy of Supply

1. Ethanol

i. E0

ii. E15

iii. E85

iv. Total Ethanol

2. Biodiesel and Renewable Diesel

i. Feedstock Availability

ii. Biodiesel and Renewable Diesel Production Capacity

iii. Biodiesel and Renewable Diesel Import Capacity

iv. Biodiesel and Renewable Diesel Distribution Capacity

v. Biodiesel and Renewable Diesel Retail Infrastructure Capacity

vi. Biodiesel and Renewable Diesel Consumption Capacity

vii. Biodiesel and Renewable Diesel Consumer Response

viii. Projected Supply of Biodiesel and Renewable Diesel in 2017

3. Total Renewable Fuel Supply

C. Market Responses to the Advanced Biofuel and Total Renewable Fuel Volume Requirements

D. Impacts of 2017 Standards on Costs

VI. Biomass-Based Diesel Volume for 2018

A. Statutory Requirements

B. Determination of Applicable Volume of Biomass-Based Diesel

1. BBD Production and Compliance Through 2015

2. Interaction Between BBD and Advanced Biofuel Standards

3. BBD Volume for 2018

C. Consideration of Statutory Factors for 2018

VII. Percentage Standards for 2017

A. Calculation of Percentage Standards

B. Small Refineries and Small Refiners

C. Final Standards

VIII. Assessment of Aggregate Compliance

A. Assessment of the Domestic Aggregate Compliance Approach

B. Assessment of the Canadian Aggregate Compliance Approach

IX. Public Participation

X. Statutory and Executive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review

B. Paperwork Reduction Act (PRA)

C. Regulatory Flexibility Act (RFA)

D. Unfunded Mandates Reform Act (UMRA)

E. Executive Order 13132: Federalism

F. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments

G. Executive Order 13045: Protection of Children From Environmental Health Risks and Safety Risks

H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use

I. National Technology Transfer and Advancement Act (NTTAA)

J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations, and Low-Income Populations

K. Congressional Review Act (CRA)

XI. Statutory Authority

I. Executive Summary

The Renewable Fuel Standard (RFS) program began in 2006 pursuant to the requirements in Clean Air Act (CAA) section 211(o) that were added through the Energy Policy Act of 2005 (EPAct). The statutory requirements for the RFS program were subsequently modified through the Energy Independence and Security Act of 2007 (EISA), resulting in the publication of major revisions to the regulatory requirements on March 26, 2010.

EISA's stated goals include moving the United States toward “greater energy independence and security, to increase the production of clean renewable fuels.” Today, nearly all of the approximately 142 billion gallons of gasoline used for transportation purposes contains 10 percent ethanol (E10), and a substantial portion of diesel fuel contains biodiesel.

75 FR 14670, March 26, 2010.

Renewable fuels represent an opportunity for the U.S. to move away from fossil fuels towards a set of lower lifecycle GHG transportation fuels, and the RFS program provides incentives for these lower lifecycle GHG fuels to grow and compete in the market. While renewable fuels include non-advanced (conventional) corn starch ethanol, which is the predominant renewable fuel in use to date, Congress envisioned the majority of growth from 2014 forward to come from advanced biofuels, as the conventional volumes remain constant in the statutory volume tables starting in 2015 while the advanced volumes continue to grow.

In this document we follow the common practice of using the term “conventional” renewable fuel to mean any renewable fuel that is not an advanced biofuel.

The statute includes annual volume targets, and requires EPA to translate those volume targets (or alternative volume requirements established by EPA in accordance with statutory waiver authorities) into compliance obligations that refiners and importers must meet every year. In this action, we are establishing the annual percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel that would apply to all gasoline and diesel produced or imported in 2017. We are also establishing the applicable volume of biomass-based diesel for 2018.

The standards we are setting are designed to achieve the Congressional intent of increasing renewable fuel use over time in order to reduce lifecycle GHG emissions of transportation fuels and increase energy security, while at the same time accounting for the real-world challenges that have slowed progress toward these goals. Those challenges have made the volume targets established by Congress for 2017 beyond reach for all fuel categories other than biomass-based diesel (BBD), for which the statute specifies only a minimum requirement of 1.0 billion gallons. In setting these standards for 2017, we have used the cellulosic waiver authority provision provided by Congress to establish volume requirements that will be lower than the statutory targets for fuels other than biomass-based diesel, but nevertheless represent significant growth from past years.

The 2017 volume requirements for advanced biofuel and total renewable fuel are higher than the levels we proposed in the NPRM, reflecting our assessment of updated information and a review of comments received. We are also finalizing the proposed volume requirement for BBD for 2018. This BBD volume requirement will continue to provide support for the BBD industry, and we expect that larger volumes of this fuel type are likely to be used to comply with the advanced biofuel requirement. The final volume requirements are shown in Table I-1 below. These final volumes, when considered together with the volumes established over the past several years of the RFS program, indicate that the RFS program is working to deliver steady, ambitious growth in the total amount of renewable fuel produced and used in the United States, consistent with Congressional intent.

Table I-1—Proposed and Final Volume Requirements

2017

Proposed

Final

2018

Proposed

Final

Cellulosic biofuel (million gallons)

312

311

n/a

Biomass-based diesel (billion gallons)

2.0

2.1

Advanced biofuel (billion gallons)

4.0

4.28

n/a

Renewable fuel (billion gallons)

18.8

19.28

n/a

All values are ethanol-equivalent on an energy content basis, except for BBD which is biodiesel-equivalent.

The 2017 BBD volume requirement was established in the 2014-2016 final rule (80 FR 77420, December 14, 2015).

Despite significant increases in renewable fuel use in the United States, real-world constraints, such as the slower than expected development of the cellulosic biofuel industry and constraints in the marketplace related to supply of certain biofuels to consumers, have made the timeline laid out by Congress for the growth in renewable fuel use (other than for BBD) impossible to achieve. These challenges continue, and are largely the same for 2017 as they were for 2016. However, a careful review of the comments we received in response to the May 31, 2016 Notice of Proposed Rulemaking (NPRM) and other information that has become available since May has led us to conclude that volume reductions for 2017 need not be as great as we had proposed. In light of the lower reductions necessary, in this final rule we rely exclusively on the cellulosic waiver authority to provide reductions in both advanced biofuel and total renewable fuel volumes. That is, we have determined that it is not necessary to provide an additional increment of volume reduction for total renewable fuels through use of the general waiver authority based on a finding of inadequate domestic supply, as we had done in the final rule establishing annual standards for 2014-2016 (“Renewable Fuel Standard Program: Standards for 2014, 2015, and 2016 and Biomass-Based Diesel Volume for 2017,” (hereinafter referred to as the “2014-2016 final rule”),

and as we also proposed to do in establishing standards for 2017.

80 FR 77420, December 14, 2015.

81 FR 34778, May 31, 2016.

We believe that the RFS program can and will drive renewable fuel use, and we have considered the ability of the market to respond to the standards we set when we assessed the amount of renewable fuel that can be reasonably attained in 2017. Therefore, while this final rule applies the tools Congress provided to make adjustments to the statutory volume targets in recognition of the constraints that exist today, we believe the standards we are setting in this action will drive growth in renewable fuels, particularly advanced biofuels, which achieve substantial lifecycle GHG emissions. In our view, while Congress recognized that supply challenges may exist as evidenced by the waiver provisions, it did not intend growth in the renewable fuels market to be stopped by those challenges, including those associated with the “E10 blendwall.”

The fact that Congress chose to mandate increasing and substantial amounts of renewable fuel clearly signals that it intended the RFS program to create incentives to increase renewable fuel supplies and overcome constraints in the market. The standards we are setting in this action will provide those incentives.

The “E10 blendwall” represents the volume of ethanol that can be consumed domestically if all gasoline contains 10% ethanol and there are no higher-level ethanol blends consumed such as E15 or E85.

The standards we are setting in this final rule are part of a collection of actions, in both the government and private sectors, to increase the use of renewable fuels. In addition to ongoing efforts to evaluate new pathways for RIN generation for advanced biofuels, we have recently proposed regulatory provisions that we believe will enhance the ability of the market to increase not only the production of advanced and cellulosic biofuels, but also the use of higher-level ethanol blends such as E15 and E85.

DOE and USDA are continuing to provide funds for the development of new technologies and expansion of infrastructure for higher ethanol blends, and the ethanol industry has also made efforts to expand the use of higher ethanol blends through its Prime the Pump program. These actions are expected to continue to help clear hurdles to support the ongoing growth in the use of renewable fuels in future years.

See the recently proposed Renewables Enhancement and Growth Support (REGS) Rule (81 FR 80828, November 16, 2016). More information about this proposed rule can be found at

https://www.epa.gov/renewable-fuel-standard-program/proposed-renewables-enhancement-and-growth-support-regs-rule.

A. Purpose of This Action

The national volume targets of renewable fuel that are intended to be achieved under the RFS program each year (absent an adjustment or waiver by EPA) are specified in CAA section 211(o)(2). The statutory volumes for 2017 are shown in Table I.A-1. The cellulosic biofuel and BBD categories are nested within the advanced biofuel category, which is itself nested within the total renewable fuel category. This means, for example, that each gallon of cellulosic biofuel or BBD that is used to satisfy the individual volume requirements for those fuel types can also be used to satisfy the requirements for advanced biofuel and total renewable fuel.

Table I.A-1—Applicable 2017 Volumes Specified in the Clean Air Act

[Billion gallons]

Cellulosic biofuel

5.5

Biomass-based diesel

≥1.0

Advanced biofuel

9.0

Renewable fuel

24.0

All values are ethanol-equivalent on an energy content basis, except values for BBD which are given in actual gallons.

Under the RFS program, EPA is required to determine and publish annual percentage standards for each compliance year. The percentage standards are calculated to ensure use in transportation fuel of the national “applicable volumes” of the four types of biofuel (cellulosic biofuel, BBD, advanced biofuel, and total renewable fuel) that are set forth in the statute or established by EPA in accordance with the Act's requirements. The percentage standards are used by obligated parties (generally, producers and importers of gasoline and diesel fuel) to calculate their individual compliance obligations. Each of the four percentage standards is applied to the volume of non-renewable gasoline and diesel that each obligated party produces or imports during the specified calendar year to determine their individual volume obligations with respect to the four renewable fuel types. The individual volume obligations determine the number of RINs of each renewable fuel type that each obligated party must acquire and retire to demonstrate compliance.

EPA is establishing the annual applicable volume requirements for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2017, and for BBD for 2018.

Table I.A-2 lists the statutory provisions and associated criteria relevant to determining the national applicable volumes used to set the percentage standards in this final rule.

The 2017 BBD volume requirement was established in the 2014-2016 final rule.

Table I.A-2—Statutory Provisions for Determination of Applicable Volumes

Applicable volumes

Clean air act reference

Criteria provided in statute for determination of applicable volume

Cellulosic biofuel

211(o)(7)(D)(i)

Required volume must be lesser of volume specified in CAA 211(o)(2)(B)(i)(III) or EPA's projected volume.

211(o)(7)(A)

EPA in consultation with other federal agencies may waive the statutory volume in whole or in part if implementation would severely harm the economy or environment of a State, region, or the United States, or if there is an inadequate domestic supply.

Biomass-based diesel

211(o)(2)(B)(ii) and (v)

Required volume for years after 2012 must be at least 1.0 billion gallons, and must be based on a review of implementation of the program, coordination with other federal agencies, and an analysis of specified factors.

211(o)(7)(A)

Advanced biofuel

211(o)(7)(D)(i)

If applicable volume of cellulosic biofuel is reduced below the statutory volume to the projected volume, EPA may reduce the advanced biofuel and total renewable fuel volumes in CAA 211(o)(2)(B)(i)(I) and (II) by the same or lesser volume. No criteria specified.

211(o)(7)(A)

Total renewable fuel

211(o)(7)(D)(i)

211(o)(7)(A)

As shown

in Table I.A-2, the statutory authorities allowing EPA to modify or set the applicable volumes differ for the four categories of renewable fuel. Under the statute, EPA must annually determine the projected volume of cellulosic biofuel production for the following year. If the projected volume of cellulosic biofuel production is less than the applicable volume specified in section 211(o)(2)(B)(i)(III) of the statute, EPA must lower the applicable volume used to set the annual cellulosic biofuel percentage standard to the projected production volume. In Section III of this final rule, we present our analysis of cellulosic biofuel production and the final applicable volume for 2017. This analysis is based on information provided by the Department of Energy's Energy Information Administration (EIA), an evaluation of producers' production plans and progress to date following discussions with cellulosic biofuel producers, and is informed by comments we received in response to the NPRM.

Section 211(o)(7)(E) also authorizes EPA in consultation with other federal agencies to issue a temporary waiver of applicable volumes of BBD where there is a significant feedstock disruption or other market circumstance that would make the price of BBD fuel increase significantly.

With regard to BBD, Congress chose to set aside a portion of the advanced biofuel standard for BBD, and CAA section 211(o)(2)(B) specifies the applicable volumes of BBD to be used in the RFS program only through year 2012. For subsequent years the statute sets a minimum volume of 1 billion gallons, and directs EPA, in coordination with the U.S. Departments of Agriculture (USDA) and Energy (DOE), to determine the required volume after review of implementation of the renewable fuels program and consideration of a number of factors. The BBD volume requirement must be established 14 months before the year in which it will apply. In the 2014-2016 final rule we established the BBD volume for 2017. In Section VI of this preamble we discuss our assessment of statutory and other relevant factors and our final volume requirement for BBD for 2018, which has been developed in coordination with USDA and DOE. We are increasing the required volume of BBD so as to provide continued support to that important contributor to the pool of advanced biofuel while at the same time setting the volume requirement in a manner anticipated to provide continued incentive for the development of other types of advanced biofuel.

Regarding advanced biofuel and total renewable fuel, Congress provided several mechanisms through which those volumes could be reduced if necessary. If we reduce the applicable volume of cellulosic biofuel below the volume specified in CAA section 211(o)(2)(B)(i)(III), we also have the authority to reduce the applicable volumes of advanced biofuel and total renewable fuel by the same or a lesser amount. We refer to this as the “cellulosic waiver authority.” We may also reduce the applicable volumes of any of the four renewable fuel types using the “general waiver authority” provided in CAA section 211(o)(7)(A) if EPA, in consultation with USDA and DOE, finds that implementation of the statutory volumes would severely harm the economy or environment of a State, region, or the United States, or if there is inadequate domestic supply. Sections II, IV, and V of this final rule describe our use of the cellulosic waiver authority alone to reduce volumes of advanced biofuel and total renewable fuel, and our assessment that the resulting volumes are reasonably attainable. As described in the NPRM, and consistent with the views that we expressed in the 2014-2016 final rule, we continue to believe that reductions in the statutory targets for 2017 are necessary. However, in light of our review of updated information and consideration of comments, we are making those reductions under the cellulosic waiver authority alone and are not finalizing an additional

increment of reduction for total renewable fuel based on a finding of inadequate domestic supply under the general waiver authority as we had proposed. Despite the reductions we are finalizing today, we continue to be mindful that the primary objective of the statute is to increase renewable fuel use over time. While progress has taken longer than Congress anticipated, we note that today's rule provides for 15 billion gallons of conventional renewable fuel, the implied level envisioned under the statute for 2017, while also providing for a substantial increase in the required volume of advanced biofuel over past volume requirements.

B. Summary of Major Provisions in This Action

This section briefly summarizes the major provisions of this final rule. We are establishing applicable volume requirements and associated percentage standards for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2017, as well as the percentage standard for BBD for 2017, and the applicable volume requirement for BBD for 2018.

1. Approach to Setting Volume Requirements

The approach we have taken in this final rule is essentially the same as that presented in the NPRM and in the 2014-2016 final rule with regard to establishing the cellulosic biofuel volume requirement, and the use of the cellulosic waiver authority to reduce advanced biofuel and total renewable fuel. However, it differs in that we have not found it necessary to also use the general waiver authority to provide an additional increment of reduction with respect to total renewable fuel. While in the NPRM we proposed to determine the maximum reasonably achievable supply of total renewable fuel, consistent with the general waiver authority's “inadequate domestic supply” criterion, in this final rule we have instead identified the total renewable fuel volume that results from use of the cellulosic waiver authority, and have determined that this volume of total renewable fuel is reasonably attainable. In this assessment, we took into account the same constraints in the supply of renewable fuel we noted in the NPRM, but have come to a different result with respect to necessary volume reductions in light of updated information and consideration of comments.

Section II provides a general description of our approach to setting volume requirements in today's rule, including a review of the statutory waiver authorities and our consideration of carryover RINs. Section III provides our assessment of the 2017 cellulosic biofuel volume based on a projection of production that reflects a neutral aim at accuracy. Sections IV and V describe our assessment of reasonably attainable volumes of advanced biofuel and total renewable fuel, respectively. Finally, Section VI provides our determination regarding the 2018 BBD volume requirement, and reflects an analysis of a set of factors stipulated in CAA section 211(o)(2)(B)(ii).

2. Cellulosic Biofuel

In the past several years the cellulosic biofuel industry has continued to make progress towards increased commercial scale production. Cellulosic biofuel production reached record levels in 2015, driven largely by compressed natural gas (CNG) and liquefied natural gas (LNG) derived from biogas, and is expected to exceed these volumes in 2016. Cellulosic ethanol, while produced in much smaller quantities than CNG/LNG derived from biogas, was produced consistently on a commercial scale for the first time in 2015. Cellulosic ethanol production levels increased from existing facilities in 2016, and significant work continues to be done to enable the production of cellulosic ethanol at new facilities in 2017 and beyond. Available data suggest that the production levels for both cellulosic CNG/LNG and cellulosic ethanol in 2016 will exceed by a significant margin the levels produced in 2015. In this rule we are establishing a cellulosic biofuel volume requirement of 311 million ethanol-equivalent gallons for 2017 based on the information we have received regarding individual facilities' capacities, production start dates and biofuel production plans, information received in public comments, input from other government agencies, and EPA's own engineering judgment.

As part of estimating the volume of cellulosic biofuel that will be made available in the U.S. in 2017, we considered all potential production sources by company and facility. This included facilities still in the commissioning or start-up phases, as well as facilities already producing some volume of cellulosic biofuel.

From this universe of potential cellulosic biofuel sources, we identified the subset that is expected to produce commercial volumes of qualifying cellulosic biofuel for use as transportation fuel, heating oil, or jet fuel by the end of 2017. To arrive at projected volumes, we collected relevant information on each facility. We then developed projected production ranges based on factors such as the status of the technology being used, progress towards construction and production goals, facility registration status, production volumes achieved, and other significant factors that could potentially impact fuel production or the ability of the produced fuel to qualify for cellulosic biofuel Renewable Identification Numbers (RINs). We also used this information to group these companies based on production history and to select a value within the aggregated projected production ranges that we believe best represents the most likely production volume from each group of companies in 2017. Further discussion of these factors and the way they were used to determine our final cellulosic biofuel projection for 2017 can be found in Section III.

Facilities primarily focused on research and development (R&D) were not the focus of our assessment, as production from these facilities represents very small volumes of cellulosic biofuel, and these facilities typically have not generated RINs for the fuel they have produced.

3. Advanced Biofuel

The conditions that compelled us to reduce the 2016 volume requirement for advanced biofuel below the statutory target remain relevant in 2017. As for 2016, we investigated the ability of volumes of non-cellulosic advanced biofuels to backfill unavailable volumes of cellulosic biofuel in 2017, through domestic production or import. We took into account the substantial GHG emissions reduction required of advanced biofuels, the various constraints on supply of advanced biofuels, the ability of the standards we set to bring about market changes in the time available, and the potential impacts associated with diverting some feedstocks from current use to the production of biofuel. Based on these considerations and review of the comments received in response to the NPRM and other information that has become available, we have determined that a portion of the shortfall in cellulosic biofuel may appropriately be backfilled with advanced biofuel. We are exercising our cellulosic waiver authority to reduce the statutory applicable volume of advanced biofuel to a final volume requirement of 4.28 billion gallons for 2017. This is somewhat higher than the proposed level of 4.0 billion gallons. The applicable volume for advanced biofuel that we are establishing for 2017 will result in significant volume growth over the volume requirement for 2016, and will require the use of more non-

cellulosic advanced biofuel (3.97 billion gallons) than would have been required under the statutory targets (3.50 billion gallons).

4. Total Renewable Fuel

Following our determination of the appropriate volume reduction for advanced biofuel for 2017 using the cellulosic waiver authority, we applied the same volume reduction to the statutory target for total renewable fuel, resulting in a volume requirement of 19.28 billion gallons. We then evaluated this total renewable fuel volume to determine if it is reasonably attainable given assessments of attainable volumes of individual fuel types, including biodiesel, renewable diesel, ethanol (in the form of E10 or higher ethanol blends such as E15 or E85, taking into account demand for E0), and other renewable fuels. Based on comments received in response to the NPRM and other information that has become available, we have determined that a total renewable fuel volume of 19.28 billion gallons is reasonably attainable in 2017. There is, therefore, no need to use the general waiver authority to further reduce the total renewable fuel volume requirement due to a finding of inadequate domestic supply.

The general waiver authority can also be used under a determination that the RFS volumes would cause “severe economic or environmental harm.” As described in Section II.A.2 and in more detail in the response to comments document accompanying this rule, EPA does not believe that the record supports a finding of severe economic or environmental harm with respect to the volume requirements we are finalizing today.

5. Biomass-Based Diesel

In EISA, Congress specified increasing applicable volumes of BBD through 2012. Beyond 2012 Congress stipulated that EPA, in coordination with other agencies, was to establish the BBD volume taking into consideration implementation of the program to date and various specified factors, providing that the required volume for BBD could not be less than 1.0 billion gallons. For 2013, EPA established an applicable volume of 1.28 billion gallons. For 2014 and 2015 we established the BBD volume requirement to reflect the actual volume for each of these years of 1.63 and 1.73 billion gallons.

For 2016 and 2017, we set the BBD volume requirements at 1.9 and 2.0 billion gallons respectively.

The 2015 BBD standard was based on actual data for the first 9 months of 2015 and on projections for the latter part of the year for which data on actual use was not available at the time.

Given current and recent market conditions, the advanced biofuel volume requirement is driving the use of biodiesel and renewable diesel volumes over and above volumes required through the separate BBD standard, and we expect this to continue. Nevertheless, we continue to believe for 2018 that it is appropriate to set increasing BBD applicable volumes to provide a floor to support continued investment to enable increased production and use of BBD. In doing so we also believe in the importance of maintaining opportunities within the advanced biofuel requirement for growth in other types of advanced biofuel, such as renewable diesel co-processed with petroleum, renewable gasoline blend stocks, and renewable heating oil, as well as others that are under development.

Thus, based on a review of the implementation of the program to date and all the factors required under the statute, and in coordination with USDA and DOE, we are finalizing an increase in the applicable volume of BBD by 100 million gallons, to 2.1 billion gallons for 2018. We believe that this increase will support the overall goals of the program while also maintaining the incentive for development and growth in production of other advanced biofuels. Establishing the volumes at this level will encourage BBD producers to manufacture higher volumes of fuel that will contribute to the advanced biofuel and total renewable fuel requirements, while also leaving considerable opportunity within the advanced biofuel mandate for investment in and growth in production of other types of advanced biofuel with comparable or potentially superior environmental or other attributes.

6. Annual Percentage Standards

The renewable fuel standards are expressed as a volume percentage and are used by each producer and importer of fossil-based gasoline or diesel to determine their renewable fuel volume obligations. The percentage standards are set so that if each obligated party meets the standards, and if EIA projections of gasoline and diesel use for the coming year prove to be accurate, then the amount of renewable fuel, cellulosic biofuel, BBD, and advanced biofuel actually used will meet the volume requirements used to derive the percentage standards, required on a nationwide basis.

Four separate percentage standards are required under the RFS program, corresponding to the four separate renewable fuel categories shown in Table I.A-1. The specific formulas we use in calculating the renewable fuel percentage standards are contained in the regulations at 40 CFR 80.1405. The percentage standards represent the ratio of renewable fuel volume to projected non-renewable gasoline and diesel volume. The volume of transportation gasoline and diesel used to calculate the final percentage standards was provided by the Energy Information Administration (EIA). The final percentage standards for 2017 are shown in Table I.B.6-1. Detailed calculations can be found in Section VII, including the projected gasoline and diesel volumes used.

Table I.B.6-1—Final 2017 Percentage Standards

Cellulosic biofuel

0.173%

Biomass-based diesel

1.67%

Advanced biofuel

2.38%

Renewable fuel

10.70%

7. Assessment of Aggregate Compliance

By November 30 of each year we are required to assess the status of the aggregate compliance approach to land-use restrictions under the definition of renewable biomass for both the U.S. and Canada. In today's action we are providing the final announcements for these administrative actions.

As part of the RFS regulations, EPA established an aggregate compliance approach for renewable fuel producers who use planted crops and crop residue from U.S. agricultural land. This compliance approach relieved such producers (and importers of such fuel) of the individual recordkeeping and reporting requirements otherwise required of producers and importers to verify that such feedstocks used in the production of renewable fuel meet the definition of renewable biomass. EPA determined that 402 million acres of U.S. agricultural land was available in 2007 (the year of EISA enactment) for production of crops and crop residue that would meet the definition of renewable biomass, and determined that as long as this total number of acres is not exceeded, it is unlikely that new land has been devoted to crop production based on historical trends and economic considerations. We indicated that we would conduct an annual evaluation of total U.S. acreage that is cropland, pastureland, or conservation reserve program land, and that if the value exceeds 402 million acres, producers using domestically grown crops or crop residue to produce renewable fuel would be subject to individual recordkeeping and reporting to verify that their feedstocks meet the definition of renewable biomass. As described in Section VIII.A, based on data provided by the USDA and using the methodology in place since 2014,

we have estimated that U.S. agricultural land totaled approximately 380 million acres in 2016 and thus did not exceed the 2007 baseline acreage. This assessment means that the aggregate compliance provision can continue to be used in the U.S. for calendar year 2017.

On September 29, 2011, EPA approved the use of a similar aggregate compliance approach for planted crops and crop residue grown in Canada. The Government of Canada utilized several types of land use data to demonstrate that the land included in their 124 million acre baseline is cropland, pastureland or land equivalent to U.S. Conservation Reserve Program land that was cleared or cultivated prior to December 19, 2007, and was actively managed or fallow and non-forested on that date (and is therefore RFS2 qualifying land). As described in Section VIII.B, based on data provided by Canada, we have estimated that Canadian agricultural land totaled approximately 118.4 million acres in 2016 and thus did not exceed the 2007 baseline acreage. This assessment means that the aggregate compliance provision can continue to be used in Canada for calendar year 2017.

II. Authority and Need For Waiver of Statutory Applicable Volumes

The statute provides the EPA with the authority to reduce volume requirements below the applicable volume targets specified in the statute under specific circumstances. This section discusses those authorities and our use of the cellulosic waiver authority alone to set 2017 volume requirements for cellulosic biofuel, advanced biofuel, and total renewable fuel that are below the statutory volume targets.

A. Statutory Authorities for Reducing Volume Targets

In CAA section 211(o)(2), Congress specified increasing annual volume targets for total renewable fuel, advanced biofuel, and cellulosic biofuel for each year through 2022, and for biomass-based diesel through 2012, and authorized EPA to set volume requirements for subsequent years in coordination with USDA and DOE, and after consideration of specified factors. However, Congress also recognized that under certain circumstances it would be appropriate for EPA to set volume requirements at a lower level than reflected in the statutory volume targets, and thus provided waiver provisions in CAA section 211(o)(7).

1. Cellulosic Waiver Authority

Section 211(o)(7)(D)(i) of the CAA provides that if EPA determines that the projected volume of cellulosic biofuel production for a given year is less than the applicable volume specified in the statute, that EPA must reduce the applicable volume of cellulosic biofuel required to the projected production volume for that calendar year. In making this projection, EPA must take a “neutral aim at accuracy.”

API

EPA,

706 F.3d 474 (D.C. Cir. 2013). Pursuant to this provision, EPA has set the cellulosic biofuel requirement lower than the statutory volumes for each year since 2010. As described in Section III.D, the projected volume of cellulosic biofuel production for 2017 is less than the 5.5 billion gallon volume target in the statute. Therefore, for 2017, we are setting the cellulosic biofuel volume requirement at a level lower than the statutory applicable volume, in accordance with this provision.

Section 211(o)(7)(D)(i) also provides that “[f]or any calendar year in which the Administrator makes . . . a reduction [in cellulosic biofuel volumes], the Administrator may also reduce the applicable volume of renewable fuel and advanced biofuels . . . by the same or a lesser volume.” Using this authority, the reductions in total renewable fuel and advanced biofuel can be less than or equal to, but no more than, the amount of reduction in the cellulosic biofuel volume. EPA used this authority to reduce applicable volumes of advanced biofuel in 2014-16, and to reduce the total renewable fuel volumes in those years by an equal amount. We refer to authority in Section 211(o)(7)(D)(i) to waive volumes of advanced and total renewable fuel as the “cellulosic waiver authority.”

The cellulosic waiver authority was discussed by the United States Court of Appeals for the District of Columbia Circuit, in the context of its consideration of a judicial challenge to the rule establishing the 2013 annual RFS standards. As the court explained,

The Clean Air Act provides that if EPA reduces the cellulosic biofuel requirement, as it did here, then it `may also reduce' the advanced biofuel and total renewable fuel quotas `by the same or a lesser volume.' 42 U.S.C. 7545(o)(7)(D)(i). There is no requirement to reduce these latter quotas, nor does the statute prescribe any factors that EPA must consider in making its decision.

See id.

In the absence of any express or implied statutory directive to consider particular factors, EPA reasonably concluded that it enjoys broad discretion regarding whether and in what circumstances to reduce the advanced biofuel and total renewable fuel volumes under the cellulosic waiver provision.

Monroe

EPA,

750 F.3d 909, 915 (D.C. Cir. 2014).

Some stakeholders have commented that EPA may only exercise the cellulosic waiver authority to reduce total and advanced volumes in circumstances described in CAA section 211(o)(7)(A) (that is, where there is inadequate domestic supply or severe harm to the environment or economy), or that it must in using the cellulosic waiver authority consider the factors specified in section 211(o)(2)(B)(ii) that are required considerations when EPA sets applicable volumes for years in which the statute does not do so. Contrary to these comments, the Court found in the

Monroe

case that the statute does not prescribe any factors that EPA must consider in making is decision; EPA has broad discretion under 211(o)(7)(D)(i) to determine when and under what circumstances to reduce the advanced and total renewable fuel volumes when it reduces the statutory applicable volume of cellulosic biofuel.

When using the cellulosic waiver authority, we believe that there would be substantial justification to exercise our discretion to lower volumes of total and advanced biofuels in circumstances where there are questions regarding the sufficiency of production or import of potentially qualifying renewable fuels, and where there is evidence of constraints that would limit the ability of those biofuels to be used for purposes specified in the Act (

i.e.,

in transportation fuel, heating oil, or jet fuel). In addition, we believe that it is appropriate in exercising the cellulosic waiver authority for EPA to consider the Congressional objectives reflected in the volumes tables in the statute, and the environmental objectives that generally favor the use of advanced biofuels over non-advanced biofuels. For example, in light of the larger GHG emissions reductions required for advanced biofuels as compared to conventional biofuel, and the Congressional objective to dramatically increase their use in the time period between 2015 and 2022, we believe that it is generally appropriate for reasonably attainable volumes of advanced biofuel that are sourced in a manner expected to provide significant GHG reduction benefits to backfill for shortages in cellulosic biofuel. On the other hand, we do not believe it would be appropriate for the gap in the availability of cellulosic biofuel in 2017 to be filled or partially filled with non-advanced biofuel, taking into consideration both the substantially lower greenhouse gas emissions reductions required for non-advanced

biofuel

and the Congressional intent reflected in the statutory tables that use of these biofuels in this time period would be limited.

These considerations are consistent with EPA's past interpretation of the cellulosic waiver authority as envisioning equivalent reductions in the applicable volumes of advanced biofuels and total renewable fuels.

See

74 FR 24914; 78 FR 49810.

Non-advanced biofuel must meet the 20% reduction in lifecycle GHG emissions described in CAA section 211(o)(2)(A)(i), unless they qualify for an exemption under 40 CFR 80.1403.

Since the advanced biofuel volume requirement is nested within the total renewable fuel volume requirement, the statutory implied volume for conventional renewable fuel in the statutory tables can be discerned by subtracting the applicable volume of advanced biofuel from that of total renewable fuel. Performing this calculation with respect to the tables in CAA section 211(o)(2)(B) indicates a Congressional expectation that in the time period 2015-2022, advanced biofuel volumes would grow from 5.5 to 21 billion gallons, while the implied volume for conventional renewable fuel would remain constant at 15 billion gallons.

Our consistent view has been that the provision is best interpreted and implemented to provide for equal reductions in advanced biofuel and total renewable fuel. We believe that this approach is consistent with the statutory language and best effectuates the objectives of the statute, in that it allows for EPA to determine an appropriate volume of advanced biofuel providing meaningful GHG emissions reductions to backfill missing cellulosic volumes, while also resulting in an implied volume for conventional renewable fuel of no greater than 15 billion gallons as envisioned in the statutory time period for 2015-2022.

We believe, as we did in setting the volumes in the past, that the circumstances justifying use of our cellulosic waiver authority and thus a reduction in statutory volumes are currently present, and we are again using our cellulosic waiver authority under 211(o)(7)(D)(i) to reduce volume requirements for advanced biofuel and total renewable fuel. Congress envisioned that there would be 5.5 billion gallons of cellulosic biofuel in 2017, while our production projection, described in detail in Section III, is for 311 million gallons. Under 211(o)(7)(D)(i), EPA must lower the required cellulosic volume to the projected production volumes. See also

API

EPA,

706 F.3d 474 (D.C. Cir. 2012). Doing so also provides EPA with authority to lower advanced and total renewable fuel volumes by the same or a lesser amount.

We have determined, as described in Section IV, that the applicable volume for advanced biofuels specified in the statute for 2017 cannot be achieved and, consistent with the principles described above, we are exercising our cellulosic waiver authority to lower the applicable volume of advanced biofuel to a level that is both reasonably attainable and appropriate, and to provide an equivalent reduction in the applicable volume of total renewable fuel. In addition, we have determined that there is adequate supply to satisfy the total renewable fuel volume derived through applying an equal volume reduction as for advanced biofuel. Therefore, no further reductions of the total renewable fuel volume requirement are necessary to address concerns of inadequate supply. The resulting volume requirements provide the benefits associated with the use of reasonably attainable and appropriate volumes of advanced biofuels to partially backfill for missing volumes of cellulosic biofuel in 2017, while also providing for an implied volume requirement for conventional biofuel equal to that envisioned by Congress for 2017.

2. General Waiver Authority

Section 211(o)(7)(A) of the CAA provides that EPA, in consultation with the Secretary of Agriculture and the Secretary of Energy, may waive the applicable volume specified in the Act in whole or in part based on petition by one or more States, by any person subject to the requirements of the Act, or by the EPA Administrator on her own motion. Such a waiver must be based on a determination by the Administrator, after public notice and opportunity for comment that (1) implementation of the requirement would severely harm the economy or the environment of a State, a region or the United States, or (2) there is an inadequate domestic supply. Because the general waiver provision provides EPA the discretion to waive the statutory applicable volume “in whole or in part,” we interpret this section as granting EPA authority to fully or partially waive any of the four applicable volume requirements in appropriate circumstances. For the years 2014-2016, EPA determined that there was an inadequate domestic supply of total renewable fuel, and used the general waiver authority to reduce the total renewable fuel volumes further than the reductions obtained using the cellulosic waiver authority. In the notice of proposed rulemaking for this rule, EPA proposed to use the general wavier authority in a similar way, and for the same reason, in establishing the 2017 total renewable fuel volume requirement.

Based on further evaluation of the availability of renewable fuel in the market, in the interim between the NPRM and this final rule, and review of public comment, EPA has determined that it is not necessary to use the general waiver authority. That is, we have determined that use of the cellulosic waiver authority alone will be sufficient to yield a volume requirement that is consistent with available supply.

Some commenters noted that in addition to the authority to reduce applicable volumes under the general waiver authority on the basis of an “inadequate domestic supply” that EPA possesses the ability to use the general waiver authority where it finds that the RFS volumes would cause “severe economic or environmental harm in a State, region, or the United States.” As described in more detail in the response to comments document accompanying this rule, EPA does not believe that the record supports a finding of severe economic or environmental harm with respect to the volume requirements we are finalizing today.

3. General Comments Related to Waiver Authorities

Many commenters suggested that EPA should only use the cellulosic waiver authority to reduce volumes of total renewable fuel in 2017. While we do not believe this would have been possible under the circumstances described in the proposal, in light of EPA's re-evaluation of available supplies, as discussed in Sections IV and V, we are today following the approach suggested by these commenters in using the cellulosic waiver authority exclusively to reduce volumes of both advanced biofuel and total renewable fuel.

Some commenters said that EPA should not reduce the volume requirements for advanced biofuel and total renewable fuel at all and should instead set standards for 2017 based on the statutory targets. In most cases, these commenters based their positions on the availability of carryover RINs and an expectation that “letting the market work” would be sufficient to overcome all constraints related the production and distribution of fuels that can be used to satisfy these standards. As described in Section II.B below, we continue to believe that, in light of the expected volume of carryover RINs, it would be inappropriate for 2017 to intentionally draw down the bank of carryover RINs for the purposes of increasing the volume requirements above levels that can be satisfied with physical volume. As for “letting the market work,” we believe that this view is dismissive of the market constraints discussed in the NPRM, Table II.E. 1-1 of the 2014-2016 final rule and in Sections IV.B and V.B of this final rule. The market is not unlimited in its ability to respond to the standards EPA sets. While setting the standards at the statutory targets would undoubtedly produce a significant increase in RIN prices, doing so in light of the combined actions of all constraints shown in Table II.E.1-1 of the 2014-2016 final rule and discussed in Sections IV.B. and V.B. of this rule would nevertheless create a

shortfall in supply in 2017 that would likely lead to a complete draw-down in the bank of carryover RINs, noncompliance, and/or additional petitions for a waiver of the standards. As described in Sections IV and V, we are authorized to use the cellulosic waiver authority in 2017 to reduce volumes of advanced and total renewable fuel, and believe it is appropriate to do so for the reasons noted in those sections.

B. Treatment of Carryover RINs

Consistent with our approach in the 2014-2016 final rule, we have also considered the availability and role of carryover RINs in our decision to exercise our cellulosic waiver authority in setting the advanced and total volume requirements for 2017.

Although the statute requires a credit program and specifies that the credits shall be valid for a 12-month time period, neither the statute nor EPA regulations specify how or whether EPA should consider the availability of carryover RINs in exercising its cellulosic waiver authority.

As noted in the context of the rule establishing the 2014-16 RFS standards, we believe that a bank of carryover RINs is extremely important in providing obligated parties compliance flexibility in the face of substantial uncertainties in the transportation fuel marketplace, and in providing a liquid and well-functioning RIN market upon which success of the entire program depends.

Carryover RINs provide flexibility in the face of a variety of circumstances that could limit the availability of RINs, including weather-related damage to renewable fuel feedstocks and other circumstances potentially affecting the production and distribution of renewable fuel.

On the other hand, carryover RINs can be used for compliance purposes, and in the context of the 2013 RFS rulemaking we noted that an abundance of carryover RINs available in that year, together with possible increases in renewable fuel production and import, justified maintaining the advanced and total renewable fuel volume requirements for that year at the levels specified in the statute.

The discussion of the role of carryover RINs as they relate to the cellulosic volume standard for 2017 can be found in Section III.D.

CAA section 211(o)(5) requires that EPA establish a credit program as part of its RFS regulations, and that the credits be valid to show compliance for 12 months as of the date of generation. EPA implemented this requirement though the use of RINs, which can be used to demonstrate compliance for the year in which they are generated or the subsequent compliance year. Obligated parties can obtain more RINs than they need in a given compliance year, allowing them to “carry over” these excess RINs for use in the subsequent compliance year, although use of these carryover RINs is limited to 20% of the obligated party's RVO. For the bank of carryover RINs to be preserved from one year to the next, individual carryover RINs are used for compliance before they expire and are essentially replaced with a newer vintage RIN that is then held for use in the next year. For example, if the volume of the RIN bank is unchanged from 2016 to 2017, then all of the vintage 2016 carryover RINs must be used for compliance in 2017, or they will expire. However, the same volume of 2017 RINs can then be “banked” for use in the next year.

See 80 FR 77482-77487 (December 14, 2015).

See id., and 72 FR 23900 (May 1, 2007).

See 79 FR 49794 (August 15, 2013).

In the 2017 NPRM, EPA estimated that the likely volume of the carryover RIN bank for 2017 would be approximately 1.72 billion carryover RINs (including all D codes). We proposed that in light of this relatively limited volume and the important functions provided by the RIN bank, that we would not set the volume requirements for 2017 in a manner that would intentionally lead to a drawdown in the bank of carryover RINs. In their comments on the 2017 NPRM, parties generally expressed two opposing points of view. Commenters representing obligated parties supported EPA's proposed decision to not assume a drawdown in the bank of carryover RINs in determining the appropriate level of volume requirements. These commenters reiterated the importance of maintaining the carryover RIN bank in order to provide obligated parties with necessary compliance flexibilities, better market trading liquidity, and a cushion against future program uncertainty. Commenters representing renewable fuel producers, however, contended that carryover RINs represent actual supply and should be accounted for when establishing the annual volume standards and, in particular, in any determination under the general waiver authority that there is an “inadequate domestic supply.” They expressed concern that obligated parties could use carryover RINs as an alternative to RINs generated for renewable fuel produced in 2017, leading to less demand for their product and inadequate return on investment.

A full description of comments received, and our detailed responses to them, is available in the Response to Comments document in the docket.

1. Updated Projection of Carryover RIN Volume

In the NPRM, EPA estimated that the carryover RIN bank available in 2017 would be approximately 1.72 billion carryover RINs. Since that time, obligated parties have submitted their compliance demonstrations for the 2014 compliance year and, based on that information, we now estimate that there will at most be 1.54 billion carryover RINs available for possible use in complying with the standards for 2017, a decrease of nearly 200 million RINs from the previous estimate.

This is approximately 8 percent of the final 2017 total renewable fuel volume standard and less than half of the 20 percent limit permitted by the regulations to be carried over for use in complying with the 2017 standards. However, there remains considerable uncertainty surrounding this number since compliance demonstrations still need to be made for the 2015 and 2016 RFS standards, and it is unclear at this time whether some portion of the 1.54 billion carryover RINs we estimate will be available for the 2017 compliance demonstrations will be used for compliance prior to 2017. In addition, we note that there have been enforcement actions in past years that have resulted in the retirement of RINs that were fraudulently generated and were therefore invalid, and parties that relied on those invalid RINs for compliance were required to acquire valid substitutes to true up their past compliance demonstrations. Future enforcement actions could have similar results, and require that obligated parties settle past enforcement-related obligations in addition to the annual standards, thereby potentially creating demand for RINs greater than can be accommodated through actual renewable fuel blending in 2017. Collectively, the result of satisfying RFS obligations in 2015 and 2016 and settling enforcement-related accounts could be an effective reduction in the size of the collective bank of carryover RINs to a level below 1.54 billion RINs. Thus, we believe there is considerable uncertainty that a RIN bank as large as 1.54 billion RINs will be available in 2017.

The calculations performed to estimate the number of carryover RINs available in 2017 can be found in the memorandum, “2017 Carryover RIN Bank Calculations,” available in the docket.

2. EPA's Decision

EPA has decided to maintain the proposed approach, and not set the volume requirements in the final rule with the intention or expectation of drawing down the current bank of carryover RINs. In finalizing this approach, we carefully considered the many comments received, including on the role of carryover RINs under our waiver authorities and the policy implications of our decision. While we have not assumed an intentional

drawdown in the overall bank of carryover RINs owned by obligated parties collectively in establishing the volume requirements for 2017, we understand that some obligated parties may choose to sell or use all or part of their individual banks of carryover RINs. To the extent that they do so, other obligated parties would be in a position to bank carryover RINs by using available renewable fuel or purchasing RINs representing such fuel, with the expected net result being no effective change in the size of the overall bank of carryover RINs that is owned collectively by obligated parties.

In response to those parties who argued that carryover RINs must be considered part of the “supply” when EPA uses the general waiver authority on the basis of a finding of “inadequate domestic supply,” we note that we are not using the general waiver authority in this final action, so these arguments are irrelevant. We believe that a balanced consideration of the possible role of carryover RINs in achieving the statutory volume objectives for advanced and total renewable fuels, versus maintaining an adequate bank of carryover RINs for important programmatic functions, is appropriate when EPA exercises its discretion under the cellulosic waiver authority, and that the statute does not specify the extent to which EPA should require a drawdown in the bank of carryover RINs when it exercises this authority.

An adequate RIN bank serves to make the RIN market liquid and to avoid the possible need for adjustments to the standards. Just as the economy as a whole functions best when individuals and businesses prudently plan for unforeseen events by maintaining inventories and reserve money accounts, we believe that the RFS program functions best when sufficient carryover RINs are held in reserve for potential use by the RIN holders themselves, or for possible sale to others that may not have established their own carryover RIN reserves. Were there to be no RINs in reserve, then even minor disruptions causing shortfalls in renewable fuel production or distribution, or higher than expected transportation fuel demand (requiring greater volumes of renewable fuel to comply with the percentage standards that apply to all volumes of transportation fuel, including the unexpected volumes) could lead to the need for a new waiver of the standards, undermining the market certainty so critical to the long term success of the RFS program. Furthermore, many obligated parties lack the ability to separate one or more types of RINs through blending. With a functioning liquid RIN market this is not a problem because we expect that these obligated parties will be able to comply by securing these RINs on the open market. However, a significant drawdown of the carryover RIN bank leading to a scarcity of RINs may stop the market from functioning in an efficient manner, even where the market overall could satisfy the standards. For all of these reasons, the collective carryover RIN bank provides a needed programmatic buffer that both facilitates individual compliance and provides for smooth overall functioning of the program.

With volume requirements increasing annually, and the size of the carryover RIN bank shrinking through use of carryover RINs in both 2013 and 2014, we believe it is prudent not to intentionally draw down the RIN bank for 2017 that we have determined will not likely be larger than 1.54 billion carryover RINs, and which could in fact be smaller.

Here we use the term “buffer” as shorthand reference to all of the benefits that are provided by a sufficient bank of carryover RINs.

For the reasons noted above, and consistent with the approach we took in the 2014-2016 final rule, we have determined that under current circumstances, an intentional drawdown of the carryover RIN bank should not be assumed in establishing the 2017 volume requirements. The current bank of carryover RINs will provide an important and necessary programmatic buffer that will both facilitate individual compliance and provide for smooth overall functioning of the program. Therefore, we are not setting renewable fuel volume requirements at levels that would envision the drawdown in the bank of carryover RINs. However, we note that we may or may not take a similar approach in future years; we will assess the situation on a case-by-case basis going forward, and take into account the size of the carryover RIN bank in the future and any lessons learned from implementing past rules.

III. Cellulosic Biofuel Volume for 2017

In the past several years the cellulosic biofuel industry has continued to make progress towards increased commercial-scale production. Cellulosic biofuel production reached record levels in 2015, driven largely by compressed natural gas (CNG) and liquefied natural gas (LNG) derived from biogas.

Cellulosic ethanol, while produced in much smaller quantities than CNG/LNG derived from biogas, was also produced consistently in 2015. Plans for multiple commercial scale facilities capable of producing drop-in hydrocarbon fuels from cellulosic biomass were also announced. This section describes our assessment of the volume of cellulosic biofuel that we project will be produced or imported into the United States in 2017, and some of the uncertainties associated with those volumes.

The majority of the cellulosic RINs generated for CNG/LNG are sourced from biogas from landfills, however the biogas may come from a variety of sources including municipal wastewater treatment facility digesters, agricultural digesters, separated MSW digesters, and the cellulosic components of biomass processed in other waste digesters.

In order to project the volume of cellulosic biofuel production in 2017 we considered the Energy Information Administration's projections of cellulosic biofuel production

along with data reported to EPA through the EPA Moderated Transaction System (EMTS) and information we collected regarding individual facilities that have produced or have the potential to produce qualifying volumes for consumption as transportation fuel, heating oil, or jet fuel in the U.S. in 2017. In this final rule we have updated the projected facility start-up dates, facility capacities, production volumes, and other relevant information with the most recent information available. However, we are using the methodology discussed in the proposed rule to project the available supply of cellulosic biofuel for 2017. As described in a memorandum to the docket, the use of essentially the same methodology to generate the applicable standards for 2016 resulted in volumes that the market is currently on track to meet, taking into account anticipated seasonal variation in cellulosic biofuel supply based on data from previous years.

“EIA projections of transportation fuel for 2017,” docket EPA-HQ-OAR-2016-0004. We note that EIA projections do not include renewable fuel oil, imports of cellulosic biofuel from foreign facilities, or CNG/LNG used as transportation fuel in their estimate of cellulosic biofuel production.

“Assessment of the Accuracy of Cellulosic Biofuel Production Projections in 2015 and 2016”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

New cellulosic biofuel production facilities projected to be brought online in the United States over the next few years would significantly increase the production capacity of the cellulosic industry. Operational experience gained at the first few commercial scale cellulosic biofuel production facilities could also lead to increasing production of cellulosic biofuel from existing production facilities. The following section discusses the companies the EPA reviewed in the process of projecting qualifying cellulosic biofuel

production in the United States in 2017. Information on these companies forms the basis for our projection of 311 million ethanol-equivalent gallons of cellulosic biofuel produced for use as transportation fuel, heating oil, or jet fuel in the United States in 2017.

A. Statutory Requirements

The volumes of renewable fuel to be used under the RFS program each year (absent an adjustment or waiver by EPA) are specified in CAA section 211(o)(2). The volume of cellulosic biofuel specified in the statute for 2017 is 5.5 billion gallons. The statute provides that if EPA determines, based on EIA's estimate, that the projected volume of cellulosic biofuel production in a given year is less than the statutory volume, then EPA is to reduce the applicable volume of cellulosic biofuel to the projected volume available during that calendar year.

The United States Court of Appeals for the District of Columbia Circuit evaluated this requirement in

API

EPA

706 F.3d 474. 479-480 (D.C. Cir. 2013), in the context of a challenge to the 2012 cellulosic biofuel standard. The Court stated that in projecting potentially available volumes of cellulosic biofuel EPA must apply an “outcome-neutral methodology” aimed at providing a prediction of “what will actually happen.”

In addition, if EPA reduces the required volume of cellulosic biofuel below the level specified in the statute, the Act also indicates that we may reduce the applicable volumes of advanced biofuels and total renewable fuel by the same or a lesser volume, and we are required to make cellulosic waiver credits available. Our consideration of the 2017 volume requirements for advanced biofuel and total renewable fuel is presented in Sections IV and V of this rule.

B. Cellulosic Biofuel Industry Assessment

In order to project cellulosic biofuel production for 2017, we have tracked the progress of several dozen potential cellulosic biofuel production facilities. As we have done in previous years, we have focused on facilities with the potential to produce commercial-scale volumes of cellulosic biofuel rather than small R&D or pilot-scale facilities. Larger commercial-scale facilities are much more likely to generate RINs for the fuel they produce and the volumes they produce will have a far greater impact on the cellulosic biofuel standards for 2017. The volume of cellulosic biofuel produced from R&D and pilot-scale facilities is quite small in relation to that expected from the commercial-scale facilities. R&D and demonstration-scale facilities have also generally not generated RINs for the fuel they have produced in the past. Their focus is on developing and demonstrating the technology, not producing commercial volumes. RIN generation from R&D and pilot-scale facilities in previous years has not contributed significantly to the overall number of cellulosic RINs generated.

While a few small R&D and pilot scale facilities have registered as cellulosic RIN generators, total production from each of these facilities from 2010 through September 2016 has been less than 50,000 RINs.

From this list of commercial-scale facilities we used information from EMTS, publically available information (including press releases and news reports), and information provided by representatives of potential cellulosic biofuel producers, to make a determination of which facilities are most likely to produce cellulosic biofuel and generate cellulosic biofuel RINs in 2017. Each of these companies was investigated further in order to determine the current status of its facilities and its likely cellulosic biofuel production and RIN generation volumes for 2017. Both in our discussions with representatives of individual companies

and as part of our internal evaluation process we gathered and analyzed information including, but not limited to, the funding status of these facilities, current status of the production technologies, anticipated construction and production ramp-up periods, facility registration status, and annual fuel production and RIN generation targets.

In determining appropriate volumes for CNG/LNG producers we generally did not contact individual producers but rather relied primarily on discussions with industry associations, and information on likely production facilities that are already registered under the RFS program. In some cases where further information was needed we did speak with individual companies.

Our approach for projecting the available volume of cellulosic biofuel in 2017 is discussed in more detail in Section III.D below. The approach is the same as the approach adopted in establishing the required volume of cellulosic biofuel in 2016.

The remainder of this Section discusses the companies and facilities EPA expects to be in a position to produce commercial-scale volumes of cellulosic biofuel by the end of 2017. This information, together with the reported cellulosic biofuel RIN generation in previous years in EMTS and EIA's projection of liquid cellulosic biofuel production in 2017 forms the basis for our volume requirement for cellulosic biofuel for 2017.

See 80 FR 77420, 77499 (December 14, 2015).

1. Potential Domestic Producers

There are a number of companies and facilities

located in the United States that have either already begun producing cellulosic biofuel for use as transportation fuel, heating oil, or jet fuel at a commercial scale, or are anticipated to be in a position to do so at some time during 2017. The financial incentive provided by cellulosic biofuel RINs,

combined with the facts that to date nearly all cellulosic biofuel produced in the United States has been used domestically

and all the domestic facilities we have contacted in deriving our projections intend to produce fuel on a commercial scale for domestic consumption using approved pathways, gives us a high degree of confidence that cellulosic biofuel RINs will be generated for any fuel produced by commercial scale facilities. In order to generate RINs, each of these facilities must be registered under the RFS program and comply with all the regulatory requirements. This includes using an approved RIN-generating pathway and verifying that their feedstocks meet the definition of renewable biomass. Most of the companies and facilities have already successfully completed facility registration, and many have successfully generated RINs. A brief description of each of the companies (or group of companies for cellulosic CNG/LNG producers) that EPA believes may produce commercial-scale volumes of RIN generating cellulosic biofuel by the end of 2017 can be found in a memorandum to the docket for this final rule.

These descriptions are based on a review of publicly available information and in many cases on information provided to EPA in conversations with company representatives. General information on each of these companies or group of companies considered in our projection of the potentially available volume of

cellulosic biofuel in 2017 is summarized in Table III.B.3-1 below.

The volume projection from CNG/LNG producers does not represent production from a single company or facility, but rather a group of facilities utilizing the same production technology.

According to data from Argus, the price for 2016 cellulosic biofuel RINs averaged $1.84 in 2016 (through September 2016). Alternatively, obligated parties can obtain a RIN value equivalent to a cellulosic biofuel RIN by purchasing an advanced (or biomass-based diesel) RIN and a cellulosic waiver credit. The price for a 2016 cellulosic waiver credit is $1.33.

The only known exception was a small volume of fuel produced at a demonstration scale facility exported to be used for promotional purposes.

“Cellulosic Biofuel Producer Company Descriptions (October 2016)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

2. Potential Foreign Sources of Cellulosic Biofuel

In addition to the potential sources of cellulosic biofuel located in the United States, there are several foreign cellulosic biofuel companies that may produce cellulosic biofuel in 2017. These include facilities owned and operated by Beta Renewables, Enerkem, Ensyn, GranBio, and Raizen. All of these facilities use fuel production pathways that have been approved by EPA for cellulosic RIN generation provided eligible sources of renewable feedstock are used and other regulatory requirements are satisfied. These companies would therefore be eligible to register these facilities under the RFS program and generate RINs for any qualifying fuel imported into the United States. While these facilities may be able to generate RINs for any volumes of cellulosic biofuel they import into the United States, demand for the cellulosic biofuels they produce is expected to be high in their own local markets.

EPA is charged with projecting the volume of cellulosic biofuel that will be produced or imported into the United States. For the purposes of this final rule we have considered all of the registered foreign facilities under the RFS program to be potential sources of cellulosic biofuel in 2017. We believe that due to the strong demand for cellulosic biofuel in local markets, the significant technical challenges associated with the operation of cellulosic biofuel facilities, and the time necessary for potential foreign cellulosic biofuel producers to register under the RFS program and arrange for the importation of cellulosic biofuel to the United States, cellulosic biofuel imports from facilities not currently registered to generate cellulosic biofuel RINs are highly unlikely in 2017. We have therefore, for purposes of our 2017 cellulosic biofuel projection evaluated in detail only the potential for foreign cellulosic biofuel production from facilities that are currently registered. Two foreign facilities that have registered as cellulosic biofuel producers have already generated cellulosic biofuel RINs for fuel exported to the United States; projected volumes from each of these facilities are included in our projection of available volumes for 2017. Two additional foreign facilities have registered as a cellulosic biofuel producer, but have not yet generated any cellulosic RINs. EPA contacted representatives from these facilities to inquire about their intentions to export cellulosic biofuel to the United States in 2017. In one case, company representatives indicated they intended to export cellulosic biofuel to the United States, and EPA believes that there is sufficient reason to believe imports of cellulosic biofuel from this company are likely. EPA has included potential volumes from this facility in our 2017 volume production projection (see Table III.B.3-1 below).

3. Summary of Volume Projections for Individual Companies

The information we have gathered on cellulosic biofuel producers forms the basis for our projected volumes of cellulosic biofuel production for each facility in 2017. As discussed above, we have focused on commercial-scale cellulosic biofuel production facilities. Each of these facilities is discussed further in a memorandum to the docket.

“Cellulosic Biofuel Producer Company Descriptions (October 2016)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

Table III.B.3-1—Projected Producers of Cellulosic Biofuel by 2017

Company name

Location

Feedstock

Fuel

Facility

capacity

(MGY)

Construction start date

First production

CNG/LNG Producers

Various (US and Canada)

Biogas

CNG/LNG

Various

N/A

August 2014.

DuPont

Nevada, IA

Corn Stover

Ethanol

November 2012

End 2016.

Edeniq

Various

Corn Kernel Fiber

Ethanol

Various

Fall 2016.

Ensyn

Renfrew, ON, Canada

Wood Waste

Heating Oil

N/A

2014.

GranBio

São Miguel dos Campos, Brazil

Sugarcane bagasse

Ethanol

Mid 2012

September 2014.

Poet

Emmetsburg, IA

Corn Stover

Ethanol

March 2012

4Q 2015.

QCCP

Galva, IA

Corn Kernel Fiber

Ethanol

Late 2013

October 2014.

C. Projection From the Energy Information Administration

Section 211(o)(3)(A) of the

Clean Air Act requires EIA to “. . . provide to the Administrator of the Environmental Protection Agency an estimate, with respect to the following calendar year, of the volumes of transportation fuel, biomass-based diesel, and cellulosic biofuel projected to be sold or introduced into commerce in the United States.” EIA provided these estimates to EPA on October 19, 2016.

With regard to cellulosic biofuel, the EIA estimated that the available volume in 2017 would be 10 million gallons.

The Facility Capacity is generally equal to the nameplate capacity provided to EPA by company representatives or found in publicly available information. If the facility has completed registration and the total permitted capacity is lower than the nameplate capacity then this lower volume is used as the facility capacity. For companies generating RINs for CNG/LNG derived from biogas the Facility Capacity is equal to the lower of the annualized rate of production of CNG/LNG from the facility or the sum of the volume of contracts in place for the sale of CNG/LNG for use as transportation fuel (reported as the actual peak capacity for these producers).

Where a quarter is listed for the first production date EPA has assumed production begins in the middle month of the quarter (

i.e.,

August for the 3rd quarter) for the purposes of projecting volumes.

For more information on these facilities see “October 2016 Assessment of Cellulosic Biofuel Production from Biogas (2017)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

“EIA projections of transportation fuel for 2017,” docket EPA-HQ-OAR-2016-0004.

In their letter, EIA did not identify the facilities on which their estimate of cellulosic biofuel production was based. EIA did, however, indicate in their letter that they did not include estimates for cellulosic biofuel produced from biogas from landfills, municipal wastewater treatment facilities, separated MSW digesters, or agricultural digesters or those producing renewable heating oil, which represent approximately 96% of our projected cellulosic biofuel volume for 2017. They also did not include projections for facilities located outside of the United States that we project will export cellulosic biofuel into the United

States in 2017. When limiting the scope of our projection to the companies assessed by EIA, we note that while our volume projections are not identical, they are very similar. EPA projects approximately 11 million gallons of liquid cellulosic biofuel will be produced domestically in 2017 (when excluding heating oil, as EIA did in their estimate of cellulosic biofuel production). EIA did not provide detail on the basis of their projections, so we cannot say precisely why EPA and EIA's projections differ. We further note that if we used EIA's projections for domestic liquid cellulosic biofuel production without modification in place of our own assessment of these facilities the impact on the cellulosic biofuel standard overall for 2017 would be less than 1%.

D. Cellulosic Biofuel Volume for 2017

For our 2017 cellulosic biofuel projection, we have used the same methodology used in the final rule establishing the cellulosic biofuel volume standard for 2016.

We believe this methodology produces a production projection that is consistent with EPA's charge to project volumes with a “neutral aim at accuracy,” and that cellulosic RIN generation data in 2015 and 2016 demonstrate that the use of this methodology has produced reasonable projections in these years.

We also received comments on our projection methodology, some of which are discussed below, with the remainder discussed in the response to comment document. Some commenters objected to the use of the same methodology used to establish the cellulosic biofuel volume for 2015 and 2016, arguing that this methodology has consistently over-estimated cellulosic RIN generation.

In this final rule we considered modifying several of the individual components of our production projection methodology (such as the start-up date, ramp-up period, expected production volume with the projected ranges, etc.), but ultimately decided to use the same methodology as proposed, as we believe this methodology resulted in reasonably accurate projection of cellulosic biofuel RIN generation in the final three months of 2015, and will likely result in a reasonably accurate projection for 2016 based on the available data that is currently available.

While this methodology overestimated portions of the cellulosic biofuel pool (such as the production of liquid cellulosic biofuels from new facilities), it also underestimated production for other portions of the cellulosic biofuel pool (production of CNG/LNG derived from biogas). Modifying individual components of the past methodology may seem justified based on a narrow consideration of each factor, but we do not believe that there is currently sufficient information to support these changes. Adjusting each individual component of the methodology each year based on the most recent information would result in an increasingly complex and unpredictable methodology, and would not necessarily project overall cellulosic biofuel production more accurately. This is especially true in an industry at the early stages of commercialization. We do not believe it would be reasonable to establish a methodology where the success or failure of a small group of companies, and in some cases a single company, would have a dramatic impact on the methodology used to project volumes from other companies the following year, especially where the methodology overall has been demonstrably successful. Therefore, for this year we have decided to use the same methodology that worked successfully in 2015 and 2016. We will continue to evaluate this methodology on an annual basis, and will adjust the methodology if it ceases to provide reasonably accurate projections in future years.

See 80 FR 77499 for additional detail.

“Assessment of the Accuracy of Cellulosic Biofuel Production Projections in 2015 and 2016”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

As support for these claims, commenters reviewed EPA's projections of cellulosic biofuel production going back to 2010. We note that we used a substantially different methodology to project volumes for 2015 and 2016 than we used in previous years, and we therefore do not believe that overestimates of cellulosic biofuel production in years prior to 2015 are relevant in assessing the reasonableness of the current methodology.

“Assessment of the Accuracy of Cellulosic Biofuel Production Projections in 2015 and 2016”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

To project cellulosic biofuel production in 2017 we separated the list of potential producers of cellulosic biofuel into four groups according to whether they are producing liquid cellulosic biofuel or CNG/LNG from biogas, and whether or not the facilities have achieved consistent commercial-scale production and cellulosic biofuel RIN generation (See Table III.D-1 through Table III.D-3). We next defined a range of likely production volumes for each group of potential cellulosic biofuel producers. The low end of the range for each group of producers reflects actual RIN generation data over the last 12 months for which data are available (October 2015—September 2016). The low end of the range for companies that have not yet begun commercial-scale production (or in the case of CNG/LNG producers have not yet generated RINs for fuel sold as transportation fuel in the United States) is zero.

To calculate the high end of the projected production range for each group of companies we considered each company individually. To determine the high end of the range of expected production volumes for companies producing liquid cellulosic biofuel we considered a variety of factors, including the expected start-up date and ramp-up period, facility capacity, and fuel off-take agreements. As a starting point, EPA calculated a production volume for these facilities using the expected start-up date, facility capacity, and a benchmark of a six-month straight-line ramp-up period representing an optimistic ramp-up scenario.

Generally we used this calculated production volume as the high end of the potential production range for each company. The only exceptions were cases where companies provided us with production projections (or projections of the volume of fuel they expected to export to the United States in the case of foreign producers) that were lower than the volumes we calculated as the high end of the range for that particular company. In these cases, the projected production volume (or import volume) provided by the company was used as the high end of the potential production range rather than the volume calculated by EPA. For CNG/LNG producers, the high end of the range was generally equal RIN production projections for 2017 provided to EPA by the renewable natural gas industry.

The high end of the ranges for all of the individual companies within each group were added together to calculate the high end of the projected production range for that group.

We did not assume a six-month straight-line ramp-up period in determining the high end of the projected production range for CNG/LNG producers. This is because these facilities generally have a history of CNG/LNG production prior to producing RINs, and therefore do not face many of the start-up and scale-up challenges that impact new facilities. For further information on the methodology used to project cellulosic RIN generation from CNG/LNG producers see “October 2016 Assessment of Cellulosic Biofuel Production from Biogas (2017)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

For additional detail on the methods used to project cellulosic biofuel production for CNG/LNG producers see “October 2016 Assessment of Cellulosic Biofuel Production from Biogas (2017)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

Table III.D-1—2017 Production Ranges for Liquid Cellulosic Biofuel Producers Without Consistent Commercial Scale Production

[Million gallons]

Low end of

the range

High end of

the range

DuPont

Edeniq

GranBio

Poet

Aggregate Range

Rounded to the nearest million gallons.

Table III.D-2—2017 Production Ranges for Liquid Cellulosic Biofuel Producers With Consistent Commercial Scale Production

(Million gallons)

Low end of

the range

high end of

the range

Ensyn

Quad County Corn Processors

Aggregate Range

3.5

Rounded to the nearest million gallons.

The low end of the range for each individual company is based on actual production volumes and is therefore withheld to protect information claimed to be confidential business information.

Table III.D-3—2017 Production Ranges for CNG/LNG Produced From Biogas

[Million gallons]

Low end of

the range

High end of

the range

CNG/LNG Producers (New Facilities)

178

CNG/LNG Producers (Currently generating RINs)

174

221

Rounded to the nearest million gallons.

EPA received comments from biofuels producers stating that production projections we receive from companies should be used as the basis for the mean value of any projected production range. They argue that EPA should defer to the technical expertise of the cellulosic biofuel manufacturers who provide these projections, and that it is inappropriate to use these projections as the high end of a projected range, with the low end of the projected range based on previous production data. EPA understands that the volume projections provided by companies included in our projection are intended to represent the companies' expectations for production, rather than the high end of a potential production range. We also acknowledge the technical expertise of these companies and the significant amount of investment that has gone into the development of these biofuel production processes as they have progressed from R&D through demonstration and pilot scale in preparation for the first commercial scale facilities. While acknowledging these facts, we do not believe it would be appropriate to ignore the history of the cellulosic biofuel industry. Each year since 2010, EPA has gathered information, including volume production projections, from companies with the potential to produce cellulosic biofuel. Each of these companies supported these projections with successful pilot and demonstration scale facilities as well as other supporting documentation. In the majority of these cases, due to a variety of circumstances, the companies were unable to meet their own volume projections, and in some cases were unable to produce any RIN-generating cellulosic biofuel.

We believe our methodology reasonably projects the range of potential production volumes for each company. A brief overview of each of the companies we believe will produce cellulosic biofuel and make it commercially available in 2017 can be found in a memorandum to the docket.

In the case of cellulosic biofuel produced from CNG/LNG we have discussed these facilities as a group rather than individually. EPA believes it is appropriate to discuss these facilities as a group since they are utilizing proven production technologies and the uncertainties and challenges they face relate primarily to linking their production to ultimate use as transportation fuel that is eligible to generate RINs under the RFS program.

“Cellulosic Biofuel Producer Company Descriptions (October 2016)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

For individual company information see “October 2016 Cellulosic Biofuel Individual Company Projections for 2017 (CBI)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

After defining likely production ranges for each group of companies we projected a likely production volume from each group of companies for 2017. We used the same percentile values to project a production volume within the established ranges for 2017 as we did in the final rule establishing the cellulosic biofuel standards for 2014-2016; the 50th and 25th percentiles respectively for liquid cellulosic biofuel producers with and without a history of consistent cellulosic biofuel production and RIN generation, and the 75th and 50th percentiles respectively for producers of CNG/LNG from biogas with and without

a history of consistent commercial-scale production and RIN generation. As discussed in the final rule establishing the 2014-2016 cellulosic biofuel standards, we believe these percentages appropriately reflect the uncertainties associated with each of these groups of companies.

We further believe that the progress to date in 2015 and 2016 supports the use of these percentile values.

We also note that these percentile values are used to project a likely production volume within the projected range for each group of companies. In most cases, especially for companies that have not yet consistently produced cellulosic RINs, the high end of these projected ranges are not necessarily the nameplate capacities of the facilities, as the projected start-up dates and ramp-up periods have been taken into consideration in developing the likely production ranges for each company. This means that our percentile values are not directly comparable to the “utilization rates” calculated or projected by some commenters, which calculate a percentage using the facility capacity rather than the high end of the ranges in the tables below. After calculating a likely production volume for each group of companies in 2017, the volumes from each group are added together to determine the total projected production volume of cellulosic biofuel in 2017.

For a further discussion of the percentile values used to projected likely production from each group of companies see 80 FR 77499.

“Assessment of the Accuracy of Cellulosic Biofuel Production Projections in 2015 and 2016”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

Table III.D-4—Projected Volume of Cellulosic Biofuel in 2017

[Million gallons]

Low end of

the range

High end of

the range

Percentile

Projected

volume

Liquid Cellulosic Biofuel Producers; Producers without Consistent Commercial Scale Production

25th

Liquid Cellulosic Biofuel Producer; Producers with Consistent Commercial Scale Production

50th

CNG/LNG Producers; New Facilities

178

50th

CNG/LNG Producers; Consistent Production

174

221

75th

209

Total

N/A

311

Volumes rounded to the nearest million gallons.

EPA received comments requesting that we assess each potential cellulosic biofuel production facility individually, in a way that reflects the circumstances of each facility, rather than grouping facilities together. We continue to believe that grouping the potential cellulosic biofuel producers using the criteria of whether or not they have achieved consistent commercial-scale production is appropriate for the purposes of projecting a likely production volume. While each of these groupings contains a diverse set of companies with their own production technologies and challenges, we believe there is sufficient commonality in the challenges related to the funding, construction, commissioning, and start-up of commercial-scale cellulosic biofuel facilities to justify aggregating these company projections into a single group for the purposes of projecting the most likely production volume of cellulosic biofuel. The challenges new production facilities face are also significantly different than those of facilities ramping up production volumes to the facility capacity and maintaining consistent production. Finally, we believe that the level of uncertainty associated with production volumes from any individual facility is sufficiently high that assessing facilities individually, rather grouping them together as done in this final rule, would not necessarily result in more accurate volume projections.

Several commenters claimed that EPA had underestimated the potential production of cellulosic RINs from cellulosic CNG/LNG in 2017. Some commenters noted the large quantity of biogas that is currently produced at landfills, or the development of new digesters designed to produce CNG/LNG from biogas to support their claims. Others stated that because biogas collection from landfills or production in digesters was an established technology EPA should not discount projections from these producers, but rather should assume these volumes can be produced. While we acknowledge that these factors reduce the uncertainty related to cellulosic biofuel production for CNG/LNG derived from biogas, they do not eliminate the uncertainties associated with these fuels. RINs can only be generated for CNG/LNG derived from biogas if the RIN generator can verify (in accordance with the regulations) that an equivalent volume of CNG/LNG was used as transportation fuel. The limited demand for CNG/LNG as transportation fuel is a significant source of uncertainty related to the generation of cellulosic RINs for CNG/LNG for biogas. We believe that the percentile values used in the proposed rule to project cellulosic RIN generation for CNG/LNG from biogas (75th percentile for facilities that have previously generated RINs and 50th percentile for new facilities) is appropriate, and that this is supported by the RIN generation data for cellulosic RINs from CNG/LNG in 2015 and 2016.

We also note that in comments on the proposed rule a group of organizations representing CNG/LNG producers supported this methodology as doing a “reasonable job at projecting production with a neutral aim at accuracy.”

“Assessment of the Accuracy of Cellulosic Biofuel Production Projections in 2015 and 2016”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

See comments from David Cox, General Counsel, Coalition for Renewable Natural Gas et al. EPA-HQ-OAR-2016-0004-1732.

EPA also received comments claiming that the proposed cellulosic biofuel volumes were unreasonably high. These commenters generally claimed that in light of the inability of cellulosic biofuel companies to achieve their projected production volumes, start-up dates, and ramp-up schedules in previous years EPA should instead rely solely on historical production data to project volumes for future years. They suggested that EPA should project future production volumes based on available cellulosic RIN generation data

from previous months. EPA believes this would be inconsistent with our charge to project available cellulosic biofuel volume by taking a neutral aim at accuracy. Adopting such an approach would effectively mean ignoring the potential for facilities that have not generated RINs in the past to contribute volumes in the future. It would also ignore the potential for facilities that have begun producing RINs to increase their fuel production rates. This would be inconsistent with our expectations for an industry that has shown substantial growth over the last several years, and is anticipated to continue to grow in 2017. Most importantly, the significant year-over-year increases in the supply of cellulosic biofuel in recent years demonstrates that this suggested method is inappropriately conservative.

We recognize that in the past we have both overestimated and underestimated cellulosic RIN generation but we do not believe that our current methodology is fundamentally biased to either an overestimate or an underestimate of total cellulosic RIN production.

Total RIN generation in July-September of 2014 (likely the last 3 months for which EPA would have data available to use in a rule establishing annual volume for 2015) was 11 million ethanol-equivalent gallons, indicating an annual standard of 44 million ethanol-equivalent gallons for 2015 if this was the only information considered in establishing the standard. Actual cellulosic RIN supply in 2015 (RINs generated less those retired for reasons other than compliance) was 141 million ethanol-equivalent gallons. Similarly, total RIN generation in July-September of 2015 was 39.2 million ethanol-equivalent gallons, indicating an annual standard of 157 million ethanol-equivalent gallons for 2016 if this was the only information considered in establishing the standard. Actual cellulosic RIN supply for 2016 (RINs generated less those retired for reasons other than compliance) has already surpassed 127 million RINs and in the first 9 months of the year and is expected to meet the 2016 standard of 230 million ethanol-equivalent gallons.

Some commenters suggested that after projecting the cellulosic biofuel production volume for 2017, EPA should add to this number the number of available carryover RIN generated in previous years available for use in 2017. These commenters argued that these RINs should be viewed as part of the available supply of cellulosic biofuel, and that a failure to include these RINs in our projection of available volume could have negative impacts on the price of cellulosic RINs and ultimately the cellulosic biofuel industry. EPA does not believe it would be appropriate to add an estimate of carryover RINs available for use in 2017 to our projection of cellulosic biofuel production in 2017 for the purposes of establishing the 2017 cellulosic biofuel standard. Because the compliance deadlines for 2015 and 2016 occur after the finalization of this rule it is impossible to know precisely the number of carryover RINs that will be available for use in 2017. While the compliance data for 2014 indicate that there are likely to be approximately 12 million cellulosic biofuel carryover RINs from that year,

and cellulosic RIN generation in 2015 exceeded the standard by 17 million RINs,

it is possible that cellulosic RIN generation in 2016 may fall short of the standard, and that many of these RINs may be used to off-set that shortfall. While it is uncertain to what extend RINs representing past production could lawfully be included in the projection of future cellulosic biofuel production required under 211(o)(7)(D), EPA has not seen any evidence that the existence of RINs generated in previous years that may be used towards satisfying cellulosic biofuel obligations in future years has had a negative impact on cellulosic RIN prices.

This suggests that any cellulosic biofuel RINs in excess of the standard are being used by obligated parties in much the same way as other types of carryover RINs; aiding market liquidity and reducing the price volatility and potential impacts of short-term supply disruptions. While we do not believe it would be appropriate to add an estimate of available cellulosic carryover RINs for use in 2017 to the projected production volume, EPA remains committed to the success of the cellulosic biofuels industry and will continue to carefully monitor the market for both cellulosic biofuels and cellulosic biofuel RINs, and will re-evaluate this issue in future years.

Annual compliance data can be found on EPA's Web site at

https://www.epa.gov/fuels-registration-reporting-and-compliance-help/annual-compliance-data-obligated-parties-and.

According to EPA's EMTS Web site (

https://www.epa.gov/fuels-registration-reporting-and-compliance-help/2015-renewable-fuel-standard-data

) net cellulosic RIN generation was approximately 140 million RINs in 2015, while the cellulosic biofuel volume requirement for 2015 was 123 million gallons.

According to data from Argus, the average 2016 cellulosic biofuel RIN price has been $1.84 through September 2016. We believe this price is reasonable, as is it is somewhat below the “theoretical maximum” cellulosic RIN price of $2.19 (the cellulosic waiver price plus the average price of all non-cellulosic advanced RINs) and significantly above the “theoretical minimum” cellulosic RIN price of $0.86 (the average price of all non-cellulosic advanced RINs; we consider this the “theoretical minimum” price for a cellulosic biofuel RINs as excess cellulosic biofuel RINs can be used to satisfy an obligated party's advanced biofuel obligation).

We believe our range of projected production volumes for each company (or group of companies for cellulosic CNG/LNG producers) represents the range of potential production volumes for each company, and that projecting overall production in 2017 in the manner described above results in a neutral estimate (neither biased to produce a projection that is unreasonably high or low) of likely cellulosic biofuel production in 2017 (311 million gallons). A brief overview of individual companies we believe will produce cellulosic biofuel and make it commercially available in 2017 can be found in a memorandum to the docket.

In the case of cellulosic biofuel produced from CNG/LNG we have discussed the production potential from these facilities as a group rather than individually.

“Cellulosic Biofuel Producer Company Descriptions (October 2016)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

For individual company information see “October 2016 Cellulosic Biofuel Individual Company Projections for 2017 (CBI)”, memorandum from Dallas Burkholder to EPA Air Docket EPA-HQ-OAR-2016-0004.

IV. Advanced Biofuel Volume for 2017

The national volume targets for advanced biofuel to be used under the RFS program each year through 2022 are specified in CAA section 211(o)(2)(B)(i)(II). Congress set annual renewable fuel volume targets that envisioned growth at a pace that far exceeded historical growth and prioritized that growth as occurring principally in advanced biofuels (contrary to historical growth patterns where most growth was in conventional renewable fuel, namely corn-ethanol). Congressional intent is evident in the fact that the portion of the total renewable fuel volume target that is not required to be advanced biofuel is 15 billion gallons in the statutory volume tables for all years after 2014, while the advanced volumes continue to grow through 2022 to a total of 21 billion gallons, for a total of 36 billion gallons in 2022.

We have evaluated the capabilities of the market and have concluded that the 9.0 billion gallons specified in the statute for advanced biofuel cannot be reached in 2017. This is primarily due to the expected continued shortfall in cellulosic biofuel; production of this fuel type has consistently fallen short of the statutory targets by 95% or more, and again in 2017 will fall far short of the statutory target of 5.5 billion gallons. In addition, although in earlier years of the RFS program we determined that the available supply of non-cellulosic advanced biofuel and other considerations justified our retaining the statutory advanced biofuel target

notwithstanding the shortfall in cellulosic biofuel production, several factors preclude such a determination for 2017, including:

• The more ambitious statutory target for 2017

• The fact that a greater proportion of that target was intended to be satisfied by cellulosic biofuels

For example, while the statutory tables indicate that 61.1% of the 2017 advanced biofuel target would be satisfied by cellulosic biofuel, the corresponding value for 2013 was only 36.4%.

• The continued slow pace of growth in cellulosic biofuel production

• Limited volumes of advanced biofuels that we believe are appropriate to backfill for missing volumes of cellulosic biofuel

As a result, we are exercising the authority granted by the statute to reduce the applicable volume of advanced biofuel using the cellulosic waiver authority. The final volume requirement for advanced biofuel recognizes the ability of the market to respond to the standards we set while staying within the limits of reasonable feasibility, providing for a partial backfilling of missing cellulosic biofuel volumes with volumes of advanced biofuel we have determined are appropriate to require for this purpose. The net impact of this volume requirement is that the required volume of advanced biofuel for 2017 will be significantly greater than volumes required or used in the past, but below the statutory target.

To help inform today's action, we investigated whether the market is on track to meet the 2016 advanced biofuel volume requirement of 3.61 billion gallons. As described in a memorandum to the docket, supply through the end of September coupled with a review of seasonal variations in supply for previous years indicate that the 2016 standards are indeed attainable.

For comparison, we have also reviewed RINs available for compliance in previous years, along with the effective volume requirements in those years.

“Comparison of 2016 availability of RINs and 2016 standards,” memorandum from David Korotney to docket EPA-HQ-OAR-2016-0004.

“Comparison of availability of RINs and standards for previous years,” memorandum from David Korotney to docket EPA-HQ-OAR-2016-0004.

A. Volumetric Limitation on Use of the Cellulosic Waiver Authority

As described in Section II.A, when making reductions in advanced biofuel and total renewable fuel under the cellulosic waiver authority, the statute limits those reductions to no more than the reduction in cellulosic biofuel. As described in Section III.D, we are finalizing a 2017 volume requirement for cellulosic biofuel of 311 million gallons, representing a reduction of 5,189 million gallons from the statutory target of 5,500 million gallons. As a result, 5,171 million gallons is the maximum volume reduction for advanced biofuel and total renewable fuel that is permissible using the cellulosic waiver authority.

If we were to use the cellulosic waiver authority to this maximum extent, the resulting 2017 volumes would be 3.83 and 18.83 billion gallons for advanced biofuel and total renewable fuel, respectively.

If we determined it necessary to provide further reductions to address inadequate domestic supply or severe economic or environmental harm, such further reductions would be possible using the general waiver authority.

Table IV.A-1—Lowest Permissible Volume Requirements Using Only the Cellulosic Waiver Authority

[Million gallons]

Advanced biofuel

Total

renewable

fuel

Statutory target

9,000

24,000

Maximum reduction permitted under the cellulosic waiver authority

5,189

Lowest 2017 volume requirement permitted using only the cellulosic waiver authority

3,811

18,811

We are authorized under the cellulosic waiver authority to reduce the advanced and total renewable fuel volumes “by the same or a lesser” amount as the reduction in the cellulosic biofuel volume. Thus, we are not required to use the authority to its maximum extent. And, as discussed in Section II.A, EPA has broad discretion in using the cellulosic waiver authority, since Congress did not specify the circumstances under which it may or should be used nor the factors to consider in determining appropriate volume reductions. We believe that advanced biofuel should be permitted to compensate for a portion of the shortfall in cellulosic biofuel, thereby promoting the larger RFS goals of reducing GHG emissions and enhancing energy security. To that end, we have investigated the volume of advanced biofuel that is reasonably attainable and appropriate to require in 2017, and have determined that such volumes are higher than the lowest permissible volumes shown in the table above.

B. Determination of Reasonably Attainable and Appropriate Volumes

In the NPRM we proposed to use only the cellulosic waiver authority to reduce volumes of advanced biofuel, and to use both the cellulosic and general waiver authorities to reduce volumes of total renewable fuel. As noted above, and described in more detail in this section and in Section V, we have determined that use of the general waiver authority is not necessary for any renewable fuel category in 2017. However, in response to the NPRM, some commenters misstated our obligations under the cellulosic waiver authority and our intent with respect to its use in setting the volume requirement for advanced biofuel. For instance, some stakeholders expressed concern that EPA had not proposed to set the advanced biofuel volume requirement at the maximum achievable level, but rather at a level that was “reasonable.” Many of these stakeholders suggested that it would be most consistent with the statutory goals if we were to set the volume requirement for advanced biofuel equal to the maximum achievable volume.

In the NPRM, as well as in the 2014-2016 final rule, we made a clear distinction between our approach in setting volumes under the cellulosic waiver authority versus our approach in setting volumes under the general waiver authority. The prerequisite for the general waiver authority as EPA has exercised it to date is a finding that there is an “inadequate domestic supply” of renewable fuel. In using this authority in the 2014-2016 final rule we noted that our objective was to waive volumes to the point where the inadequacy of supply is removed.

Therefore, we set volume requirements at the level we determined to be the maximum achievable. When using the cellulosic waiver authority, in contrast, we are only required to ensure that any reduction is no larger than that provided for cellulosic biofuel. The statute does not specify other prerequisites for its use, nor any criteria or factors that EPA should consider in determining whether, and to what extent, to use the authority. Thus, under the cellulosic waiver authority, Congress provided EPA with broad discretion to lower advanced biofuel and total renewable fuel applicable volumes in instances where it lowers the cellulosic biofuel requirement, as in today's rule. In exercising this broad discretion in the context of the 2014-2016 final rule, our intent was to require the use of “reasonably attainable” volumes to partially backfill for missing cellulosic biofuel volumes. We explained that we were not required, and did not intend, to necessarily require the use of the “maximum” volumes of advanced biofuel, and that our assessment of “reasonably attainable” volumes was similar to, but not intended to be as exacting, as our assessment of “maximum achievable” supplies when using the general waiver authority based on a finding of inadequate domestic supply.

In using the cellulosic waiver authority to set the 2017 advanced biofuel volume requirement, we have been mindful of the fact that the statute concentrates all of the very substantial growth in the statutory targets for renewable fuel on advanced biofuel for years after 2014, and that advanced biofuels are required to provide significantly greater lifecycle GHG reductions (at least 50%) in comparison to non-advanced renewable fuel (20%, or no reduction if grandfathered under § 80.1403). In addition, we generally believe that greater use of renewable fuel enhances energy security. These considerations, taken alone, would support the commenters' suggestion that when using the cellulosic waiver authority we should require maximum achievable levels of advanced biofuel to backfill to the greatest extent possible for missing volumes of cellulosic biofuel. However, we note, first, that our assessments contain some uncertainty. To the extent we may over-estimate supply in setting the advanced biofuel volume requirement, we can create a situation where compliance costs dramatically escalate and/or obligated parties are either unable to comply or compliance requires a substantial drawdown in the collective bank of carryover RINs. While our assessment of “maximum achievable” volumes for the 2014-2016 final rule reflected our view of what is achievable, if proven to be correct such negative implications will not materialize. Nevertheless, we believe that it is appropriate given the broad discretion afforded under the cellulosic waiver authority to allow an additional cushion to ensure that the standards can be met, and we describe this less exacting approach as one designed to identify “reasonably attainable” volumes based on supply considerations. In the 2014-2016 final rule we set the advanced biofuel volume requirement so as to require all reasonably attainable volumes of advanced biofuel, and we proposed a similar approach for 2017.

However, some commenters suggested that EPA should take into consideration the fact that higher advanced biofuel volume requirements could create an incentive for switching advanced biofuel feedstocks from existing uses to biofuel production, and that in light of such market reactions we should set the advanced biofuel volume requirement at less than the reasonably attainable level. We agree with these commenters that we have the broad discretion when using the cellulosic waiver authority to take into consideration such implications. We believe that in the short-term, every increment in the advanced biofuel standard should not necessarily be expected to result in a corresponding incremental increase in the volume of advanced biofuel feedstocks produced on a global scale, since increasing demand for such feedstocks for advanced biofuel production could potentially be filled through diversion of feedstocks from other non-biofuel markets. There is significant uncertainty related to the GHG emission benefits associated with fuels produced in this way. Moreover, rapidly increasing the required volumes of advanced biofuels without giving the market adequate time to adjust by increasing supplies could also result in diversion of advanced biofuels from foreign countries to the U.S. without increasing total global supply, contribute to shortages and/or reallocation of raw materials in other sectors, disrupt markets, and/or increase prices.

We believe that we are authorized to take these factors into account in exercising our discretion under the cellulosic waiver authority. Although we are not able to quantify these factors at this time, we believe that they would be a likely consequence of setting the 2017 volume requirement for advanced biofuel at the highest possible level, and that they justify our taking a more measured approach in determining the volume of advanced biofuel that should backfill for missing cellulosic biofuel volumes in 2017.

These considerations are described in more detail in the following section describing our assessment of advanced biodiesel and renewable diesel volumes. Our final approach results in a volume requirement that provides for significant growth in the production and use of advanced biofuels above all historic levels, is within the range of what is reasonably attainable from a supply perspective and is also appropriate, taking other considerations into account.

For example, see comments from Action Aid USA & The Hunger Project (EPA-HQ-OAR-2016-0004-1817), American Cleaning Institute (EPA-HQ-OAR-2016-0004-1735) and Union of Concerned Scientists (EPA-HQ-OAR-2016-0004-1672).

We have also considered comments raising additional factors that stakeholders deemed relevant in setting the advanced biofuel standard, as described in the response to comments document. We believe the volume requirement established today reflects an appropriate balancing of these often competing considerations.

Having determined the reasonably attainable and appropriate volume reduction for advanced biofuel, we used the cellulosic waiver authority to provide an equivalent reduction in total renewable fuel. That step is described in more detail in Section V.A, together with our assessment that no further increment of reduction is required for total renewable fuel in 2017 on the basis of supply considerations.

1. Imported Sugarcane Ethanol

In the NPRM, we noted that the predominant source of advanced biofuel other than cellulosic biofuel and BBD was imported sugarcane ethanol, and we proposed that the volume of imported sugarcane ethanol for purposes of determining the reasonably attainable volume of advanced biofuel for 2017 would be 200 million gallons. This is the same volume that we used in setting the 2016 standards, and we said that the information currently available to us did not suggest that the circumstances would be significantly different for 2017 than they are for 2016. We also pointed to the high variability in ethanol import volumes in the past (including of Brazilian sugarcane ethanol, the predominant form of imported ethanol), the fact that imports of Brazilian sugarcane ethanol in 2014 and 2015 reached only 64 and 89 million gallons, respectively, increasing gasoline consumption in Brazil, and variability in Brazilian production of sugar.

In response to the NPRM, stakeholders representing some refiners and conventional ethanol interests said that our estimate of 200 million gallons was too high given recent import levels. We agree that 200 million gallons is considerably higher than actual imports of Brazilian sugarcane ethanol in 2014 and 2015, of 64 and 89 million gallons, respectively, but it is far lower than the historic maximum of 680 million gallons of Brazilian sugarcane ethanol imports in 2006 or the more recent high volume of 486 million gallons imported in 2012.

ER12DE16.004

In proposing to use 200 million gallons in assessing reasonably attainable supply of advanced biofuel in 2017, we attempted to balance indications of lower potential imports from more recent data with indications that higher volumes were possible based on older data, as depicted in the figure above.

Stakeholders who represent advanced biofuel interests generally believed that our assumption of 200 million gallons of imported sugarcane ethanol for 2017 was too low. Some commenters cited projections from other sources that were considerably higher than 200 million gallons, and even pointed to the historical maximum of 681 million gallons for sugarcane ethanol imported in 2006 as evidence that volumes larger than 200 million gallons are possible. We generally believe that this information is of limited probative value in determining the volume of sugarcane ethanol that should be assumed in the context of determining reasonably attainable volumes of advanced biofuel for 2017. Sources providing projections for 2017 and beyond have not accurately predicted current and past import levels, highlighting the uncertainty in such projections.

As for the historical maximum of 681 million gallons in 2006, there is no basis for believing that the economic and market circumstances which led to that import volume would be repeated in 2017, more than a decade later, when more recent years have shown far more modest import levels.

For instance, the FAPRI-MU report “U.S. Baseline Briefing Book,” (March 2016) indicates that ethanol imports in 2015 reached 167 mill gal, nearly double the actual imports of 89 mill gal according to data from EMTS. Also, the FAPRI-ISU report “2012 World Agricultural Outlook” projected that the U.S. would be a net ethanol exporter in 2013-2015, when in fact it was a net importer.

The Brazilian Sugarcane Industry Association (UNICA) said that it was not appropriate for EPA to use actual import data from 2010-2015 as the basis for estimating the potential import volume in 2017. While these years reflects the period when the RFS2 program has been in place, UNICA argued that the low import volumes in 2014 and 2015 resulted from the fact that EPA had not established applicable RFS percentage standards until the end of 2015. However, UNICA also noted that weather, harvests, and world prices also affect ethanol exports from Brazil. As discussed in the 2014-2016 final rule, total ethanol exports from Brazil in 2014 and 2015 were at their lowest levels since 2004, suggesting the possibility that unusual factors were at work in these two years to minimize exports from Brazil. For instance, Brazil increased the ethanol concentration requirement in its gasoline in early 2015 and indications from available data suggest that total gasoline consumption will continue rising in 2016.

65 66

Given the high variability of ethanol imports in the past and the difficulty in precisely identifying the reasons for that variability, there is no way to know whether the lack of applicable standards in 2014 and 2015 was the primary

reason for low import levels, or a less significant contributing factor.

See discussion at 80 FR 77477.

“Gasoline Demand in Brazil: An empirical analysis,” Thaís Machado de Matos Vilela, Pontifical Catholic University of Rio de Janeiro, Figure 2.

Since release of the NPRM, some data on imports in 2016 have become available. Imports of sugarcane ethanol in 2016 through September have reached 34 million gallons, with essentially all of this volume occurring since June.

Historically, ethanol imports have been higher in the summer and early fall than at other times of the year, so it is possible that the monthly average that has occurred in June-September could continue through the end of the year. If so, then total sugarcane ethanol imports for 2016 could reach 76 million gallons, similar to the levels imported in 2014 and 2015. Nevertheless, the low observed 2016 volume indicates that an increase in the advanced biofuel standard does not necessarily result in an increase in imports of sugarcane ethanol, and also implies that even California's Low Carbon Fuel Standard (LCFS) has not spurred demand for the large volumes of advanced ethanol imports that UNICA predicted.

Data from the International Trade Commission, from which EIA derives their reported values of imports of ethanol. See “2016 imports of ethanol from Brazil through September,” docket EPA-HQ-OAR-2016-0004.

For instance, UNICA said that “. . . sugarcane ethanol should continue to be a major renewable fuel source in California.”

As they did in response to the 2014-2016 proposed standards, UNICA again commented on the proposed 2017 standards that potential ethanol exports from Brazil to the U.S. are driven primarily by a combination of Brazilian ethanol production capacity and opportunities created by the RFS program itself. The RIN value of advanced biofuels is undoubtedly a factor in the volume of ethanol that Brazil exports to the U.S., and the RIN value is a function of the level of the advanced biofuel standard. However, recent data on imports of sugarcane ethanol into the U.S. suggest that it would be inappropriate to increase the volume used in the determination of the applicable volume requirement for advanced biofuel above 200 million gallons.

UNICA went on to say that sugarcane mills have significant flexibility in the amount of sugar versus ethanol that they produce, and that the amount of ethanol required to be blended into gasoline is likewise flexible based on opportunities for ethanol exports. We continue to believe that UNICA has underestimated the uncertainty associated with other market factors, including the E10 blendwall in the U.S., ongoing growth in gasoline demand in Brazil, and competing world demand for sugar, and has overstated the flexibility and speed with which Brazil can change the relative production of sugar versus ethanol and the required ethanol content of gasoline.

Based on these facts, we continue to believe that recent low import levels and high variability in longer-term historical imports are significant and must be taken into account in the context of determining reasonably attainable volumes of advanced biofuel for 2017. However, we do not agree with commenters who argued for deviating from the 200 million gallons of sugarcane ethanol that we proposed using in the determination of the 2017 advanced biofuel volume requirement. We believe that this level reflects a reasonable intermediate point between the lower levels imported recently and the considerably higher levels that have been achieved in earlier years. Regardless of this assumed level used only in deriving the advanced biofuel volume requirement, we note that actual imports of sugarcane ethanol could be higher or lower than 200 million gallons as shown in the scenarios for how the market could respond in Section V.C below.

Aside from the specific assessment of sugarcane ethanol imports, one stakeholder said that the inclusion of any imported renewable fuels in the determination of applicable standards was inconsistent with Congressional intent to increase domestic energy security. However, the statute does not discriminate between domestically-produced and imported biofuels, and an increased diversity of fuels, including those imported from a variety of countries, helps contribute to the stability of the energy supply.

2. Biodiesel and Renewable Diesel

With regard to biodiesel and renewable diesel, there are many different factors that could potentially constrain the

total

volume of these fuels that can be used as transportation fuel or heating oil in the United States. These constraints could include such factors as the availability of qualifying biodiesel and renewable diesel feedstocks, limitations on the market's ability to distribute biodiesel, and limitations related to diesel engine manufacturers recommendations for biodiesel use in the engines they produce. Each of these factors, and the degree to which they may constrain the total supply of biodiesel and renewable diesel in 2017, is discussed in detail in Section V.B.2. Of these potential constraints, however, the primary constraint considered in our determination of the reasonably attainable and appropriate volume of

advanced

biodiesel and renewable diesel considered in the context of deriving the advanced biofuel standard for 2017 is the availability of advanced biodiesel and renewable diesel feedstock.

This is because most registered biodiesel and renewable diesel production facilities are capable of producing either advanced or non-advanced biofuels depending on a number of economic and regulatory factors, and the combined production capacity of the registered biodiesel and renewable diesel facilities exceeds the volume of these fuels we project can be supplied in 2017.

Since the reasonably attainable and appropriate volume of

advanced

biodiesel and renewable diesel for 2017 projected in the context of deriving the advanced biofuel standard (determined primarily by an assessment of advanced biodiesel and renewable feedstocks) is less than the maximum reasonably achievable volume of all biodiesel and renewable diesel in 2017, other potential constraints (such as limitations on the market's ability to distribute and use biodiesel and renewable diesel) are not expected to limit the supply of

advanced

biodiesel and renewable diesel. This section will therefore focus on the availability of qualifying feedstocks, while other potential constraints related to the distribution and use of biodiesel and renewable diesel are discussed in Section V.B.2.

Throughout this section we refer to advanced biodiesel and renewable diesel as well as advanced biodiesel and renewable diesel feedstocks. In this context, advanced biodiesel and renewable diesel refers to any biodiesel or renewable diesel for which RINs can be generated that satisfy an obligated party's advanced biofuel obligation (

i.e.,

D4 or D5 RINs). An advanced biodiesel or renewable feedstock refers to any of the biodiesel, renewable diesel, jet fuel, and heating oil feedstocks listed in Table 1 to § 80.1426 that can be used to produce fuel that qualifies for D4 or D5 RINs. These feedstocks include soy bean oil; oil from annual cover crops; oil from algae grown photosynthetically; biogenic waste oils/fats/greases; non-food grade corn oil; camelina sativa oil; and canola/rapeseed oil (See pathways F, G, and H of Table 1 to § 80.1426).

See Section V.B.2.ii for a discussion of the current production capacity for biodiesel and renewable diesel. While some biodiesel facilities are limited to certain types of feedstocks (typically virgin vegetable oils) we note that some virgin vegetable oils qualify as advanced biofuels, while others can only be used to produce non-advanced renewable fuel (fuel that qualifies to produce D6 RINs) when used at facilities that qualify for an exemption from the 20% lifecycle greenhouse gas reduction requirements under 40 CFR 80.1403.

Before considering availability of qualifying feedstocks that could be used to produce advanced biodiesel and renewable diesel, it is helpful to review the supply of biodiesel and renewable

diesel to the United States in recent years. While historic supply data and trends alone are insufficient to project the volumes of biodiesel and renewable diesel that are reasonably attainable and appropriate in future years, historic data can serve as a useful frame of reference in considering future volumes. Past experience suggests that a high percentage of the supply of biodiesel and renewable diesel to the United States qualifies as advanced biofuel.

In previous years biodiesel and renewable diesel produced in the United States has been almost exclusively advanced biofuel.

Imports of advanced biodiesel have increased in recent years and will likely continue in 2017, as discussed in Section V.B.2.iii. Setting the 2017 advanced biofuel volume requirement so as to require that a high percentage of the projected total supply of biodiesel and renewable diesel would be advanced biofuel would not only be consistent with our experience in previous years, but would also be consistent with the goal of seeking to increase volumes of fuels with higher potential GHG reductions.

From 2011 through 2015 over 95% of all biodiesel and renewable diesel supplied to the United States (including domestically-produced and imported biodiesel and renewable diesel) qualified as advanced biodiesel and renewable diesel (6,836 million gallons of the 7,159 million gallons) according to EMTS data.

From 2011 through 2015 over 99.8% of all the domestically produced biodiesel and renewable diesel supplied to the United States qualified as advanced biodiesel and renewable diesel (6,538 million gallons of the 6,545 million gallons) according to EMTS data.

Table IV.B.2-1—Advanced (D4 and D5) Biodiesel and Renewable Diesel From 2011 to 2016

[million gallons]

2011

2012

2013

2014

2015

2016

Domestic Biodiesel (Annual Change)

967 (N/A)

1,014 (+47)

1,376 (+362)

1,303 (−73)

1,253 (−50)

N/A

Domestic Renewable Diesel (Annual Change)

58 (N/A)

11 (−47)

92 (+81)

155 (+63)

175 (+20)

N/A

Imported Biodiesel(Annual Change)

44 (N/A)

40 (−4)

156 (+116)

130 (−26)

261 (+131)

N/A

Imported Renewable Diesel

(Annual Change)

0 (N/A)

28 (+28)

145 (+117)

129 (−16)

121 (−8)

N/A

Exported Biodiesel

(Annual Change)

48 (N/A)

102 (+54)

125 (+23)

134 (+9)

133 (−1)

N/A

Total (Annual Change)

1021 (N/A)

991 (−30)

1,644 (+653)

1,583 (−61)

1,677 (+94)

2,100 (+423)

All data for 2011-2015 from EMTS. EPA reviewed all advanced biodiesel and renewable diesel RINs retired for reasons other than demonstrating compliance with the RFS standards and subtracted these RINs from the RIN generation totals for each category in the table above to calculate the supply in each year.

Volumes for 2016 are those determined reasonably attainable in the final rule deriving the 2016 standards. This projection was for all advanced biodiesel and renewable diesel and did not differentiate between domestically produced and imported fuels or between biodiesel and renewable diesel.

In calculating the supply of advanced biodiesel and renewable diesel we have assumed all exported biodiesel must retire 1.5 RINs per gallon consistent with 80.1130. No parties reported exports of advanced renewable diesel from 2011-2015.

Table IV.B.2—2 Supply of Conventional (D6) Biodiesel and Renewable Diesel From 2011 to 2016

[million gallons]

2011

2012

2013

2014

2015

2016

Domestic Biodiesel (Annual Change)

0 (N/A)

0 (+0)

6 (+6)

1 (−5)

0 (+0)

N/A

Domestic Renewable Diesel (Annual Change)

0 (N/A)

0 (+0)

N/A

Imported Biodiesel (Annual Change)

0 (N/A)

0 (+0)

31 (+31)

52 (+21)

74 (+22)

N/A

Imported Renewable Diesel

(Annual Change)

0 (N/A)

0 (+0)

53 (+53)

0 (−53)

106 (+106)

N/A

Exported Biodiesel

(Annual Change)

0 (N/A)

0 (+0)

N/A

Total (Annual Change)

0 (N/A)

0 (+0)

90 (+90)

53 (−37)

180 (+127)

400 (+220)

All data for 2011-2015 from EMTS. EPA reviewed all conventional biodiesel and renewable diesel RINs retired for reasons other than demonstrating compliance with the RFS standards and subtracted these RINs from the RIN generation totals for each category in the table above to calculate the supply in each year.

Volumes for 2016 are those used in deriving the total renewable fuel standard in the final rule deriving the 2016 standards. This projection was for all conventional biodiesel and renewable diesel and did not differentiate between domestically produced and imported fuels or between biodiesel and renewable diesel.

In calculating the supply of conventional biodiesel and renewable diesel we have assumed all exported biodiesel must retire 1.5 RINs per gallon consistent with 80.1130. No parties reported exports of renewable diesel from 2011-2015.

Since 2011 the year-over-year increases in the volume of advanced biodiesel and renewable diesel in the United States have varied greatly, from a low of negative 61 million gallons from 2011 to 2012 to a high of 653 million gallons from 2012 to 2013. These changes in supply were likely influenced by a number of factors such as the cost of biodiesel feedstocks and petroleum diesel, the status of the biodiesel blenders tax credit, growth in marketing of biodiesel at high volume truck stops and centrally fueled fleet locations, demand for biodiesel and renewable diesel in other countries, and the volumes of renewable fuels (particularly advanced biofuels) required by the RFS. This historical information does not indicate that the maximum previously observed increase of 653 million gallons of advanced biodiesel and renewable diesel is reasonably attainable and appropriate from 2016 to 2017, nor does it indicate that the low growth rates observed in other years represent the limit of

potential growth in 2017. Rather, these data illustrate both the magnitude of the increases in advanced biodiesel and renewable diesel in previous years and the significant variability in these increases.

We also acknowledge that the volume of conventional (D6) biodiesel and renewable diesel use in the United States has increased in recent years, and that these fuels are likely to continue to contribute to the supply of renewable fuel in the United States in 2017.

If there are constraints on the total volume of all forms of biodiesel and renewable diesel related to the ability of the market to distribute and/or consume biodiesel and renewable diesel, as we believe will likely be the case in 2017, setting the RFS standards in such a way that the projected volume of

advanced

biodiesel and renewable diesel was equal to the projected volume of

total

biodiesel and renewable diesel (including both advanced and conventional fuels) would require all of the reasonably attainable volume of biodiesel and renewable diesel to qualify as an advanced biofuel (See Section V.B.2 for more detail on these constraints). This would assume that the standards we set could effectively close the market for

conventional

biodiesel and renewable diesel, as constraints related to the distribution and use of additional volumes of biodiesel and renewable diesel would be expected to make the use of conventional fuels in addition to the advanced volumes unlikely.

If effective, establishing the RFS volumes in this way could significantly disrupt the supply chains established to supply the United States with conventional biodiesel and renewable diesel. However, it is also possible that the conventional forms of these fuels would continue to be imported in 2017 despite our action in setting the advanced biofuel standard, consistent with past practice and established contracts and supply chains, and that the result, due to constraints related to distribution and/or consumption of all forms of biodiesel and renewable diesel, would be an inability to satisfy the advanced biofuel volume requirement through the production and use of advanced biofuels (as opposed to use of carryover RINs).

As shown in Table IV.B.2-2, there was no qualifying conventional biodiesel and renewable diesel used in the United States in 2011 and 2012, and the volume of these fuels rose to 90 million gallons, 53 million gallons, and 180 million gallons from 2013-2015.

We also note that the potential constraints related to the distribution and use of biodiesel may lead to an increasing demand for renewable diesel, which faces fewer potential constraints related to distribution and use than biodiesel. Much of the renewable diesel produced globally would qualify as conventional, rather than advanced biofuel, and we therefore expect that conventional renewable diesel will continue to be an important source of renewable fuel used in the United States in 2017.

Although there is uncertainty regarding EPA's ability to effectively constrain the entry into commerce in the U.S. of conventional biodiesel and renewable diesel through setting a higher advanced biofuel standard, we believe our decision for 2017 is reasonably made on the basis of an analysis of feedstock availability. The primary difference between conventional and advanced forms of biodiesel and renewable diesel is the type of feedstock used for production. EPA received several comments on our proposed rule related to the availability of qualifying advanced biodiesel and renewable diesel feedstocks. Some of these comments argued that the expected increase of qualifying advanced feedstocks was less than the proposed increase of 200 million gallons of advanced biodiesel and renewable diesel from 2016 to 2017 (from 2.1 billion gallons to 2.3 billion gallons). These parties generally argued that because the available supply of qualifying advanced feedstocks would not increase in line with the proposed volume requirements, the proposed standards would likely result in feedstock substitution, with an increased use of qualifying advanced feedstocks for biodiesel and renewable diesel production, while the parties previously using these feedstocks for food, feed, or industrial purposes would turn to alternative feedstocks. These commenters generally speculated that as biodiesel and renewable diesel producers sought out more qualifying advanced feedstocks, other parties would likely turn to greater use of palm oil as a substitute. Alternatively, other parties argued that there were sufficient qualifying advanced feedstocks to achieve significantly higher volumes of advanced biodiesel and renewable diesel than the volumes in EPA's proposed rule. They requested that in light of the availability of these feedstocks EPA should finalize increases from both the proposed advanced biofuel standard for 2017 and the proposed biomass-based diesel standard for 2018. Commenters arguing for either lower or higher advanced biofuel standards in 2017 on the basis of the availability of qualifying advanced feedstocks both included feedstock assessments to support their claims. These assessments are discussed briefly below. More detail on EPA's evaluation of each of these assessments can be found in Section 2.4.5 of the RTC document.

Commenters claiming that qualifying feedstocks would not increase sufficiently to meet the proposed increase in advanced biodiesel and renewable diesel from 2016 to 2017 generally relied on a study by Nelson and Searle.

This study builds upon a 2015 study by Brorsen

of available feedstocks capable of being utilized to produce biodiesel. The Nelson and Searle study focused on the production and recovery of feedstocks in the United States that can be used to produce advanced biodiesel, after accounting for demand from other sectors (

e.g.,

food, feed, industrial, etc.). It concluded that feedstocks for advanced biofuels (

e.g.,

soy oil, canola oil, yellow grease etc.) were expected to increase so that biodiesel fuel could increase by 23 million gallons in 2017, and increase at an annual average rate of 31.5 million gallons through 2022.

The study's strength is its transparent methodology in accounting for the different types of feedstocks that can be utilized to produce advanced biofuels.

Nelson, B. and Searle, S., “

Projected availability of fats, oils, and greases in the U.S.”,

2016, ICCT Working Paper. EPA-HQ-OAR-2016-0004-1800.

Brorsen, W., “

Projections of U.S. Production of Biodiesel Feedstock”,

2015, EPA-HQ-OAR-2015-0111.

Producing one gallon of biodiesel or renewable diesel requires approximately one gallon of feedstock.

The Nelson and Searle study is a fairly conservative view of the increased availability of advanced biodiesel/renewable diesel feedstocks from planted crops in the United States in the next few years. For the following reasons we believe it likely under-estimates the total availability of advanced feedstocks for biodiesel and renewable diesel production in 2017. USDA's most recent World Agricultural Supply and Demand Estimates (WASDE) has larger increases in vegetable oils in the U.S. than the Nelson and Searle study (see discussion below).

The Nelson and Searle study did not consider the availability of feedstocks for advanced biodiesel and renewable diesel production in countries other than the United States. It also assumed no significant increases in distillers corn oil or the recovery of additional waste oils such as yellow grease or brown grease.

USDA,

World Agricultural Supply and Demand Estimates,

September 2016, p. 10.

The study also did not account for the potential decline in soybean oil use in food, as a result of a June 2015 FDA determination requiring the elimination by 2018 of all partially hydrogenated oil in food use (See the determination on the RFS

Web site at

http://www.fda.gov/Food/IngredientsPackagingLabeling/FoodAdditivesIngredients/ucm449162.htm

). To the extent that soy oil continues to be phased down for food purposes, this will free up some supply of soy oil for biodiesel. Any reduction in soybean oil used for food purposes, however, would be expected to lead to an increased use of other vegetable oils for food purposes. These alternative oils, then, would not be available as potential feedstocks for renewable fuel.

Commenters arguing that there is sufficient available feedstock for much higher volumes of advanced biodiesel and renewable diesel generally cited studies conducted by LMC International.

80 81

The 2016 LMC International study is an update to a previous study that LMC International undertook for the previous RFS Annual Rule (2014-2016). Both of the LMC International studies sought to quantify the global availability of feedstocks for advanced biodiesel and renewable diesel production, after accounting for demand for these feedstocks in other markets. The most recent LMC International study concluded that the global availability of feedstocks for use in advanced biodiesel and renewable diesel production is expected to grow from 8.6 billion gallons in 2017 to 9.2 billion gallons in 2018 and 9.8 billion gallons in 2020. While they do not provide an estimate of feedstock availability broken down by qualifying oils and fats in 2016, they do state that the global supply of advanced feedstock is expected to “rise steadily” over the forecast period. In part, this is due to an upward revision of the projected level of soy oil production worldwide since their 2015 study. This would suggest an annual increase in advanced feedstock availability of up to 600 million gallons per year. The most recent LMC International study does not attempt to determine how much of the increase in this feedstock, or the resulting biodiesel or renewable diesel, could be expected to be used in the United States versus other international markets, however they do note that approximately one third of the existing feedstock is produced in North America.

LMC International, “

Current and Future Supply of Biodiesel Feedstocks”,

2016, EPA-HQ-OAR-2016-0004-2904 (Attachment 14).

LMC International, “

Current and Future Supply of Biodiesel Feedstocks”,

2015, EPA-HQ-OAR-2016-0004-2904 (Attachment 14).

Both of the LMC International studies may overestimate feedstock availability. For example, when estimating availability, the studies consider the theoretical maximum amount of oil that could be extracted from an oil seed, or “oil in seed”, versus the amount of oil actually expected to be extracted/produced. Some amount of the soybean supply is not crushed, and is fed directly to livestock, and in other instances the soybean is crushed, and oil is extracted, but it is added as a necessary element to feed and thus doesn't enter the oil market. These unaccounted for alternate practices contribute to oil supply estimates that are in some cases significantly higher than USDA estimates. For example, the most recent LMC International estimate of global soybean oil supply is more than 25 percent greater than that projected by USDA-WASDE in 2016/2017.

USDA,

World Agricultural Supply and Demand Estimates,

August 2016.

http://usda.mannlib.cornell.edu/usda/waob/wasde//2010s/2016/wasde-08-12-2016.pdf

NBB also submitted a study that contained updated results from the World Agricultural Economic and Environmental Services model (WAEES model).

Rather than project the availability of advanced biodiesel and renewable diesel feedstocks in 2017, this study instead looked at the likely impacts of meeting a “market reality” scenario with an advanced biofuel standard of 4.75 billion gallons in 2017 and 2018 and biomass-based diesel standards of 2.0 and 2.50 billion gallons in 2017 and 2018, respectively. In the “market reality” scenario, the WAEES model projected that approximately 2.3 billion gallons of biodiesel and 0.6 billion gallons of renewable diesel would be used to satisfy the RFS standards for 2017 assumed in this scenario.

The study concludes that these higher standards could be met with a rise in biodiesel costs from $3.02 in 2016 to $3.34 in 2017 and $3.58 in 2018.

Kruse, J., “Implications of Higher Biodiesel Volume Obligations for Global Agriculture and Biofuels”, 2016, World Agricultural Economic and Environmental Services (WAEES), EPA-HQ-OAR-2016-0004-2904 (Attachment 13).

This study assumes that all of the biodiesel is advanced biodiesel, but notes that the volume of renewable diesel includes both advanced and conventional renewable diesel.

These WAEES model results, however, are significantly impacted by a number of fairly optimistic assumptions. Each individual assumption may be justifiable, but when compiled together the results of the study imply an outlook for biodiesel/renewable diesel feedstocks that is more favorable than is likely. For example, WAEES assumes the U.S. biodiesel blenders tax credit is in place for 2017 and 2018; that foreign countries do not meet their renewable fuel mandates thus freeing up biodiesel supplies for the United States market;

that biodies

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