# Regulation of Fuels and Fuel Additives: Renewable Oxygenate Requirement for Reformulated Gasoline

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## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** August 2, 1994

## Text

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[AMS-FRL-5017-1]

Regulation of Fuels and Fuel Additives: Renewable Oxygenate
Requirement for Reformulated Gasoline

AGENCY: Environmental Protection Agency.

ACTION: Final rule.

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SUMMARY: EPA's regulations for reformulated gasoline (RFG) based on the
Clean Air Act, as amended, requires that gasoline sold in certain areas
be reformulated to achieve the greatest possible reductions in vehicle
emissions of toxic and ozone-forming compounds. Among other things,
EPA's regulations establish standards requiring a specified oxygen
content in reformulated gasoline. This rule promulgates additional
regulations which require that 30 percent of the oxygen required by the
Clean Air Act to be used in reformulated gasoline be derived from
renewable feedstocks. This renewable oxygenate requirement will assure
that implementation of the RFG program is consistent with the
longstanding federal policy of promoting renewable fuels. The renewable
oxygenate requirement is expected to have a positive energy impact by
reducing the amount of fossil energy needed to meet the requirements of
the reformulated gasoline program. In addition, this program is
expected to stimulate the development of new technologies which would
lead to reduced emissions of greenhouse gases and further reductions in
fossil energy consumption.

EFFECTIVE DATE: This rule is effective on September 1, 1994, except
Secs. 80.83 (g) and (h) are not effective until OMB has approved the
Information Collection Requirements contained in them. EPA will publish
a document in the Federal Register following OMB approval of the
information collection requirements.

ADDRESSES: Materials relevant to this final rule (FRM) are contained in
Public Docket A-93-49, located at Room M-1500, Waterside Mall (ground
floor), U.S. Environmental Protection Agency, 401 M Street SW.,
Washington, DC 20460. Information relevant to this rulemaking may also
be found in dockets A-91-02 and A-92-12, which are hereby incorporated
into docket A-93-49 for the purposes of this rulemaking. The docket may
be inspected from 8 a.m. until 4 p.m. Monday through Friday. A
reasonable fee may be charged by EPA for copying docket materials.

FOR FURTHER INFORMATION CONTACT:
Paul Machiele, Regulation Development and Support Division, U.S. EPA
(RDSD-12), 2565 Plymouth Road, Ann Arbor, MI 48105, Telephone: (313)
668-4264.
Joann Jackson Stephens, Regulation Development and Support Division,
U.S. EPA (RDSD-12), 2565 Plymouth Road, Ann Arbor, MI 48105, Telephone:
(313) 668-4276.

To request copies of this rule contact: Delores Frank, Regulation
Development and Support Division, U.S. EPA (RDSD-12), 2565 Plymouth
Road, Ann Arbor, MI 48105, Telephone: (313) 668-4295.

SUPPLEMENTARY INFORMATION: A copy of this action is available on the
OAQPS Technology Transfer Network Bulletin Board System (TTNBBS). The
TTNBBS can be accessed with a dial-in phone line and a high-speed modem
(PH# 919-541-5742). The parity of your modem should be set to none, the
data bits to 8, and the stop bits to 1. Either a 1200, 2400, 9600, or
14400 baud modem should be used. When first signing on, the user will
be required to answer some basic informational questions for
registration purposes. After completing the registration process,
proceed through the following series of menus:
(M) OMS
(K) Rulemaking and Reporting
(3) Fuels
(9) Reformulated gasoline.

A list of ZIP files will be shown, all of which are related to the
reformulated gasoline rulemaking process. Today's action, as well as
the Regulatory Impact Analysis & Response to Comments Document, will be
in the form of ZIP files and can be identified by the following titles:
ROXY-PRE.ZIP, ROXY-REG.ZIP, and ROXY-RIA.ZIP. To download these files,
type the instructions below and transfer according to the appropriate
software on your computer:

ownload, rotocol, xamine, ew, ist, or elp Selection
or to exit: D filename.zip

You will be given a list of transfer protocols from which you must
choose one that matches with the terminal software on your own
computer. The software should then be opened and directed to receive
the file using the same protocol. Programs and instructions for de-
archiving compressed files can be found via ystems Utilities from
the top menu, under rchivers/de-archivers.
Please note that due to differences between the software used to
develop the document and the software into which the document may be
downloaded, changes in format, page length, etc. may occur.

I. Background

A. Clean Air Act Requirements

The primary purpose of the federal reformulated gasoline program is
to improve air quality by reducing motor vehicle emissions of toxic and
tropospheric ozone-forming compounds, as prescribed by section 211(k)
of the Clean Air Act as amended (CAA or the Act). The Act mandates
certain requirements for the reformulated gasoline program. Section
211(k)(2) requires a minimum content of 2.0 weight percent oxygen and
maximum content of 1.0 volume percent benzene, and section 211(k)(3)
sets minimum performance standards for emissions of ozone forming
volatile organic compounds (VOC), oxides of nitrogen (NOX), and
air toxics. To meet the oxygen content requirement, oxygenates must be
added to gasoline. The two most common oxygenates used today are methyl
tertiary-butyl ether (MTBE) and ethanol. MTBE is an ether derived
primarily from isobutylene, a product typically produced from natural
gas or petroleum, and methanol, which in turn is also produced
primarily from natural gas. Ethanol is an alcohol produced primarily
from corn, though it can be produced from other feedstocks as well. A
third oxygenate, ethyl tertiary butyl ether (ETBE), is an ether derived
from ethanol and isobutylene. A number of other oxygenates such as
tertiary amyl methyl ether (TAME) and tertiary amly ethyl ether (TAEE)
are currently under consideration by the industry as well. Their
ultimate use will depend on their relative economics compared to those
oxygenates currently in use.
Section 211(k)(1) of the Act directs EPA to promulgate regulations
establishing requirements for reformulated gasoline. It also provides
that such regulations require the greatest reductions in VOC and toxics
emissions, taking into consideration the cost of achieving such
emission reductions, non-air-quality and other air-quality related
health and environmental impacts and energy requirements.

B. Historical Background

There is considerable history behind EPA's decision to promulgate a
renewable oxygenate requirement. Congress and both the past and the
present Administrations have long supported the development and use of
renewable fuels for a variety of reasons, including a desire to reduce
oil imports, save fossil energy, reduce global warming emissions, and
develop domestic sources of fuel. This support has taken the form of a
number of legislative and policy initiatives. For example, since 1978
renewable fuels have been eligible for an excise tax credit which today
is set at 54 cents/gallon. The Departments of Energy and Agriculture
have invested hundreds of millions of dollars in research and
development related to the production and commercialization of
renewable fuels. As a result of these programs, the ethanol industry
developed into a significant industry which by 1990 represented roughly
one percent of the nation's gasoline consumption.
The 1990 amendments to the Clean Air Act provided ethanol blends
with a limited waiver from vapor pressure limits placed on the
volatility of conventional gasolines, in order to maintain the ease
with which ethanol could be blended with gasoline. Furthermore, the
1990 amendments to the Clean Air Act included several provisions which
many expected to further stimulate demand for renewable oxygenates such
as ethanol. These provisions included the wintertime oxygenated fuels
program which began in 1992 and has already considerably increased the
demand for ethanol, and the year-round reformulated gasoline program
which is to begin in December of 1994. EPA promulgated final
regulations for RFG on December 15, 1993 (59 FR 7716, February 16,
1994).
In the process of developing the regulations for the RFG program,
EPA entered into a regulatory negotiation with interested parties
shortly after passage of the Clean Air Act Amendments of 1990. Included
in the negotiations were representatives of the States, oxygenate
producers, farm interests, environmental groups, the oil industry, the
automobile industry, the driving public, the EPA, and the Department of
Energy. (See 56 FR 31176, July 9, 1991, for an explanation of the
members of the negotiating committee and a discussion of the process
for selecting them.) After extensive discussions, an Agreement in
Principle was signed by all members of the advisory committee in August
of 1991.
The 1991 regulatory negotiation agreement formed the basis for
EPA's April 1992 Supplemental Notice of Proposed Rulemaking (SNPRM) (57
FR 13416, April 16, 1992) for reformulated gasoline. In order to ensure
compliance with the minimum reductions in ozone forming volatile
organic compounds (VOCs) required by Congress for the RFG program, this
proposal did not extend the volatility waiver for ethanol-blended
conventional gasoline to RFG. In response, members of the ethanol
industry submitted comments to EPA which expressed their concern that
the proposed reformulated gasoline rules would effectively exclude
ethanol from the reformulated gasoline market.
Ethanol, when added to gasoline in the amount needed to satisfy the
oxygen content requirement of the Act, raises the Reid vapor pressure
(RVP) of the resulting blend by about 1 psi, making it more difficult
for ethanol blends to meet the mass VOC performance standards than
blends using other oxygenates. For ethanol to be used in summertime
RFG, a gasoline blendstock with an RVP low enough to offset the
increase resulting from adding ethanol would have to be obtained. The
contention was that obtaining such blendstocks would be both difficult
and expensive, because ``sub-RVP'' blendstocks would be more costly to
refine and distribute and because blendstock production would be
controlled by petroleum refiners. The ethanol industry representatives
believed that the oil industry would have a tendency to rely almost
exclusively on MTBE over ethanol because MTBE does not boost a fuel's
RVP and is readily blended at the refinery and distributed through the
existing gasoline infrastructure, since, unlike ethanol, it does not
raise materials compatibility or water adsorption concerns with the
existing gasoline distribution infrastructure. Thus, there would be
little incentive to make the sub-RVP blendstock necessary for ethanol
blending into summertime RFG. The ethanol industry representatives also
contended that refiners would not want to switch oxygenates during the
course of the year and would therefore utilize MTBE year-round, thereby
eliminating any RFG market for ethanol.
For this reason, ethanol and farm interests sought a summer
volatility waiver for ethanol-based reformulated gasolines. Other
signatories to the regulatory negotiation agreement, such as the oil
industry, methanol and ether producers, states, and environmental
groups, opposed such a waiver because it could eliminate most or all of
the VOC benefits of the RFG program if ethanol was used in large
volumes. At the request of ethanol and farm interests, the Agency held
a public hearing to receive testimony on this and other issues in June
of 1992 in Chicago.
In an attempt to address the role of ethanol, the Agency
subsequently proposed a renewable oxygenate program (ROP) (58 FR 11722,
February 26, 1993) to provide incentives for the use of ethanol and
other renewable oxygenates in reformulated gasoline. The objective of
the ROP was to provide incentives for the use of renewable oxygenates
in the reformulated gasoline program in the summer while maintaining
the overall environmental benefits of the program. Ethanol was
considered a renewable oxygenate because it is produced primarily from
agricultural sources such as corn, which can be regenerated. Other
oxygenates such as MTBE are produced primarily from nonrenewable
resources, such as petroleum and/or natural gas.
For a variety of reasons, as explained in section II of the
preamble and section I of the Regulatory Impact Analysis (RIA) for the
reformulated gasoline final rule, EPA decided not to promulgate the
ROP. First, EPA received comments from virtually all constituencies
affected by the rulemaking, including the ethanol industry, stating
that the ROP as proposed was neither feasible nor workable. While EPA
believed that a feasible program could be structured, EPA also
acknowledged that it could represent a considerable burden on the
industry. Second, the ROP would have reduced the RFG program's VOC
emission control benefits because it provided an incentive for the use
during the summer months of an oxygenate which exhibited commingling-
related emission increases. (Combining ethanol blends and non-ethanol
blends in consumer fuel tanks, even if both have identical low RVPs,
results in a mixture with significantly higher fuel volatility and
hence significantly higher VOC emissions. This effect is referred to as
commingling.) The commingling effect, along with other unique
distillation effects of ethanol on evaporative emissions and other
provisions of the ROP as proposed, were estimated in the RIA for the
RFG final rule to result in approximately a 6.0-7.5 percent increase in
VOC emissions compared to an RFG program without such incentives. While
difficult to estimate due to uncertainty in future ethanol and ETBE
market shares and lack of sufficient data to reliably quantify the
distillation effects, such an increase in VOC emissions amounts to a
loss of about 40 to 50 percent of the minimum VOC control that is
required under section 211(k)(3) for reformulated gasoline during the
summer, even though the average RVP of the RFG produced by refiners
remained the same. Thus, EPA's analysis indicated that the proposal
would not maintain the environmental benefits of reformulated gasoline.
A third concern with the ROP was that the program would have created an
incentive for the use of renewables but in no way assured their use.
Upon consideration of these and other factors, the Agency decided not
to finalize the ROP. Other options considered did not resolve the
concerns raised with the ROP as proposed. (The reader is referred to
section II of the Preamble and section I of the RIA for the
reformulated gasoline final rule for a description of the options and
alternatives to the ROP considered.)
Hence, the final rule for reformulated gasoline does not include
provisions to provide incentives for the use of renewable oxygenates.
This left substantial uncertainty regarding the magnitude of the role
renewable oxygenates would play in the roughly 35 percent of the U.S.
gasoline market expected to be covered by the RFG program.

C. Renewable Oxygenate Requirement Proposal

To address the issues discussed above, at the same time EPA issued
the final rules for RFG, it also proposed (58 FR 68343) a year-round
requirement that 30 percent of the mandatory oxygen content
specification for reformulated gasoline be obtained from renewable
oxygenates. To ensure that the ozone benefits from the reformulated
gasoline program are not adversely affected by that requirement, EPA
proposed that during the VOC control period (i.e., the summer months)
only renewable oxygenates that do not exhibit volatility-related
commingling effects when mixed with gasoline would receive renewable
oxygenate credit. All approved renewable oxygenates, including ethanol,
were expected to be acceptable during the non-summer months when
commingling-related volatility increases have relatively little effect
on VOC emissions and when ozone exceedances are rare. Also included in
the proposal were provisions for averaging and credit trading in order
to provide maximum flexibility to refiners and fuel importers in
complying with the program.
EPA presented several justifications for proposing a renewable
oxygenate requirement for reformulated gasoline. The Agency concluded
that expanding the use of renewable fuels produced from resources such
as corn, grain, wood, organic waste products, and municipal solid waste
could help cut dependence on foreign oil and reduce primary energy use
by 20% or more as compared to nonrenewable oxygenates. The Agency also
believed that renewable oxygenates offered potential air quality
advantages (such as lower emissions of VOCs and greenhouse gases) as
well as jobs-creation benefits. The Agency also stated its belief that
the 30 percent requirement for renewable oxygenates was an appropriate
level to ensure that renewables were not excluded from the reformulated
gasoline oxygenate market while allowing the remaining 70 percent of
the market to be open to all fuels, regardless of their renewables
content.
The proposed renewable oxygenate requirement would be applied in
conjunction with the reformulated gasoline program. It did not alter
the performance standards or other provisions for the reformulated
gasoline outlined in the final rulemaking for reformulated gasoline. In
addition, the proposal did not mandate the use of any particular
oxygenate, but rather ensured some minimum use of the class of
oxygenates deemed renewable, defined in the proposal as ethanol and
methanol from renewable sources, and their ether derivatives. This
proposal was designed to supplement and not negate the Agreement in
Principle arrived at through regulatory negotiation.
EPA received over 12,000 comments in response to the renewable
oxygenate proposal. The vast majority of these comments were letters
supporting the proposal written by farmers, ethanol producers, and
their supporters. Several hundred responses containing detailed,
substantive, technical comments were received from representatives of
the oil industry, the ethanol industry, corn farming and other
agricultural interests, methanol producers, environmental groups,
federal agencies, and state and local governments. Some of these
comments supported the proposal while others opposed it. Detailed
responses to many of the comments are provided in subsequent sections
of this preamble and in the Regulatory Impact Analysis (RIA) in the
docket.
The remainder of this preamble is organized into the following
sections:

II. Overview of the Renewable Oxygenate Requirement
III. Renewable Oxygenate Requirement for Reformulated Gasoline
IV. Enforcement of the Renewable Oxygenate Requirement
V. Federal Preemption
VI. Environmental, Energy, and Economic Impacts
VII. Public Participation
VIII. Compliance with Regulatory Flexibility Act
IX. Statutory Authority
X. Administrative Designation and Regulatory Analysis
XI. Compliance with the Paperwork Reduction Act

II. Overview of the Renewable Oxygenate Requirement

EPA is hereby promulgating a renewable oxygenate requirement for
reformulated gasoline similar to that proposed on December 15, 1993 (58
FR 68343, December 27, 1993). EPA believes that this action will ensure
that the requirements for the reformulated gasoline program promulgated
on December 15, 1993 (59 FR 7716, February 16, 1994) are consistent
with existing government programs and initiatives supporting renewable
fuels. For many years, both Congress and the Executive Branch have
promoted through various actions the use of renewable fuels and the
development of the renewable fuels industry for various energy,
economic, environmental, and agricultural policy objectives. Renewable
fuels have been viewed as a key element of policies to enhance domestic
energy security, reduce oil imports, conserve fossil energy resources,
and reduce emissions of greenhouse gases.
Congress, along with present and past Administrations, has
supported these goals through a variety of mechanisms. The Departments
of Energy (DOE) and Agriculture (USDA) have invested hundreds of
millions of dollars over the past 20 years to research and develop
renewable fuel feedstocks and production techniques. Congress has
supported the increased use of renewable fuels since the late 1970's
through various legistative actions. The Energy Security Act of 1980
established a number of federal policies to expand fuel ethanol
production and use. The Omnibus Budget Reconciliation Act of 1987
stated the intent of Congress to expand ethanol use. Under the
Alternative Motor Fuels Act (AMFA) of 1988, the Alternative Fuels
Council identified a significant role for ethanol. The National Energy
Policy Act (EPACT) of 1992 includes provisions to stimulate the use of
a wide-range of alternative (nonpetroleum) fuels, including several
renewable fuels. Congress and prior Administrations have also
stimulated renewable fuel use through mechanisms such as the 1.0 psi
volatility waiver in the CAAA for gasoline (other than reformulated
gasoline) blended with ethanol (the major renewable fuel in use today),
the oxygen content requirements of the wintertime oxygenated gasoline
and reformulated gasoline programs, and various economic incentives
such as tax credits since 1978 (currently equal to 54 cents per gallon
of renewable fuel).
These programs, combined with additional tax incentives in many
states and continued innovation in production techniques, have helped
the renewable fuels industry develop and grow. It has become
economically attractive to add ethanol to conventional gasoline in many
areas of the country, primarily by splash-blending ethanol with
gasoline. This process involves mixing ethanol into finished gasoline
at the terminal. (Due to materials compatibility concerns and the
hygroscopic properties of ethanol, ethanol generally is not added into
the existing gasoline distibution system at the refineries.) The
resulting ethanol blend, commonly known as gasohol, has higher
volatility than either the ethanol or the original gasoline in
isolation.
Until EPA's Phase I volatility controls went into effect in 1989,
gasoline volatility was essentially unregulated. EPA's volatility
control program reversed the upward trend in gasoline volatility, and
the resulting considerable increase in evaporative VOC emissions, by
establishing limits on the volatility of summer gasoline. In
promulgating the volatility control program, however, EPA granted a one
pound per square inch (psi) volatility waiver for ethanol-containing
blends. This waiver permitted continuation of splash blending of
ethanol into gasoline without regulatory impediment, thereby avoiding
what could have been a significant disruption to the existing market
for fuel ethanol. For ethanol to continue to be blended in the absense
of the waiver, refiners would have had to produce and market a special
low volatility gasoline specifically for blending with ethanol. Since
there was no assurance refiners would be willing to do so, the rule
could have caused a dramatic decrease in the market share for ethanol
blends that had developed under the existing Congressional and
Administration programs. EPA believed it was important to avoid such a
disruption to the ethanol industry, and as a result, granted a 1.0 psi
volatility waiver.
EPA believed that such a waiver would not significantly jeopardize
the rule's air quality objectives for several reasons. First, even with
the waiver the volatility of ethanol blends would be reduced
considerably. In fact, the volatility of the ethanol blends would be
reduced by the same amount (though not to the same level) as that of
non-ethanol blends. Second, ethanol's market share was small,
particularly in most ozone nonattainment areas, so the potential impact
on ozone levels was thought to be small. At the then existing market
share for ethanol, the waiver reduced by only about 3 percent the
volatility control that otherwise would have been achieved by both
phases of the volatility control program. Third, the rulemaking neither
required the use of oxygenates such as ethanol in gasoline nor was it
expected to increase their use. Were this not the case, the
environmental impacts of the waiver could have been considerably
greater. Congress later incorporated a similar volatility waiver in the
1990 amendments to the Clean Air Act, when it established statutory
limits on the volatility of conventional gasoline.
As a result of the Federal and State initiatives and with the
continued blending flexibility afforded by the volatility waiver, the
market for ethanol grew from a fledgling industry in 1978 to a market
which stabilized at approximately 0.8 billion gallons per year by 1990,
an amount equivalent to slightly less than 1% of nationwide gasoline
consumption.
With the passage of the CAAA of 1990, the industry once again began
to expand considerably. The oxygenated fuels program required by
section 211(m) of the CAA requires that, during the winter months, all
gasoline sold in certain cities with a history of exceedences of EPA's
national ambient air quality standard (NAAQS) for carbon monoxide (CO)
must contain oxygenates. Under this program (which began with the
winter of 1992-93), ethanol has captured approximately 30% of the
resulting oxygenate market. As a result, the demand for ethanol has
grown by roughly 50% to an estimated 1.25 billion gallons in 1993.
The oxygenate requirements of the reformulated gasoline program
contained in section 211(k) of the CAA also provide the potential to
expand considerably the market for ethanol and other renewable
oxygenates. RFG is required in the nine cities with the nation's worst
ozone pollution problem and has been adopted for many other ozone
nonattainment areas as well as a key component in their efforts to
improve air quality. The areas which will use RFG are estimated to
represent 35% of all gasoline sold in the United States.
The VOC emission performance standards for reformulated gasoline
raised concerns in the ethanol industry that just as under the gasoline
volatility control program, they will be unable to compete in the RFG
market without a volatility waiver. However, section 211(k)(3) of the
CAA establishes minimum emission performance standards that RFG must
meet, with no allowance for a volatility waiver for ethanol-blended
RFG. Furthermore, as discussed in the RFG final rule (59 FR 7716),
providing such a waiver for ethanol-containing RFG would have
jeopardized the emission benefits which Congress mandated the RFG
program to achieve. For these reasons, the final regulations for
reformulated gasoline do not contain such a volatility waiver for
summer RFG.
Thus, ethanol cannot be splash-blended into unmodifed gasoline
blendstocks and still have the resulting blend comply with the RFG
emission performance standards. Instead, either special reduced-
volatility (``sub-RVP'') blendstocks would be necessary during the
summer, or the ethanol would have to be converted into ETBE. Many in
the ethanol industry have continued to express concern that refiners
would not produce such blendstocks. If that were to occur, ethanol
producers would lose access during the summer months to those current
markets which will be covered by the RFG program. This loss of access,
the ethanol industry contends, could also lead to a reduced market
share in RFG areas in the winter months, even though no volatility
restrictions apply during those months. EPA has received numerous
letters from various members of Congress emphasizing their belief that
the RFG program was intended to provide a significant new market for
ethanol and other renewable oxygenates. EPA has also received numerous
letters from members of Congress opposing a renewable oxygenate
requirement. In general, they were not opposed to the use of renewable
oxygenates, but rather to EPA requiring their use. As discussed in
section III.A, there was also a considerable amount of discussion
concerning this issue during the Congressional debate over the 1990
CAAA.
As stated in the RFG final rule, EPA continues to believe that
ethanol will not be excluded from the oxygenate market under the RFG
program. Rather, EPA believes that many refiners will find it
economically attractive to blend ethanol in RFG. As a result, EPA
believes a market for ethanol will continue following implementation of
the RFG program. The RFG program represents a major new market for
oxygenates such as ethanol. Nevertheless, EPA has received comments
stating that without promulgation of today's rulemaking or other
similar measures, creation of additional ethanol and renewable
oxygenate blending capacity beyond that currently underway is in doubt.
EPA recognizes that concerns over the marketability of ethanol in RFG
have created substantial uncertainty for ethanol producers and
investors.
EPA believes that today's action will reduce that uncertainty and
make the RFG program consistent with long-running Congressional and
Administration policies to promote renewable fuels. This program
represents an attempt to harmonize the goals of greater reliance on
renewable fuels and air quality improvements through the use of RFG.
Specifically, the renewable oxygenate requirement will ensure that RFG
regulations do not inappropriately limit the growth of the renewable
oxygenate industry. It will ensure that several oxygenates will be used
in the RFG program and provide the renewable oxygenates a minimum
market.
It should be noted that the program encourages the use of all
renewable oxygenates, not any one renewable oxygenate (as discussed
more fully in section III). By providing market certainty the program
will encourage expanded private investment in new, more efficient and
environmentally beneficial renewable fuel production technologies. Such
potential renewable oxygenates include ethanol from cellulosic plant
material and waste cellulose and MTBE derived from methanol which was
produced from municipal solid waste, landfill gas, or sewage sludge.
The program establishes a minimum 30% market share for renewable
oxygenates. This level represents a market share for renewables that
EPA believes would likely have been achieved through open competition
with nonrenewable oxygenates in the absence of VOC emission
restrictions, based on experience under the oxygenated fuels program.
At this market share an estimated 1.7 volume percent (on an ethanol
equivalent basis) of reformulated gasoline will be derived from
renewable resources.
EPA is promulgating the renewable oxygenate program because of the
important benefits of the program. First, EPA believes the program will
help conserve fossil energy resources and minimize any detrimental
effects the reformulated gasoline program may have on energy
consumption. Second, EPA believes that the program has the potential to
provide global warming benefits by providing stimulus to the market to
develop new, more efficient production processes for renewable
oxygenates and their feedstocks. In addition, EPA believes that the
program as structured maintains the environmental benefits of the
reformulated gasoline program as promulgated on December 15, 1993, and
has the potential to increase these benefits through the incentives it
provides for increased ETBE use during the summer months.
The reformulated gasoline program promulgated in December of 1993
is projected to cause an increase in fossil energy consumption, as
discussed in more detail in sections III.H and VI of this notice.
Today's action is intended to mitigate to some extent the increase in
fossil fuel consumption that otherwise would result from implementation
of the RFG program. Today's action also provides the certainty needed
to encourage private investment in more advanced and energy-efficient
production facilities and more diverse feedstock utilization. This will
not only increase the fossil energy benefits of this program, but also
provide the opportunity for reductions in greenhouse gas emissions.
Today's action will also create incentives to utilize ETBE during
the summer months. Its use, relative to MTBE or ethanol, has the
potential to achieve slightly greater VOC emission reductions beyond
those required by the final rule for RFG. Ethanol-containing gasoline,
when mixed with other gasoline, causes the mixture to produce greater
VOC emissions than the original fuels would produce. This can occur
even in a vehicle fuel tank. This effect is called commingling and is
discussed in sections III.C and VI of this notice and in the Regulatory
Impact Analysis for the reformulated gasoline final rule. The effect of
such commingling on VOC emissions is not controlled directly by the RFG
program. As a result, to the extent that ETBE use displaces ethanol use
during the summer months, additional VOC emission benefits are
possible. In addition, ETBE possesses front-end distillation
characteristics relative to both ethanol and MTBE which are also not
controlled in the reformulated gasoline final rule, and which may
provide further (though not quantifiable with any certainty at the
present time) VOC emission benefits during the summer should its use
increase as a result of the incentives created by today's program.
Finally, EPA believes that this program is designed in a way which
provides maximum compliance flexibility for refiners and minimizes
their burden. The program is an annual program with provisions for a
refiner to average over the course of the year or trade credits with
other refiners anywhere in the country. EPA believes that by designing
the program in such a way, the objectives can be met at a minimum cost.
These provisions are especially important during the initial startup of
the program. While the renewable oxygenate program takes effect for
refiners beginning December 1, 1994, individual refiners do not need to
blend any renewable oxygenate into their gasoline until later in the
year or at all if they so desire. They will just have to demonstrate
that they met the requirements over the course of the entire year
through either the blending of greater than 15% renewable oxygenates in
the latter part of the year, or the purchase of credits from other
refiners. As a result, the averaging and trading provisions effectively
provide refiners with additional time to meet the initial requirements
of the program.

III. Renewable Oxygenate Requirement for Reformulated Gasoline

A. Legal Authority

1. Introduction
The final rule adopted today is a reasonable exercise of the
discretionary authority granted the agency under section 211(k)(1) of
the Act. EPA interprets the first sentence of section 211(k) as broad
authority to adopt reasonable requirements for reformulated gasoline,
unless otherwise prohibited by the Clean Air Act or other statutory
provision. EPA interprets the second sentence of section 211(k)(1) as
authorizing EPA to adopt regulations for the reformulated gasoline
program that result in the greatest emission reductions achievable, and
at the same time tend to optimize the resulting impacts on cost, energy
requirements, and other health and environmental impacts. In effect,
EPA has full authority to adopt emission reduction standards and other
requirements that achieve this result.1
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\1\Various commenters argued that statements in the Regulatory
Impact Analysis supporting the FRM signed on 12/15/93 showed that
EPA believed it did not have the legal authority to require the use
of renewable oxygenates. To the contrary, EPA's proposal, also
signed on 12/15/93, clearly described EPA's view that it did have
the authority to require the use of renewable oxygenates. The
statements in the RIA address renewable oxygenate requirements that
would be significantly different from that proposed in December and
would raise many of the same concerns described in the preamble to
the final rule, such as increased emissions in the summertime from
increased use of ethanol in the summertime. The prior statements in
the RIA are not relevant to the proposal issued by EPA in December.
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2. Analysis of the Text of the Statute
An analysis of EPA's authority starts with the text of the statute.
Under the first sentence of that paragraph, EPA is authorized to:

promulgate regulations under this section establishing requirements
for reformulated gasoline to be used in gasoline-fueled vehicles in
specified nonattainment areas.

Under the second sentence of section 211(k)(1), EPA's regulations are
to:

require the greatest achievable reduction in emissions of ozone
forming volatile organic compounds (during the high ozone season)
and emissions of toxic air pollutants (during the entire year)
achievable through the reformulation of conventional gasoline,
taking into consideration the cost of achieving such emission
reductions, any nonair-quality and other air-quality related health
and environmental impacts and energy requirements.

Section 211(k)(1) provides EPA general authority to establish
reasonable requirements for reformulated gasoline, including emissions
reduction requirements. Other provisions in section 211(k) address
various specific elements of the program, such as minimum requirements
for various fuel parameters (section 211(k)(2)), minimum emissions
reduction requirements (section 211(k)(3)), certification requirements
(section 211(k)(4)), prohibited acts (section 211(k)(5)), state opt-
ins, (section 211(k)(6)), and credit programs (section 211(k)(7)).
This interpretation of section 211(k)(1) is supported by the plain
meaning of that provision. On its own terms, the first sentence stands
as a general grant of authority to establish any reasonable requirement
for reformulated gasoline, with no explicit restriction on this
authority other than a one year deadline for agency action.
The first sentence of section 211(k)(1) both grants authority to
the agency and establishes a deadline for agency action. This structure
is not at all uncommon, and was employed by Congress in several similar
provisions adopted in 1990. See, e.g., section 211(h)(1) (regulation of
Reid vapor pressure), section 211(i)(2) (regulation of motor vehicle
diesel fuel), section 211(l) (regulation of gasoline detergent
additives), and section 202(a)(6) (regulation of refueling emissions
from motor vehicles). The general framework of section 211(k) is also
not unique--a grant of broad general authority in (k)(1) followed by
several detailed provisions that ensure certain minimum actions are
taken. This is consistent with the approach taken by Congress in
various other provisions of Title II of the Clean Air Act. For example,
Congress granted EPA broad, general authority to regulate motor
vehicles and their fuels, as in section 202(a) and section 211(c)(1).
These grants of broad, general authority were then supplemented by
detailed provisions providing specific actions that Congress expected
in these areas. See, e.g., section 202(b), (f), (g), (h), and (i), as
well as sections 211(c)(2), 211(g), prior to the 1990 amendments, and
the various paragraphs of section 211 cited above.
The regulations adopted today are a reasonable exercise of this
discretionary authority. They further Congressional goals by fostering
achievement of the important benefits that Congress expected to flow
from this program. They are not prohibited by any provision of the Act
or any other law, and are well within the range of authority granted by
Congress.
The plain meaning of the second sentence of section 211(k)(1)
corroborates EPA's view on it authority to issue this rule. This
provision requires promulgation of regulations that require a certain
result. The result desired by Congress is clear--the greatest
achievable reductions, taking into consideration cost, energy,
environmental and other impacts. There is no indication that EPA's
authority is limited to establishing emissions reduction standards. In
fact, this provision would authorize EPA to adopt all reasonable
requirements designed to achieve the required result. The regulation
adopted today is designed to ensure that the emissions reduction
requirements for reformulated gasoline are achieved in a manner that
reasonably optimizes the energy, cost, environmental, and other impacts
of this program. The regulations adopted today, in combination with the
regulations promulgated in December 1993, act together to achieve this
result.
Finally, EPA believes that section 211(k)(4) does not preclude the
renewable oxygenate provisions proposed herein. Section 211(k)(4)
states that the Administrator ``shall certify a fuel formulation or
slate of fuel formulations as complying with this subsection if such
fuel or fuels--(i) comply with the requirements of paragraph (2), and
(ii) achieve equivalent or greater reductions * * * than are achieved
by a reformulated gasoline meeting the applicable requirements of
paragraph (3).'' This could be interpreted as requiring certification
of a fuel that met the oxygen and other requirements of paragraph (2)
and the emissions requirements of paragraph (3) even if it did not
comply with the proposed renewable oxygenate requirement. Section
211(k)(1), however, authorizes EPA to establish requirements above and
beyond those required under paragraph (2) and (3), and section
211(k)(1) and (4) must be read together to provide a meaningful
interpretation to both provisions. EPA believes that a reasonable
interpretation requires certification of a fuel as reformulated as long
as it complies with the requirements of paragraphs (2) and (3), as well
as any additional requirements established under paragraph (1). Since
the renewable oxygenate provision is an additional requirement
established under section 211(k)(1), certification is not required
under section 211(k)(4)(B) unless a fuel or slate of fuels complies
with the requirement.
3. Analysis of the Legislative History
The legislative history of the reformulated gasoline provision
supports and is consistent with EPA's interpretation of section 211(k).
Changes made to various bills during the course of congressional
review, as well as floor debates in the respective houses, indicate EPA
was provided broad general authority to adopt requirements designed to
achieve the objectives for this program. EPA's renewables requirement
does just that, without inappropriately impinging on refiners' and
importers' operational flexibility.
a. House of Representatives--The bill reported by the House
Committee on Energy and Commerce included provisions on reformulated
gasoline that roughly paralleled the current provisions of section
211(k)(1). Under that provision, EPA was required to:

promulgate regulations under section 211 establishing specifications
for cleaner gasoline to be used in conventional gasoline fueled
vehicles. Such standards shall require the greatest reduction in
ozone-forming volatile organic compounds and air toxic emissions
achievable through the reformulation of conventional gasoline,
taking into consideration the cost of achieving such emission
reductions, and health, environmental and energy impacts.2
---------------------------------------------------------------------------

\2\H. Rep. No. 101-490, 101st Cong. 2d Sess. 60 (1990);
reprinted at 1 A Legislative History of the Clean Air Act Amendments
of 1990 at 3021 (1993) (`` Leg. Hist.'').

This provision is similar to current section 211(k)(1) in that it
provides general authority to establish ``specifications'' for
reformulated gasoline, and separately requires that these regulations
include requirements to obtain the greatest achievable reductions in
VOCs and air toxics. The Committee Report's description of this
provision is fairly brief, with no indication that this general
authority is limited to establishing emission reduction
requirements.3
---------------------------------------------------------------------------

\3\2 Leg. Hist. at 3321-21.
---------------------------------------------------------------------------

Certain changes were made to this provision prior to its adoption
by the House, reflecting an intent to expand at least somewhat the
scope of agency authority. First, while the Committee bill authorized
EPA to establish ``specifications'' for cleaner gasoline, the House
bill used broader language authorizing EPA to establish
``requirements,'' as currently found in section 211(k)(1). Likewise,
the second sentence of the Committee bill provision referred to ``such
standards,'' while the House bill broadened this to ``such
requirements.''4 The House intended to broaden EPA's authority,
not limit it, and these changes were eventually adopted by Congress.
---------------------------------------------------------------------------

\4\S.1630 as passed by the House of Representatives; 2 Leg.
Hist. at 2059.
---------------------------------------------------------------------------

The Committee bill was amended in several other significant ways
prior to final passage by the House. For example, many of the specific
reformulated gasoline requirements now found in section 211(k)(2)
through (10) were first debated and adopted on the floor of the House.
Nonetheless, the general structure of section 211(k)(1) stayed the same
with the exceptions noted above. This indicates that from the very
beginning the House intended to provide EPA with broad general
authority to establish reasonable requirements for a reformulated
gasoline program. The vast bulk of the legislative history in the House
is directed at the subsequent adoption of fairly specific minimum
requirements for reformulated gasoline, with no indication that
Congress intended to otherwise limit this broad, general grant of
agency authority.
b. Senate--The legislative history in the Senate likewise shows a
desire to broaden EPA's authority in this area. The bill reported out
of the Senate Committee on Environment and Public Works started from a
more restrictive position and authorizing EPA to:

(1) * * * promulgate regulations establishing specifications for
fuel quality which will minimize, to the extent economically and
technically achievable, emissions [of various pollutants] * * *. (2)
In order to achieve and maintain attainment of ambient air quality
standards, the Administrator may promulgate regulations * * *
establishing specifications for fuels (including regulations
requiring the availability or sale of fuels meeting the
specifications in a nonattainment area or areas) to reduce emissions
of pollutants subject to a standard under this title or hazardous
air pollutants from motor vehicles. In establishing such
specifications and availability requirements the Administrator shall
consider other environmental effects which would result from
production and use of fuels meeting the specifications.5
---------------------------------------------------------------------------

\5\S. Rep. at 639-40. The relevant portions of the Mitchell-Dole
substitute, Amendment No. 1293, debated on the floor of the Senate,
were identical to the bill reported out of the Senate Committee. 5
Leg. Hist. at 7552-54.

This provision is much narrower than that reported out of the House
Committee. The authority to establish ``specifications'' is clearly
limited to specifications to reduce emissions of specified pollutants,
and the specifications are limited to those aimed at achieving and
maintaining attainment of the NAAQS. It also clearly requires that such
specifications and requirements be written as performance standards.
Most of the amendments and debate on this provision focused on a
number of detailed minimum requirements that parallel the current
reformulated gasoline provisions found in section 211(k)(2) though
(10). However, certain very important changes were made to the general
authority provisions. First, the second paragraph of the provision was
replaced in its entirety with broader language that more closely
parallels the version adopted by the House. The Senate approved a floor
amendment by Senator Daschle requiring that:

The Administrator, pursuant to paragraph (1) * * * promulgate
regulations establishing specifications for reformulated gasoline to
be used in conventional gasoline fueled vehicles [in specified ozone
nonattainment areas].6
---------------------------------------------------------------------------

\6\3 Leg. Hist. at 4383-88, 4 Leg. Hist. at 6816-18.

This amendment removed the limitation that the specifications could
only be designed to reduce emissions and achieve and maintain
attainment, significantly broadening EPA's authority. Nonetheless, the
provision passed by the Senate was narrower than the House bill. Even
though paragraph one of the provision was somewhat similar to the
second sentence of current section 211(k)(1), the Senate bill did not
contain a general grant of authority as found in the first sentence of
section 211(k)(1). It also more narrowly authorized EPA to establish
specifications, instead of requirements.
c. Conference Committee Bill--The Conference Committee on the House
and Senate bills rejected the Senate's narrower limits on general
authority and instead reported out the broader, more general authority
provision found in the House bill.7 This provision was then
adopted in the final bill. This legislative history indicates that both
houses, to different degrees, moved to broaden the agency's authority
to implement the reformulated gasoline program. The final bill adopted
by Congress rejected the narrower approach from the Senate and instead
approved the more general language from the House. While there was
little discussion of this, the textual changes described above lead to
the conclusion that Congress intended to provide EPA with broad general
authority to establish regulatory requirements for reformulated
gasoline. There are no indications that Congress intended otherwise.
EPA's interpretation is therefore fully consistent and supported by
this legislative history.
---------------------------------------------------------------------------

\7\1 Leg. Hist. at 1548.
---------------------------------------------------------------------------

d. Floor debates in the two houses--The legislative history does
contain extensive floor debate about the reformulated gasoline
provisions. While these focus primarily on the specific requirements
found in section 211(k)(2) though (10), they still provide important
insight on overall Congressional intent for this program.8 First,
Congress expected that this motor vehicle fuel program would provide
several important benefits for the nation. Most obviously it would lead
to major reductions in air pollution in the largest metropolitan areas
with the worst ozone nonattainment problems, reducing ozone forming
VOCs and toxic pollutants. Reformulating the gasoline used in
conventional vehicles would constitute a significant component of the
federal program to control motor vehicle pollution. There was a clear
concern that gasoline had gotten more polluting over the prior twenty
years, primarily through increased levels of aromatic compounds in
gasoline, used to replace the octane previously obtained from lead
additives. Benzene and aromatics were seen as the predominant air toxic
threat.
---------------------------------------------------------------------------

\8\The Conference Committee Report contains limited discussion
of the reformulated gasoline program, and the Reports for the bills
reported out of the respective House and Senate Committee's are of
limited use as these bills were changed significantly prior to
passage. The floor debates, however, do contain extensive discussion
of the bills.
---------------------------------------------------------------------------

Second, Congress emphasized that reformulated gasoline would
provide benefits in the form of improving our energy security, reducing
our reliance on foreign oil, and providing a major opportunity for the
agricultural sector of our economy to market renewable alcohols and
their derivatives. This would come from the use of oxygenates as
gasoline additives, including renewable oxygenates like ethanol and
ETBE. In effect, Congress intentionally designed the reformulated
gasoline program to obtain emissions reductions benefits in a way that
would promote these other very important benefits.9
---------------------------------------------------------------------------

\9\For example, the following statements are from the floor
debate on the Conference Committee bill: 1 Leg. Hist. at 851-856
(Sen. Durenberger); 1 Leg. Hist. at 1154-71 (Sen. Simpson); 1 Leg.
Hist. at 969 (Sen. Baucus); 1 Leg. Hist. at 1073 (Sen. Dole); 1 Leg.
Hist. at 1187 (Rep. Dingell); 1 Leg. Hist. at 1195 (Rep. Waxman); 1
Leg. Hist. at 1209 (Rep. Sharp); 1 Leg. Hist. at 1263-67 (Rep.
Madigan); 1 Leg. Hist. at 1315 (Rep. Hall); 1 Leg. Hist. at 1435
(Rep. Richardson). Similar statements were made during consideration
of the respective House and Senate bills.
---------------------------------------------------------------------------

Third, the structure developed by Congress to obtain these various
benefits involved a complex balance between imposing detailed
requirements and preserving refiner flexibility.10 The floor
debates include detailed responses by individual members of Congress to
various arguments that Congress was mandating ``government gas'' or a
``recipe,'' or was mandating use of only one oxygenate, such as
ethanol.11 The floor debates also show there was no common
understanding of terms such as ``fuel neutral,'' or ``government gas,''
or even whether certain provisions did or did not require the use of a
specific oxygenate such as ethanol. These debates do make clear,
however, that Congress designed the detailed provisions in section
211(k)(2) through (10) to ensure achievement of various benefits from
this program, while retaining an appropriate degree of refiner
flexibility.
---------------------------------------------------------------------------

\1\0This complex balance can be seen in the various specific
requirements of section 211(k). Congress established both specific
content requirements (section 211(k)(2)) and minimum requirements
for either a performance standard or a ``formula,'' whichever EPA
determined to be more stringent (section 211(k)(3)(A) and (B)). A
certification program was also established, with EPA to certify any
fuel that obtained emissions reductions of a fuel that met the
requirements of section 211(k)(2) and (3). A credit program was also
established for the three specific content requirements established
in section 211(k)(2) and (3). Both the emissions performance
standards and content requirements of section 211(k)(2) and (3) act
as performance standards in light of the certification equivalency
provision of section 211(k)(4). For example, the ``formula'' of
section 211(k)(3)(A) acts as a performance standard based on section
211(k)(4).
\1\1From the debate on the Conference Committee: 1 Leg. Hist. at
853, 855 (Sen. Durenberger); 1 Leg. Hist. at 1233 (Rep. Fields); 1
Leg. Hist. at 1263 (Rep. Madigan); 1 Leg. Hist. at 1270 (Rep.
Synar); 1 Leg. Hist. at 1325 (Rep. Hall); 1 Leg. Hist. at 1395-7
(Rep. Moorehead). From the debate on the House bill: 2 Leg. Hist. at
2606, 2694-7, 2701-2, 2750-58 (Rep. Richardson); 2 Leg. Hist. at
2716 (Rep. Dingell); 2 Leg. Hist. at 2717 (Rep. Lent); 2 Leg. Hist.
at 2722 (Rep. Michel); 2 Leg. Hist. at 2733-34 (Rep. Synar). From
the debate on the Senate bill: 4 Leg. Hist. at 6812, 15, 19 (Sen.
Daschle); 4 Leg. Hist. at 6820-21 (Sen. McClure); 4 Leg. Hist. at
6824 (Sen. Grassley); 4 Leg. Hist. at 6825 (Sen. Nickles); 4 Leg.
Hist. at 6829-30 (Sen. Wirth); 4 Leg. Hist. at 6836 (Sen. Dole); 4
Leg. Hist. at 6836 (Sen. Johnston).
---------------------------------------------------------------------------

Various statements were made by different members of Congress that
any oxygenate could be used that met the oxygen content and emissions
reduction requirements for reformulated gasoline.12 These
statements reflect Congress' interest in retaining appropriate refiner
flexibility. However, they only address compliance with the oxygen
content requirement mandated under section 211(k)(2) and the emissions
reduction requirements mandated under section 211(k)(1) and (3), and do
not address compliance with additional requirements established under
section 211(k)(1). They do not indicate an intention to preclude EPA
from appropriately exercising its authority under section 211(k)(1) to
either require greater than the minimum reductions called for in
section 211(k)(3) or to establish additional requirements like the
renewable requirements. Given the ambiguity in the debates on this
issue and the Act's provision that the requirements of (k)(2) be issued
under the (k)(1) rulemaking authority, EPA believes this rule may also
be considered a reasonable implementation of the (k)(2) oxygen content
requirement.
---------------------------------------------------------------------------

\1\2See, e.g., 4 Leg. Hist. at 6812 (Sen. Daschle), and 1 Leg.
Hist. at 1216 (Rep. Sharp, noting that ``[t]he Administrator may not
discriminate among these different oxygenates, and should encourage
fair competition among them. As long as the percentage weight
requirement is met, and other requirements of new 211(k) . . . are
satisfied, any oxygenate should be allowed to satisfy new United
States needs.'') Also see 1 Leg. Hist. at 1325 (Rep. Hall). EPA's
renewables requirement is fully consistent with this--refiners may
use any oxygenate as long as the resulting gasoline meets the oxygen
content and renewable requirements established under section 211(k).
---------------------------------------------------------------------------

This legislative history indicates that while Congress itself did
not choose to mandate any one oxygenate or class of oxygenate, it also
did not restrict EPA's ability to require the use of a class or
category of oxygenates if that would reasonably ensure achievement of
these benefits and would not inappropriately limit the operational
flexibility of refiners and importers. The renewables requirement is
entirely consistent with this approach. It is designed to achieve
important goals, and includes provisions specifically designed to
maximize the flexibility of refiners in meeting the requirement.13
---------------------------------------------------------------------------

\1\3Certain commenters claimed that the requirement was
inconsistent with Congressional intent as expressed in the debate
over the Energy Policy Act of 1992. Congress rejected an amendment
to that bill which would have required that an increasing portion of
the octane in all gasoline be obtained from domestically produced,
renewable, nonpetroleum sources. The floor debate on this amendment
indicates several reasons various members of Congress were opposed
to this amendment, including concern that there would not be enough
supply of ethanol, concern over possible interference with
implementation of the Clean Air Act (based on a confusing provision
addressing the interrelationship of the two laws and authority under
the amendment for DOE to waive the requirement for air quality
reasons), as well as concern over not being fuel neutral. EPA
therefore believes that the rejection by the House of
Representatives in 1992 of an amendment to an unrelated statutory
provision, apparently based on a wide number of different reasons,
is not relevant to Congress's prior intent in 1990 when it amended
the Clean Air Act. Section 1508 of the Omnibus Budget Reconciliation
of 1987 is much more relevant on the issue of Congressional intent
and supports EPA's interpretation and rule. 42 U.S.C. 7545. In that
provision, Congress found that the United States was increasingly
dependent on the Middle East for its energy needs, that ethanol
could be used in gasoline to produce a cleaner burning fuel and
reduce pollution, and that ethanol was a renewable resource and its
increased use would reduce farm program costs and grain surpluses
and create new jobs. That bill explicitly states the sense of
Congress that EPA should use its authority under the Clean Air Act
to require greater use of ethanol as a motor fuel. EPA's renewable's
requirement is fully consistent with this statutory provision.
---------------------------------------------------------------------------

Most of the congressional debate focused on the various detailed
requirements of section 211(k) such as the content requirements of
section 211(k)(2), and the emissions standards of section 211(k)(3).
There was relatively little debate or discussion concerning the scope
of EPA's general authority in section 211(k)(1). However, there are
indications that this was considered a reservoir of broad, general
authority.14 There was no indication that section 211(k)(1) did
not mean what its plain language indicates--that Congress provided EPA
with broad, general authority to establish the requirements for
reformulated gasoline, including requirements that tend to optimize the
energy and other benefits obtained by the emission reductions
requirements.
---------------------------------------------------------------------------

\1\4From the debate on Conference Committee bill: 1 Leg. Hist.
at 855-6 (Sen. Durenberger noted that the performance standards and
the formula were minimum requirements, and EPA had authority to
require greater emissions reductions if appropriate); 1 Leg. Hist.
at 968-69 (colloquy between Sen. Durenberger and Sen. Baucus on same
point); 1 Leg. Hist. at 1219 (Rep. Sharp discusses the threat that
EPA could exercise its authority to reinstate a program akin to the
1970's oil price and allocation controls); 1 Leg. Hist. at 128-9
(Rep. Bliley) (``It is vital that [section 211(k)(1)] be viewed as
residual authority to modify the more specific requirements
throughout. . . .''). From the debate on the Senate bill: 4 Leg.
Hist. at 5052-3 (Sen. Symms recognized that the bill reported out of
the Committee on Environment and Public Works provided EPA broad,
general authority when he noted that ``the bill directs the
Administrator . . . to promulgate regulations establishing
specifications for fuel quality. This, in essence, would give the
Administrator the authority to mandate specific fuel formulations. .
. .'').
---------------------------------------------------------------------------

4. Conclusion
EPA's interpretation of its authority under section 211(k)(1) is a
reasonable interpretation based on the plain language of the provision.
The legislative history supports this interpretation and fails to show
a contrary intent. The changes made in the reformulated gasoline
provisions, and textual changes made in the two houses and in
conference indicate an intent to broaden EPA's general authority. The
floor debates support this and fail to show a contrary intent.
EPA's exercise of authority under section 211(k)(1) also helps to
obtain the important benefits identified by Congress for reformulated
gasoline. The legislative history makes it clear that in addition to
emissions reductions, Congress expected that reformulated gasoline
would benefit the nation by obtaining various energy and other benefits
from the expanded use of oxygenates, including specifically the
benefits from using renewable oxygenates like ethanol and ETBE. EPA's
interpretation and this rule are fully consistent with this
Congressional goal.
Congress established a complex statutory structure to ensure
achievement of these various goals while retaining an appropriate
degree of refiner flexibility. EPA's final rule is carefully designed
with refiner flexibility in mind, and draws an appropriate balance
between obtaining the benefits from using renewable oxygenates and
retaining refiner flexibility. For example, the rule establishes as
close to a performance standard as is currently possible, does not
mandate one specific fuel or fuel additive, allows for a phase-in over
two years to minimize disruption, allows averaging over a long time
period, and allows for generation, use and trading of credits to show
compliance. It also is carefully designed to minimize any adverse
environmental impacts.
EPA's interpretation of its authority is consistent with the plain
language of the statute and its legislative history, and furthers the
goals identified by Congress for this program. As such it is a lawful
exercise of agency authority under section 211(k).

B. Program Overview

The renewable oxygenate requirement is one component of the
reformulated gasoline program. It does not alter the emission
performance standards or other provisions for the reformulated gasoline
program contained in the final rule for reformulated gasoline (See 59
FR 7716; February 16, 1994). In addition, it does not mandate the use
of any particular oxygenate, but rather ensures a specified minimum use
of a range of oxygenates derived from renewable resources.
As mentioned previously, EPA is requiring that 30 percent of the
required 2.0 weight percent oxygen content of all reformulated gasoline
be produced using renewable oxygenates. Renewable oxygenates must meet
two criteria for them to be used to comply with the requirements of the
program. First, they must be produced from non-fossil fuel feedstocks
(i.e., other than petroleum, natural gas, coal, or peat), or their
oxygen content must derive from oxygenates produced from such
feedstocks, as described more fully in section III.C.1 of this notice.
Second, to be considered ``renewable'' when blended into VOC-controlled
RFG, the oxygenate must not cause commingling-related increases in fuel
volatility (i.e., the oxygenate must have a linear vapor pressure
blending curve). In addition to the requirements of this program,
renewable oxygenates must also be approved for use in gasoline in
keeping with the provisions of section 211(f) of the Act, and must be
approved for use in reformulated gasoline (i.e., certifiable under
either the Simple or Complex Model, as discussed in the final rule for
the RFG program).
The oxygenates which are expected to meet these requirements, at
least in the near term include: (1) Any alcohols derived from biomass
or waste products other than untransformed fossil fuels, except when
used in RFG designated as ``VOC-controlled,'' and (2) all approved
ethers produced from renewable feedstocks, when used in either VOC-
controlled or non-VOC-controlled RFG. EPA recognizes that some non-
ether oxygenates, including some alcohols, may not cause commingling-
related increases in fuel volatility. Upon submittal of sufficient data
demonstrating that addition of a non-ether renewable oxygenate does not
cause a nonlinear increase in RVP, the Administrator may permit the
oxygenate in question to receive credit under today's renewable
oxygenate program when blended into VOC-controlled RFG. However,
methanol and ethanol will not be granted such permission, since the
nonlinearity of their effect on RVP is well-established at the present
time.
The program will be phased in over the course of two years. Fifteen
percent of the minimum 2.0 weight percent oxygen content of
reformulated gasoline is required in the form of renewable oxygenates,
as defined above, from December 1, 1994 through December 31, 1995
(hereafter referred to as the ``first year of the program''). Thirty
percent of the minimum oxygen content in reformulated gasoline is
required to be from renewable oxygenates in 1996 and each year
thereafter. As a result, on average reformulated gasoline will be
required to have at least 0.30 weight percent oxygen content (15
percent of 2.0 weight percent) provided by renewable oxygenates in the
first year of the program and 0.60 weight percent oxygen content
provided by renewable oxygenates in subsequent years.
A program phase-in is necessary because the reformulated gasoline
program takes effect at refineries December 1, 1994. As discussed more
fully in section III.F of this notice, EPA is concerned that
insufficient time is available for ethanol producers to adjust their
production schedules, for ether suppliers to set up contracts for the
purchase of renewable alcohols, for fuel producers to obtain supplies
of renewable oxygenates for addition at the refinery or for blending
with refinery-produced reformulated blendstock for oxygenate blending
(RBOB), and for terminal operators to build and obtain permits for
sufficient ethanol and ether storage and blending facilities in order
to meet the full 30 percent requirement in 1995. Reformulated gasoline
producers may also have to adjust their gasoline production plans to
accommodate a different mix of oxygenates than they might have used in
the absence of today's rule. The phase-in addresses these leadtime
concerns, ensures a more orderly startup of the program, and minimizes
the risk of any market disruptions.
The applicable renewable oxygenate requirement (15 percent or 30
percent) applies year-round. The requirement is measured on an oxygen-
equivalent basis (i.e., credit given according to the oxygenate content
of the RFG) and is based on a per gallon oxygen content of 2.0 weight
percent which is consistent with the minimum per gallon oxygen content
standard in the RFG program. However, the renewable oxygenate
requirement must be met on an annual average basis and need not be met
on a per-gallon basis. This requirement applies to all refiners or
importers of reformulated gasoline and/or RBOB. It does not apply to
oxygenate blenders, pipeline operators, or terminal operators, though
such parties are required to abide by any restrictions regarding the
type of oxygenate that may be blended into RBOB provided by refiners.
Specifically oxygenate blenders, pipeline operators and terminal
operators will have to adhere to the RBOB blending limitations not only
of the RFG final rulemaking, but also the additional limitations
resulting from today's rulemaking. If a state exercises the option
discussed in section III.G of this notice to address shoulder season
concerns, the enforcement requirements on terminal operators may be
slightly altered.
Refiners and importers of reformulated gasoline are also permitted
to generate and trade, on a nationwide basis, credits earned from use
of renewable oxygenates in excess of the applicable minimum requirement
to other producers desiring to use a lesser volume of renewable
oxygenates. Such credits can be used to satisfy part or all of a
refiner's renewable oxygenate requirement for the same calendar year
that the credits are earned. No banking of credits between calendar
years is allowed. The averaging and trading provisions established
today for the renewable oxygenate program will have no adverse
environmental impact since today's action does not alter the VOC,
toxics, and NOX emission performance standards for reformulated
gasoline.
The effect of these averaging and trading provisions is to greatly
expand the flexibility afforded refiners, particularly during the
initial startup of the program. While the renewable oxygenate program
takes effect for refiners beginning December 1, 1994, individual
refiners do not need to blend any renewable oxygenate into their
gasoline until later in the year or at all if they so desire. They will
just have to demonstrate that they met the requirements over the course
of the entire year through either the blending of greater than 15%
renewable oxygenates in the latter part of the year, or the purchase of
sufficient credits from other refiners. As a result, the averaging and
trading provisions effectively provide refiners with additional time to
meet the initial requirements of the program, and allows them to
smoothly ramp up their use of renewable oxygenates during the course of
the first year to the full 30% requirement in 1996.
The renewable oxygenate requirements are placed at the refinery
level and will apply to reformulated gasoline sold in all the covered
areas, including the opt-in areas and the two covered areas in the
State of California (Los Angeles and San Diego). Details of the
enforcement program are discussed in section IV of this notice.
Refiners who produce reformulated gasoline for use in California
beginning in March 1996 are exempt from most federal reformulated
gasoline reporting, recordkeeping, and similar enforcement
requirements. As a result, refiners producing California reformulated
gasoline are not currently required to distinguish between gasoline
volumes sold in Los Angeles or San Diego and gasoline sold in other
parts of California. However, the renewable oxygenate provisions
promulgated today will apply to reformulated gasoline sold in Los
Angeles and San Diego, as discussed in section IV of this notice in
greater detail.
The Agency received a number of comments concerning impacts of the
program on VOC emissions during the ``shoulder season.'' After
considering the issue, EPA has decided that a limited change to the
program to address the shoulder season concerns is warranted. As
discussed in section III.G, EPA has included in the final rule a
provision which would allow EPA to extend the limitations on the
blending of certain renewable oxygenates which exhibit volatility-
related commingling effects to the shoulder season within individual
states upon receipt of a petition from the Governors of the states if
certain requirements are met.

C. Renewables Requirement and Definition

1. Renewables Definition
The definition of renewable oxygenates adopted in this final rule
has been expanded from that contained in the proposal, but nevertheless
it is intended to limit credit toward the renewable oxygenate
requirement to those oxygenates which EPA expects to yield net fossil
fuel savings. The final definition is structured so as to exclude from
the renewables definition oxygenates produced in their entirety from
nonrenewable sources such as coal, oil, peat, and natural gas due to
their non-renewable, fossil nature. The definition includes oxygenates
derived wholly from renewable biomass sources including but not limited
to corn and other grains, other food products, and cellulosic plant
material. It also includes oxygenates derived from waste products such
as waste cellulose and plastics, sewage, sawdust, scrap tires, and
methane recovered from landfills. EPA recognizes that some of these
waste products may have been derived from fossil hydrocarbon sources.
Including these sources in the set of permissible feedstocks will not
by itself result in increased generation of such wastes, however, and
hence will not increase consumption of materials which can be used as
fossil fuels.
The definition excludes waste products that are untransformed from
their original fossil fuel form. As a result, methane captured from
landfills would qualify as a renewable feedstock but natural gas
currently flared at the wellhead or refinery would not qualify as a
renewable feedstock, since it would be used in its untransformed state
as an oxygenate feedstock and is in fact a fossil fuel.
It should be noted, however, that the definition includes
oxygenates whose oxygen content comes from another renewable oxygenate.
As a result, ethers derived from renewable alcohols and isobutylene
which was produced from oil or natural gas would qualify as a renewable
oxygenate, whereas ethers derived from nonrenewable alcohols would not
qualify regardless of the source of isobutylene.
Like all gasoline additives, renewable oxygenates must meet the
requirements of section 211(f) of the Clean Air Act or be waived from
those requirements. In addition, reformulated gasoline containing
renewable oxygenates must be certifiable under the appropriate RFG
emission model (as set forth in Sec. 80.42 and Sec. 80.45 of the Code
of Federal Regulations).
2. Renewable Oxygenates for Summer RFG
Alcohols and other oxygenates which cause commingling-related
volatility increases used in VOC-controlled reformulated gasoline will
not receive credit toward the 30 percent renewable oxygenate
requirement for two reasons. First, EPA does not want incentives
created by the renewable oxygenate program to diminish the VOC benefits
of the RFG program during the high ozone season. As discussed in the
RFG final rule and RIA and elsewhere in this notice, a program which
would encourage increased use of ethanol (and by extension any other
oxygenates with a similar non-linear vapor pressure blending curve) in
summer RFG introduces a number of serious concerns related to increased
VOC emissions. Second, as discussed in the proposal, the process energy
needed to offset the direct vapor pressure boost from ethanol, the
primary renewable oxygenate used in gasoline today, negates the fossil
energy savings from ethanol. The vapor pressure boost must be offset to
comply with the VOC emission performance standards for summer RFG. EPA
would expect a similar situation to apply to other oxygenates that
increase the vapor pressure of gasoline.
Direct RVP increases are controlled and accounted for in summer
reformulated gasoline by the RFG program. However, alcohols such as
ethanol and methanol can create commingling problems in vehicle fuel
tanks which are not reflected in the RFG emission models. Commingling
can significantly increase average in-use fuel volatility which leads
to higher emissions of VOCs, an ozone precursor. EPA believes that by
not granting credit toward the renewable oxygenate requirement during
the summer for commingling oxygenates, today's program will not
encourage increased use of these oxygenates during the high ozone
season, thereby avoiding the VOC emission increases that would result
from such increased use. In fact, today's provision has the potential
to stimulate the use of ETBE during the summer months, which could
displace ethanol use that otherwise may have existed under the RFG
program, thereby reducing commingling related emission increases during
the high ozone season.
As discussed in the Regulatory Impact Analysis\15\ (RIA) for the
RFG Final Rule, a thirty percent ethanol blend market share in a Phase
I VOC-controlled gasoline pool in VOC Control Region 1 would increase
the effective average RVP of the gasoline pool (even if the ethanol
blends and non-ethanol blends have the same RVP) and thereby increase
total VOC emissions (including both exhaust and non-exhaust VOC
emissions) relative to a scenario in which ethanol blends had zero
market share. EPA estimated in the RIA for the RFG Final Rule that the
commingling-related increase in VOC emissions from a thirty percent
market share for ethanol-blended RFGs would result in a VOC increase of
approximately two to three percent. In other words, the commingling
effect would reduce RFG's Phase I VOC benefits by up to twenty percent.
While EPA was aware of the commingling effect during the development of
the Complex Model, the effects could not be reliably estimated in time
for proposal and, since adding the commingling effect to the Complex
Model would have represented a considerable change to the model, EPA
deferred adding the effect to the Complex Model at the time of the RFG
final rule.
---------------------------------------------------------------------------

\15\Final Regulatory Impact Analysis for the Reformulated
Gasoline Program, FSSB, RDSD, OMS, OAR, US EPA, December 1993,
document number V-B-1, EPA Docket A-92-12.
---------------------------------------------------------------------------

The commingling effect does not occur when ethers are blended with
gasoline. Furthermore, such blends are projected by DOE\16\ to require
less fossil energy than would RFG containing nonrenewable oxygenates.
As a result, this program allows renewable ethers blended into VOC-
controlled RFG to receive renewable oxygenate credit during the high
ozone season. Under the final rule, the Administrator may allow
renewable alcohols other than ethanol and methanol and renewable
oxygenates other than alcohols and ethers to receive such credit if
sufficient information demonstrating the absence of any commingling
effects is submitted for the approval of the Administrator. As with any
fuel additive, they would also have to meet the requirements of section
211(f) of the CAA, and the RFG containing such an additive must be
certifiable under the Simple Model or Complex Model, whichever is
applicable.
---------------------------------------------------------------------------

\16\``Energy Requirements and CO2-Equivalent Emissions of
RFG,'' U.S. Department of Energy, June 6, 1994 and March 17, 1994
(draft).
---------------------------------------------------------------------------

Outside of the ozone season, VOC reductions are not required in
reformulated gasoline for ozone control and RVP is not controlled. At
such times, renewable alcohol blends would produce the desired fossil
energy savings and potential greenhouse gas emission reductions.
Therefore, EPA will give credit to renewable alcohols blended into non-
VOC-controlled RFG, the use of which is restricted to the non-high
ozone season. The only exception to this, as discussed in section
III.G, is during shoulder season months where based on a request from
the Governor of a State, EPA has extended the non-commingling season
beyond the VOC control season. Should that occur, oxygenates which
exhibit commingling effects would not be given credit toward the
renewables requirement in that State during the shoulder season as
well.
3. Performance-Based Definition of Renewable
In its proposal, EPA solicited comments on the proposed definition
of renewable oxygenates and, in particular, on the potential for
establishing a performance requirement based on energy consumption and/
or greenhouse gas emissions to define renewable oxygenates. After
further consideration and evaluation of the comments received, EPA has
decided not to promulgate a numerical type of performance-based
standard for renewable oxygenates for a number of reasons. First, the
degree of scientific uncertainty associated with quantifying energy
consumption and emissions of different greenhouse gases throughout the
entire life cycle of various oxygenates is considerable. Second, even
if life cycle emissions could be estimated, based on comments on the
proposal and discussions with EPA's Global Change Division there is
currently insufficient scientific consensus on the relative warming
potential of various greenhouse gases, notably VOC and NOX (the
bulk of the emissions other than CO2), to provide reliable
comparisons. Third, EPA has concluded that at the present time it would
be difficult and costly to collect and verify the necessary data to
implement a performance-based standard for renewable oxygenates, to the
point where the recordkeeping and reporting burden could discourage
new, more efficient feedstock and oxygenate production practices.
Fourth, EPA believes that the definition of renewable oxygenates
contained in this rule is sufficient to provide certainty that fossil
energy savings are being achieved without the establishment of a
numerical performance standard. As discussed below in section III.C.4,
the group of oxygenates derived from renewable sources are expected to
achieve energy and greenhouse gas emission performance levels roughly
equivalent to or better than those achieved by ethanol alone. For these
reasons, EPA does not believe it to be appropriate at the present time
to institute a performance standard for renewable oxygenates. However,
the Agency reserves the right to alter its definition of ``renewable''
to a performance-based standard in the future if a reasonable,
workable, and enforceable definition can be developed.
4. Renewable Alcohols/Ethers Limitation
In the December NPRM, the only oxygenates included in the proposed
definition of renewable oxygenates were ethanol and methanol produced
from renewable feedstocks and their ether derivatives. However, EPA
recognizes that for a number of reasons the production of other
oxygenates from renewable feedstocks is likely to produce fossil energy
savings similar to that for renewable methanol and ethanol. First, many
of these other oxygenates may at times be produced as co-products or
by-products of methanol or ethanol production. As a result, they should
have similar fossil energy balances. In fact, if by including them in
today's definition they are not forced to be separated out from the
ethanol and/or methanol to make them pure, it could help reduce energy
expenditures. Second, even if not co-products, they are likely to be
produced from similar feedstocks using similar production practices as
those currently used for renewable ethanol and methanol. As a result,
the energy balance should not be significantly different. In fact, the
energy balance could very well be better, since the energy balance of
either the oxygenate production itself, or that associated with
blending it into RFG, may be the reason prompting the production of the
other oxygenates in lieu of ethanol or methanol. Third, in order for
these other oxygenates to compete in the marketplace with renewable
ethanol or methanol they will need to be cost competitive. Since the
energy inputs represent a significant portion of the costs of renewable
oxygenate production, these other oxygenates are unlikely to be
produced (unless they are co-products as discussed above) unless they
are at least as energy efficient as the alternatives. Furthermore, if
they are able to compete, the oxygenate they are likely to displace
from the marketplace will be the marginal renewable oxygenate
production which is the most costly and inefficient to produce and
therefore provides the least energy savings to begin with. Fourth,
while EPA does not expect these oxygenates to represent a large portion
of the renewable oxygenate market, their exclusion from the definition
might hinder their entry into the market and hinder the development of
new, energy efficient renewable oxygenate production technologies.
As a result, EPA is including other oxygenates produced from
renewable feedstocks in its definition of permitted renewable
oxygenates under today's rule. As discussed above, however, such
oxygenates cannot be blended during the high ozone season unless either
they are converted to an ether form, or it can be demonstrated that
they do not cause a volatility increase when commingled with other
gasoline blends.
Although several commenters supported the petition process which
EPA proposed as an optional means to respond to future developments in
oxygenate technology, the Agency is limiting this petition process to
determining whether the renewable oxygenate exhibits commingling
effects which are relevant to their use under this program during the
summer months. As discussed above, EPA is extending the definition of
renewable oxygenate based on its determination that all oxygenates
derived from renewable sources and expected to be used to comply with
this program should exhibit energy benefits similar to those resulting
from ethanol use.

D. Averaging and Trading

EPA is promulgating averaging and trading provisions, as proposed,
for the oxygenates in reformulated gasoline receiving renewable credit
under today's program. Refiners are allowed to average the renewable
oxygen content of reformulated gasoline over the calendar year. During
the first year, however, the averaging period will run for 13 months,
from December 1, 1994 through December 31, 1995, to track the time
period for the other RFG requirements. Refiners are also allowed to
trade credits earned by exceeding the renewable oxygenate requirement
to other refiners. No banking of credits from one year to the next,
however, is allowed, in order to keep the program as simple as
possible.
Averaging and trading provide refiners many benefits. For example,
averaging provides refiners with production flexibility, since every
gallon need not meet the renewable oxygenate requirement. Trading
provides additional flexibility by permitting refiners to specialize:
it may be more cost-effective for some refiners than others to produce
reformulated gasoline with a renewable oxygenate content. Trading
enables those refiners for whom it is less cost-effective to buy
renewable credits from those who find it more cost-effective to blend
renewable oxygenates. Averaging and trading also allow refiners to
avoid any cost associated with compliance margins, since refiners will
not need to blend renewable oxygenates in excess of the 30 percent
requirement to assure compliance.
These provisions are especially important during the initial
startup of the program. While the renewable oxygenate program takes
effect for refiners beginning December 1, 1994, individual refiners do
not need to blend any renewable oxygenate into their gasoline until
later in the year, or at all if they so desire. They will just have to
demonstrate that they met the requirements over the course of the
entire year through either the blending of greater than 15% renewable
oxygenates in the latter part of the year, or the purchase of credits
from other refiners. As a result, the averaging and trading provisions
effectively provide refiners with additional time to meet the initial
requirements of the program, and allows them to smoothly ramp up their
use of renewable oxygenates during the course of the first year to the
full 30% requirement in the second year (1996).
1. Averaging Period
USDA submitted comments to the Agency encouraging a season-specific
averaging program, rather than an annual averaging program. USDA argued
that requiring the renewables requirement to be met separately for VOC-
controlled and non-VOC-controlled gasoline would increase the energy
and environmental benefits. Specifically, USDA suggested that a season-
specific program would provide additional incentives to convert ethanol
that would otherwise have been blended directly into summer RFG into
the form of ETBE. USDA argued that the resulting reduction in summer
ethanol use would further reduce commingling effects and lead to
additional VOC emission reductions due to the distillation
characteristics of ETBE. USDA suggested that a season-specific program
would provide the potential for ethanol market share to expand beyond
30 percent in future years. The reader is referred to the RIA for a
detailed discussion of the seasonal averaging program suggested by
USDA.
EPA has considered the issues raised by USDA, and has decided to
retain the annual averaging period proposed in the December NPRM, based
on an analysis of the logistical, energy, environmental, and cost
impacts of splitting the summer and winter seasons. First, seasonal
averaging would require ETBE use in VOC-controlled reformulated
gasoline, which presents serious capacity problems in the short-term.
Although only minor modifications are necessary in order to produce
ethers from ethanol rather than methanol, it will take some time to
make those ether production facility conversions and to acquire the
necessary construction and operating permits. EPA's analysis indicates
that insufficient ETBE capacity would be available to fully meet the
summer requirements of a season-specific renewable program in 1995 and
likely also 1996. As a result, a seasonal averaging program would have
to be delayed and/or phased in. Since, as discussed below, EPA
anticipates the Phase II RFG requirements to stimulate the use of ETBE,
a phased-in requirement might have little actual impact on ETBE use. In
addition, a split season program would introduce additional complexity
and expense to the renewable oxygenate and reformulated gasoline
programs. ETBE is more expensive on an oxygen content basis than either
MTBE or ethanol, and ETBE provides smaller toxics emission reductions
than other oxygenates included in EPA's RFG emission models, which
refiners would have to offset through other fuel controls. Thus,
forcing ETBE use in summer gasoline in order to meet a season-specific
renewable oxygenate requirement could have increased the cost of
compliance with the annual toxics requirement of the reformulated
gasoline rule, especially under Phase I of the RFG program, and
complicated implementation of the RFG program given the short leadtime
available. This problem would have been particularly severe during the
initial years of the program, since the refinery modifications
necessary to offset the increase in toxics emissions can require
several years to complete, and since the value of ETBE's RVP benefits
will increase only when the Phase II RFG standards are implemented.
Furthermore, EPA concluded that the purposes of the program could
be achieved without a season-specific program. The renewable oxygenate
program is being promulgated to provide two primary benefits: reducing
the fossil energy impact of RFG, and stimulating the development of
renewable fuels which can lead to greenhouse gas emission benefits,
this would supplement the VOC and toxics emissions reduction benefits
from RFG. ETBE use per se is not required to obtain these benefits.
Based on the DOE analysis, ETBE use during the summer does not provide
any additional fossil energy benefit than ethanol use in the winter,
and in fact, results in a slightly smaller fossil energy savings. The
program may also achieve some marginal crude oil savings and some
additional VOC emission benefits with the use of ETBE during the summer
months (due to the favorable front-end distillation characteristics of
ETBE relative to ethanol and MTBE). However, EPA does not believe a
split season is necessary to stimulate the use of ETBE in the summer
months, particularly when the Phase II RFG standards take effect.
In summary, EPA believes that a season-specific program would offer
minimal energy and environmental benefits, would increase complexity
and impair compliance flexibility resulting in increased costs in
complying with the program, would likely run into near-term capacity
limitations, and would have no impact on the overall use of renewable
fuels. As a result, EPA considers a season-specific program to be
unnecessary in order to achieve the objectives of this program.

E. Level of Renewables Required

1. Existing Renewables Market Share
During the rulemaking process, EPA considered requiring greater and
lesser levels of renewable oxygenates and requested comment on the
appropriateness of the proposed 30 percent level for renewables. Under
the winter oxygenated fuels program, which began in 1992, ethanol has
been used in approximately 30 percent of the oxygenated gasoline. That
program includes certain areas that will require RFG, but in general it
focuses on non-RFG areas with wintertime carbon monoxide (CO) problems.
Based on this experience, it appears that splash-blended ethanol can be
expected to be used in at least thirty percent of the oxygenate market
when the RVP increase resulting from the blend is not constrained,
given existing incentives for the use of ethanol and other renewable
oxygenates. The 30 percent requirement for the renewable oxygenate
program helps assure that, at minimum, renewable oxygenates will be
used to an extent similar to what would have occurred in the RFG-
related oxygenate market had the air quality imperatives of the RFG
program not required constraints on RVP levels. This will avoid a
situation where the requirements and complexity of the RFG program
limit the growth of renewable oxygenate use. Today's renewable
oxygenate requirement will in effect set a floor to avoid reduced use
of renewable oxygenates in the future. It does not set a ceiling, and
should not interfere with growth of renewable oxygenate use. There are
no similar restrictions placed on the remaining 70 percent of the RFG
oxygenate market. As discussed below in section III.E.4, if MTBE
dominates this portion of the RFG oxygenate market as anticipated, MTBE
use will still grow dramatically over its current demand.
2. Renewables Production Capacity
In the December proposal, EPA stated that given the current absence
of renewable methanol capacity, ethanol and its ether derivatives were
likely to be the primary oxygenates used to meet the renewable
oxygenate requirement in the short term. Based on 1990 data, EPA
estimated that the 30 percent renewable oxygenate requirement would
require an average production of roughly 630 million gallons of ethanol
per year, or about 60 percent of EPA's estimate of current ethanol
production capacity of roughly one billion gallons per year. EPA has
updated these estimates, as discussed more fully in the RIA, and now
estimates that approximately 670 million gallons per year of ethanol
will be needed to meet the requirements of the renewables program alone
in the 1995-1996 time frame. Other analyses have reached similar
conclusions; for example, USDA's analysis indicates that the 30 percent
renewable oxygenate requirement would require an average production of
680 million gallons per year. As discussed below in section III.F, EPA
believes that this new demand can be met, provided there is a phase-in
of the program in 1995. A phase-in will give oxygenate producers,
refiners, and terminals one additional year to obtain permits,
construct facilities and negotiate contracts before the full program
goes into effect in 1996.
3. Comments Regarding the Level of Renewables
The majority of comments from ethanol suppliers and feedstock
producers who addressed the appropriate level of renewable oxygenates
supported the 30 percent requirement. The primary rationale for their
support was that the current market share for ethanol in the oxygenated
fuels program should be maintained.
Comments were received recommending both higher and lower levels of
renewable oxygenates. Higher levels were suggested in the belief that
the ethanol industry needed the additional encouragement through just
such an incentive to grow at a more desirable rate. At this point in
time, however, the 30 percent renewables requirement in those areas
covered by the RFG program represents a considerable stimulus to the
renewable oxygenate industry. EPA believes that a larger renewable
oxygenate requirement would call into question the near-term
feasibility of the renewables program. Furthermore, EPA believes that
the 30 percent level is all that is necessary to overcome the ethanol
blending limitations in RFG caused by the VOC performance standard,
since this is the level ethanol was able to achieve absent any blending
restrictions under the winter oxygenated fuels program. In addition,
the 30 percent renewables requirement being promulgated today is a
minimum requirement. It does not prevent renewable oxygenates from
increasing their share of the gasoline oxygenate market.
Many of those opposing the 30 percent requirement argued that it
could create the potential for supply disruption and significant cost
increases in the short-term. The oil and MTBE industries objected to
the necessity for a renewable oxygenate program out-of-hand. They
argued that since ethanol already has a large portion of the current
wintertime oxygenated fuel market and since the market for ethanol
would likely increase when the RFG program begins in 1995, the 30
percent renewable oxygenate program was unnecessary. Others, notably
state air pollution control officials, recommended that the 30 percent
requirement be lowered to 10 percent in order to mitigate any
potentially negative environmental and energy impacts, as well as to
allow the market more input in selecting the oxygenates used in the
program. EPA has considered these comments but continues to believe
that the 30 percent requirement is appropriate and feasible given the
energy and environmental benefits of the renewables requirement and
long-running governmental policies to promote renewable fuels. The
basis for these conclusions is discussed elsewhere in this notice and
in the RIA.
4. Implications for Non-Renewable Oxygenates
EPA believes the 30 percent level will provide the benefits
identified above and stimulate the development of a diverse supply of
oxygenates for the oxygenate market. The 30 percent requirement will
ensure a strong role for renewable oxygenates in the RFG program while
still permitting the majority of the RFG oxygenate market share to be
open to any oxygenate, regardless of the feedstocks used to produce it.
Even with today's rule, production of MTBE and its methanol feedstock
is projected to increase because of the increased demand for oxygenates
in the United States as the RFG program takes effect. MTBE demand would
increase by 3.1 billion gallons annually if it is used in all of the
remaining 70 percent of the RFG oxygenate market. Such an expansion
equals an approximate increase of 170 percent from current MTBE usage
levels. While EPA acknowledges that MTBE and methanol demand might be
even greater in the absence of today's rule, it is important to note
that the RFG program is likely to result in dramatic growth in MTBE,
methanol, and ethanol production. Furthermore, MTBE producers can
modify their facilities at relatively modest expense to produce ETBE if
its use should prove economically advantageous given the requirements
of the RFG program and today's rule.
Similar conclusions hold true for the natural gas industry. Natural
gas is used to produce methanol and isobutylene, which in turn are used
to produce MTBE. Since MTBE production is projected to grow from
current levels as a result of the RFG program, EPA expects the demand
for natural gas for oxygenate production to grow as well. Furthermore,
isobutylene derived from natural gas is expected to play a major role
in ETBE production. It should also be noted that oxygenate production
represents a small portion of total demand for natural gas.
For these reasons, EPA does not believe that today's action will
result in significant adverse effects on the MTBE, methanol, or natural
gas industries, as their markets will dramatically increase with or
without today's action. This is particularly the case since a
considerable amount of ethanol was likely to have been used to satisfy
the RFG program requirements absent today's rule. As discussed in
section III.F, based on the expansion of ethanol production capacity
planned prior to this rule, ethanol could potentially have been used to
fulfill 15 percent of the oxygenate requirement of the RFG program.

F. Timing and Phase-In

1. Introduction
In the NPRM, EPA proposed to require that renewable oxygenates be
used to meet 30 percent of the 2.0 weight percent oxygen requirement
for the RFG program. However, at that time EPA was concerned whether
adequate supplies of renewable oxygenates would be available and
whether the distribution infrastructure was sufficient during the
initial years of the program without disrupting existing markets for
such oxygenates or incurring excessive costs. With that in mind, the
proposal requested comments concerning these issues. More specifically,
comments were requested on the appropriate level of the renewable
oxygenate requirement, leadtime requirements associated with providing
adequate renewable oxygenate supplies, the potential need for a phase-
in period, and any other supply-related issues. In response, EPA
received considerable information on the current and projected supply
of renewable oxygenates, as well as less complete information regarding
the logistics of renewable oxygenate distribution. The detailed
analysis is contained in the Regulatory Impact Analysis (RIA), and is
summarized below. Based on the projected supply of renewable oxygenates
over time and the leadtime required to establish blending and storage
facilities, EPA has concluded that, while the market can readily bear a
30 percent requirement given adequate leadtime, a phase-in of the 30
percent requirement is necessary. Therefore, EPA is requiring that 15
percent of the RFG program's 2.0 weight percent oxygen requirement be
met from renewable oxygenate sources in 1995, and that the full 30
percent of the oxygen requirement be met from such sources in 1996 and
thereafter.
The purpose of EPA's analysis was to determine whether sufficient
renewable oxygenate supply, distribution, tankage, and blending
capacity would be available in 1995 and 1996 to meet the program
requirements. Failure to have sufficient supply, distribution, tankage,
or blending capacity for the considerable increase in renewable
oxygenate demand could result in shortages or price spikes and could
interfere with the orderly implementation of the reformulated gasoline
program.
In addition, EPA considered it to be desirable for a variety of
reasons to limit to the extent possible any need to displace
substantial amounts of ethanol from existing markets. First, displacing
ethanol from existing markets would do nothing to expand the use of
renewable oxygenates and achieve the resulting benefits. Second,
shifting ethanol from existing markets to RFG markets would not
stimulate the introduction of more advanced renewable fuels production
technology. Third, as described in sections III.H and VI of this
notice, the use of ethanol from new or expanded plants is projected to
displace more fossil energy than would ethanol from existing plants.
Fourth, relatively high prices for ethanol would be needed to displace
it from existing markets, leading to higher than necessary price
increases for RFG during the initial years of the program. Ethanol
purchase contracts may already be established for 1995, and breaking
such agreements in order to shift ethanol from existing gasoline
markets to RFG markets might be difficult and costly. Furthermore,
approximately half of current ethanol consumption occurs in states
which offer substantial tax credits for ethanol blends. These credits
are equal in value to between 10 and 20 cents per gallon of ethanol. To
induce ethanol suppliers to shift ethanol from such markets to
unsubsidized markets would likely require a purchase price in excess of
current market prices for ethanol equal to or greater than the value of
the tax credits available in existing markets. In addition, ethanol is
currently used in many markets to provide the added octane for mid-
grade and premium gasolines. These gasoline grades enjoy a considerable
retail price premium which can be reflected in the price paid for the
ethanol. These price premiums for ethanol blended mid-grade and premium
gasolines may not be available to the same extent in the new renewable
oxygenate markets, particularly for the full amount of ethanol expected
to be blended under the renewable oxygenate program.
The analysis examined each element of the renewable oxygenate
supply process separately. First EPA evaluated which renewable
oxygenates would be likely to be used to fulfill the program
requirements during the early years of the program and what volume of
oxygenate that represented. Second, feedstocks for the production of
these oxygenates were examined to determine whether sufficient
feedstock supplies would be available. Third, EPA examined the adequacy
of projected production capacity for the dominant oxygenates for the
first years of the program. Fourth, EPA investigated whether
transportation and distribution networks were adequate to support the
program during the initial years. Fifth, EPA examined the projected
storage and blending capability during this time frame. EPA examined
the capability over time of each link in the renewable oxygenate
production and distribution chain to handle the demands of the
renewable oxygenate program, and concluded that a phase-in of the 30
percent requirement is necessary and that the phase-in being
promulgated today is an appropriate response to leadtime concerns.
2. Likely Renewable Oxygenates
Ethanol is likely to be the dominant renewable oxygenate used to
meet the renewable oxygenate requirements, especially during the
initial years of the program, since it is the only renewable oxygenate
currently produced in large quantities. Since ethanol cannot be blended
during the summer months to meet the requirements of the program, its
use will be concentrated during the winter months. ETBE, the simplest
ether derived from ethanol, also is likely to be used in significant
quantities since it, unlike ethanol, can be blended during the summer
months to meet the requirements of the program. As discussed below in
section III.F.6, however, ETBE production capacity is expected to be
virtually non-existent in 1995 due to construction and permitting time
constraints. Its use is expected to increase by 1996 through the
conversion of existing MTBE facilities so that the requirements of the
program are met by a combination of ethanol use in the winter and ETBE
use year-round. Other renewable oxygenates are not expected to be
available in significant quantities before 1997 given the leadtime
required to design and construct new renewable production facilities.
ETBE use is expected to increase further during the summer months once
the Phase II RFG standards take effect in the year 2000, since ETBE use
will make it easier (relative to MTBE) for refiners to achieve the more
stringent VOC performance standards.
3. New Renewable Oxygenate Demand
Before EPA could evaluate the adequacy of the renewable oxygenate
supply, distribution, and blending capacity, it was necessary to
estimate the program's demand for renewable oxygenates. The estimate
was derived in terms of new ethanol demand, since as discussed above
only ethanol or ETBE are expected to be used in significant quantities
during the first few years of the program, and since the use of ETBE
would not alter the total amount of ethanol required by today's rule
because the oxygen in ETBE is derived solely from ethanol. The ethanol
demand created by the program was estimated by multiplying the
projected 1995 volume of reformulated gasoline covered by the Federal
RFG program (including the two covered California areas) of 38.7
billion gallons per year by the volume percent of ethanol (5.76
percent) necessary to meet to 2.0 weight percent oxygen requirement in
30 percent of RFG. As a result, today's program is estimated to require
about 670 million gallons of ethanol to meet the full 30 percent
requirement. In actual practice, refiners may blend greater or lesser
amounts of ethanol in any individual gallon of RFG, depending on such
factors as tax credits and price and availability of various
oxygenates.
The actual amount of new ethanol production required by today's
rule is smaller than 670 million gallons because some ethanol is
currently sold in areas covered by the RFG program. Based on the
monthly reporting by Information Resources, Inc. (IRI) for 1993, it
appears that as much as 280 million gallons of ethanol is already being
used in areas covered by the reformulated gasoline program (State-wide
data was weighted based on population to reflect ethanol consumption
only in the RFG areas within the State). Not all of this can be
credited toward the renewable oxygenate program, however, unless the
summertime use is converted to ETBE. Based on the IRI data, as much as
180 million gallons of ethanol is currently being used during those
months of the year in which EPA would expect non-VOC-controlled
gasoline to be produced (on average September 15 through March 31).
Thus, the amount of additional wintertime ethanol production required
to meet a 30 percent renewable oxygenate requirement in 1995 would be
approximately 490 million gallons (390 million gallons in new, year-
round capacity in later years once ETBE production capacity can be
brought on-line). A 15 percent phase-in of the program would require
approximately 155 million gallons of additional ethanol production.
While this volume of ethanol could be met using existing capacity by
displacing ethanol from existing ethanol markets, EPA believes, for
reasons discussed earlier, it is desirable to minimize displacing
significant amounts of ethanol from existing markets.
4. Feedstock Capacity
The next step in EPA's analysis was to determine whether sufficient
feedstocks were available to permit this increase in renewable
oxygenate production. According to comments received from agricultural
interests, corn is the feedstock for 90 percent of current ethanol
production and is expected to provide the vast bulk of the feedstock
for new ethanol capacity added in the near term. Of the total 8.7
billion bushels of corn produced in an average year,17
approximately 360 million bushels (approximately 4 percent of average
annual corn production) was used to produce an estimated 900 million
gallons of ethanol. Therefore, the estimated 490 million gallons of new
ethanol demand resulting from today's rule would increase corn demand
by approximately 195 million bushels, or about 2 percent. Based on this
analysis, EPA has concluded that the feedstock demands for this program
can be satisfied solely with corn without significant difficulty. In
addition, other feedstocks can be used to produce renewable oxygenates,
including waste products from farms, dairy operations, bakeries, and
the soft drink industry; from cellulosic sources such as grasses and
fast-growing energy crops, and from such sources as municipal solid
waste. Based on the diversity and immense supply of these potential
feedstocks, EPA has concluded that feedstock supplies are sufficient to
support the requirements of the renewable oxygenate program being
promulgated today.
---------------------------------------------------------------------------

\1\7According to information provided by John W. McClelland of
USDA, ``Memorandum for Richard Wilson, Director, Office of Mobile
Sources, U.S. Environmental Protection Agency,'' June 20, 1994.
---------------------------------------------------------------------------

5. Ethanol Supply and Production Capacity
Current (1993) ethanol operating production capacity nationwide has
been estimated by DOE to be approximately 1.15 billion gallons. Data
from IRI for 1993 estimates ethanol consumption at roughly 1.25 billion
gallons, and EPA received comments from an ethanol producer that 1994
ethanol production was projected to be 1.25 billion gallons. As a
result, current ethanol production would be more than sufficient to
meet the requirements of today's rulemaking as long as no constraints
were placed on the volume of ethanol that could be diverted from
existing markets. However, as discussed above, there are several
reasons why EPA considers it appropriate to minimize to the extent
possible diverting ethanol from existing markets to satisfy the
renewable oxygenate program. As a result, EPA examined the amount of
current excess ethanol capacity and projected new ethanol capacity to
determine the amount of renewable oxygenates that would be available to
supply the needs of the program being promulgated today during the
initial years of the program.
The U.S. Department of Agriculture estimates that the current
ethanol production capacity is as high as 1.4 billion gallons per year.
One commenter representing the ethanol industry submitted a list of
existing ethanol plants and their operational capacity which suggested
that current ethanol production capacity is also nearly 1.4 billion
gallons per year. Based on this production capacity information and on
the current domestic ethanol consumption estimates, it appears that
there may be approximately 150 million gallons of excess ethanol
production capacity (some of which may currently be exported) currently
available that could be used to supply the requirements of the
renewable oxygenate program. However, not all of this production could
be used to supply ethanol for blending during the winter; only
approximately 80 million gallons could be supplied from current excess
capacity during the winter months.
In addition to current excess capacity, a considerable amount of
new capacity is expected to come on-line in the remainder of 1994,
1995, and 1996, according to information supplied by the Renewable
Fuels Association and USDA. This information suggests that
approximately 305 million gallons per year of additional ethanol
capacity is currently under construction and will become available in
1995. (Additional amounts are possible, but more speculative.)
Furthermore, plans were being made for another 304 million gallons of
annual capacity to be brought on line in 1996, though much of that
apparently depended on the outcome of today's rulemaking. USDA
estimated similar increases in ethanol capacity over this time period.
It should be noted that not all of the additional capacity available in
1995 would be available at the beginning of the year, and not all of it
could be dedicated to production only during the winter months as would
be required until ETBE production capacity comes on-line. A similar
situation would occur in 1996. After considering these factors, EPA has
concluded that approximately 93 million gallons of additional ethanol
production from new capacity will be available for blending during the
winter months to meet the program requirements in 1995, and an
additional 157 million gallons to meet the program requirements during
the winter months in 1996.
It should be noted that additional ethanol capacity also may become
available from corn processors, many of whom already have feedstock
processing facilities in operation and would only need to install the
capital equipment necessary to ferment the starch and separate the
ethanol. Such processors may be able to install ethanol production
capacity relatively quickly. Based on comments received, however, EPA
cannot conclude with any degree of assurance that such additional
capacity will become available.
Based on the foregoing analysis, EPA believes that as much as 173
million gallons of new ethanol production can be made available during
the winter months to meet 1995 program requirements and 330 million
gallons during the winter months to meet the 1996 requirements. After
taking into consideration the 180 million gallons of ethanol currently
blended in the RFG markets during the winter months, a total of 353
million and 510 million gallons of ethanol should be available for
blending during the winter months in both 1995 and 1996, respectively.
As shown in the following table, absent a phase-in and ETBE production
capacity, 317 million gallons of ethanol would have to be diverted from
existing markets in 1995 and 160 million gallons would have to be
diverted in 1996.

Summary of Ethanol Supply/Demand (MM gal) and Need for Displacement
------------------------------------------------------------------------
1995 (15% 1995 (No
Phase-in) Phase-in) 1996
------------------------------------------------------------------------
New Renewable Oxygenate Ethanol
Demand.......................... 335 670 670
Existing EtOH Demand in RFG Areas
During Winter\1\................ 180 180 180
Net New Winter Capacity Required. 155 490 490
Current Winter Excess Capacity... 80 80 80
1995 New Winter Capacity\2\\3\... 93 93 164
1996 New Winter Capacity\2\\3\... 0 0 89
Shortfall (Displaced from
Existing Markets)............... ........... 317 157\4\
------------------------------------------------------------------------
\1\Based on IRI estimates.
\2\If additional summer production can be stored until the winter, then
this estimate could be increased slightly.
\3\Annual available new capacity is derived from expected capacities of
ethanol plants under design/construction prorated by their projected
start-up dates.
\4\Will be reduced to the extent ETBE capacity can come online.

To the extent that existing ethanol storage

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-17649. Public record. Not legal advice.