# Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3AE7-7140 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 1, 2007 - **Citation:** 72 FR 23900 ## Text ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 80 [EPA-HQ-OAR-2005-0161; FRL-8299-9] RIN 2060-AN76 Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program AGENCY: Environmental Protection Agency (EPA). ACTION: Final rule. SUMMARY: Under the Clean Air Act, as amended by Section 1501 of the Energy Policy Act of 2005, the Environmental Protection Agency is required to promulgate regulations implementing a renewable fuel program. The statute specifies the total volume of renewable fuel that the regulations must ensure is used in gasoline sold in the U.S. each year, with the total volume increasing over time. In this context, this program is expected to reduce dependence on foreign sources of petroleum, increase domestic sources of energy, and help transition to alternatives to petroleum in the transportation sector. The increased use of renewable fuels such as ethanol and biodiesel is also expected to have the added effect of providing an expanded market for agricultural products such as corn and soybeans. Based on our analysis, we believe that the expanded use of renewable fuels will provide reductions in carbon dioxide emissions that have been implicated in climate change. Also, there will be some reductions in air toxics emissions such as benzene from the transportation sector, while some other emissions such as oxides of nitrogen are expected to increase. This action finalizes regulations designed to ensure that refiners, blenders, and importers of gasoline will use enough renewable fuel each year so that the total volume requirements of the Energy Policy Act are met. Our rule describes the standard that will apply to these parties and the renewable fuels that qualify for compliance. The regulations also establish a trading program that will be an integral aspect of the overall program, allowing renewable fuels to be used where they are most economical while providing a flexible means for obligated parties to comply with the standard. DATES: This final rule is effective on September 1, 2007. The incorporation by reference of certain publications listed in the rule is approved by the Director of the Federal Register as of September 1, 2007. ADDRESSES: EPA has established a docket for this action under Docket ID No. EPA-HQ-OAR-2005-0161. All documents in the docket are listed in the www.regulations.gov Web site. Although listed in the index, some information is not publicly available, e.g., confidential business information (CBI) or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available either electronically through www.regulations.gov or in hard copy at the EPA Docket Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW., Washington, DC. This Docket Facility is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566-1744 and the telephone number for the EPA Docket Center is (202) 566-1742. FOR FURTHER INFORMATION CONTACT: Julia MacAllister, U.S. Environmental Protection Agency, National Vehicle and Fuel Emissions Laboratory, 2000 Traverwood, Ann Arbor MI, 48105; telephone number (734) 214-4131; fax number (734) 214-4816; e-mail address macallister.julia@epa.gov. SUPPLEMENTARY INFORMATION: I. General Information Entities potentially affected by this action include those involved with the production, distribution and sale of gasoline motor fuel or renewable fuels such as ethanol and biodiesel. Regulated categories and entities could include: Category NAICS 1 codes SIC 2 codes Examples of potentially regulated entities Industry 324110 2911 Petroleum Refineries. Industry 325193 2869 Ethyl alcohol manufacturing. Industry 325199 2869 Other basic organic chemical manufacturing. Industry 424690 5169 Chemical and allied products merchant wholesalers. Industry 424710 5171 Petroleum bulk stations and terminals. Industry 424720 5172 Petroleum and petroleum products merchant wholesalers. Industry 454319 5989 Other fuel dealers. 1 North American Industry Classification System (NAICS). 2 Standard Industrial Classification (SIC) system code. This table is not intended to be exhaustive, but provides a guide for readers regarding entities likely to be regulated by this action. This table lists the types of entities that EPA is now aware could potentially be affected by this action. Other types of entities not listed in the table could also be affected. To decide whether your organization might be affected by this action, you should carefully examine today's notice and the existing regulations in 40 CFR part 80. If you have any questions regarding the applicability of this action to a particular entity, consult the persons listed in the preceding FOR FURTHER INFORMATION CONTACT section. Table of Contents I. Introduction A. The Role of Renewable Fuels in the Transportation Sector B. Requirements in the Energy Policy Act C. Development of the RFS Program II. Overview of the Program A. Impacts of Increased Reliance on Renewable Fuels 1. Renewable Fuel Volume Scenarios Analyzed 2. Emissions 3. Economic Impacts 4. Greenhouse Gases and Fossil Fuel Consumption 5. Post 2012 RFS Standards B. Program Structure 1. What Is the RFS Program Standard? 2. Who Must Meet the Standard? 3. What Qualifies as a Renewable Fuel? 4. Equivalence Values of Different Renewables Fuels 5. How Will Compliance Be Determined? 6. How Will the Trading Program Work? 7. How Will the Program Be Enforced? C. Voluntary Green Labeling Program III. Complying With the Renewable Fuel Standard A. What Is the Standard That Must Be Met? 1. How Is the Percentage Standard Calculated? 2. What Are the Applicable Standards? 3. Compliance in 2007 4. Renewable Volume Obligations B. What Counts as a Renewable Fuel in the RFS Program? 1. What Is a Renewable Fuel That Can Be Used for Compliance? a. Ethanol Made From a Cellulosic Feedstock b. Ethanol Made From any Feedstock in Facilities Using Waste Material To Displace 90 Percent of Normal Fossil Fuel Use c. Ethanol That Is Made From the Non-Cellulosic Portions of Animal, Other Waste, and Municipal Waste d. Foreign Producers of Cellulosic and Waste-Derived Ethanol 2. What Is Biodiesel? a. Biodiesel (Mono-Alkyl Esters) b. Non-Ester Renewable Diesel 3. Does Renewable Fuel Include Motor Fuel That Is Made From Coprocessing a Renewable Feedstock With Fossil Fuels? a. Definition of “Renewable Crudes” and “Renewable Crude-Based Fuels” b. How Are Renewable Crude-Based Fuel Volumes Measured? 4. What Are “Equivalence Values” for Renewable Fuel? a. Authority Under the Act To Establish Equivalence Values b. Energy Content and Renewable Content as the Basis for Equivalence Values c. Lifecycle Analyses as the Basis for Equivalence Values C. What Gasoline Is Used To Calculate the Renewable Fuel Obligation and Who Is Required To Meet the Obligation? 1. What Gasoline Is Used To Calculate the Volume of Renewable Fuel Required To Meet a Party's Obligation? 2. Who Is Required To Meet the Renewable Fuels Obligation? 3. What Exemptions Are Available Under the RFS Program? a. Small Refinery and Small Refiner Exemption b. General Hardship Exemption c. Temporary Hardship Exemption Based on Unforeseen Circumstances 4. What Are the Opt-in and State Waiver Provisions Under the RFS Program? a. Opt-in Provisions for Noncontiguous States and Territories b. State Waiver Provisions D. How Do Obligated Parties Comply With the Standard? 1. Why Use Renewable Identification Numbers? a. RINs Serve the Purpose of a Credit Trading Program b. Alternative Approach To Tracking Batches 2. Generating RINs and Assigning Them to Batches a. Form of Renewable Identification Numbers b. Generating RINs c. Cases in Which RINS Are Not Generated 3. Calculating and Reporting Compliance a. Using RINs To Meet the Standard b. Valid Life of RINs c. Cap on RIN Use To Address Rollover d. Deficit Carryovers 4. Provisions for Exporters of Renewable Fuel 5. How Will the Agency Verify Compliance? E. How Are RINs Distributed and Traded? 1. Distribution of RINs With Volumes of Renewable Fuel a. Responsibilities of Renewable Fuel Producers and Importers b. Responsibilities of Parties That Buy, Sell, or Handle Renewable Fuels c. Batch Splits and Batch Mergers 2. Separation of RINs From Volumes of Renewable Fuel 3. Distribution of Separated RINs 4. Alternative Approaches to RIN Distribution IV. Registration, Recordkeeping, and Reporting Requirements A. Introduction B. Registration 1. Who Must Register Under the RFS Program? 2. How Do I Register? 3. How Do I Know I am Properly Registered With EPA? 4. How are Small Volume Domestic Producers of Renewable Fuels Treated for Registration Purposes? C. Reporting 1. Who Must Report Under the RFS Program? 2. What Reports Are Required Under the RFS Program? 3. What Are the Specific Reporting Items for the Various Types of Parties Required To Report? 4. What are the Reporting Deadlines? 5. How May I Submit Reports to EPA? 6. What Does EPA Do With the Reports it Receives? 7. May I Claim Information in Reports as CBI and How Will EPA Protect it? 8. How are Spilled Volumes With Associated Lost RINs To Be Handled in Reports? D. Recordkeeping 1. What Types of Records Must Be Kept? 2. What Recordkeeping Requirements are Specific to Producers of Cellulosic or Waste-Derived Ethanol? E. Attest Engagements 1. What Are the Attest Engagement Requirements Under the RFS Program? 2. Who Is Subject to the Attest Engagement Requirements for the RFS Program? 3. How Are the Attest Engagement Requirements in this Final Rule Different From Those Proposed? V. What Acts Are Prohibited and Who Is Liable for Violations? VI. Current and Projected Renewable Fuel Production and Use A. Overview of U.S. Ethanol Industry and Future Production/Consumption 1. Current Ethanol Production 2. Expected Growth in Ethanol Production 3. Current Ethanol and MTBE Consumption 4. Expected Growth in Ethanol Consumption B. Overview of Biodiesel Industry and Future Production/Consumption 1. Characterization of U.S. Biodiesel Production/Consumption 2. Expected Growth in U.S. Biodiesel Production/Consumption C. Feasibility of the RFS Program Volume Obligations 1. Production Capacity of Ethanol and Biodiesel 2. Technology Available To Produce Cellulosic Ethanol a. Sugar Platform i. Pretreatment ii. Dilute acid hydrolysis iii. Concentrated acid hydrolysis iv. Enzymatic hydrolysis b. Syngas Platform c. Plasma Technology d. Feedstock Optimization 3. Renewable Fuel Distribution System Capability VII. Impacts on Cost of Renewable Fuels and Gasoline A. Renewable Fuel Production and Blending Costs 1. Ethanol Production Costs a. Corn Ethanol b. Cellulosic Ethanol 2. Biodiesel Production Costs 3. Diesel Fuel Costs B. Distribution Costs 1. Ethanol Distribution Costs a. Capital Costs To Upgrade Distribution System for Increased Ethanol Volume b. Ethanol Freight Costs 2. Biodiesel Distribution Costs C. Estimated Costs to Gasoline 1. Description of Cases Modeled a. Base Case (2004) b. Reference Case (2012) c. Control Cases (2012) 2. Overview of Cost Analysis Provided by the Contractor Refinery Model 3. Overall Impact on Fuel Cost a. Cost Without Ethanol Subsidies b. Gasoline Costs Including Ethanol Consumption Tax Subsidies VIII. What Are the Impacts of Increased Ethanol Use on Emissions and Air Quality? A. Effect of Renewable Fuel Use on Emissions 1. Emissions From Gasoline Fueled Motor Vehicles and Equipment a. Gasoline Fuel Quality b. Emissions From Motor Vehicles c. Nonroad Equipment 2. Diesel Fuel Quality: Biodiesel 3. Renewable Fuel Production and Distribution B. Impact on Emission Inventories 1. Primary Analysis 2. Sensitivity Analysis 3. Local and Regional VOC and NO X Emission Impacts in July C. Impact on Air Quality 1. Impact of Increased Ethanol Use on Ozone 2. Particulate Matter IX. Impacts on Fossil Fuel Consumption and Related Implications A. Impacts on Lifecycle GHG Emissions and Fossil Energy Use 1. Time Frame and Volumes Considered 2. GREET Model a. Renewable Fuel Pathways Considered b. Modifications to GREET c. Sensitivity Analysis 3. Displacement Indexes (DI) 4. Impacts of Increased Renewable Fuel Use a. Greenhouse Gases and Carbon Dioxide b. Fossil Fuel and Petroleum B. Implications of Reduced Imports of Petroleum Products C. Energy Security Implications of Increases in Renewable Fuels 1. Effect of Oil Use on Long-Run Oil Price, U.S. Import Costs, and Economic Output 2. Short-Run Disruption Premium From Expected Costs of Sudden Supply Disruptions 3. Costs of Existing U.S. Energy Security Policies X. Agricultural Sector Economic Impacts XI. Public Participation XII. Administrative Requirements A. Executive Order 12866: Regulatory Planning and Review B. Paperwork Reduction Act C. Regulatory Flexibility Act 1. Overview 2. Background 4. Summary of Potentially Affected Small Entities 5. Impact of the Regulations on Small Entities 6. Small Refiner Outreach 7. Reporting, Recordkeeping, and Compliance Requirements 8. Related Federal Rules 9. Conclusions D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments G. Executive Order 13045: Protection of Children From Environmental Health and Safety Risks H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use I. National Technology Transfer Advancement Act J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations. K. Congressional Review Act L. Clean Air Act Section 307(d) XIII. Statutory A I. Introduction Through today's final rule, we are putting in place a compliance and enforcement program that implements the renewable fuel program, also known as the Renewable Fuel Standard (RFS) program. This program accomplishes the statutory goal of increasing the volume of renewable fuels that are required to be used in vehicles in the U.S. as required in Section 211(o) of the Clean Air Act (CAA) enacted as part of the Energy Policy Act of 2005 (the Energy Act or the Act). This final rule resulted from a collaborative effort with stakeholders, including refiners, renewable fuel producers, and distributors, who together helped to design a program that is simple, flexible, and enforceable. As a result of the favorable economics of renewable fuels in comparison to conventional gasoline and diesel, renewable fuel volumes are expected to exceed the requirements of the RFS program. We have evaluated the impacts of a range of renewable fuel volumes as high as 10 billion gallons in 2012. This represents a significant increase over the volume of renewable fuel used in 2004 which was approximately 3.5 billion gallons, and this increase is estimated to produce a number of significant effects. For instance, we estimate that the transition to renewable fuels will reduce petroleum consumption by 2.0 to 3.9 billion gallons or approximately 0.8 to 1.6 percent of the petroleum that would otherwise be used by the transportation sector. The increased use of renewable fuels is also expected to produce reductions in some regulated pollutants. Carbon monoxide emissions from gasoline powered vehicles and equipment will be reduced by 0.9 to 2.5 percent and emissions of benzene (a mobile source air toxic) will be reduced by 1.8 to 4.0 percent. 1 At the same time, other emissions may increase. Nationwide, we estimate between a 41,000 and 83,000 ton increase in VOC + NO X emissions. However, the effects will vary significantly by region with some major metropolitan areas experiencing small emission benefits, while other areas may see an increase in VOC emissions from 4 to 5 percent and an increase in NO X emissions from 6 to 7 percent from gasoline powered vehicles and equipment. 1 These reductions are relative to the Mobile Source Air Toxics (MSAT) standards in effect. Additional benzene emission reductions will occur as a result of the recently finalized MSAT2 standards (72 FR 8428, February 26, 2007). The use of renewable fuel will likewise reduce greenhouse gas emissions such as carbon dioxide by 8.0 to 13.1 million metric tons, about 0.4 to 0.6 percent of the anticipated greenhouse gas emissions from the transportation sector in the United States in 2012. Greenhouse gas emissions contribute to climate change, and thus, increased renewable use is an important step in addressing this issue. Finally, we estimate that increases in the use of renewable fuels will increase net farm income and the nation's energy security. Net U.S. farm income is estimated to increase by between $2.6 and $5.4 billion through transfers from users of gasoline and consumers of agricultural products used to produce ethanol. However, as feedstocks used in the production of renewable fuels expand beyond the corn and soybeans that are most common today, the renewable fuels industry is expected to continue to diversify and grow in its ability to benefit the nation's environment and economy. A. The Role of Renewable Fuels in the Transportation Sector Renewable fuels have been an important part of our nation's transportation fuel supply for many years. Following the CAA amendments of 1990, the use of renewable fuels, particularly ethanol, increased dramatically. Several key clean fuel programs required by the CAA established new market opportunities for ethanol. A very successful mobile source control strategy, the reformulated gasoline (RFG) program, was implemented in 1995. This program set stringent new controls on the emissions performance of gasoline, which were designed to significantly reduce summertime ozone precursors and year round air toxics emissions. The RFG program also required that RFG meet an oxygen content standard. Several areas of the country began blending ethanol into gasoline to help meet this new standard, such as Chicago and St. Louis. Another successful clean fuel strategy required certain areas exceeding the national ambient air quality standard for carbon monoxide to also meet an oxygen content standard during the winter time to reduce harmful carbon monoxide emissions. Many of these areas, such as Denver and Phoenix, also blended ethanol during the winter months to help meet this new standard. Today, the role and importance of renewable fuels in the transportation sector continue to expand. In the past several years as crude oil prices have soared above the lower levels of the 1990's, the relative economics of renewable fuel use have improved dramatically. In addition, since the vast majority of crude oil produced in or imported into the U.S. is consumed as gasoline or diesel fuel in the U.S., concerns about our dependence on foreign sources of crude oil have renewed interest in renewable transportation fuels. The emergence of more in-depth understanding of the impacts of human activities on climate change has also focused attention on the various ways that renewable fuels can reduce the consumption of fossil fuels. The passage of the Energy Policy Act of 2005 demonstrated a strong commitment on the part of U.S. policymakers to consider additional means of supporting renewable fuels as a supplement to petroleum-based fuels in the transportation sector. The RFS program is one such means. The RFS program was debated by the U.S. Congress over several years before finally being enacted through passage of the Energy Policy Act of 2005. The RFS program is first and foremost designed to increase the use of renewable fuels in motor vehicle fuel consumed in the U.S. In this context, it is expected to simultaneously reduce dependence on foreign sources of petroleum, increase domestic sources of energy, and diversify our energy portfolio to help transition to alternatives to petroleum in the transportation sector. Based on our analysis, we also believe that the expanded use of renewable fuels will provide reductions in carbon dioxide emissions that contribute to climate change and in air toxics emissions such as benzene from the transportation sector, while other emissions such as hydrocarbons and oxides of nitrogen are projected to increase. The increased use of renewable fuels such as ethanol and biodiesel is also expected to have the added effect of providing an expanded market for agricultural products such as corn and soybeans. The expected increase in cellulosic ethanol production will also expand the market opportunities to a wider array of feedstocks. The requirement for use of a specified volume of renewable fuels complements other provisions of the Energy Act. In particular, the required volume of renewable fuel use will offset any possible loss in demand for renewable fuels occasioned by the Act's repeal of the oxygen content mandate in the RFG program while allowing greater flexibility in how renewable fuels are blended into the nation's fuel supply. The RFS program also creates a specific annual level for minimum renewable fuel use which increases over time, ensuring overall growth in the demand and opportunity for renewable fuels. Because renewable fuels such as ethanol and biodiesel are not new to the U.S. transportation sector, the expansion of their use is expected to follow distribution and blending practices already in place. For instance, the market already has the necessary production and distribution mechanisms in place in many areas and the ability to expand these mechanisms into new markets. Recent spikes in ethanol use resulting first from the state MTBE bans, and now the virtual elimination of MTBE from the marketplace, have tested the limits of the ethanol distribution system. However, future growth is expected to move in a more orderly fashion since the use of renewable fuels will not be geographically constrained and, given EIA volume projections, investment decisions can follow market forces rather than regulatory mandates. In addition, the increased production volumes of ethanol and the expanded penetration of ethanol in new markets may create new opportunities for blending of E85, a blend of 85 percent ethanol and 15 percent gasoline, in the long run. The increased availability of E85 will mean that more flexible fueled vehicles (FFV) can use this fuel. Of the approximately 5 million FFVs currently in use in the U.S, most are currently fueled with conventional gasoline rather than E85, in part due to the limited availability of E85. Given the ever-increasing demand for petroleum-based products in the transportation sector, the RFS program also moves the nation in the direction of replacing part of this demand with renewable energy. The RFS program provides the certainty that at least a minimum amount of renewable fuel will be used in the U.S., which in turn provides some certainty for investment in production capacity of renewable fuels. However, it should be understood that the RFS program is not the only factor currently impacting demand for ethanol and other renewable fuels. As Congress was developing the RFS program in the Energy Act, several large states were adopting and implementing bans on the use of MTBE in gasoline. As a result, refiners supplying reformulated gasoline (RFG) in those states switched to ethanol to satisfy the oxygen content mandate for their RFG, causing a large, sudden increase in demand for ethanol. Even more importantly, with the removal of the oxygen content mandate for RFG, refiners elected to remove essentially all MTBE from the gasoline supply in the U.S. during the spring of 2006. In order to accomplish this transition quickly, while still maintaining gasoline volume, octane, and gasoline air toxics performance standards, refiners elected to blend ethanol into virtually all reformulated gasoline nationwide. This caused a second dramatic increase in demand for ethanol, which in the near term was met by temporarily shifting large volumes of ethanol out of conventional gasoline and into the RFG areas. Perhaps the largest impact on renewable fuel demand, however, has been the increase in the cost of crude oil. In the last few years, both crude oil prices and crude oil price forecasts have increased dramatically. This has resulted in a large economic incentive for the use of ethanol and biodiesel. The Energy Information Administration (EIA) and others are currently projecting renewable fuel demand to exceed the minimum volumes required under the RFS program by a substantial margin. In this context, the effect of the RFS program is to provide a minimum level of demand to support ongoing investment in renewable fuel production. However, market demand for renewable fuels is expected to exceed the statutory minimums. We believe that the program we are finalizing today will operate effectively regardless of the level of renewable fuel use or market conditions in the energy sector. B. Requirements in the Energy Policy Act Section 1501 of the Energy Policy Act amended the Clean Air Act and provides the statutory basis for the RFS program in Section 211(o). It requires EPA to establish a program to ensure that the pool of gasoline sold in the contiguous 48 states contains specific volumes of renewable fuel for each calendar year starting with 2006. The required overall volumes for 2006 through 2012 are shown in Table I.B-1 below. Table I.B-1.— Applicable Volumes of Renewable Fuel Under the RFS Program Calendar year Billion gallons 2006 2006 4.0 2007 4.7 2008 5.4 2009 6.1 2010 6.8 2011 7.4 2012 7.5 In order to ensure the use of the total renewable fuel volume specified for each year, the Agency must set a standard for each year representing the amount of renewable fuel that each refiner, blender, or importer must use, expressed as a percentage of gasoline sold or introduced into commerce. This yearly percentage standard is to be set at a level that will ensure that the total renewable fuel volumes shown in Table I.B-1 will be used based on gasoline volume projections provided by the Energy Information Administration (EIA). The standard for each year must be published in the Federal Register by November 30 of the previous year. Starting with 2013, EPA is required to establish the applicable national volume, based on the criteria contained in the statute, which must require at least the same overall percentage of renewable fuel use as was required in 2012. The Act defines renewable fuels primarily on the basis of the feedstock. In general, renewable fuel must be a motor vehicle fuel that is produced from plant or animal products or wastes, as opposed to fossil fuel sources. The Act specifically identifies several types of motor vehicle fuels as renewable fuels, including cellulosic biomass ethanol, waste-derived ethanol, biogas, biodiesel, and blending components derived from renewable fuel. The standard set annually by EPA is to be a single percentage applicable to refiners, blenders, and importers, as appropriate. The percentage standard is used by obligated parties to determine a volume of renewable fuel that they are responsible for introducing into the domestic gasoline pool for the given year. The percentage standard must be adjusted such that it does not apply to multiple parties for the same volume of gasoline. The standard must also take into account the use of renewable fuel by small refineries that are exempt from the program until 2011. Under the Act, the required volumes in Table I.B-1 apply to the contiguous 48 states. However, Alaska and Hawaii can opt into the program, in which case the pool of gasoline used to calculate the standard, and the number of regulated parties, would change. In addition, other states can request a waiver of the RFS program under certain conditions, which would affect the national quantity of renewable fuel required under the program. The Act requires the Agency to promulgate a credit trading program for the RFS program whereby an obligated party may generate credits for over-complying with their annual obligation. The obligated party can then use these credits to meet their requirements in the following year or trade them for use by another obligated party. Thus the credit trading program allows obligated parties to comply in the most cost-effective manner by permitting them to generate, transfer, and use credits. The trading program also permits renewable fuels that are not blended into gasoline, such as biodiesel, to participate in the RFS program. The Agency must determine who can generate credits, under what conditions credits may be traded, how credits may be transferred from one party to another, and the appropriate value of credits for different types of renewable fuel. If a party is not able to generate or purchase sufficient credits to meet their annual obligation, they are allowed to carry over the deficit to the next annual compliance period, but must achieve full compliance in that following year. C. Development of the RFS Program Section 1501 of the Energy Act prescribed the RFS program, including the required total volumes, the timing of the obligation, the parties who are obligated to comply, the definition of renewable fuel, and the general framework for a credit trading program. Various aspects of the program require additional development by the Agency beyond the specifications in the Act. The Agency must develop regulations to ensure the successful implementation of the RFS program, based on the framework spelled out in the statute. Under the RFS program the trading provisions comprise an integral element of compliance. Many obligated parties do not have access to renewable fuels or the ability to blend them, and so must use credits to comply. The RFS trading program is also unique in that the parties liable for meeting the standard (refiners, importers, and blenders of gasoline) are not generally the parties who make the renewable fuels or blend them into gasoline. This creates the need for trading mechanisms that ensure that the means to demonstrate compliance will be readily available for use by obligated parties. The first step we took in developing the proposed program was to seek input and recommendations from the affected stakeholders. There were initially a wide range of thoughts and views on how to design the program. However, there was broad consensus that the program should satisfy a number of guiding principles, including, for example, that the compliance and trading program should provide certainty to the marketplace and minimize cost to the consumers; that the program should preserve existing business practices for the production, distribution, and use of both conventional and renewable fuels; that the program should be designed to accommodate all qualifying renewable fuels; that all renewable volumes produced are made available to obligated parties for compliance; and that the Agency should have the ability to easily verify compliance to ensure that the volume obligations are in fact met. These guiding principles and the comments we received on our Notice of Proposed Rulemaking (NPRM) helped to move us toward the program in today's final rule. We published a Notice of Proposed Rulemaking on September 22, 2006 (71 FR 55552) which described our proposed approach to compliance and the trading program, as well as preliminary analyses of the environmental and economic impacts of increased use of renewable fuels. The program finalized today largely mirrors the proposed program, with some revisions reflecting continued input from stakeholders during the formal comment period. II. Overview of the Program Today's action establishes the final requirements for the RFS program, as well as our assessment of the environmental and economic impacts of the nation's transition to greater use of renewable fuels. This section provides an overview of our program and renewable fuel impacts assessment. Sections III through V provide the details of the structure of the program, while Sections VI through X describe our assessment of the impacts on emissions of regulated pollutants and greenhouse gases, air quality, fossil fuel use, energy security, economic impacts in the agricultural sector, and cost from the expanded use of renewable fuels. A. Impacts of Increased Reliance on Renewable Fuels In a typical major rulemaking, EPA would conduct a full assessment of the economic and environmental impacts of the specific rule that it is promulgating. However, as discussed in Section I.A., the replacement of MTBE with ethanol and the extremely favorable economics for renewable fuels brought on by the rise in crude oil prices are causing renewable fuel use to far exceed the RFS requirements. Given these circumstances, it is important to assess the impacts of this larger increase in renewable use and the related changes occurring to gasoline. For this reason we have carried out an assessment of the economic and environmental impacts of the broader changes in fuel quality resulting from our nation's transition to greater utilization of renewable fuels, as opposed to an assessment that is limited to the RFS program itself. To carry out our analyses, we elected to use 2004 as the baseline from which to compare the impacts of expanded renewable use. We chose 2004 as a baseline primarily due to the fact that all the necessary refinery production data, renewable fuel production data, and fuel quality data were already in hand at the time we needed to begin the analysis. We did not use 2005 as a baseline year because 2005 may not be an appropriate year for comparison due to the extraordinary impacts of hurricanes Katrina and Rita on gasoline production and use. To assess the impacts of anticipated increases in renewable fuels, we elected to look at what they would be in 2012, the year the statutorily-mandated renewable fuel volumes will be fully phased in. By conducting the analysis in this manner, the impacts include not just the impact of expanded renewable fuel use by itself, but also the corresponding decrease in the use of MTBE, and the potential for oxygenates to be removed from RFG due to the absence of the RFG oxygenate mandate. Since these three changes are all inextricably linked and are occurring simultaneously in the marketplace, evaluating the impacts in this manner is both necessary and appropriate. We evaluated the impacts of expanded renewable fuel use and the corresponding changes to the fuel supply on fuel costs, consumption of fossil fuels, and some of the economic impacts on the agricultural sector and energy security. We also evaluated the impacts on emissions, including greenhouse gas emissions that contribute to climate change, and the corresponding impacts on nationwide and regional air quality. Our analyses are summarized in this section. 1. Renewable Fuel Volume Scenarios Analyzed As shown in Table I.B-1, the Act stipulates that the nationwide volumes of renewable fuel required under the RFS program must be at least 4.0 billion gallons in 2006 and increase to 7.5 billion gallons in 2012. However, we expect that the volume of renewable fuel will actually exceed the required volumes by a significant margin. Based on economic modeling in 2006, EIA projected renewable fuel demand in 2012 of 9.6 billion gallons for ethanol, and approximately 300 million gallons for biodiesel using crude oil prices forecast at $48 per barrel. 2 Therefore, in assessing the impacts of expanded use of renewable fuels, we evaluated two comparative scenarios, one representing the statutorily required minimum, and another reflecting the higher levels projected by EIA. Although the actual renewable fuel volumes produced in 2012 may differ from both the required and projected volumes, we believe that these two volume scenarios together represent a reasonable range for analysis purposes. 3 2 $48/barrel from Annual Energy Outlook 2006, Energy Information Administration, Department of Energy. 3 Subsequent to the analysis for this final rule, EIA has released its 2007 AEO forecasts for ethanol use, which increase the projection to 11.2 billion gallons by 2012. The Act also stipulates that at least 250 million gallons out of the total volume required in 2013 and beyond must meet the definition specified for cellulosic biomass ethanol. As described in Section VI, there are a number of companies already making plans to produce ethanol from cellulosic feedstocks and/or waste-derived energy sources that could potentially meet the definition of cellulosic biomass ethanol. Accordingly, we anticipate a ramp-up in production of cellulosic biomass ethanol production in the coming years, and for analysis purposes we have assumed that 250 million gallons of cellulosic biomass ethanol will be used in 2012. As discussed in Section VI, we chose 2004 to represent current baseline conditions. However, a direct comparison of the fuel quality impacts on emissions and air quality that are expected to occur once the RFS program is fully phased in required that changes in overall fuel volume, fleet characterization, and other factors be constant. Therefore, we created a 2012 reference case from the 2004 base case for use in the emissions and air quality analysis that maintained current fuel quality parameters while incorporating forecasted increases in vehicle miles traveled and changes in fleet demographics. The 2012 fuel reference case was developed by growing out the 2004 renewable fuel baseline according to EIA's forecasted energy growth rates between 2004 and 2012. For the analyses, we created two 2012 scenarios representing expanded renewable fuel production. The “RFS Case” represents volume levels designed to exactly meet the requirements of the RFS program, and includes the effects of higher credit values for cellulosic ethanol and biodiesel. Since higher credit values mean that one gallon of renewable fuel counts as more than one gallon for compliance purposes, less than 7.5 billion gallons of renewable fuel is needed to meet the 7.5 billion gallon statutory requirement, but credits equivalent to 7.5 billion gallons of renewable fuel would still be available for compliance purposes. The “EIA Case” represents volume levels based on EIA projections. A summary of the assumed renewable fuel volumes for the scenarios we evaluated is shown in Table II.A.1-1. Details of the calculations used to determine these volumes are given in Chapter 2 of the Regulatory Impact Analysis (RIA) in the docket for this rulemaking. Table II.A.1-1.—Renewable Fuel Volume Scenarios (Billion Gallons) 2004 base case 2012 Reference case RFS case EIA case Corn-ethanol 3.548 3.947 6.421 9.388 Cellulosic ethanol 0 0 0.25 0.25 Biodiesel 0.025 0.030 0.303 0.303 Total volume 3.573 3.977 6.974 9.941 2. Emissions We evaluated the impacts of increased use of ethanol and biodiesel on emissions and air quality in the U.S. relative to the reference case. We estimated that nationwide VOC emissions in 2012 from gasoline vehicles and equipment will increase by about 0.3% in the RFS Case and about 0.7% in the EIA Case. For NO X , we estimated that nationwide annual emissions in 2012 will increase about 0.9% for the RFS Case and 1.6% for the EIA Case. These increases are equivalent to an additional 18,000 to 43,000 tons of VOC per year, and an additional 23,000 to 40,000 tons of NO X per year. We also estimated the change in emissions in those areas which are projected to experience a significant change in ethanol use; i.e., where the market share of ethanol blends was projected to change by 50 percent or more. We focused on July emissions since these are most relevant to ozone formation and modeled 2015 because our ozone model is based upon a 2015 emissions inventory (though we would expect similar results in 2012). Finally, we developed separate estimates for RFG areas, low RVP areas (i.e., RVP standards less than 9.0 RVP), and conventional gasoline areas with a summer 9.0 RVP standard. For areas with a significant change in ethanol use, compared to the reference case, VOC emissions in RFG areas increased by up to 2.3%, while NO X emissions increased by up to 1.6%. In low RVP areas, VOC emissions increased by up to 4.6%, while NO X emissions increased by up to 6.2%. In 9.0 RVP areas, VOC emissions increased by up to 4.6%, while NO X emissions increased by up to 7.3%. Unlike VOC and NO X , emissions of CO and benzene from gasoline vehicles and equipment were estimated to decrease in 2012 when the use of renewable fuels increased. Reductions in emissions of CO varied from 0.9% percent to as high as 2.5% percent for the nation as a whole, depending on the renewable fuel volume scenario. Similarly, benzene emissions from gasoline vehicles and equipment were estimated to be reduced from 1.8% to 4.0% percent. We do not have sufficient data to predict the effect of ethanol use on levels of either directly emitted particulate matter (PM) or secondarily formed PM. The increased NO X emissions are expected to lead to increases in secondary nitrate PM, but at the same time reduced aromatics resulting from ethanol blending are likely to lead to a decrease in secondary organic PM, as discussed in Section VIII.C. In addition, biodiesel use is expected to result in some reduction in direct PM emissions, though small in magnitude due to the relatively small volumes. The emission impact estimates described above are based on the best available data and models. However, it must be highlighted that most of the fuel effect estimates are based on very limited or old data which may no longer be reliable in estimating the emission impacts on vehicles in the 2012 fleet with advanced emission controls. 4 As such, these emission estimates should be viewed as preliminary. EPA hopes to conduct significant new testing in order to better estimate the impact of fuel changes on emissions from both highway vehicles and nonroad equipment, including those fuel changes brought about by the use of renewable fuels. We hope to be able to incorporate the data from such additional testing into the analyses for other studies required by the Energy Act, and into a subsequent rule to set the RFS program standard for 2013 and later. 4 Advanced emission controls include close-coupled, high-density catalysts and their associated electronic control systems for light-duty vehicles, and NO X adsorbers and PM traps for heavy-duty engines. We used the Ozone Response Surface Model (RSM) to estimate the impacts of the increased use of ethanol on ozone levels for both the RFS Case and the EIA Case. The ozone RSM approximates the effect of VOC and NO X emissions in a 37-state eastern area of the U.S. Using this model, we projected that the changes in VOC and NO X emissions could produce a very small increase in ambient ozone levels. On average, population-weighted ozone design value concentrations increased by about 0.05 ppb, which represents 0.06 percent of the standard. Even for areas expected to experience a significant increase in ethanol use, population-weighted ozone design value concentrations increased by only 0.15 to 0.18 ppb, about 0.2 percent of the standard. These ozone impacts do not consider the reductions in CO emissions mentioned above, or the change in the types of compounds comprising VOC emissions. Directionally, both of these factors may mitigate these ozone increases. We investigated several other issues related to emissions and air quality that could affect our estimates of the impacts of increased use of renewable fuels. These are discussed in Section VIII and in greater detail in the RIA. For instance, our current models assume that recent model year vehicles are insensitive to many fuel changes. However, a limited amount of new test data suggest that newer vehicles may be just as sensitive as older model year vehicles. Our sensitivity analysis suggests that if this is the case, VOC emissions could decrease by as much as 0.3%, instead of increasing by up to 0.7%. NO X emissions could increase by up to 4.2%, up from a 1.6% increase. We also evaluated the emissions from the production of both ethanol and biodiesel fuel and determined that they will also increase with increased use of these fuels. Nationwide, emissions related to the production and distribution of ethanol and biodiesel fuel are projected to be of the same order of magnitude as the emission impacts related to the use of these fuels in vehicles. Finally, a lack of emission data and atmospheric modeling tools prevented us from making specific projections of the impact of renewable fuels on ambient PM levels. As mentioned, however, ethanol use may affect ambient PM levels due to the increase in NO X emissions and the reduction in the aromatic content of gasoline, which should reduce aromatic VOC emissions. All of these issues will be the subject of further study and analysis in the future. 3. Economic Impacts In Section VII of this preamble, we estimate the cost of producing the extra volumes of renewable fuel anticipated through 2012. For corn ethanol, we estimate the per gallon cost of ethanol to range from $1.26 per gallon in 2012 (2004 dollars) in the RFS Case to $1.32 per gallon in the EIA Case. These costs take into account the cost of the feedstock (corn), plant equipment and operation and the value of any co-products (distiller's dried grain and solubles, for example). For biodiesel, we estimate the per gallon cost to be between $1.89 and $2.06 per gallon if produced using soy bean oil, and less if using yellow grease ($1.11 to $1.56 per gallon) or other relatively low cost or no-cost feedstocks. The price paid for ethanol, however, is reduced by the $0.51 per gallon federal tax subsidy as well as any state subsidies that might apply. Similarly the price paid for biodiesel is reduced due to the $1.00 per gallon federal tax subsidy biodiesel produced from soy bean oil and $0.50 per gallon tax subsidy for biodiesel produced from yellow grease. We also note that these costs represent the production cost of the fuel and not the market price. In recent years, the prices of ethanol and biodiesel have tended to track the prices of gasoline and diesel fuel, in some cases even exceeding those prices. These renewable fuels are then blended in gasoline and diesel fuel. While biodiesel is typically just blended with typical petroleum diesel, additional efforts are sometimes necessary and/or economically advantageous at the refiner level when adding ethanol to gasoline. For example, ethanol's high octane reduces the need for other octane enhancements by the refiner, whereas offsetting the volatility increase caused by ethanol may require removal of other highly volatile components. Section VII examines these fuel cost impacts and concludes that the net cost to society in 2012 in comparison to the reference case will range from an estimate of 0.5 cent to 1.0 cent per gallon of gasoline due to the increased use of renewable fuels and their displacement of MTBE. The resulting total nationwide costs in 2012 are $823 million per year for the RFS case and $1,739 million per year for the EIA case. This total excludes the effects of the 51 cent/gal federal excise tax credit as well as state tax subsidies. Our estimates of fuel impacts do not consider other societal benefits. For example, the displacement of petroleum-based fuel (largely imported) by renewable fuel (largely produced in the United States), should reduce our use of imported oil and fuel. We estimate that 95 percent of the lifecycle petroleum reductions resulting from the use of renewable fuel will be met through reductions in net petroleum imports. In Section IX of this preamble we estimate the value of the decrease in imported petroleum at about $2.6 billion in 2012 for the RFS Case and $5.1 billion for the EIA Case, in comparison to our 2012 reference case. Total petroleum import expenditures in 2012 are projected to be about $698 billion. Furthermore, the above estimate on reduced petroleum import expenditures only partly assess the economic impacts. One of the effects of increased use of renewable fuel is that it diversifies the energy sources used in making transportation fuel. To the extent that diverse sources of fuel energy reduce the dependence on any one source, the risks, both financial as well as strategic, of a potential disruption in supply reflected in the price volatility of a particular energy source are reduced. As indicated in the proposal, EPA has worked with researchers at Oakridge National Laboratory to update a study they previously published and which has been used or cited in several government actions impacting oil consumption. A draft report is being made available in the docket at this time for further consideration. This analysis only looks at the impact of reduced petroleum imports on energy security. Other energy security issues could arise with the wider use of biofuels. For example, ethanol's production and costs are determined by the availability of corn as a feedstock. Corn production, in turn, is weather-dependent. Also, the use of biofuels may increase the use of natural gas. A full integrated analysis of the energy security implications of the wider use of biofuels has yet to be undertaken. While increased use of renewable fuel will reduce expenditures on imported oil, it will also increase expenditures on renewable fuels and in-turn, on the sources of those renewable fuels. The RFS program attempts to spur the increased use of renewable transportation fuels made principally from agricultural crops produced in the U.S. As a result, it is important to analyze the consequences of the transition to greater renewable fuel use in the U.S. agricultural sector. To perform this analysis, EPA selected the Forest and Agricultural Sector Optimization Model (FASOM) developed by Professor Bruce McCarl of Texas A&M University and others over the past thirty years. FASOM is a dynamic, nonlinear programming model of the agriculture and forestry sectors of the U.S. (For this analysis, we focused on the agriculture portion of the model.) Due to the greater demand for corn as a feedstock for ethanol production, corn prices are estimated to increase in 2012 by 18 cents per bushel for the RFS Case and 39 cents per bushel of corn for the EIA Case from $2.32 (in 2004 dollars) in the Reference Case. Although soybean prices are expected to rise slightly, the increased cost is likely due to higher input costs, such as land prices. We estimate a price increase of 18 cents (RFS Case) to 21 cents (EIA Case) per bushel of soybeans from a Reference Case price of $5.26 per bushel. These higher commodity prices are predicted to also result in higher U.S. farm income. Our analysis predicts that farm income will increase by $2.6 billion annually by 2012 for the RFS Case and $5.4 billion for the EIA Case, roughly a 5 to 10 percent increase. Due to higher corn prices, U.S. exports of corn are estimated to decrease by $573 million in the RFS Case and by $1.29 billion in the EIA Case in 2012. With higher commodity prices, we would expect some upward pressure on food costs as the higher cost of corn and soybeans is passed along to consumers. We estimate a relatively modest increase in annual household food costs associated with the higher price commanded by corn and soybeans. For the RFS Case, annual per capita wholesale food cost are estimated to increase by approximately $7, while the higher renewable fuel volumes anticipated by the EIA Case will result in a $12 annual increase in the per capita wholesale food cost. This equates to roughly a $2.1 to $3.6 billion increase in nationwide food costs in 2012. 4. Greenhouse Gases and Fossil Fuel Consumption There has been considerable interest in the impacts of fuel programs on greenhouse gases implicated in climate change and on fossil fuel consumption due largely to concerns about dependence on foreign sources of petroleum. Therefore, in this rulemaking we have undertaken an analysis of the greenhouse gas and fossil fuel consumption impacts of a transition to greater renewable fuel use. This is the first analysis of its kind in a high profile rule, and as such it may guide future work in this area. As a result of the transition to greater renewable fuel use, some petroleum-based gasoline and diesel will be directly replaced by renewable fuels. Therefore, consumption of petroleum-based fuels will be lower than it would be if no renewable fuels were used in transportation vehicles. However, a true measure of the impact of greater use of renewable fuels on petroleum use, and indeed on the use of all fossil fuels, accounts not only for the direct use and combustion of the finished fuel in a vehicle or engine, but also includes the petroleum use associated with production and transportation of that fuel. For instance, fossil fuels are used in producing and transporting renewable feedstocks such as plants or animal byproducts, in converting the renewable feedstocks into renewable fuel, and in transporting and blending the renewable fuels for consumption as motor vehicle fuel. Likewise, fossil fuels are used in the production and transportation of petroleum and its finished products. In order to estimate the true impacts of increases in renewable fuel use on fossil fuel use, we must take these steps into account. Such analyses are termed lifecycle analyses. There is also no consensus on the most appropriate approach for conducting such lifecycle analyses. We have chosen to base our lifecycle analysis on Argonne National Laboratory's GREET model for the reasons described in Section IX. However, there are other lifecycle models in use. The choice of model inputs and assumptions all have a bearing on the results of lifecycle analyses, and many of these assumptions remain the subject of debate among researchers. With these caveats, we compared the lifecycle impacts of renewable fuels to the petroleum-based gasoline and diesel fuels that they replace. This analysis allowed us to estimate not only the overall impacts of renewable fuel use on petroleum use, but also on emissions of greenhouse gases such as carbon dioxide from all fossil fuels. In comparison to the reference case, we estimate that the increased use of renewable fuels in the RFS and EIA cases will reduce transportation sector petroleum consumption by about 0.8 and 1.6 percent, respectively, in the transportation sector in 2012. This is equivalent to 2.0-3.9 billion gallons of petroleum in 2012. We also estimated that greenhouse gases from the transportation sector will be reduced by about 0.4 and 0.6 percent for the RFS and EIA cases, respectively, equivalent to about 8-13 million metric tons. These reductions are projected to continue to increase beyond 2012 since crude oil prices have been projected by EIA to continue to be high relative to the prices of the 1990's, and as a result there is expected to be an economic advantage to using renewable fuels beyond 2012. These greenhouse gas emission reductions are also highly dependent on the expectation that the majority of the future ethanol use will be produced from corn. If advances in the technology for converting cellulosic feedstocks into ethanol allow cellulosic ethanol use to exceed the levels assumed in our analysis, then even greater greenhouse gas reductions may result. 5 5 Cellulosic ethanol is estimated to provide a comparable petroleum displacement as corn derived ethanol on a per gallon basis, though the impacts on total energy and greenhouse gas emissions differ. 5. Post 2012 RFS Standards The Energy Policy Act of 2005, in addition to setting the standards to be adopted through 2012, requires EPA, in coordination with the Departments of Agriculture and Energy, to determine the applicable volume for the renewable fuel standard for the year 2013 and subsequent calendar years. This determination is to be based on a review of the program's implementation in 2006 through 2012 as well as review of the impact of renewable fuels on the environment, air quality, energy security, job creation, rural economic development and the expected annual rate of renewable fuel production, including production of cellulosic ethanol. In today's final rulemaking, we do not suggest any specific renewable fuel volumes for 2013 and beyond that may be appropriate under the statutory criteria. However, we would note that the President, in his State of the Union address this January, set specific goals reducing the amount of gasoline usage in the United States by 20 percent in the next 10 years. This would be accomplished by reforming and modernizing fuel economy standards for cars and setting mandatory fuels standard equivalent to requiring use of 35 billion gallons of renewable and alternative 6 fuels in 2017. Therefore, given the necessity to address the post-2013 period under the Energy Act and the prospect of continued attention by the Administration and Congress to this issue, EPA will continue to devote attention to the issue of renewable and alternative fuel volumes in the post-2013 period. 6 While the RFS program is specific to renewable fuels, the president's goal of 35 billion gallons by 2017 would include not only renewable fuels, but also other types of alternatives fuels. From a program structure perspective, we believe that what we are putting in place today will remain useful as part of a 2013 and later program. For example, EPA considers that the identification of renewable fuel via a Renewable Identification Number (RIN), the determination of liable parties, the averaging, banking and trading system and the recordkeeping and reporting system would all be elements of a post-2013 program. Depending on the structure of any final legislation approved by Congress and signed into law, such elements could also be incorporated into an expanded renewable and alternative fuels program. B. Program Structure The RFS program being finalized today requires refiners, importers, and blenders (other than oxygenate blenders) to show that a required volume of renewable fuel is used in gasoline. The required volume is determined by multiplying their annual gasoline production by a percentage standard specified by EPA. Compliance is demonstrated through the acquisition of unique Renewable Identification Numbers (RINs) assigned by the producer or importer to every batch of renewable fuel produced or imported. The RIN shows that a certain volume of renewable fuel was produced or imported. Each year, the refiners, blenders and importers obligated to meet the renewable volume requirement (referred to as “obligated parties”) must acquire sufficient RINs to demonstrate compliance with their volume obligation. RINs can be traded, thereby functioning as the credits envisioned in the Act. A system of recordkeeping and electronic reporting for all parties that have RINs ensures the integrity of the RIN pool. This RIN-based system will both meet the requirements of the Act and provide several other important advantages: • Renewable fuel production volumes can be easily verified. • RIN trading can occur in real time as soon as the renewable fuel is produced rather than waiting to the end of the year when an obligated party would determine if it had exceeded the standard. • Renewable fuel can continue to be produced, distributed, and blended in those markets where it is most economical to do so. • Instances of double-counting of renewable fuel claimed for compliance purposes can be identified based on electronically reported data. Our RIN-based trading program is an essential component of the RFS program, ensuring that every obligated party can comply with the standard while providing the flexibility for each obligated party to use renewable fuel in the most economical ways possible. 1. What Is the RFS Program Standard? EPA is required to convert the aggregate national volumes of renewable fuel specified in the Act into corresponding renewable fuel standards expressed as a percent of gasoline production or importation. The renewable volume obligation that will apply to an individual obligated party will then be determined based on this percentage and the total gasoline production or import volume in a calendar year, January 1 through December 31. EPA will publish the percentage standard in the Federal Register each November for the following year based on the most recent EIA gasoline demand projections. However, for compliance in 2007 we are publishing the percentage standard in today's action. The standard for 2007 is 4.02 percent. Section III.A describes the calculation of the standard. 2. Who Must Meet the Standard? Under our program, any party that produces or imports gasoline for consumption in the U.S., including refiners, importers, and blenders (other than oxygenate blenders), will be subject to a renewable volume obligation that is based on the renewable fuel standard. These obligated parties will determine the level of their obligation by multiplying the percentage standard by their annual volume of gasoline production or importation. The result will be the renewable fuel volume which each party must ensure is blended into gasoline consumed in the U.S., with credit for certain other renewable fuels that are not blended into gasoline. For 2007, we are requiring that the renewable fuel volume obligation be determined by multiplying the percentage standard by the volume of gasoline produced or imported prospectively from September 1, 2007 until December 31, 2007. While the standard will not apply to all of 2007 gasoline production, we are nevertheless confident that the total volume of renewable fuel used in all of 2007 will still exceed the volume specified in the Act due to expectations that the demand for renewable fuel will exceed the RFS requirements. In determining their annual gasoline production volume, obligated parties must include all of the finished gasoline which they produced or imported for use in the contiguous 48 states, and must also include reformulated blendstock for oxygenate blending (RBOB), and conventional blendstock for oxygenate blending (CBOB). For refiners and importers this includes unfinished gasoline produced or imported that will become gasoline upon addition of an oxygenate downstream of the refiner. Other producers of gasoline, such as blenders, will count as their gasoline production only the volumes of blendstocks which become gasoline upon their addition to finished gasoline, unfinished gasoline, or other blendstocks. Renewable fuels blended into gasoline by any party will not be counted as gasoline for the purposes of calculating the annual gasoline production volume. Small refiners and small refineries are exempt from meeting the renewable fuel requirements through 2010. All gasoline producers located in Alaska, Hawaii, and noncontiguous U.S. territories and parties who import gasoline into these areas will be exempt indefinitely. However, if Alaska, Hawaii or a noncontiguous territory opts into the RFS program, all of the refiners (except for exempt small refiners and refineries), importers, and blenders located in the state or territory will be subject to the renewable fuel standard. Section III.A provides more details on the standard that must be met, while Section III.C describes the parties that are obligated to meet the standard. 3. What Qualifies as a Renewable Fuel? We have designed the program to cover the range of renewable fuels produced today as well as any that might be produced in the future, so long as they meet the Act's definition of renewable fuel and have been registered and approved for use in motor vehicles. In this manner, we believe that the program provides the greatest possible encouragement for the development, production, and use of renewable fuels to reduce our dependence on petroleum as well as to reduce the carbon dioxide emissions that contribute to climate change. In general, renewable fuels must be produced from plant or animal products or wastes, as opposed to fossil fuel sources. Valid renewable fuels include ethanol made from starch seeds, sugar, or cellulosic materials, biodiesel (mono-alkyl esters), non-ester renewable diesel, and a variety of other products. Both renewable fuels blended into conventional gasoline or diesel and those used in their neat (unblended) form as motor vehicle fuel will qualify. Section III.B provides more details on the renewable fuels that will be allowed to be used for compliance with the standard under our program. 4. Equivalence Values of Different Renewables Fuels One question that we faced in developing the program was what value to place on different renewable fuels and on what basis should that value be determined. The Act specifies that each gallon of cellulosic biomass ethanol and waste-derived ethanol be treated as if it were 2.5 gallons of renewable fuel for compliance purposes, but does not specify the values for other renewable fuels. Although in the NPRM we considered a range of options including straight volume, energy content, and requested comment on the merit and basis for setting “Equivalence Values” on several metrics including lifecycle energy or greenhouse gas emissions, for this final rule we are requiring that the “Equivalence Values” for the different renewable fuels be based on their energy content in comparison to the energy content of ethanol, and adjusted as necessary for their renewable content. The result is an Equivalence Value for corn ethanol of 1.0, for biobutanol of 1.3, for biodiesel (mono alkyl ester) of 1.5, for non-ester renewable diesel of 1.7, and for cellulosic ethanol and waste-derived ethanol of 2.5. The proposed methodology can be used to determine the appropriate Equivalence Value for any other potential renewable fuel as well. Section III.B.4 provides details of the determination of Equivalence Values. 5. How Will Compliance Be Determined? Under our program, every gallon of renewable fuel produced or imported into the U.S. must be assigned a unique RIN. A block of RINs would be assigned to any batch of renewable fuel that is valid for compliance purposes under the RFS program. These RINs must be transferred with renewable fuel as ownership of a volume of renewable fuel is initially transferred through the distribution system. Once the renewable fuel is obtained by an obligated party or actually blended into a motor vehicle fuel, the RIN can be separated from the batch of renewable fuel and then either used for compliance purposes, held, or traded. RINs represent proof of production which is then taken as proof of consumption as well, since all but a trivial quantity of renewable fuel produced or imported will be either consumed as fuel or exported. For instance, ethanol produced for use as motor vehicle fuel is denatured specifically so that it can only be used as fuel. Similarly, biodiesel is produced only for use as fuel and has no other significant uses. An obligated party demonstrates compliance with the renewable fuel standard by accumulating sufficient RINs to cover their individual renewable volume obligation. It will not matter whether the obligated party used the renewable fuel themselves. An obligated party's obligation will be to ensure that a certain amount of renewable fuel was used, either by themselves or by someone else, and the RIN is evidence that this occurred for a certain volume of renewable fuel. Exporters of renewable fuel will also be required to acquire RINs in sufficient quantities to cover the volume of renewable fuel exported. RINs claimed for compliance purposes by obligated parties will thus represent renewable fuel actually consumed as motor vehicle fuel in the U.S. RINs are valid for compliance purposes for the calendar year in which they are generated, or the following calendar year. This approach to RIN life is consistent with the Act's prescription that credits be valid for compliance purposes for 12 months as of the date of generation, where credits are generated at the end of a year when compliance is determined. An obligated party can either use RINs to demonstrate compliance, or can transfer RINs to any other party. If an obligated party is not able to accumulate sufficient RINs for compliance in a given year, it can carry a deficit over to the next year so long as the full deficit and obligation is covered in the next year. In order to ensure that previous year RINs are not used preferentially for compliance purposes in a manner that would effectively circumvent the limitation that RINs be valid for only 12 months after the year generated, we are setting a cap on the use of RINs generated the previous year when demonstrating compliance with the renewable volume obligation for the current year. The cap will mean that no more than 20 percent of a current year obligation can be satisfied using RINs from the previous year. In this manner there is no ability for excess renewable fuel use in successive years to cause an accumulation of RINs to significantly depress renewable fuel demand in any future year. In keeping with the Act, excess RINs not used in the year they are generated or in the subsequent year will expire. Section III.D provides more details on how obligated parties must use RINs for compliance purposes. 6. How Will the Trading Program Work? Renewable fuel producers and importers will be required to generate RINs when they produce or import a batch of renewable fuel (unless, for importers, the RINs have been assigned by a foreign producer registered with EPA). They will then be required to transfer those RINs along with the renewable fuel batches that they represent whenever they transfer ownership of the batch to another party. Likewise any other non-obligated party that takes ownership of a volume of renewable fuel with RINs will be required to transfer those RINs with a volume of renewable fuel. The RIN can be separated from renewable fuel only by obligated parties (at the point when they take ownership of the batch) or a party that converts the renewable fuel into motor vehicle fuel (such as upon blending with gasoline or diesel). Once a RIN is separated from a volume of renewable fuel, it can be used for compliance purposes, banked, or traded to another party. Separated RINs can be transferred to any party any number of times. Recordkeeping and reporting requirements will apply to any party that takes ownership of RINs, whether through the ownership of a batch of renewable fuel or through the transfer of separated RINs. Thus obligated parties can acquire RINs directly through the purchase of renewable fuel with assigned RINs or through the open market for RINs that is allowed under this proposal. Section III.E provides more details on how our RIN trading program will work. 7. How Will the Program Be Enforced? As in all EPA fuel regulations, there is a system of registration, recordkeeping, and reporting requirements for obligated parties, renewable producers and importers (RIN generators), and any parties that procure or trade RINs either as part of their renewable purchases or separately. In most cases, the recordkeeping requirements are not significantly different from what these parties might be doing already as a part of normal business practices. The lynch pin to the compliance program, however, is the unique RIN number itself coupled with an electronic reporting system where RIN generation, RIN use, and RIN transactions will be reported and verified. Thus, EPA, as well as industry can have confidence that invalid RINs are not generated and that there is no double counting. C. Voluntary Green Labeling Program In the proposal EPA asked for comments on the idea of creating a voluntary labeling program to encourage the adoption and use of practices that minimize the environmental concerns associated with renewable fuel production. The proposal suggested adding a “G” (for green) to the end of the RIN of a fuel to indicate that a gallon of renewable fuel was produced with the combination of best farming practices and environmentally friendly production methods and facilities. EPA received a number of comments on this idea. The majority of respondents were very supportive of voluntary labeling and encouraged EPA to establish this program through this final rulemaking. Two commenters opposed the labeling concept, telling EPA that the number and complexity of issues associated with fuel production, and particularly with farming practices, would make such a program impractical and difficult to implement. EPA also was told that it would be hard to audit such a program. Most commenters agreed that using the RIN to host the label makes sense, however the use of “G” for green fuel is insufficient to capture the full range of environmental impacts of renewable fuel production and that it would be difficult for EPA to establish an appropriate cut-off point for determining which fuel qualified for a “G” designation. Several respondents suggested that EPA instead use a more continuous scale based on energy or lifecycle greenhouse gas emissions. A well designed voluntary labeling program could permit producers and blenders to distinguish their fuels in the marketplace and allow consumers to express preferences for “green” products through their fuel purchases. While such a program could be valuable to producers, blenders, and consumers, given the range of comments received on the topic, we believe it is important first to continue the dialogue with the various stakeholders to ensure that the program adequately addresses the issues raised prior to putting any such program in place. Thus we are not finalizing a voluntary labeling program. We will continue to investigate the issues surrounding a voluntary labeling program and the various ways in which it could be designed. In particular we are interested in further exploring methods to incorporate lifecycle impacts into a voluntary labeling program and consumer expectations for such “green” labeling. III. Complying With the Renewable Fuel Standard According to the Energy Act, the RFS program places obligations on individual parties such that the renewable fuel volumes shown in Table I.B-1 are used as motor vehicle fuel in the U.S. each year. To accomplish this, the Agency must calculate and publish a standard by November 30 of each year which is applicable to every obligated party. On the basis of this standard each obligated party determines the volume of renewable fuel that it must ensure is consumed as motor vehicle fuel. In addition to setting the standard, we must clarify who the obligated parties are and what volumes of gasoline are subject to the standard. Obligated parties must also know which renewable fuels are valid for RFS compliance purposes, and the relative values of each type of renewable fuel in terms of compliance. This section discusses how the annual standard is determined and which parties and volumes of gasoline will be subject to the requirements. Because renewable fuels are not produced or distributed evenly around the country, some obligated parties will have easier access to renewable fuels than others. As a result, the RFS program depends on a robust trading program. This section also describes all the elements of our trading program. A. What Is the Standard That Must Be Met? 1. How Is the Percentage Standard Calculated? Table I.B-1 shows the required total volume of renewable fuel specified in the Act for 2007 through 2012. The renewable fuel standard is based primarily on (1) the 48-state gasoline consumption volumes projected by EIA (as the Act exempts Hawaii and Alaska, subject to their right to opt-in, as discussed in Section III.C.4), and (2) the volume of renewable fuels required by the Act for the coming year. The renewable fuel standard will be expressed as a volume percentage of gasoline sold or introduced into commerce in the U.S., and will be used by each refiner, blender or importer to determine their renewable volume obligation. The applicable percentage is set so that if each regulated party meets the percentage and total gasoline consumption does not fall short of EIA projections then the total amount of renewable fuel used will meet the total renewable fuel volume specified in Table I.B-1. In determining the applicable percentage for a calendar year, the Act requires EPA to adjust the standard to prevent the imposition of redundant obligations on any person and to account for the use of renewable fuel during the previous calendar year by exempt small refineries, defined as refineries that process less than 75,000 bpd of crude oil. As a result, in order to be assured that the percentage standard will in fact result in the volumes shown in Table I.B-1, we must make several adjustments to what is otherwise a simple calculation. As stated, the renewable fuel standard for a given year is basically the ratio of the amount of renewable fuel specified in the Act for that year to the projected 48-state non-renewable gasoline volume for that year. While the required amount of total renewable fuel for a given year is provided by the Act, the Act requires EPA to use an EIA estimate of the amount of gasoline that will be sold or introduced into commerce for that year. The level of the percentage standard is reduced if Alaska, Hawaii, or a U.S. territory choose to participate in the RFS program, as gasoline produced in or imported into those states or territories would then be subject to the standard. Should any of these states or territories opt into the RFS program, the projected gasoline volume would increase above that consumed in the 48 contiguous states. In the proposal, we stated that EIA had indicated that the best estimation of the coming year's gasoline consumption is found in Table 5a (U.S. Petroleum Supply and Demand: Base Case) of the October issue of the monthly EIA publication Short-Term Energy Outlook which publishes quarterly energy projections. Commenters on this issue supported the use of the October issue of EIA's Short-Term Energy Outlook (STEO), Table 5a, for the purpose of estimating the next year's gasoline consumption, and we have used the October 2006 STEO values for estimating 2007 gasoline consumption for this final rule. The gasoline volumes in the STEO include renewable fuel use. As discussed below in Section III.C.1, the renewable fuel obligation does not apply to renewable blenders. Thus, the gasoline volume used to determine the standard must be the non-renewable portion of the gasoline pool, in order to achieve the volumes of renewables specified in the Act. In order to get a total non-renewable gasoline volume, we must subtract the renewable fuel volume from the total gasoline volume. EIA has indicated that the best estimation of the coming year's renewable fuel consumption is found in Table 11 (U.S. Renewable Energy Use by Sector: Base Case) of the October issue of the STEO. As with the gasoline projections discussed above, we have used the October 2006 STEO values for estimating 2007 renewable fuel values for this final rule. The Act exempts small refineries 7 from the RFS requirements until the 2011 compliance period. As discussed in Section III.C.3.a, as proposed, EPA is also exempting small refiners 8 from the RFS requirements until 2011, and is treating small refiner gasoline volumes the same as small refinery gasoline volumes. Since small refineries and small refiners are exempt from the program until 2011, EPA is excluding their gasoline volumes from the overall non-renewable gasoline volume used to determine the applicable percentage. EPA believes this is appropriate because the percentage standard should be based only on the gasoline subject to the renewable volume obligation. Because small refineries and small refiners are exempt (unless they waive exemption) only through the 2010 compliance period when the exemption ends, calculation of the standard for calendar year 2011 and beyond will include small refinery and small refiner volumes. 9 Using information from gasoline batch reports submitted to EPA, EIA data, and input from the California Air Resources Board regarding California small refiners, we are finalizing a small refiner exemption adjustment to the standard of a constant 13.5%, 10 consistent with the proposal. 7 Under the Act, small refineries are those with 75,000 bbl/day or less average aggregate daily crude oil throughput. 8 Small refiners are those entities who produced gasoline from crude oil in 2004, and who meet the crude processing capability (no more than 155,000 barrels per calendar day, bpcd) and employee (no more than 1500 people) criteria as specified in previous EPA fuel regulations. 9 As discussed in section III.C.3.a of this preamble, the small refinery exemption may be extended under 211(o)(9)(A)(ii) or (B) of the Clean Air Act as amended by the Energy Policy Act. 10 “Calculation of the Small Refiner/Small Refinery Fraction for the Renewable Fuel Program,” memo to the docket from Christine Brunner, ASD, OTAQ, EPA September 2006. The Act requires that the small refinery adjustment also account for renewable fuels used during the prior year by small refineries that are exempt and do not participate in the RFS program. Accounting for this volume of renewable fuel would reduce the total volume of renewable fuel use required of others, and thus directionally would reduce the percentage standard. However, as discussed in the proposal, there are no such data available, the amount of renewable fuel that would qualify (i.e., that was used by exempt small refineries and small refiners but not used as part of the RFS program) is expected to be very small and would not significantly change the resulting percentage standard. Because whatever renewables small refiners and small refineries blend will be reflected as RINs available in the market, there is no need for a separate accounting of their renewable fuel use in the equation used to determine the standard. We thus proposed that this value be zero, and we are finalizing the equation as such. We also proposed not to include renewable fuel used in Alaska, Hawaii, or U.S. territories when subtracting renewable fuel volumes from the anticipated total gasoline volumes in EIA projections. The Act requires that the renewable fuel be consumed in the contiguous 48 states unless Alaska, Hawaii, or a U.S. territory opt-in. However, because renewable fuel produced in Alaska, Hawaii, and U.S. territories is unlikely to be transported to the contiguous 48 states, including their renewable fuel volumes in the calculation of the standard would not serve the purpose intended by the Act of ensuring that the statutorily required renewable fuel volumes are consumed in the 48 contiguous States. We are finalizing the exclusion of these areas' renewable fuel use as proposed. We stated that any deficit carryover from 2006 would increase the 2007 standard. Since renewable fuel use in 2006 exceeded the 2.78 percent default standard, there is no deficit to carry over to 2007. Beginning with the 2007 compliance period, when annual individual party compliance replaces collective compliance, any deficit is calculated for an individual party and is included in the party's Renewable Volume Obligation (RVO) determination, as discussed in Section III.A.4. In summary, the total projected non-renewable gasoline volumes from which the annual standard is calculated is based on EIA projections of gasoline consumption in the contiguous 48 states, adjusted by a constant percentage of 13.5% to account for small refinery/refiner volume, with built-in correction factors to be used when and if non-contiguous states and territories opt-in to the program. If actual gasoline consumption were to exceed the EIA projection, the result would be that renewable fuel volumes will exceed the statutory requirements. Conversely, if actual gasoline consumption was less than the EIA projection for a given year, theoretically a renewable fuel shortfall could occur. However, our projections of renewable fuel use due to market demand would make a shortfall extremely unlikely regardless of the error in gasoline consumption projections. The following formula will be used to calculate the percentage standard: ER01MY07.056 Where: RFStd i = Renewable Fuel standard in year i, in percent. RFV i = Annual volume of renewable fuels required by section 211(o)(2)(B) of the Act for year i, in gallons. G i = Amount of gasoline projected to be used in the 48 contiguous states, in year i, in gallons. R i = Amount of renewable fuel blended into gasoline that is projected to be consumed in the 48 contiguous states, in year i, in gallons. GS i = Amount of gasoline projected to be used in Alaska, Hawaii, or a U.S. territory in year i if the state or territory opts-in, in gallons. RS i = Amount of renewable fuel blended into gasoline that is projected to be consumed in Alaska, Hawaii, or a U.S. territory in year i if the state or territory opts-in, in gallons. GE i = Amount of gasoline projected to be produced by exempt small refineries and small refiners in year i, in gallons (through 2010 only unless exemption extended under §§ 211(o)(9)(A)(ii) or (B)). Equivalent to 0.135*(G i −R i ). Cell i = Beginning in 2013, the amount of renewable fuel that is required to come from cellulosic sources, in year i, in gallons (250,000,000 gallons minimum). After 2012 the Act requires that the applicable volume of required renewable fuel specified in Table I.B-1 include a minimum of 250 million gallons that are derived from cellulosic biomass. As shown in Table III.A.2-1 below, we have estimated this value (250 million gallons) as a percent of an obligated party's production for 2013. Thus, an obligated party will be subject to two standards in 2013 and beyond, a non-cellulosic standard and a cellulosic standard. We are therefore also finalizing the following formula for calculating the cellulosic standard that is required beginning in 2013: ER01MY07.057 Where, except for RFCell i , the variable descriptions are as discussed above. The definition of RFCell i is: RFCell i = Renewable Fuel Cellulosic Standard in year i, in percent Note that after 2012 cellulosic RINs cannot be used to satisfy the non-cellulosic RFS standard (RFStd i ). The amount of renewable fuel that is required to come from cellulosic sources (Cell i ) is a fixed amount. We are not finalizing regulations that would specify the criteria under which a state could petition the EPA for a waiver of the RFS requirements, nor the ramifications of Agency approval of such a waiver in terms of the level or applicability of the standard. As discussed in the proposal, there was no clear way to include such a provision in the context of the program being finalized. As a result, the formula for the standard shown above does not include any components to account for Agency approval of a state petition for a waiver of the RFS requirements. Should EPA grant such a waiver in the future, it will determine at that time what adjustments to make to the standard. 2. What Are the Applicable Standards? As discussed in the proposal, EPA will set the percentage standard for each upcoming year based on the most recent EIA STEO projections, and using the other sources of information as noted above. EPA will publish the standard in the Federal Register by November 30 of the preceding year. The standards are used to determine the renewable volume obligation based on an obligated party's total gasoline production or import volume in a calendar year, January 1 through December 31. The percentage standards do not apply on a per gallon basis. An obligated party will calculate its Renewable Volume Obligation (discussed in Section III.A.4) using the annual standard. In the NPRM, we estimated the standards for 2007 and later using data available at the time and the formulas discussed above. 11 We have revised these values based on more recent data, and using EIA's October 2006 STEO gasoline and renewable fuel consumption projections. 12 In the proposal, we had used the lower heating value of ethanol for converting from Btu to gallons of ethanol for the purpose of calculating the standard. However, for this final rule, we have used the higher heating value of ethanol as recommended by commenters, to be consistent with EIA practices. 13 14 Variables related to state or territory opt-ins were set to zero since we do not have any information related to their participation at this time. As mentioned earlier, we estimate the small refinery and small refiner fraction to be 13.5%. The exemption for small refineries and small refiners ends at the end of the 2010 compliance period, unless extended as discussed in Section III.C.3.a. Based on all of these factors, the standard for 2007 is 4.02%. Projected values of the standard for 2008 and beyond are shown in Table III.A.2-1. 11 “Calculation of the Renewable Fuel Standard” memo to the docket from Christine Brunner, ASD, OTAQ, EPA, September 2006. 12 “Calculation of the Renewable Fuel Standard—Revised” memo to the docket from Christine Brunner, ASD, OTAQ, EPA, April 2007. 13 The higher (or gross or upper) heating value is used in all Btu calculations for EIA's Annual Energy Review and in related EIA publications (see discussion in EIA's Annual Energy Review, Appendix A, Thermal Conversion Factors). 14 The lower heating value (LHV) is used to represent energy content in the context of setting Equivalence Values as described in Section III.B.4 because it more accurately reflects the energy available in the fuel to produce work. Table III.A.2-1.—Projected Standards Year Projected standard Cellulosic standard 2008 4.63% Not applicable. 2009 5.21% Not applicable. 2010 5.80% Not applicable. 2011 5.38% Not applicable. 2012 5.42% Not applicable. 2013+ 5.24% min. (non-cellulosic) 0.18% min. As discussed in Section II.A.5, for calendar year 2013 and thereafter, the applicable volumes will be determined in accordance with separate statutory provisions that include EPA coordination with the Departments of Agriculture and Energy, and a review of the program during calendar years 2006 through 2012. The Act specifies that this review consider the impact of the use of renewable fuels on the environment, air quality, energy security, job creation, and rural economic development, and the expected annual rate of future production of renewable fuels, including cellulosic ethanol. We intend to conduct another rulemaking as we approach the 2013 timeframe that would include our review of these factors. That rulemaking will present our conclusions regarding the appropriate applicable volume of renewable fuel for use in calculating the renewable fuel standard for 2013 and beyond. The program finalized by today's rule will continue to apply after 2012, though some elements may be modified in the rulemaking setting the standards for 2013 and beyond. Today's rule does not contain a mechanism for establishing a post-2012 standard. 3. Compliance in 2007 The Energy Act requires that EPA promulgate regulations to implement the RFS program, and if EPA did not issue such regulations then a default standard for renewable fuel use would apply in 2006. On December 30, 2005 we promulgated a direct final rule to interpret and implement the application of the statutory default standard of 2.78 percent in calendar year 2006 (70 FR 77325). However, the Act provides no default standard for any other year. In the NPRM we stated our expectation that, due to the limited time available for this rulemaking, we would be unable to publish the final rule and have it become effective by January 1, 2007. We discussed several ways that we could specify how, and for what time periods, the applicable standard and other program requirements would apply to regulated parties for gasoline produced during 2007. We discussed a collective compliance approach similar to that applied in 2006, as well as a “full year” approach that would have based the renewable volume obligation for each obligated party on all gasoline produced starting on January 1, 2007 regardless of the effective date of the rule. However, due to a number of issues with these approaches, we proposed a “prospective” approach in which the renewable fuel standard would be applied to only those volumes of gasoline produced after the effective date of the final rule. Essentially the renewable volume obligation for 2007 would be based on only those volumes of gasoline produced or imported by an obligated party prospectively from the effective date of the rulemaking forward, and renewable producers would not have to begin generating RINs and maintaining the necessary records until this same date. We received no comments supporting the alternative “full year” approach to 2007 compliance. However, several parties expressed a preference for either a collective compliance approach for 2007, or if not that then delaying implementation of the comprehensive program to January 1, 2008. They argued that regulated parties needed additional time to put into place the sophisticated RIN tracking systems that would be required. The additional time would also allow regulated parties to debug the systems, train personnel, and put support programs into place. The American Coalition for Ethanol also argued that the prospective approach did not guarantee that the total renewable fuel volumes required by the Act for 2007 would actually be used in 2007, whereas a collective compliance approach would. Parties in favor of a collective compliance approach argued that EPA has the authority to implement such an approach despite the fact that the Act does not explicitly give EPA this authority, and also argued that there was no need to include any form of credit carryover under a collective compliance approach. However, a number of refiners and their associations opposed a collective compliance approach to 2007 and expressed strong support for the proposed prospective approach. They argued that a start date at least 60 days from the date of publication of the final rule would provide sufficient time to obligated parties for making the necessary adjustments for compliance. They also argued that they should be afforded the opportunity to participate as soon as possible in the trading program, which the collective compliance approach used for 2006 would preclude for 2007. We continue to believe that a collective compliance approach is not appropriate for 2007. The Energy Act requires us to promulgate regulations that provide for the generation of credits by any person who over complies with their obligation. It also stipulates that a person who generates credits must be permitted to use them for compliance purposes, or to transfer them to another party. These credit provisions have meaning only in the context of an individual obligation to meet the applicable standard. Delaying a credit program until 2008 would mean the credit provisions have no meaning at all for 2007, since under a collective compliance approach no individual facility or company would be liable for meeting the applicable standard. Including a “collective” credit or deficit carryforward as part of a collective compliance program would also not fully implement the credit provisions of the Act. The prospective compliance approach, in contrast, not only provides obligated parties with the opportunity to generate credits, but also provides the industry with the certainty they need to comply and is relatively straightforward to implement. Rather than requiring the program to begin on the effective date of the rule as proposed (60 days following publication in the Federal Register ), we are finalizing a start date of September 1, 2007. From this date forward, the renewable fuel standard will be applicable to all gasoline produced or imported, and all renewable fuels produced or imported will have to be assigned a RIN. All regulated parties must be registered by this date, and the recordkeeping responsibilities will also begin. By setting such a date, industry will be able to plan with confidence to start complying upon signature of the rule, rather than having the start date depend upon the timing of publication of this final rule in the Federal Register . We recognize the concerns expressed in comments that time is needed to prepare Information Technology (IT) systems to comply with the program. However, we believe that a September 1, 2007 start date will provide sufficient time. The final rule is in most respects consistent with the NPRM, and based on discussions with industry, plans for implementation are already underway. Furthermore, a September 1, 2007 start date will likely provide regulated parties some additional time to prepare in comparison to simply setting the start date as 60 days following publication of the rule. As stated in the NPRM, we recognize that the prospective approach to 2007 compliance will not guarantee by regulation that the total renewable fuel volumes required by the Act for 2007 would actually be used in 2007. However, current projections from the Energy Information Administration (EIA) on the volume of renewable fuel expected to be produced in 2007 indicate that the Act's required volumes will be exceeded by a substantial margin due to the relative economic value of renewable fuels in comparison to gasoline. We are confident that the combined effect of the regulatory requirements for 2007 and the expected market demand for renewable fuels will lead to greater renewable fuel use in 2007 than is called for under the Act. Current renewable production already exceeds the rate required for all of 2007, and as discussed in Section VI, capacity is expected to continue to grow. Furthermore, refiners and importers are not required to meet any requirements under the Act until EPA adopts the regulations, and EPA is authorized to consider appropriate lead time in establishing the regulatory requirements. 15 Under this option we believe there will be reasonable lead-time for regulated parties to meet their 2007 compliance obligations. While no option before us is perhaps totally consistent with all of the provisions of the Act, we believe the rule as adopted does the best job possible given the circumstances of implementing all of the provisions of the Act for 2007. 15 The statutory default standard for 2006 is the one exception to this, since it directly establishes a renewable fuel obligation applicable to refiners and importers in the event that EPA does not promulgate regulations. 4. Renewable Volume Obligations In order for an obligated party to demonstrate compliance, the percentage standards described in Section III.A.2 which are applicable to all obligated parties must be converted into the volume of renewable fuel each obligated party is required to satisfy. This volume of renewable fuel is the volume for which the obligated party is responsible under the RFS program, and is referred to here as its Renewable Volume Obligation (RVO). The calculation of the RVO requires that the standard shown in Table III.A.2-1 for a particular compliance year be multiplied by the gasoline volume produced by an obligated party in that year. To the degree that an obligated party did not demonstrate full compliance with its RVO for the previous year, the shortfall is included as a deficit carryover in the calculation. The equation used to calculate the RVO for a particular year is shown below: RVO i = Std i × GV i + D i−1 Where: RVO i = The Renewable Volume Obligation for the obligated party for year i, in gallons. Std i = The RFS program standard for year i, in percent. GV i = The non-renewable gasoline volume produced by an obligated party in year i, in gallons. D i−1 = Renewable fuel deficit carryover from the previous year, in gallons. The Energy Act only permits a deficit carryover from one year to the next if the obligated party achieves full compliance with its RVO including the deficit carryover in the second year. Thus deficit carryovers could not occur two years in succession. They could, however, occur as frequently as every other year for a given obligated party. The calculation of an obligated party's RVO is necessarily retrospective, since the total gasoline volume that it produces in a calendar year will not be known until the year has ended. However, the obligated party will have an incentive to project gasoline volumes, and thus the RVO, throughout the year so that it can spread its efforts to comply across the entire year. Most refiners and importers will be able to project their annual gasoline production volumes with a minimum of uncertainty based on their historical operations, capacity, plans for facility downtimes, knowledge of gasoline markets, etc. Even if unforeseen circumstances (e.g., hurricane, unit failure, etc.) significantly reduced the production volumes in comparison to their projections, their RVO will likewise be reduced proportionally and their ability to comply with the RFS requirements will be only minimally affected. Each obligated party's projected RVO for a given year becomes more accurate as that year progresses, but the obligated party should nevertheless have a sufficiently accurate estimate of its RVO at the beginning of the year to allow it to begin its efforts to comply. B. What Counts as a Renewable Fuel in the RFS Program? Section 211(o) of the Clean Air Act defines “renewable fuel” and specifies many of the details of the renewable fuel program. The following section provides EPA's views and interpretations on issues related to what fuels may be counted towards compliance with the RVO, and how they are counted. 1. What Is a Renewable Fuel That Can Be Used for Compliance? The statutory definition of renewable fuel includes cellulosic ethanol and waste derived ethanol. It includes biodiesel, as defined in the Energy Act. 16 It also includes all motor vehicle fuels that are produced from biomass material such as grain, starch, oilseeds, animal, or fish materials including fats, greases and oils, sugarcane, sugar beets, tobacco, potatoes or other biomass (such as bagasse from sugar cane, corn stover, and algae and seaweed). In addition, it includes motor vehicle fuels made using a feedstock of natural gas if produced from a biogas source such as a landfill, sewage waste treatment plant, feedlot, or other place where decaying organic material is found. 16 As discussed below, for purposes of this rulemaking, the regulations separate “biodiesel” as defined in the Energy Act, into biodiesel (diesels that meet the Energy Act's definition and are a mono-alkyl ester) and renewable diesel (other diesels that meet the Energy Act's definition but are not mono-alkyl esters). According to the Act, the motor vehicle fuels must be used “to replace or reduce the quantity of fossil fuel present in a fuel mixture used to operate a motor vehicle.” Some motor vehicle fuels can be used in both motor vehicles or nonroad engines or equipment. For example, highway gasoline and diesel fuel are often used in both highway and off-highway applications. Compressed natural gas can likewise be used in either highway or nonroad applications. For purposes of the renewable fuel program, EPA considers a fuel to be a “motor vehicle fuel” and to be “a fuel mixture used to operate a motor vehicle,” based on its potential for use in highway and nonroad vehicles, without regard to whether it, in fact, is used in a highway vehicle application. EPA does not believe that the much more complex and costly regulatory scheme that would be needed to track motor vehicle fuel use versus off-road fuel use would be justified. (As discussed further below, heaters and boilers are not considered highway or nonroad engine applications and renewable fuel produced or imported specifically for use in such equipment is not valid for compliance purposes under the RFS program.) If it is a fuel that could be used in highway vehicles, it will satisfy these parts of the definition of renewable fuel, whether it is later used in highway or nonroad applications. This will allow a motor vehicle fuel that otherwise meets the definition to be counted towards a party's RVO without the need to track it to determine its actual application in a highway vehicle, and provided only that the producer does not know that the fuel will be used for a purpose other than highway and nonroad engine applications. This is also consistent with the requirement that EPA base the renewable fuel obligation on estimates of the entire volume of gasoline consumed, without regard to whether it is used in highway or nonroad applications. Renewable fuel as defined, may be made from a number of different types of feedstocks. For example, the Fisher-Tropsch process can use methane gas from landfills as a feedstock, to produce diesel or gasoline. Vegetable oil made from oilseeds such as rapeseed or soybeans can be used to make biodiesel or renewable diesel. Methane, made from landfill gas (biogas) can be used to make methanol, or can be used directly as a fuel in vehicles with engines designed to run on compressed natural gas. Also, some vegetable oils or animal fats can be processed in distillation columns in refineries to make gasoline; as such, the renewable feedstock serves as a “renewable crude,” and the resulting gasoline or diesel product would be a renewable fuel. This last example is discussed in further detail in Section III.B.3 below. As this discussion shows, the definition of renewable fuel in the Act is broad in scope, and covers a wide range of fuels. While ethanol is used primarily in combination with gasoline, the definition of renewable fuel in the Act is not limited to fuels that can be blended with gasoline. Various fuels that meet the definition of renewable fuel can be used in their neat form, such as ethanol, biodiesel, methanol or natural gas. Others, including ethanol may be used to produce a gasoline blending component (such as ETBE). At the same time, the RFS regulatory program is to “ensure that gasoline sold or introduced into commerce * * * contains the applicable volume of renewable fuel.” This applicable volume is specified as a total volume of renewable fuel on an aggregate basis. Congress also clearly specified that one renewable fuel, biodiesel, could be counted towards compliance even though it is not a gasoline component, and does not directly displace or replace gasoline. The Act is unclear on whether other fuels that meet the definition of renewable fuel, but are not used in gasoline, could also be used to demonstrate compliance towards the aggregate national use of renewable fuels. EPA interprets the Act as allowing regulated parties to demonstrate compliance based on any fuel that meets the statutory definition for renewable fuel, whether it is directly blended with gasoline or not. This would include neat alternative fuels such as ethanol, methanol, and natural gas that meet the definition of renewable fuel. This is appropriate for several reasons. First, it promotes the use of all renewable fuels, which will further the achievement of the purposes behind this provision. Congress did not intend to limit the program to only gasoline components, as evidenced by the provision for biodiesel, and the broad definition of renewable fuel evidences an intention to address more renewable fuels than those used with gasoline. Second, in practice EPA expects that the overwhelming volume of renewable fuel used to demonstrate compliance with the renewable fuel obligation would still be ethanol blended with gasoline. Finally, as discussed later, EPA's compliance program is based on assigning volumes at the point of production, and not at the point of blending into motor vehicle fuel. This interpretation avoids the need to track renewable fuels downstream to ensure they are blended with gasoline and not used in their neat form; the gasoline that is used in motor vehicles is reduced by the presence of renewable fuels in the gasoline pool whether they are blended with gasoline or not. Comments received on this interpretation were favorable towards it. EPA continues to believe, therefore, that this approach is consistent with the intent of Congress and is a reasonable interpretation of the Act. One commenter indicated that a logical extension of this reasoning would provide that renewable fuel that could be used in motor vehicles is still a renewable fuel under the Act when used by renewable fuel producers in a boiler or heater. EPA disagrees. The term “renewable fuel” means “motor vehicle fuel that * * * is used to replace or reduce the quantity of fossil fuel present in a fuel mixture used to operate a motor vehicle.” We believe that all but a trivial quantity of renewable fuels that can be used in motor vehicles will ultimately be used as motor vehicle fuel. Producers of ethanol biodiesel and other products that can be used as motor vehicle fuel can generally assume, therefore, that their products will be used in that way, and can assign RINs to their product without tracking its ultimate use. However, renewable fuel used onsite in a boiler or heater by a renewable fuel producer clearly is not a motor vehicle fuel used to replace or reduce the quantity of fossil fuel present in a fuel mixture used to operate a motor vehicle. Under the Act, renewable fuel includes “cellulosic biomass ethanol” and “waste derived ethanol”, each of which is defined separately. Ethanol can be cellulosic biomass ethanol in one of two ways, as described below. a. Ethanol Made From a Cellulosic Feedstock The simplest process of producing ethanol is by fermenting sugar in sugar cane or beets, but ethanol can also be produced from starch in corn and other feedstocks by first converting the starch to sugar. Ethanol can also be produced from complex carbohydrates, such as the cellulosic portion of plants or plant products. The cellulose is first converted to sugars (by hydrolysis); then the same fermentation process is used as for sugar to make ethanol. Cellulosic feedstocks (composed of cellulose and hemicellulose) are currently more difficult and costly to convert to sugar than are starches. While the cost and difficulty are a disadvantage, the cellulosic process offers the advantage that a wider variety of feedstocks can be used. Ultimately with more feedstocks available from which to make ethanol more volume of ethanol can be produced. The Act provides the definition of cellulosic biomass ethanol, which states: “The term ‘cellulosic biomass ethanol’ means ethanol derived from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis, including: (i) Dedicated energy crops and trees; (ii) Wood and wood residues; (iii) Plants; (iv) Grasses; (v) Agricultural residues; (vi) Animal wastes and other waste materials, and (viii) Municipal solid waste.” Examples of cellulosic biomass source material include rice straw, switch grass, and wood chips. Ethanol made from these materials would qualify under the definition as cellulosic ethanol. In addition to the above sources of feedstocks for cellulosic biomass ethanol, the Act's definition also includes animal waste, municipal solid wastes, and other waste materials. “Other waste materials” generally includes waste material such as sewage sludge, waste candy, and waste starches from food production, but for purposes of the definition of cellulosic ethanol discussed in III.B.1.b below, it can also mean waste heat obtained from an off-site combustion process. Although the definitions of “cellulosic biomass ethanol” and “waste derived ethanol” both include animal wastes and municipal solid waste in their respective lists of covered feedstocks, there remains a distinction between these types of ethanol. If the animal wastes or municipal solid wastes contain cellulose or hemicellulose, the resulting ethanol can be termed “cellulosic biomass ethanol.” If the animal wastes or municipal solid wastes do not contain cellulose or hemicellulose, then the resulting ethanol is labeled “waste derived ethanol.” This is discussed further in Section III.B.1.c below. b. Ethanol Made From Any Feedstock in Facilities Using Waste Material To Displace 90 Percent of Normal Fossil Fuel Use The definition of cellulosic biomass ethanol in the Act also provides that ethanol made at any facility—regardless of whether cellulosic feedstock is used or not—may be defined as cellulosic if at such facility “animal wastes or other waste materials are digested or otherwise used to displace 90 percent or more of the fossil fuel normally used in the production of ethanol.” The statutory language suggests that there are two methods through which “animal and other waste materials” may be considered for displacing fossil fuel. The first method is the digestion of animal wastes or other waste materials. EPA has interpreted the term “digestion” to mean the conversion of animal or other wastes into methane, which can then be combusted as fuel. We base our interpretation on the practice in industry of using anaerobic digesters to break down waste products such as manure into methane. Anaerobic digestion refers to the breakdown of organic matter by bacteria in the absence of oxygen, and is used to treat waste to produce renewable fuels. We note also that the digestion of animal wastes or other waste materials to produce the fuel used at the ethanol plant does not have to occur at the plant itself. Methane made from animal or other wastes offsite and then purchased and used at the ethanol plant would also qualify. The second method is suggested by the term “otherwise used” which we interpret to mean (1) the direct combustion of the waste materials as fuel at an ethanol plant, or (2) the use of thermal energy that itself is a waste product; e.g., waste heat that is obtained from an off-site combustion process such as a neighboring plant that has a furnace or boiler from which the waste heat is captured. With respect to the first meaning, “other waste materials” includes but is not limited to waste materials from tree farms (tops, branches, limbs, etc.), or waste materials from saw mills (sawdust, shavings and bark) as well as other vegetative waste materials such as corn stover, or sugar cane bagasse, that could be used as fuel for gasifier/boiler units at ethanol plants. Since these materials are not also used as a feedstock to starch-based ethanol plants, they are truly waste materials. Although these waste materials conceivably could be feedstocks to a cellulosic ethanol plant, their use in that manner is sufficiently challenging at the current time that EPA believes that such use does not subvert the intent of the definition. 17 Since corn kernels can readily be used as a feedstock in a typical ethanol production facility, their use as a fuel for gasified/boiler units at a corn ethanol plant would not be considered use of “other waste material” for purposes of the definition of cellulosic biomass ethanol. 17 On the other hand, wood from plants or trees that are grown as an energy crop may not qualify as a waste-derived fuel in an ethanol facility because such wood would not qualify as waste materials under this portion of the definition. Under the definition of renewable fuels and cellulosic biomass ethanol, however, such wood material could serve as a feedstock in a cellulosic ethanol plant, since these definitions do not restrict such feedstock to waste materials only. Regarding the use of waste heat as a source of thermal energy, we note that there may be situations in which an off-site furnace, boiler or heater creates excess or waste heat that is not used in the process for which the thermal energy is employed. For example, a glass furnace generates a significant amount of waste heat that often goes unused. We have therefore included in the regulatory definition of cellulosic biomass ethanol waste heat generated from off-site sources in the definition of “other waste materials” that can be used to displace 90% of the fossil fuel otherwise used at an ethanol production facility. Several commenters argued that because the source of the waste heat is ultimately a fossil fuel in most cases that it should not be considered an “other waste material”. The Agency recognizes that fossil fuel is ultimately the source of most waste heat, but it is also the case that waste heat that is uncaptured represents a loss of energy that could otherwise displace fossil fuel use elsewhere. Specifically, waste heat used at an ethanol plant would result in displacement of fossil fuel use at the plant. In writing the proposed rule, we were aware of the concern raised by the commenters and therefore proposed to restrict waste heat to off-site sources only. We believe that this approach minimizes the concern. We disagree with another commenter that such restriction would create a perverse incentive for facilities near ethanol plants to oversize its combustion units to sell waste heat to the neighboring ethanol facilities where it would be used to displace fossil fuel. It is highly unlikely that businesses would incur the additional expense of building an oversized combustion unit for the sale of waste heat. Also, the 2.5 gallon value given for one gallon of cellulosic ethanol as provided by the Act extends only through 2012. Any additional market value for waste heat used to qualify ethanol as cellulosic would therefore be of relatively short duration and not likely to warrant investment in oversized combustion units. 18 18 The term “other waste materials” is also included in the portions of the definitions of “cellulosic biomass ethanol” and “waste-derived ethanol” that identify feedstocks. The inclusion of off-site generated waste heat in the definition of “other waste materials”, however, applies only to the portion of the definition of cellulosic biomass ethanol that relates to displacement of fossil fuels, and does not apply to the term “other waste materials” as otherwise used in these definitions. The term “fossil fuel normally used in the production of ethanol” means fossil fuel used at the facility in the ethanol production process itself, rather than other phases such as trucks transporting product, and fossil fuel used to grow and harvest the feedstock. Therefore the diesel fuel that trucks consume in hauling wood waste from sawmills to the ethanol facility would not be counted in determining whether the 90% displacement criterion has been met. We are interpreting it in this way because we believe the accounting of fuel use associated with transportation and other life cycle activities would be extremely difficult and in many cases impossible. 19 19 In Section IX of today's preamble we discuss our analysis of the lifecycle fuel impacts of the RFS rule, with respect to greenhouse gas (GHG) emissions. While we do account for fuel used in hauling materials to ethanol plants in our analysis, we are using average nationwide values, rather than data collected for individual plants. Based on the operation of ethanol plants, we are viewing this definition to apply to waste materials used [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE7-7140. Public record. Not legal advice.