Podcast: An Update on the Renewable Fuel Standard Final Rule

Susan Lafferty: Hello and welcome to our podcast on the renewable fuel standard final rule, also known as the "set rule," that was just released on June 21. This is Susan Lafferty, I'm a partner at Holland & Knight and joined by Andy Kriha, an associate at Holland & Knight. This is our follow up to a podcast we did earlier this year in February on the proposed rule for the renewable fuel standard, or RFS, and what we would like to do is to update you on the contents of what was in the final rule and some key changes, especially with regards to what was not in the final rule. So, setting the stage, this is a rule that was initially proposed November 30 of last year. It was, the actual proposal was then actually published on December 30, so the very end of last year, and it covered the renewable volume obligations, the RVOs, for 2023, 2024 and 2025. It proposed that it could look at as far as 2026, but it did not in the final rule. And the proposed rule was also looking to establish a way for pathway approval of renewable electricity to e-RIN, and also combined with that to standardize RIN generation protocols for biogas with some RNG reforms. Separately, it was also looking to establish some new separated food waste traceability rules to clarify what the requirements are in that area, along with some other technical changes. The comment period after this proposed rule ended in February, and there were over 4,700 comments received on all parts of the rule. Many groups lobbied the EPA up until that time and then continued afterwards. Lots of meetings also at the Office of Management and Budget, OMB, which is the final stop for any rulemaking. And the bulk of those comments and those efforts, while really addressed to all parts of the rule, like I said, most of it really focused on a) the volumes, which is sort of the foundation of what the rulemaking was addressing, and then b) on the e-RINs and the RNG reforms that were proposed. This rulemaking was set to be finalized subject to a consent decree. Technically, EPA should have announced, especially right now we're in '23, they should have announced the 2023 RVOs 14 months before the rule the calendar year came, and therefore it also should have already proposed the 2024 RVOs. But EPA did not, it was sued by Growth Energy, an ethanol trade association, and by the consent decree, EPA and Growth Energy agreed that the RVOs for 2023 would be finalized by June 14. EPA at the last minute asked Growth Energy and the court to approve a delay of one week to June 21. It is not entirely clear what the need for the delay was on EPA's end, but their counterparty and then the court agreed to that, and so that's why we had the final rule on the 21. It will go into effect technically 60 days after the publication of the regulations in the Federal Register, but again, these are RVOs for 2023. So both producers of renewable fuel and generators of RINs and then obligated parties can and will start applying these new RVOs immediately. Other parts of the rules have some phased in effective dates that we will reference as we go forward. Last thing I will say in terms of setting the stage is we expect the rule to be litigated just like all RVO rules are litigated. We also expect the reforms, the RNG reforms, very likely could be litigated, as might the food waste traceability rules. We do not expect, at least at this time, that any of that litigation will mean that the rule effective date will be delayed. We would expect that the rule will move forward while the litigation is going on. Litigation will take some time to be fully filed with the court and then potentially consolidated if it's in different circuits, especially outside of the D.C. Circuit, which is where EPA strongly prefers for rules to be examined. And then the litigation will most likely take one to three, maybe even four years to be complete. But as this is the first rulemaking for the post-2022 statutory volume setting whereby EPA is fully in charge of establishing what the volumes are going forward, their approach will undoubtedly be challenged by many and perhaps even not just trade associations, but a lot more individual companies as well who really want to set the stage for how the rule is applied in future years, regardless of what administration is in charge. So with that, Andy, will you go into the meat of the rule in terms of the RVOs?

Renewable Volume Obligations (RVOs): An Update

Andy Kriha: Absolutely. Thank you, Susan. And I think it would be helpful to start, just because this rule has attracted a lot of attention from parties that hadn't necessarily participated in the process before, at least not to the extent that they had hoped to after this rule, I think it makes sense to just quickly go back over the categories of renewable identification numbers, or RINs, and how those feed the volume obligations. So there's four categories. There's the D3 and D7, cellulosic RINs, those are fuels that come from plants, cell walls, woodchips, biogas, things like that. It must have a life cycle greenhouse gas reduction of at least 60 percent below the baseline set in the statute. The second category is D4 RINs, these are biomass-based diesel. It comes from vegetable oil, waste oil, animal fats, etc. and requires GHG reductions at least 50 percent below the baseline. The D5 RINs are other advanced biofuels. These are renewable fuels other than ethanol from corn starch and have life cycle GHG reduction, again, of at least 50 percent below the baseline. And the final category is D6 renewable fuel, so this is all other renewable fuels, primarily corn-based ethanols. And so, EPA's requirements every year is to set renewable volume obligations, this is the amount of renewable fuel that must be supplied into the general transportation fuel supply chain. There are four categories, EPA sets a percentage and volume standard for each of three of the categories. There is total advanced biofuel that is everything except for D6 RINs, and then as a subset of that, EPA set standards specifically for D4 RINs and specifically for cellulosic D3 and D7 RINs. EPA also sets a total renewable fuel volume obligation and percentage standard, and it is implied then from that, that those D6 RINs from corn-based ethanols will make up the difference between the total value and the total advanced biofuel value, although that difference can be made up with other categories of RINs as well. So where that takes us into this rulemaking, EPA back in December had proposed the volumes for 2023, 2024 and 2025. Producers, as expected, as is usually the case, almost every type of fuel argued in the comments and in their letters and separate lobbying efforts, that actual production capacity for their applicable fuel type would exceed EPA's estimates, and thus the volume obligations for their applicable fuel types should be increased. Additionally, many advanced biofuel producers and traditional refineries argued that the implied ethanol mandate should be lowered because it exceeded what the supply chain was actually capable of producing and blending into fuel. EPA throughout the process publicly took the view that any shortfall in ethanol use could be made up by exceeding requirements in the advanced biofuel categories, and we did see that view represented to some extent in the final rule, but there were also some tweaks as well to lower the ethanol mandate while increasing the other mandates. So for what actually happened in the final rule, e-RINs, that would have been cellulosic RINs for electricity that powered EVs, was entirely removed. We're going to discuss that more in a little bit, that resulted in lower cellulosic volumes. The cellulosic final volumes, nonetheless, were higher than the proposed volumes after accounting for the removal of e-RINs, so some of the difference from removing e-RINs was given back, and EPA acknowledg[ed] that there was a higher capacity for cellulosic fuel production. D4 RINs were finalized at the proposed volume for 2023, but increased relative to the proposal and the two subsequent years. All other advanced biofuel volumes increased relative to the proposal. None of them increased to the extent that was actually asked for by industry. So really, EPA was looking to create some sort of a compromise position here. Some of the increase in advanced biofuels was offset by a 250 million gallon decrease in the implied ethanol mandate in 2024 and 2025. And so the final result is 20.94 billion gallon total mandate in 2023, that's an increase of 120 million gallons relative to the proposal. All of that coming from advanced biofuel. In 2024, the total mandate is 21.54 billion gallons, that's an increase of 270 million gallons from the proposal. And lastly, in 2025, a total mandate of 22.33 billion gallons, which is 620 million gallons over what the proposal was. So with that, I think it's time to get to probably the most headline-grabbing story of this rule, which is the elimination of e-RINs, and Susan, can you describe that for us?

And so, EPA's requirements every year is to set renewable volume obligations, this is the amount of renewable fuel that must be supplied into the general transportation fuel supply chain.

The Elimination of e-RINs

Susan Lafferty: Yes. So e-RINs are not part of the final rule. They were, as we said, proposed. E-RINs have actually been in the proposal since arguably at least since 2014, some would even say back to 2010, but there has been a pathway for renewable electricity to be made from biogas and RNG, but EPA has not approved any of those registrations to date. EPA said that it needed additional regulations to ensure that there wasn't double counting of RINs and established more clearly who would be responsible for different obligations. But it appears that in the face of some legal challenges, that is why EPA has at least held back the introduction of e-RINs into the program at this time. And so, again, you know, EPA has previously stated that e-RINs are allowed, they say that they still are allowed. They even established a pathway. It never approved of registration. And so the proposal attempted to address the issues that EPA said were deficient in the, in the existing RINs, and in the proposal, it would have established pathways that could be approved with effective date starting in January 2024. Early reports indicated that EPA could still finalize a rule later this year with a 2025 effective date for an e-RIN program, but as Andy just described, right now, e-RINs have been excluded from the finalized 2025 volumes, which seems to indicate that it may not have another rulemaking forthcoming, at least in this year, although that is still possible at, frankly, any time between now and 2025. Initial proposal would have set the original equipment manufacturer, or the OEMs, which are the electric vehicle manufacturers, as the sole RIN generators. They would have been able to generate a D3 e-RIN, and then that e-RIN would just look like a normal D3 RIN and be able to satisfy the cellulosic biofuel RVO, which, as Andy said, nests into the advanced biofuel category and the total renewable fuel category. Many parties did object to the OEMs taking the primary role, and frankly, some objected to the OEMs having any role in the generation of RINs, of e-RINs. It is important to know, to follow who generates the RIN, but also who separates the RIN from the underlying energy commodity. They’re the entity that gets to sell and monetize that RIN, and under the proposal, it would have been the OEMs generating and separating the e-RINs. But even with those objections, most program participants generally preferred having an e-RIN program over having no program at all. Nonetheless, as noted, some legal questions were raised, and reports have been that is part of why EPA did not finalize the program in its action last week. As discussed in our last podcast, there is language in the RFS statute that refers to RIN generation by refiners, blenders and importers, which some have construed to exclude non-liquid fuels. EPA really disagrees with this, and even recently, one of their officials, Joe Goffman, continued to state that the law, in their view, is not a liquid fuel only program. In addition to that, other commentators pointed to language in the statute requiring the EPA to conduct a feasibility study on e-RINs as evidence that Congress did not intend for the e-RINs program to be included until, at a minimum, that the study was concluded, which it never was. There is an additional direction in the statute to conduct a feasibility program on a nuclear, on nuclear power for e-RINs, which is a fuel that is not biomass, which right now the RFS is biomass-based in terms of what the feedstock is allowed to be made from. Thus, clearly, nuclear power is not allowed under the existing statute. Again, some saw this as evidence that Congress was capable of asking for a study on future applications without intending that the application be allowed until it acted further, it being Congress. So some commentators viewed this as evidence that even had EPA concluded the e-RIN study, it would not have allowed e-RINs without a statutory change. One counter to this is that EPA did include renewable electricity in its rulemakings and regulations since 2010, and as I said, even had a pathway back in 2014 established, none of which has been challenged and has again led to EPA stating that legal challenges in this area to its authority are time barred. And lastly, there have been also some reports that EPA paused because it was concerned about market concentration of the e-RINs in the production stage where it was generated. Note that more generally there are still pending e-RIN applications under the current regulations, and it is unclear what the plans are next with regards to whether EPA might deny these registrations or whether any of the companies that have those pending registrations will take action themselves. It is possible that they could try to sue EPA for delay or effective denial, since they have been pending with the EPA for some time. We think that is just an area to watch and see what happens and see if that prompts any more intelligence coming from EPA about really what its plans are for the e-RIN program generally, and then what timing we might be able to expect. So, Andy, one of the hot topics in this area that was much debated was whether you could have an e-RIN and a REC, so why don't you review that whole area?

But even with those objections, most program participants generally preferred having an e-RIN program over having no program at all. 

Debate Surrounding e-RINs and RECs

Andy Kriha: Yeah, thanks, Susan. And like you said, this was a debate about whether an e-RIN specifically could be generated while a REC is also generated, a REC being a renewable energy certificate or renewable electricity certificate. These can be voluntary, they can be under state renewable portfolio standards, but the issues associated with it, the issues underlying the debate, really apply to RINs more generally, not just to e-RINs, and so it wasn't completely surprising that we did see EPA finalize some language on this issue, even though it ultimately excluded e-RINs. How this debate started was that EPA stated in the proposed rule that so long as transportation use can still be demonstrated for a particular volume of fuel and there's no express conflict with another program, an e-RIN and a REC could be generated on the same electricity and sold separately. A lot of people disagreed with this. A lot of people agreed with that. I think, you know, we advised back in our previous podcast — and we advised people since then — that we thought other regulators, such as the FTC, such as state regulators, that had more direct authority over the types of claims that can be made about environmental attributes might see it differently than EPA. So following the comment period, EPA did insert new language that expressly states that RINs cannot be stacked with other credits where it would be incompatible with demonstrating that the underlying environmental attributes remain bundled with the physical fuel through use as a transportation fuel. Some people did ask us if a RIN is itself an environmental attribute. I wouldn't go that far. I don't think EPA has gone that far with this language, but a RIN is based on environmental attributes inherent to the fuel. It's based on the "renewable-ness of the fuel" or the fact that it comes from certain renewable feedstocks. It's also, to a certain extent, based on the carbon reductions of the underlying fuel. And so what EPA is saying here is those attributes, the renewable-ness of the fuel, the greenhouse gas reductions of the fuel, cannot be separated and sold as a separate credit, otherwise the fuel that is ultimately used as a transportation fuel does not have those characteristics and thus cannot generate a RIN. Whether or not you believe that is the appropriate view to be taking or a bad policy choice, we do believe that is in line with the view that the FTC would take and that most state authorities would take. And those agencies, like I said, have more direct authority over the claims, so it certainly provides greater certainty to entities that this language was inserted. To that end, I'll also note here that EPA indicated in the final rule that it will explore entering into a memorandum of understanding with the FTC to potentially share with each other and enforcement the issues that are under each agency's jurisdiction, which means that EPA may aid FTC when it comes to things like greenwashing claims associated with these types of credits. EPA also indicated that it has expanded its existing MOU with California regulators and is entering into talks with the CFTC to expand its existing MOU with that agency in order to target more effectively some market manipulation concerns that each of those agencies have, so we could see expanded enforcement in this area. And with that, I'll pass it back to you, Susan, to talk about biogas regulatory reform.

Biogas Regulatory Reform

Susan Lafferty: Thanks. So we've talked a lot about the e-RINs, and along with that, EPA proposed some RNG reforms, and generally the proposed rule was finalized as proposed. There had been some question as to whether the CNG/LNG reforms were necessary without the additional enforcement burden of e-RINs. Many in the industry said the new rule seemed to be a solution in search of a problem, but EPA said the reforms were needed regardless of whether they adopted the e-RIN proposal or not, so they have been finalized. Changes in the CNG/LNG pathways would allow only the RNG producer to generate RINs, which would remain with the gas until separated by a downstream party that is able to demonstrate transportation fuel use. And this is going to either be the party that withdraws the gas from the commercial pipeline or produces the CNG or LNG from the volume that it's withdrawn, or the entity that dispenses the CNG/LNG. So that is the real crux of the primary changes in this area, where before under the current rules the parties could decide commercially who in the chain was going to generate the RIN, and range were generated upon the demonstration of transportation fuel use generally by periodic affidavits and then metering and other documentation showing that a certain volume had been dispensed. And so the RIN generator currently generates the RINs, the D3 RINs, and immediately separates. And again, when it's separated is when the RIN is fungible and can be sold into the marketplace until ultimately held by an obligated party that uses it to satisfy its RVO at the end of each client's year. So this fundamentally changes that. It requires the RNG producer to be that generator. RNG producer will be the entity that has brought the biogas to pipeline quality standards and injects into the commercial pipeline system. Slightly different rules if you're using a closed system that I won't go into but just to be aware of. And again, separating of the RIN will not occur until downstream. And so that, again, is another fundamental change to the current program. EPA really believes that this is going to ease the administrative burden on EPA by standardizing the agreements that it has to review and also allowing it to view the RIN traveling with the RNG in EPA's EMTS system. But the reality is more parties are now directly regulated and will have registration reporting, recordkeeping, PTD, product transfer documentation, requirements and test obligations on an annual basis. So a lot more regulation of many more entities in the chain. And this will require amendments to most likely all existing project agreements, both in terms of determining who is now the RIN generator, making sure RNG producer, and then to deal with the fact that the RIN will be transferred downstream and separated by a party. That meets the requirements and then even the RIN agreements for just the sale and purchase of fungible RINs may need to be reexamined to make sure that the entity you are buying from is going to be the entity that when these rules go into effect, is actually holding the D3 RINs. So these requirements go into place generally July 1, 2024, so just [under] a year from now. However, existing projects that are registered by July 1, 2024, will have until January 2025 to be amended and come back into compliance. But frankly, I think that they're going to likely need that whole time in order to make sure all of their current projects are ready to be generating RINs on the new basis by 2025. And again, any new projects should go ahead and start making sure that they're either going to be prepared to register and generate RINs under the new proposal or that they're doing it under the existing proposal, have a plan for pivoting at the right time to make sure that they're in compliance by 2025. So one of the last big parts of this rulemaking that got a lot of interest was traceability of feedstocks. And Andy, why don't you talk to us about where EPA landed in that regard?

But the reality is more parties are now directly regulated and will have registration reporting, recordkeeping, PTD, product transfer documentation, requirements and test obligations on an annual basis.

Feedstocks and Closing Thoughts

Andy Kriha: Yeah, absolutely. So anyone who listened to our last podcast would remember that last year, EPA took the position that renewable fuel producers themselves must retain detailed records of the sources of any used cooking oil or other separated food waste feedstocks that they use, and they must keep those records themselves. EPA framed that as a clarification of its existing position, as opposed to a new requirement that did go against some previous guidance that EPA had put out. In the cases where renewable fuel producers use aggregators to collect UCO from various restaurants and other sources, aggregators in general are very hesitant to share their supplier lists with their customers because there is a legitimate fear that the customers would then just go directly to these restaurants and other vendors and cut the aggregators out. The proposed rule sought to solve this issue by allowing aggregators to register as program participants and to follow the rules for bio intermediate producers, potentially even including aggregated used cooking oil as a bio intermediate. The proposal received considerable backlash, accused of being overly burdensome. Some commenters feared that aggregators would refuse to comply and instead just leave the transportation fuel market entirely to avoid the burdensome regulations, which could cause significant harm to the use of UCO within this program and within transportation uses more, more broadly. The final rule is largely modeled off of the proposed rule, although it does pull back on the burdens that would be placed on aggregators. So there is still an option to not take on any increased burden and for renewable fuel producers to maintain vendor lists themselves. If aggregators do not want to share these lists with their customers, they will need to register with the EPA. However, they will not need to submit themselves to third party engineering reviews, nor will they need to submit separated food waste plans with their registration. They will also not need to separately participate in the Quality Assurance Program. The renewable fuel producer itself, if it selects this option where records are held with the aggregator, will need to participate in the quality assurance program, which is otherwise voluntary, and their provider will need to audit the aggregator's facility as part of that, but the aggregator itself will not need to participate, which should relieve some burden. Additionally, it was clarified that the aggregated used cooking oil or aggregated separated food waste is not itself considered a bio intermediate, which means it can be aggregated and then sent on to another intermediate facility for some amount of processing before making its way to the renewable fuel producer. Had it been treated as a bio intermediate and the bio intermediate steps, which allow only a single intermediate processing point, no additional processing could have been done to the feedstock before it reached the renewable fuel producer. So it remains to be seen what the reaction to this is and how it ultimately impacts the use of aggregators in the market and the market more broadly, but certainly does at least pull back slightly from the proposed rule. Just a couple other more minor things that we wanted to mention before we sign off. EPA updated the equivalency value for biomass-based diesel in the percentage standard formula, so that equivalency value is now 1.6. That is up from the previous 1.5 and even slightly higher than the proposal, which was 1.57. Additionally, EPA had sought comment on whether the term "produced from renewable biomass" should be defined on an energy content basis or a mass content basis. Most commenters said that both should be allowed to provide for maximum flexibility and to allow the most possible number of fuels to participate in the program. After reviewing the comments, EPA declined to finalize a definition at this time. And lastly, there are many, many minor technical changes that were proposed and finalized that we did not have time to discuss here today, but we would be happy to discuss any of them on an as needed basis. And so with that, thank you for joining us.

Susan Lafferty: Thank you.