Small refineries lose court battle over compressed RFS compliance schedule

A federal appeals court July 18 upheld altered reporting deadlines for complying with US biofuel blending mandates, tossing petitions from a group of mostly small refineries who argued the new compliance timelines were contrary to law.

At issue was a rule finalized in February 2022 extending compliance deadlines for the Renewable Fuel Standard program after a series of delays by the US Environmental Protection Agency in setting mandates for the 2020-2022 compliance years.

"We take no position on whether EPA has reasonably mitigated the harm borne by obligated parties due to its delayed issuance of the 2020-2022 standards," the DC Circuit Court of Appeals said. "Nor do we opine on the lawfulness of EPA's small refinery exemption policies and decisions. Rather, we hold simply that the extension rule's compliance schedule is reasonable and reasonably explained."

The EPA initially issued renewable volume obligations (RVOs) for 2020 just two months late in February 2020, but published revised mandates in the Federal Register on July 1, 2022, 31 months after the statutory due date. RVOs for 2021 and 2022 were also published in July 2022, making them 19 and 8 months late, respectively.

To get the program back on track, the EPA compressed compliance lead times for those RVOs and compliance intervals between reporting periods. The extension rule also established a new compliance schedule for 2023 and later years.

Refineries demonstrate compliance through tradable credits called Renewable Identification Numbers (RINs). RINs are acquired either by blending renewable fuel into conventional transportation fuel or purchasing the credits from other entities. For corn-based ethanol, one gallon of ethanol yields one RIN.

Biomass-based diesel D4 RINs prices averaged $1.45/RIN in June while D6 ethanol RINs prices averaged $1.43/RIN after both spending most of 2023 averaging between $1.50-$1.70/RIN, according to S&P Global Commodity Insights' assessments. S&P Global forecasts D4 RINs prices to average $1.44/RIN and D6 RINs prices to average $1.32/RIN in the second half of 2023.

Having to purchase RINs to satisfy the 2020-2022 RVOs on a substantially shorter timeframe would impose significant financial burden, refineries argued in court, with one petitioner asserting that the altered schedule "would be an extreme financial shock to the system of any obligated party, much less [small refineries]," according to court documents.

Core mandate

Small refineries argued they had insufficient time to meet their compliance obligations and that the Clean Air Act afforded them a minimum of 13 months' compliance lead time and a 12-month compliance interval.

The DC Circuit found that the potential for financial burden gave the refineries standing to bring the lawsuit but that their arguments fell short (Wynnewood Refining v. EPA, 22-1015).

"Importantly, the [CAA] itself contains no compliance deadlines or intervals for obligated parties," the court said in an opinion penned by Chief Judge Cornelia Pillard. "Thus, rather than task EPA with overseeing a fixed compliance schedule, the Act gives EPA flexibility to craft and adjust a compliance regime in service of the Act's core mandate: to ensure the Act's annual renewable fuel volumes are met."

The court also pointed to precedent in which it characterized similar reporting deadline extensions and compression of compliance intervals as "vital to mitigating the harm to obligated parties caused by EPA's delay."

The DC Circuit rejected the refineries' claims that the extension rule violated the CAA and was arbitrary and capricious.

"The refineries read the CAA to require EPA, when it fails to timely publish a renewable fuel standard, to either remain persistently behind schedule from year to year, or to catch up by abandoning its statutory duty 'to ensure' the program's annual renewable fuel volumes are met for the affected year," the court said. "We do not read the Act to prioritize the timeframes the refineries see as implicit in the statute over EPA's express statutory obligation to implement the requisite use of renewable fuels."

Past experience

The DC Circuit sided with the EPA's past experience in finding that parties would have adequate notice and time to comply under the new timelines.

The court noted that refineries had more than two years' advance notice of the 2020 RVO which was ultimately revised downward, making it easier for parties to comply and justifying the shorter lead time.

And parties had 10 months lead time for the 2021 RVO, which aligned with actual renewable fuel use, guarding "against RIN shortages by ensuring that the quantity of RINs already generated during the relevant year will be adequate to satisfy the renewable fuel standards for that compliance year," the court said.

Lastly, 12 months' lead time was afforded for the 2022 RVO, with refineries offering "no reason why that one-month discrepancy renders EPA's 2022 deadline unreasonable," the court said.

Another blow

The ruling serves as another blow to small refineries as the EPA on July 14 stuck to its more stringent stance on small refinery exemptions (SREs), denying 26 pending petitions spanning the 2016-2023 RFS compliance years.

SREs were created under the RFS as a safety valve for refineries with a capacity of less than 75,000 b/d, allowing them to apply for waivers to the RFS if meeting the biofuel-blending requirements would create disproportionate financial hardship.

In line with a 10th US Circuit Court of Appeals ruling, the EPA determined that SREs may only be granted when a small refinery's hardship is caused by compliance with the RFS program. "After reviewing more than a decade of RFS market data and confidential information submitted by petitioning small refineries, EPA concluded that none of the 26 SRE petitions demonstrated disproportionate economic hardship caused by compliance with the RFS program," the agency said.

American Fuel & Petrochemical Manufacturers said in an email that the group lacked visibility into the individual petitions at issue but was concerned with the EPA's uniform rejection.

"Congress understood from the get-go that RFS compliance could impose a disproportionate financial burden on small refineries," AFPM spokesperson Ericka Perryman said. "Last year's [Government Accountability Office] report echoed this and made clear that EPA has erred in past blanket denials of small refinery petitions. If the agency has yet to implement any of the recommendations set forth in the GAO report, they should do so immediately."

That GAO report, issued Nov. 3, called on the EPA to reassess its conclusion that small refineries recover the cost of complying with the RFS in the price of the gasoline and diesel they sell. though The EPA and biofuel advocates were quick to assert the report was flawed.