D.C. Circuit Issues Mixed Ruling on Biofuels Targets

The D.C. Circuit delivered a mixed decision recently regarding an American Petroleum Institute (“API”) challenge to the 2012 EPA Rule (“2012 Rule”) outlining blending requirements for cellulosic biofuels.  Cellulosic biofuel is an advanced biofuel that comes from sources such as switchgrass and agricultural wastes.

Background

Under the Renewable Fuel Standard (“RFS”) program, EPA must promulgate regulations to ensure that transportation fuel includes an increasing percentage of renewable fuel, including “advanced biofuels.”  Each year, EPA then makes “applicable volume” determinations estimating biofuel production for that year.  The applicable volume for a particular biofuel is used to determine how much of that fuel a refiner must purchase each year to comply with the RFS.

In the 2012 Rule, EPA projected 10.45 million ethanol-equivalent gallons of cellulosic biofuel would be produced in 2012, thereby requiring refiners to blend this amount into traditional transportation fuels.  If refiners do not blend the required amount, they must instead purchase “cellulosic waiver credits,” which essentially amount to a fine, for the difference. 

EPA stated it based this prediction on several sources, but also took into account the “objective of promoting growth in the industry,” and that the standard it set “helps drive the production of volumes that will be made available.”  The agency also noted concern that using a lower projection could hurt the market for cellulosic biofuel. In reality, only 22,000 gallons of cellulosic biofuels were produced in 2012.  API argued refiners were essentially forced to purchase credits for “phantom gallons” of cellulosic biofuel.

Ruling

The court held EPA exceeded its statutory authority by basing the unrealistic projections upon the desire to spur investment in the industry.  The court found EPA “did not take neutral aim at accuracy.”  While noting that agencies in the past have been allowed to base a standard or mandate upon future technology, the court explained there was always a connection between the regulated entity and the proposed innovation.  Because the refiners are not the producers of cellulosic biofuels, they have no control over whether or not production reaches a level high enough to allow them to come into compliance.

Despite vacating the 2012 Rule, the court rejected API’s argument that EPA should have lowered the applicable volume of all advanced biofuels.  The court also found that EPA may rely on information from producers of cellulosic biofuels in forming their projections, calling producers an “almost inevitable source of information.”

Implications

While a headline on E² Wire, The Hill’s Energy and Environment Blog, called the decision “a blow to the biofuel industry,” biofuel groups are downplaying the impacts of the decision.  Issuing a joint statement, biofuel producers and industry groups noted the rejection of the argument that EPA must reduce the applicable volume of all advanced biofuels.  The groups also noted EPA is not prevented from setting targets in the future as long as the information available demonstrates the volumes are reasonably achievable.

There is no denying the potential impact upon investments in cellulosic biofuel production that may result from such uncertainty in EPA targets from this point forward.  EPA is faced with the task of basing projections off of an industry in its early stages of growth, with little information available.  The potential exists for a significant reduction in the blending requirements in the future, which could halt, or at least depress, investment in the field. 

On January 31, EPA released its 2013 RFS proposal. To calculate the percentage standard for cellulosic biofuel for 2013, EPA used an applicable volume of 14 million ethanol-equivalent gallons. The API said in a statement that the proposed rule ignores the recent decision.  However Renewable Fuels Association President Bob Dineen has suggested that this number may ultimately prove to be a conservative estimate as cellulosic biofuel is now finally beginning to be produced on a commercial scale.