EPA finalizes E15 rule, steps back approach to RIN market reform

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The U.S. EPA released its final E15/RIN market reform rule May 31. The rule extends the 1-pound-per-square-inch Reid vapor pressure (RVP) waiver to E15. It also includes some reforms to the renewable identification number (RIN) compliance system, although those changes are more minor that those originally proposed by the agency.

For RIN markets, the EPA will now require public disclosure when RIN holdings exceed specified thresholds. The agency will also collect additional data to improve market transparency and enhance EPA oversight. Specifically, this will including the reporting of additional price and affiliate data to EPA.

The agency has finalized two RIN thresholds, which apply to holdings of separated D6 RINs only. If a non-obligated party’s end-of-day separated D6 RIN holdings exceed 3 percent of the total implied conventional biofuel requirement, it has triggered the primary threshold. If an obligated party’s end-of-day separated D6 RIN holdings exceed 3 percent of the total implied conventional biofuel volume requirement and exceed 130 percent of its individual implied conventional renewable volume obligation (RVO), it has triggered the secondary threshold. In the rule, the EPA said it is requiring that parties made calculations of daily RIN holdings and report new information in a quarterly report, including a yes/no certification statement about exceeding the threshold and a list of all RIN-holding corporate affiliates and all contractual affiliates. The agency said it will publish the names of any parties that report exceeding thresholds on its website.

The EPA also said it will require parties to follow certain conventions when reporting RIN prices to the agency and to report whether the RIN transaction was on the spot market or as a result of a term contract. The EPA said that requirement will enhance its oversight capabilities of RIN market behavior.

In additional, the agency confirmed its intention to take non-regulatory steps after promulgation of the rule to update business rules in EMTS to require that both parties in a RIN transaction enter the same RIN price and to employ a third-party market monitor to conduct analysis of the RIN market, including screening for potential anti-competitive behavior.

The EPA said it will not take final action on three of the RIN market reforms that were included in the proposed rule related to RIN retirement frequency, limitations on the parties that can purchase a D6 RIN, and the duration parties can hold D6 RINs. Rather, the agency will defer action on those components of the rule until its analyses of the RIN market and potential manipulation are complete.

EPA Assistant Administrator for Air and Radiation Bill Wehrum held a media call May 31 to discuss the final rule.

He said when the original 1 pound RVP waiver was implemented, E10 was the dominant fuel. “Things have changed, primarily because of the effect of the Renewable Fuel Standard, which requires us at EPA to mandate ever increasing amounts of renewable fuel to be blended into the nation’s gasoline supply,” he said. “Now, we are at the point where the market is saturated with E10. To be able to blend more ethanol into the gasoline supply, we need to go above E10, and that’s were E15 comes in.”

“Traditionally, we have interpreted the 1 pound RVP waiver to be applicable to E10 because that’s all that was sold when that provision was adopted,” Wehrum continued, noting that the agency now sees the opportunity to extend the program through the increased sales of E15.

“We and the industry think that over time this is going to result in a substantial increase in the amount of E15 sold and as a result that will allow us to continue to increase the amount of renewable fuel blended into the gasoline supply,” Wehrum said.

He also addressed the agency’s legal justification for extending the RVP waiver. “There is a fairly complex legal argument, but the key to it all is a particular provision in the Clean Air Act, Section 211(h)4 and that is the provision that speaks to the 1 pound RVP waiver,” Wehrum said, noting congress previously told the agency to make the E10 RVP waiver available. “Previously we interpreted that provision as having that waiver available only for E10. But the key to our legal interpretation, our legal basis for the action, is that we are changing our interpretation to 211(h)4 and we are now interpreting it to say the 1 pound waiver is available not just for E10, but for any blend of E10 or greater, which of course E15 is. So, that’s the lynchpin of the legal argument…and we think that’s an entirely reasonable interpretation of this part of the statute because the world has changed. Years ago, when this was enacted, E10 was the predominant fuel in the market and it made sense, you know, that this provision would speak to E10, but if you fast forward to today, and particularly taking into account that Congress on the other hand has told us that we should require ever increasing amounts of renewable fuel to be put into the gasoline supply and under current circumstances, that means we have to get past E10. And to get past E10, this RVP issue is entirely reasonable, and in fact necessary to interpret this provision to allow the 1 pound waiver to apply to higher levels beyond E10.”

For the RIN market provisions, Wehrum explained that the agency is taking a two-step approach. He noted that there have been concerns by certain people in the oil industry that RIN trading is unnecessary constrained and may be intentionally manipulated by some market players in an effort to increase the cost of the credits.

The RIN provisions in the final rule add additional measures to the EPA’s market trading program to create greater transparency into how that market works, Wehrum explained. “We believe that by implementing these measures we’ll have a much clearer view of how the market operates and once we obtain that better view into the market, we’ll be able to determine for sure whether there is manipulation or not—and if there is manipulation there are other measures we can implement to take care of that.”

“We’re dealing with the market trading side of this issue in a step-wise fashion,” he said. “Step one, today, is to give us better tools to monitor the market. And, if we need to, we’ll take step two later to actually take measures to eliminate the possibility of manipulation, if in fact we find that exists.”

“We’ve looked at the market very closely, and we take very seriously the claims of market manipulation, but so far we have not found clear evidence that there is any significant amount of market manipulation, so in our judgement, the best thing to do at this point is to give ourselves better tools for following what happens in the market and also to vet some ideas of how we could reduce the likelihood or prevent manipulation if we needed to do that based on the better look we get at the market,” Wehrum continued.

He said this two-step approach to RIN reform is prudent because some of the measures the agency would have to implement to reduce or eliminate manipulation would also reduce the flexibility and efficiency of the market from an economic standpoint. “We don’t want to implement measures that are not needed and measures that may reduce flexibility and efficiency,” he said.

Representatives of the biofuels industry have spoken out in support of the final rule.

The Renewable Fuels Association applauded the rule, but cautioned that the benefits of year-round E15 could be undermined by the agency’s indiscriminate approval of small refinery exemptions (SREs). “The ethanol industry thanks President Trump for personally championing this critical regulatory reform that will enhance competition, bolster the rural economy, and provide greater consumer access to cleaner, more affordable fuel options,” said Geoff Cooper, president and CEO of the RFA. “We have always agreed with the President’s assertion that the outdated summertime prohibition on E15 was ‘unnecessary’ and ‘ridiculous.’

“E15 already has a proven track record for saving drivers money at the pump and reducing emissions, and today’s action will ensure that more Americans are able to enjoy those benefits,” Cooper continued. “Year-round E15 will also provide a badly needed long-term demand boost for our industry and America’s farmers, who face a number of daunting challenges today.

“We are cognizant, however, that the promise of today’s E15 announcement could be undermined if EPA continues its unprecedented assault on the RFS with indiscriminate small refinery hardship waivers,” Cooper said. “Against the intent of Congress, EPA has been granting RFS exemptions to refiners without requiring them to demonstrate their claimed ‘hardship’ is somehow connected to the RFS. The demand destruction caused by EPA’s waivers must end. We urge the President to build upon the momentum of today’s announcement by reining in EPA’s abuse of the small refiner exemption program.”

The American Coalition for Ethanol also expressed gratitude for the E15 rule and the agency’s approach to RIN reform, but called on the EPA to stop damaging the ethanol industry through its approval of SREs. “EPA’s rule means U.S. retailers finally have the opportunity to offer E15 to their customers year round as the peak summer driving season kicks off this weekend,” said Brian Jennings, CEO of ACE. “We’re grateful EPA kept the President’s promise to get the rulemaking done on time and we will work to ensure retailers understand their hands are no longer tied by red tape preventing them from offering a lower priced, higher octane E15 fuel to their customers all year starting this summer. For the ethanol industry and farmers, this means greater market access—more ethanol demand over the long term as additional retailers begin offering E15.

“We’re also grateful EPA considered the comments ACE and many others made in opposition to sweeping and unnecessary reforms to the way RIN credits are handled under the Renewable Fuel Standard (RFS),” Jennings continued. “Had EPA gone forward with the so-called RIN reforms, it would have dulled the upside benefit of E15 year-round.

“Finally, speaking of dulling the upside benefit of E15 year-round, as we have repeatedly cautioned, EPA’s ongoing mismanagement of the RFS through blanket small refinery exemptions (SREs) needs to stop,” Jennings said. “The net effect of E15 year-round with 2.61 billion gallons worth of SREs that aren’t reallocated means we’re still in the hole when it comes to ethanol demand through the RFS. EPA is currently sitting on nearly 40 requests for refinery waivers from the 2018 compliance year. We discourage EPA from erasing any benefit of today’s rule by granting more waivers at a time when rural America can least afford it.”

Growth Energy is also celebrating the EPA’s action to allow year-round E15 sales. “We are grateful to President Trump for delivering on his promise to unleash the power of E15 all year-long,” said Emily Skor, CEO of Growth Energy. “The approval of year-round E15 is an incredible milestone for the biofuels industry, and the result of over a decade of hard work by Growth Energy, our members, our congressional champions, and folks all across rural America who made their voices heard.

“With year-round E15, retailers will have the regulatory certainty they need to offer American drivers a cleaner, more affordable fuel choice throughout the year,” Skor continued. “This action also means savings for American motorists at the pump and a sorely needed market for farmers who are facing a devastating economic downturn. We estimate this one change will generate over a billion new gallons of ethanol demand in the next five years. Over time, demand for E15 could boost the market for American grain by an additional two billion bushels.”

The Biotechnology Innovation Organization said year-round E15 will save Americans billions of dollars. “BIO applauds EPA for finalizing this pro-consumer directive ahead of the summer driving season and thanks the Trump administration for fulfilling the promise made to U.S. biofuels producers and farmers,” said Stephanie Batchelor, acting executive vice president of BIO’s industrial and environmental section. “The transportation sector is the largest contributor to greenhouse gases, and we must take the necessary actions to improve our air quality for future generations. By increasing the volume of advanced and cellulosic biofuels in the transportation fuel market, we will reduce harmful pollution and save Americans money at the pump."

BIO estimates year-round availability of  E15 could save U.S. drivers approximately $9.5 billion per year and that summer use of E15 could save between 7 million and 10.4 million metric tons of CO2 equivalent GHG emissions, which is equivalent to taking 1.4 to 2.2 million cars off the road over a 10-year period.

Additional information, including a full copy of the final rule, is available on the EPA’s website.