Why the 800-million-gallon RFS2 mandate really means 800 million gallons

By NBB | June 14, 2011

The million dollar question in biodiesel right now is how much fuel the industry will produce this year. In May, at a congressional hearing on biofuels, a top U.S. EPA official left little doubt what the answer is.

Responding to questions about delays in commercial production of other advanced biofuels, Margo Oge, director of EPA’s Office of Transportation and Air Quality, said the agency is standing firm behind its overall advanced biofuel carve-out in the RFS2 program because it believes biodiesel will not only meet its 800 million gallon mandate, but there is enough production capacity to fill in shortcomings elsewhere. “We believe the capacity is there to make up the difference,” she told lawmakers.

Director Oge’s comment is the latest in a series of statements from EPA officials that should put to rest any question about where biodiesel stands and whether its RFS2 mandate is real.

Why is this important? Oge and her office are the referees—her team manages the RFS2 program. In fact, they have been managing congressionally imposed fuel programs for nearly 20 years, and they know how to run them. They understand the petroleum sector, and they understand advanced biofuels like biodiesel. They analyze the reports and know which companies produce every gallon of biofuel. 
Team EPA has done the math and concluded that biodiesel can reach the EPA’s goals.

For biodiesel, that means producing not only 800 million gallons of biomass-based diesel under the RFS2 program, but also potentially an additional 100 million gallons to help meet general, undifferentiated advanced biofuels targets. In fact, biodiesel is the only fuel being used on a commercial scale in the U.S. today that meets EPA’s advanced biofuels criteria. Others such as renewable diesel and sugarcane ethanol are not likely to be used in significant volumes in 2011 and 2012.

Despite this, some have continued to question whether this production will really happen, whether EPA’s targets will really be met. The answer is yes. Here is why.

The RFS2 program can’t be avoided. EPA established a set of rules that provide flexibility under which petroleum companies can comply, but they must comply. If petroleum companies don’t comply, EPA is allowed to use an elaborate set of compliance rules that could result in multimillion dollar fines and jail time for noncompliance. 

While options for avoidance in any given year exist for individual companies, together with possible continued exemptions and waivers, they are tightly controlled and can be used only under clearly defined circumstances. 

Regarding waivers, EPA is required to periodically evaluate the impact of the RFS2 requirements on the price of diesel fuel. But the statute specifically states that EPA can reduce volume requirements only in cases of significant renewable feedstock disruptions or other market factors that create significant price increases. In such cases, EPA can reduce the mandate by a maximum of 15 percent. If after 60 days the cause of the price increase continues, the requirement may be reduced again by an appropriate amount not to exceed an additional 15 percent (800 MMgy x 15 percent = 120 MMgy).

Separately, interested parties can apply for general waivers, but EPA has made it clear that waivers will be granted only in strict circumstances. Only one partial waiver has been requested in the history of the program, by the state of Texas, and it was denied.

Regarding options for individual companies, there are two tools that give individual companies flexibility. First, if a company generated excess RINs that were not used in 2010, it can roll over no more than 20 percent of its 2011 volume requirement to 2011. In other words, if an obligated party acquired 500 excess RINs in 2010 and its 2011 RVO is 1,000 RINs, then only 200 RINs from 2010 could be used in 2011 (20 percent of 1,000 = 200). In tracking biodiesel production volumes from 2010, we are confident that very few, if any, excess RINs were generated in 2010.

Second, the regulations allow companies that are unable to generate or purchase sufficient RINs to meet the annual volume requirements to carry forward a renewable fuel deficit into the next year; we call this a deficit carryover. If any deficit is carried over, however, the obligated party must acquire enough RINs to meet the next year’s requirement and satisfy the deficit. An obligated party may not carry a deficit in two consecutive years. For example, if Company A is required to acquire 1,000 biodiesel RINs in 2011 but does not do so and 1,200 biodiesel RINs in 2012, then in 2012 the company is required to purchase 2,200 RINs in order to meet the 2012 compliance requirements. Further, Company A cannot roll any of the 2,200 RINs into 2013. 

Finally, the last piece of the puzzle addresses small refineries. Small refineries were exempted from the program until Jan. 1. In 2009, a Senate Appropriations Committee directed U.S. DOE to study and determine whether small refineries faced a disproportionate economic hardship in meeting renewable fuel standard (RFS) requirements beginning this year. The study has been completed and is under review by EPA. If small refineries continue to be exempted from the program, then there may be some very minor adjustments to the overall volume requirements.

In conclusion, there is no doubt this program is complicated, but compliance is a must, and the thresholds for waiving the program are extremely high. Already, we are mid-year, volumes have increased dramatically, the program has not been waived, and we are in the middle of high biodiesel blend season. As an industry, our goal is to work with our customers, the obligated parties, to ensure both producers and obligated parties meet the volume requirements of the program. Whether we produce 800 or 900 million gallons this year, let’s start planning for 1 billion gallons in 2012.

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