NATSO ANALYSIS: Court Sides with Biofuels Interests in Case Examining RFS Small Refinery Exemptions

Appeals court ruling hands a major victory to biofuels stakeholders, casting doubt on the legal underpinnings of EPA’s rationale for increasing the number of small refinery exemptions and adding a new wrinkle of uncertainty to an already-volatile Renewable Fuel Standard program.

A federal appeals court ruling on Friday, January 24 handed a major victory to biofuels stakeholders, casting doubt on EPA’s legal justification for its recent increase of small refinery exemptions and adding a new wrinkle of uncertainty to an already-volatile Renewable Fuel Standard (RFS) program. 

The U.S. Court of Appeals for the 10th Circuit ruled that EPA has been granting “hardship” exemptions to a larger universe of refineries than Congress intended when it developed the RFS more than a decade ago.  The exemptions have resulted in lower prices for the Renewable Identification Number (RIN) trading credits used to demonstrate compliance under the RFS and have diminished demand for renewable fuels in the United States.

Friday’s ruling held that Congress only intended for small refineries to be granted their first hardship exemption until 2012.  Beginning in 2013, only refineries that had previously been granted an exemption could apply to have those exemptions “extended” for future years, the court found; refineries that had not received an exemption before 2011 are not eligible to receive exemptions in future years.

"Paired with the reset of the amended Clean Air Act, therefore, common definitions of "extension" mean that a small refinery which did not seek or receive an exemption in prior years is ineligible for an extension, because at that point there is nothing to prolong, enlarge, or add to.  Congress chose to provide an "Extension of exemption" for disproportionate economic hardship, based either on the results of the DOE [Department of Energy] study or on a meritorious petition.  Congress did not provide an unlimited "Exemption" to every small refinery identified in the DOE study or with a meritorious petition.  Congress presumably used the term "extension" for a reason, and we should be hesitant to strip that word of significant meaning."
The appeals court also agreed with biofuels stakeholders' arguments that EPA improperly granted exemptions based on hardship caused to refiners by factors other than RFS compliance. "Granting extensions of exemptions based at least in part on hardships not caused by RFS compliance was outside the scope of EPA's statutory authority," the court wrote.  
In addition, the court stated that EPA should have addressed whether refiners could pass-through RIN costs in the price of their product. 

The immedidate issue the ruling presents is how to deal with the fact that EPA in recent years has granted exemptions to dozens of refineries that, according to Friday’s ruling, were ineligible to receive them. 

The case formally governs only three refineries. (The 10th Circuit has jurisdiction over a limited geographic area these three refineries are in that region and had not consistently received exemptions in prior years.) Its implications, however, could be significant.  

The ruling will, at the very least, make it difficult for EPA going forward to grant hardship exemptions to any refinery that did not already receive one before 2013. This would be an abrupt change from what most observers had been expecting. (If EPA issues fewer exemptions than the market expects, it would tend to increase demand for RINs as obligated parties anticipate heightened volume obligations.)

Beyond that, biofuel stakeholders will likely insist that the ruling be applied not only prospectively, but also demand that EPA require many refineries that received exemptions in past years be required to purchase additional RINs above their present obligations.

While it’s reasonable to assume a smaller number of exemptions will be issued this year than in previous years, it is uncertain how EPA will implement the ruling.  The Agency has over the past several years exercised discretionary authority in a manner that tended to favor parties that oppose the RFS and prefer less expensive RIN credits; EPA may seek to implement Friday’s ruling in a similar manner. 

There is a separate case now under consideration by the D.C. Circuit of Appeals presenting similar legal questions.  How that case is decided will be an important factor in how the murky, fluid legal issues surrounding small refinery exemptions are ultimately resolved.

Friday’s ruling is the latest in a series of seemingly unanticipated policy developments surrounding EPA’s implementation of the RFS.  It will likely generate further litigation and regulatory policymaking throughout 2020.

NATSO and NATSO's Alternative Fuels Council will continue to play an active role in biofuels policymaking and keep its members apprised of further developments.

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