Well, as a matter of fact and law, there is. In “Why mess with it?,” I listed a future post on the illegality of the RFS obligated party definition/point of obligation. Until now, I avoided legal citations and discussion. No longer. I’ll keep law-speak to a minimum.

The definition of obligated party and, therefore, the RFS point of obligation are illegal because exempt gasoline blenders, i.e., all non-refining and significant Big Oil marketer/wholesalers, may sell RINs without ever exceeding a proportionate share of statutory renewable fuel volumes. This practice violates paragraph (5) of Section 211(o) of the Clean Air Act (45 USC §7545(o)(5)).

At 40 CFR §80.1406(a)(1), EPA defines “Obligated Party” as:

any refiner that produces gasoline or diesel fuel within the 48 contiguous states or Hawaii, or any importer that imports gasoline or diesel fuel into the 48 contiguous states or Hawaii during a compliance period. A party that simply blends renewable fuel into gasoline or diesel fuel, as defined in §80.1407(c) or (e), is not an obligated party.

A simple blender need not retire RINs for compliance and may sell them.

Selling all RINs from gasoline blending, however, is illegal. Only RINs from blending more than a proportionate share of statutory volumes may be sold. For example, in 2018, E10.47 ensures all 15 billion gallons of conventional renewable fuel allowed by the Clean Air Act will be blended into gasoline. Any marketer/wholesaler producing only E10 will not exceed its proportionate share of that volume and, therefore, may not sell RINs from gasoline blending. Blending must exceed E10.47 before RINs may be sold.

Paragraph (5) of §211(o) of the Clean Air Act, 45 USC §7545(o)(5), states:

(5) Credit program

(A) In general. The regulations promulgated under paragraph (2)(A) shall provide

(i) for the generation of an appropriate amount of credits by any person that refines, blends, or imports gasoline that contains a quantity of renewable fuel that is greater than the quantity required under paragraph (2);

Clearly, credits or RINs may not exist or, for that matter, be sold until “gasoline . . . contains a quantity of renewable fuel that is greater than the quantity required under paragraph (2).” The impact of this language is clear to a person familiar with RFS. For the lay person, some background is in order.

The RFS is a volumetric mandate. The statute does not require blending to a specific concentration such as E10 for gasoline or B5, i.e. 5% biodiesel, for diesel. Rather, specific biofuel volumes are prescribed. For 2018, the statutory volumes in billions of gallons are: total renewable fuel – 26.0; advanced biofuel – 11.0; cellulosic biofuel – 7.0; and biomass-based diesel (“BBD” or “biodiesel”) – no 2018 volume mandated. Cellulosic and BBD are subsets of advanced biofuel, and advanced biofuel is subsumed in renewable fuel. The 15 billion gallon conventional portion is simply the difference between 26 billion gallons of renewable fuel and 11 billion of advanced biofuel. Of the 26 billion gallons required for 2018, 11 billion must be advanced biofuel. The other 15 billion gallons may be conventional biofuel or corn ethanol.

EPA has the statutory power to modify these volumes and issues final numbers in an annual rule. For 2018, however, EPA’s implied corn ethanol mandate matches the statute.

In the statute, volumes are specified in paragraph (2), the only paragraph to which paragraph (5) refers. Paragraph (3) specifies the procedure for converting volumes into “applicable percentages” and directs EPA to publish each year the “renewable fuel obligation that ensures that the requirements of paragraph (2) are met.” The obligation “shall be expressed in terms of a volume percentage of transportation fuel.” The clear implication is paragraph (2) volumes will be achieved if nationwide blending meets or exceeds the applicable percentages and renewable fuel obligation in paragraph (3). The U.S. Circuit Court of Appeals for the District of Columbia Circuit described it this way, “The result is a percentage standard informing each obligated party how much of its fuel production must consist of renewable fuels.” Monroe Energy, LLC v. E.P.A., 750 F.3d 909, 912 (D.C. Cir. 2014).

The definition of obligated party exempts anyone “that simply blends.” That person, therefore, is not held to account for “how much of its fuel production must consist of renewable fuels.” Under paragraph (5), however, compliance is a concept distinct and apart from RIN generation and sales. Paragraph (5) never refers to paragraph (3) nor to the renewable fuel obligation therein. In fact, paragraph (5) never refers to “obligated party”. The paragraph (5) criterion for generating and selling RINs applies to “any person”, not just an obligated party, “that refines, blends, or imports gasoline that contains a quantity of renewable fuel that is greater than the quantity required under paragraph (2).” What matters under paragraph (5) is not whether a person has exceeded its paragraph (3) obligation but whether it has exceeded a proportionate share of paragraph (2) volumes.

Under the obligated party definition, exempt parties face no legal sanctions for falling short of the paragraph (3) “renewable fuel obligation” and “percentage standards.” Paragraph (5), however, does not award any RINs to anyone, obligated or not, until those threshold levels are exceeded. Such is necessary to “a quantity of renewable fuel that is greater than the quantity required under paragraph (2).” The obligated party definition and point of obligation allow exempt parties to generate and sell RINs without regard to the quantity required in paragraphs (2) and (5) and are, therefore, contrary to law.

A little contemplation convinces me ethanol was, after all, intended to be just like benzene and sulfur. Those outperforming the standard may sell credits; those underperforming must buy credits. No one underperforming or simply complying may sell credits as is the current state of affairs. Move the point of obligation so blenders surpassing the standard have RINs to sell and blenders falling short must buy them.

Best,

Bob