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Environmental Protection Agency

VIEWS: 27 PAGES: 116

                                                                                                                              May 1, 2007

                                                                                                                              Part II

                                                                                                                              Protection Agency
                                                                                                                              40 CFR Part 80
                                                                                                                              Regulation of Fuels and Fuel Additives:
                                                                                                                              Renewable Fuel Standard Program; Final
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                                        23900                        Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        ENVIRONMENTAL PROTECTION                                        will provide reductions in carbon                   e.g., confidential business information
                                        AGENCY                                                          dioxide emissions that have been                    (CBI) or other information whose
                                                                                                        implicated in climate change. Also,                 disclosure is restricted by statute.
                                        40 CFR Part 80                                                  there will be some reductions in air                Certain other material, such as
                                        [EPA–HQ–OAR–2005–0161; FRL–8299–9]                              toxics emissions such as benzene from               copyrighted material, is not placed on
                                                                                                        the transportation sector, while some               the Internet and will be publicly
                                        RIN 2060–AN76                                                   other emissions such as oxides of                   available only in hard copy form.
                                                                                                        nitrogen are expected to increase.                  Publicly available docket materials are
                                        Regulation of Fuels and Fuel
                                                                                                           This action finalizes regulations                available either electronically through
                                        Additives: Renewable Fuel Standard
                                                                                                        designed to ensure that refiners,          or in hard copy at
                                                                                                        blenders, and importers of gasoline will            the EPA Docket Center, EPA/DC, EPA
                                        AGENCY:  Environmental Protection                               use enough renewable fuel each year so              West, Room 3334, 1301 Constitution
                                        Agency (EPA).                                                   that the total volume requirements of               Ave., NW., Washington, DC. This
                                        ACTION: Final rule.                                             the Energy Policy Act are met. Our rule             Docket Facility is open from 8:30 a.m.
                                                                                                        describes the standard that will apply to           to 4:30 p.m., Monday through Friday,
                                        SUMMARY: Under the Clean Air Act, as                            these parties and the renewable fuels               excluding legal holidays. The telephone
                                        amended by Section 1501 of the Energy                           that qualify for compliance. The                    number for the Public Reading Room is
                                        Policy Act of 2005, the Environmental                           regulations also establish a trading                (202) 566–1744 and the telephone
                                        Protection Agency is required to                                program that will be an integral aspect             number for the EPA Docket Center is
                                        promulgate regulations implementing a                           of the overall program, allowing                    (202) 566–1742.
                                        renewable fuel program. The statute                             renewable fuels to be used where they               FOR FURTHER INFORMATION CONTACT: Julia
                                        specifies the total volume of renewable                         are most economical while providing a
                                        fuel that the regulations must ensure is                                                                            MacAllister, U.S. Environmental
                                                                                                        flexible means for obligated parties to             Protection Agency, National Vehicle
                                        used in gasoline sold in the U.S. each                          comply with the standard.
                                        year, with the total volume increasing                                                                              and Fuel Emissions Laboratory, 2000
                                        over time. In this context, this program                        DATES: This final rule is effective on              Traverwood, Ann Arbor MI, 48105;
                                        is expected to reduce dependence on                             September 1, 2007. The incorporation                telephone number (734) 214–4131; fax
                                        foreign sources of petroleum, increase                          by reference of certain publications                number (734) 214–4816; e-mail address
                                        domestic sources of energy, and help                            listed in the rule is approved by the     
                                        transition to alternatives to petroleum in                      Director of the Federal Register as of              SUPPLEMENTARY INFORMATION:
                                        the transportation sector. The increased                        September 1, 2007.
                                                                                                                                                            I. General Information
                                        use of renewable fuels such as ethanol                          ADDRESSES: EPA has established a
                                        and biodiesel is also expected to have                          docket for this action under Docket ID                Entities potentially affected by this
                                        the added effect of providing an                                No. EPA–HQ–OAR–2005–0161. All                       action include those involved with the
                                        expanded market for agricultural                                documents in the docket are listed in               production, distribution and sale of
                                        products such as corn and soybeans.                             the Web site.                   gasoline motor fuel or renewable fuels
                                        Based on our analysis, we believe that                          Although listed in the index, some                  such as ethanol and biodiesel. Regulated
                                        the expanded use of renewable fuels                             information is not publicly available,              categories and entities could include:

                                                                                NAICS 1      SIC 2
                                                Category                                                                               Examples of potentially regulated entities
                                                                                 codes       codes

                                        Industry     ........................    324110          2911    Petroleum Refineries.
                                        Industry     ........................    325193          2869    Ethyl alcohol manufacturing.
                                        Industry     ........................    325199          2869    Other basic organic chemical manufacturing.
                                        Industry     ........................    424690          5169    Chemical and allied products merchant wholesalers.
                                        Industry     ........................    424710          5171    Petroleum bulk stations and terminals.
                                        Industry     ........................    424720          5172    Petroleum and petroleum products merchant wholesalers.
                                        Industry     ........................    454319          5989    Other fuel dealers.
                                           1 North   American Industry Classification System (NAICS).
                                           2 Standard  Industrial Classification (SIC) system code.

                                           This table is not intended to be                             persons listed in the preceding FOR                    5. Post 2012 RFS Standards
                                        exhaustive, but provides a guide for                            FURTHER INFORMATION CONTACT    section.                B. Program Structure
                                        readers regarding entities likely to be                                                                                1. What Is the RFS Program Standard?
                                                                                                        Table of Contents                                      2. Who Must Meet the Standard?
                                        regulated by this action. This table lists
                                                                                                        I. Introduction                                        3. What Qualifies as a Renewable Fuel?
                                        the types of entities that EPA is now                                                                                  4. Equivalence Values of Different
                                        aware could potentially be affected by                             A. The Role of Renewable Fuels in the
                                                                                                              Transportation Sector                               Renewables Fuels
                                        this action. Other types of entities not                           B. Requirements in the Energy Policy Act            5. How Will Compliance Be Determined?
                                        listed in the table could also be affected.                        C. Development of the RFS Program                   6. How Will the Trading Program Work?
                                        To decide whether your organization                             II. Overview of the Program                            7. How Will the Program Be Enforced?
                                        might be affected by this action, you                              A. Impacts of Increased Reliance on                 C. Voluntary Green Labeling Program
                                        should carefully examine today’s notice                               Renewable Fuels                               III. Complying With the Renewable Fuel
                                                                                                           1. Renewable Fuel Volume Scenarios                     Standard
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                                        and the existing regulations in 40 CFR
                                                                                                              Analyzed                                         A. What Is the Standard That Must Be Met?
                                        part 80. If you have any questions                                                                                     1. How Is the Percentage Standard
                                                                                                           2. Emissions
                                        regarding the applicability of this action                         3. Economic Impacts                                    Calculated?
                                        to a particular entity, consult the                                4. Greenhouse Gases and Fossil Fuel                 2. What Are the Applicable Standards?
                                                                                                              Consumption                                      3. Compliance in 2007

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                            23901

                                           4. Renewable Volume Obligations                        E. How Are RINs Distributed and Traded?               2. Technology Available To Produce
                                           B. What Counts as a Renewable Fuel in the              1. Distribution of RINs With Volumes of                  Cellulosic Ethanol
                                              RFS Program?                                           Renewable Fuel                                     a. Sugar Platform
                                           1. What Is a Renewable Fuel That Can Be                a. Responsibilities of Renewable Fuel                 i. Pretreatment
                                              Used for Compliance?                                   Producers and Importers                            ii. Dilute acid hydrolysis
                                           a. Ethanol Made From a Cellulosic                      b. Responsibilities of Parties That Buy,              iii. Concentrated acid hydrolysis
                                              Feedstock                                              Sell, or Handle Renewable Fuels                    iv. Enzymatic hydrolysis
                                           b. Ethanol Made From any Feedstock in                  c. Batch Splits and Batch Mergers                     b. Syngas Platform
                                              Facilities Using Waste Material To                  2. Separation of RINs From Volumes of                 c. Plasma Technology
                                              Displace 90 Percent of Normal Fossil                   Renewable Fuel                                     d. Feedstock Optimization
                                              Fuel Use                                            3. Distribution of Separated RINs                     3. Renewable Fuel Distribution System
                                           c. Ethanol That Is Made From the Non-                  4. Alternative Approaches to RIN                         Capability
                                              Cellulosic Portions of Animal, Other                   Distribution                                     VII. Impacts on Cost of Renewable Fuels and
                                              Waste, and Municipal Waste                        IV. Registration, Recordkeeping, and                       Gasoline
                                           d. Foreign Producers of Cellulosic and                    Reporting Requirements                             A. Renewable Fuel Production and
                                              Waste-Derived Ethanol                               A. Introduction                                          Blending Costs
                                           2. What Is Biodiesel?                                  B. Registration                                       1. Ethanol Production Costs
                                           a. Biodiesel (Mono-Alkyl Esters)                       1. Who Must Register Under the RFS                    a. Corn Ethanol
                                           b. Non-Ester Renewable Diesel                             Program?                                           b. Cellulosic Ethanol
                                           3. Does Renewable Fuel Include Motor                   2. How Do I Register?                                 2. Biodiesel Production Costs
                                              Fuel That Is Made From Coprocessing a               3. How Do I Know I am Properly Registered             3. Diesel Fuel Costs
                                              Renewable Feedstock With Fossil Fuels?                 With EPA?                                          B. Distribution Costs
                                           a. Definition of ‘‘Renewable Crudes’’ and              4. How are Small Volume Domestic                      1. Ethanol Distribution Costs
                                              ‘‘Renewable Crude-Based Fuels’’                        Producers of Renewable Fuels Treated               a. Capital Costs To Upgrade Distribution
                                           b. How Are Renewable Crude-Based Fuel                     for Registration Purposes?                            System for Increased Ethanol Volume
                                              Volumes Measured?                                   C. Reporting                                          b. Ethanol Freight Costs
                                           4. What Are ‘‘Equivalence Values’’ for                 1. Who Must Report Under the RFS                      2. Biodiesel Distribution Costs
                                              Renewable Fuel?                                        Program?                                           C. Estimated Costs to Gasoline
                                           a. Authority Under the Act To Establish                2. What Reports Are Required Under the                1. Description of Cases Modeled
                                              Equivalence Values                                     RFS Program?                                       a. Base Case (2004)
                                           b. Energy Content and Renewable Content                3. What Are the Specific Reporting Items              b. Reference Case (2012)
                                              as the Basis for Equivalence Values                    for the Various Types of Parties Required
                                                                                                                                                        c. Control Cases (2012)
                                           c. Lifecycle Analyses as the Basis for                    To Report?
                                                                                                                                                        2. Overview of Cost Analysis Provided by
                                              Equivalence Values                                  4. What are the Reporting Deadlines?
                                                                                                                                                           the Contractor Refinery Model
                                           C. What Gasoline Is Used To Calculate the              5. How May I Submit Reports to EPA?
                                                                                                                                                        3. Overall Impact on Fuel Cost
                                              Renewable Fuel Obligation and Who Is                6. What Does EPA Do With the Reports it
                                                                                                                                                        a. Cost Without Ethanol Subsidies
                                              Required To Meet the Obligation?                       Receives?
                                           1. What Gasoline Is Used To Calculate the              7. May I Claim Information in Reports as              b. Gasoline Costs Including Ethanol
                                              Volume of Renewable Fuel Required To                   CBI and How Will EPA Protect it?                      Consumption Tax Subsidies
                                              Meet a Party’s Obligation?                          8. How are Spilled Volumes With                     VIII. What Are the Impacts of Increased
                                           2. Who Is Required To Meet the Renewable                  Associated Lost RINs To Be Handled in                 Ethanol Use on Emissions and Air
                                              Fuels Obligation?                                      Reports?                                              Quality?
                                           3. What Exemptions Are Available Under                 D. Recordkeeping                                      A. Effect of Renewable Fuel Use on
                                              the RFS Program?                                    1. What Types of Records Must Be Kept?                   Emissions
                                           a. Small Refinery and Small Refiner                    2. What Recordkeeping Requirements are                1. Emissions From Gasoline Fueled Motor
                                              Exemption                                              Specific to Producers of Cellulosic or                Vehicles and Equipment
                                           b. General Hardship Exemption                             Waste-Derived Ethanol?                             a. Gasoline Fuel Quality
                                           c. Temporary Hardship Exemption Based                  E. Attest Engagements                                 b. Emissions From Motor Vehicles
                                              on Unforeseen Circumstances                         1. What Are the Attest Engagement                     c. Nonroad Equipment
                                           4. What Are the Opt-in and State Waiver                   Requirements Under the RFS Program?                2. Diesel Fuel Quality: Biodiesel
                                              Provisions Under the RFS Program?                   2. Who Is Subject to the Attest Engagement            3. Renewable Fuel Production and
                                           a. Opt-in Provisions for Noncontiguous                    Requirements for the RFS Program?                     Distribution
                                              States and Territories                              3. How Are the Attest Engagement                      B. Impact on Emission Inventories
                                           b. State Waiver Provisions                                Requirements in this Final Rule Different          1. Primary Analysis
                                           D. How Do Obligated Parties Comply With                   From Those Proposed?                               2. Sensitivity Analysis
                                              the Standard?                                     V. What Acts Are Prohibited and Who Is                  3. Local and Regional VOC and NOX
                                           1. Why Use Renewable Identification                       Liable for Violations?                                Emission Impacts in July
                                              Numbers?                                          VI. Current and Projected Renewable Fuel                C. Impact on Air Quality
                                           a. RINs Serve the Purpose of a Credit                     Production and Use                                 1. Impact of Increased Ethanol Use on
                                              Trading Program                                     A. Overview of U.S. Ethanol Industry and                 Ozone
                                           b. Alternative Approach To Tracking                       Future Production/Consumption                      2. Particulate Matter
                                              Batches                                             1. Current Ethanol Production                       IX. Impacts on Fossil Fuel Consumption and
                                           2. Generating RINs and Assigning Them to               2. Expected Growth in Ethanol Production                 Related Implications
                                              Batches                                             3. Current Ethanol and MTBE                           A. Impacts on Lifecycle GHG Emissions
                                           a. Form of Renewable Identification                       Consumption                                           and Fossil Energy Use
                                              Numbers                                             4. Expected Growth in Ethanol                         1. Time Frame and Volumes Considered
                                           b. Generating RINs                                        Consumption                                        2. GREET Model
                                           c. Cases in Which RINS Are Not Generated               B. Overview of Biodiesel Industry and                 a. Renewable Fuel Pathways Considered
                                           3. Calculating and Reporting Compliance                   Future Production/Consumption                      b. Modifications to GREET
                                           a. Using RINs To Meet the Standard                     1. Characterization of U.S. Biodiesel                 c. Sensitivity Analysis
                                           b. Valid Life of RINs                                     Production/Consumption                             3. Displacement Indexes (DI)
                                           c. Cap on RIN Use To Address Rollover                  2. Expected Growth in U.S. Biodiesel                  4. Impacts of Increased Renewable Fuel
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                                           d. Deficit Carryovers                                     Production/Consumption                                Use
                                           4. Provisions for Exporters of Renewable               C. Feasibility of the RFS Program Volume              a. Greenhouse Gases and Carbon Dioxide
                                              Fuel                                                   Obligations                                        b. Fossil Fuel and Petroleum
                                           5. How Will the Agency Verify                          1. Production Capacity of Ethanol and                 B. Implications of Reduced Imports of
                                              Compliance?                                            Biodiesel                                             Petroleum Products

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                                        23902                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                          C. Energy Security Implications of                    program. We have evaluated the impacts                A. The Role of Renewable Fuels in the
                                             Increases in Renewable Fuels                       of a range of renewable fuel volumes as               Transportation Sector
                                          1. Effect of Oil Use on Long-Run Oil Price,           high as 10 billion gallons in 2012. This
                                             U.S. Import Costs, and Economic Output                                                                      Renewable fuels have been an
                                          2. Short-Run Disruption Premium From
                                                                                                represents a significant increase over the            important part of our nation’s
                                             Expected Costs of Sudden Supply                    volume of renewable fuel used in 2004                 transportation fuel supply for many
                                             Disruptions                                        which was approximately 3.5 billion                   years. Following the CAA amendments
                                          3. Costs of Existing U.S. Energy Security             gallons, and this increase is estimated to            of 1990, the use of renewable fuels,
                                             Policies                                           produce a number of significant effects.              particularly ethanol, increased
                                        X. Agricultural Sector Economic Impacts                 For instance, we estimate that the
                                        XI. Public Participation                                                                                      dramatically. Several key clean fuel
                                                                                                transition to renewable fuels will reduce             programs required by the CAA
                                        XII. Administrative Requirements
                                                                                                petroleum consumption by 2.0 to 3.9                   established new market opportunities
                                          A. Executive Order 12866: Regulatory
                                             Planning and Review                                billion gallons or approximately 0.8 to               for ethanol. A very successful mobile
                                          B. Paperwork Reduction Act                            1.6 percent of the petroleum that would               source control strategy, the reformulated
                                          C. Regulatory Flexibility Act                         otherwise be used by the transportation               gasoline (RFG) program, was
                                          1. Overview                                           sector.                                               implemented in 1995. This program set
                                          2. Background                                            The increased use of renewable fuels
                                          4. Summary of Potentially Affected Small
                                                                                                                                                      stringent new controls on the emissions
                                                                                                is also expected to produce reductions                performance of gasoline, which were
                                             Entities                                           in some regulated pollutants. Carbon
                                          5. Impact of the Regulations on Small                                                                       designed to significantly reduce
                                             Entities                                           monoxide emissions from gasoline                      summertime ozone precursors and year
                                          6. Small Refiner Outreach                             powered vehicles and equipment will                   round air toxics emissions. The RFG
                                          7. Reporting, Recordkeeping, and                      be reduced by 0.9 to 2.5 percent and                  program also required that RFG meet an
                                             Compliance Requirements                            emissions of benzene (a mobile source                 oxygen content standard. Several areas
                                          8. Related Federal Rules                              air toxic) will be reduced by 1.8 to 4.0              of the country began blending ethanol
                                          9. Conclusions                                        percent.1 At the same time, other
                                          D. Unfunded Mandates Reform Act                                                                             into gasoline to help meet this new
                                                                                                emissions may increase. Nationwide, we                standard, such as Chicago and St. Louis.
                                          E. Executive Order 13132: Federalism
                                                                                                estimate between a 41,000 and 83,000                  Another successful clean fuel strategy
                                          F. Executive Order 13175: Consultation
                                             and Coordination With Indian Tribal                ton increase in VOC + NOX emissions.                  required certain areas exceeding the
                                             Governments                                        However, the effects will vary                        national ambient air quality standard for
                                          G. Executive Order 13045: Protection of               significantly by region with some major               carbon monoxide to also meet an
                                             Children From Environmental Health                 metropolitan areas experiencing small                 oxygen content standard during the
                                             and Safety Risks                                   emission benefits, while other areas may              winter time to reduce harmful carbon
                                          H. Executive Order 13211: Actions                     see an increase in VOC emissions from
                                             Concerning Regulations That                                                                              monoxide emissions. Many of these
                                                                                                4 to 5 percent and an increase in NOX                 areas, such as Denver and Phoenix, also
                                             Significantly Affect Energy Supply,
                                                                                                emissions from 6 to 7 percent from                    blended ethanol during the winter
                                             Distribution, or Use
                                          I. National Technology Transfer                       gasoline powered vehicles and                         months to help meet this new standard.
                                             Advancement Act                                    equipment.                                               Today, the role and importance of
                                          J. Executive Order 12898: Federal Actions                The use of renewable fuel will                     renewable fuels in the transportation
                                             to Address Environmental Justice in                likewise reduce greenhouse gas                        sector continue to expand. In the past
                                             Minority Populations and Low-Income                emissions such as carbon dioxide by 8.0               several years as crude oil prices have
                                             Populations.                                       to 13.1 million metric tons, about 0.4 to
                                          K. Congressional Review Act
                                                                                                                                                      soared above the lower levels of the
                                                                                                0.6 percent of the anticipated                        1990’s, the relative economics of
                                          L. Clean Air Act Section 307(d)
                                                                                                greenhouse gas emissions from the                     renewable fuel use have improved
                                        XIII. Statutory A
                                                                                                transportation sector in the United                   dramatically. In addition, since the vast
                                        I. Introduction                                         States in 2012. Greenhouse gas                        majority of crude oil produced in or
                                           Through today’s final rule, we are                   emissions contribute to climate change,               imported into the U.S. is consumed as
                                        putting in place a compliance and                       and thus, increased renewable use is an               gasoline or diesel fuel in the U.S.,
                                        enforcement program that implements                     important step in addressing this issue.              concerns about our dependence on
                                        the renewable fuel program, also known                     Finally, we estimate that increases in             foreign sources of crude oil have
                                        as the Renewable Fuel Standard (RFS)                    the use of renewable fuels will increase              renewed interest in renewable
                                        program. This program accomplishes                      net farm income and the nation’s energy               transportation fuels. The emergence of
                                        the statutory goal of increasing the                    security. Net U.S. farm income is                     more in-depth understanding of the
                                        volume of renewable fuels that are                      estimated to increase by between $2.6                 impacts of human activities on climate
                                        required to be used in vehicles in the                  and $5.4 billion through transfers from               change has also focused attention on the
                                        U.S. as required in Section 211(o) of the               users of gasoline and consumers of                    various ways that renewable fuels can
                                        Clean Air Act (CAA) enacted as part of                  agricultural products used to produce                 reduce the consumption of fossil fuels.
                                        the Energy Policy Act of 2005 (the                      ethanol. However, as feedstocks used in               The passage of the Energy Policy Act of
                                        Energy Act or the Act). This final rule                 the production of renewable fuels                     2005 demonstrated a strong
                                        resulted from a collaborative effort with               expand beyond the corn and soybeans                   commitment on the part of U.S.
                                        stakeholders, including refiners,                       that are most common today, the                       policymakers to consider additional
                                        renewable fuel producers, and                           renewable fuels industry is expected to               means of supporting renewable fuels as
                                        distributors, who together helped to                    continue to diversify and grow in its                 a supplement to petroleum-based fuels
                                        design a program that is simple, flexible,              ability to benefit the nation’s                       in the transportation sector. The RFS
                                        and enforceable.                                        environment and economy.                              program is one such means.
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                                           As a result of the favorable economics                                                                        The RFS program was debated by the
                                                                                                  1 These reductions are relative to the Mobile
                                        of renewable fuels in comparison to                                                                           U.S. Congress over several years before
                                                                                                Source Air Toxics (MSAT) standards in effect.
                                        conventional gasoline and diesel,                       Additional benzene emission reductions will occur
                                                                                                                                                      finally being enacted through passage of
                                        renewable fuel volumes are expected to                  as a result of the recently finalized MSAT2           the Energy Policy Act of 2005. The RFS
                                        exceed the requirements of the RFS                      standards (72 FR 8428, February 26, 2007).            program is first and foremost designed

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                                                  23903

                                        to increase the use of renewable fuels in               may create new opportunities for                      production. However, market demand
                                        motor vehicle fuel consumed in the U.S.                 blending of E85, a blend of 85 percent                for renewable fuels is expected to
                                        In this context, it is expected to                      ethanol and 15 percent gasoline, in the               exceed the statutory minimums. We
                                        simultaneously reduce dependence on                     long run. The increased availability of               believe that the program we are
                                        foreign sources of petroleum, increase                  E85 will mean that more flexible fueled               finalizing today will operate effectively
                                        domestic sources of energy, and                         vehicles (FFV) can use this fuel. Of the              regardless of the level of renewable fuel
                                        diversify our energy portfolio to help                  approximately 5 million FFVs currently                use or market conditions in the energy
                                        transition to alternatives to petroleum in              in use in the U.S, most are currently                 sector.
                                        the transportation sector. Based on our                 fueled with conventional gasoline rather
                                                                                                                                                      B. Requirements in the Energy Policy
                                        analysis, we also believe that the                      than E85, in part due to the limited
                                        expanded use of renewable fuels will                    availability of E85.
                                        provide reductions in carbon dioxide                       Given the ever-increasing demand for                 Section 1501 of the Energy Policy Act
                                        emissions that contribute to climate                    petroleum-based products in the                       amended the Clean Air Act and
                                        change and in air toxics emissions such                 transportation sector, the RFS program                provides the statutory basis for the RFS
                                        as benzene from the transportation                      also moves the nation in the direction                program in Section 211(o). It requires
                                        sector, while other emissions such as                   of replacing part of this demand with                 EPA to establish a program to ensure
                                        hydrocarbons and oxides of nitrogen are                 renewable energy. The RFS program                     that the pool of gasoline sold in the
                                        projected to increase. The increased use                provides the certainty that at least a                contiguous 48 states contains specific
                                        of renewable fuels such as ethanol and                  minimum amount of renewable fuel will                 volumes of renewable fuel for each
                                        biodiesel is also expected to have the                  be used in the U.S., which in turn                    calendar year starting with 2006. The
                                        added effect of providing an expanded                   provides some certainty for investment                required overall volumes for 2006
                                        market for agricultural products such as                in production capacity of renewable                   through 2012 are shown in Table I.B–1
                                        corn and soybeans. The expected                         fuels. However, it should be understood               below.
                                        increase in cellulosic ethanol                          that the RFS program is not the only
                                        production will also expand the market                  factor currently impacting demand for                   TABLE I.B–1.—APPLICABLE VOLUMES
                                        opportunities to a wider array of                       ethanol and other renewable fuels. As                   OF RENEWABLE FUEL UNDER THE
                                        feedstocks.                                             Congress was developing the RFS                         RFS PROGRAM
                                           The requirement for use of a specified               program in the Energy Act, several large
                                        volume of renewable fuels complements                   states were adopting and implementing                                                                           Billion
                                        other provisions of the Energy Act. In                  bans on the use of MTBE in gasoline. As                              Calendar year                              gallons
                                        particular, the required volume of                      a result, refiners supplying reformulated                                                                        2006
                                        renewable fuel use will offset any                      gasoline (RFG) in those states switched
                                                                                                                                                      2006     ..............................................        4.0
                                        possible loss in demand for renewable                   to ethanol to satisfy the oxygen content              2007     ..............................................        4.7
                                        fuels occasioned by the Act’s repeal of                 mandate for their RFG, causing a large,               2008     ..............................................        5.4
                                        the oxygen content mandate in the RFG                   sudden increase in demand for ethanol.                2009     ..............................................        6.1
                                        program while allowing greater                          Even more importantly, with the                       2010     ..............................................        6.8
                                        flexibility in how renewable fuels are                  removal of the oxygen content mandate                 2011     ..............................................        7.4
                                        blended into the nation’s fuel supply.                  for RFG, refiners elected to remove                   2012     ..............................................        7.5
                                        The RFS program also creates a specific                 essentially all MTBE from the gasoline
                                        annual level for minimum renewable                      supply in the U.S. during the spring of                  In order to ensure the use of the total
                                        fuel use which increases over time,                     2006. In order to accomplish this                     renewable fuel volume specified for
                                        ensuring overall growth in the demand                   transition quickly, while still                       each year, the Agency must set a
                                        and opportunity for renewable fuels.                    maintaining gasoline volume, octane,                  standard for each year representing the
                                           Because renewable fuels such as                      and gasoline air toxics performance                   amount of renewable fuel that each
                                        ethanol and biodiesel are not new to the                standards, refiners elected to blend                  refiner, blender, or importer must use,
                                        U.S. transportation sector, the                         ethanol into virtually all reformulated               expressed as a percentage of gasoline
                                        expansion of their use is expected to                   gasoline nationwide. This caused a                    sold or introduced into commerce. This
                                        follow distribution and blending                        second dramatic increase in demand for                yearly percentage standard is to be set
                                        practices already in place. For instance,               ethanol, which in the near term was met               at a level that will ensure that the total
                                        the market already has the necessary                    by temporarily shifting large volumes of              renewable fuel volumes shown in Table
                                        production and distribution                             ethanol out of conventional gasoline                  I.B–1 will be used based on gasoline
                                        mechanisms in place in many areas and                   and into the RFG areas.                               volume projections provided by the
                                        the ability to expand these mechanisms                     Perhaps the largest impact on                      Energy Information Administration
                                        into new markets. Recent spikes in                      renewable fuel demand, however, has                   (EIA). The standard for each year must
                                        ethanol use resulting first from the state              been the increase in the cost of crude                be published in the Federal Register by
                                        MTBE bans, and now the virtual                          oil. In the last few years, both crude oil            November 30 of the previous year.
                                        elimination of MTBE from the                            prices and crude oil price forecasts have             Starting with 2013, EPA is required to
                                        marketplace, have tested the limits of                  increased dramatically. This has                      establish the applicable national
                                        the ethanol distribution system.                        resulted in a large economic incentive                volume, based on the criteria contained
                                        However, future growth is expected to                   for the use of ethanol and biodiesel. The             in the statute, which must require at
                                        move in a more orderly fashion since                    Energy Information Administration                     least the same overall percentage of
                                        the use of renewable fuels will not be                  (EIA) and others are currently projecting             renewable fuel use as was required in
                                        geographically constrained and, given                   renewable fuel demand to exceed the                   2012.
                                        EIA volume projections, investment                      minimum volumes required under the                       The Act defines renewable fuels
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                                        decisions can follow market forces                      RFS program by a substantial margin. In               primarily on the basis of the feedstock.
                                        rather than regulatory mandates. In                     this context, the effect of the RFS                   In general, renewable fuel must be a
                                        addition, the increased production                      program is to provide a minimum level                 motor vehicle fuel that is produced from
                                        volumes of ethanol and the expanded                     of demand to support ongoing                          plant or animal products or wastes, as
                                        penetration of ethanol in new markets                   investment in renewable fuel                          opposed to fossil fuel sources. The Act

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                                        23904                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        specifically identifies several types of                renewable fuel, and the general                       II. Overview of the Program
                                        motor vehicle fuels as renewable fuels,                 framework for a credit trading program.                 Today’s action establishes the final
                                        including cellulosic biomass ethanol,                   Various aspects of the program require                requirements for the RFS program, as
                                        waste-derived ethanol, biogas, biodiesel,               additional development by the Agency                  well as our assessment of the
                                        and blending components derived from                    beyond the specifications in the Act.                 environmental and economic impacts of
                                        renewable fuel.                                         The Agency must develop regulations to                the nation’s transition to greater use of
                                           The standard set annually by EPA is                  ensure the successful implementation of               renewable fuels. This section provides
                                        to be a single percentage applicable to                 the RFS program, based on the                         an overview of our program and
                                        refiners, blenders, and importers, as                   framework spelled out in the statute.                 renewable fuel impacts assessment.
                                        appropriate. The percentage standard is                    Under the RFS program the trading                  Sections III through V provide the
                                        used by obligated parties to determine a                provisions comprise an integral element               details of the structure of the program,
                                        volume of renewable fuel that they are                  of compliance. Many obligated parties                 while Sections VI through X describe
                                        responsible for introducing into the                    do not have access to renewable fuels or
                                        domestic gasoline pool for the given                                                                          our assessment of the impacts on
                                                                                                the ability to blend them, and so must                emissions of regulated pollutants and
                                        year. The percentage standard must be                   use credits to comply. The RFS trading
                                        adjusted such that it does not apply to                                                                       greenhouse gases, air quality, fossil fuel
                                                                                                program is also unique in that the                    use, energy security, economic impacts
                                        multiple parties for the same volume of                 parties liable for meeting the standard
                                        gasoline. The standard must also take                                                                         in the agricultural sector, and cost from
                                                                                                (refiners, importers, and blenders of                 the expanded use of renewable fuels.
                                        into account the use of renewable fuel                  gasoline) are not generally the parties
                                        by small refineries that are exempt from                who make the renewable fuels or blend                 A. Impacts of Increased Reliance on
                                        the program until 2011.                                 them into gasoline. This creates the                  Renewable Fuels
                                           Under the Act, the required volumes                  need for trading mechanisms that
                                        in Table I.B–1 apply to the contiguous                                                                           In a typical major rulemaking, EPA
                                                                                                ensure that the means to demonstrate                  would conduct a full assessment of the
                                        48 states. However, Alaska and Hawaii                   compliance will be readily available for
                                        can opt into the program, in which case                                                                       economic and environmental impacts of
                                                                                                use by obligated parties.                             the specific rule that it is promulgating.
                                        the pool of gasoline used to calculate
                                                                                                   The first step we took in developing               However, as discussed in Section I.A.,
                                        the standard, and the number of
                                                                                                the proposed program was to seek input                the replacement of MTBE with ethanol
                                        regulated parties, would change. In
                                        addition, other states can request a                    and recommendations from the affected                 and the extremely favorable economics
                                        waiver of the RFS program under                         stakeholders. There were initially a                  for renewable fuels brought on by the
                                        certain conditions, which would affect                  wide range of thoughts and views on                   rise in crude oil prices are causing
                                        the national quantity of renewable fuel                 how to design the program. However,                   renewable fuel use to far exceed the RFS
                                        required under the program.                             there was broad consensus that the                    requirements. Given these
                                           The Act requires the Agency to                       program should satisfy a number of                    circumstances, it is important to assess
                                        promulgate a credit trading program for                 guiding principles, including, for                    the impacts of this larger increase in
                                        the RFS program whereby an obligated                    example, that the compliance and                      renewable use and the related changes
                                        party may generate credits for over-                    trading program should provide                        occurring to gasoline. For this reason we
                                        complying with their annual obligation.                 certainty to the marketplace and                      have carried out an assessment of the
                                        The obligated party can then use these                  minimize cost to the consumers; that the              economic and environmental impacts of
                                        credits to meet their requirements in the               program should preserve existing                      the broader changes in fuel quality
                                        following year or trade them for use by                 business practices for the production,                resulting from our nation’s transition to
                                        another obligated party. Thus the credit                distribution, and use of both                         greater utilization of renewable fuels, as
                                        trading program allows obligated parties                conventional and renewable fuels; that                opposed to an assessment that is limited
                                        to comply in the most cost-effective                    the program should be designed to                     to the RFS program itself.
                                        manner by permitting them to generate,                  accommodate all qualifying renewable                     To carry out our analyses, we elected
                                        transfer, and use credits. The trading                  fuels; that all renewable volumes                     to use 2004 as the baseline from which
                                        program also permits renewable fuels                    produced are made available to                        to compare the impacts of expanded
                                        that are not blended into gasoline, such                obligated parties for compliance; and                 renewable use. We chose 2004 as a
                                        as biodiesel, to participate in the RFS                 that the Agency should have the ability               baseline primarily due to the fact that
                                        program.                                                to easily verify compliance to ensure                 all the necessary refinery production
                                           The Agency must determine who can                    that the volume obligations are in fact               data, renewable fuel production data,
                                        generate credits, under what conditions                 met. These guiding principles and the                 and fuel quality data were already in
                                        credits may be traded, how credits may                  comments we received on our Notice of                 hand at the time we needed to begin the
                                        be transferred from one party to another,               Proposed Rulemaking (NPRM) helped to                  analysis. We did not use 2005 as a
                                        and the appropriate value of credits for                move us toward the program in today’s                 baseline year because 2005 may not be
                                        different types of renewable fuel. If a                 final rule.                                           an appropriate year for comparison due
                                        party is not able to generate or purchase                  We published a Notice of Proposed                  to the extraordinary impacts of
                                        sufficient credits to meet their annual                 Rulemaking on September 22, 2006 (71                  hurricanes Katrina and Rita on gasoline
                                        obligation, they are allowed to carry                   FR 55552) which described our                         production and use. To assess the
                                        over the deficit to the next annual                     proposed approach to compliance and                   impacts of anticipated increases in
                                        compliance period, but must achieve                     the trading program, as well as                       renewable fuels, we elected to look at
                                        full compliance in that following year.                 preliminary analyses of the                           what they would be in 2012, the year
                                                                                                environmental and economic impacts of                 the statutorily-mandated renewable fuel
                                        C. Development of the RFS Program                       increased use of renewable fuels. The                 volumes will be fully phased in. By
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                                          Section 1501 of the Energy Act                        program finalized today largely mirrors               conducting the analysis in this manner,
                                        prescribed the RFS program, including                   the proposed program, with some                       the impacts include not just the impact
                                        the required total volumes, the timing of               revisions reflecting continued input                  of expanded renewable fuel use by
                                        the obligation, the parties who are                     from stakeholders during the formal                   itself, but also the corresponding
                                        obligated to comply, the definition of                  comment period.                                       decrease in the use of MTBE, and the

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                                        potential for oxygenates to be removed                                     assessing the impacts of expanded use                                   constant. Therefore, we created a 2012
                                        from RFG due to the absence of the RFG                                     of renewable fuels, we evaluated two                                    reference case from the 2004 base case
                                        oxygenate mandate. Since these three                                       comparative scenarios, one representing                                 for use in the emissions and air quality
                                        changes are all inextricably linked and                                    the statutorily required minimum, and                                   analysis that maintained current fuel
                                        are occurring simultaneously in the                                        another reflecting the higher levels                                    quality parameters while incorporating
                                        marketplace, evaluating the impacts in                                     projected by EIA. Although the actual                                   forecasted increases in vehicle miles
                                        this manner is both necessary and                                          renewable fuel volumes produced in                                      traveled and changes in fleet
                                        appropriate.                                                               2012 may differ from both the required                                  demographics. The 2012 fuel reference
                                           We evaluated the impacts of                                             and projected volumes, we believe that                                  case was developed by growing out the
                                        expanded renewable fuel use and the                                        these two volume scenarios together                                     2004 renewable fuel baseline according
                                        corresponding changes to the fuel                                          represent a reasonable range for analysis                               to EIA’s forecasted energy growth rates
                                        supply on fuel costs, consumption of                                       purposes.3                                                              between 2004 and 2012.
                                        fossil fuels, and some of the economic                                        The Act also stipulates that at least                                   For the analyses, we created two 2012
                                        impacts on the agricultural sector and                                     250 million gallons out of the total                                    scenarios representing expanded
                                        energy security. We also evaluated the                                     volume required in 2013 and beyond                                      renewable fuel production. The ‘‘RFS
                                        impacts on emissions, including                                            must meet the definition specified for                                  Case’’ represents volume levels
                                        greenhouse gas emissions that                                              cellulosic biomass ethanol. As described                                designed to exactly meet the
                                        contribute to climate change, and the                                      in Section VI, there are a number of                                    requirements of the RFS program, and
                                        corresponding impacts on nationwide                                        companies already making plans to                                       includes the effects of higher credit
                                        and regional air quality. Our analyses                                     produce ethanol from cellulosic                                         values for cellulosic ethanol and
                                        are summarized in this section.                                            feedstocks and/or waste-derived energy                                  biodiesel. Since higher credit values
                                                                                                                   sources that could potentially meet the                                 mean that one gallon of renewable fuel
                                        1. Renewable Fuel Volume Scenarios
                                                                                                                   definition of cellulosic biomass ethanol.                               counts as more than one gallon for
                                        Analyzed                                                                   Accordingly, we anticipate a ramp-up in                                 compliance purposes, less than 7.5
                                           As shown in Table I.B–1, the Act                                        production of cellulosic biomass                                        billion gallons of renewable fuel is
                                        stipulates that the nationwide volumes                                     ethanol production in the coming years,                                 needed to meet the 7.5 billion gallon
                                        of renewable fuel required under the                                       and for analysis purposes we have                                       statutory requirement, but credits
                                        RFS program must be at least 4.0 billion                                   assumed that 250 million gallons of                                     equivalent to 7.5 billion gallons of
                                        gallons in 2006 and increase to 7.5                                        cellulosic biomass ethanol will be used                                 renewable fuel would still be available
                                        billion gallons in 2012. However, we                                       in 2012.                                                                for compliance purposes. The ‘‘EIA
                                        expect that the volume of renewable                                           As discussed in Section VI, we chose                                 Case’’ represents volume levels based on
                                        fuel will actually exceed the required                                     2004 to represent current baseline                                      EIA projections. A summary of the
                                        volumes by a significant margin. Based                                     conditions. However, a direct                                           assumed renewable fuel volumes for the
                                        on economic modeling in 2006, EIA                                          comparison of the fuel quality impacts                                  scenarios we evaluated is shown in
                                        projected renewable fuel demand in                                         on emissions and air quality that are                                   Table II.A.1–1. Details of the
                                        2012 of 9.6 billion gallons for ethanol,                                   expected to occur once the RFS program                                  calculations used to determine these
                                        and approximately 300 million gallons                                      is fully phased in required that changes                                volumes are given in Chapter 2 of the
                                        for biodiesel using crude oil prices                                       in overall fuel volume, fleet                                           Regulatory Impact Analysis (RIA) in the
                                        forecast at $48 per barrel.2 Therefore, in                                 characterization, and other factors be                                  docket for this rulemaking.

                                                                                 TABLE II.A.1–1.—RENEWABLE FUEL VOLUME SCENARIOS (BILLION GALLONS)
                                                                                                                                                                                       base case     Reference      RFS case        EIA case

                                        Corn-ethanol ............................................................................................................................          3.548           3.947          6.421           9.388
                                        Cellulosic ethanol .....................................................................................................................           0               0              0.25            0.25
                                        Biodiesel ..................................................................................................................................       0.025           0.030          0.303           0.303

                                              Total volume .....................................................................................................................           3.573           3.977          6.974           9.941

                                        2. Emissions                                                               emissions in 2012 will increase about                                   more. We focused on July emissions
                                                                                                                   0.9% for the RFS Case and 1.6% for the                                  since these are most relevant to ozone
                                          We evaluated the impacts of increased                                    EIA Case. These increases are equivalent                                formation and modeled 2015 because
                                        use of ethanol and biodiesel on                                            to an additional 18,000 to 43,000 tons of                               our ozone model is based upon a 2015
                                        emissions and air quality in the U.S.                                      VOC per year, and an additional 23,000                                  emissions inventory (though we would
                                        relative to the reference case. We                                         to 40,000 tons of NOX per year.                                         expect similar results in 2012). Finally,
                                        estimated that nationwide VOC                                                We also estimated the change in                                       we developed separate estimates for
                                        emissions in 2012 from gasoline                                            emissions in those areas which are                                      RFG areas, low RVP areas (i.e., RVP
                                        vehicles and equipment will increase by                                    projected to experience a significant                                   standards less than 9.0 RVP), and
                                        about 0.3% in the RFS Case and about                                       change in ethanol use; i.e., where the                                  conventional gasoline areas with a
                                        0.7% in the EIA Case. For NOX, we                                          market share of ethanol blends was                                      summer 9.0 RVP standard. For areas
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                                        estimated that nationwide annual                                           projected to change by 50 percent or                                    with a significant change in ethanol use,
                                          2 $48/barrel from Annual Energy Outlook 2006,                              3 Subsequent to the analysis for this final rule,                     use, which increase the projection to 11.2 billion
                                        Energy Information Administration, Department of                           EIA has released its 2007 AEO forecasts for ethanol                     gallons by 2012.

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                                        23906                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        compared to the reference case, VOC                     levels for both the RFS Case and the EIA              through 2012. For corn ethanol, we
                                        emissions in RFG areas increased by up                  Case. The ozone RSM approximates the                  estimate the per gallon cost of ethanol
                                        to 2.3%, while NOX emissions increased                  effect of VOC and NOX emissions in a                  to range from $1.26 per gallon in 2012
                                        by up to 1.6%. In low RVP areas, VOC                    37-state eastern area of the U.S. Using               (2004 dollars) in the RFS Case to $1.32
                                        emissions increased by up to 4.6%,                      this model, we projected that the                     per gallon in the EIA Case. These costs
                                        while NOX emissions increased by up to                  changes in VOC and NOX emissions                      take into account the cost of the
                                        6.2%. In 9.0 RVP areas, VOC emissions                   could produce a very small increase in                feedstock (corn), plant equipment and
                                        increased by up to 4.6%, while NOX                      ambient ozone levels. On average,                     operation and the value of any co-
                                        emissions increased by up to 7.3%.                      population-weighted ozone design value                products (distiller’s dried grain and
                                           Unlike VOC and NOX, emissions of                     concentrations increased by about 0.05                solubles, for example). For biodiesel, we
                                        CO and benzene from gasoline vehicles                   ppb, which represents 0.06 percent of                 estimate the per gallon cost to be
                                        and equipment were estimated to                         the standard. Even for areas expected to              between $1.89 and $2.06 per gallon if
                                        decrease in 2012 when the use of                        experience a significant increase in                  produced using soy bean oil, and less if
                                        renewable fuels increased. Reductions                   ethanol use, population-weighted ozone                using yellow grease ($1.11 to $1.56 per
                                        in emissions of CO varied from 0.9%                     design value concentrations increased                 gallon) or other relatively low cost or
                                        percent to as high as 2.5% percent for                  by only 0.15 to 0.18 ppb, about 0.2                   no-cost feedstocks. The price paid for
                                        the nation as a whole, depending on the                 percent of the standard. These ozone                  ethanol, however, is reduced by the
                                        renewable fuel volume scenario.                         impacts do not consider the reductions                $0.51 per gallon federal tax subsidy as
                                        Similarly, benzene emissions from                       in CO emissions mentioned above, or                   well as any state subsidies that might
                                        gasoline vehicles and equipment were                    the change in the types of compounds                  apply. Similarly the price paid for
                                        estimated to be reduced from 1.8% to                    comprising VOC emissions.                             biodiesel is reduced due to the $1.00 per
                                        4.0% percent.                                           Directionally, both of these factors may              gallon federal tax subsidy biodiesel
                                           We do not have sufficient data to                    mitigate these ozone increases.                       produced from soy bean oil and $0.50
                                        predict the effect of ethanol use on                       We investigated several other issues               per gallon tax subsidy for biodiesel
                                        levels of either directly emitted                       related to emissions and air quality that             produced from yellow grease. We also
                                        particulate matter (PM) or secondarily                  could affect our estimates of the impacts             note that these costs represent the
                                        formed PM. The increased NOX                            of increased use of renewable fuels.                  production cost of the fuel and not the
                                        emissions are expected to lead to                       These are discussed in Section VIII and               market price. In recent years, the prices
                                        increases in secondary nitrate PM, but at               in greater detail in the RIA. For                     of ethanol and biodiesel have tended to
                                        the same time reduced aromatics                         instance, our current models assume                   track the prices of gasoline and diesel
                                        resulting from ethanol blending are                     that recent model year vehicles are                   fuel, in some cases even exceeding those
                                        likely to lead to a decrease in secondary               insensitive to many fuel changes.                     prices.
                                        organic PM, as discussed in Section                     However, a limited amount of new test                    These renewable fuels are then
                                        VIII.C. In addition, biodiesel use is                   data suggest that newer vehicles may be               blended in gasoline and diesel fuel.
                                        expected to result in some reduction in                 just as sensitive as older model year                 While biodiesel is typically just blended
                                        direct PM emissions, though small in                    vehicles. Our sensitivity analysis                    with typical petroleum diesel,
                                        magnitude due to the relatively small                   suggests that if this is the case, VOC                additional efforts are sometimes
                                        volumes.                                                emissions could decrease by as much as                necessary and/or economically
                                           The emission impact estimates                        0.3%, instead of increasing by up to                  advantageous at the refiner level when
                                        described above are based on the best                   0.7%. NOX emissions could increase by                 adding ethanol to gasoline. For example,
                                        available data and models. However, it                  up to 4.2%, up from a 1.6% increase.                  ethanol’s high octane reduces the need
                                        must be highlighted that most of the fuel               We also evaluated the emissions from                  for other octane enhancements by the
                                        effect estimates are based on very                      the production of both ethanol and                    refiner, whereas offsetting the volatility
                                        limited or old data which may no longer                 biodiesel fuel and determined that they               increase caused by ethanol may require
                                        be reliable in estimating the emission                  will also increase with increased use of              removal of other highly volatile
                                        impacts on vehicles in the 2012 fleet                   these fuels. Nationwide, emissions                    components. Section VII examines these
                                        with advanced emission controls.4 As                    related to the production and                         fuel cost impacts and concludes that the
                                        such, these emission estimates should                   distribution of ethanol and biodiesel                 net cost to society in 2012 in
                                        be viewed as preliminary. EPA hopes to                  fuel are projected to be of the same                  comparison to the reference case will
                                        conduct significant new testing in order                order of magnitude as the emission                    range from an estimate of 0.5 cent to 1.0
                                        to better estimate the impact of fuel                   impacts related to the use of these fuels             cent per gallon of gasoline due to the
                                        changes on emissions from both                          in vehicles.                                          increased use of renewable fuels and
                                        highway vehicles and nonroad                               Finally, a lack of emission data and               their displacement of MTBE. The
                                        equipment, including those fuel changes                 atmospheric modeling tools prevented                  resulting total nationwide costs in 2012
                                        brought about by the use of renewable                   us from making specific projections of                are $823 million per year for the RFS
                                        fuels. We hope to be able to incorporate                the impact of renewable fuels on                      case and $1,739 million per year for the
                                        the data from such additional testing                   ambient PM levels. As mentioned,                      EIA case. This total excludes the effects
                                        into the analyses for other studies                     however, ethanol use may affect                       of the 51 cent/gal federal excise tax
                                        required by the Energy Act, and into a                  ambient PM levels due to the increase                 credit as well as state tax subsidies.
                                        subsequent rule to set the RFS program                  in NOX emissions and the reduction in                    Our estimates of fuel impacts do not
                                        standard for 2013 and later.                            the aromatic content of gasoline, which               consider other societal benefits. For
                                           We used the Ozone Response Surface                   should reduce aromatic VOC emissions.                 example, the displacement of
                                        Model (RSM) to estimate the impacts of                  All of these issues will be the subject of            petroleum-based fuel (largely imported)
                                        the increased use of ethanol on ozone                   further study and analysis in the future.             by renewable fuel (largely produced in
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                                                                                                                                                      the United States), should reduce our
                                          4 Advanced emission controls include close-           3. Economic Impacts                                   use of imported oil and fuel. We
                                        coupled, high-density catalysts and their associated
                                        electronic control systems for light-duty vehicles,
                                                                                                   In Section VII of this preamble, we                estimate that 95 percent of the lifecycle
                                        and NOX adsorbers and PM traps for heavy-duty           estimate the cost of producing the extra              petroleum reductions resulting from the
                                        engines.                                                volumes of renewable fuel anticipated                 use of renewable fuel will be met

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                                        through reductions in net petroleum                        Due to the greater demand for corn as              indeed on the use of all fossil fuels,
                                        imports. In Section IX of this preamble                 a feedstock for ethanol production, corn              accounts not only for the direct use and
                                        we estimate the value of the decrease in                prices are estimated to increase in 2012              combustion of the finished fuel in a
                                        imported petroleum at about $2.6                        by 18 cents per bushel for the RFS Case               vehicle or engine, but also includes the
                                        billion in 2012 for the RFS Case and                    and 39 cents per bushel of corn for the               petroleum use associated with
                                        $5.1 billion for the EIA Case, in                       EIA Case from $2.32 (in 2004 dollars) in              production and transportation of that
                                        comparison to our 2012 reference case.                  the Reference Case. Although soybean                  fuel. For instance, fossil fuels are used
                                        Total petroleum import expenditures in                  prices are expected to rise slightly, the             in producing and transporting
                                        2012 are projected to be about $698                     increased cost is likely due to higher                renewable feedstocks such as plants or
                                        billion.                                                input costs, such as land prices. We                  animal byproducts, in converting the
                                           Furthermore, the above estimate on                   estimate a price increase of 18 cents                 renewable feedstocks into renewable
                                        reduced petroleum import expenditures                   (RFS Case) to 21 cents (EIA Case) per                 fuel, and in transporting and blending
                                        only partly assess the economic                         bushel of soybeans from a Reference                   the renewable fuels for consumption as
                                        impacts. One of the effects of increased                Case price of $5.26 per bushel. These                 motor vehicle fuel. Likewise, fossil fuels
                                        use of renewable fuel is that it                        higher commodity prices are predicted                 are used in the production and
                                        diversifies the energy sources used in                  to also result in higher U.S. farm                    transportation of petroleum and its
                                        making transportation fuel. To the                      income. Our analysis predicts that farm               finished products. In order to estimate
                                        extent that diverse sources of fuel                     income will increase by $2.6 billion                  the true impacts of increases in
                                        energy reduce the dependence on any                     annually by 2012 for the RFS Case and                 renewable fuel use on fossil fuel use, we
                                        one source, the risks, both financial as                $5.4 billion for the EIA Case, roughly a              must take these steps into account. Such
                                        well as strategic, of a potential                       5 to 10 percent increase.                             analyses are termed lifecycle analyses.
                                        disruption in supply reflected in the                      Due to higher corn prices, U.S.                       There is also no consensus on the
                                        price volatility of a particular energy                 exports of corn are estimated to decrease             most appropriate approach for
                                        source are reduced. As indicated in the                 by $573 million in the RFS Case and by                conducting such lifecycle analyses. We
                                        proposal, EPA has worked with                           $1.29 billion in the EIA Case in 2012.                have chosen to base our lifecycle
                                        researchers at Oakridge National                        With higher commodity prices, we                      analysis on Argonne National
                                        Laboratory to update a study they                       would expect some upward pressure on                  Laboratory’s GREET model for the
                                        previously published and which has                      food costs as the higher cost of corn and             reasons described in Section IX.
                                        been used or cited in several                           soybeans is passed along to consumers.                However, there are other lifecycle
                                        government actions impacting oil                        We estimate a relatively modest increase              models in use. The choice of model
                                        consumption. A draft report is being                    in annual household food costs                        inputs and assumptions all have a
                                        made available in the docket at this time               associated with the higher price                      bearing on the results of lifecycle
                                        for further consideration. This analysis                commanded by corn and soybeans. For                   analyses, and many of these
                                        only looks at the impact of reduced                     the RFS Case, annual per capita                       assumptions remain the subject of
                                        petroleum imports on energy security.                   wholesale food cost are estimated to                  debate among researchers.
                                        Other energy security issues could arise                increase by approximately $7, while the                  With these caveats, we compared the
                                        with the wider use of biofuels. For                     higher renewable fuel volumes                         lifecycle impacts of renewable fuels to
                                        example, ethanol’s production and costs                 anticipated by the EIA Case will result               the petroleum-based gasoline and diesel
                                        are determined by the availability of                   in a $12 annual increase in the per                   fuels that they replace. This analysis
                                        corn as a feedstock. Corn production, in                capita wholesale food cost. This equates              allowed us to estimate not only the
                                        turn, is weather-dependent. Also, the                   to roughly a $2.1 to $3.6 billion increase            overall impacts of renewable fuel use on
                                        use of biofuels may increase the use of                 in nationwide food costs in 2012.                     petroleum use, but also on emissions of
                                        natural gas. A full integrated analysis of                                                                    greenhouse gases such as carbon
                                                                                                4. Greenhouse Gases and Fossil Fuel                   dioxide from all fossil fuels. In
                                        the energy security implications of the
                                                                                                Consumption                                           comparison to the reference case, we
                                        wider use of biofuels has yet to be
                                        undertaken.                                                There has been considerable interest               estimate that the increased use of
                                           While increased use of renewable fuel                in the impacts of fuel programs on                    renewable fuels in the RFS and EIA
                                        will reduce expenditures on imported                    greenhouse gases implicated in climate                cases will reduce transportation sector
                                        oil, it will also increase expenditures on              change and on fossil fuel consumption                 petroleum consumption by about 0.8
                                        renewable fuels and in-turn, on the                     due largely to concerns about                         and 1.6 percent, respectively, in the
                                        sources of those renewable fuels. The                   dependence on foreign sources of                      transportation sector in 2012. This is
                                        RFS program attempts to spur the                        petroleum. Therefore, in this                         equivalent to 2.0–3.9 billion gallons of
                                        increased use of renewable                              rulemaking we have undertaken an                      petroleum in 2012. We also estimated
                                        transportation fuels made principally                   analysis of the greenhouse gas and fossil             that greenhouse gases from the
                                        from agricultural crops produced in the                 fuel consumption impacts of a transition              transportation sector will be reduced by
                                        U.S. As a result, it is important to                    to greater renewable fuel use. This is the            about 0.4 and 0.6 percent for the RFS
                                        analyze the consequences of the                         first analysis of its kind in a high profile          and EIA cases, respectively, equivalent
                                        transition to greater renewable fuel use                rule, and as such it may guide future                 to about 8–13 million metric tons. These
                                        in the U.S. agricultural sector. To                     work in this area.                                    reductions are projected to continue to
                                        perform this analysis, EPA selected the                    As a result of the transition to greater           increase beyond 2012 since crude oil
                                        Forest and Agricultural Sector                          renewable fuel use, some petroleum-                   prices have been projected by EIA to
                                        Optimization Model (FASOM)                              based gasoline and diesel will be                     continue to be high relative to the prices
                                        developed by Professor Bruce McCarl of                  directly replaced by renewable fuels.                 of the 1990’s, and as a result there is
                                        Texas A&M University and others over                    Therefore, consumption of petroleum-                  expected to be an economic advantage
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                                        the past thirty years. FASOM is a                       based fuels will be lower than it would               to using renewable fuels beyond 2012.
                                        dynamic, nonlinear programming model                    be if no renewable fuels were used in                 These greenhouse gas emission
                                        of the agriculture and forestry sectors of              transportation vehicles. However, a true              reductions are also highly dependent on
                                        the U.S. (For this analysis, we focused                 measure of the impact of greater use of               the expectation that the majority of the
                                        on the agriculture portion of the model.)               renewable fuels on petroleum use, and                 future ethanol use will be produced

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                                        23908                 Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        from corn. If advances in the technology                system would all be elements of a post-               corresponding renewable fuel standards
                                        for converting cellulosic feedstocks into               2013 program. Depending on the                        expressed as a percent of gasoline
                                        ethanol allow cellulosic ethanol use to                 structure of any final legislation                    production or importation. The
                                        exceed the levels assumed in our                        approved by Congress and signed into                  renewable volume obligation that will
                                        analysis, then even greater greenhouse                  law, such elements could also be                      apply to an individual obligated party
                                        gas reductions may result.5                             incorporated into an expanded                         will then be determined based on this
                                                                                                renewable and alternative fuels                       percentage and the total gasoline
                                        5. Post 2012 RFS Standards                                                                                    production or import volume in a
                                           The Energy Policy Act of 2005, in                                                                          calendar year, January 1 through
                                        addition to setting the standards to be                 B. Program Structure                                  December 31. EPA will publish the
                                        adopted through 2012, requires EPA, in                     The RFS program being finalized                    percentage standard in the Federal
                                        coordination with the Departments of                    today requires refiners, importers, and               Register each November for the
                                        Agriculture and Energy, to determine                    blenders (other than oxygenate                        following year based on the most recent
                                        the applicable volume for the renewable                 blenders) to show that a required                     EIA gasoline demand projections.
                                        fuel standard for the year 2013 and                     volume of renewable fuel is used in                   However, for compliance in 2007 we are
                                        subsequent calendar years. This                         gasoline. The required volume is                      publishing the percentage standard in
                                        determination is to be based on a review                determined by multiplying their annual                today’s action. The standard for 2007 is
                                        of the program’s implementation in                      gasoline production by a percentage                   4.02 percent. Section III.A describes the
                                        2006 through 2012 as well as review of                  standard specified by EPA. Compliance                 calculation of the standard.
                                        the impact of renewable fuels on the                    is demonstrated through the acquisition
                                                                                                                                                      2. Who Must Meet the Standard?
                                        environment, air quality, energy                        of unique Renewable Identification
                                        security, job creation, rural economic                  Numbers (RINs) assigned by the                           Under our program, any party that
                                        development and the expected annual                     producer or importer to every batch of                produces or imports gasoline for
                                        rate of renewable fuel production,                      renewable fuel produced or imported.                  consumption in the U.S., including
                                        including production of cellulosic                      The RIN shows that a certain volume of                refiners, importers, and blenders (other
                                        ethanol.                                                renewable fuel was produced or                        than oxygenate blenders), will be
                                           In today’s final rulemaking, we do not               imported. Each year, the refiners,                    subject to a renewable volume
                                        suggest any specific renewable fuel                     blenders and importers obligated to                   obligation that is based on the
                                        volumes for 2013 and beyond that may                    meet the renewable volume requirement                 renewable fuel standard. These
                                        be appropriate under the statutory                      (referred to as ‘‘obligated parties’’) must           obligated parties will determine the
                                        criteria. However, we would note that                   acquire sufficient RINs to demonstrate                level of their obligation by multiplying
                                        the President, in his State of the Union                compliance with their volume                          the percentage standard by their annual
                                        address this January, set specific goals                obligation. RINs can be traded, thereby               volume of gasoline production or
                                        reducing the amount of gasoline usage                   functioning as the credits envisioned in              importation. The result will be the
                                        in the United States by 20 percent in the               the Act. A system of recordkeeping and                renewable fuel volume which each
                                        next 10 years. This would be                            electronic reporting for all parties that             party must ensure is blended into
                                        accomplished by reforming and                           have RINs ensures the integrity of the                gasoline consumed in the U.S., with
                                        modernizing fuel economy standards for                  RIN pool. This RIN-based system will                  credit for certain other renewable fuels
                                        cars and setting mandatory fuels                        both meet the requirements of the Act                 that are not blended into gasoline.
                                        standard equivalent to requiring use of                 and provide several other important                      For 2007, we are requiring that the
                                        35 billion gallons of renewable and                     advantages:                                           renewable fuel volume obligation be
                                                                                                   • Renewable fuel production volumes                determined by multiplying the
                                        alternative 6 fuels in 2017. Therefore,
                                                                                                can be easily verified.                               percentage standard by the volume of
                                        given the necessity to address the post-
                                                                                                   • RIN trading can occur in real time               gasoline produced or imported
                                        2013 period under the Energy Act and
                                                                                                as soon as the renewable fuel is                      prospectively from September 1, 2007
                                        the prospect of continued attention by
                                                                                                produced rather than waiting to the end               until December 31, 2007. While the
                                        the Administration and Congress to this
                                                                                                of the year when an obligated party                   standard will not apply to all of 2007
                                        issue, EPA will continue to devote
                                                                                                would determine if it had exceeded the                gasoline production, we are
                                        attention to the issue of renewable and
                                                                                                standard.                                             nevertheless confident that the total
                                        alternative fuel volumes in the post-
                                                                                                   • Renewable fuel can continue to be                volume of renewable fuel used in all of
                                        2013 period.
                                                                                                produced, distributed, and blended in                 2007 will still exceed the volume
                                           From a program structure perspective,
                                                                                                those markets where it is most                        specified in the Act due to expectations
                                        we believe that what we are putting in
                                                                                                economical to do so.                                  that the demand for renewable fuel will
                                        place today will remain useful as part of
                                                                                                   • Instances of double-counting of                  exceed the RFS requirements.
                                        a 2013 and later program. For example,                                                                           In determining their annual gasoline
                                        EPA considers that the identification of                renewable fuel claimed for compliance
                                                                                                purposes can be identified based on                   production volume, obligated parties
                                        renewable fuel via a Renewable                                                                                must include all of the finished gasoline
                                        Identification Number (RIN), the                        electronically reported data.
                                                                                                   Our RIN-based trading program is an                which they produced or imported for
                                        determination of liable parties, the                                                                          use in the contiguous 48 states, and
                                        averaging, banking and trading system                   essential component of the RFS
                                                                                                program, ensuring that every obligated                must also include reformulated
                                        and the recordkeeping and reporting                                                                           blendstock for oxygenate blending
                                                                                                party can comply with the standard
                                          5 Cellulosic ethanol is estimated to provide a        while providing the flexibility for each              (RBOB), and conventional blendstock
                                        comparable petroleum displacement as corn               obligated party to use renewable fuel in              for oxygenate blending (CBOB). For
                                        derived ethanol on a per gallon basis, though the       the most economical ways possible.                    refiners and importers this includes
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                                        impacts on total energy and greenhouse gas                                                                    unfinished gasoline produced or
                                        emissions differ.                                       1. What Is the RFS Program Standard?                  imported that will become gasoline
                                          6 While the RFS program is specific to renewable

                                        fuels, the president’s goal of 35 billion gallons by
                                                                                                   EPA is required to convert the                     upon addition of an oxygenate
                                        2017 would include not only renewable fuels, but        aggregate national volumes of renewable               downstream of the refiner. Other
                                        also other types of alternatives fuels.                 fuel specified in the Act into                        producers of gasoline, such as blenders,

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                                        will count as their gasoline production                 were 2.5 gallons of renewable fuel for                used, either by themselves or by
                                        only the volumes of blendstocks which                   compliance purposes, but does not                     someone else, and the RIN is evidence
                                        become gasoline upon their addition to                  specify the values for other renewable                that this occurred for a certain volume
                                        finished gasoline, unfinished gasoline,                 fuels. Although in the NPRM we                        of renewable fuel. Exporters of
                                        or other blendstocks. Renewable fuels                   considered a range of options including               renewable fuel will also be required to
                                        blended into gasoline by any party will                 straight volume, energy content, and                  acquire RINs in sufficient quantities to
                                        not be counted as gasoline for the                      requested comment on the merit and                    cover the volume of renewable fuel
                                        purposes of calculating the annual                      basis for setting ‘‘Equivalence Values’’              exported. RINs claimed for compliance
                                        gasoline production volume.                             on several metrics including lifecycle                purposes by obligated parties will thus
                                           Small refiners and small refineries are              energy or greenhouse gas emissions, for               represent renewable fuel actually
                                        exempt from meeting the renewable fuel                  this final rule we are requiring that the             consumed as motor vehicle fuel in the
                                        requirements through 2010. All gasoline                 ‘‘Equivalence Values’’ for the different              U.S.
                                        producers located in Alaska, Hawaii,                    renewable fuels be based on their energy                 RINs are valid for compliance
                                        and noncontiguous U.S. territories and                  content in comparison to the energy                   purposes for the calendar year in which
                                        parties who import gasoline into these                  content of ethanol, and adjusted as                   they are generated, or the following
                                        areas will be exempt indefinitely.                      necessary for their renewable content.                calendar year. This approach to RIN life
                                        However, if Alaska, Hawaii or a                         The result is an Equivalence Value for                is consistent with the Act’s prescription
                                        noncontiguous territory opts into the                   corn ethanol of 1.0, for biobutanol of                that credits be valid for compliance
                                        RFS program, all of the refiners (except                1.3, for biodiesel (mono alkyl ester) of              purposes for 12 months as of the date of
                                        for exempt small refiners and                           1.5, for non-ester renewable diesel of                generation, where credits are generated
                                        refineries), importers, and blenders                    1.7, and for cellulosic ethanol and                   at the end of a year when compliance is
                                        located in the state or territory will be               waste-derived ethanol of 2.5. The                     determined. An obligated party can
                                        subject to the renewable fuel standard.                 proposed methodology can be used to                   either use RINs to demonstrate
                                           Section III.A provides more details on               determine the appropriate Equivalence                 compliance, or can transfer RINs to any
                                        the standard that must be met, while                    Value for any other potential renewable               other party. If an obligated party is not
                                        Section III.C describes the parties that                fuel as well. Section III.B.4 provides                able to accumulate sufficient RINs for
                                        are obligated to meet the standard.                     details of the determination of                       compliance in a given year, it can carry
                                        3. What Qualifies as a Renewable Fuel?                  Equivalence Values.                                   a deficit over to the next year so long as
                                                                                                                                                      the full deficit and obligation is covered
                                           We have designed the program to                      5. How Will Compliance Be                             in the next year.
                                        cover the range of renewable fuels                      Determined?                                              In order to ensure that previous year
                                        produced today as well as any that                         Under our program, every gallon of                 RINs are not used preferentially for
                                        might be produced in the future, so long                renewable fuel produced or imported                   compliance purposes in a manner that
                                        as they meet the Act’s definition of                    into the U.S. must be assigned a unique               would effectively circumvent the
                                        renewable fuel and have been registered                 RIN. A block of RINs would be assigned                limitation that RINs be valid for only 12
                                        and approved for use in motor vehicles.                 to any batch of renewable fuel that is                months after the year generated, we are
                                        In this manner, we believe that the                     valid for compliance purposes under the               setting a cap on the use of RINs
                                        program provides the greatest possible                  RFS program. These RINs must be                       generated the previous year when
                                        encouragement for the development,                      transferred with renewable fuel as                    demonstrating compliance with the
                                        production, and use of renewable fuels                  ownership of a volume of renewable                    renewable volume obligation for the
                                        to reduce our dependence on petroleum                   fuel is initially transferred through the             current year. The cap will mean that no
                                        as well as to reduce the carbon dioxide                 distribution system. Once the renewable               more than 20 percent of a current year
                                        emissions that contribute to climate                    fuel is obtained by an obligated party or             obligation can be satisfied using RINs
                                        change. In general, renewable fuels must                actually blended into a motor vehicle                 from the previous year. In this manner
                                        be produced from plant or animal                        fuel, the RIN can be separated from the               there is no ability for excess renewable
                                        products or wastes, as opposed to fossil                batch of renewable fuel and then either               fuel use in successive years to cause an
                                        fuel sources. Valid renewable fuels                     used for compliance purposes, held, or                accumulation of RINs to significantly
                                        include ethanol made from starch seeds,                 traded.                                               depress renewable fuel demand in any
                                        sugar, or cellulosic materials, biodiesel                  RINs represent proof of production                 future year. In keeping with the Act,
                                        (mono-alkyl esters), non-ester renewable                which is then taken as proof of                       excess RINs not used in the year they
                                        diesel, and a variety of other products.                consumption as well, since all but a                  are generated or in the subsequent year
                                        Both renewable fuels blended into                       trivial quantity of renewable fuel                    will expire.
                                        conventional gasoline or diesel and                     produced or imported will be either                      Section III.D provides more details on
                                        those used in their neat (unblended)                    consumed as fuel or exported. For                     how obligated parties must use RINs for
                                        form as motor vehicle fuel will qualify.                instance, ethanol produced for use as                 compliance purposes.
                                        Section III.B provides more details on                  motor vehicle fuel is denatured
                                                                                                specifically so that it can only be used              6. How Will the Trading Program Work?
                                        the renewable fuels that will be allowed
                                        to be used for compliance with the                      as fuel. Similarly, biodiesel is produced                Renewable fuel producers and
                                        standard under our program.                             only for use as fuel and has no other                 importers will be required to generate
                                                                                                significant uses. An obligated party                  RINs when they produce or import a
                                        4. Equivalence Values of Different                      demonstrates compliance with the                      batch of renewable fuel (unless, for
                                        Renewables Fuels                                        renewable fuel standard by                            importers, the RINs have been assigned
                                           One question that we faced in                        accumulating sufficient RINs to cover                 by a foreign producer registered with
                                        developing the program was what value                   their individual renewable volume                     EPA). They will then be required to
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                                        to place on different renewable fuels                   obligation. It will not matter whether                transfer those RINs along with the
                                        and on what basis should that value be                  the obligated party used the renewable                renewable fuel batches that they
                                        determined. The Act specifies that each                 fuel themselves. An obligated party’s                 represent whenever they transfer
                                        gallon of cellulosic biomass ethanol and                obligation will be to ensure that a                   ownership of the batch to another party.
                                        waste-derived ethanol be treated as if it               certain amount of renewable fuel was                  Likewise any other non-obligated party

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                                        that takes ownership of a volume of                        The majority of respondents were                   subject to the standard. Obligated
                                        renewable fuel with RINs will be                        very supportive of voluntary labeling                 parties must also know which
                                        required to transfer those RINs with a                  and encouraged EPA to establish this                  renewable fuels are valid for RFS
                                        volume of renewable fuel. The RIN can                   program through this final rulemaking.                compliance purposes, and the relative
                                        be separated from renewable fuel only                   Two commenters opposed the labeling                   values of each type of renewable fuel in
                                        by obligated parties (at the point when                 concept, telling EPA that the number                  terms of compliance. This section
                                        they take ownership of the batch) or a                  and complexity of issues associated                   discusses how the annual standard is
                                        party that converts the renewable fuel                  with fuel production, and particularly                determined and which parties and
                                        into motor vehicle fuel (such as upon                   with farming practices, would make                    volumes of gasoline will be subject to
                                        blending with gasoline or diesel).                      such a program impractical and difficult              the requirements.
                                           Once a RIN is separated from a                       to implement. EPA also was told that it                 Because renewable fuels are not
                                        volume of renewable fuel, it can be used                would be hard to audit such a program.                produced or distributed evenly around
                                        for compliance purposes, banked, or                     Most commenters agreed that using the                 the country, some obligated parties will
                                        traded to another party. Separated RINs                 RIN to host the label makes sense,                    have easier access to renewable fuels
                                        can be transferred to any party any                     however the use of ‘‘G’’ for green fuel               than others. As a result, the RFS
                                        number of times. Recordkeeping and                      is insufficient to capture the full range             program depends on a robust trading
                                        reporting requirements will apply to any                of environmental impacts of renewable                 program. This section also describes all
                                        party that takes ownership of RINs,                     fuel production and that it would be                  the elements of our trading program.
                                        whether through the ownership of a                      difficult for EPA to establish an
                                        batch of renewable fuel or through the                  appropriate cut-off point for                         A. What Is the Standard That Must Be
                                        transfer of separated RINs.                             determining which fuel qualified for a                Met?
                                           Thus obligated parties can acquire                   ‘‘G’’ designation. Several respondents                1. How Is the Percentage Standard
                                        RINs directly through the purchase of                   suggested that EPA instead use a more                 Calculated?
                                        renewable fuel with assigned RINs or                    continuous scale based on energy or
                                        through the open market for RINs that                                                                            Table I.B–1 shows the required total
                                                                                                lifecycle greenhouse gas emissions.
                                        is allowed under this proposal. Section                    A well designed voluntary labeling                 volume of renewable fuel specified in
                                        III.E provides more details on how our                  program could permit producers and                    the Act for 2007 through 2012. The
                                        RIN trading program will work.                          blenders to distinguish their fuels in the            renewable fuel standard is based
                                                                                                marketplace and allow consumers to                    primarily on (1) the 48-state gasoline
                                        7. How Will the Program Be Enforced?                                                                          consumption volumes projected by EIA
                                                                                                express preferences for ‘‘green’’
                                           As in all EPA fuel regulations, there                products through their fuel purchases.                (as the Act exempts Hawaii and Alaska,
                                        is a system of registration,                            While such a program could be valuable                subject to their right to opt-in, as
                                        recordkeeping, and reporting                            to producers, blenders, and consumers,                discussed in Section III.C.4), and (2) the
                                        requirements for obligated parties,                     given the range of comments received                  volume of renewable fuels required by
                                        renewable producers and importers                       on the topic, we believe it is important              the Act for the coming year. The
                                        (RIN generators), and any parties that                  first to continue the dialogue with the               renewable fuel standard will be
                                        procure or trade RINs either as part of                 various stakeholders to ensure that the               expressed as a volume percentage of
                                        their renewable purchases or separately.                program adequately addresses the issues               gasoline sold or introduced into
                                        In most cases, the recordkeeping                        raised prior to putting any such program              commerce in the U.S., and will be used
                                        requirements are not significantly                      in place. Thus we are not finalizing a                by each refiner, blender or importer to
                                        different from what these parties might                 voluntary labeling program. We will                   determine their renewable volume
                                        be doing already as a part of normal                    continue to investigate the issues                    obligation. The applicable percentage is
                                        business practices. The lynch pin to the                surrounding a voluntary labeling                      set so that if each regulated party meets
                                        compliance program, however, is the                     program and the various ways in which                 the percentage and total gasoline
                                        unique RIN number itself coupled with                   it could be designed. In particular we                consumption does not fall short of EIA
                                        an electronic reporting system where                    are interested in further exploring                   projections then the total amount of
                                        RIN generation, RIN use, and RIN                        methods to incorporate lifecycle                      renewable fuel used will meet the total
                                        transactions will be reported and                       impacts into a voluntary labeling                     renewable fuel volume specified in
                                        verified. Thus, EPA, as well as industry                program and consumer expectations for                 Table I.B–1.
                                        can have confidence that invalid RINs                   such ‘‘green’’ labeling.                                 In determining the applicable
                                        are not generated and that there is no                                                                        percentage for a calendar year, the Act
                                                                                                III. Complying With the Renewable                     requires EPA to adjust the standard to
                                        double counting.
                                                                                                Fuel Standard                                         prevent the imposition of redundant
                                        C. Voluntary Green Labeling Program                        According to the Energy Act, the RFS               obligations on any person and to
                                          In the proposal EPA asked for                         program places obligations on                         account for the use of renewable fuel
                                        comments on the idea of creating a                      individual parties such that the                      during the previous calendar year by
                                        voluntary labeling program to encourage                 renewable fuel volumes shown in Table                 exempt small refineries, defined as
                                        the adoption and use of practices that                  I.B–1 are used as motor vehicle fuel in               refineries that process less than 75,000
                                        minimize the environmental concerns                     the U.S. each year. To accomplish this,               bpd of crude oil. As a result, in order
                                        associated with renewable fuel                          the Agency must calculate and publish                 to be assured that the percentage
                                        production. The proposal suggested                      a standard by November 30 of each year                standard will in fact result in the
                                        adding a ‘‘G’’ (for green) to the end of                which is applicable to every obligated                volumes shown in Table I.B–1, we must
                                        the RIN of a fuel to indicate that a gallon             party. On the basis of this standard each             make several adjustments to what is
                                        of renewable fuel was produced with                     obligated party determines the volume                 otherwise a simple calculation.
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                                        the combination of best farming                         of renewable fuel that it must ensure is                 As stated, the renewable fuel standard
                                        practices and environmentally friendly                  consumed as motor vehicle fuel. In                    for a given year is basically the ratio of
                                        production methods and facilities. EPA                  addition to setting the standard, we                  the amount of renewable fuel specified
                                        received a number of comments on this                   must clarify who the obligated parties                in the Act for that year to the projected
                                        idea.                                                   are and what volumes of gasoline are                  48-state non-renewable gasoline volume

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                                        for that year. While the required amount                in Section III.C.3.a, as proposed, EPA is             renewable fuel volumes from the
                                        of total renewable fuel for a given year                also exempting small refiners 8 from the              anticipated total gasoline volumes in
                                        is provided by the Act, the Act requires                RFS requirements until 2011, and is                   EIA projections. The Act requires that
                                        EPA to use an EIA estimate of the                       treating small refiner gasoline volumes               the renewable fuel be consumed in the
                                        amount of gasoline that will be sold or                 the same as small refinery gasoline                   contiguous 48 states unless Alaska,
                                        introduced into commerce for that year.                 volumes. Since small refineries and                   Hawaii, or a U.S. territory opt-in.
                                        The level of the percentage standard is                 small refiners are exempt from the                    However, because renewable fuel
                                        reduced if Alaska, Hawaii, or a U.S.                    program until 2011, EPA is excluding                  produced in Alaska, Hawaii, and U.S.
                                        territory choose to participate in the                  their gasoline volumes from the overall               territories is unlikely to be transported
                                        RFS program, as gasoline produced in or                 non-renewable gasoline volume used to                 to the contiguous 48 states, including
                                        imported into those states or territories               determine the applicable percentage.                  their renewable fuel volumes in the
                                        would then be subject to the standard.                  EPA believes this is appropriate because              calculation of the standard would not
                                        Should any of these states or territories               the percentage standard should be based               serve the purpose intended by the Act
                                        opt into the RFS program, the projected                 only on the gasoline subject to the                   of ensuring that the statutorily required
                                        gasoline volume would increase above                    renewable volume obligation. Because                  renewable fuel volumes are consumed
                                        that consumed in the 48 contiguous                      small refineries and small refiners are               in the 48 contiguous States. We are
                                        states.                                                 exempt (unless they waive exemption)                  finalizing the exclusion of these areas’
                                           In the proposal, we stated that EIA                  only through the 2010 compliance                      renewable fuel use as proposed.
                                        had indicated that the best estimation of               period when the exemption ends,
                                        the coming year’s gasoline consumption                  calculation of the standard for calendar                 We stated that any deficit carryover
                                        is found in Table 5a (U.S. Petroleum                    year 2011 and beyond will include                     from 2006 would increase the 2007
                                        Supply and Demand: Base Case) of the                    small refinery and small refiner                      standard. Since renewable fuel use in
                                        October issue of the monthly EIA                        volumes.9 Using information from                      2006 exceeded the 2.78 percent default
                                        publication Short-Term Energy Outlook                   gasoline batch reports submitted to EPA,              standard, there is no deficit to carry over
                                        which publishes quarterly energy                        EIA data, and input from the California               to 2007. Beginning with the 2007
                                        projections. Commenters on this issue                   Air Resources Board regarding                         compliance period, when annual
                                        supported the use of the October issue                  California small refiners, we are                     individual party compliance replaces
                                        of EIA’s Short-Term Energy Outlook                      finalizing a small refiner exemption                  collective compliance, any deficit is
                                        (STEO), Table 5a, for the purpose of                    adjustment to the standard of a constant              calculated for an individual party and is
                                        estimating the next year’s gasoline                     13.5%,10 consistent with the proposal.                included in the party’s Renewable
                                        consumption, and we have used the                          The Act requires that the small                    Volume Obligation (RVO)
                                        October 2006 STEO values for                            refinery adjustment also account for                  determination, as discussed in Section
                                        estimating 2007 gasoline consumption                    renewable fuels used during the prior                 III.A.4.
                                        for this final rule.                                    year by small refineries that are exempt                 In summary, the total projected non-
                                           The gasoline volumes in the STEO                     and do not participate in the RFS                     renewable gasoline volumes from which
                                        include renewable fuel use. As                          program. Accounting for this volume of                the annual standard is calculated is
                                        discussed below in Section III.C.1, the                 renewable fuel would reduce the total                 based on EIA projections of gasoline
                                        renewable fuel obligation does not                      volume of renewable fuel use required                 consumption in the contiguous 48
                                        apply to renewable blenders. Thus, the                  of others, and thus directionally would               states, adjusted by a constant percentage
                                        gasoline volume used to determine the                   reduce the percentage standard.
                                                                                                                                                      of 13.5% to account for small refinery/
                                        standard must be the non-renewable                      However, as discussed in the proposal,
                                        portion of the gasoline pool, in order to                                                                     refiner volume, with built-in correction
                                                                                                there are no such data available, the
                                        achieve the volumes of renewables                                                                             factors to be used when and if non-
                                                                                                amount of renewable fuel that would
                                        specified in the Act. In order to get a                                                                       contiguous states and territories opt-in
                                                                                                qualify (i.e., that was used by exempt
                                        total non-renewable gasoline volume,                                                                          to the program. If actual gasoline
                                                                                                small refineries and small refiners but
                                        we must subtract the renewable fuel                                                                           consumption were to exceed the EIA
                                                                                                not used as part of the RFS program) is
                                        volume from the total gasoline volume.                                                                        projection, the result would be that
                                                                                                expected to be very small and would not
                                        EIA has indicated that the best                                                                               renewable fuel volumes will exceed the
                                                                                                significantly change the resulting
                                        estimation of the coming year’s                         percentage standard. Because whatever                 statutory requirements. Conversely, if
                                        renewable fuel consumption is found in                  renewables small refiners and small                   actual gasoline consumption was less
                                        Table 11 (U.S. Renewable Energy Use by                  refineries blend will be reflected as RINs            than the EIA projection for a given year,
                                        Sector: Base Case) of the October issue                 available in the market, there is no need             theoretically a renewable fuel shortfall
                                        of the STEO. As with the gasoline                       for a separate accounting of their                    could occur. However, our projections
                                        projections discussed above, we have                    renewable fuel use in the equation used               of renewable fuel use due to market
                                        used the October 2006 STEO values for                   to determine the standard. We thus                    demand would make a shortfall
                                        estimating 2007 renewable fuel values                   proposed that this value be zero, and we              extremely unlikely regardless of the
                                        for this final rule.                                    are finalizing the equation as such.                  error in gasoline consumption
                                           The Act exempts small refineries 7                      We also proposed not to include                    projections.
                                        from the RFS requirements until the                     renewable fuel used in Alaska, Hawaii,                   The following formula will be used to
                                        2011 compliance period. As discussed                    or U.S. territories when subtracting                  calculate the percentage standard:
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                                          7 Under the Act, small refineries are those with      barrels per calendar day, bpcd) and employee (no      extended under 211(o)(9)(A)(ii) or (B) of the Clean
                                        75,000 bbl/day or less average aggregate daily crude    more than 1500 people) criteria as specified in       Air Act as amended by the Energy Policy Act.
                                        oil throughput.                                         previous EPA fuel regulations.                          10 ‘‘Calculation of the Small Refiner/Small
                                          8 Small refiners are those entities who produced                                                            Refinery Fraction for the Renewable Fuel Program,’’
                                                                                                  9 As discussed in section III.C.3.a of this
                                        gasoline from crude oil in 2004, and who meet the       preamble, the small refinery exemption may be         memo to the docket from Christine Brunner, ASD,
                                        crude processing capability (no more than 155,000                                                             OTAQ, EPA September 2006.

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                                        23912                        Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                                                                                                                                   RFVi − Celli
                                                                                                               RFStd i = 100 ×
                                                                                                                                       ( G i − R i ) + ( GSi − RSi ) − GE i

                                        Where:                                                                     calculating the cellulosic standard that                                  the Federal Register by November 30 of
                                        RFStdi = Renewable Fuel standard in year i,                                is required beginning in 2013:                                            the preceding year. The standards are
                                             in percent.                                                                                                                                     used to determine the renewable
                                        RFVi = Annual volume of renewable fuels                                                                           Celli                              volume obligation based on an obligated
                                             required by section 211(o)(2)(B) of the                                RFCelli = 100 ×
                                             Act for year i, in gallons.                                                                     ( G i − R i ) + ( GSi − RSi )                   party’s total gasoline production or
                                                                                                                                                                                             import volume in a calendar year,
                                        Gi = Amount of gasoline projected to be used
                                             in the 48 contiguous states, in year i, in                            Where, except for RFCelli, the variable                                   January 1 through December 31. The
                                             gallons.                                                                 descriptions are as discussed above. The                               percentage standards do not apply on a
                                        Ri = Amount of renewable fuel blended into                                    definition of RFCelli is:                                              per gallon basis. An obligated party will
                                             gasoline that is projected to be consumed                             RFCelli = Renewable Fuel Cellulosic                                       calculate its Renewable Volume
                                             in the 48 contiguous states, in year i, in                               Standard in year i, in percent                                         Obligation (discussed in Section III.A.4)
                                             gallons.                                                                                                                                        using the annual standard.
                                        GSi = Amount of gasoline projected to be
                                                                                                                      Note that after 2012 cellulosic RINs
                                             used in Alaska, Hawaii, or a U.S.                                     cannot be used to satisfy the non-                                           In the NPRM, we estimated the
                                             territory in year i if the state or territory                         cellulosic RFS standard (RFStdi). The                                     standards for 2007 and later using data
                                             opts-in, in gallons.                                                  amount of renewable fuel that is                                          available at the time and the formulas
                                        RSi = Amount of renewable fuel blended into                                required to come from cellulosic sources                                  discussed above.11 We have revised
                                             gasoline that is projected to be consumed                             (Celli) is a fixed amount.                                                these values based on more recent data,
                                             in Alaska, Hawaii, or a U.S. territory in                                We are not finalizing regulations that                                 and using EIA’s October 2006 STEO
                                             year i if the state or territory opts-in, in                          would specify the criteria under which                                    gasoline and renewable fuel
                                             gallons.                                                              a state could petition the EPA for a                                      consumption projections.12 In the
                                        GEi = Amount of gasoline projected to be
                                                                                                                   waiver of the RFS requirements, nor the                                   proposal, we had used the lower heating
                                             produced by exempt small refineries and
                                             small refiners in year i, in gallons                                  ramifications of Agency approval of                                       value of ethanol for converting from Btu
                                             (through 2010 only unless exemption                                   such a waiver in terms of the level or                                    to gallons of ethanol for the purpose of
                                             extended under §§ 211(o)(9)(A)(ii) or                                 applicability of the standard. As                                         calculating the standard. However, for
                                             (B)). Equivalent to 0.135*(Gi¥Ri).                                    discussed in the proposal, there was no                                   this final rule, we have used the higher
                                        Celli = Beginning in 2013, the amount of                                   clear way to include such a provision in                                  heating value of ethanol as
                                             renewable fuel that is required to come                               the context of the program being                                          recommended by commenters, to be
                                             from cellulosic sources, in year i, in                                finalized. As a result, the formula for the                               consistent with EIA practices.13 14
                                             gallons (250,000,000 gallons minimum).                                standard shown above does not include                                     Variables related to state or territory opt-
                                           After 2012 the Act requires that the                                    any components to account for Agency                                      ins were set to zero since we do not
                                        applicable volume of required                                              approval of a state petition for a waiver                                 have any information related to their
                                        renewable fuel specified in Table I.B–1                                    of the RFS requirements. Should EPA                                       participation at this time. As mentioned
                                        include a minimum of 250 million                                           grant such a waiver in the future, it will                                earlier, we estimate the small refinery
                                        gallons that are derived from cellulosic                                   determine at that time what adjustments                                   and small refiner fraction to be 13.5%.
                                        biomass. As shown in Table III.A.2–1                                       to make to the standard.                                                  The exemption for small refineries and
                                        below, we have estimated this value                                                                                                                  small refiners ends at the end of the
                                        (250 million gallons) as a percent of an                                   2. What Are the Applicable Standards?                                     2010 compliance period, unless
                                        obligated party’s production for 2013.                                       As discussed in the proposal, EPA                                       extended as discussed in Section
                                        Thus, an obligated party will be subject                                   will set the percentage standard for each                                 III.C.3.a. Based on all of these factors,
                                        to two standards in 2013 and beyond, a                                     upcoming year based on the most recent                                    the standard for 2007 is 4.02%.
                                        non-cellulosic standard and a cellulosic                                   EIA STEO projections, and using the                                       Projected values of the standard for
                                        standard. We are therefore also                                            other sources of information as noted                                     2008 and beyond are shown in Table
                                        finalizing the following formula for                                       above. EPA will publish the standard in                                   III.A.2–1.

                                                                                                               TABLE III.A.2–1.—PROJECTED STANDARDS
                                                                        Year                                                         Projected standard                                                     Cellulosic standard

                                        2008 ...................................................................   4.63%   ...............................................................   Not applicable.
                                        2009 ...................................................................   5.21%   ...............................................................   Not applicable.
                                        2010 ...................................................................   5.80%   ...............................................................   Not applicable.
                                        2011 ...................................................................   5.38%   ...............................................................   Not applicable.
                                        2012 ...................................................................   5.42%   ...............................................................   Not applicable.
                                        2013+ .................................................................    5.24%   min. (non-cellulosic) ..............................              0.18% min.
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                                          11 ‘‘Calculation of the Renewable Fuel Standard’’                          13 The higher (or gross or upper) heating value is                        14 The lower heating value (LHV) is used to

                                        memo to the docket from Christine Brunner, ASD,                            used in all Btu calculations for EIA’s Annual Energy                      represent energy content in the context of setting
                                        OTAQ, EPA, September 2006.                                                 Review and in related EIA publications (see                               Equivalence Values as described in Section III.B.4
                                          12 ‘‘Calculation of the Renewable Fuel Standard—
                                                                                                                   discussion in EIA’s Annual Energy Review,                                 because it more accurately reflects the energy
                                        Revised’’ memo to the docket from Christine

                                                                                                                   Appendix A, Thermal Conversion Factors).                                  available in the fuel to produce work.
                                        Brunner, ASD, OTAQ, EPA, April 2007.

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                            23913

                                          As discussed in Section II.A.5, for                   date of the final rule. Essentially the               applicable standard. Delaying a credit
                                        calendar year 2013 and thereafter, the                  renewable volume obligation for 2007                  program until 2008 would mean the
                                        applicable volumes will be determined                   would be based on only those volumes                  credit provisions have no meaning at all
                                        in accordance with separate statutory                   of gasoline produced or imported by an                for 2007, since under a collective
                                        provisions that include EPA                             obligated party prospectively from the                compliance approach no individual
                                        coordination with the Departments of                    effective date of the rulemaking forward,             facility or company would be liable for
                                        Agriculture and Energy, and a review of                 and renewable producers would not                     meeting the applicable standard.
                                        the program during calendar years 2006                  have to begin generating RINs and                     Including a ‘‘collective’’ credit or deficit
                                        through 2012. The Act specifies that this               maintaining the necessary records until               carryforward as part of a collective
                                        review consider the impact of the use of                this same date.                                       compliance program would also not
                                        renewable fuels on the environment, air                    We received no comments supporting                 fully implement the credit provisions of
                                        quality, energy security, job creation,                 the alternative ‘‘full year’’ approach to             the Act. The prospective compliance
                                        and rural economic development, and                     2007 compliance. However, several                     approach, in contrast, not only provides
                                        the expected annual rate of future                      parties expressed a preference for either             obligated parties with the opportunity to
                                        production of renewable fuels,                          a collective compliance approach for                  generate credits, but also provides the
                                        including cellulosic ethanol. We intend                 2007, or if not that then delaying                    industry with the certainty they need to
                                        to conduct another rulemaking as we                     implementation of the comprehensive                   comply and is relatively straightforward
                                        approach the 2013 timeframe that                        program to January 1, 2008. They argued               to implement.
                                        would include our review of these                       that regulated parties needed additional                 Rather than requiring the program to
                                        factors. That rulemaking will present                   time to put into place the sophisticated              begin on the effective date of the rule as
                                        our conclusions regarding the                           RIN tracking systems that would be                    proposed (60 days following publication
                                        appropriate applicable volume of                        required. The additional time would                   in the Federal Register), we are
                                        renewable fuel for use in calculating the               also allow regulated parties to debug the             finalizing a start date of September 1,
                                        renewable fuel standard for 2013 and                    systems, train personnel, and put                     2007. From this date forward, the
                                        beyond. The program finalized by                        support programs into place. The                      renewable fuel standard will be
                                        today’s rule will continue to apply after               American Coalition for Ethanol also                   applicable to all gasoline produced or
                                        2012, though some elements may be                       argued that the prospective approach                  imported, and all renewable fuels
                                        modified in the rulemaking setting the                  did not guarantee that the total                      produced or imported will have to be
                                        standards for 2013 and beyond. Today’s                  renewable fuel volumes required by the                assigned a RIN. All regulated parties
                                        rule does not contain a mechanism for                   Act for 2007 would actually be used in                must be registered by this date, and the
                                        establishing a post-2012 standard.                      2007, whereas a collective compliance                 recordkeeping responsibilities will also
                                                                                                approach would. Parties in favor of a                 begin. By setting such a date, industry
                                        3. Compliance in 2007                                   collective compliance approach argued                 will be able to plan with confidence to
                                           The Energy Act requires that EPA                     that EPA has the authority to implement               start complying upon signature of the
                                        promulgate regulations to implement                     such an approach despite the fact that                rule, rather than having the start date
                                        the RFS program, and if EPA did not                     the Act does not explicitly give EPA this             depend upon the timing of publication
                                        issue such regulations then a default                   authority, and also argued that there                 of this final rule in the Federal Register.
                                        standard for renewable fuel use would                   was no need to include any form of                    We recognize the concerns expressed in
                                        apply in 2006. On December 30, 2005                     credit carryover under a collective                   comments that time is needed to
                                        we promulgated a direct final rule to                   compliance approach.                                  prepare Information Technology (IT)
                                        interpret and implement the application                    However, a number of refiners and                  systems to comply with the program.
                                        of the statutory default standard of 2.78               their associations opposed a collective               However, we believe that a September 1,
                                        percent in calendar year 2006 (70 FR                    compliance approach to 2007 and                       2007 start date will provide sufficient
                                        77325). However, the Act provides no                    expressed strong support for the                      time. The final rule is in most respects
                                        default standard for any other year.                    proposed prospective approach. They                   consistent with the NPRM, and based on
                                           In the NPRM we stated our                            argued that a start date at least 60 days             discussions with industry, plans for
                                        expectation that, due to the limited time               from the date of publication of the final             implementation are already underway.
                                        available for this rulemaking, we would                 rule would provide sufficient time to                 Furthermore, a September 1, 2007 start
                                        be unable to publish the final rule and                 obligated parties for making the                      date will likely provide regulated
                                        have it become effective by January 1,                  necessary adjustments for compliance.                 parties some additional time to prepare
                                        2007. We discussed several ways that                    They also argued that they should be                  in comparison to simply setting the start
                                        we could specify how, and for what                      afforded the opportunity to participate               date as 60 days following publication of
                                        time periods, the applicable standard                   as soon as possible in the trading                    the rule.
                                        and other program requirements would                    program, which the collective                            As stated in the NPRM, we recognize
                                        apply to regulated parties for gasoline                 compliance approach used for 2006                     that the prospective approach to 2007
                                        produced during 2007. We discussed a                    would preclude for 2007.                              compliance will not guarantee by
                                        collective compliance approach similar                     We continue to believe that a                      regulation that the total renewable fuel
                                        to that applied in 2006, as well as a ‘‘full            collective compliance approach is not                 volumes required by the Act for 2007
                                        year’’ approach that would have based                   appropriate for 2007. The Energy Act                  would actually be used in 2007.
                                        the renewable volume obligation for                     requires us to promulgate regulations                 However, current projections from the
                                        each obligated party on all gasoline                    that provide for the generation of credits            Energy Information Administration
                                        produced starting on January 1, 2007                    by any person who over complies with                  (EIA) on the volume of renewable fuel
                                        regardless of the effective date of the                 their obligation. It also stipulates that a           expected to be produced in 2007
                                        rule. However, due to a number of                       person who generates credits must be                  indicate that the Act’s required volumes
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                                        issues with these approaches, we                        permitted to use them for compliance                  will be exceeded by a substantial margin
                                        proposed a ‘‘prospective’’ approach in                  purposes, or to transfer them to another              due to the relative economic value of
                                        which the renewable fuel standard                       party. These credit provisions have                   renewable fuels in comparison to
                                        would be applied to only those volumes                  meaning only in the context of an                     gasoline. We are confident that the
                                        of gasoline produced after the effective                individual obligation to meet the                     combined effect of the regulatory

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                                        23914                 Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        requirements for 2007 and the expected                      The Energy Act only permits a deficit                animal, or fish materials including fats,
                                        market demand for renewable fuels will                   carryover from one year to the next if                  greases and oils, sugarcane, sugar beets,
                                        lead to greater renewable fuel use in                    the obligated party achieves full                       tobacco, potatoes or other biomass (such
                                        2007 than is called for under the Act.                   compliance with its RVO including the                   as bagasse from sugar cane, corn stover,
                                        Current renewable production already                     deficit carryover in the second year.                   and algae and seaweed). In addition, it
                                        exceeds the rate required for all of 2007,               Thus deficit carryovers could not occur                 includes motor vehicle fuels made using
                                        and as discussed in Section VI, capacity                 two years in succession. They could,                    a feedstock of natural gas if produced
                                        is expected to continue to grow.                         however, occur as frequently as every                   from a biogas source such as a landfill,
                                        Furthermore, refiners and importers are                  other year for a given obligated party.                 sewage waste treatment plant, feedlot,
                                        not required to meet any requirements                       The calculation of an obligated party’s              or other place where decaying organic
                                        under the Act until EPA adopts the                       RVO is necessarily retrospective, since                 material is found.
                                        regulations, and EPA is authorized to                    the total gasoline volume that it                          According to the Act, the motor
                                        consider appropriate lead time in                        produces in a calendar year will not be                 vehicle fuels must be used ‘‘to replace
                                        establishing the regulatory                              known until the year has ended.                         or reduce the quantity of fossil fuel
                                        requirements.15 Under this option we                     However, the obligated party will have                  present in a fuel mixture used to operate
                                        believe there will be reasonable lead-                   an incentive to project gasoline                        a motor vehicle.’’ Some motor vehicle
                                        time for regulated parties to meet their                 volumes, and thus the RVO, throughout                   fuels can be used in both motor vehicles
                                        2007 compliance obligations. While no                    the year so that it can spread its efforts              or nonroad engines or equipment. For
                                        option before us is perhaps totally                      to comply across the entire year. Most                  example, highway gasoline and diesel
                                        consistent with all of the provisions of                 refiners and importers will be able to                  fuel are often used in both highway and
                                        the Act, we believe the rule as adopted                  project their annual gasoline production                off-highway applications. Compressed
                                        does the best job possible given the                     volumes with a minimum of uncertainty                   natural gas can likewise be used in
                                        circumstances of implementing all of                     based on their historical operations,                   either highway or nonroad applications.
                                        the provisions of the Act for 2007.                      capacity, plans for facility downtimes,                 For purposes of the renewable fuel
                                                                                                 knowledge of gasoline markets, etc.                     program, EPA considers a fuel to be a
                                        4. Renewable Volume Obligations                          Even if unforeseen circumstances (e.g.,                 ‘‘motor vehicle fuel’’ and to be ‘‘a fuel
                                                                                                 hurricane, unit failure, etc.) significantly            mixture used to operate a motor
                                           In order for an obligated party to
                                                                                                 reduced the production volumes in                       vehicle,’’ based on its potential for use
                                        demonstrate compliance, the percentage                                                                           in highway and nonroad vehicles,
                                        standards described in Section III.A.2                   comparison to their projections, their
                                                                                                 RVO will likewise be reduced                            without regard to whether it, in fact, is
                                        which are applicable to all obligated                                                                            used in a highway vehicle application.
                                        parties must be converted into the                       proportionally and their ability to
                                                                                                 comply with the RFS requirements will                   EPA does not believe that the much
                                        volume of renewable fuel each obligated                                                                          more complex and costly regulatory
                                        party is required to satisfy. This volume                be only minimally affected. Each
                                                                                                 obligated party’s projected RVO for a                   scheme that would be needed to track
                                        of renewable fuel is the volume for                                                                              motor vehicle fuel use versus off-road
                                        which the obligated party is responsible                 given year becomes more accurate as
                                                                                                 that year progresses, but the obligated                 fuel use would be justified. (As
                                        under the RFS program, and is referred                                                                           discussed further below, heaters and
                                        to here as its Renewable Volume                          party should nevertheless have a
                                                                                                 sufficiently accurate estimate of its RVO               boilers are not considered highway or
                                        Obligation (RVO).                                                                                                nonroad engine applications and
                                                                                                 at the beginning of the year to allow it
                                           The calculation of the RVO requires                   to begin its efforts to comply.                         renewable fuel produced or imported
                                        that the standard shown in Table                                                                                 specifically for use in such equipment is
                                        III.A.2–1 for a particular compliance                    B. What Counts as a Renewable Fuel in                   not valid for compliance purposes
                                        year be multiplied by the gasoline                       the RFS Program?                                        under the RFS program.) If it is a fuel
                                        volume produced by an obligated party                      Section 211(o) of the Clean Air Act                   that could be used in highway vehicles,
                                        in that year. To the degree that an                      defines ‘‘renewable fuel’’ and specifies                it will satisfy these parts of the
                                        obligated party did not demonstrate full                 many of the details of the renewable                    definition of renewable fuel, whether it
                                        compliance with its RVO for the                          fuel program. The following section                     is later used in highway or nonroad
                                        previous year, the shortfall is included                 provides EPA’s views and                                applications. This will allow a motor
                                        as a deficit carryover in the calculation.               interpretations on issues related to what               vehicle fuel that otherwise meets the
                                        The equation used to calculate the RVO                   fuels may be counted towards                            definition to be counted towards a
                                        for a particular year is shown below:                    compliance with the RVO, and how                        party’s RVO without the need to track
                                                                                                 they are counted.                                       it to determine its actual application in
                                        RVOi = Stdi × GVi + Di¥1                                                                                         a highway vehicle, and provided only
                                        Where:                                                   1. What Is a Renewable Fuel That Can                    that the producer does not know that
                                        RVOi = The Renewable Volume Obligation                   Be Used for Compliance?                                 the fuel will be used for a purpose other
                                             for the obligated party for year i, in                 The statutory definition of renewable                than highway and nonroad engine
                                             gallons.                                            fuel includes cellulosic ethanol and                    applications. This is also consistent
                                        Stdi = The RFS program standard for year i,              waste derived ethanol. It includes                      with the requirement that EPA base the
                                             in percent.                                                                                                 renewable fuel obligation on estimates
                                                                                                 biodiesel, as defined in the Energy
                                        GVi = The non-renewable gasoline volume
                                                                                                 Act.16 It also includes all motor vehicle               of the entire volume of gasoline
                                             produced by an obligated party in year
                                             i, in gallons.                                      fuels that are produced from biomass                    consumed, without regard to whether it
                                                                                                 material such as grain, starch, oilseeds,               is used in highway or nonroad
                                        Di¥1 = Renewable fuel deficit carryover from                                                                     applications.
                                            the previous year, in gallons.                         16 As discussed below, for purposes of this              Renewable fuel as defined, may be
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                                                                                                 rulemaking, the regulations separate ‘‘biodiesel’’ as   made from a number of different types
                                           15 The statutory default standard for 2006 is the     defined in the Energy Act, into biodiesel (diesels      of feedstocks. For example, the Fisher-
                                        one exception to this, since it directly establishes     that meet the Energy Act’s definition and are a
                                        a renewable fuel obligation applicable to refiners       mono-alkyl ester) and renewable diesel (other
                                                                                                                                                         Tropsch process can use methane gas
                                        and importers in the event that EPA does not             diesels that meet the Energy Act’s definition but are   from landfills as a feedstock, to produce
                                        promulgate regulations.                                  not mono-alkyl esters).                                 diesel or gasoline. Vegetable oil made

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                              23915

                                        from oilseeds such as rapeseed or                       EPA expects that the overwhelming                     converted to sugars (by hydrolysis); then
                                        soybeans can be used to make biodiesel                  volume of renewable fuel used to                      the same fermentation process is used as
                                        or renewable diesel. Methane, made                      demonstrate compliance with the                       for sugar to make ethanol. Cellulosic
                                        from landfill gas (biogas) can be used to               renewable fuel obligation would still be              feedstocks (composed of cellulose and
                                        make methanol, or can be used directly                  ethanol blended with gasoline. Finally,               hemicellulose) are currently more
                                        as a fuel in vehicles with engines                      as discussed later, EPA’s compliance                  difficult and costly to convert to sugar
                                        designed to run on compressed natural                   program is based on assigning volumes                 than are starches. While the cost and
                                        gas. Also, some vegetable oils or animal                at the point of production, and not at                difficulty are a disadvantage, the
                                        fats can be processed in distillation                   the point of blending into motor vehicle              cellulosic process offers the advantage
                                        columns in refineries to make gasoline;                 fuel. This interpretation avoids the need
                                                                                                                                                      that a wider variety of feedstocks can be
                                        as such, the renewable feedstock serves                 to track renewable fuels downstream to
                                                                                                                                                      used. Ultimately with more feedstocks
                                        as a ‘‘renewable crude,’’ and the                       ensure they are blended with gasoline
                                        resulting gasoline or diesel product                    and not used in their neat form; the                  available from which to make ethanol
                                        would be a renewable fuel. This last                    gasoline that is used in motor vehicles               more volume of ethanol can be
                                        example is discussed in further detail in               is reduced by the presence of renewable               produced.
                                        Section III.B.3 below.                                  fuels in the gasoline pool whether they                 The Act provides the definition of
                                           As this discussion shows, the                        are blended with gasoline or not.                     cellulosic biomass ethanol, which
                                        definition of renewable fuel in the Act                 Comments received on this                             states:
                                        is broad in scope, and covers a wide                    interpretation were favorable towards it.
                                                                                                                                                         ‘‘The term ‘cellulosic biomass ethanol’
                                        range of fuels. While ethanol is used                   EPA continues to believe, therefore, that
                                                                                                                                                      means ethanol derived from any
                                        primarily in combination with gasoline,                 this approach is consistent with the
                                                                                                                                                      lignocellulosic or hemicellulosic matter that
                                        the definition of renewable fuel in the                 intent of Congress and is a reasonable
                                                                                                                                                      is available on a renewable or recurring basis,
                                        Act is not limited to fuels that can be                 interpretation of the Act. One                        including:
                                        blended with gasoline. Various fuels                    commenter indicated that a logical                       (i) Dedicated energy crops and trees;
                                        that meet the definition of renewable                   extension of this reasoning would                        (ii) Wood and wood residues;
                                        fuel can be used in their neat form, such               provide that renewable fuel that could                   (iii) Plants;
                                        as ethanol, biodiesel, methanol or                      be used in motor vehicles is still a                     (iv) Grasses;
                                        natural gas. Others, including ethanol                  renewable fuel under the Act when used                   (v) Agricultural residues;
                                        may be used to produce a gasoline                       by renewable fuel producers in a boiler                  (vi) Animal wastes and other waste
                                        blending component (such as ETBE). At                   or heater. EPA disagrees. The term                    materials, and
                                        the same time, the RFS regulatory                       ‘‘renewable fuel’’ means ‘‘motor vehicle                 (viii) Municipal solid waste.’’
                                        program is to ‘‘ensure that gasoline sold               fuel that * * * is used to replace or
                                        or introduced into commerce * * *                       reduce the quantity of fossil fuel present               Examples of cellulosic biomass source
                                        contains the applicable volume of                       in a fuel mixture used to operate a                   material include rice straw, switch
                                        renewable fuel.’’ This applicable                       motor vehicle.’’ We believe that all but              grass, and wood chips. Ethanol made
                                        volume is specified as a total volume of                a trivial quantity of renewable fuels that            from these materials would qualify
                                        renewable fuel on an aggregate basis.                   can be used in motor vehicles will                    under the definition as cellulosic
                                        Congress also clearly specified that one                ultimately be used as motor vehicle fuel.             ethanol. In addition to the above sources
                                        renewable fuel, biodiesel, could be                     Producers of ethanol biodiesel and other              of feedstocks for cellulosic biomass
                                        counted towards compliance even                         products that can be used as motor
                                                                                                                                                      ethanol, the Act’s definition also
                                        though it is not a gasoline component,                  vehicle fuel can generally assume,
                                        and does not directly displace or replace                                                                     includes animal waste, municipal solid
                                                                                                therefore, that their products will be
                                        gasoline. The Act is unclear on whether                 used in that way, and can assign RINs                 wastes, and other waste materials.
                                        other fuels that meet the definition of                 to their product without tracking its                 ‘‘Other waste materials’’ generally
                                        renewable fuel, but are not used in                     ultimate use. However, renewable fuel                 includes waste material such as sewage
                                        gasoline, could also be used to                         used onsite in a boiler or heater by a                sludge, waste candy, and waste starches
                                        demonstrate compliance towards the                      renewable fuel producer clearly is not a              from food production, but for purposes
                                        aggregate national use of renewable                     motor vehicle fuel used to replace or                 of the definition of cellulosic ethanol
                                        fuels.                                                  reduce the quantity of fossil fuel present            discussed in III.B.1.b below, it can also
                                           EPA interprets the Act as allowing                   in a fuel mixture used to operate a                   mean waste heat obtained from an off-
                                        regulated parties to demonstrate                        motor vehicle.                                        site combustion process.
                                        compliance based on any fuel that meets                    Under the Act, renewable fuel                         Although the definitions of
                                        the statutory definition for renewable                  includes ‘‘cellulosic biomass ethanol’’               ‘‘cellulosic biomass ethanol’’ and
                                        fuel, whether it is directly blended with               and ‘‘waste derived ethanol’’, each of                ‘‘waste derived ethanol’’ both include
                                        gasoline or not. This would include neat                which is defined separately. Ethanol can              animal wastes and municipal solid
                                        alternative fuels such as ethanol,                      be cellulosic biomass ethanol in one of               waste in their respective lists of covered
                                        methanol, and natural gas that meet the                 two ways, as described below.
                                        definition of renewable fuel. This is                                                                         feedstocks, there remains a distinction
                                        appropriate for several reasons. First, it              a. Ethanol Made From a Cellulosic                     between these types of ethanol. If the
                                        promotes the use of all renewable fuels,                Feedstock                                             animal wastes or municipal solid wastes
                                        which will further the achievement of                      The simplest process of producing                  contain cellulose or hemicellulose, the
                                        the purposes behind this provision.                     ethanol is by fermenting sugar in sugar               resulting ethanol can be termed
                                        Congress did not intend to limit the                    cane or beets, but ethanol can also be                ‘‘cellulosic biomass ethanol.’’ If the
                                        program to only gasoline components,                    produced from starch in corn and other                animal wastes or municipal solid wastes
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                                        as evidenced by the provision for                       feedstocks by first converting the starch             do not contain cellulose or
                                        biodiesel, and the broad definition of                  to sugar. Ethanol can also be produced                hemicellulose, then the resulting
                                        renewable fuel evidences an intention to                from complex carbohydrates, such as                   ethanol is labeled ‘‘waste derived
                                        address more renewable fuels than those                 the cellulosic portion of plants or plant             ethanol.’’ This is discussed further in
                                        used with gasoline. Second, in practice                 products. The cellulose is first                      Section III.B.1.c below.

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                                        b. Ethanol Made From Any Feedstock in                   believes that such use does not subvert                  market value for waste heat used to
                                        Facilities Using Waste Material To                      the intent of the definition.17 Since corn               qualify ethanol as cellulosic would
                                        Displace 90 Percent of Normal Fossil                    kernels can readily be used as a                         therefore be of relatively short duration
                                        Fuel Use                                                feedstock in a typical ethanol                           and not likely to warrant investment in
                                           The definition of cellulosic biomass                 production facility, their use as a fuel                 oversized combustion units.18
                                        ethanol in the Act also provides that                   for gasified/boiler units at a corn                         The term ‘‘fossil fuel normally used in
                                        ethanol made at any facility—regardless                 ethanol plant would not be considered                    the production of ethanol’’ means fossil
                                        of whether cellulosic feedstock is used                 use of ‘‘other waste material’’ for                      fuel used at the facility in the ethanol
                                        or not—may be defined as cellulosic if                  purposes of the definition of cellulosic                 production process itself, rather than
                                        at such facility ‘‘animal wastes or other               biomass ethanol.                                         other phases such as trucks transporting
                                                                                                   Regarding the use of waste heat as a                  product, and fossil fuel used to grow
                                        waste materials are digested or
                                                                                                source of thermal energy, we note that                   and harvest the feedstock. Therefore the
                                        otherwise used to displace 90 percent or
                                                                                                there may be situations in which an off-                 diesel fuel that trucks consume in
                                        more of the fossil fuel normally used in
                                                                                                site furnace, boiler or heater creates                   hauling wood waste from sawmills to
                                        the production of ethanol.’’ The
                                                                                                excess or waste heat that is not used in                 the ethanol facility would not be
                                        statutory language suggests that there
                                                                                                the process for which the thermal                        counted in determining whether the
                                        are two methods through which ‘‘animal
                                                                                                energy is employed. For example, a                       90% displacement criterion has been
                                        and other waste materials’’ may be
                                                                                                glass furnace generates a significant                    met. We are interpreting it in this way
                                        considered for displacing fossil fuel.
                                                                                                amount of waste heat that often goes                     because we believe the accounting of
                                        The first method is the digestion of
                                                                                                unused. We have therefore included in                    fuel use associated with transportation
                                        animal wastes or other waste materials.
                                                                                                the regulatory definition of cellulosic                  and other life cycle activities would be
                                        EPA has interpreted the term                            biomass ethanol waste heat generated                     extremely difficult and in many cases
                                        ‘‘digestion’’ to mean the conversion of                 from off-site sources in the definition of               impossible.19
                                        animal or other wastes into methane,                    ‘‘other waste materials’’ that can be used                  Based on the operation of ethanol
                                        which can then be combusted as fuel.                    to displace 90% of the fossil fuel                       plants, we are viewing this definition to
                                        We base our interpretation on the                       otherwise used at an ethanol production                  apply to waste materials used to
                                        practice in industry of using anaerobic                 facility.                                                produce thermal energy rather than
                                        digesters to break down waste products                     Several commenters argued that                        electrical energy. Electrical usage at
                                        such as manure into methane.                            because the source of the waste heat is                  ethanol plants is used for lights and
                                        Anaerobic digestion refers to the                       ultimately a fossil fuel in most cases                   equipment not directly related to the
                                        breakdown of organic matter by bacteria                 that it should not be considered an                      production of ethanol. Also, the
                                        in the absence of oxygen, and is used to                ‘‘other waste material’’. The Agency                     calculation of fossil fuel used to
                                        treat waste to produce renewable fuels.                 recognizes that fossil fuel is ultimately                generate such electrical usage would be
                                        We note also that the digestion of                      the source of most waste heat, but it is                 difficult because it is not always
                                        animal wastes or other waste materials                  also the case that waste heat that is                    possible to track the source of electricity
                                        to produce the fuel used at the ethanol                 uncaptured represents a loss of energy                   that is purchased off-site. Therefore, the
                                        plant does not have to occur at the plant               that could otherwise displace fossil fuel                final regulations consider displacement
                                        itself. Methane made from animal or                     use elsewhere. Specifically, waste heat                  of 90 percent of fossil fuels at the
                                        other wastes offsite and then purchased                 used at an ethanol plant would result in                 ethanol plant to mean those fuels
                                        and used at the ethanol plant would                     displacement of fossil fuel use at the                   consumed on-site and that are used to
                                        also qualify.                                           plant. In writing the proposed rule, we                  generate thermal energy used to produce
                                           The second method is suggested by                    were aware of the concern raised by the                  ethanol.
                                        the term ‘‘otherwise used’’ which we                    commenters and therefore proposed to                        One commenter suggested that
                                        interpret to mean (1) the direct                        restrict waste heat to off-site sources                  electricity from cogeneration (i.e.,
                                        combustion of the waste materials as                    only. We believe that this approach                      combined heat and power) units be
                                        fuel at an ethanol plant, or (2) the use                minimizes the concern. We disagree                       considered in determining the
                                        of thermal energy that itself is a waste                with another commenter that such                         percentage of fossil fuel use that is
                                        product; e.g., waste heat that is obtained              restriction would create a perverse                      displaced. The commenter claims that
                                        from an off-site combustion process                     incentive for facilities near ethanol                    allowing consideration of electricity use
                                        such as a neighboring plant that has a                  plants to oversize its combustion units                  would provide an incentive for
                                        furnace or boiler from which the waste                  to sell waste heat to the neighboring                    cogeneration to be used at ethanol
                                        heat is captured. With respect to the                   ethanol facilities where it would be                     plants. Our findings regarding the use of
                                        first meaning, ‘‘other waste materials’’                used to displace fossil fuel. It is highly               electricity at ethanol plants remain the
                                        includes but is not limited to waste                    unlikely that businesses would incur                     same—that is, it is not used as part of
                                        materials from tree farms (tops,                        the additional expense of building an
                                        branches, limbs, etc.), or waste materials              oversized combustion unit for the sale                      18 The term ‘‘other waste materials’’ is also

                                        from saw mills (sawdust, shavings and                   of waste heat. Also, the 2.5 gallon value                included in the portions of the definitions of
                                        bark) as well as other vegetative waste                                                                          ‘‘cellulosic biomass ethanol’’ and ‘‘waste-derived
                                                                                                given for one gallon of cellulosic                       ethanol’’ that identify feedstocks. The inclusion of
                                        materials such as corn stover, or sugar                 ethanol as provided by the Act extends                   off-site generated waste heat in the definition of
                                        cane bagasse, that could be used as fuel                only through 2012. Any additional                        ‘‘other waste materials’’, however, applies only to
                                        for gasifier/boiler units at ethanol                                                                             the portion of the definition of cellulosic biomass
                                        plants. Since these materials are not also                17 On the other hand, wood from plants or trees        ethanol that relates to displacement of fossil fuels,
                                                                                                that are grown as an energy crop may not qualify         and does not apply to the term ‘‘other waste
                                        used as a feedstock to starch-based                                                                              materials’’ as otherwise used in these definitions.
                                                                                                as a waste-derived fuel in an ethanol facility
                                        ethanol plants, they are truly waste                    because such wood would not qualify as waste                19 In Section IX of today’s preamble we discuss
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                                        materials. Although these waste                         materials under this portion of the definition.          our analysis of the lifecycle fuel impacts of the RFS
                                        materials conceivably could be                          Under the definition of renewable fuels and              rule, with respect to greenhouse gas (GHG)
                                                                                                cellulosic biomass ethanol, however, such wood           emissions. While we do account for fuel used in
                                        feedstocks to a cellulosic ethanol plant,               material could serve as a feedstock in a cellulosic      hauling materials to ethanol plants in our analysis,
                                        their use in that manner is sufficiently                ethanol plant, since these definitions do not restrict   we are using average nationwide values, rather than
                                        challenging at the current time that EPA                such feedstock to waste materials only.                  data collected for individual plants.

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                                        the heat source in ethanol production                   ethanol treated in the same manner as                 a. Biodiesel (Mono-Alkyl Esters)
                                        for economic reasons. We note also that                 domestic cellulosic or waste-derived                     Under today’s rule, the term
                                        the commenter did not present any                       ethanol under the RFS program because                 ‘‘biodiesel (mono-alkyl esters)’’ means a
                                        evidence to the contrary. As such, we                   of the difficulty in verifying their                  motor vehicle fuel which: (1) Meets the
                                        continue to maintain that electricity is                compliance with the provisions                        registration requirements for fuels and
                                        not ‘‘normally used in the production of                discussed above. Today’s rule allows                  fuel additives established by the
                                        ethanol’’ and we are therefore only                     such producers to participate, provided               Environmental Protection Agency under
                                        considering the displacement of fossil                  they meet the requirements discussed in               section 7545 of this title (Clean Air Act
                                        fuels associated with thermal energy at                 Section IV.D.2. of the preamble. The                  Section 211); (2) is a mono-alkyl ester;
                                        the plant.                                              requirements for foreign producers of
                                           Owners who claim their product                                                                             (3) meets ASTM specification D–6751–
                                                                                                cellulosic or waste-derived ethanol are               07; (4) is intended for use in engines
                                        qualifies as cellulosic biomass ethanol                 different than for domestic producers
                                        based on the 90 percent fossil fuel                                                                           that are designed to run on
                                                                                                and allow for verification of                         conventional, petroleum-derived diesel
                                        displacement through the use of waste                   compliance.
                                        materials (i.e., animal wastes, and other                                                                     fuel, and (5) is derived from
                                        waste materials) are required under                     2. What Is Biodiesel?                                 nonpetroleum renewable resources.
                                        today’s rule to keep records of fuel                       The Act states that ‘‘The term                     b. Non-Ester Renewable Diesel
                                        (waste-derived and fossil fuel) used for                ‘renewable fuel’ includes * * *                          The term ‘‘non-ester renewable
                                        thermal energy for verification of their                biodiesel (as defined in section 312(f))
                                        claims. They will also be required to                                                                         diesel’’ means a motor vehicle fuel
                                                                                                of the Energy Policy Act of 1992.’’ This              which: (1) Meets the registration
                                        track the fossil fuel equivalent of any                 definition, as modified by Section 1515
                                        off-site generated waste heat that is                                                                         requirements for fuels and fuel additives
                                                                                                of the Energy Act states:                             established by the Environmental
                                        captured and which displaces fossil fuel
                                                                                                   The term ‘‘biodiesel’’ means a diesel fuel         Protection Agency under section 7545 of
                                        used in the ethanol production process.                 substitute produced from nonpetroleum
                                        Since such waste heat would typically                                                                         this title (Clean Air Act Section 211); (2)
                                                                                                renewable resources that meets the                    is not a mono-alkyl ester; (3) is intended
                                        be purchased through agreement with                     registration requirements for fuels and fuel
                                        the off-site owner, we do not feel it                                                                         for use in engines that are designed to
                                                                                                additives established by the Environmental
                                        burdensome for owners to track such                     Protection Agency under section 7545 of this
                                                                                                                                                      run on conventional, petroleum-derived
                                        information. Owners will therefore                      title, and includes biodiesel derived from            diesel fuel, and (4) is derived from
                                        calculate the amount of energy in Btu’s                 animal wastes, including poultry fats and             nonpetroleum renewable resources.
                                        associated with waste-derived fuels                     poultry wastes, and other waste materials, or         Current examples of a non-ester
                                        (including the fossil fuel equivalent                   municipal solid waste and sludges and oils            renewable diesel include: ‘‘Renewable
                                                                                                derived from wastewater and the treatment of          diesel’’ produced by the Neste or UOP
                                        waste heat), and divided by the total
                                                                                                wastewater.                                           process, or diesel fuel produced by
                                        energy in Btus used to produce ethanol
                                        in a given year. Ethanol produced from                     This definition of biodiesel would                 processing fats and oils through a
                                        such facilities will get the benefit of the             include both mono-alkyl esters which                  refinery hydrotreating process.
                                        2.5 ratio. (Section III.D.3.e discusses the             meet the current ASTM specification D–                3. Does Renewable Fuel Include Motor
                                        requirements for owners of facilities that              6751–07 20 (the most common meaning                   Fuel That Is Made From Coprocessing a
                                        claim to have produced cellulosic                       of the term ‘‘biodiesel’’) that have been             Renewable Feedstock With Fossil Fuels?
                                        ethanol under the 90 percent                            registered with EPA, and any non-esters
                                        displacement provision, but which fail                  that are intended for use in engines that                Renewable fuels can be produced by
                                        to meet those requirements.)                            are designed to run on conventional,                  processing biologically derived wastes
                                                                                                petroleum-derived diesel fuel, have                   such as animal fats, as well as other
                                        c. Ethanol That Is Made From the Non-                   been registered with the EPA, and are                 nonpetroleum based feedstocks in a
                                        Cellulosic Portions of Animal, Other                    made from any of the feedstocks listed                traditional refinery—that is, a refinery
                                        Waste, and Municipal Waste                              above.                                                that normally uses crude oil or other
                                           ‘‘Waste derived ethanol’’ is defined in                 To implement the above definition of               fossil fuel-based blendstocks as feeds to
                                        the Act as ethanol derived from ‘‘animal                biodiesel in the context of the RFS                   processing units. Such wastes are pre-
                                        wastes, including poultry fats and                      rulemaking while still recognizing the                processed so that they are in liquid form
                                        poultry wastes, and other waste                         unique history and role of mono-alkyl                 to enable their further processing in
                                        materials; * * * or municipal solid                     esters meeting ASTM D–6751, we have                   units at a traditional refinery. In the
                                        waste.’’ Both animal wastes and                         divided the Act’s definition of biodiesel             proposed rule, we defined such
                                        municipal solid waste are also listed as                into two separate parts: Biodiesel                    feedstocks as ‘‘biocrudes’’ and included
                                        allowable feedstocks for the production                 (mono-alkyl esters) and non-ester                     a discussion on how the fuels resulting
                                        of ‘‘cellulosic biomass ethanol.’’ When                 renewable diesel. The combination of                  from these feedstocks should be
                                        such feedstocks do not contain                          ‘‘biodiesel (mono-alkyl esters)’’ and                 counted. Our basic approach remains
                                        cellulose, however, the resulting ethanol               ‘‘non-ester renewable diesel’’ in the                 the same. We have changed the term
                                        is waste derived. Both waste-derived                    regulations fulfills the Act’s definition             ‘‘biocrudes’’ to ‘‘renewable crudes’’,
                                        and cellulosic ethanol both are                         of biodiesel. Commenters supported                    since we believe it is more accurate. We
                                        considered equivalent to 2.5 gallons of                 EPA’s approach in defining biodiesel in               are providing additional discussion in
                                        renewable fuel when determining                         this manner.                                          this preamble on how renewable fuels
                                        compliance with the renewable volume                                                                          are made from renewable crudes.
                                        obligation.                                               20 In the event that the ASTM specification D–         The fuels resulting from the co-
                                                                                                6751 is succeeded with an updated specification in    processing of the pre-processed liquid
                                        d. Foreign Producers of Cellulosic and
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                                                                                                the future, EPA may revise the regulations            form of these renewable crudes (i.e.,
                                        Waste-Derived Ethanol                                   accordingly at such time. Regulations cannot be       those feedstocks listed in the definition
                                                                                                promulgated that only reference ‘‘the most recent
                                          Some commenters stated that foreign                   version’’ of an ASTM standard, since doing so
                                                                                                                                                      of ‘‘renewable fuel’’ and, for biodiesel,
                                        ethanol producers should not be able to                 would place the American Society for Testing and      in the statutory definition of
                                        have their cellulosic or waste-derived                  Materials in the position of a regulatory body.       ‘‘biodiesel’’) in a traditional refinery are

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                                        23918                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        themselves indistinguishable from the                   refinery.21 In this case, a batch of                  block codes that are in the RIN
                                        gasoline and diesel products produced                   renewable crude used as feedstock to a                (discussed in further detail in Section
                                        from crude oil. As such, the treatment                  production unit would replace crude oil               III.D).22 The general counting procedure
                                        of any resulting renewable fuel presents                or other petroleum based feedstocks                   for renewable crude-based fuels that are
                                        a particular complication in terms of                   which ordinarily would be the feedstock               not derived through coprocessing with
                                        RFS program compliance—namely, if                       in that process unit. The third approach              fossil fuels is that the volumes of
                                        such fuels are indistinguishable from                   would be non-ester renewable diesel                   renewable fuel produced are measured
                                        gasoline and diesel produced from                       fuel produced by processing fats and                  directly, and an appropriate
                                        crude oil feedstocks, how are the                       oils through a refinery hydrotreating                 Equivalence Value is assigned according
                                        volumes to be measured? Also, some                      process. All three approaches can                     to the methodology discussed in Section
                                        renewable feedstocks are used to                        produce renewable fuel that is valid for              III.B.4.
                                        produce renewable diesel (discussed in                  compliance purposes under the RFS
                                                                                                program, but the measurement of                       4. What Are ‘‘Equivalence Values’’ for
                                        Section III.B.2 above). In other                                                                              Renewable Fuel?
                                        circumstances renewable feedstocks are                  volumes produced and/or their
                                        processed in dedicated facilities or                    associated Equivalence Values may                        One question that EPA needed to
                                        units—that is, in either (1) facilities                 differ.                                               address in developing the regulations
                                        other than refineries that process fossil                                                                     was how to count volumes of renewable
                                                                                                b. How Are Renewable Crude-Based
                                        fuels, (2) equipment located within a                                                                         fuel in determining compliance with the
                                                                                                Fuel Volumes Measured?
                                        traditional refinery but which is                                                                             renewable volume obligation. The Act
                                        dedicated to renewable feedstocks, or                      As discussed above, some renewable                 stipulates that every gallon of waste-
                                        (3) equipment located within a                          feedstocks are processed in facilities                derived ethanol and cellulosic biomass
                                        traditional refinery that processes                     other than refineries, or in equipment                ethanol should count as if it were 2.5
                                        renewable and conventional feedstocks                   located within a traditional refinery but             gallons for RFS compliance purposes.
                                        but solely for the production of motor                  which is dedicated to renewable                       The Act does not stipulate similar
                                        vehicle fuels.                                          feedstocks. The resulting product is                  values for other renewable fuels, but as
                                                                                                ‘‘renewable diesel’’ (and such units may              described below we believe it is
                                           The processing approach for the                      in the future also produce ‘‘renewable                appropriate to do so.
                                        renewable feedstock dictates whether                    gasoline’’ though none is currently                      We are requiring that the
                                        the resulting fuel is distinguishable from              made in such dedicated facilities). In                ‘‘Equivalence Values’’ for renewable
                                        crude oil-based fuels by virtue of its                  other situations, renewable crudes are                fuels other than those for which specific
                                        being made and stored separately from                   coprocessed along with crude oils in                  values are set forth in the Act be based
                                        fossil fuels as discussed in further detail             traditional refineries, resulting in                  on their energy content in comparison
                                        below. Therefore, our method for                        gasoline or diesel products that may be               to the energy content of ethanol,
                                        counting renewable fuels made from                      combinations of renewable and non-                    adjusted as necessary for their
                                        renewable feedstocks differ based on                    renewable fuels.                                      renewable content. The result is an
                                        how the renewable feedstock is                             In the case of renewable crude                     Equivalence Value for corn ethanol of
                                        processed                                               coprocessed with fossil fuels in                      1.0, for biobutanol of 1.3, for biodiesel
                                        a. Definition of ‘‘Renewable Crudes’’                   refineries, we are assuming that all of               (mono alkyl ester) of 1.5, and for non-
                                        and ‘‘Renewable Crude-Based Fuels’’                     the renewable crude used as a feedstock               ester renewable diesel of 1.7. However,
                                                                                                in a refinery unit will end up as a                   the methodology can be used to
                                           Under some circumstances renewable                   renewable crude-based fuel that is valid              determine the appropriate equivalence
                                        feedstocks can be preprocessed into a                   for RFS compliance purposes. We are                   value for any other potential renewable
                                        liquid that is similar to petroleum-based               taking this approach because renewable                fuel as well.
                                        feedstocks used in traditional refineries.              crudes that are processed through                        This section describes why the use of
                                        We are classifying such liquids as                      distillate hydrotreaters are first pre-               the Equivalence Value approach in
                                        ‘‘renewable crudes,’’ and any motor                     processed so that they are in liquid                  today’s rule is appropriate under the
                                        vehicle fuel that is made from such                     form, and such liquid produces diesel                 Act, and our conclusions regarding the
                                        liquids is defined broadly as ‘‘renewable               fuel in volumes approximately equal to                possible future use of lifecycle analyses
                                        crude-based fuel’’.                                     the amount that is input to the                       as the basis of Equivalence Values.
                                           There are three approaches that can                  hydrotreater. We are assuming that
                                                                                                renewable crudes could also be                        a. Authority Under the Act To Establish
                                        be taken to making renewable fuels from                                                                       Equivalence Values
                                        renewable crudes. The first would                       processed in other process units at
                                        include gasoline or diesel products                     refineries to make gasoline. The                        We are requiring that Equivalence
                                        resulting from the processing of                        renewable crude processed at a refinery               Values be assigned to every renewable
                                        renewable crudes in production units                    is functionally equivalent to crude oil,              fuel to provide an indication of the
                                        within refineries that simultaneously                   and the end products (gasoline and/or                 number of gallons that can be claimed
                                        process crude oil and other petroleum                   diesel) are indistinguishable from                    for compliance purposes for every
                                        based feedstocks. In these cases, the                   products made from crude oil. Thus,                   physical gallon of renewable fuel. An
                                        final product consists of a mixture of                  rather than requiring the refiner to                  Equivalence Value of 1.0 means that
                                        renewable fuel and fossil-based fuel,                   document what portion of the                          every physical gallon of renewable fuel
                                        and may include both motor vehicle                      renewable crude-based fuel is renewable               counts as one gallon for RFS compliance
                                        fuel and non-motor vehicle fuel. The                    fuel, we are requiring that the volume of             purposes. An Equivalence Value greater
                                        second approach would include diesel                    the renewable crude itself count as the               than 1.0 means that every physical
                                                                                                volume of renewable fuel produced for                 gallon of renewable fuel counts as more
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                                        and other products resulting from
                                        processing renewable crudes at a stand-                 the purposes of determining the volume                than one gallon for RFS compliance
                                        alone facility that does not process any                  21 Renewable crude-based fuels will need to be        22 We are considering the volumes of renewable
                                        fossil fuels, or at a facility dedicated to             registered under the provisions contained in 40 CFR   crude itself, not the feedstocks that are made into
                                        renewable crudes within a traditional                   79 Part 4 before they can be sold commercially.       renewable crude.

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                                        purposes, while a value less than 1.0                   ‘‘appropriate’’ credit for biodiesel, and             required by the Act may not be
                                        counts as less than one gallon.                         also establishes a 2.5 value for cellulosic           consumed in use.
                                           We have interpreted the Act as                       biomass ethanol and waste-derived                        Some commenters disagreed with our
                                        allowing us to develop Equivalence                      ethanol. As ethanol and biodiesel were                belief that there will only be very
                                        Values according to the methodology                     likely the two primary renewable fuels                limited additional situations where an
                                        discussed below. We believe that the                    envisioned in the near-term under the                 Equivalence Value other than 1.0 is
                                        use of Equivalence Values based on                      Act, it would seem normal for Congress                used. They expressed concern that the
                                        energy content in comparison to the                     to have focused on these. However,                    provision for Equivalence Values will
                                        energy content of ethanol is consistent                 Congress also clearly allowed for other               interfere with meeting the total national
                                        with the intent of Congress to treat                    renewable fuels to participate in the                 volume goals for usage of renewable
                                        different renewable fuels differently in                RFS program, and it is appropriate for                fuel.
                                        different circumstances, and to provide                 EPA to consider how they should be                       While in the long term we agree that
                                        incentives for use of renewable fuels in                treated under the Act. Furthermore, in                renewable fuels with an Equivalence
                                        certain circumstances, as evidenced by                  addition to the Act’s direction that EPA              Value greater than 1.0 may grow to
                                        those specific circumstances addressed                  determine an appropriate level of credit              become a larger portion of the
                                        by Congress. The Act has several                        for biodiesel, the Act also directs EPA               renewable fuel pool, we do not believe
                                        provisions that provide for mechanisms                  to determine the ‘‘appropriate’’ amount               that this is likely to be the case before
                                        other than straight volume measurement                  of credit for renewable fuel use in                   2013, the time period when the statute
                                        to determine the value of a renewable                   excess of the required volumes, and to                specifies the overall national volumes.
                                        fuel in terms of RFS compliance. For                    determine the ‘‘renewable fuel portion’’              EPA will be issuing a new rule prior to
                                        example, 1 gallon of cellulosic biomass                 of a blending component derived from                  2013, and can reconsider its approach to
                                        or waste derived ethanol is to be treated               a renewable fuel. These statutory                     Equivalence Values for renewable fuel
                                        as 2.5 gallons of renewable fuel. EPA is                provisions lend further support to our                at that time if it is appropriate to do so.
                                        also required to establish an                           belief that Congress did not limit the                For instance, EIA projects that biodiesel
                                        ‘‘appropriate amount of credits’’ for                   RFS program solely to a straight volume               volumes will reach 300 million gallons
                                        biodiesel, and to provide for ‘‘an                      measurement of gallons. Having                        by 2012. With the Equivalence Value of
                                        appropriate amount of credit’’ for using                concluded that it is appropriate to                   1.5 that we are finalizing today, this
                                        more renewable fuels than are required                  determine an appropriate level of credit              means that the 7.5 billion gallons
                                        to meet your obligation. EPA is also to                 for biodiesel based on energy content as              required by the Act for 2012 could be
                                        determine the ‘‘renewable fuel portion’’                compared to ethanol, EPA is using a                   met with 7.35 billion gallons of
                                        of a blending component derived from                    consistent approach for other types of                renewable fuel. However, this result is
                                        a renewable fuel. These statutory                                                                             well within the variability in actual
                                                                                                renewable fuels for which a specific
                                        provisions provide evidence that                                                                              volumes resulting from the other
                                                                                                statutory credit value is not prescribed.
                                        Congress did not limit this program                                                                           statutory provisions described above,
                                        solely to a straight volume measurement                    Another reason given by parties                    and would still result in 7.5 billon
                                        of gallons in the context of the RFS                    opposing our approach to Equivalence                  gallons of ethanol-equivalent (in terms
                                        program.                                                Values was that Equivalence Values                    of energy content) renewable fuel being
                                           In response to the NPRM, some                        higher than 1.0 would result in actual                consumed. Congress explicitly
                                        commenters supported our view that the                  volumes of renewable fuel being less                  recognized the expected use of credits
                                        Act provides sufficient context and                     than the volumes required by the Act.                 for biodiesel, as it did for cellulosic
                                        direction to permit the use of                          Although it is true that the Act specifies            ethanol. By requiring or authorizing
                                        Equivalence Values, while other                         the annual volumes of renewable fuel                  EPA to assign credit values for such
                                        commenters opposed this view. Some                      that the program must require and                     products, Congress recognized that the
                                        parties commented that the                              directs EPA to promulgate regulations                 national volumes specified in the Act
                                        methodology proposed in the NPRM did                    ensuring that gasoline sold each year                 would not necessarily be met on a
                                        not go far enough. These parties argued                 ‘‘contains the applicable volume of                   gallon per gallon basis. For the very
                                        that instead of energy content, EPA                     renewable fuel,’’ the Act also contains               limited number of other renewable fuels
                                        should be using lifecycle impacts to set                language that makes the achievement of                not covered by these express statutory
                                        the Equivalence Values. Lifecycle                       those volumes imprecise. For instance,                provisions, assigning an equivalence
                                        analyses are discussed in more detail in                the deficit carryover provision allows                value is consistent with this overall
                                        Section III.B.4.c.                                      any obligated party to fail to meet its               approach. Moreover, EIA is projecting
                                           Parties that opposed our proposed                    RVO in one year if it meets the deficit               that the total volume of renewable fuel
                                        approach to Equivalence Values argued                   and its RVO in the next year. If many                 will exceed the Act’s requirements by a
                                        that since the Act did not explicitly give              obligated parties took advantage of this              substantial margin due primarily to the
                                        EPA the authority to set Equivalence                    provision, it could result in the                     favorable economics of ethanol in
                                        Values for renewable fuels other than                   nationwide total volume obligation for a              comparison to gasoline. Under such
                                        cellulosic biomass ethanol and waste-                   particular calendar year not being met.               projections, the existence of renewable
                                        derived ethanol, EPA had no authority                   In addition, the calculation of the                   fuels with Equivalence Values higher
                                        to do so. In their view, the explicit                   renewable fuel standard is based on                   than 1.0 will have no impact on the
                                        inclusion of a 2.5 credit value for                     projected nationwide gasoline volumes                 demand for renewable fuel.
                                        cellulosic and waste-derived ethanol                    provided by EIA (see Section III.A). If                  Finally, the Act also contains
                                        and the omission of any credit values                   the projected gasoline volume falls short             language indicating that EPA has
                                        for other renewables fuels should be                    of the actual gasoline volume in a given              flexibility in determining how various
                                        taken as evidence that Congress                         year, the standard will fail to create the            renewable fuels should count towards
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                                        intended all other renewable fuels to                   demand for the full renewable fuel                    meeting the required annual volumes.
                                        have Equivalence Values of 1.0.                         volume required by the Act for that                   For instance, valid renewable fuels are
                                           We disagree that our discretion is so                year. The Act contains no provision for               defined as those that ‘‘replace or reduce
                                        strictly limited. The Act specifically                  correcting for underestimated gasoline                the quantity of fossil fuel present in a
                                        gave EPA the authority to determine an                  volumes, and as a result the volumes                  fuel mixture used to operate a motor

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                                        vehicle.’’ Fossil fuels such as gasoline or             Equivalence Value that precisely                      atoms’’), but rather must be based on the
                                        diesel are only replaced or reduced to                  accounts for the amount of petroleum in               energy inherent in that portion of the
                                        the degree that the energy they contain                 motor vehicle fuel that is reduced or                 molecules comprised of renewable
                                        is replaced or reduced. We do not                       replaced by that renewable fuel in                    atoms. To identify the renewable atoms
                                        believe it would be appropriate to treat                comparison to ethanol. To the degree                  within the molecules that comprise the
                                        a renewable fuel with very low                          that corn-based ethanol continues to                  renewable fuel, we must examine the
                                        volumetric energy content as being                      dominate the pool of renewable fuel,                  chemical process through which the
                                        equivalent to a renewable fuel with very                this approach allows actual volumes of                renewable fuel was produced. A
                                        high volumetric energy content, since                   renewable fuel to be consistent with the              detailed explanation of calculations for
                                        the impact on motor vehicle fossil fuel                 volumes required by the Act.                          R and several examples are given in a
                                        use is very different for these two                       Equivalence Values also account for                 technical memorandum in the docket.23
                                        renewable fuels. The use of Equivalence                 the renewable content of renewable                       In the case of ethanol, denaturants are
                                        Values based on volumetric energy                       fuels, since the presence of any non-                 added to preclude the ethanol’s use as
                                        content helps to achieve this goal.                     renewable content impairs the ability of              food. Denaturants are generally a fossil-
                                           A case in point would be butanol. It                 the renewable fuel to replace or reduce               fuel based, gasoline-like hydrocarbon in
                                        is produced from the same feedstocks as                 the quantity of fossil fuel present in a              concentrations of 2–5 volume percent,
                                        ethanol (i.e., starch crops such as corn)               fuel mixture used to operate a motor                  with 5 percent being the most common
                                        in a similar process. However, it results               vehicle. The Act specifically states that             historical level. One commenter argued
                                        in an alcohol with a higher volumetric                  only the renewable fuel portion of a                  that the Equivalence Value of ethanol
                                        energy content than ethanol. If we were                 blending component should be                          must be specified as 0.95 for this very
                                        to give butanol an Equivalence Value of                 considered part of the applicable                     reason. However, as described in the
                                        1.0, it would provide an economic                       volume under the RFS program. As                      NPRM, we believe that the Equivalence
                                        disincentive for corn to be used to                     described in more detail below, we have               Value for ethanol should be specified as
                                        produce butanol instead of ethanol.                     interpreted this to mean that every                   1.0 despite the presence of a denaturant.
                                           As a result, we continue to believe                  renewable fuel should be evaluated at                 First, as stated above, ethanol is
                                        that the assignment of Equivalence                      the molecular level to distinguish                    expected to dominate the renewable fuel
                                        Values other than 1.0 to some renewable                 between those molar fractions that were               pool for at least the next several years,
                                        fuels is a reasonable way for the RFS                   derived from a renewable feedstock,                   and it is likely that the authors of the
                                        program to establish ‘‘appropriate’’                    versus those molar fractions that were                Act recognized this fact. Thus it seems
                                        credit values while also ensuring that                  derived from a fossil fuel feedstock.                 likely that it was the intent of the
                                        the Act’s volume obligations, read                      Along with energy content in                          authors of the Act that each physical
                                        together with the Act’s directions                      comparison to ethanol, the relative                   gallon of denatured ethanol be counted
                                        regarding credit values towards                         energy fraction of renewable versus non-              as one gallon for RFS compliance
                                        fulfillment of that obligation, are                     renewable content is thus used directly               purposes. Second, the accounting of
                                        satisfied. This approach is consistent                  as the basis for the Equivalence Value.               ethanol has historically ignored the
                                        with the way Congress treated the                         We are requiring that the calculation               presence of the denaturant. For
                                        various specific circumstances noted                    of Equivalence Values simultaneously                  instance, under Internal Revenue
                                        above, and thus is basically a                          take into account both the renewable                  Service (IRS) regulations the denaturant
                                        continuation of that process.                           content of a renewable fuel and its                   can be counted as ethanol by parties
                                        b. Energy Content and Renewable                         energy content in comparison to                       filing claims to the IRS for the federal
                                        Content as the Basis for Equivalence                    denatured ethanol. To accomplish this,                excise tax credit. Also, EIA reporting
                                        Values                                                  we are requiring the following formula:               requirements for ethanol producers
                                                                                                EV = (RRF / REth) × (ECRF / ECEth)                    allow them to include the denaturant in
                                           To appropriately account for the                                                                           their reported volumes. The commenter
                                        different energy contents of different                  Where:
                                                                                                                                                      arguing for the use of an Equivalence
                                        renewable fuels as well as the fact that                EV = Equivalence Value for the renewable
                                                                                                     fuel.                                            Value of 0.95 for ethanol provided no
                                        some renewable fuels actually contain                                                                         additional information to counter these
                                                                                                RRF = Renewable content of the renewable
                                        some non-renewable content, we are                           fuel, in percent of molecular energy.            arguments.
                                        requiring that Equivalence Values be                    REth = Renewable content of denatured                    Since we are requiring that denatured
                                        calculated using both the renewable                          ethanol, in percent of molecular energy.         ethanol be assigned an Equivalence
                                        content of a renewable fuel and its                     ECRF = Energy content of the renewable fuel,          Value of 1.0, this must be reflected in
                                        energy content. This section describes                       in Btu per gallon (LHV).                         the values of REth and ECEth. We have
                                        the calculation methodology for                         ECEth = Energy content of denatured ethanol,
                                                                                                                                                      calculated these values to be 93.1
                                        Equivalence Values.                                          in Btu per gallon (LHV).
                                                                                                                                                      percent and 77,550 Btu/gal,
                                           In order to take the energy content of                 Instead of the higher heating value,                respectively. Details of these
                                        a renewable fuel into account when                      the lower heating value (LHV) is used to              calculations can be found in the
                                        calculating the Equivalence Values, we                  represent energy content because it                   aforementioned technical memorandum
                                        must identify an appropriate point of                   more accurately reflects the energy                   to the docket. The final equation to be
                                        reference. Ethanol is a reasonable point                available in the fuel to produce work.                used for calculation of Equivalence
                                        of reference as it is currently the most                  R is a measure of that portion of the               Values is therefore:
                                        prominent renewable fuel in the                         renewable fuel molecules which can be                 EV = (R / 0.931) * (EC / 77,550)
                                        transportation sector, and it is likely                 considered to have come from a
                                        that the authors of the Act saw ethanol                 renewable source. Since R (that is, RRF               Where:
                                        as the primary means through which the                  and REth) is being combined with                      EV = Equivalence Value for the renewable
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                                        required volumes would be met in at                     relative energy content in the formula                    fuel.
                                        least the first years of the RFS program.               above, the value of R cannot be based                    23 ‘‘Calculation of equivalence values for
                                        By comparing every renewable fuel to                    on the weight fraction of the atoms in                renewable fuels under the RFS program’’, memo
                                        ethanol on an equivalent energy content                 the molecule which came from a                        from David Korotney to EPA Air Docket OAR–
                                        basis, each renewable fuel is assigned an               renewable feedstock (the ‘‘renewable                  2005–0161.

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                                        R = Renewable content of the renewable fuel,               TABLE III.B.4–1.—EQUIVALENCE but which has a different renewable
                                            expressed as a percent, on an energy                VALUES FOR SOME RENEWABLE FUELS content or energy content than the
                                            basis, of the renewable fuel that comes                                                                                values assumed for our calculations. For
                                            from a renewable feedstock.                                                                                Equiva-     such cases we have created a regulatory
                                        EC = Energy content of the renewable fuel,                                                                      lence      mechanism through which the producer
                                            in Btu per gallon (lower heating value).                                                                    value      may submit a petition to the Agency
                                                                                                                                                                   describing the renewable fuel, its
                                           For the specific case of biogas which                                                                                   feedstock and production process, and
                                        cannot be measured in volumetric units,                 Cellulosic biomass ethanol or
                                                                                                  waste-derived ethanol 24 ...........                       2.5   the calculation of its Equivalence Value.
                                        we are specifying that 77,550 Btu of                    Ethanol from corn, starches, or                                    The Agency will review the petition and
                                        biogas will be considered to be the                       sugar .........................................            1.0   approve an appropriate Equivalence
                                        equivalent of one gallon of renewable                   Biodiesel (mono alkyl ester) .........                       1.5   Value based on the information
                                        fuel.                                                   Non-ester renewable diesel and                                     provided. We will publish newly
                                                                                                  hydrotreated renewable crudes                              1.7   assigned Equivalence Values in the
                                           The calculation of the Equivalence                   Butanol ..........................................           1.3
                                        Value for a particular renewable fuel                   Renewable crude-based fuels ......                           1.0
                                                                                                                                                                   Federal Register at the same time as the
                                        can lead to values that deviate only                                                                                       annual standard is published each
                                        slightly from 1.0, and/or can have                         Consistent with the NPRM, the                                   November.
                                        varying degrees of precision depending                  Equivalence Value for renewable crude-                                In the NPRM, we also described an
                                                                                                based fuels is 1.0. Although some                                  additional approach to setting the
                                        on the uncertainty in the value of R or
                                                                                                renewable crude-based fuels might                                  Equivalence Value for biodiesel (mono
                                        ECRF. In the NPRM we proposed several
                                                                                                warrant a higher value based on their                              alkyl esters). Since ethanol derived from
                                        simplifications to streamline the                                                                                          waste products such as animal wastes
                                        application of Equivalence Values in the                energy content, it is also likely that
                                                                                                some of the renewable crude does not                               and municipal solid waste will be
                                        context of the RFS program. These                                                                                          assigned an Equivalence Value of 2.5
                                        included the use of pre-specified bins,                 end up as a motor vehicle fuel. Rather
                                                                                                than requiring the refiner to document                             based on a requirement in the Act, we
                                        rounding, and the use of an Equivalence                                                                                    pointed out that it might be appropriate
                                                                                                what portion of the biocrude-based
                                        Value of 1.0 when the calculated value                                                                                     to create a parallel provision for
                                                                                                renewable fuel is other than diesel or
                                        was close to 1.0. We received some                                                                                         biodiesel made from wastes. Under this
                                                                                                gasoline (e.g., jet fuel), we are
                                        comments suggesting that these three                    combining the Equivalence Value of 1.0                             approach, biodiesel made from waste
                                        simplifications unnecessarily                           with a requirement that the volume of                              products would have been assigned an
                                        complicated the determination of                        the renewable crude itself count as the                            Equivalence Value of 2.5 through 2012.
                                        Equivalence Values. Based on                            volume of renewable fuel produced for                              Supporters of 2.5 Equivalence Value
                                        comments received, we have                              the purposes of determining the volume                             argued that it would place the treatment
                                        determined for the final rule to simplify               block codes that are in the RIN                                    of waste-derived biodiesel on the same
                                        the application of Equivalence Values                   (discussed in further detail in Section                            level as waste-derived ethanol, and that
                                        by only requiring the calculated values                 III.D). While this approach may result in                          it would be good Agency policy to
                                        be rounded to the first decimal place.                  some products such as jet fuel being                               encourage and reward parties that turn
                                        Also, based on consideration of                         counted as renewable fuel, we believe                              materials that would otherwise be
                                                                                                the majority of the products produced                              wasted into usable motor vehicle fuel.
                                        comments received on how such
                                                                                                will be motor vehicle fuel because we                              While some of these arguments may
                                        products should be counted, for
                                                                                                assume refiners who elect to use                                   have merit, we nevertheless believe that
                                        renewable diesel produced by                                                                                               it is most appropriate to maintain the
                                        processing fats and oils through a                      biocrudes would do so to help meet the
                                                                                                requirements of this rule. Furthermore,                            general methodology applicable to
                                        refinery hydrotreating process, we have                                                                                    renewable fuels at this time and reserve
                                        determined that the default Equivalence                 both diesel and gasoline presently make
                                                                                                up about 85 percent of the product slate                           the 2.5:1 valuation for just the fuel
                                        Value should be 1.7 consistent with                                                                                        specified by Congress. Therefore, we
                                        renewable diesel produced through                       of refineries on average. This amount
                                                                                                that has been steadily increasing for                              have not finalized a 2.5 Equivalence
                                        other processes. This approach                                                                                             Value for waste-derived biodiesel.
                                                                                                over time, and we expect that the
                                        recognizes that hydrotreating produces a                                                                                      For the specific case of ETBE, we have
                                                                                                percentage will continue to increase as
                                        product consistent with our definition                                                                                     chosen for this final rule to eliminate a
                                                                                                demand for gasoline and diesel
                                        of non-ester renewable diesel.                                                                                             uniquely determined Equivalence
                                                                                                increases. Thus the designation of an
                                        Furthermore, based on comments                                                                                             Value. As described in Section III.D.2.b,
                                                                                                Equivalence Value of 1.0 balances out
                                        received, the volume of the final                                                                                          ETBE is generally made from ethanol to
                                                                                                the potentially higher energy content of
                                        product is expected to be comparable to                                                                                    which RINs will have already been
                                                                                                renewable crude-based fuels with the
                                        the volume of the input renewable                                                                                          assigned. An ETBE producer, therefore,
                                                                                                potential for lower yields of renewable
                                        crude. Therefore, the volume of                                                                                            would need only assign the RINs
                                                                                                fuel produced as motor vehicle fuel. We
                                        renewable crude will be used as a                                                                                          received with the ethanol to the ETBE
                                                                                                received no comment on this issue and
                                        surrogate for the volume of the final                                                                                      made from that ethanol. In this case,
                                                                                                are finalizing it as proposed.
                                                                                                   Since there are a wide variety of                               there will be no need to generate new
                                        product. With the exception of
                                                                                                possible renewable fuels that could                                RINs, and therefore no need for a
                                        renewable diesel produced through
                                                                                                qualify under the RFS program, there                               separate Equivalence Value.
                                        hydroteating fats or oils which is                                                                                            Except for cellulosic biomass ethanol
                                        identical to renewable diesel, none of                  may be cases in which a party produces
                                                                                                a renewable fuel not shown in Table                                and waste-derived ethanol, the
                                        the specific Equivalence Values                                                                                            Equivalence Values shown in Table
                                                                                                III.B.4–1. A party may also produce a
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                                        proposed in the NPRM have changed as                                                                                       III.B.4–1, or any others approved
                                        a result of this simplification. The final              renewable fuel listed in the above table,
                                                                                                                                                                   through the petition process, will be
                                        values are shown in the table below.                      24 The 2.5 value is specified by the Energy Act,                 applicable for all years. However,
                                                                                                and is not based on the EV formula discussed                       beginning in 2013, the 2.5 to 1 ratio no
                                                                                                earlier.                                                           longer applies for cellulosic biomass

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                                        ethanol. The Act is unclear about                       picture of the potential impacts of                      There currently exists no organized,
                                        whether the 2.5 to 1 ratio for waste-                   different fuels or different fuel sources.            comprehensive dialogue among
                                        derived ethanol will apply after 2012,                  While the use of energy content to                    stakeholders about the appropriate tools
                                        though it might be appropriate to treat                 establish Equivalence Values is an                    and assumptions behind any lifecycle
                                        cellulosic biomass ethanol and waste-                   improvement over a simple gallon-for-                 analyses. We will be initiating more
                                        derived ethanol in a consistent manner.                 gallon approach, a lifecycle basis would              comprehensive discussions about
                                        Nevertheless, in the subsequent                         provide a further level of sophistication             lifecycle analyses with stakeholders in
                                        rulemaking mentioned above, we will                     in assessing the net energy input and                 the near future.
                                        address this issue explicitly. In today’s               output of fuels and the emissions                        Another issue related to using
                                        final rule we are only specifying the                   associated with the use of different                  lifecycle analyses as the basis for
                                        ratio for cellulosic biomass and waste-                 fuels.                                                Equivalence Values pertains to the
                                        derived ethanol prior to 2013.                             Supporters of the use of lifecycle                 ultimate impact that the RFS program
                                                                                                analyses for setting the Equivalence                  would have on petroleum use, fossil
                                        c. Lifecycle Analyses as the Basis for                  Values of different renewable fuels                   fuel use, regulated pollutant emissions,
                                        Equivalence Values                                      pointed to several advantages of this                 and/or emissions of GHGs. With a fixed
                                           In the NPRM we also described an                     approach. First, doing so could create an             volume of renewable fuel required
                                        alternative approach in which                           incentive for obligated parties to choose             under the RFS program, any renewable
                                        Equivalence Values for renewable fuels                  renewable fuels having a greater ability              fuel with an Equivalence Value greater
                                        would be based on lifecycle analyses.                   to reduce fossil fuel use or resulting                than 1.0 would necessarily mean that
                                        We described both the merits and                        emissions, since such renewable fuels                 fewer actual gallons would be needed to
                                        challenges associated with such an                      would have higher Equivalence Values                  meet the RFS standard. Thus, the
                                        approach and requested comment.                         and thus greater value in terms of                    advantage per gallon may be offset with
                                        Based on the comments received we                       compliance with the RFS requirements.                 fewer overall gallons, resulting in no
                                        continue to believe that lifecycle                      The preferential demand for renewable                 overall additional benefit under the
                                        analyses could provide a means of                       fuels having higher Equivalence Values                chosen metric for using fuels with
                                        reflecting the relative benefits of one                 could in turn spur additional growth in               higher Equivalence Values unless the
                                        renewable fuel in comparison to                         production of these renewable fuels.                  RFS standard was simultaneously
                                        another. However, we are not, in this                   Second, using lifecycle analyses as the               adjusted by Congress.
                                        action, establishing Equivalence Values                 basis for Equivalence Values could                       Based on comments received in
                                        on a lifecycle basis. Rather, we intend                 orient the RFS program more explicitly                response to our NPRM, we continue to
                                        to continue evaluating and updating the                 towards reducing petroleum use, fossil                believe that the current state of
                                        tools and assumptions associated with                   fuel use or emissions.                                scientific inquiry surrounding lifecycle
                                        lifecycle analyses in a collaborative                      However, the use of lifecycle analyses             analyses is not sufficiently robust to
                                        effort with stakeholders. This                          to establish the Equivalence Values for               warrant its use to set Equivalence
                                        rulemaking makes no determination and                   different renewable fuels also raises a               Values in this final rule. Since
                                        should not be interpreted to make any                   number of issues, generally                           renewable fuel use is expected to far
                                        determination regarding whether EPA                     acknowledged by supporters of the use                 exceed the standards being finalized
                                        has the legal authority under section                   of lifecycle analyses. For instance,                  today, a higher equivalence value for
                                        1501 of the Energy Act, as incorporated                 lifecycle analyses can be conducted                   those renewables with greater lifecycle
                                        in section 211(o) of the Clean Air Act,                 using several different metrics,                      benefits will likely do little to stimulate
                                        to use lifecycle analysis in establishing               including total fossil fuel consumed,                 their use. However, if in the future the
                                        Equivalence Values in general or                        petroleum energy consumed, regulated                  RFS standard more closely matches
                                        Equivalence Values specifically related                 pollutant emissions (e.g., VOC, NOX,                  renewable demand, this could be
                                        to greenhouse gas or carbon dioxide                     PM), carbon dioxide emissions, or                     important. We are committed to
                                        emissions. This section describes some                  greenhouse gas emissions. Each metric                 continuing our investigations into
                                        of the comments we received on the use                  would result in a different set of                    lifecycle analyses.
                                        of lifecycle analyses and our responses.                Equivalence Values. At the present time
                                           Lifecycle analyses involve an                                                                              C. What Gasoline Is Used To Calculate
                                                                                                there is no consensus on which metric
                                        examination of fossil fuel used, and                                                                          the Renewable Fuel Obligation and Who
                                                                                                would be most appropriate for this
                                        emissions generated, at all stages of a                                                                       Is Required To Meet the Obligation?
                                                                                                purpose or the purposes of the Act.
                                        renewable fuel’s life. A typical lifecycle                 There is also no consensus on the                  1. What Gasoline Is Used To Calculate
                                        analysis examines production of the                     approach to lifecycle analyses                        the Volume of Renewable Fuel Required
                                        feedstock, its transport to a conversion                themselves. Although we have chosen                   To Meet a Party’s Obligation?
                                        facility, the conversion of the feedstock               to base our lifecycle analyses on                        The Act requires EPA to promulgate
                                        into renewable motor vehicle fuel, and                  Argonne National Laboratory’s GREET                   regulations designed to ensure that
                                        the transport of the renewable fuel to                  model for the reasons described in                    ‘‘gasoline sold or introduced into
                                        the consumer. At each stage, every                      Section IX, there are a variety of other              commerce in the United States (except
                                        activity that consumes fossil fuels or                  lifecycle models and analyses available.              in noncontiguous states or territories)’’
                                        results in emissions is quantified, and                 The choice of model inputs and                        contains on an annual average basis, the
                                        these energy consumption and emission                   assumptions all have a bearing on the                 applicable aggregate volumes of
                                        estimates are then summed over all                      results of lifecycle analyses, and many               renewable fuels as prescribed in the
                                        stages. By accounting for every activity                of these assumptions remain the subject               Act.25 To implement this provision,
                                        associated with renewable fuels over                    of debate among researchers. Lifecycle                today’s final rule provides that the
                                        their entire life, we can assess                        analyses must also contend with the fact              volume of gasoline used to determined
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                                        renewable fuels in terms of not just their              that the inputs and assumptions                       the renewable fuel obligation must
                                        impact within the transportation sector,                generally represent industry-wide                     include all finished gasoline (RFG and
                                        but across all sectors and thus for the                 averages even though energy consumed
                                        nation as a whole. In this way, lifecycle               and emissions generated vary widely                     25 CAA Section 211(o)(2)(A)(i), as added by

                                        analyses provide a more complete                        from one facility or process to another.              Section 1501(a) of the Energy Policy Act of 2005.

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                                        conventional) produced or imported for                  subject to the renewable fuel obligation              that obligated parties with multiple
                                        use in the contiguous United States                     for the volume of ethanol that they                   facilities could gain an economic
                                        during the annual averaging period and                  blend. There are currently                            advantage over obligated parties with
                                        all unfinished gasoline that becomes                    approximately 1,200 such ethanol                      only a single facility if aggregate
                                        finished gasoline upon the addition of                  blenders. Of these blenders, only those               compliance is allowed, we do not
                                        oxygenate blended downstream from                       who blend ethanol into RBOB are                       believe that this will be the case given
                                        the refinery or importer. This would                    regulated parties under current fuels                 the unrestricted trading allowed under
                                        include both unfinished reformulated                    regulations. Designating all of these                 our program. We also believe that
                                        gasoline, called ‘‘reformulated gasoline                ethanol blenders as obligated parties                 clarification in the regulations regarding
                                        blendstock for oxygenate blending,’’ or                 under the RFS program would greatly                   the basis on which the obligation may
                                        ‘‘RBOB,’’ and unfinished conventional                   expand the number of regulated parties                be determined is a necessary and logical
                                        gasoline designed for downstream                        and increase the complexity of the RFS                outgrowth of the proposal. As a result,
                                        oxygenate blending (e.g. sub-octane                     program beyond that which is necessary                the regulations have been modified in
                                        conventional gasoline), called ‘‘CBOB.’’                to carry out the renewable fuels                      the final rule to clarify that the
                                        The volume of any other unfinished                      mandate under the Act.                                renewable fuels obligation may be
                                        gasoline or blendstock, such as butane,                    The Act provides that the renewable                determined based on the gasoline
                                        is not included in the volume used to                   fuel obligation shall be ‘‘applicable to              production of all of an obligated party’s
                                        determine the renewable fuel obligation,                refiners, blenders, and importers, as                 facilities in the aggregate, or each
                                        except where the blendstock is                          appropriate.’’ 27 For the reasons                     facility individually.
                                        combined with other blendstock or                       discussed above, we believe it is
                                                                                                                                                         We received comment that EPA
                                        finished gasoline to produce finished                   appropriate to exclude downstream
                                                                                                                                                      should clarify when obligated parties
                                        gasoline, RBOB, or CBOB. Where a                        renewable fuel blenders from the group
                                                                                                                                                      must include imported gasoline that is
                                        blendstock is blended with other                        of parties subject to the renewable fuel
                                                                                                                                                      used as ‘‘gasoline treated as
                                        blendstock to produce finished gasoline,                obligation and to exclude renewable
                                                                                                                                                      blendstock’’, or GTAB, in the volume of
                                        RBOB, or CBOB, the total volume of the                  fuels from the volume of gasoline used
                                                                                                                                                      gasoline used to determine the party’s
                                        gasoline blend is included in the                       to determine the renewable fuel
                                                                                                                                                      renewable fuel obligation. As stated in
                                        volume used to determine the                            obligation. This exclusion applies to any
                                                                                                                                                      the preamble to the proposed rule,
                                        renewable fuels obligation for the                      renewable fuels that are blended into
                                                                                                                                                      GTAB is to be treated as a blendstock
                                        blender. Where a blendstock is added to                 gasoline at a refinery, contained in
                                                                                                imported gasoline, or added at a                      with regard to the RFS rule. Where the
                                        finished gasoline, only the volume of
                                                                                                downstream location. Thus, for                        GTAB is blended with other blendstock
                                        the blendstock is included, since the
                                                                                                example, any ethanol added to RBOB or                 (other than only renewable fuel) to
                                        finished gasoline would have been
                                                                                                CBOB downstream from the refinery or                  produce gasoline, the total volume of
                                        included in the compliance
                                                                                                importer would be excluded from the                   the gasoline blend, including the GTAB,
                                        determinations of the refiner or importer
                                                                                                volume of gasoline used to determine                  is included in the volume of gasoline
                                        of the gasoline.
                                           Gasoline produced or imported for                    the obligation. Any non-renewable fuel                used to determine the renewable fuel
                                        use in a noncontiguous state or U.S.                    added downstream, however, would be                   obligation. Where the GTAB is blended
                                        territory 26 is not included in the volume              included in the volume of gasoline used               with finished gasoline, only the GTAB
                                        used to determine the renewable fuel                    to determine the obligation. This                     volume is included in the volume of
                                        obligation (unless the noncontiguous                    approach has no impact on the total                   gasoline used to determine the
                                        state or territory has opted-in to the RFS              volume of renewable fuels required                    renewable fuel obligation (since the
                                        program), nor is gasoline, RBOB or                      (which is specified in the Act and must               finished gasoline will already be
                                        CBOB exported for use outside the                       be met regardless of the approach taken               included in the RFS calculations of the
                                        United States.                                          here), but merely on the number of                    refiner of that gasoline). For purposes of
                                           For purposes of this preamble, the                   obligated parties. As discussed earlier,              compliance demonstrations, the RFS
                                        various gasoline products (as described                 this volume of renewable fuel is                      rule treats GTAB in a manner that is
                                        above) that are included in the volume                  likewise excluded from the calculation                consistent with the reformulated
                                        of gasoline used to determine the                       performed each year by EPA to                         gasoline (RFG) and conventional
                                        renewable fuel obligation are                           determine the applicable percentage.                  gasoline (CG) regulations. Under the
                                        collectively called ‘‘gasoline.’’                          The NPRM was unclear with regard to                RFG/CG regulations, importers who
                                           The final rule excludes the volume of                whether obligated parties are to                      designate imported gasoline as GTAB
                                        renewable fuels contained in gasoline                   determine their renewable fuel                        must be registered with EPA as both an
                                        from the volume of gasoline used to                     obligation based on the gasoline                      importer and a refiner. The importer
                                        determine the renewable fuels                           production of all of their facilities in the          submits separate compliance reports to
                                        obligation. In implementing the Act’s                   aggregate, or each facility individually.             EPA, one in its capacity as an importer,
                                        renewable fuels requirement, our                        As discussed above, EPA has discretion                and one in its capacity as a refiner. The
                                        primary goal was to design a program                    under the Energy Act to determine the                 GTAB is blended by the importer and
                                        that is simple, flexible and enforceable.               renewable fuels obligation applicable to              included in the importer’s compliance
                                        If the program were to include                          parties, ‘‘as appropriate.’’ We believe               calculations in its capacity as a refiner
                                        renewable fuels in the volume of                        that allowing obligated parties to                    of the GTAB, and is excluded from the
                                        gasoline used to determine the                          determine their obligation based on                   importer’s compliance calculations in
                                        renewable fuel obligation, then every                   either their facilities in the aggregate or           its capacity as an importer. The RFS
                                        blender that blends ethanol downstream                  individually is appropriate, since                    rule treats GTAB in a similar manner;
                                        from the refinery or importer would be                  allowing this flexibility will not affect             i.e., the importer includes the GTAB in
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                                                                                                compliance with the RFS. Although                     the volume of gasoline used to
                                          26 The noncontiguous states are Alaska and
                                                                                                some commenters expressed concern                     determine the renewable fuel obligation
                                        Hawaii. The territories are the Commonwealth of                                                               of the importer in its capacity as a
                                        Puerto Rico, the U.S. Virgin Islands, Guam,
                                        American Samoa, and the Commonwealth of the               27 CAA Section 211(o)(3)(B), as added by Section    refiner of the GTAB, and excludes the
                                        Northern Marianas.                                      1501(a) of the Energy Policy Act of 2005.             GTAB in the volume of gasoline used to

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                                        23924                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        determine the renewable fuel obligation                 states is an obligated party if it                    75,000 barrels.’’ 28 Thus, any gasoline
                                        of the importer in its capacity as an                   ‘‘imports’’ into the 48 states any                    produced at a refinery that qualifies as
                                        importer. The regulations have been                     gasoline produced or imported by a                    a small refinery under this definition is
                                        clarified with regard to how GTAB is                    refiner or importer located in a                      not counted in determining the
                                        used to determine the GTAB importer’s                   noncontiguous state or territory.                     renewable fuel obligation of a refiner
                                        renewable fuels obligation.                                We received comment that EPA                       until January 1, 2011. Where a refiner
                                          We received comment that EPA                          should clarify how the RFS rule applies               complies with the renewable fuel
                                        should clarify that the terms RBOB and                  to transmix processors and blenders.                  obligation on an aggregate basis for
                                        CBOB include ‘‘blendstocks for                          Transmix processors and blenders are                  multiple refineries, the refiner may
                                        oxygenate blending’’ that are designed                  treated like any other blenders under                 exclude from its compliance
                                        to comply with state fuels requirements,                the RFS rule. Transmix processors are                 calculations gasoline produced at any
                                        such as CARBOB (California), AZRBOB                     parties that separate the gasoline portion            refinery that qualifies as a small refinery
                                        (Arizona), and LVBOB (Las Vegas). As                    of the transmix from the transmix and                 under the RFS program. This exemption
                                        discussed in Section III.C.1, all gasoline,             either sell the gasoline portion as                   applies to any refinery that meets the
                                        and all unfinished gasoline that                        finished gasoline or blend it with other              definition of small refinery stated above
                                        becomes finished gasoline upon the                      components to produce gasoline.                       regardless of the size of the refining
                                        addition of oxygenate, that is produced                 Transmix processors exclude the                       company that owns the refinery. Based
                                        or imported for use in the contiguous                   gasoline portion of the transmix from                 on information currently available to us
                                        United States is included in the volume                 the volume that is used to determine the              we expect 42 small refineries to qualify
                                        of gasoline used to determine an                        party’s renewable fuel obligation, since              for this exemption. Beginning in 2011,
                                        obligated party’s renewable fuels                       the gasoline portion of the transmix                  small refineries will be required to meet
                                        obligation. As such, any finished                       would have been included in the                       the same renewable fuel obligation as all
                                        gasoline, or unfinished gasoline that                   volume used to determine the                          other refineries, unless their exemption
                                        becomes finished gasoline upon the                      renewable fuels obligation of the refiner             is extended pursuant to § 80.1141(e).
                                        addition of oxygenate, that is produced                 or importer of the gasoline. In                          In addition to small refineries as
                                        or imported to comply with state fuels                  calculating the volume used to                        defined in the Act, we proposed to
                                        programs must also be included in the                   determine its renewable fuel obligation,              extend this relief to refiners who, during
                                        volume of gasoline used to determine an                 the transmix processor would include                  2004: (1) Produced gasoline at a refinery
                                        obligated party’s renewable fuels                       any blendstocks (other than renewable                 by processing crude oil through refinery
                                        obligation. The regulations have been                   fuels) that are added to the gasoline                 processing units; (2) employed an
                                        clarified in this regard.                               separated from the transmix. Where the                average of no more than 1,500 people,
                                                                                                transmix processor combines the                       including all employees of the small
                                        2. Who Is Required To Meet the
                                                                                                gasoline portion of the transmix with                 refiner, any parent company and its
                                        Renewable Fuels Obligation?
                                                                                                purchased finished gasoline, both the                 subsidiary companies; and (3) had a
                                           Under the final rule, any person who                                                                       total average crude oil processing
                                                                                                gasoline portion of the transmix and the
                                        meets the definition of refiner under the                                                                     capability for all of the small refiner’s
                                                                                                finished gasoline would be excluded,
                                        fuels regulations, which includes any                                                                         refineries of 155,000 barrels per
                                        blender who produces gasoline by                        since the finished gasoline would have
                                                                                                been included in the volume used to                   calendar day (bpcd). These size criteria
                                        combining blendstocks or blending                                                                             were established in prior rulemakings
                                        blendstocks into finished gasoline, is                  determine the renewable fuels
                                                                                                obligation of the refiner or importer of              and were the result of our analyses of
                                        subject to the renewable fuels                                                                                small refiner impacts. Based on
                                        obligation. Any person who brings                       the finished gasoline. Transmix
                                                                                                blenders are parties that blend small                 information currently available to us,
                                        gasoline into the 48 contiguous states                                                                        we believe that there are only three
                                        from a foreign country or from an area                  amounts of unprocessed transmix into
                                                                                                gasoline. Transmix blenders are not                   gasoline refineries owned by small
                                        that has not opted-in to the RFS                                                                              refiners that meet these criteria and that
                                        program, or brings gasoline from a                      obligated parties if they only blend
                                                                                                transmix into finished gasoline. If the               currently exceed the 75,000 bpcd crude
                                        foreign country or an area that has not                                                                       oil processing capability defined by the
                                        opted-in to the RFS program into an                     transmix blender adds blendstocks to
                                                                                                the transmix, the transmix blender                    Act.
                                        area that has opted-in to the RFS                                                                                We received comments supporting the
                                        program, is considered an importer                      would be an obligated party with regard
                                                                                                                                                      proposed extension of the small refinery
                                        under the RFS program and is subject to                 to the volume of blendstocks added. The
                                                                                                                                                      exemption to small refiners, and we also
                                        the renewable fuels obligation. As noted                regulations have been clarified with
                                                                                                                                                      received comments opposing the
                                        above, a blender who only blends                        regard to how the RFS rule applies to
                                                                                                                                                      proposed provision. Commenters that
                                        renewable fuels downstream from the                     transmix processors and blenders.
                                                                                                                                                      supported the provision generally stated
                                        refinery or importer is not subject to the              3. What Exemptions Are Available                      that they believe that a small refiner
                                        renewable fuel obligation. Any person                   Under the RFS Program?                                exemption is necessary as those entities
                                        that is required to meet the renewable                                                                        (i.e., companies) that would qualify as
                                        fuels obligation is called an ‘‘obligated               a. Small Refinery and Small Refiner
                                                                                                Exemption                                             small refiners are generally at an
                                        party.’’ We generally refer to all of the                                                                     economic disadvantage due to their
                                        obligated parties as refiners and                          The Act provides an exemption from                 company size—whereas the Act only
                                        importers, since the covered blenders                   the RFS standard for small refineries                 recognizes facilities, based on the size of
                                        are all refiners under the regulations.                 during the first five years of the                    each location. These commenters also
                                           A refiner or importer located in a                   program. The Act defines small refinery               stated that they have concerns with the
                                        noncontiguous state or U.S. territory is                as ‘‘a refinery for which the average                 cost and the availability of credits under
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                                        not subject to the renewable fuel                       aggregate daily crude oil throughput for              this program, and believe that
                                        obligation and thus is not an obligated                 a calendar year (as determined by                     provisions for small refiners are
                                        party (unless the noncontiguous state or                dividing the aggregate throughput for
                                        territory opts-in to the RFS program). A                the calendar year by the number of days                 28 CAA Section 211(o)(a)(9), as added by Section

                                        party located within the contiguous 48                  in the calendar year) does not exceed                 1501(a) of the Energy Policy Act of 2005.

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                            23925

                                        necessary to help mitigate any                          will not impose a significant adverse                 comments on this provision in which
                                        significant adverse economic impact on                  economic impact on small refiners if                  commenters stated that requiring small
                                        these entities. Commenters that opposed                 they are given the small refinery                     refinery applications was inconsistent
                                        the provision stated that they believe                  exemption. Further, as noted above, we                with the language set out in the Act. The
                                        that EPA exceeded its discretionary                     believe that no more than three                       commenters stated that small refineries
                                        authority, that there appears to be no                  additional refiners that do not meet the              should not be obligated parties in 2007
                                        basis on which the Agency can                           Energy Policy Act’s definition of a small             even if they do not submit a small
                                        legitimately expand this statutory                      refinery will qualify as small refiners for           refinery application by September 1,
                                        exemption to add small refiners, and                    this rule. Therefore, we are finalizing               2007. We agree with these statements,
                                        that Congress ‘‘clearly did not intend                  the proposed provision that the small                 and believe that the Energy Policy Act
                                        that the exemption be broadened to also                 refinery exemption will be provided to                did in fact intend to provide this
                                        include small refiners.’’ One commenter                 qualified small refiners. This exemption              exemption without the need for small
                                        also stated that it does not believe that               does not mean that less renewable fuel                refineries to submit applications.
                                        small refiner provisions are necessary                  will be used than is required in the                  However, in order to ensure that this
                                        because this rule does not require costly               Energy Policy Act; rather, it just means              provision is not being misused, we
                                        capital investments like previous fuel                  that small refiners will not be obligated             believe that it is necessary for refiners
                                        regulations.                                            to ensure that those volumes are                      to verify that their refineries meet the
                                          As stated in the proposal, we believe                 attained during the period of their                   definition set out in the Act. Therefore,
                                        that we have discretion in determining                  exemption.                                            we are finalizing that the small refinery
                                        an appropriate lead-time for the start-up                  We also proposed to allow foreign                  exemption will become active
                                        of this program, as well as discretion to               refiners to apply for a small refinery or             immediately upon the effective date of
                                        determine the regulated refiners,                       small refiner exemption under the RFS                 the rule. Refiners will only be required
                                        blenders and importers, ‘‘as                            program. We requested comment on the                  to send a letter to EPA verifying their
                                        appropriate.’’ We continue to believe                   provision and related aspects, and we                 status as a small refinery. We did not
                                        that some refiners, due to their size,                  received some comments in which                       receive any comments on our proposal
                                        generally face greater challenges                       commenters stated that they believe that              to base eligibility on 2004 data, nor did
                                        compared to larger refiners. The Small                  there is no reason to extend the small                we receive comments on whether a
                                        Business Regulatory Enforcement                         refinery exemption to these refiners.                 multiple-year average should be used.
                                        Fairness Act (SBREFA) also recognizes                   One commenter even stated that it                     We believe that eligibility should be
                                        this and requires agencies, during                      believes that such an allowance would                 based on 2004 data rather than on 2005
                                        promulgation of new standards, to                       be unlawful. We proposed this                         data, since it was the first full year prior
                                        assess the potential impacts on small                   provision for consistency with prior                  to passage of the Energy Act. In
                                        businesses (as defined by the Small                     gasoline-related fuel programs (anti-                 addition, some refineries’ production
                                        Business Administration (SBA) at 13                     dumping, MSAT, and gasoline sulfur)                   may have been affected by Hurricanes
                                        CFR 121.201). For those instances where                 which allowed foreign refiners to                     Katrina and Rita in 2005. We are thus
                                        the Agency cannot certify that a rule                   receive such exemptions, and we are                   finalizing our proposed approach to
                                        will not have a significant economic                    finalizing the provision in this action.              base eligibility on 2004 data.
                                        impact on a substantial number of small                 Under this provision, foreign small                      As discussed above, we proposed that
                                        entities, we are required to convene a                  refiners and foreign small refineries can             refiners that do not qualify for a small
                                        SBREFA Panel. A SBREFA Panel                            apply for an exemption from the RFS                   refinery exemption under the 75,000
                                        process—which generally takes at least                  standards such that importers would not               bpcd criteria, but nevertheless meet the
                                        six months to complete—entails                          count the small refiner or small refinery             criteria of a small refiner may apply for
                                        performing outreach with entities that                  gasoline volumes towards the importer’s               small refiner status under the RFS rule.
                                        meet the definition of a small business                 renewable volume obligation. The                      We proposed that the applications must
                                        to develop ways to mitigate potential                   Energy Policy Act does not prohibit EPA               be received by EPA by September 1,
                                        adverse economic impacts on small                       from granting this avenue of relief to                2007 for the exemption to be effective in
                                        entities, in consultation with SBA and                  foreign entities, and EPA believes it is              2007 and subsequent calendar years
                                        the Office of Management and Budget                     consistent with the spirit of                         (similar to the small refinery
                                        (OMB).                                                  international trade agreements to                     exemption). We also proposed that
                                          ‘‘Small refiners’’ have historically                  provide it.                                           small refiner status would be
                                        been recognized in EPA fuel regulations                    In the proposal we stated that                     determined based on documentation
                                        as those refiners who employ no more                    applications for a small refinery                     submitted in the application which
                                        than 1,500 employees and have an                        exemption must be received by EPA by                  demonstrates that the refiner met the
                                        average crude oil capacity of 155,000                   September 1, 2007 for the exemption to                criteria for small refiner status during
                                        bpcd. These refiners generally have                     be effective in 2007 and subsequent                   the calendar year 2004 and that EPA
                                        greater difficulty in raising and securing              calendar years. We proposed that the                  would notify a refiner of approval or
                                        capital for investing in capital                        application should include                            disapproval of small refiner status by
                                        improvements and in competing for                       documentation that the small refinery’s               letter.
                                        engineering resources and projects. This                average aggregate daily crude oil                        The final rule provides that qualified
                                        rulemaking does not require that                        throughput for calendar year 2004 did                 small refiners receiving the small
                                        refiners make capital improvements,                     not exceed 75,000 barrels; and that                   refinery exemption will also receive the
                                        however there are still significant costs               eligibility would be based on 2004 data               exemption immediately upon the
                                        associated with meeting the standard.                   (rather than 2005). Further, we proposed              effective date of the rule. These refiners
                                        While we were not required to assess                    that the small refinery exemption would               must also submit a verification letter
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                                        the impacts on small businesses under                   be effective 60 days after receipt of the             showing that they meet the small refiner
                                        the Energy Policy Act, we are required                  application by EPA unless EPA notifies                criteria. This letter will be similar to the
                                        to do so under SBREFA. Based on our                     the applicant that the application was                small refiner applications required
                                        own analysis and outreach with small                    not approved or that additional                       under other EPA fuel programs (and
                                        refiners, our assessment is that this rule              documentation is required. We received                must contain all the required elements

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                                        23926                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        specified in the regulations at                            We proposed that the automatic                     circumstances. We proposed not to
                                        § 80.1142), except the letter will not be               exemption to 2011 and any small                       include such an exemption in the RFS
                                        due prior to the program. Small refiner                 refinery extended exemptions may be                   program. The need for such an
                                        status verification letters for this rule               waived upon notification to EPA; and                  exemption would primarily be based on
                                        that are later found to contain false or                we are finalizing this provision.                     the inability to comply with the
                                        inaccurate information will be void as of               Gasoline produced at a refinery which                 renewable fuels standard due to a
                                        the effective date of these regulations.                waives its exemption will be included                 natural disaster, such as a hurricane.
                                        Unlike the case for small refineries,                   in the RFS program and will be                        However, in the event of a natural
                                        small refiners who subsequently do not                  included in the gasoline used to                      disaster, we believe it is likely that the
                                        meet all of the criteria for small refiner              determine the refiner’s renewable fuel                volume of gasoline produced by an
                                        status (i.e., cease producing gasoline by               obligation. If a refiner waives the                   obligated party would also drop, which
                                        processing crude oil, employ more than                  exemption for its small refinery or its               would result in a reduction in the
                                        1,500 people or exceed the 155,000                      exemption as a small refiner, the refiner             renewable fuel requirement. We,
                                        bpcd crude oil capacity limit) as a result              will be able to separate and transfer                 therefore, reasoned in the NPRM that
                                        of a merger with or acquisition of or by                RINs like any other obligated party. If a             unforeseen circumstances, such as a
                                        another entity are disqualified as small                refiner does not waive the exemption,                 hurricane or other natural disaster,
                                        refiners, except in the case of a merger                the refiner could still separate and                  would not result in a party’s inability to
                                        between two previously approved small                   transfer RINs, but only for the renewable             obtain sufficient RINs to comply with
                                        refiners. As in other EPA programs,                     fuel that the refiner itself blends into              the applicable renewable fuels standard.
                                        where such disqualification occurs, the                 gasoline (i.e. the refinery operates as an               We received several comments
                                        refiner must notify EPA in writing no                   oxygenate blender facility). Thus,                    regarding the inclusion of a temporary
                                        later than 20 days following the                        exempt small refineries and small                     hardship exemption based on
                                        disqualifying event.                                    refiners who blend ethanol can separate               unforeseen circumstances. One
                                           The Act provides that the Secretary of               RINs from batches without opting in to                commenter believes it would be of value
                                        Energy must conduct a study for EPA to                  the program in the same manner that an                to have a mechanism for selectively
                                        determine whether compliance with the                   oxygenate blender is allowed to do.                   waiving or modifying the RFS
                                        renewable fuels requirement would                                                                             downward on a temporary basis in the
                                                                                                b. General Hardship Exemption                         event of unforeseen circumstances such
                                        impose a disproportionate economic                         In recent rulemakings, we have                     as significant drought affecting potential
                                        hardship on small refineries. If the                    included a general hardship exemption                 crop production. The commenter
                                        study finds that compliance with the                    for parties that are able to demonstrate              believes that crop shortages could have
                                        renewable fuels requirements would                      severe economic hardship in complying                 an impact on a national level, or a major
                                        impose a disproportionate economic                      with the standard. We proposed not to                 disaster may impact logistics of
                                        hardship on a particular small refinery,                include provisions for a general                      renewable fuel distribution regionally,
                                        EPA is required to extend the small                     hardship exemption in the RFS                         necessitating a more rapid response
                                        refinery’s exemption for a period of not                program. Unlike most other fuels                      from EPA than is provided in the Energy
                                        less than two additional years (i.e., to                programs, the RFS program includes                    Act. Another commenter believes that a
                                        2013). The Act also provides that a                     inherent flexibility since compliance                 temporary hardship exemption based on
                                        refiner with a small refinery may at any                with the renewable fuels standard is                  unforeseen circumstances should be
                                        time petition EPA for an extension of                   based on a nationwide trading program,                included in the rule since it is
                                        the exemption for the reason of                         without any per gallon requirements,                  impossible to predict how the RFS
                                        disproportionate economic hardship. In                  and without any requirement that the                  program will impact small refiners.
                                        accordance with these provisions of the                 refiner or importer produce the                       Another commenter believes that, given
                                        Act, we are finalizing the provision that               renewable fuel. By purchasing RINs,                   the variety of potentially challenging
                                        refiners with small refineries may                      obligated parties will be able to fulfill             unforeseen events during the last
                                        petition EPA for an extension of the                    their renewable fuel obligation without               several years, it is not inconceivable that
                                        small refinery exemption. As provided                   having to make capital investments that               man-made or natural circumstances
                                        in the Act, EPA will act on the petition                may otherwise be necessary in order to                could adversely impact the RFS
                                        not later than 90 days after the date of                blend renewable fuels into gasoline. We               program. A natural disaster in the
                                        receipt of the petition. Today’s                        believe that sufficient RINs will be                  agricultural section, for example, may
                                        regulations do not provide a comparable                 available and at reasonable prices, given             make it difficult to meet the renewable
                                        opportunity for an extension of the                     that EIA projects that far greater                    fuels mandate which, in turn, could
                                        small refinery exemption for small                      renewable fuels will be used than                     drive the price of RINs high enough to
                                        refiners. Therefore, all parties                        required. Given the flexibility provided              disrupt the gasoline market. The
                                        temporarily exempted from the RFS                       in the RIN trading program, including                 commenter believes that a mechanism
                                        program on the basis of qualifying as a                 the provisions for deficit carry-over, and            built into the program from the outset
                                        small refiner, rather than a small                      the fact that the standard is proportional            would provide a more flexible and less
                                        refinery, must comply with the program                  to the volume of gasoline actually                    disruptive way to address unforeseen
                                        beginning January 1, 2011 (unless they                  produced or imported, we continue to                  circumstances than the more time-
                                        waive their exemption prior to this                     believe a general hardship exemption is               consuming waiver process provided in
                                        date).                                                  not warranted. As a result, the final rule            the Energy Act.
                                           During the initial exemption period                  does not contain provisions for a general                Under other EPA fuels programs,
                                        for small refineries and small refiners                 hardship exemption.                                   compliance is based on a demonstration
                                        and any extended exemption periods for                                                                        that the fuel meets certain component or
                                                                                                c. Temporary Hardship Exemption
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                                        small refineries, the gasoline produced                                                                       emissions standards. Unforeseen
                                        by exempted small refineries and                        Based on Unforeseen Circumstances                     circumstances, such as a natural
                                        refineries owned by approved small                         In recent rulemakings, we have                     disaster, may affect an individual
                                        refiners will not be subject to the                     included a temporary hardship                         refiner’s or importer’s ability to produce
                                        renewable fuel standard.                                exemption based on unforeseen                         or import fuel that complies with the

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                                        standards. As a result, we have included                Energy Act. As a result, the final rule               properly delivered to EPA, EPA does
                                        in other fuels programs provisions for a                does not contain provisions for a                     not envision providing an opportunity
                                        temporary hardship exemption from the                   temporary hardship exemption based on                 to comment on an opt-in request,
                                        standards in the event of an unforeseen                 unforeseen circumstances.                             although we will provide notice in the
                                        natural disaster that affects a party’s                                                                       publication of the standard for the
                                                                                                4. What Are the Opt-in and State Waiver
                                        ability to produce gasoline that                                                                              following year.
                                                                                                Provisions Under the RFS Program?                        We received several comments
                                        complies with the standards. Unlike
                                        most other fuels programs, compliance                   a. Opt-in Provisions for Noncontiguous                regarding when a noncontiguous state or
                                        under the RFS program is based on a                     States and Territories                                territory should be able to opt-in to the
                                        demonstration that a party has fulfilled                   The Act provides that, upon the                    RFS program. One commenter
                                        its individual renewable fuels obligation               petition of a noncontiguous state or U.S.             supported the approach in this final rule
                                        on an annual basis, as compared to                      territory, EPA may apply the renewable                that EPA use the EIA Short-term Energy
                                        meeting specific gasoline content                       fuels requirements to gasoline produced               Outlook published each October to
                                        requirements. The renewable fuels                       in or imported into that noncontiguous                assist in determining the percentage
                                        obligation can be met through the use of                state or U.S. territory at the same time              standard and therefore a state can only
                                        purchased RINs, and there is a deficit                  as, or any time after the promulgation of             opt-in beginning with the first full
                                        carry forward provision allowing                        regulations establishing the RFS                      compliance period of 2008. Another
                                        compliance to be shown over more than                   program.30 In granting such a petition,               commenter believed we should include
                                        one year. In the event of a natural                     EPA may issue or revise the RFS                       a provision to allow noncontiguous
                                        disaster, the volume of gasoline                        regulations, establish applicable volume              states or territories to opt-in to the first
                                        produced by an obligated party is also                  percentages, provide for generation of                compliance period which starts
                                        likely to drop, which would result in a                 credits, and take other actions as                    September 1, 2007. While we see the
                                        reduction in the party’s renewable fuel                 necessary to allow for the application of             merits of allowing a noncontiguous state
                                        obligation. As a result, we believe that                the RFS program in a noncontiguous                    or territory to opt-in to the first
                                        an individual party would be able to                    state or territory. We believe that                   compliance period, we intend to
                                        meet its renewable fuel obligation even                 approval of the petition does not require             maintain the current approach and
                                        in the event of a natural disaster that                 a showing other than a request by the                 allow noncontiguous states and
                                        affects the party’s refinery or blending                Governor of the State or the equivalent               territories to opt-in beginning with the
                                        facility. Therefore, unlike other fuels                 official of a Territory to be included in             2008 compliance year. The statute
                                        programs, we do not believe there is a                  the program.                                          clearly states that the program may
                                        need to include a temporary hardship                       Today’s final rule will implement this             apply to noncontiguous states and
                                        exemption in the RFS rule to address an                 provision of the Act by providing a                   territories (that have petitioned EPA) at
                                        individual party’s inability to comply                  process whereby the governor of a                     any time after these regulations have
                                        with its renewable fuels obligation due                 noncontiguous state or territory may                  been promulgated. Given the short
                                        to unforeseen circumstances.                            petition EPA to have the state or                     period of time between publication of
                                           Most of the concerns raised by the                   territory included in the RFS program.                the final rule and the effective date of
                                        commenters relate to problems that                      The petition must be received by EPA                  the program, the need for a state and
                                        would have a more regional or national                  on or before November 1 for the                       regulated parties to discuss opting-in
                                        effect, as compared to affecting one or                 noncontiguous state or territory to be                with knowledge of the final version of
                                        a few individuals. In the event that                    included in the RFS program in the next               the rule, and the requirement for EPA to
                                        unforeseen circumstances do occur                       calendar year. A noncontiguous state or               notify obligated parties with sufficient
                                        which result in a shortage of renewable                 territory for which a petition is received            lead time to any change in the standard,
                                        fuel and available RINs, we believe that                after November 1 would not be included                EPA believes 2008 is the earliest
                                        Congress provided an adequate                           in the RFS program in the next calendar               practical date for an opt-in to be
                                        mechanism for addressing such                           year, but would be included in the RFS                effective. In addition, EPA notes that
                                        situations in the Energy Act.29 The                     program in the subsequent year. For                   none of the noncontiguous states or
                                        Energy Act provides that on petition by                 example, if EPA receives a petition on                territories indicated a strong interest in
                                        one or more States, EPA, in consultation                September 1, 2007, the noncontiguous                  opting-in for the remainder of the 2007
                                        with the Departments of Agriculture and                 state or territory would be included in               compliance period.
                                        Energy, may waive the required                          the RFS program beginning on January                     Where a noncontiguous state or
                                        aggregate renewable fuels volume                        1, 2008. If EPA receives a petition on                territory opts-in to the RFS program,
                                        obligation in whole or in part upon a                   December 1, 2007, the noncontiguous                   producers and importers of gasoline for
                                        sufficient showing of economic or                       state or territory would be included in               that state or territory will be obligated
                                        environmental harm, or inadequate                       the RFS program beginning January 1,                  parties subject to the renewable fuel
                                        supply. As a result, we believe that a                  2009. We believe that requiring                       requirements. All refiners and importers
                                        renewable fuel supply problem that                      petitions to be received by November 1                who produce or import gasoline for use
                                        affects all parties can be addressed using              is necessary to allow EPA time to make                in a state or territory that has opted-in
                                        this statutory provision. We have                       any adjustments in the applicable                     to the RFS program will be required to
                                        carefully considered the comments;                      standard. The method for calculating                  comply with the renewable fuel
                                        however, we do not believe that the                     the renewable fuels standard to reflect               standard and will be able to separate
                                        comments provide a compelling                           the addition of a state or territory that             RINs from batches of renewable fuels in
                                        rationale for providing a temporary                     has opted into the RFS program is                     the same manner as other obligated
                                        hardship exemption from the RFS                         discussed in Section III.A. Because                   parties.
                                        obligation based on unusual                             today’s regulations make EPA approval                    Once a petition to opt-in to the RFS
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                                        circumstances that goes beyond the                      of an opt-in petition automatic if it is              program is approved by EPA, the state
                                        provisions that Congress included in the                signed by the appropriate authority and               or territory would remain in the RFS
                                                                                                                                                      program and be treated as any of the 48
                                          29 CAA section 211(o)(7), as added by Section           30 CAA Section 211(o)(2)(A)(ii), as added by        contiguous states. We received a
                                        1501(a) of the Energy Policy Act of 2005.               Section 1501(a) of the Energy Policy Act of 2005.     comment asserting that once a state or

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                                        territory opts-in, they should be                       prohibition on the sale or consumption                 territories which have opted-in to the
                                        required to remain in the program for at                of renewable fuels in that state. In fact,             program as well. Once a state or
                                        least 5 years. As stated earlier, EPA will              the Act prohibits the regulations from                 territory has opted-in to the program,
                                        recognize a state or territory that opts-               restricting the geographic areas in which              they will be treated as identical to any
                                        in to the program as identical to any of                renewable fuels may be used.32                         other state and specific relief will not be
                                        the 48 states. The current regulations do               Renewable fuel use in the state in                     provided to regulated parties serving
                                        not allow a state to opt-out and the only               question would thus continue to be                     these areas after the approval of a
                                        form of relief from the program is a                    driven by natural market forces and,                   waiver. Noncontiguous states and
                                        waiver, in whole or in part, of the                     perhaps if the economics of ethanol                    territories should consider this in
                                        national renewable fuel volume                          blending were less favorable than today,               discussions with regulated parties
                                        requirement. Noncontiguous states and                   the nationally-applicable renewable fuel               before opting-in to the program.
                                        territories should be aware of the                      standard.
                                        obligations of the program and should                      Given that state petitions for a waiver                Another commenter stated that EPA
                                        only choose to opt-in if they expect to                 of the RFS program appear unlikely to                  should publish regulations outlining
                                        meet those obligations for the indefinite               affect renewable fuel use in that state,               specific criteria that will be considered
                                        future. If in the future a state believes               we have not finalized regulations                      in reviewing a petition, so that the
                                        EPA should change its regulations and                   providing more specificity regarding the               public would have a more meaningful
                                        allow an opt-out the state could petition               criteria for a waiver or the ramifications             opportunity to participate in the
                                        EPA to change the regulations. As in                    of Agency approval of such a waiver in                 process. While EPA realizes that the
                                        other situations where a party petitions                terms of the level or applicability of the             criteria provided by the statute are quite
                                        EPA to revise its regulations, EPA                      standard. However, states can still                    general, the rationales of severe
                                        would be in a position at that point to                 submit petitions to the Agency for a                   environmental or economic harm or
                                        consider the concerns raised by the state               waiver of the RFS requirements under                   inadequate domestic supply are
                                        as well as other interested stakeholder                 the provision in the Energy Act and                    sufficient for a basic framework upon
                                        and to determine whether it would be                    such petitions will be addressed by EPA                which a petition can be built and
                                        appropriate to revise the regulations.                  on a case-by-case basis.                               evaluated. Each situation in which a
                                                                                                   We received several comments                        waiver may be requested will be unique,
                                        b. State Waiver Provisions
                                                                                                objecting to the decision to not propose               and promulgating a list of more specific
                                           The Energy Act provides that EPA, in                 regulations detailing the waiver process
                                        consultation with the U.S. Department                                                                          criteria in the abstract may be counter-
                                                                                                and our rationale for not doing so. One                productive. Communication between
                                        of Agriculture (USDA) and the                           commenter stated that nothing in the
                                        Department of Energy (DOE), may waive                                                                          the petitioning state(s), EPA, DOE,
                                                                                                statute prevents relief from being                     USDA, and public and industry
                                        the renewable fuels requirements in                     directed toward a state which has
                                        whole or in part upon a petition by one                                                                        stakeholders should begin early in the
                                                                                                requested the waiver by reducing the
                                        or more states by reducing the national                                                                        process, well before a waiver request is
                                                                                                renewable fuel obligation of refiners,
                                        quantity of renewable fuel required                                                                            submitted. This communication will
                                                                                                blenders, and importers who market
                                        under the Act.31 The Act also outlines                                                                         supply these federal agencies with a
                                                                                                gasoline in the affected state. Contrary
                                        the basic requirements for such a                       to the commenter’s assertion, the statute              knowledgeable background of the
                                        waiver, such as a demonstration that                    states that, ‘‘[t]he Administrator * * *               situation prompting the potential waiver
                                        implementation of the renewable fuels                   may waive the requirements * * * by                    request. The waiver request may even
                                        requirements would severely harm the                    reducing the national quantity of                      prove unnecessary after an initial
                                        economy or environment of a state, a                    renewable fuel required’’.33 Congress’s                investigation and analysis of the
                                        region, or the United States or that there              clear intent was to limit EPA’s authority              situation. If not, and if the state
                                        is an inadequate domestic supply of                     to provide relief under the state waiver               continues to believe that a valid basis
                                        renewable fuel.                                         provision of section 211(o)(7). Relief                 for submission of a petition exists,
                                           If EPA, after public notice and                      under that provision is limited to                     federal agencies can instruct the state(s)
                                        opportunity for comment, approves a                     reducing the total national volume                     as to what more detailed information is
                                        state’s petition for a waiver of the RFS                required under the RFS program. Thus,                  needed for waiver approval. Petitions
                                        program, the Act stipulates that the                    the renewable volume obligation for                    will be published in the Federal
                                        national quantity of renewable fuel                     regulated parties would be reduced, but                Register, as required by statute, to
                                        required (Table I.B–1) may be reduced                   the reduced obligation would still apply               provide public notice and opportunity
                                        in whole or in part. This reduction                     to all obligated refiners, blenders and                for comment.
                                        could reduce the percentage standard                    importers, including those in the state                   A third commenter raised the point
                                        applicable to all obligated parties.                    that requested the waiver. This may                    that there is no provision in the Act that
                                        However, there is no provision in the                   provide some relief to the part of the                 would permit EPA to waive any
                                        Act that would permit EPA to reduce or                  country submitting the petition, but                   obligations for specific entities in a state
                                        eliminate any obligations under the RFS                 EPA is not authorized to grant other                   that has petitioned for a waiver, and in
                                        program specifically for parties located                more targeted relief such as reducing the              the case of an emergency, such as a
                                        within the state that petitioned for the                percentage for some refiners and not
                                        waiver. Thus all refiners, importers, and                                                                      natural disaster, specific relief may be
                                                                                                others or refusing to count towards                    warranted. The commenter is correct in
                                        blenders located in the state would still               compliance renewable fuel that is
                                        be obligated parties if they produce                                                                           the observation that EPA cannot waive
                                                                                                produced or used in certain parts of the               obligations for specific entities or
                                        gasoline. In addition, an approval of a                 country. It should be noted here that
                                        state’s petition for a waiver may not                                                                          locations. However, the Act does
                                                                                                this approach holds true for states or
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                                        have any impact on renewable fuel use                                                                          authorize EPA to waive the obligations
                                        in that state since it would not be a                     32 CAA Section 211(o)(2)(iii), as added by Section
                                                                                                                                                       of the program as it applies to all
                                                                                                1501(a) of the Energy Policy Act of 2005.              obligated parties, in whole or in part,
                                          31 CAA Section 211(o)(7), as added by Section           33 CAA Section 211(o)(7), as added by Section        depending on the severity of the
                                        1501(a) of the Energy Policy Act of 2005.               1501(a) of the Energy Policy Act of 2005.              situation.

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                                        D. How Do Obligated Parties Comply                      program and minimizing the influence                  point of its production. Finally, the RIN
                                        With the Standard?                                      that the program has on the operation of              will identify the year in which the batch
                                           Under the Act, EPA is to establish a                 the market.                                           was produced, a critical element in
                                                                                                   In order to implement a program that               determining the applicable time period
                                        renewable fuel standard annually,
                                                                                                is based on production of a certain                   within which RINs are valid for
                                        expressed as a percentage of gasoline
                                                                                                volume of renewable fuels, we are                     compliance purposes.
                                        sold or introduced into commerce, that
                                                                                                finalizing a system of volume                            Although production volumes of
                                        will ensure that overall a specified total
                                                                                                accounting and tracking of renewable                  renewable fuels intended for blending
                                        national volume of renewable fuels will
                                                                                                fuels. We are requiring that this system              into gasoline are a reasonably accurate
                                        be used in gasoline in the U.S. The Act
                                                                                                be based on the assignment of unique                  surrogate for volumes ultimately
                                        does not require each obligated party to
                                                                                                numbers to each batch of renewable                    blended into gasoline, changes can
                                        necessarily do the blending themselves
                                                                                                fuel. These numbers are called                        occur at various times throughout the
                                        in order to comply with this obligation.                Renewable Identification Numbers or                   year in the volumes of renewable fuel
                                        Rather, under the credit trading program                RINs, and are assigned to each batch by               that are in storage. These stock changes
                                        required by the Act, each obligated                     the renewable fuel producer or                        involve the temporary storage of
                                        party is allowed to satisfy its obligations             importer.                                             renewable fuel during times of excess
                                        either through its own actions or                          The use of RINs allows the Agency to               and can affect the length of time
                                        through the transfer of credits from                    measure and track renewable fuel                      between production and ultimate use.
                                        others who have more than satisfied                     volumes starting at the point of their                While there may be seasonal
                                        their individual requirements.                          production rather than at the point                   fluctuations in stocks due to seasonal
                                           This section describes our final                     when they are blended into                            demand, these stock changes always
                                        compliance program. It is based on the                  conventional fuels. Although an                       have a net change of zero over the long
                                        use of unique renewable identification                  alternative approach would be to                      term since there is no economic benefit
                                        numbers (RINs) assigned to batches of                   measure renewable fuel volumes as they                to stockpiling renewable fuels. As a
                                        renewable fuel by renewable fuel                        are blended into conventional gasoline                result there is no need to account for
                                        producers and importers. These RINs                     or diesel, measuring renewable fuel                   stock changes in our program.
                                        can then be sold or traded, and                         volumes at the point of production                       Exports of renewable fuel represent
                                        ultimately used by any obligated party                  provides more accurate measurements                   the only significant distribution
                                        to demonstrate compliance with the                      that can be easily verified. For instance,            pathway that could impair the use of
                                        applicable standard. Excess RINs serve                  ethanol producers are already required                production as a surrogate for renewable
                                        the function of the credits envisioned by               to report their production volumes to                 fuel blending into gasoline or other use
                                        the Act and also provide additional                     EIA through Monthly Oxygenate                         as a motor vehicle fuel. However, our
                                        benefits, as described below. We believe                Reports. These data provide an                        approach accounts for exports through
                                        that our approach is consistent with the                independent source for verifying                      an explicit requirement placed upon
                                        language and intent of the Act and                      volumes. The total number of batches                  exporters (discussed in Section III.D.4
                                        preserves the natural market forces and                 and parties involved are also minimized               below). As a result, we are confident
                                        blending practices that will keep                       in this approach. The total number of                 that our approach satisfies the statutory
                                        renewable fuel costs to a minimum.                      batches is smallest at the point of                   obligation that our regulations impose
                                        1. Why Use Renewable Identification                     production, since batches are commonly                obligations on refiners and importers
                                        Numbers?                                                split into smaller ones as they proceed               that will ensure that gasoline sold or
                                                                                                through the distribution system to the                introduced into commerce in the U.S.
                                          Once renewable fuels are produced or                                                                        each year will contain the volumes of
                                                                                                place where they are blended into
                                        imported, there is very high confidence                                                                       renewable fuel specified in the Act. By
                                                                                                conventional fuel. The number of
                                        that all but de minimus quantities will                                                                       tracking the amount of renewable fuel
                                                                                                renewable fuel producers is also far
                                        in fact be blended into gasoline or                                                                           produced or imported and subtracting
                                                                                                smaller than the number of blenders.
                                        otherwise used as motor vehicle fuels,                                                                        the amount exported, we will have an
                                                                                                Currently there just over 100 ethanol
                                        except for exports. Renewable fuels are                                                                       accurate accounting of the renewable
                                                                                                plants and 85 biodiesel plants in the
                                        not used for food, chemicals, or as                                                                           fuel actually consumed as motor vehicle
                                                                                                U.S., compared with approximately
                                        feedstocks to other production                                                                                fuel in the U.S. Exports of renewable
                                                                                                1200 blenders 34 based on IRS data.
                                        processes. In fact the denaturant that                                                                        fuel are discussed in more detail in
                                                                                                   The assignment of RINs to batches of
                                        must be added to ethanol is designed                                                                          Section III.D.4.
                                                                                                renewable fuel at the point of their
                                        specifically to ensure that the ethanol is
                                                                                                production also allows those batches to               a. RINs Serve the Purpose of a Credit
                                        primarily used as motor vehicle fuel. In
                                                                                                be identified according to various                    Trading Program
                                        discussions with stakeholders prior to
                                                                                                categories important for compliance
                                        release of the NPRM, it became clear                                                                             According to the Act, we must
                                                                                                purposes. For instance, the RIN will
                                        that other renewable fuels, including                                                                         promulgate regulations that include
                                                                                                contain a component that specifies
                                        biodiesel and renewable fuels used in                                                                         provisions for a credit trading program.
                                                                                                whether a batch of ethanol was made
                                        their neat (unblended) form, likewise                                                                         The credit trading program allows a
                                                                                                from cellulosic feedstocks. This RIN
                                        are not used in appreciable quantities                                                                        refiner that overcomplied with its
                                                                                                component will be of particular
                                        for anything other than motor vehicle                                                                         annual RVO to generate credits
                                                                                                importance for 2013 and beyond when
                                        fuel. Therefore if a refiner ensures that                                                                     representing the excess renewable fuel.
                                                                                                the Act specifies a national volume
                                        a certain volume of renewable fuel has                                                                        The Act stipulates that those credits can
                                                                                                requirement for cellulosic biomass
                                        been produced, in effect they have also                                                                       then be used within the ensuing 12
                                                                                                ethanol. The RIN will also identify the
                                        ensured that this volume will be                                                                              month period, or transferred to another
                                                                                                Equivalence Value of the renewable fuel
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                                        blended into gasoline or otherwise used                                                                       refiner that had not blended sufficient
                                                                                                which will often only be known at the
                                        as a motor vehicle fuel. Focusing on                                                                          renewable fuel into its gasoline to
                                        production of renewable fuel as a                         34 Those blenders who add ethanol to RBOB are       satisfy its RVO. In this way the credit
                                        surrogate for use of such fuel has many                 already regulated under our reformulated gasoline     trading program permits current
                                        benefits as far as streamlining the                     regulations.                                          blending practices to continue wherein

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                                        some refiners purchase a significant                    gasoline or diesel or used in their neat              registration process as described in
                                        amount of renewable fuel for blending                   form as motor vehicle fuel. The NPRM                  Section IV.B. Company IDs will be used
                                        into their gasoline while others do little              described a number of significant                     primarily to determine compliance,
                                        or none, thus providing a means for all                 problems that this approach would                     while the inclusion of facility IDs allows
                                        refiners to economically comply with                    create, including the potential for                   the assignment of batch numbers unique
                                        the standard.                                           double-counting, increasing the number                to each facility. The use of both
                                           Our RIN-based program fulfills all the               of parties subject to enforcement                     company and facility IDs is also
                                        functions of a credit trading program                   provisions, and the loss of a distinction             consistent with our approach in other
                                        and thus meets the Act’s requirements.                  between cellulosic ethanol and other                  fuel programs. The batch number is
                                        If at the end of a compliance period a                  forms of ethanol. We concluded that a                 chosen by the producer and includes
                                        party had more RINs than it needed to                   blender-based approach to tracking                    five digits to allow for facilities that
                                        show compliance with its renewable                      volumes of renewable fuel was inferior                produce up to a hundred thousand
                                        volume obligation, these excess RINs                    to our proposed program focusing on                   batches per year. In the NPRM we
                                        would serve the function of credits and                 the point of production and                           proposed that batch numbers be
                                        could be used or traded in the next                     importation. We did not receive any                   sequential values starting with 00001 at
                                        compliance period. RINs can be                          comments supporting a blender-based                   the beginning of each year. Following
                                        transferred to another party in an                      approach and, consistent with the                     release of the NPRM, some stakeholders
                                        identical fashion to a credit. However,                 rationale provided in the proposed rule,              expressed the desire to be able to align
                                        our program provides additional                         have decided not to implement it.                     RIN batch numbers with numbers used
                                        flexibility in that it permits all RINs to                                                                    in other aspects of their business. As a
                                        be transferred between parties before                   2. Generating RINs and Assigning Them
                                                                                                                                                      result, we have determined that the
                                        they are deemed to be in excess of a                    to Batches
                                                                                                                                                      requirement that the batch numbers be
                                        party’s annual RVO at the end of the                    a. Form of Renewable Identification                   sequential is not necessary so long as
                                        year. This is because a RIN serves two                  Numbers                                               each batch number is unique within a
                                        functions: It is direct evidence of                        Each RIN is generated by the producer              given calendar year. Batches are
                                        compliance and, after a compliance year                 or importer of the renewable fuel and                 described more fully in Section III.E.1.a.
                                        is over, excess RINs serve the function                 uniquely identifies not only a specific                  The RR, D, and K codes together
                                        of credits for overcompliance. Thus the                 batch, but also every gallon in that                  describe the nature of the renewable
                                        RIN approach has the advantage of                       batch. The RIN consists of a 38-                      fuel and the RINs that are generated to
                                        allowing real-time trading without                      character code having the following                   represent it. The RR code simply
                                        having to wait until the end of the year                form:                                                 represents the Equivalence Value for the
                                        to determine excess.                                                                                          renewable fuel, multiplied by 10 to
                                           As in other motor vehicle fuels credit               RIN: KYYYYCCCCFFFFFBBBBB
                                                                                                                                                      eliminate the decimal place inherent in
                                        programs, we are also requiring that any                RRDSSSSSSSSEEEEEEEE
                                                                                                                                                      Equivalence Values. Equivalence Values
                                        renewable producer that generates RINs                  Where:                                                form the basis for the total number of
                                        must use an independent auditor to                      K = Code distinguishing assigned RINs from            RINs that can be generated for a given
                                        conduct annual reviews of the party’s                       separated RINs.
                                                                                                                                                      volume of renewable fuel, and are
                                                                                                YYYY = Calendar year of production or
                                        renewable production, RIN generation,                       import.                                           described in Section III.B.4.
                                        and RIN transactions. These reviews are                 CCCC = Company ID.                                       The D code identifies cellulosic
                                        called ‘‘attest engagements,’’ because the              FFFFF = Facility ID.                                  biomass ethanol batches as such. Since
                                        auditor is asked to attest to the validity              BBBBB = Batch number.                                 the Act requires that a minimum of 250
                                        of the regulated party’s credit                         RR = Code identifying the Equivalence Value.          million gallons of cellulosic biomass
                                        transactions. For example, the                          D = Code identifying cellulosic biomass               ethanol be consumed starting in 2013,
                                        reformulated gasoline program requires                      ethanol.                                          obligated parties will need to be able to
                                        attest engagements for refiners and                     SSSSSSSS = Start of RIN block.                        distinguish RINs representing cellulosic
                                                                                                EEEEEEEE = End of RIN block.
                                        importers, and downstream oxygenate                                                                           biomass ethanol from RINs representing
                                        blenders to verify the underlying                         In response to the NPRM, one                        other types of renewable fuel. This
                                        documentation forming the basis of the                  commenter requested that the full RIN                 requirement is discussed in more detail
                                        required reports (40 CFR part 80,                       generation date, not just the year, be                in Section III.A.
                                        subpart F). In the case of RIN                          included in the RIN. We believe that                     In the NPRM, the K code served to
                                        generation, the auditor is required to                  this is unnecessary and would unduly                  distinguish between standard-value
                                        verify that the number of RINs generated                lengthen the RIN. Compliance with the                 RINs and extra-value RINs, and it was
                                        matched the volume of renewable fuels                   standard is determined on a calendar                  placed in the middle of the RIN. As
                                        produced, that any extra value RINs are                 year basis, and the year of RIN                       described more fully in Section III.E.1.a,
                                        appropriately generated, and that RIN                   generation is necessary in order to                   our final rule eliminates the need for a
                                        numbers are properly transferred with                   ensure that RINs are used for                         distinction between standard-value
                                        the renewable fuel as required by the                   compliance purposes only in the                       RINs and extra-value RINs, but requires
                                        regulations.                                            calendar year generated or the following              a distinction between RINs that must be
                                                                                                year. See Section III.D.3.b. The full RIN             transferred with a volume of renewable
                                        b. Alternative Approach to Tracking                     generation date, while a potentially                  fuel (assigned RINs) and RINs that can
                                        Batches                                                 useful piece of information in the                    be transferred without renewable fuel
                                           If we had not implemented a RIN-                     context of potential enforcement                      (separated RINs). Thus for the final rule
                                        based system for uniquely identifying,                  activities, is not necessary as a                     we have changed the purpose of the K
                                        measuring, and tracking batches of                      component of the RIN since                            code. As described in Section III.E.2, we
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                                        renewable fuel, the RFS program would                   recordkeeping requirements contain this               are requiring that RINs separated from
                                        necessarily require that we measure                     same information and can be consulted                 volumes of renewable fuel be identified
                                        renewable fuel volumes at the point in                  in the enforcement context.                           as such, by changing the K code from a
                                        the distribution system where they are                    The company and facility IDs are                    value of 1 to a value of 2. Placing the
                                        actually blended into conventional                      assigned by the EPA as part of the                    K code at the beginning of the RIN

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                                        makes this process more straightforward                 renewable fuel in inventory at the start                  The RIN block will often represent the
                                        for obligated parties and oxygenate                     of the program that was produced prior                 actual number of gallons in the batch,
                                        blenders who will be responsible for                    to September 1, 2007, we are also                      for cases where the Equivalence Value
                                        changing the K code after separating a                  allowing them to generate RINs for such                is 1.0. In other cases, the RIN block start
                                        RIN from renewable fuel.                                renewable fuel. This provision ensures                 and RIN block end values in the batch-
                                           The RIN also contains two codes                      that every gallon that a producer or                   RIN will not exactly correspond to the
                                        SSSSSSSS and EEEEEEEE that together                     importer sells starting on September 1,                volume of the batch. For instance, in
                                        identify the ‘‘RIN block’’ which                        2007 can have an assigned RIN, and                     cases where the Equivalence Value is
                                        demarcates the number of gallons of                     obligated parties that take ownership of               larger than 1.0, the number of gallon-
                                        renewable fuel that the batch represents                renewable fuel directly from a producer                RINs generated will be larger than the
                                        in the context of compliance. Depending                 or importer will have greater assurance                number of gallons in the batch. In such
                                        on the Equivalence Value, this may not                  of having access to RINs at the start of               cases the batch will have a greater value
                                        necessarily be the same as the actual                   the program. Other volumes of ethanol                  in terms of compliance than a batch
                                        number of gallons in the batch. The                     in inventory in the distribution system                with the same volume but an
                                        methodology for designating the                         on September 1, 2007 will continue to                  Equivalence Value equal to 1.0.
                                        SSSSSSSS and EEEEEEEE values is                         be sold and distributed without RINs.                  Likewise, a batch with an Equivalence
                                        described in Section III.D.2.b below.                                                                          Value less than 1.0 will have a smaller
                                           In the NPRM we assigned six digits to                   In order to determine the number of
                                                                                                gallon-RINs that must be generated and                 value in terms of compliance than a
                                        the RIN block codes to allow batches up                                                                        batch with the same volume but an
                                        to a million gallons in size. Based on                  assigned to a batch by a producer or
                                                                                                                                                       Equivalence Value equal to 1.0. In the
                                        comments received, we have decided to                   importer, the actual volume of the batch
                                                                                                                                                       context of our modified approach to RIN
                                        expand the number of digits to eight to                 must be multiplied by the Equivalence
                                                                                                                                                       distribution as described in Section
                                        accommodate batches up to 100 million                   Value to determine an applicable ‘‘RIN
                                                                                                                                                       III.E.1, however, the transfer of RINs
                                        gallons in size. Although it is highly                  volume’’:
                                                                                                                                                       with batches will be straightforward
                                        unlikely that a single tank would hold                  VRIN = EV × Vs                                         regardless of the number of gallon-RINs
                                        this volume, we are adding a definition                                                                        assigned to a particular volume of
                                        of ‘‘batch’’ to our final regulations that                                                                     renewable fuel, as every gallon-RIN will
                                                                                                VRIN = RIN volume, in gallons, representing
                                        would allow this high volume to be                                                                             always have the capability of covering
                                                                                                    the number of gallon-RINs that must be
                                        counted as a single batch for the                           generated (rounded to the nearest whole            one gallon of an obligated party’s RVO.
                                        purposes of generating RINs.                                gallon).                                              In response to the NPRM, some
                                           In the NPRM we pointed out that                      EV = Equivalence value for the renewable               obligated parties requested that
                                        ‘‘RIN’’ can refer to either the number                      fuel.                                              fractional RINs be used for cases in
                                        representing an entire batch or the                     Vs = Standardized volume of the batch of               which the Equivalence Value is less
                                        number representing one gallon of                           renewable fuel at 60 °F, in gallons.               than 1.0. Under this approach, every
                                        renewable fuel in the context of                                                                               gallon in a batch would still have an
                                        compliance. In order to make the                          When RINs are first assigned to a
                                                                                                batch of renewable fuel by its producer                assigned gallon-RIN, but those gallon-
                                        distinction clear, we are defining the                                                                         RINs would represent only a fraction of
                                        latter as a gallon-RIN, and a batch-RIN                 or importer, the RIN block start for that
                                                                                                batch will in general be 1 (i.e.,                      a gallon for compliance purposes. The
                                        will represent multiple gallon-RINs. In                                                                        commenters also argued that our
                                        the case of a gallon-RIN, the values of                 SSSSSSSS will have a value of
                                                                                                00000001). The RIN block end value                     proposed system in which RINs are
                                        SSSSSSSS and EEEEEEEE will be                                                                                  assigned to only a portion of a batch
                                        identical. A batch-RIN, on the other                    EEEEEEEE will be equal to the RIN
                                                                                                volume calculated above. The batch-RIN                 would be unworkable given the need to
                                        hand, will generally have different                                                                            ensure that RINs remain assigned to
                                        values for SSSSSSSS and EEEEEEEE,                       then represents all the gallon-RINs
                                                                                                assigned to the batch. Table III.D.2.b–1               batches as they travel through the
                                        representing the starting and ending                                                                           distribution system.
                                        values of a batch of renewable fuel.                    provides some examples of the number
                                                                                                                                                          We continue to believe that the most
                                        Examples of RINs are presented in the                   of gallon-RINs that would be assigned to
                                                                                                                                                       straightforward system calculates the
                                        next section.                                           a batch under different circumstances.
                                                                                                                                                       number of gallon-RINs representing a
                                        b. Generating RINs                                                                                             batch as the product of the Equivalence
                                                                                                      TABLE III.D.2.B–1.—EXAMPLES OF
                                                                                                                                                       Value and the actual volume of the
                                           As described in Section III.E.1.a, we                                BATCH-RINS 35                          batch. Then every gallon-RIN will have
                                        have eliminated the distinction between                                                                        the capability of covering one gallon of
                                        standard-value RINs and extra-value                     Batch volume: 2000 gallons corn ethanol.
                                                                                                                                                       an obligated party’s RVO, and thus
                                        RINs for this final rule. Instead, all                  Equivalence value: 1.0.
                                                                                                Gallon-RINs: 2000.                                     every gallon-RIN has the same value.
                                        gallon-RINs must be assigned to batches                                                                        This is true both for renewable fuels
                                        of renewable fuel by the producer or                    Batch-RIN: 1–2007–1234–12345–00001–10–
                                                                                                  2–00000001–00002000.                                 with Equivalence Values less than 1.0,
                                        importer. Consistent with the NPRM,                                                                            and renewable fuels with Equivalence
                                        each gallon-RIN will continue to                        Batch volume: 2000 gallons biodiesel.                  Values greater than 1.0. Also, as
                                        represent one gallon of renewable fuel                  Equivalence value: 1.5.                                described in Section III.E.1, we have
                                        in the context of compliance.                           Gallon-RINs: 3000.                                     modified our approach to the
                                           Also consistent with the NPRM, we                    Batch-RIN: 1–2007–1234–12345–00002–15–                 distribution of RINs assigned to volumes
                                        are requiring that RIN generation begin                   2–00000001–00003000.
                                                                                                                                                       of renewable fuel. As a result, the batch-
                                        at the same time that the renewable fuel                                                                       splitting and batch-merging protocols
                                        standard becomes applicable to                          Batch volume: 2000 gallons cellulosic eth-
                                                                                                  anol.                                                have become largely irrelevant, and thus
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                                        obligated parties. Thus RINs must be                                                                           the transfer of renewable fuels having an
                                                                                                Equivalence value: 2.5.
                                        generated for all renewable fuel                        Gallon-RINs: 5000.
                                        produced or imported on or after                        Batch-RIN: 1–2007–1234–12345–00003–25–                   35 RIN codes have been separated by hyphens in
                                        September 1, 2007. Since many                             1–00000001–00005000.                                 this table for demonstrative purposes only. In actual
                                        producers and importers will have                                                                              use, no hyphens would be present in the RIN.

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                                        Equivalence Value less than 1.0 has                        A second case in which some                        volume of renewable fuel that the
                                        become greatly simplified. We are                       renewable fuel would not have an                      obligated party must ensure is used in
                                        therefore finalizing our proposed                       assigned RIN would occur for small                    the U.S. in a given calendar year. Since
                                        approach in which renewable fuels                       volume producers. We are allowing                     the nationwide renewable fuel volumes
                                        having an Equivalence Value less than                   renewable fuel producers who produce                  shown in Table I.B–1 are required by
                                        1.0 result in fewer assigned gallon-RINs                less than 10,000 gallons in a year to                 the Act to be consumed in whole
                                        than gallons in a batch.                                avoid the requirement to generate RINs                calendar years, each obligated party
                                           Following release of the NPRM, we                    and assign them to batches. Such                      must likewise calculate its RVO on an
                                        also identified some cases in which the                 producers would not contribute                        annual basis.
                                        generation of RINs for a partially                      meaningfully to the nationwide pool of                   Since our program uses RINs as a
                                        renewable fuel or blending component                    renewable fuel, and we do not believe                 measure of the amount of renewable
                                        would result in double-counting of RINs                 that the very small business operations               fuel used as motor vehicle fuel that is
                                        generated. For instance, ethyl tertiary                 involved should be subject to the                     sold or introduced into commerce
                                        butyl ether (ETBE) is made from                         burden of recordkeeping and reporting.                within the U.S., obligated parties must
                                        combining ethanol with isobutylene.                     Although two commenters disagreed                     meet their RVO through the
                                        The ethanol is generally from corn, and                 that these small volume producers                     accumulation of RINs. In so doing, they
                                        the isobutylene is generally from                       should be exempt from the requirement                 will effectively be causing the
                                        petroleum. The ETBE producer may                        to generate RINs, they did not provide                renewable fuel represented by the RINs
                                        purchase ethanol from another source,                   compelling evidence that the exemption                to be consumed as motor vehicle fuel.
                                        and that ethanol may already have RINs                  would create a problem in the                         Obligated parties are not required to
                                        assigned to it. In such cases it would not              distribution system or provide an unfair              physically blend the renewable fuel into
                                        be appropriate for the ETBE producer to                 advantage to small producers. As a                    gasoline or diesel fuel themselves. The
                                        generate additional RINs for the ETBE                   result we are finalizing this provision as            accumulation of RINs is the means
                                        made from that ethanol. Even if the                     proposed. Note that if a small producer               through which each obligated party
                                        ETBE producer purchased ethanol                         chooses to register as a renewable fuel               shows compliance with its RVO and
                                        without assigned RINs, our program                      producer under the RFS program, they                  thus with the renewable fuel standard.
                                        design ensures that either RINs were                    will be subject to all the regulatory                    For each calendar year, each obligated
                                        generated for the ethanol and separated                 provisions that apply to all producers,               party is required to submit a report to
                                        prior to purchase by the ETBE producer,                 including the requirement to assign                   the Agency documenting the RINs it
                                        or RINs were legitimately not assigned                  RINs to batches.                                      acquired and showing that the sum of
                                        to the ethanol. The NPRM did not                           In the NPRM we proposed that a                     all gallon-RINs acquired is equal to or
                                        address the potential for generating                    renewable fuel producer which also                    greater than its RVO. This reporting is
                                        RINs twice for the same renewable fuel                  operated as an exporter would not be                  discussed in more detail in Section IV.
                                        in these cases. Therefore, we are                       required to generate and assign a RIN to              In the context of demonstrating
                                        finalizing a provision prohibiting a                    any renewable fuel that it produced and               compliance, all gallon-RINs have the
                                        party from generating RINs for a                        exported. However, one commenter                      same compliance value. The Agency can
                                        partially renewable fuel or blending                    pointed out that this approach could                  then verify that the RINs used for
                                        component that it produces if the                       lead to confusion regarding which                     compliance purposes are valid by
                                        renewable feedstock used to make the                    gallons should have an assigned RIN                   simply comparing RINs reported by
                                        renewable fuel or blending component                    and which should not, given the                       producers to RINs claimed by obligated
                                        was acquired from another party. Any                    complex nature of tracking volumes of                 parties. We can also verify simply that
                                        RINs acquired with the renewable                        renewable fuel. As a result we have                   any given gallon-RIN was not double-
                                        feedstock (e.g. ethanol) must be assigned               determined that this provision should                 counted, i.e., used by more than one
                                        to the product made from that feedstock                 be eliminated. Our final regulations                  obligated party for compliance
                                        (e.g. ETBE). This approach is consistent                require that producers assign RINs to all             purposes. In order to be able to identify
                                        with comments submitted by Lyondell                     renewable fuel, regardless of whether it              the cause of any double-counting,
                                        Chemical Company.                                       is exported. Exports of renewable fuel                however, additional information is
                                                                                                are discussed further in Section III.D.4.             needed on RIN transactions as discussed
                                        c. Cases in Which RINS Are Not                                                                                in Section IV.
                                        Generated                                               3. Calculating and Reporting                             If an obligated party has acquired
                                           Although in general every batch of                   Compliance                                            more RINs than it needs to meet its
                                        renewable fuel produced or imported                        Under our program, RINs form the                   RVO, then in general it can retain the
                                        must have an assigned batch-RIN, there                  basis of the volume accounting and                    excess RINs for use in complying with
                                        are several cases in which a RIN may                    tracking system that allows each                      its RVO in the following year or transfer
                                        not be assigned to a batch by a producer                obligated party to demonstrate that they              the excess RINs to another party. The
                                        or importer. For instance, if the                       have met their renewable fuel obligation              conditions under which this is allowed
                                        renewable fuel was consumed within                      each year. This section describes how                 are determined by the valid life of a
                                        the confines of the production facility                 the compliance process using RINs                     RIN, described in more detail in Section
                                        where it was made, it would not be                      works. Our approach to the distribution               III.D.3.b below. If, alternatively, an
                                        acquired by either an obligated party or                and trading of RINs is covered                        obligated party has not acquired
                                        a gasoline blender. In such cases, the                  separately in Section III.E below.                    sufficient RINs to meet its RVO, then
                                        RIN could not be separated from the                                                                           under certain conditions it can carry a
                                        batch and transferred separately since                  a. Using RINs To Meet the Standard                    deficit into the next year. Deficit
                                        producers do not have this right. A RIN                    Under our program, each obligated                  carryovers are discussed in more detail
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                                        is assigned to renewable fuel when                      party must determine its Renewable                    in Section III.D.3.d.
                                        ownership of the renewable fuel is                      Volume Obligation (RVO) based on the                     The regulations prohibit any party
                                        transferred to another party. Since no                  applicable percentage standard and its                from creating or transferring invalid
                                        such transfer would occur in this case,                 annual gasoline volume as described in                RINs. Invalid RINs cannot be used in
                                        no RIN should be generated.                             Section III.A.4. The RVO represents the               demonstrating compliance regardless of

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                                     23933

                                        the good faith belief of a party that the               meaning that credits would only be                    price of credits as represented by RINs,
                                        RINs are valid. These enforcement                       valid for compliance purposes for the                 and thus ethanol blends, could rise
                                        provisions are necessary to ensure the                  following compliance year. Hence if a                 above the levels that would exist if no
                                        RFS program goals are not compromised                   refiner or importer overcomplied with                 minimum required volumes existed.
                                        by illegal conduct in the creation and                  their 2007 obligation they would                      The 12 month valid life creates some
                                        transfer of RINs.                                       generate credits that could be used to                flexibility in the market to help mitigate
                                           As in other motor vehicle fuel credit                show compliance with the 2008                         price fluctuations. The renewable fuels
                                        programs, the regulations address the                   compliance obligation, but the credits                market could also experience a
                                        consequences if an obligated party is                   could not be used to show compliance                  significant drop in supply if, for
                                        found to have used invalid RINs to                      for later years. Since RINs fulfill the role          instance, a drought were to limit the
                                        demonstrate compliance with its RVO.                    of credits, the statutory provisions                  production of the feedstocks needed to
                                        In this situation, the refiner or importer              regarding credits apply to RINs                       produce renewable fuel. Obligated
                                        that used the invalid RINs will be                         The Act’s limit on credit life helps               parties could use banked credits to
                                        required to deduct any invalid RINs                     balance the risks between the needs of                comply rather than carry a deficit into
                                        from its compliance calculations. The                   renewable fuel producers and obligated                the next year.
                                        refiner or importer will be liable for                  parties. Producers are currently making                  In the context of our RIN-based
                                        violating the standard if the remaining                 investments in expanded production                    program, we have been able to
                                        number of valid RINs is insufficient to                 capacity on the expectation of a                      accomplish the same objective as the
                                        meet its RVO, and the obligated party                   statutorily guaranteed minimum                        Act’s 12 month life of credits by
                                        may be subject to additional monetary                   quantity demanded. Under the market                   allowing RINs to be used to show
                                        penalties if it used invalid RINs in its                conditions we are experiencing today                  compliance for the year in which the
                                        compliance demonstration. See Section                   that make ethanol use more                            renewable fuel was produced and its
                                        V of this preamble for further discussion               economically attractive, the annual                   associated RIN first generated or for the
                                        regarding liability for use of invalid                  volume requirements in the RFS                        following year. RINs not used for
                                        RINs.                                                   program will not drive consumption of                 compliance purposes in the year in
                                           Just as for RIN generators, we are also              renewable fuels. However, if the price of             which they were generated will by
                                        requiring that obligated parties conduct                crude oil dropped significantly or the                definition be in excess of the RINs an
                                        attest engagements for the volume of                    use of ethanol in gasoline became                     obligated party needed in that year,
                                        gasoline they produce and the number                    otherwise less economically attractive,               making excess RINs equivalent to the
                                        of RINs procured to ensure compliance                   obligated parties could use stockpiled                credits referred to in the Energy Act.
                                        with their RVO. In most cases, this                     credits to comply with the program                    Excess RINs are valid for compliance
                                        should amount to little more than is                    requirements. As a result, demand for                 purposes in the year following the one
                                        already required under existing EPA                     renewable fuel could fall well below the              in which they initially came into
                                        gasoline regulations. In the case of                    RFS program requirements, and many                    existence.36 RINs not used within their
                                        renewable fuel exporters, the attest                    producers could end up with a stranded                valid life will expire. This approach
                                        engagement will verify the volume of                    investment. The 12 month valid life                   satisfies the Act’s 12 month duration for
                                        renewable fuel exported and therefore                   limit for credits minimizes the potential             credits.
                                        the magnitude of their RVO. Attest                      for this type of result.                                 Thus we are requiring that every RIN
                                        engagement reports must be submitted                       For obligated parties, the Act’s 12                be valid for the calendar-year
                                        to the party that commissioned the                      month valid life for credits provides a               compliance period in which it was
                                        engagement and to EPA. See Section IV                   window within which parties who do                    generated or the following year. If a RIN
                                        of this preamble for further discussion                 not meet their renewable fuel obligation              was created in one year but was not
                                        of the attest engagement requirements.                  through their own physical use of                     used by an obligated party to meet its
                                                                                                renewable fuel can obtain credits from                RVO for that year, the RIN can be used
                                        b. Valid Life of RINs
                                                                                                other parties who have excess. This                   for compliance purposes in the next
                                           The Act requires that renewable fuel                 critical aspect of the trading system                 year (subject to certain provisions to
                                        credits be valid for showing compliance                 allows the renewable fuels market to                  address RIN rollover as discussed
                                        for 12 months as of the date of                         continue operating according to natural               below). If, however, a RIN was created
                                        generation. This section describes our                  market forces, avoiding the possibility               in one year and was not used for
                                        interpretation of this provision in the                 that every single refiner would need to               compliance purposes in that year or in
                                        context of our program wherein excess                   purchase renewable fuel for blending                  the next year, it will expire. In response
                                        RINs fulfill the Act’s requirements                     into its own gasoline. But the 12 month               to the NPRM, this approach was
                                        regarding credits.                                      life also provides a window within                    supported by a number of obligated
                                           As discussed in Section III.D.1.a, we                which banking and trading can be used                 parties and their representative
                                        interpret the Act such that credits                     to offset the negative effects of                     associations. These commenters agreed
                                        would represent renewable fuel                          fluctuations in either supply of or                   that allowing RINs to be used for the
                                        volumes in excess of what an obligated                  demand for renewable fuels. For                       year generated or the following year was
                                        party needs to meet their annual                        instance, if crude oil prices were to drop            not only supported by the statutory
                                        compliance obligation. Given that the                   significantly and natural market                      language, but was also an element of
                                        renewable fuel standard is an annual                    demand for ethanol likewise fell, the                 program flexibility that would be
                                        standard, obligated parties will                        RFS program would normally bring                      critical for offsetting the negative effects
                                        determine compliance shortly after the                  demand back up to the minimum                         of potential fluctuations in either supply
                                        end of the year, and credits would be                   required volumes shown in Table I.B–1.                of or demand for renewable fuels.
                                        identified at that time. Obligated parties              But in this circumstance, the use of
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                                        will typically demonstrate compliance                   ethanol in gasoline would be less                       36 The use of previous-year RINs for current year

                                        by submitting a compliance                              economically attractive, since demand                 compliance purposes will also be limited by the 20
                                                                                                                                                      percent RIN rollover cap under today’s final rule.
                                        demonstration to EPA. Given the 12-                     for ethanol would not be following price              However, as discussed in the next section, we
                                        month life of a credit as stated in the                 but rather the statutorily required                   believe that this cap will still provide a significant
                                        Act, we interpret this provision as                     minimum volumes. As a result, the                     amount of flexibility to obligated parties.

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                                           However, in response to our NPRM,                    the deficit carryover provision allows                life for RINs virtually meaningless in
                                        other commenters said that the Energy                   any obligated party to fail to meet its               practice.
                                        Act’s 12-month credit life provision                    RVO in one year if it meets the deficit                  RIN rollover also undermines the
                                        should be interpreted as applying                       and its RVO in the next year. If several              ability of a limit on credit life to
                                        retrospectively, not prospectively.                     obligated parties took advantage of this              guarantee a market for renewable fuels.
                                        Under this approach, the 12-month                       provision, it could result in the                     As described in Section III.D.3.b, if the
                                        timeframe in the Act would be                           nationwide total volume obligation for a              natural market demand for ethanol was
                                        interpreted to refer to the full calendar               particular calendar year not being met.               higher than the volumes required under
                                        year within which a credit was                          In a similar fashion, the statutory                   the RFS program for several years in a
                                        generated. Under this alternative                       requirement that every gallon of                      row, as may occur in practice, obligated
                                        approach no RINs could be used for                      cellulosic biomass ethanol be treated as              parties could amass RINs that, in the
                                        compliance purposes beyond the                          2.5 gallons for the purposes of                       extreme, could be used entirely in lieu
                                        calendar year in which they originally                  compliance means that the annually                    of actually demanding ethanol in some
                                        came into existence. As discussed                       required volumes of renewable fuel                    subsequent year.
                                        below, we do not believe that this                      could be met in part by virtual, rather                  As described in the NPRM, we believe
                                        approach is appropriate.                                than actual, volumes. Finally, the                    that the rollover issue must be
                                           Commenters who supported the                         calculation of the renewable fuel                     addressed. The Act’s provision
                                        retrospective approach to the Act’s 12-                 standard is based on projected                        regarding the valid life of credits is
                                        month credit life provision argued that                 nationwide gasoline volumes provided                  clearly intended to obtain the benefits
                                        the Energy Act could have been written                  by EIA (see Section III.A). If the                    associated with a limited credit life.
                                        to explicitly allow a valid life of                     projected gasoline volume falls short of              Any program structure in which some
                                        multiple years if that had been                         the actual gasoline volume in a given                 RINs effectively have an infinite life,
                                        Congress’ intent. In response, the Act                  year, the standard will fail to create the            regardless of the technical life of
                                        explicitly indicates that obligated                     demand for the full renewable fuel                    individual RINs, does not appropriately
                                        parties may either use the credits they                 volume required by the Act for that                   achieve the benefits expected from the
                                        have generated or transfer them. For a                  year. The Act contains no provision for               Act’s provision regarding the 12-month
                                        party to be able to use credits generated,              correcting for underestimated gasoline                life of credits. The authority to establish
                                        such credit use must necessarily occur                  volumes. Additional responses to the                  a credit program and to implement a
                                        in a compliance year other than the one                 issues raised by commenters on RIN life               limited life for credits includes the
                                        in which the credit was generated. Thus                 can be found in the S&A document.                     authority to limit actions that have the
                                        we do not believe that a retrospective                                                                        practical effect of circumventing this
                                        approach to the Act’s 12-month credit                   c. Cap on RIN Use To Address Rollover                 limited credit life.
                                        life provision is consistent with the                      As described in Section III.D.3.b                     To be consistent with the Act, we
                                        explicit credit provisions of the Act. In               above, RINs are valid for compliance                  believe that the rollover issue should be
                                        addition, we believe that an                            purposes for the calendar year in which               addressed in our regulations. However,
                                        interpretation leading to a valid life of               they are generated or the following year.             we also believe that the limits to
                                        one year after the year in which the RIN                We believe that this approach is most                 preclude such unhindered rollovers
                                        was generated is most consistent with                   consistent with the Act’s prescription                should not preclude all previous-year
                                        the program as a whole. In comparison                   that credits be valid for compliance                  RINs from being used for current-year
                                        to a single-year valid life for RINs, our               purposes for 12 months as of the date of              compliance. To accomplish this, we
                                        approach provides some additional                       generation. Our approach is intended to               must restrict the number of previous-
                                        compliance flexibility to obligated                     address both the risk taken by producers              year RINs that can be used for current
                                        parties as they make efforts to acquire                 expecting a guaranteed demand to cover                year compliance. To this end, we
                                        sufficient RINs to meet their RVOs each                 their expanded production capacity                    proposed a 20 percent cap on the
                                        year. This flexibility will have the effect             investments and the risk taken by                     amount of an obligated party’s
                                        of keeping fuel costs lower than they                   obligated parties who need a guaranteed               Renewable Volume Obligation (RVO)
                                        would otherwise be.                                     supply in order to meet their regulatory              that can be met using previous-year
                                           In the comments we received on the                   obligations under this program.                       RINs. After review of the comments we
                                        NPRM, one objection to our proposed                        However, the use of previous year                  received on the NPRM, we have decided
                                        approach was that the use of RINs                       RINs to meet current year compliance                  to finalize this provision. Thus each
                                        generated in one compliance period to                   obligations does create an opportunity                obligated party will be required to use
                                        satisfy obligations in a subsequent                     for effectively circumventing the valid               current-year RINs to meet at least 80
                                        compliance period could result in less                  life limit for RINs. This can occur in                percent of its RVO, with a maximum of
                                        renewable fuel used in a given year than                situations wherein the total number of                20 percent being derived from previous-
                                        is set forth in the statute. While this is              RINs generated each year for a number                 year RINs. Any previous-year RINs that
                                        true, we believe this approach is most                  of years in a row exceeds the number of               an obligated party may have that are in
                                        consistent with the Act, as described                   RINs required under the RFS program                   excess of the 20 percent cap can be
                                        above. The Act clearly set up a credit                  for those years. The excess RINs                      traded to other obligated parties that
                                        program with a credit life, meaning                     generated in one year could be used to                need them. If the previous-year RINs in
                                        Congress intended parties to use credits                show compliance in the next year,                     excess of the 20 percent cap are not
                                        in some cases instead of blending                       leading to the generation of new excess               used by any obligated party for
                                        renewable fuel. The Act is best read to                 RINs in the next year, causing the total              compliance, they will expire. The net
                                        harmonize all of its provisions. In                     number of excess RINs in the market to                result will be that, for the market as a
                                        addition, we note that other provisions                 accumulate over multiple years despite                whole, no more than 20 percent of a
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                                        of the Act may lead to less renewable                   the limit on RIN life. The NPRM                       given year’s renewable fuel standard can
                                        fuel use in a given year than the                       included examples of how this                         be met with RINs from the previous
                                        statutorily-prescribed volumes, but                     ‘‘rollover’’ might occur. The rollover                year.
                                        Congress adopted them and intended                      issue would in some circumstances                        As described in the NPRM, we believe
                                        that they could be used. For instance,                  essentially make the applicable valid                 that the 20 percent cap provides the

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                                        appropriate balance between, on the one                 waiver would not occur in a timely                    provision allowing the cap to be raised
                                        hand, allowing legitimate RIN                           fashion. The availability of excess                   in the event that supply shortfalls
                                        carryovers and protecting against                       previous-year RINs would thus provide                 overwhelmed the 20 percent cap. Under
                                        potential supply shortfalls that could                  compliance certainty in the event that                this conditional provision, the Agency
                                        limit the availability of RINs, and on the              the supply of current-year RINs falls                 would monitor standard indicators of
                                        other hand ensuring an annual demand                    below the RFS program requirements                    agricultural production and renewable
                                        for renewable fuels as envisioned by the                and the Agency does not waive any                     fuel supply to determine if sufficient
                                        Act. We believe this approach also                      portion of the program requirements.                  volumes of renewable can be produced
                                        provides the certainty all parties desire                  In contrast to obligated parties,                  to meet the RFS program requirements
                                        in implementing the program. The same                   renewable fuel producers provided                     in a given year. Prior to the end of a
                                        cap will apply equally to all obligated                 comments on the NPRM indicating that                  compliance period, if the Agency
                                        parties, and the cap will be the same for               10 percent would be more appropriate.                 determined that a supply shortfall was
                                        all years, providing certainty on exactly               They argued that a 10 percent cap was                 imminent, it could raise the cap to
                                        how obligated parties must comply with                  closer to their preferred approach to RIN             permit a greater number of previous-
                                        their RVO going out into the future. A                  life in which the Act’s 12-month life of              year RINs to be used for current-year
                                        20 percent cap will be readily                          a credit is interpreted as allowing RINs              compliance. Although this approach
                                        enforceable with minimal additional                     to be used for compliance purposes only               would not change the required volumes,
                                        program complexity, as each obligated                   in the year in which they are generated.              it could create some additional
                                        party’s annual report will simply                          We continue to believe that a cap set              temporary flexibility. However, we did
                                        provide separate listings of previous-                  at 20 percent is appropriate, and the                 not propose this provision, and
                                        year and current-year RINs to establish                 comments submitted in response to the                 commenters did not address it. We do
                                        that the cap has not been exceeded. A                   NPRM did not provide compelling                       not believe it is necessary, and thus we
                                        20 percent cap will have no impact on                   evidence to the contrary. The level of 20             have not finalized it.
                                        who could own RINs, their valid life, or                percent is consistent with past ethanol                  Finally, the cap is designed to prevent
                                        any other regulatory provision regarding                market fluctuations. As described above,              the rollover of RINs generated two years
                                        compliance.                                             the largest single-year drop in ethanol               ago from being used for compliance
                                                                                                supply occurred in 1996 and resulted in               purposes in the current year. No RINs
                                           Some NPRM commenters did not                         21% less ethanol being produced than                  were generated in 2006 when the
                                        perceive a problem with the RIN                         in 1995. While future supply shortfalls               default standard of 2.78 percent was in
                                        rollover issue and argued for no rollover               may be larger or smaller, the                         effect on a collective basis, so the first
                                        cap or at least for a more flexible one.                circumstances of 1996 provide one                     year in which RINs will be generated is
                                        They pointed to the need for maximum                    example of their potential magnitude.                 2007. Consequently, the first year in
                                        flexibility in responding to fluctuations                  We believe that a cap of 20 percent is             which there could be rollover would be
                                        in the market, and they were primarily                  a reasonable way to limit RIN rollover                2009. Therefore, we proposed that the
                                        concerned about potential supply                        and provide some assurances to                        cap would not be effective until
                                        problems. For instance, if a drought                    renewable fuel producers regarding                    compliance year 2009. Two commenters
                                        were to reduce the availability of corn                 demand for renewable fuel. A cap of 20                pointed out that this approach could
                                        for ethanol production, there may                       percent also ensures that many                        under some scenarios lead to a situation
                                        simply not be sufficient RINs available                 previous-year RINs can still be used for              in which more than 20 percent of the
                                        for compliance purposes. A drought                      current year compliance, providing                    RINs used for compliance purposes in
                                        situation actually occurred in 1996, and                some flexibility in the event of market               2008 were actually generated in the
                                        as a result 1996 ethanol production was                 disruptions.                                          previous year, 2007. EPA believes that
                                        21% less than it had been in 1995. In                      Given the competing needs expressed                implementing the rollover cap in 2008
                                        1997, production had not yet returned                   by renewable fuel producers and                       would, indeed, prevent the initiation of
                                        to the 1995 levels. Moreover, there is no               refiners, a rollover cap of 20 percent                an excess buildup of past RINs. In
                                        guarantee that future droughts, should                  also balances the risk taken by                       addition, it would simplify the
                                        they occur, would result in a reduction                 producers of renewable fuels expecting                regulations, since there would be no
                                        in ethanol production of only 21                        a guaranteed quantity demanded to                     need for an exception from the RIN cap
                                        percent. As a result, in the NPRM we                    cover their production capacity                       for 2008. Consequently we are finalizing
                                        requested comment on whether a higher                   investments and the risk taken by                     the 20 percent cap to apply to all years,
                                        cap, such as 30 percent, would be more                  obligated parties who need a guaranteed               including 2008.
                                        appropriate. A number of refiners and                   supply in order to meet their regulatory
                                        refinery associations commented that 30                 obligations under this program. We are                d. Deficit Carryovers
                                        percent would indeed provide them                       therefore finalizing a rollover cap of 20                The Energy Act also contains a
                                        with the additional flexibility they                    percent.                                              provision allowing an obligated party to
                                        would need in the case of a significant                    In the NPRM we also considered an                  carry a deficit forward from one year
                                        market disruption. Some requested a                     alternative approach whereby we would                 into the next if it cannot comply with
                                        cap of 40 percent or even no cap at all.                set the cap annually based on the actual              its RVO. However, deficits cannot be
                                        These parties also expressed concern                    excess renewable fuel production. We                  carried over two years in a row.
                                        that, although the Agency has the                       did not propose this approach, and                       Deficit carryovers are measured in
                                        authority to waive the required                         commenters did not support it. We have                gallons of renewable fuel, just as for
                                        renewable fuel volumes in whole or in                   determined that fixing the cap at 20                  RINs and RVOs. If an obligated party
                                        part in the event of inadequate domestic                percent both provides certainty to the                does not acquire sufficient RINs to meet
                                        supply, this can occur only on petition                 RIN market and ensures that some                      its RVO in a given year, the deficit is
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                                        by one or more states and then only                     minimum level of flexibility exists for               calculated by subtracting the total
                                        after consultation with both the                        individual obligated parties even in a                number of RINs an obligated party has
                                        Department of Agriculture and the                       market without excess RINs.                           acquired from its RVO. There are no
                                        Department of Energy. Some obligated                       We also requested comment on                       volume penalties, discounts, or other
                                        parties expressed concern that such a                   whether the Agency should adopt a                     factors included when calculating a

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                                        deficit carryover. As described in                      be made up in the following year.                     on the volume of renewable fuel
                                        Section III.D.1, the deficit is then added              Finally, any threshold we could set to                exported. One commenter supported
                                        to the RVO for the next year. The                       demonstrate an obligated party’s                      this alternative approach, explaining
                                        calculation of the RVO as described in                  inability to generate or purchase                     that the proposed approach of requiring
                                        Section III.A.4 shows how a deficit                     sufficient credits would likely require a             the exporter to acquire sufficient RINs to
                                        would be carried over into the next year:               comprehensive investigation of their                  offset an RVO equal to the exported
                                        RVOi = (Stdi × GVi) + Di-1                              opportunities to acquire RINs. Such                   volume would place a significant
                                                                                                investigations would consume Agency                   recordkeeping burden on exporters.
                                                                                                resources that would be better spent, in              This commenter also expressed concern
                                        RVOi = The Renewable Volume Obligation
                                             for the obligated party for year i, in
                                                                                                terms of ensuring that the goals of the               that exporters would receive no value in
                                             gallons.                                           Act are met, on other compliance                      return for compliance with an RVO. We
                                        Stdi = The RFS program standard for year i,             enforcement matters. Therefore, we                    do not believe that these are compelling
                                             in percent.                                        have not set any thresholds in the final              reasons to place the burden for exported
                                        GVi = The non-renewable gasoline volume                 rule.                                                 renewable fuel on obligated parties. Not
                                             produced by an obligated party in year                                                                   only would this alternative approach
                                             i, in gallons.                                     4. Provisions for Exporters of Renewable
                                                                                                Fuel                                                  have required an estimate of the volume
                                        Di-1 = Renewable fuel deficit carryover from
                                             the previous year, in gallons.                                                                           of renewable fuel exported in the next
                                                                                                   As described in Section III.D.2.a, we              year, but would also mean that every
                                           If an obligated party does not acquire               believe that U.S. consumption of                      obligated party would share in
                                        sufficient RINs to meet its RVO in year                 renewable fuel as motor vehicle fuel can              accumulating RINs to cover the
                                        i-1, the obligated party must procure                   be measured with considerable accuracy                activities of other parties not under their
                                        sufficient RINs to cover the full RVO for               through the tracking of renewable fuel                control.
                                        year i including the deficit. There are no              production and importing records. This
                                                                                                                                                         In the NPRM we pointed out that in
                                        provisions allowing for another year of                 is the basis for our RIN-based system of
                                                                                                                                                      specific circumstances involving
                                        carryover. If the obligated party does not              compliance. However, exports of
                                                                                                                                                      exports of renewable fuels, the need for
                                        acquire sufficient RINs to meet its RVO                 renewable fuel must be accounted for
                                                                                                                                                      RINs might not be necessary. For
                                        for that year plus the deficit carryover                under this approach. For instance, if a
                                                                                                                                                      instance, if the exporter was wholly
                                        from the previous year, it will be in                   gallon of ethanol is produced in the U.S.
                                                                                                                                                      owned by a renewable fuel producer,
                                        noncompliance.                                          but consumed outside of the U.S., the
                                           The Act indicates that deficit                       RIN associated with that gallon is not                there would be no need to generate RINs
                                        carryovers are to occur due to                          valid for RFS compliance purposes                     for the exported product. We therefore
                                        ‘‘inability’’ to generate or purchase                   since the RFS program is intended to                  proposed to allow exported product to
                                        sufficient credits. We believe that                     require a specific volume of renewable                be excluded from the exporter’s RVO if
                                        obligated parties will make a                           fuel to be consumed in the U.S. Exports               the exporter was also the producer and
                                        determined effort to satisfy their RVO                  of renewable fuel currently represent                 no RINs were generated for that product.
                                        on an annual basis and that a deficit                   about 5 percent of U.S. production,                   However, one commenter pointed out
                                        will demonstrate that they were unable                  though the exact value varies each year.              that this approach could lead to
                                        to do so. Thus, we did not propose that                    To ensure that renewable fuels                     confusion regarding which gallons
                                        any particular demonstration of                         exported from the U.S. cannot be used                 should have an assigned RIN and which
                                        ‘‘inability’’ be a prerequisite to the                  by an obligated party for RFS                         should not, given the complex nature of
                                        ability of obligated parties to carry                   compliance purposes, the RINs                         tracking volumes of renewable fuel. As
                                        deficits forward. However, one                          associated with that exported renewable               a result we have determined that this
                                        commenter requested that we should                      fuel must be removed from circulation.                provision should be eliminated. Our
                                        establish some sort of standard or                      For this final rule we have concluded                 final regulations require producers to
                                        threshold that obligated parties must                   that it should be the exporter’s                      assign RINs to all renewable fuel,
                                        meet before they would be allowed to                    responsibility to account for exported                regardless of whether it is exported. In
                                        use the deficit carryover provision.                    renewable fuel in our RIN-based                       this case the renewable producer would
                                        Although the commenter provided no                      program. We are therefore requiring that              merely use these RINs to cover its
                                        suggestions regarding how such a                        an RVO be assigned to each exporter                   obligation as an exporter.
                                        threshold could be established, he                      that is equal to the annual volume of                    As described in Section III.D.2, there
                                        indicated that in the absence of such a                 renewable fuel it exported. Just as for               are cases in which there is not a one-to-
                                        threshold obligated parties could                       obligated parties, then, the exporter is              one correspondence between gallons in
                                        potentially use the deficit carryover                   required to acquire sufficient gallon-                a batch of renewable fuel and the gallon-
                                        provision to undermine the amount of                    RINs to meet its RVO. If the exporter                 RINs generated for that batch. If the
                                        actual renewable fuel used in a given                   purchases renewable fuel directly from                RVO assigned to the exporter were
                                        year.                                                   a producer, that renewable fuel will                  based strictly on the actual volume of
                                           We agree that the deficit carryover                  come with associated gallon-RINs which                the exported product, it would not
                                        provision could result in less renewable                can then be applied to its RVO under                  necessarily capture all the gallon-RINs
                                        fuel being consumed in a given year                     our program. In this circumstance, the                which were generated for that exported
                                        than is required by the Act, especially                 exporter will not need to acquire RINs                volume. Thus we are requiring that the
                                        if several obligated parties took                       from any other source. If, however, the               RVO assigned to an exporter be based
                                        advantage of it at the same time.                       exporter receives renewable fuel                      not on the actual volume of renewable
                                        However, in any given year some parties                 without the associated RINs, it will need             fuel exported, but rather on a volume
                                        may be making up deficits from a prior                  to acquire RINs from some other source                adjusted by the Equivalence Value
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                                        year, while other parties might be                      in order to meet its RVO.                             assigned to each batch. The Equivalence
                                        generating deficits. This fact will tend to                In the NPRM we presented an                        Value is represented by the RR code
                                        reduce the net effect in any given year,                alternative approach which would have                 within the RIN as described in Section
                                        and regardless, the deficit in demand in                increased the obligation placed on                    III.D.2.a. Thus the exporter must
                                        one year will by regulatory requirement                 refiners and importers of gasoline based              multiply the actual volume of a batch by

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                                        that batch’s Equivalence Value to obtain                obligated party had not exceeded the 20                  EPA’s final program was developed in
                                        the volume used to calculate the RVO.                   percent cap to address RIN rollover, as               light of the somewhat unique aspects of
                                           In cases wherein an exporter obtains                 described in Section III.D.3.c.                       the RFS program. As discussed earlier,
                                        a batch of renewable fuel whose RIN has                    In order to verify compliance for each             under this program the refiners and
                                        already been separated by an obligated                  obligated party, the primary Agency                   importers of gasoline are the parties
                                        party or blender, the exporter may not                  activity will involve the validation of               obligated to comply with the renewable
                                        know the Equivalence Value. We are                      RINs. The Agency will perform the                     fuel requirements. At the same time,
                                        requiring that for such cases the                       following four basic elements of RIN                  refiners and importers do not generally
                                        exporter use the equivalence value                      validation:                                           produce or blend renewable fuels at
                                        applicable to that type of renewable fuel                  (1) RINs used by an obligated party to             their facilities and so are dependent on
                                        (e.g., 1.5 for biodiesel). However, in the              comply with its RVO will be checked to                the actions of others for the means of
                                        case of ethanol, the same product could                 ensure that they are within their two-                compliance. Unlike EPA’s other fuel
                                        have been produced as corn ethanol or                   year valid life. The RIN itself will                  programs, the actions needed for
                                        cellulosic ethanol. Thus, in the case of                contain the year of generation, so this               compliance largely center on the
                                        ethanol, if the exporter does not know                  check involves only an examination of                 production, distribution, and use of a
                                        the equivalence value we are requiring                  the listed RINs.                                      product by parties other than refiners
                                        that the exporter use the actual volume                    (2) All RINs owned by an obligated                 and importers. In this context, we
                                        of the batch to calculate its RVO. This                 party will be cross-checked with reports              believe that the RIN transfer mechanism
                                        will introduce some small error into the                from renewable fuel producers to verify               should focus primarily on facilitating
                                        calculation of the RVO for cases in                     that each RIN had in fact been                        compliance by refiners and importers
                                        which the ethanol had in fact been                      generated.                                            and doing so in a way that imposes
                                        assigned an Equivalence Value of 2.5.                      (3) All RINs used by an obligated                  minimum burden on other parties and
                                        However, we believe that the potential                  party for compliance purposes will be                 minimum disruption of current
                                        impact of this on the overall program                   cross-checked with annual reports from                mechanisms for distribution of
                                        will be exceedingly small.                              other obligated parties to ensure that no             renewable fuels.
                                                                                                two parties used the same RIN to                         Our final program does this by relying
                                        5. How Will the Agency Verify                           comply.                                               on the current market structure for
                                        Compliance?                                                (4) Previous-year RINs used for                    ethanol distribution and use and
                                           The primary means through which                      compliance purposes will be checked to                avoiding the need for creation of new
                                        the Agency will verify an obligated                     ensure that they do not exceed 20                     mechanisms for RIN distribution that
                                        party’s compliance with its RVO will be                 percent of the obligated party’s RVO.                 are separate and apart from this current
                                        the annual compliance demonstration                        In cases where a RIN is highlighted                structure. Our program basically
                                        reports. These reports will include a                   under suspicion of being invalid, the                 requires RINs to be transferred with
                                        variety of information required for                     Agency will then need to take                         renewable fuel until the point at which
                                        compliance and enforcement, including                   additional steps to resolve the issue. In             the renewable fuel is purchased by an
                                        the demonstration of compliance with                    general this will involve a review of RIN             obligated party or is blended into
                                        the previous calendar year’s RVO, a list                transfer records submitted quarterly to               gasoline or diesel fuel by a blender. This
                                        of all transactions involving RINs, and                 the Agency by all parties in the                      approach allows the RIN to be
                                        the tabulation of the total number of                   distribution system that held the RINs.               incorporated into the current market
                                        RINs owned, used for compliance,                        RIN transfers will be recorded through                structure for sale and distribution of
                                        transferred, retired and expired.                       EPA’s Central Data Exchange as                        renewable fuel, and avoids requiring
                                        Reporting requirements for obligated                    described in Section IV. These RIN                    refiners to develop and use wholly new
                                        and non-obligated parties are covered in                transfer records will permit the Agency               market mechanisms. While the
                                        detail in Section IV.                                   to identify all transaction(s) involving              development of new market
                                           In its annual reports, an obligated                  the RINs in question. The Agency can                  mechanisms to distribute RINs is not
                                        party will be required to include a list                then contact liable parties and take                  precluded under our program, it is also
                                        of all RINs held as of the reporting date,              appropriate steps to formally invalidate              not required.
                                        divided into a number of categories. For                a RIN improperly claimed by a                            In the NPRM the Agency also
                                        instance, a distinction must be made                    particular party. Additional details of               evaluated several options for
                                        between current-year RINs and                           the liabilities and prohibitions                      distributing RINs other than the option
                                        previous-year RINs as follows:                          attributed to parties in the distribution             incorporated into today’s rule. We are
                                           Current-year RINs: RINs that came                    system are discussed in Section V.                    not finalizing these alternatives because
                                        into existence during the calendar year                                                                       they tend to require the development of
                                                                                                E. How Are RINs Distributed and
                                        for which the report is demonstrating                                                                         new market mechanisms, as compared
                                        compliance.                                                                                                   to relying on the current market
                                           Previous-year RINs: RINs that came                     Under our final program structure, a                structure for distribution of ethanol, and
                                        into existence in the calendar year                     Renewable Identification Number (RIN)                 they are less focused on facilitating
                                        preceding the year for which the report                 must (with certain exceptions) be                     compliance for the obligated parties.
                                        is demonstrating compliance.                            generated for all renewable fuel
                                           The report must also indicate which                  produced or imported into the U.S., and               1. Distribution of RINs With Volumes of
                                        RINs have been used for compliance                      RINs must be acquired by obligated                    Renewable Fuel
                                        with the RVO including any potential                    parties for use in demonstrating                         We are requiring that RINs be
                                        deficit, which current-year RINs have                   compliance with the RFS requirements.                 transferred with volumes of renewable
                                        not been used for compliance and are                    However, as described in the NPRM,                    fuel as they move through the
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                                        therefore valid for compliance the next                 there are a variety of ways in which                  distribution system, until ownership of
                                        year, and which previous-year RINs                      RINs could theoretically be transferred               those volumes is assumed by an
                                        have not been used for compliance and                   from the point of generation by                       obligated party, exporter, or a party that
                                        therefore expire. The report must also                  renewable fuel producers to the                       converts the renewable fuel into motor
                                        include a demonstration that the                        obligated parties that need them.                     vehicle fuel. At such time, RINs can be

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                                        separated from the volumes and freely                   renewable fuel producer in cases where                result the producer may not receive any
                                        traded. This approach places certain                    the renewable fuel in question had an                 economic benefit from them. Therefore,
                                        requirements on anyone who takes                        Equivalence Value greater than 1.0. We                for the case of cellulosic biomass and
                                        ownership of renewable fuels, including                 proposed that all standard-value RINs                 waste-derived ethanol we are
                                        renewable fuel producers, importers,                    must be assigned to volumes of                        maintaining the ability of the producer,
                                        marketers, distributors, blenders, and                  renewable fuel, but that producers                    should they so choose, to retain the
                                        terminal operators.                                     should have the option of whether to                  extra value and not assign these RINs to
                                                                                                assign extra-value RINs to batches. We                the renewable fuel that they represent.
                                        a. Responsibilities of Renewable Fuel
                                                                                                took this approach in part out of                     In such cases, the producer of the
                                        Producers and Importers
                                                                                                concern that the assignment of extra-                 cellulosic biomass or waste-derived
                                           The initial generation of RINs and                   value RINs to volumes would mean that                 ethanol would be required to change the
                                        their assignment to batches of renewable                the number of gallon-RINs assigned to a               K code from 1 to 2 in order to designate
                                        fuel will be the sole responsibility of                 batch could be greater than the number                these extra RINs as separated RINs.
                                        renewable fuel producers and renewable                  of gallons in that batch. This was of                    This approach is also consistent with
                                        fuel importers. As described in Section                 particular concern for ethanol, since a               one of the primary motivations for the
                                        III.D.1, volumes of renewable fuel can                  tank could contain both corn-ethanol                  approach described in our NPRM,
                                        be measured most accurately and be                      and cellulosic ethanol. When volume                   namely that each gallon-RIN be allowed
                                        more readily verified at these                          was withdrawn from the tank, it would                 to have a value of 1.0 to facilitate
                                        originating locations.                                  have been unclear whether the volume                  trading. Even though different
                                           The final rule defines a batch of                    should be assigned the extra-value RINs               renewable fuels will have different
                                        renewable fuel as a volume that has                     or not. In the process of designing the               Equivalence Values and therefore
                                        been assigned a unique batch-RIN. This                  proposed program structure to                         different numbers of gallon-RINs per
                                        simple and flexible definition of a batch               accommodate such situations, however,                 gallon, each gallon-RIN will still count
                                        allows renewable fuel producers and                     the program became more complicated                   as one gallon of renewable fuel for RFS
                                        importers to construct each batch-RIN                   than it needed to be.                                 compliance purposes.
                                        based on the particular circumstances                      In response to the NPRM, some                         However, the distinction between
                                        associated with the batch. In this                      commenters requested that extra-value                 standard-value RINs and extra-value
                                        context, a batch is not confined to the                 RINs be treated just like standard-value              RINs is no longer necessary. The total
                                        volume that can be held in a tank, but                  RINs. Specifically, some obligated                    number of gallon-RINs that can be
                                        instead can include a significantly larger              parties, as well as gasoline marketers                generated for a given batch of renewable
                                        volume. However, we are placing two                     and distributors, argued that all RINs, be            fuel will be determined directly by its
                                        limits on the volumes of renewable fuel                 they standard-value or extra-value,                   Equivalence Value as described in
                                        that are identified as a single batch.                  should be required to travel with                     Section III.D.2.b, and all such gallon-
                                        First, the RIN contains only enough                     volumes of renewable fuel so that they                RINs will be summarized in a single
                                        digits to permit the assignment of                      will all be equally available to the                  batch-RIN assigned to a batch. In cases
                                        99,999,999 gallon-RINs to a single batch.               obligated parties that need them for                  where the Equivalence Value is greater
                                        For corn-ethanol with an Equivalence                    compliance. These commenters                          than 1.0, there will be more gallon-RINs
                                        Value of 1.0, this means that a single                  expressed concern that some producers                 assigned to a batch of renewable fuel
                                        batch can be comprised of up to                         may not release extra-value RINs, if                  than gallons in that batch. Once again,
                                        99,999,999 gallons of ethanol. In                       given the choice, in an effort to drive up            in the context of the changes we are
                                        contrast, for biodiesel with an                         demand for renewable fuel.                            making to the RIN distribution program
                                        Equivalence Value of 1.5, a single batch                   After further consideration, we have               structure as described in Section
                                        can contain up to 66,666,666 gallons of                 determined that in most cases there is                III.E.1.b below, we do not believe that
                                        biodiesel. Second, in order to provide                  no need to treat extra-value RINs                     this will in any way complicate the
                                        more clarity in the event that an                       differently from standard-value RINs in               process of distributing RINs with
                                        investigation of a party’s volume and                   terms of whether each should be                       renewable fuel. For the specific case of
                                        RIN generation records is conducted, we                 assigned to batches of renewable fuel by              cellulosic biomass or waste-derived
                                        are also limiting a batch to the                        the producer or importer. Therefore, for              ethanol with an Equivalence Value of
                                        maximum volume that is produced or                      most renewable fuels we are finalizing                2.5, producers will be required to assign
                                        imported by the renewable fuel                          a requirement that all RINs be assigned               only one gallon-RIN to each gallon of
                                        producer or importer within a calendar                  to batches of renewable fuel by the                   ethanol, each of which has a K code
                                        month. Within these two limits,                         producer or importer. Since each                      value of 1. The additional 1.5 gallon-
                                        producers and importers can define                      renewable fuel with a different                       RINs that can be generated for each
                                        batches of renewable fuel according to                  Equivalence Value is a distinct fuel,                 gallon can remain unassigned, and thus
                                        their own discretion and practices,                     producers and importers will still                    be assigned a K code value of 2.
                                        including using individual tankfulls to                 receive the added value of extra-value                   In addition to cases where the
                                        represent each batch. These parties must                RINs that are assigned to volumes of                  Equivalence Value is greater than 1.0,
                                        designate a unique serial number for                    renewable fuel if those volumes are                   there are several other cases in which
                                        each batch (RIN code BBBBB) and                         priced appropriately in comparison to                 the gallon-RINs assigned to a batch will
                                        specify its Equivalence Value. The                      other renewable fuels with different                  not exactly correspond to the number of
                                        batch-RIN will identify all the gallon-                 Equivalence Values. The only exception                gallons in that batch. First, if a
                                        RINs assigned to the batch. See Section                 to this is cellulosic biomass and waste-              renewable fuel has an Equivalence
                                        III.D.2.a for details on the format for                 derived ethanol. Producers of such                    Value less than 1.0, then there will be
                                        RINs.                                                   ethanol may have difficulty marketing                 fewer gallon-RINs than gallons in the
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                                           In the NPRM, we proposed different                   their product at prices different than                batch. Such potential circumstances are
                                        approaches to the assignment of                         that for corn ethanol given the fungible              described in Section III.D.2.c. RINs may
                                        standard-value RINs and extra-value                     distribution system for ethanol. The                  also not correspond exactly to gallons if
                                        RINs. Under the proposal, extra-value                   added value of the extra-value RINs may               the density of the batch changes due to
                                        RINs could be generated by the                          not be reflected in the price and as a                changes in temperature. For instance,

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                                        under extreme changes in temperature,                    producers and importers of renewable                  PTDs, we are also requiring that the PTD
                                        the volume of a batch of ethanol can                     fuel the flexibility to determine which               transferring ownership of the volume
                                        change by 5 percent or more. For this                    of the volumes they own on September                  must indicate whether RINs are being
                                        reason we are requiring that all batch                   1, 2007 constitute production as of the               transferred and the number of gallon–
                                        volumes be corrected to represent a                      start of the program.                                 RINs being transferred, though it need
                                        standard condition of 60 °F prior to the                    Although a RIN is generated when                   not list the actual RINs.
                                        assignment of a RIN. For ethanol,37 we                   renewable fuel is produced or imported,                  As described in Section III.E.1.b
                                        are requiring that the correction be done                we do not define the point of                         below, while assigned RINs must always
                                        as follows:38                                            production. However, the RIN must be                  be transferred to another party with a
                                        Vs,e = Va,e × (¥0.0006301 × T + 1.0378)                  assigned to a batch no later than the                 volume of renewable fuel, we are
                                                                                                 point in time when ownership of the                   allowing any party that received
                                                                                                 batch is transferred from the producer or             assigned RINs with renewable fuel to
                                        Vs,e = Standard volume of ethanol at 60 °F, in
                                                                                                 importer to another party. If ownership               thereafter transfer anywhere from zero
                                        Va,e = Actual volume of ethanol, in gallons.             of the batch is retained by the producer              to 2.5 gallon-RINs with each gallon of
                                        T = Actual temperature of the batch, in °F.              or importer after the batch leaves the                renewable fuel. This provision provides
                                                                                                 originating facility, the RIN need not be             the flexibility to transfer more assigned
                                        Since batches of ethanol are generally                   transferred along with the batch on                   RINs with some volumes and less
                                        sold using standard volumes rather than                  product transfer documents identifying                assigned RINs with other volumes
                                        actual volumes, this approach to                         transfer of custody.                                  depending on the business
                                        assigning RINs to batches is consistent                     The means through which RINs are                   circumstances of the transaction and the
                                        with current practices and will maintain                 transferred with volumes of renewable                 number of RINs that the seller has
                                        the one-to-one correspondence between                    fuel will in some respects be left to the             available. However, for producers and
                                        the volume block in the batch-RIN and                    discretion of the renewable fuel                      importers of renewable fuel, this level of
                                        the standardized volume of the batch.                    producer or importer. The primary                     flexibility could contribute to short-term
                                        We are requiring a similar approach for                  requirement would be that the RIN                     hoarding that was the primary concern
                                        biodiesel, where the volume correction                   transfer be recorded on a product                     expressed by obligated parties during
                                        must be calculated using the following                   transfer document (PTD). The PTD can                  development of the proposed program.
                                        equation:39                                              be included in any form of standard                   Therefore we are also finalizing a
                                        Vs,b = Va,b × (¥0.0008008 × T + 1.0480)                  documentation that is already                         provision that requires producers and
                                        Where:                                                   associated with or used to identify title             importers to transfer assigned gallon-
                                        Vs,b = Standard volume of biodiesel at 60 °F,            to the volume or can be a separate                    RINs with gallons such that the ratio of
                                             in gallons.                                         document as described below. In many                  assigned gallon-RINs to gallons is equal
                                        Va,b = Actual volume of biodiesel, in gallons.           cases an invoice could serve this                     to the equivalence value for the
                                        T = Actual temperature of the batch, in °F.              purpose. As in other fuels programs, we               renewable fuel. Since this is not
                                           Consistent with the NPRM, we are                      believe the PTD requirement can be met                possible for exempt small volume
                                        requiring that RIN generation begin at                   by including the required information                 producers, or when a producer or
                                        the same time that the renewable fuel                    generated and transferred in the normal               importer obtains renewable fuel from
                                        standard becomes applicable to                           course of business.                                   another party without assigned RINs,
                                        obligated parties. Thus RINs must be                        RINs are transferable in the context of            exceptions are made in these cases.
                                        generated for all renewable fuel                         the RFS program and initially must be                    We received comment that EPA
                                        produced or imported on or after                         transferred along with ownership of a                 should require a purchaser of imported
                                        September 1, 2007. Since many                            volume of renewable fuel. The approach                gasoline who subsequently blends
                                        producers and importers will have                        that a producer or importer takes to the              renewable fuel into the imported
                                        renewable fuel in inventory at the start                 transfer or sale of RINs and volumes                  gasoline to transfer the RINs associated
                                        of the program that was produced prior                   would be at their discretion, under the               with the renewable fuel back to the
                                        to September 1, 2007, we are also                        condition that the RIN and volume be                  importer of the gasoline. The
                                        allowing them to generate RINs for any                   transferred or sold on the same day and               commenter suggested that this
                                        renewable fuel that they own on                          to the same party. Based on comments                  requirement would ensure that the
                                        September 1, 2007. This provision                        received, we are also permitting the                  importer of the gasoline obtains all the
                                        ensures that every gallon that a                         transfer of RINs to be done in a separate             RINs associated with the renewable fuel
                                        producer or importer sells starting on                   PTD from the PTD used to transfer                     blended into that gasoline in cases
                                        September 1, 2007 can have an assigned                   ownership of the volume of renewable                  where the importer has a long-term
                                        RIN, and obligated parties that take                     fuel. This will provide some additional               contractual agreement with the party
                                        ownership of renewable fuel directly                     flexibility to parties who take ownership             that purchases the gasoline and adds the
                                        from a producer or importer will have                    of renewable fuel with assigned RINs,                 renewable fuel. However, we do not
                                        greater assurance of receiving RINs at                   permitting IT systems managing RIN                    believe that such a provision is
                                        the start of the program. Since RINs are                 transfers to be more easily incorporated              warranted. The RFS program places the
                                        not assigned to volumes until those                      into existing business management                     renewable fuels obligation on parties
                                        volumes are transferred to another                       systems. Thus a party may use two                     based on ownership of the gasoline at
                                                                                                 separate PTDs, one for the volume and                 the refiner or importer level. We believe
                                        party, this approach also provides
                                                                                                 another for the RINs. However, transfer               this approach is the most effective way
                                          37 An appropriate temperature correction for           of the RINs must occur on the same day                to implement and enforce the renewable
                                        other renewable fuels must likewise be used.             that transfer of the volume occurred,                 fuels requirement. We also believe it is
                                          38 Derived from ‘‘Fuel Ethanol Technical               and the two PTDs must contain                         appropriate to allow parties who add
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                                        Information,’’ Archer Daniels Midland Company,           sufficient information to uniquely                    the renewable fuel to gasoline,
                                        v1.2, 2003.                                              cross–reference them. In many cases an                including blenders, to separate RINs
                                          39 Derived from R.E. Tate et al., ‘‘The densities of

                                        three biodiesel fuels at temperatures up to 300 °C,’’
                                                                                                 electronic transfer will suffice if                   from the renewable fuel volume and to
                                        Fuel 85 (2006) 1004–1009, Table 1 for soy methyl         sufficient information about the transfer             have the right to sell those RINs to any
                                        ester.                                                   is recorded. In the case of such parallel             party. Individual parties may agree that,

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                                        in certain situations, it would be                      where they originated to the places                      • Small volume producers are exempt
                                        appropriate for the RINs to be                          where they are blended into                           from generating and assigning RINs to
                                        transferred from the renewable fuels                    conventional gasoline or diesel. Some of              their product.
                                        blender to the importer of the gasoline.                these parties take custody but not                       • At the start of the program, some
                                        In such cases, the parties may make                     ownership of these volumes, storing and               parties may have renewable fuel in their
                                        contractual arrangements for the                        transmitting them on behalf of those                  inventories that have not been assigned
                                        transfers. We do not believe it would be                who retain ownership. Other parties                   a RIN.
                                        appropriate or workable for EPA to                      take ownership but not custody, such as                  • Batches of renewable fuels with
                                        require such transfers.                                 a refiner who purchases ethanol and has               Equivalence Values less than 1.0 will
                                           The NPRM did not specify whether                     it delivered directly to a blending                   have fewer gallon-RINs than gallons.
                                        RINs should be generated for and                        facility. Thus prior to blending, each                   • Batch volumes can swell or shrink
                                        assigned to renewable fuel that is                      volume of renewable fuel can be owned                 due to temperature changes.
                                        already contained in imported gasoline                  or held by any number of parties                         • Batch volumes can shrink due to
                                        (for example, a blend of 10 percent                     including marketers, distributors,                    evaporation, spillage, leakage, or
                                        ethanol and 90 percent gasoline). Since                 terminal operators, and refiners.                     accidents.
                                        the renewable fuel contained in                            In the NPRM, we proposed that in                      • Volume metering imprecision.
                                        imported gasoline is part of the total                  general all parties that assume                          Indeed, if the program could be
                                        volume of renewable fuel in gasoline                    ownership of any volume of renewable                  designed such that every gallon in the
                                        sold or introduced into commerce in the                 fuel would be required to transfer all                distribution system always had an
                                        U.S., we believe it is appropriate to treat             RINs assigned to that volume to another               assigned RIN, the complete fungibility
                                        it as any other imported renewable fuel.                party to whom ownership of the volume                 of RINs would be straightforward.
                                        Thus, we believe it would be                            is being transferred. The only                        However, this is not the case.
                                        appropriate for importers to assign RINs                exceptions to the requirement that RINs                  In order to make assigned RINs more
                                        to renewable fuel contained in imported                 be transferred with volumes would be                  fungible, we are finalizing a modified
                                        gasoline. However, the volume of                        for parties who are obligated to meet the             version of our proposed approach.
                                        renewable fuel contained in imported                    renewable fuel standard and parties                   Consistent with the NPRM, no party
                                        gasoline is very small in comparison to                 who convert the renewable fuel into                   will be permitted to change a RIN
                                        the volume requirements of the RFS                      motor vehicle fuel. Commenters                        assigned to a volume of renewable fuel
                                        program. If an importer of gasoline                     overwhelmingly supported this                         into an unassigned (separated) RIN
                                        containing renewable fuel imports less                  approach to the distribution of RINs                  except for those parties explicitly given
                                        than 10,000 gallons per year of                         assigned to volumes of renewable fuel,                the right to do so (for example, obligated
                                        renewable fuel, then that party is not                  and as a result we are adopting this                  parties and oxygenate blenders). Also
                                        required to generate RINs. But a small                  approach in our final program. In this                consistent with the NPRM, any party
                                        volume importer that chooses to                         context, we are also clarifying that                  not authorized to separate an assigned
                                        generate and assign RINs to any volume                  parties taking custody of a volume of                 RIN that takes ownership of a RIN
                                        of renewable fuel in imported gasoline                  renewable fuel but not ownership of                   assigned to a volume of renewable fuel
                                        is required to fulfill all of the                       that volume would have no                             cannot transfer ownership of that RIN to
                                        requirements that apply to renewable                    responsibilities with regard to the                   another party without simultaneously
                                        fuel importers under the RFS rule, in                   transfer of RINs.                                     transferring an appropriate volume of
                                        addition to all of the requirements that                   However, in response to the NPRM,                  renewable fuel.
                                        apply to gasoline importers as obligated                several stakeholders apprised us of                      However our final regulations allow
                                        parties. An importer that assigns RINs to               certain aspects of our proposed program               any party to transfer a volume of
                                        the renewable fuel in imported gasoline                 that would limit the intended                         renewable fuel without assigned RINs,
                                        may separate the RINs from the                          fungibility of RINs assigned to volumes               or with a different number of assigned
                                        renewable fuel, since the renewable fuel                of renewable fuel. While the goal of our              RINs than were received with the
                                        has been blended into gasoline.                         proposed program was to permit RINs to                renewable fuel, as long as the number of
                                           Regardless of a small volume                         be interchangeable with one another                   assigned gallon-RINs held by that party
                                        importer’s decision to generate and                     and to permit one assigned RIN to be                  at the end of a quarter is no higher than
                                        assign RINs to renewable fuel contained                 exchanged with another RIN, our                       the number of gallons it owns at the end
                                        in imported gasoline, an importer that                  proposed regulations did not                          of the quarter. This will provide parties
                                        imports any gasoline containing                         sufficiently capture this level of                    with the flexibility to decide which
                                        renewable fuel must include the                         fungibility. Instead, the proposed                    RINs are transferred with which
                                        gasoline portion of the imported                        regulations effectively required that a               volumes, and to transfer some volumes
                                        product in the volume used to                           specific RIN assigned to a specific                   without RINs if the party took
                                        determine the importer’s renewable fuel                 gallon of renewable fuel must remain                  ownership of some volumes without
                                        obligation (and exclude the renewable                   assigned to that specific gallon as it                assigned RINs. Our final regulations
                                        fuel portion of the batch). RINs must be                travels through the distribution system.              require only that the number of gallon-
                                        assigned to imported renewable fuels                    This approach was taken in order to                   RINs held by a party at the end of a
                                        that are not contained in gasoline at the               accommodate the legitimate existence of               quarter be no higher than the number of
                                        time of importation, unless less than                   some volumes of renewable fuel without                gallons held by that party, adjusted by
                                        10,000 gallons of renewable fuel are                    assigned RINs, and some assigned RINs                 their Equivalence Value. Aside from
                                        imported per year.                                      that have no corresponding volume.                    spillage, evaporation, or volume
                                                                                                These situations can occur in the                     metering imprecision, the only way that
                                        b. Responsibilities of Parties That Buy,                distribution system for several reasons,              the number of gallon-RINs that are held
                                        Sell, or Handle Renewable Fuels
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                                                                                                such as the following:                                by a party could be higher than the
                                           Volumes of renewable fuel can be                        • RINs can be separated from                       number of gallons held (adjusted for
                                        transferred between many different                      renewable fuel by obligated parties or                their Equivalence Value) is if that party
                                        types of parties as they make their way                 blenders, and the renewable fuel re-                  transferred some volume without RINs.
                                        from the production or import facilities                introduced into the distribution system.              In such a case the excess RINs held

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                          23941

                                        would be deemed to have been                            available for obligated parties’ annual               RINs he could have received given the
                                        separated from renewable fuel, in                       compliance. Quarterly reports will                    volume of renewable fuel that he owns.
                                        violation of the prohibition against                    provide us with the ability to monitor                Parties that do not satisfy the above
                                        separating RINs.                                        the activities of marketers and                       equation are deemed to be in violation
                                           While this approach creates more                     distributors in real time to ensure that              of the prohibition against separating
                                        flexibility for parties that hold assigned              they are transferring RINs with                       RINs from volumes.
                                        RINs, it requires three additional                      renewable fuel, and to address potential                 Under our modified approach to RIN
                                        changes to the proposed regulations.                    violations as soon as they arise.                     distribution, it might be possible for a
                                        First, we are requiring parties that hold                  As discussed in Section III.E.1.a                  party who owns volumes of renewable
                                        assigned RINs to also report the volumes                above, we are requiring that producers                fuel with assigned RINs to hold onto all
                                        of renewable fuel held at the end of each               and importers of renewable fuel assign                the RINs until near the end of a quarter
                                        quarter. While the NPRM did not                         all RINs to volumes of renewable fuel,                while selling volume without RINs.
                                        propose that volumes held be reported,                  consistent with our proposed approach                 Then, in order to comply with the above
                                        we believe that the additional burden on                to standard-value RINs. As a result,                  equation, the party could transfer all
                                        parties holding assigned RINs will be                   downstream parties can legitimately                   assigned RINs with a single volume of
                                        minimal. The NPRM proposed that the                     hold more gallon-RINs than gallons if                 renewable fuel prior to the last day of
                                        recordkeeping requirements include                      some of the renewable fuel has an                     the quarter. This approach would
                                        information on all renewable fuel                       Equivalence Value greater than 1.0. In                amount to short-term hoarding. To
                                        volumes transferred, so under the                       the context of our modified approach to               prevent it, we are also placing a cap on
                                        proposal parties holding assigned RINs                  RIN distribution, this fact must be taken             the maximum number of gallon-RINs
                                        would in general already have the                       into account in the end-of-quarter                    that can be transferred with any gallon
                                        information available. In addition, we                  comparison of gallon-RINs held and                    of renewable fuel. The cap is dictated by
                                        are not requiring that all volumes held                 gallons held. Thus the following                      the maximum number of gallon-RINs
                                        at any time during the quarter be                       equation must be satisfied at the end of              that a party could receive with a volume
                                        reported, nor are we requiring that all                 each quarter by each party that has                   of renewable fuel, which is 2.5 in the
                                        volumes transferred be reported. Rather,                taken ownership of any assigned RINs:                 case of cellulosic biomass ethanol or
                                        parties will be required only to report                 S(RIN)D ≤ S(Vsi×EVi)D                                 waste-derived ethanol. For a party that
                                        the total volume of renewable fuel and                                                                        took ownership of these types of
                                        the total number of gallon-RINs held on                 Where:                                                renewable fuel, we must allow them to
                                        the last day of a quarter, in addition to               D = Last day of a quarter (Jan–Mar, Apr–Jun,          transfer up to 2.5 gallon-RINs with each
                                        other information regarding RINs held                        Jul–Sep, Oct–Dec).                               gallon.
                                                                                                S(RIN)D = Sum of all assigned gallon-RINs                We are also aware that there are
                                        and transferred.                                             with a K code of 1 that are owned on the
                                           Second, our modified approach                             last day of the quarter.
                                                                                                                                                      situations in which the volume
                                        requires that we distinguish between                    (Vsi)D = Volume i of renewable fuel owned on          transferred to another party might be
                                        RINs assigned to renewable fuel and                          the last day of the quarter, standardized        smaller than the volume originally
                                        RINs that have already been separated                        to 60 °F, in gallons.                            received. This could occur due to fuel
                                        from renewable fuel, since only                         EVi = Equivalence Value representing volume           evaporation, spillage, leakage, or
                                        assigned RINs would be subject to the                        i.                                               volume metering imprecision, and
                                        end-of-quarter comparison of RINs held                  S(Vsi×EVi)D = Sum of all volumes of                   would have the effect of raising the ratio
                                        and volumes held. We have chosen to                          renewable fuel owned on the last day of          of gallon-RINs held to gallons held. For
                                        use the K code in the RIN for this                           the quarter, multiplied by their                 spillage/leakage involving significant
                                                                                                     respective equivalence values.
                                        purpose, since it no longer serves the                                                                        volumes, we have developed a
                                        purpose of distinguishing between                          Under our fungible distribution                    mechanism for formally retiring the
                                        standard-value and extra-value RINs.                    system, the RINs received with a                      RINs associated with the lost volume.
                                        The K code has also been moved to the                   volume of renewable fuel may not be                   See Section IV. Smaller volume losses
                                        beginning of the RIN to make its value                  the RINs originally generated to                      can be accommodated by a RIN transfer
                                        more prominent. RINs assigned to                        represent that particular volume. Thus                cap of 2.5, which would in general
                                        renewable fuel must have a K code of                    the Equivalence Value for a volume of                 allow RINs associated with lost volume
                                        1. Parties who legally separate a RIN                   renewable fuel cannot be based on the                 to be transferred with remaining
                                        from renewable fuel must change the K                   RR code of associated RINs, but instead               volume. In the rare case that a party
                                        code for that RIN to a value of 2. The                  should be determined from the                         takes ownership of only cellulosic
                                        RIN then formally becomes an                            composition of the renewable fuel. If the             biomass ethanol or waste-derived
                                        unassigned RIN that can be transferred                  Equivalence Value for a volume of                     ethanol and experiences some small
                                        independent of renewable fuel volumes.                  renewable fuel cannot be determined                   volume loss, he can take ownership of
                                        The end-of-quarter comparisons                          from its composition, it should be                    a small volume of some other form of
                                        between RINs held and volumes held                      assumed to be 1.0. However, in the                    renewable fuel with an Equivalence
                                        apply only to RINs with a K value of 1.                 specific case of ethanol the owner may                Value less than 2.5. This will permit
                                           Third, we are requiring quarterly                    not know if a volume can be categorized               him to transfer RINs associated with lost
                                        reporting in addition to annual reports                 as cellulosic biomass ethanol or waste-               volume to another party while still
                                        for RINs held and transferred. In the                   derived ethanol. Thus for volumes of                  meeting the RIN transfer cap of 2.5.
                                        NPRM we took comment on requiring                       ethanol held at the end of a quarter, the                Our program is designed to allow RIN
                                        quarterly reporting for various reasons.                Equivalence Value should be assumed                   transfer and documentation to occur as
                                        We received both comments supporting                    to be 2.5 to ensure that a party can                  part of normal business practices in the
                                        and opposing quarterly reporting. As                    legitimately hold more RINs than                      context of renewable fuel distribution.
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                                        discussed further in Section IV, we are                 gallons.                                              Thus the incremental costs of
                                        requiring quarterly reporting in this                      The above equation ensures that the                transferring RINs with volumes is
                                        final rule. Under our modified program                  total number of gallon-RINs that can be               expected to be minimal. Marketers and
                                        structure, quarterly reporting will be                  held by a party at the end of a quarter               distributors must simply add the RIN to
                                        necessary to ensure that RINs are                       is no greater than the number of gallon-              product transfer documents such as

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                                        invoices, and record the RINs in their                  would be reasonable to transfer RINs                  requiring a blender to separate the RIN
                                        records of volume purchases and sales.                  with volumes in a manner consistent                   from the renewable fuel if he takes
                                           Finally, the final rule also provides                with the Equivalence Value of the                     ownership of the renewable fuel and
                                        that a foreign entity may apply to EPA                  renewable fuel, but this would not be                 actually blends it into gasoline (or, in
                                        for approval to own RINs. As an                         required under our final regulations in               the case of biodiesel, into diesel fuel).
                                        approved foreign RIN owner, the foreign                 which the number of assigned gallon-                  This would only apply to volumes
                                        entity will be able to obtain, sell,                    RINs transferred with each gallon of                  where the RIN had not already been
                                        transfer and hold both assigned and                     renewable fuel can be anywhere                        separated by an obligated party. Since
                                        separated RINs. An approved foreign                     between zero and 2.5. In addition,                    blenders will in general not be obligated
                                        RIN owner will be required to comply                    volumes of renewable fuel can be split                parties under our program, blenders
                                        with all requirements that apply to                     or merged any number of times while                   who separate RINs from renewable fuel
                                        domestic RIN owners under the RFS                       remaining under the ownership of a                    will have no need to hold onto those
                                        rule. In addition, similar to other fuels               single party, with no impact on RINs. It              RINs and thus can transfer them to an
                                        programs, an approved foreign RIN                       is only when ownership of a volume of                 obligated party for compliance purposes
                                        owner will be required to comply with                   renewable is transferred to another party             or to any other party.
                                        additional requirements designed to                     that an appropriate number of gallon-                    There may be occasions in which a
                                        ensure that enforcement of the RFS                      RINs need to be withdrawn from the                    retailer downstream of a blender
                                        regulations at the foreign RIN owner’s                  party’s inventory and assigned to the                 actually owns the volume of renewable
                                        place of business will not be                           transferred volume, subject to the                    fuel when it is blended into gasoline or
                                        compromised.                                            flexibility associated with the quarterly             diesel. In such cases the blender will
                                                                                                average as discussed above.                           have custody but not ownership of the
                                        c. Batch Splits and Batch Mergers
                                                                                                                                                      renewable fuel. In today’s final rule we
                                           In the RIN distribution approach                     2. Separation of RINs From Volumes of                 are requiring the RIN to be separated
                                        proposed in the NPRM, RINs assigned to                  Renewable Fuel                                        from the volume of renewable fuel when
                                        a given volume of renewable fuel                           Separation of a RIN from a volume of               that volume is blended into gasoline,
                                        remained assigned to that volume as it                  renewable fuel means that the RIN is no               but the RIN can only be separated by the
                                        moved through the distribution system.                  longer included on the PTD and can be                 party that owns that volume of
                                        In that context, batch splits and batch                 traded independently from the volume                  renewable fuel at the time of blending.
                                        mergers required special treatment. We                  to which it had originally been assigned.             In the case of a blender and a
                                        discussed the need for protocols to                     In general commenters supported our                   downstream customer who might both
                                        ensure that RINs assigned to parent                     proposed approach of limiting the                     lay claim to the right to separate any
                                        batches were appropriately distributed                  parties that can separate a RIN from a                assigned RINs (for instance, if transfer of
                                        among daughter batches, and that RINs                   batch, and the associated conditions                  ownership occurred simultaneous with
                                        assigned to batches that were merged                    under which separation can occur.                     blending), these two parties would need
                                        were all re-assigned to the new                            In designing the regulatory program,               to come to agreement between
                                        combined batch. The proposed                            we structured it around facilitating                  themselves regarding which party will
                                        regulations included some restrictions                  compliance by obligated parties with                  own the separated RINs.
                                        on how parent batch RINs were to be                     their renewable fuel obligation, with the                As described in Section III.B, many
                                        apportioned to daughter batches during                  intention of giving obligated parties the             different types of renewable fuel can be
                                        splits, but fell short of prescribing a                 power to market the renewable fuel                    used to meet the RFS volume
                                        detailed batch split protocol.                          separately from the RIN originally                    obligations placed upon refineries and
                                        Nevertheless, commenters by and large                   assigned to it. Our final program                     importers. Currently, ethanol is the most
                                        did not address these protocols in their                therefore requires a refiner or importer              prominent renewable fuel and is most
                                        comments.                                               to separate the RIN from renewable fuel               commonly used as a low level blend in
                                           The need for protocols for batch splits              as soon as he assumes ownership of that               gasoline at concentrations of 10 volume
                                        and batch mergers was directly related                  renewable fuel. In the case of ethanol                percent or less. However, some
                                        to the NPRM’s approach to the                           blended into gasoline at low                          renewable fuels can be used in neat
                                        distribution of RINs with volumes of                    concentrations (≤ 10 volume percent),                 form (i.e. not blended with conventional
                                        renewable fuel. As described in Section                 stakeholders have informed us that a                  gasoline or diesel). The two RIN
                                        III.E.1.b above, we are modifying our                   large volume of the ethanol is purchased              separation situations described above
                                        approach to permit assigned RINs to be                  by refiners directly from ethanol                     would capture any renewable fuel for
                                        more fungible. As a result, there is no                 producers, and is then passed to                      which ownership is assumed by an
                                        need for the regulations to specify any                 blenders who carry out the blending                   obligated party or a party that blends the
                                        batch splitting or batch merging                        with gasoline. Therefore, in many cases               renewable fuel into gasoline or diesel.
                                        protocols.                                              RINs assigned to renewable fuel will                  However, renewable fuels which are
                                           Under our final regulations, parties                 pass directly from the producers who                  used in their neat (unblended) form as
                                        taking ownership of volumes of                          generated them to the obligated parties               motor vehicle fuel would not be
                                        renewable fuel with assigned RINs will                  who need them.                                        captured. This would include such
                                        simply retain an inventory of all                          However, significant volumes of                    renewable fuels as neat biodiesel (B100)
                                        assigned RINs owned. As volumes of                      ethanol are also blended into gasoline                or renewable diesel, methanol for use in
                                        renewable fuel are then transferred to                  without first being purchased by a                    a dedicated methanol vehicle or biogas
                                        other parties, an appropriate number of                 refiner. In some cases, the blender itself            for use in a CNG vehicle.
                                        gallon-RINs are withdrawn from the                      purchases the ethanol. In other cases, a                 Under our final program, producers
                                        party’s inventory and transferred along                 downstream customer purchases the                     and importers must assign a RIN to all
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                                        with the renewable fuel. There is no                    ethanol and contracts with the blender                renewable fuels produced or imported,
                                        need for the party to determine which                   to carry out the blending. Regardless,                including neat renewable fuels. To
                                        RINs were originally assigned to the                    the ethanol may never be held or owned                avoid the possibility that the RIN
                                        volume being transferred. For parties                   by an obligated party before it is                    assigned to neat renewable fuel would
                                        handling both ethanol and biodiesel, it                 blended into gasoline. Thus we are also               never become available to an obligated

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                                        party for RFS compliance purposes, in                   generating RINs for the renewable fuel                esters) 40 and the conditions under
                                        the NPRM we proposed to more broadly                    produced. But since renewable crude is                which we believed a RIN should be
                                        define the right to separate a RIN from                 generally processed in a traditional                  separated from a volume of such
                                        renewable fuel. In addition to obligated                refinery, the refiner will be an obligated            biodiesel. As described in the proposal,
                                        parties and blenders, we proposed that                  party and can therefore immediately                   biodiesel is one type of renewable fuel
                                        any producer holding a volume of                        separate those RINs from the renewable                that can under certain conditions be
                                        renewable fuel for which the RIN has                    fuel and transfer them to another party.              used in its neat form. However, in the
                                        not been separated could separate the                   As described in III.E.1.a above,                      vast majority of cases it is blended with
                                        RIN from that volume if the party                       cellulosic and waste-derived ethanol                  conventional diesel fuel before use,
                                        designates it for use only as a motor                   producers will also be permitted to                   typically in concentrations of 20 volume
                                        vehicle fuel in its neat form and it is in              separate the RINs associated with the                 percent or less. This approach is taken
                                        fact only used as such. This approach                   extra 1.5 value of their ethanol                      for a variety of reasons, such as to
                                        would recognize that the neat form of                   production.                                           reduce impacts on fuel economy, to
                                        the renewable fuel is valid for                                                                               mitigate cold temperature operability
                                                                                                   Once a RIN is separated from a
                                        compliance purposes under the RFS                                                                             issues, to address concerns of some
                                                                                                volume of renewable fuel, the PTD
                                        program, as described in Section III.B.                                                                       engine owners or manufacturers
                                                                                                associated with that volume can no
                                        In effect, it would place neat fuel                                                                           regarding the impacts of biodiesel on
                                                                                                longer list the RIN. However, in the
                                        producers in the same category as                                                                             engine durability or drivability, or to
                                                                                                NPRM we requested comment on
                                        blenders, in that they are producing                                                                          reduce the cost of the resulting fuel.
                                                                                                whether PTDs should include some
                                        motor vehicle fuel. We did not receive                                                                        Biodiesel (mono alkyl esters) is also
                                        any negative comments on this                           notation indicating that the assigned
                                                                                                                                                      used in low concentrations as a lubricity
                                        proposal, and thus are finalizing this                  RIN has been removed to avoid
                                                                                                                                                      additive and as a means for complying
                                        provision as proposed.                                  concerns about whether RINs assigned
                                                                                                                                                      with the ultra-low sulfur requirements
                                           As discussed above, under our final                  to batches have not been appropriately
                                                                                                                                                      for highway diesel fuel. Biodiesel (mono
                                        rule, obligated parties must separate                   transferred with the batch. One refiner
                                                                                                                                                      alkyl esters) is occasionally used in its
                                        RINs from volumes of renewable fuel.                    commented that the addition of such a
                                                                                                                                                      neat form. However, this approach is the
                                        This applies to all volumes of renewable                note on a PTD would represent an
                                                                                                                                                      exception rather than the rule.
                                        fuel that an obligated party owns. The                  unnecessary burden, while two
                                                                                                                                                      Consequently, in the NPRM we
                                        requirement to separate a RIN from the                  commenters representing fuel
                                                                                                                                                      proposed that the RIN assigned to a
                                        renewable fuel is intended to apply to                  distribution operations indicated that
                                                                                                                                                      volume of biodiesel could only be
                                        refiners, blenders and importers for                    such a notation would be useful. Based
                                                                                                                                                      separated from that volume if and when
                                        whom the production or importation of                   on comments we received, we have
                                                                                                                                                      the biodiesel was blended with
                                        gasoline is a significant part of their                 determined that such notation on PTDs
                                                                                                                                                      conventional diesel. To avoid claims
                                        overall business operations. Parties that               would not only be useful to parties
                                                                                                                                                      that very high concentrations of
                                        are predominately renewable fuel                        receiving volumes of renewable fuel, but
                                                                                                                                                      biodiesel count as a blended product,
                                        producers or importers, but which must                  would also be an important element of
                                                                                                                                                      we also proposed that biodiesel must be
                                        be designated as obligated parties due to               our RIN distribution requirements under
                                                                                                                                                      blended into conventional diesel at a
                                        the production or importation of a small                our modified approach. The
                                                                                                                                                      concentration of 80 volume percent or
                                        amount of gasoline, should not be able                  requirement will ensure that parties
                                                                                                                                                      less before the RIN could be separated
                                        to separate RINs from all renewable                     who take ownership of renewable fuel
                                                                                                                                                      from the volume.
                                        fuels that they own. For example, we                    without assigned RINs will know that                     A number of commenters expressed
                                        believe it would be inappropriate to                    RINs were originally assigned but                     concern that the 80 volume percent
                                        permit an ethanol producer to separate                  subsequently removed. We also believe                 limit put biodiesel at odds with the RIN
                                        RINs from all volumes that they own                     that such a requirement would be of                   separation criteria applicable to other
                                        simply because the producer imported,                   minimal burden to parties that have                   renewable fuels, including neat fuels.
                                        for example, a single truckload of                      separated a RIN from a volume of                      Upon further consideration, we have
                                        gasoline from Canada or Mexico. As a                    renewable fuel.                                       determined that the 80 volume percent
                                        result, the final rule prohibits obligated                 As described in Section III.E.1.b, we              limit remains a valid means for ensuring
                                        parties from separating RINs from                       have modified the RIN transfer                        that the separation of RINs from
                                        volumes of renewable fuel that they                     requirements for the final rule to make               biodiesel is consistent with its common
                                        produce or import that are in excess of                 RINs more fungible and to provide more                use at low blend levels just as for
                                        their RVO. However, obligated parties                   flexibility to distributors while still               ethanol, and that RINs are generally
                                        must separate any RINs from volumes of                  requiring RINs to be transferred with                 separated at the point in time when the
                                        renewable fuel that they own if that                    volumes of renewable fuel. However,                   biodiesel can be deemed to be motor
                                        volume was produced or imported by                      our modified approach requires that we                vehicle fuel. However, based on
                                        another party.                                          distinguish between RINs assigned to                  comments received, we are changing the
                                           As described in Section III.B.2, RINs                renewable fuel and RINs that have                     treatment of biodiesel for the final rule
                                        can be generated for renewable fuels                    already been separated from renewable                 in two ways.
                                        made from renewable crude which is                      fuel. Our final rule thus requires that                  First, obligated parties are required to
                                        treated as if it were a petroleum-derived               parties who separate a RIN from                       separate RINs from volumes of biodiesel
                                        crude oil or derivative, and is used as                 renewable fuel must change the K code                 at the point when they gain ownership
                                        a feedstock in a traditional refinery                   for that RIN to a value of 2. The RIN                 of the biodiesel, not when they blend
                                        processing unit. Whether the renewable                  then becomes an unassigned RIN that                   biodiesel with conventional diesel fuel.
                                        crude is coprocessed with petroleum                     can be transferred independent of                     This approach is consistent with our
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                                        derivatives or is processed in a facility                                                                     treatment of the RIN separation
                                                                                                renewable fuel volumes.
                                        or unit dedicated to the renewable
                                        crude, the final product is generally a                    In the NPRM we also provided a                       40 Throughout this Section III.E.2, ‘‘biodiesel’’
                                        motor vehicle fuel. In such cases the                   discussion of the unique circumstances                means mono alkyl esters, not non-ester renewable
                                        refinery will have the responsibility of                regarding biodiesel (mono alkyl                       diesel.

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                                        23944                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        requirements for obligated parties for                  been allowed to transfer credits, and                 provide us the ability to verify the
                                        other renewable fuels. Parties that                     argued that the success of those                      validity of RINs and the source of any
                                        actually blend biodiesel into                           programs should compel the Agency to                  invalid RINs. Since all RINs generated,
                                        conventional diesel fuel at a                           use those past credit program structures              traded, and used for compliance would
                                        concentration of 80 volume percent or                   as the model for the RFS program.                     be recorded electronically in an Agency
                                        less would continue to be required to                      We continue to believe that there is a             database, these types of investigations
                                        separate the RIN from the biodiesel, as                 need to provide for more open trading                 should be straightforward. The number
                                        proposed.                                               in the RFS program and that this need                 of RIN trades, and the parties between
                                          Second, we have determined that a                     warrants a unique approach for this                   whom the RINs are being traded, will
                                        biodiesel producer should be allowed to                 rule. First, unlike other programs where              only have the effect of increasing the
                                        separate a RIN from a volume of                         credits generally represent                           size of the database.
                                        biodiesel that it produces if it designates             overcompliance with an applicable                        Some commenters were concerned
                                        the volume of biodiesel specifically for                standard and are thus supplemental to                 that an open RIN market could lead to
                                        use as motor vehicle fuel in its neat                   the means of compliance, under the RFS                price volatility and potentially higher
                                        form, and the neat biodiesel is in fact                 program RINs are the fundamental unit                 prices as non-obligated speculators
                                        used as motor vehicle fuel. In general                  for compliance. There will be many                    enter the market expressly to profit from
                                        this demonstration would require that                   more RINs in the RFS program than                     the sale of RINs. According to
                                        the producer track the volume of                        credits in other programs, and the                    commenters, these speculators would
                                        biodiesel to the point of its final use.                trading structure must maximize the                   hold an unfair advantage over obligated
                                        However, this approach to the treatment                 fluidity of those RINs. A wider RIN                   parties that must purchase credits for
                                        of neat biodiesel is consistent with how                market will make it easier for obligated              compliance since speculators can hold
                                        we are treating other renewable fuels                   parties to get access to RINs.                        onto RINs indefinitely, driving up their
                                        used in their neat form.                                   Second, obligated parties are typically            price. However, by expanding the
                                                                                                not the ones producing the renewable                  number of parties that can hold RINs,
                                        3. Distribution of Separated RINs                       fuels and generating the RINs, nor                    we minimize the potential for any one
                                           In the NPRM, we proposed that RINs                   blending the renewable fuels into                     party to exercise market power, and
                                        become freely transferable once they are                gasoline, so there is a need for trades to            thus we do not believe that such activity
                                        separated from a batch of renewable                     occur between obligated parties and                   on the part of speculators is likely to
                                        fuel. Each RIN could be held by any                     non-obligated parties. If we prohibited               substantively affect the availability of
                                        party and transferred between parties                   everyone except obligated parties from                RINs or their price. Moreover, we do not
                                        any number of times. We argued that the                 holding RINs after they have been                     believe that a given party will hold a
                                        unique features of the RFS program                      separated from a batch, non-obligated                 RIN indefinitely simply to increase
                                        warranted more open trading than in                     parties seeking avenues for releasing                 profit because RINs have a limited life
                                        past fuel credit programs. In particular,               their RINs would only be able to release              and new RINs will be generated and
                                        RINs are generated by parties other than                them to obligated parties. Having fewer               will enter the market continuously.
                                        obligated parties, and many                             avenues through which they could                         Based on our review of the comments
                                        nonobligated parties will own RINs (for                 market their RINs, some non-obligated                 received, we did not find compelling
                                        example, oxygenate blenders who have                    parties might opt not to transfer their               evidence that an open market for RINs
                                        the right to separate RINs from                         RINs at all rather than participate in the            would create particular difficulties for
                                        volumes). While recognizing that                        RIN market with the attendant                         obligated parties seeking RINs or would
                                        limiting trading to and between                         recordkeeping requirements.                           limit the enforceability of the program.
                                        obligated parties might help obligated                  Furthermore, a potentially large number               As a result we are finalizing a RIN
                                        parties to maintain control of those RINs               of oxygenate blenders, many of which                  trading program that permits any party
                                        being traded, such an approach could                    will be small businesses, will be looking             to hold RINs and for RINs to be traded
                                        have the unintended effect of limiting                  for ways to market their RINs. Allowing               any number of times.
                                        the number of RINs that non-obligated                   other parties, including brokers, to own                 As with other credit-trading programs,
                                        parties contribute to the RIN market.                   and transfer RINs may create a more                   the business details of RIN transactions,
                                        The RFS program must work efficiently                   fluid and free market that would                      such as the conditions of a sale or any
                                        not only for a limited number of                        increase the venues for RINs to be                    other transfer, RIN price, role of
                                        obligated parties, but a number of non-                 acquired by the obligated parties that                mediators, etc. will be at the discretion
                                        obligated parties as well.                              need them. Limiting RIN trading to and                of the parties involved. The Agency is
                                           There was disagreement among                         among obligated parties could make it                 concerned only with information such
                                        commenters about whether an open RIN                    more difficult for RINs to eventually be              as who holds a given RIN at any given
                                        market was appropriate. Several parties                 transferred to the obligated parties that             moment, when transfers of RINs occur,
                                        supported our proposed approach,                        need them.                                            who the party to the transfers are, and
                                        saying that unlimited trading among all                    Some commenters argued that                        ultimately which obligated party relies
                                        interested parties would increase                       limiting the RIN trading market to and                on a given RIN for compliance purposes.
                                        liquidity and transparency in the RIN                   among obligated parties would make the                This type of information will therefore
                                        market. They also argued that increasing                program more enforceable, since there                 be the subject of various recordkeeping
                                        the number of participants would                        would be fewer parties to track and the               and reporting requirements as described
                                        facilitate the acquisition of RINs by                   sources of RINs would be more reliable.               in Section IV, and these requirements
                                        obligated parties and promote economic                  While this may be directionally true, we              will generally apply regardless of
                                        efficiency.                                             believe the RFS program will remain                   whether a RIN has been separated from
                                           However, some commenters                             sufficiently enforceable under an open                a batch.
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                                        disagreed, arguing instead that an open                 RIN market, and as discussed above, the                  The means through which RIN trades
                                        market does not necessarily make the                    greater need for market fluidity for this             occur will also be at the discretion of
                                        market any more fluid and free. They                    program warrants the change. The RIN                  the parties involved. For instance,
                                        pointed to past credit programs in                      number, along with the associated                     parties with RINs can create open
                                        which only refiners and importers have                  electronic reporting mechanism, will                  auctions, contract directly with those

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                         23945

                                        obligated parties who seek RINs, use                    today requires an obligated party to                  fuels or the business agreements
                                        brokers to identify potential transferees               separate a RIN from a batch as soon as                developed by parties transferring
                                        and negotiate terms, or just transfer the               it gains ownership of that batch. Our                 renewable fuels. For instance, we are
                                        RINs to any other party. Brokers                        final program design is based on the                  exempting small volume producers from
                                        involved in RIN transfer can either                     expectation that all but a negligible                 generating RINs, renewable fuels with
                                        operate in the role of arbitrator without               quantity of renewable fuels will                      equivalence values less than 1.0 may
                                        owning the RINs, or alternatively can                   eventually be consumed as motor                       have fewer RINs than gallons, and
                                        take custody of the RINs from one party                 vehicle fuel, primarily through blending              volume swell and metering
                                        and transfer them to another. If they are               with gasoline or diesel. See further                  discrepancies can all contribute to
                                        the transferee of any RINs, they will also              discussion in Section III.D. As a result,             situations in which batches legitimately
                                        be subject to the registration,                         we do not believe that it is necessary to             do not have assigned RINs
                                        recordkeeping, and reporting                            verify that blending has actually                     corresponding to their actual volumes.
                                        requirements. The Agency will not be                    occurred in order to provide a program                Parties that sell such batches could
                                        directly involved in RIN transfers, other               that adequately ensures it occurs. The                choose to price such product differently
                                        than in the role of providing a database                American Petroleum Institute agreed                   from product that has assigned RINs
                                        within which transfers will be recorded                 that tracking renewable fuels to the                  with a one-to-one correspondence to
                                        for enforcement purposes.                               point of blending would represent an                  product volume. We are also requiring
                                           In order to provide public information               unnecessary burden and added that                     that PTDs associated with transfers of
                                        that could be helpful in managing and                   such a requirement could preclude                     volume include notation indicating
                                        trading RINs as well as understanding                   many obligated parties from taking                    whether RINs are being simultaneously
                                        how the program is operating, we intend                 direct steps to obtain RINs to meet their             transferred to address these types of
                                        to publish a report each year that                      obligations.                                          situations.
                                        summarizes information submitted to us                     The Renewable Fuels Association,                      Another commenter argued that the
                                        through the quarterly and annual                        however, argued that allowing obligated               alternative approach could limit the
                                        reports required as part of our                         parties to separate RINs from batches                 potential for one refiner to purchase
                                        enforcement efforts (see Section IV).                   before blending occurred could give rise              large volumes of renewable fuel with
                                        Annual summary reports published by                     to RIN hoarding, fraud, and confusion.                the intent of separating the RINs and
                                        EPA may include such information as                     Most importantly, they noted, the                     exercising market power in the RIN
                                        the number of RINs generated in each                    alternative approach would provide                    market. However, the commenter did
                                        month or in each state, the average                     direct verification of blending. For the              not provide any information regarding
                                        number of trades that RINs undergo                      reasons described in Section III.D, we                how such market power could be
                                        before being used for compliance                        do not believe that a compliance system               exercised by one refiner in a system
                                        purposes, or the frequency of deficit                   requiring verification of blending is                 where unassigned RINs can be
                                        carryovers. However, we will not                        necessary, given that, with the                       transferred freely between parties any
                                        publish information identifying specific                exception of exports, essentially all                 number of times, and access to those
                                        parties.                                                renewable fuel produced in the U.S. is                RINs is not limited geographically in
                                                                                                used as motor vehicle fuel in the U.S.                any way. In addition, RINs that have
                                        4. Alternative Approaches to RIN
                                                                                                This is a foundational principle of the               been separated from their assigned
                                                                                                use of a RIN-based program design that                batches by oxygenate blenders represent
                                           In the NPRM, we also described                       enjoyed widespread support among
                                        several alternative approaches to the                                                                         an additional safety valve in the RIN
                                                                                                stakeholders and widespread                           market, providing additional assurances
                                        proposed trading and compliance                         recognition that it accurately describes
                                        program that were offered by                                                                                  that no one refiner could exercise
                                                                                                real world practices.                                 market power in the RIN market.
                                        stakeholders. Most of these alternatives                   If verification of blending were                      Commenters supporting a
                                        recognized the value of a RIN-based                     required before a RIN could be                        requirement that RINs be separated only
                                        system of compliance, but they differed                 separated from a batch, both obligated
                                        in terms of which parties would be                                                                            at the point of blending offered no other
                                                                                                parties and blenders would be subject to
                                        allowed to separate a RIN from a batch                                                                        arguments that hoarding or fraud could
                                                                                                additional recordkeeping and
                                        and the means through which the RINs                                                                          actually occur under our proposed
                                                                                                paperwork burdens. The Agency would
                                        would be transferred to obligated                                                                             approach. Therefore, we are finalizing
                                                                                                be compelled to enforce activities at the
                                        parties. We invited comment on all of                                                                         an approach that requires obligated
                                                                                                blender level, adding about 1200 parties
                                        these alternatives in the NPRM, but                                                                           parties to separate RINs from batches at
                                                                                                to the list of those subject to
                                        received very few. Based on those                                                                             the point of ownership.
                                                                                                enforcement under our final program.
                                        comments we did receive, we do not                      Although we agree that the reformulated               IV. Registration, Recordkeeping, and
                                        believe that any of these alternative                   gasoline program could act as a model                 Reporting Requirements
                                        approaches should be implemented at                     from which to construct such a
                                        this time. In general our responses to                  recordkeeping and enforcement system,                 A. Introduction
                                        comments on the alternatives can be                     we continue to believe that such a                      Registration, recordkeeping and
                                        found in the Summary and Analysis of                    system would be both unnecessary and                  reporting are necessary to track
                                        Comments document in the docket, but                    burdensome.                                           compliance with the renewable fuels
                                        we have addressed one particular                           The Renewable Fuels Association also               standard and transactions involving
                                        subject area below.                                     argued that our proposed program                      RINs. This summarizes these
                                           In the NPRM, we described an                         would result in confusion in the                      requirements. Our estimates as to the
                                        alternative approach to RIN distribution                distribution system, since there would                burden associated with registration,
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                                        in which obligated parties would only                   be renewable fuel both with and                       recordkeeping and reporting are
                                        be able to separate a RIN from a batch                  without RINs. However, there are many                 contained in this Federal Register
                                        of renewable fuel at the point in time                  other reasons that this situation could               notice in Section XII.B and explained
                                        when blending actually occurs. In                       arise, and none is expected to negatively             fully in ‘‘OMB–83 Supporting
                                        contrast, the approach we are finalizing                impact the distribution of renewable                  Statement—Renewable Fuels Standard

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                                        23946                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        (RFS) Program (Final Rule)—EPA ICR                      or handle transactions involving RINs                 basis. It is focused on calculating the
                                        No. 2242.02,’’ which has been placed in                 until you have registered and received                RVO, indicating RINs used for
                                        the public docket for this rulemaking.                  your registration numbers from us. It is              compliance, and determining any deficit
                                                                                                advisable to register as soon as possible             carried over.
                                        B. Registration
                                                                                                if you believe you will be engaged in                    The second report is a quarterly RIN
                                        1. Who Must Register Under the RFS                      activities that may require registration              generation report that is required to be
                                        Program?                                                under the RFS program. Registration can               submitted by producers and importers
                                          Obligated parties (including refiners                 occur any time following signature of                 of renewable fuel. This report is focused
                                        and importers), exporters of renewable                  this final rule.                                      on providing information on all batches
                                        fuels, producers and importers of                          If you are already registered under                of renewable fuel produced and
                                        renewable fuels, and any party who                      another fuels program, such as RFG and                imported and all RINs generated.
                                        owns RINs must register with EPA. Any                   anti-dumping or diesel sulfur, then you                  The third report is a RIN transaction
                                        party may own RINs including, but not                   do not have to register again. You will               report that is required to be submitted
                                        limited to, the above-named parties and                 use the same company and facility                     by any party that owns RINs, including
                                        marketers, blenders, terminal operators,                identification number you are currently               RIN marketers and brokers, as well as
                                        jobbers, and brokers. Owning RINs, and                  using for RFS reporting. Parties in this              obligated parties, exporters, and
                                        engaging in any activities regarding                    situation may contact the Agency for                  renewable fuel producers and importers.
                                        RINs, is prohibited as of September 1,                  confirmation or clarification of the                  This report is focused on providing
                                        2007 unless the party has registered and                appropriate registration numbers to use.              information on individual RIN
                                        received EPA company and facility                       As noted above, registrations never                   purchases, RIN sales, retired RINs, and
                                        identification numbers.                                 expire, but you are responsible for                   expired RINs.41 A separate RIN
                                          Most refiners and importers and many                  keeping the information we have up to                 transaction report is required to be
                                        biodiesel producers are already                         date. If you have previously registered               submitted for each RIN purchase and
                                        registered with us under various                        with us but have not had to report until              sale, and for each retired or expired RIN,
                                        regulations in 40 CFR part 80 related to                now, then you may wish to contact the                 and must be submitted by the end of the
                                        reformulated (RFG) and conventional                     person listed on our renewable fuels                  quarter in which the activity occurred.
                                        gasoline or diesel fuel. Parties who are                Web page (                    The purpose of the RIN transaction
                                        already registered will not have to take                renewablefuels/index.htm) in order to                 report is to document the ownership
                                        any action to register under the RFS                    confirm the information in your                       and transfer of RINs, and to track
                                        program, because their existing                         registration file.                                    expired and retired RINs. This report is
                                        registration will be applied to the RFS                 4. How Are Small Volume Domestic                      necessary because compliance with the
                                        program as well.                                        Producers of Renewable Fuels Treated                  RVO is primarily demonstrated through
                                                                                                for Registration Purposes?                            self-reporting of RIN trades and
                                        2. How Do I Register?                                                                                         therefore we must be able to link
                                           Registration is a simple process. We                    Small volume domestic producers of                 transactions involving each unique RIN
                                        will use the same basic forms for RFS                   renewable fuels are those who produce                 in order to verify compliance. We will
                                        program registration that we use under                  less than 10,000 gallons per year or who              be able to import reports into our
                                        the reformulated gasoline (RFG) and                     import less than 10,000 gallons per year.             compliance database and match RINs to
                                        anti-dumping program. You may                           These parties are not required to register            transactions across their entire journey
                                        download our registration forms at                      if they do not wish to generate RINs. If              from generation to use. As with our
                                                   a small volume domestic producer of                   other 40 CFR part 80 compliance-on-
                                        rfgforms.htm. These forms are well                      renewable fuels wishes to generate                    average and credit trading programs,
                                        known in the regulated community and                    RINs, then that party must register and               many potential violations are expected
                                        are very simple to fill out. Information                comply with all recordkeeping and                     to be self-reported.
                                        requested includes company and facility                 reporting requirements.                                  The fourth report is a quarterly gallon-
                                        names, addresses, and the identification                C. Reporting                                          RIN activity report that also is required
                                        of a contact person with telephone                                                                            to be submitted by any party that owns
                                        number and e-mail address.                              1. Who Must Report Under the RFS                      RINs. This report is focused on the total
                                        Registrations never expire and do not                   Program?                                              number of gallon-RINs owned at the
                                        have to be renewed. However, all                           Obligated parties, exporters of                    start and end of the quarter, and the
                                        registered parties are responsible for                  renewable fuel, producers and importers               total number of gallon-RINs purchased,
                                        notifying us of any change to their                     of renewable fuel, and any party who                  sold, retired and expired during the
                                        company or facility information.                        owns either assigned or unassigned                    quarter. This report also requires
                                                                                                RINs such as marketers or brokers must
                                        3. How Do I Know I Am Properly
                                                                                                submit periodic reports to us covering                   41 In this final rule, we have clearly distinguished
                                        Registered With EPA?
                                                                                                RIN generation, RIN use, and RIN                      expired RINs, which are no longer valid due to the
                                          Upon receipt of a completed                           transactions.                                         passage of time, from retired RINs, which are RINs
                                                                                                                                                      no longer valid due to the reportable spillage of
                                        registration form, we will provide you                                                                        their assigned volumes under § 80.1132, RINs used
                                        with a unique 4-digit company                           2. What Reports Are Required Under the
                                                                                                                                                      to satisfy an enforcement action, or RINs used to
                                        identification number and a unique                      RFS Program?                                          effect an import volume correction under
                                        5-digit facility identification number.                   There are four basic reports under the              § 80.1166(k). Rather than leaving retired RINs under
                                                                                                                                                      ‘‘any additional information that the Administrator
                                        These numbers will appear in                            RFS program. The first report is an                   may require,’’ we have specifically addressed them
                                        compliance reports and, in the case of                  annual compliance demonstration                       in this final rule. We believe it is useful to
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                                        renewable fuel producers and importers,                 report that is required to be submitted               specifically distinguish between retired and expired
                                        they will be incorporated in the unique                 by obligated parties and exporters of                 RINs because it will be easier for us to determine
                                                                                                                                                      whether a report is complete and to quality assure
                                        RINs they generate for each batch of                    renewable fuel. This report provides the              and check reported information by applying a
                                        renewable fuel. Timely registration is                  RFS compliance demonstration and is                   consistent reporting distinction between expired
                                        important because you cannot generate                   required to be submitted on an annual                 and retired RINs.

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                                                    23947

                                        information on end-of-quarter                              3. What Are the Specific Reporting                                 type of report by the type of regulated
                                        renewable fuel volumes.                                    Items for the Various Types of Parties                             party:
                                                                                                   Required To Report?
                                                                                                     The following table summarizes the
                                                                                                   information to be submitted in each

                                                                   TABLE IV.C.3–1.—INFORMATION CONTAINED IN REPORTS BY REGULATED PARTY *
                                                                                                                   Exporters of renewable                 Producers and importers                  Other parties who own
                                               Type of report                   Obligated parties                           fuel                             of renewable fuel                             RINS

                                        Annual Compliance Dem-           • Calculation of RVO .......            • Calculation of RVO .......            No report ...........................   No report.
                                          onstration Report.             • List of RINs used for                 • List of RINS used for
                                                                           compliance.                             compliance.
                                                                         • Calculation of deficit car-           • Calculation of deficit car-
                                                                           ryover.                                 ryover.
                                        Quarterly RIN Generation         No report ...........................                                   • Volume of each batch
                                                                                                                 No report ...........................                                           No report.
                                         Report.                                                                                                   produced or imported.
                                                                                                                                                 • RINs generated for each
                                                                                                                                                 • Volume of denaturant
                                                                                                                                                   and applicable equiva-
                                                                                                                                                   lence value of each
                                        RIN Transaction Report ....      Separate report for each            Separate report for each            Separate report for each                        Separate report for each
                                                                           transaction:.                       transaction:.                       transaction:.                                   transaction:
                                                                         • RIN purchase ................ • RIN purchase ................ • RIN purchase ................                         • RIN purchase.
                                                                         • RIN sale ........................ • RIN sale ........................ • RIN sale ........................             • RIN sale.
                                                                         • Expired RIN ................... • Expired RIN ................... • Expired RIN ...................                   • Expired RIN.
                                                                         • Retired RIN ................... • Retired RIN ................... • Retired RIN ...................                   • Retired RIN.
                                        Quarterly gallon-RIN Activ-      • Number of gallon-RINs*            • Number of gallon-RINs             • Number of gallon-RINs                         • Number of gallon-RINs
                                         ity Report.                       owned at start of quarter.          owned at start of quarter.          owned at start of quarter.                      owned at start of quar-
                                                                         • Number of gallon-RINs             • Number of gallon-RINs             • Number of gallon-RINs                           ter.
                                                                           purchased.                          purchased.                          purchased.                                    • Number of gallon-RINs
                                                                         • Number of gallon-RINs             • Number of gallon-RINs             • Number of gallon-RINs                           purchased.
                                                                           sold.                               sold.                               sold.                                         • Number of gallon-RINs
                                                                         • Number of gallon-RINs             • Number of gallon-RINs             • Number of gallon-RINs                           sold.
                                                                           retired.                            retired.                            retired.                                      • Number of gallon-RINs
                                                                         • Number of gallon-RINs             • Number of gallon-RINS             • Number of gallon-RINs                           retired.
                                                                           expired (4th quarter                expired (4th quarter                expired (4th quarter                          • Number of gallon-RINs
                                                                           only).                              only).                              only).                                          expired (4th quarter
                                                                         • Number of gallon-RINs             • Number of gallon-RINs             • Number of gallon-RINs                           only).
                                                                           at end of quarter.                  at end of quarter.                  at end of quarter.                            • Number of gallon-RINs
                                                                         • Volume (gals) of renew- • Volume (gals) of renew- • Volume (gals) of renew-                                             at end of quarter.
                                                                           able fuel owned at end              able fuel owned at end              able fuel owned at end                        • Volume (gals) of renew-
                                                                           of quarter.                         of quarter.                         of quarter.                                     able fuel owned at end
                                                                                                                                                                                                   of quarter.
                                           * A gallon-RIN is a RIN that represents an individual gallon of renewable fuel. See § 80.1101.

                                        4. What Are the Reporting Deadlines?                       be submitted by February 28th for the                              compliance. This information must be
                                                                                                   prior calendar year. For the RIN                                   reported by May 31, 2008 for calendar
                                           In the proposed rule, we had                            transaction and quarterly gallon-RIN                               year 2007. All other reporting follows
                                        requested comment on whether                               activity reports, the following schedule                           the schedule indicated above.
                                        reporting should be annual or quarterly.                   applies to all reporting parties:
                                        After consideration of comments                                                                                               5. How May I Submit Reports to EPA?
                                        received, we have determined that each                         TABLE IV.C.4–1.—QUARTERLY RE-                                     We will use a simplified and secure
                                        RIN transaction report must be                                                                                                method of reporting via the Agency’s
                                                                                                       PORTING SCHEDULE FOR RFS PRO-
                                        submitted by the end of the quarter in                                                                                        Central Data Exchange (CDX). CDX
                                        which the transaction occurred, and the                        GRAM
                                                                                                                                                                      permits us to accept reports that are
                                        gallon-RIN activity report should be                                                                                          electronically signed and certified by
                                                                                                        Quarter covered by                   Due date for
                                        submitted quarterly. Quarterly reporting                         quarterly report                   quarterly report          the submitter in a secure and robustly
                                        is better because it provides us with the                                                                                     encrypted fashion. Using CDX will
                                        information necessary to confirm the                       January–March ................         May 31.                     eliminate the need for wet ink
                                        validity and legitimacy of RINs prior to                   April–June ........................    August 31.                  signatures and will reduce the reporting
                                        their use in compliance. Additionally,                     July–September ...............         November 30.                burden on regulated parties. Guidance
                                        quarterly reporting enables EPA to                         October–December .........             February 28.                for reporting will be issued before
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                                        enforce the RIN/inventory balance                                                                                             implementation and will contain
                                        requirements for producers and                                In the first year of the RFS program                            specific instructions and formats
                                        marketers of renewable fuels.                              only, obligated parties and exporters are                          consistent with provisions in this final
                                           The annual compliance                                   given an extra quarter to submit their                             rule. The guidance will be posted on our
                                        demonstration for obligated parties must                   list of RINs used to demonstrate                                   renewable fuels Web page: http://

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                                                      multiplied by its equivalence value. If               cannot be summarized by a shorter
                                        index.htm.                                              the equivalence value for the spilled                 code.
                                           We will accept electronic reports                    volume may be determined based on its                    Parties must keep copies of all records
                                        generated in virtually all commercially                 composition, then the appropriate                     for a period of not less than five (5)
                                        available spreadsheet programs and will                 equivalence value shall be used. If the               years. In addition to documentation
                                        even permit parties to submit reports in                equivalence value for the spilled                     related to transfers, parties must keep
                                        comma delimited text, which can be                      volume cannot be determined, the                      information related to the sale,
                                        generated with a variety of basic                       equivalence value is 1.0. In the case that            purchase, brokering and trading of RINs
                                        software packages.                                      the fuel must be reported in pounds                   and copies of any reports they submit to
                                           CDX will confirm delivery of your                    rather than gallons, the party that                   us for compliance reports. For example,
                                        report. As described below with regard                  reported the spill should use the best                if a volume of fuel and its associated
                                        to recordkeeping, you must retain                       available conversion for converting the               RINs are reported to us as lost due to
                                        copies of all items submitted to us for                 volume into gallons. In the event that                spillage, documentation related to that
                                        five (5) years.                                         volume is spilled in transport, the                   spill must be retained for the five year
                                                                                                owner of the RINs will need to request                period. Upon request, parties are
                                        6. What Does EPA Do With the Reports
                                                                                                a copy of the spill report from the party             responsible for providing records to the
                                        it Receives?
                                                                                                that reported the spill.                              Administrator or the Administrator’s
                                           In order to permit maximum                                                                                 authorized representative.
                                        flexibility in meeting the RFS program                  D. Recordkeeping
                                        requirements, we must track activities                                                                        2. What Recordkeeping Requirements
                                        involving the creation and use of RINs,                 1. What Types of Records Must Be Kept?                Are Specific to Producers of Cellulosic
                                        as well as any transactions such as                                                                           or Waste-Derived Ethanol?
                                                                                                   The recordkeeping requirements for
                                        purchase or sale of RINs. Reports will be               obligated parties and exporters of                       In addition to the records applicable
                                        imported into a compliance database                     renewable fuels support the                           to all ethanol producers, producers of
                                        managed by EPA’s Office of                              enforcement of the use of RINs for                    cellulosic biomass or waste-derived
                                        Transportation and Air Quality and will                 compliance purposes. Records kept by                  ethanol must keep records of fuel use in
                                        be reviewed for completeness and for                    parties are central to tracking individual            order to ensure compliance with, and
                                        potential violations. It is important to                RINs through the fungible distribution                enforcement of, the definitions of these
                                        keep your company contact updated                       system after those RINs are assigned to               types of renewable fuel. Producers of
                                        (this is an item on the registration form),             batches of renewable fuel. Parties use                cellulosic biomass or waste-derived
                                        because we may need to speak to that                    invoices or other types of product                    ethanol must keep records of volume
                                        person about any problems with a report                 transfer documentation, which are                     and types of all feedstocks purchased to
                                        submitted. Potential violations will be                 customarily generated and issued in the               ensure compliance with, and
                                        referred to EPA enforcement personnel.                                                                        enforcement of, the feedstock aspect of
                                                                                                course of business and which are
                                                                                                                                                      the definitions of cellulosic biomass and
                                        7. May I Claim Information in Reports                   familiar to parties who transfer or
                                                                                                                                                      waste-derived ethanol. In addition,
                                        as CBI and How Will EPA Protect it?                     receive fuel. Parties are afforded
                                                                                                                                                      producers of cellulosic biomass or
                                                                                                significant freedom with regard to the
                                           You may claim information submitted                                                                        waste-derived ethanol are required to
                                                                                                form these documents take, although
                                        to us as confidential business                                                                                arrange for an independent third party
                                                                                                they must travel in some manner (on
                                        information (CBI). Please be sure to                                                                          to review the ethanol producer’s records
                                                                                                paper or electronically) with the volume
                                        follow all reporting guidance and                                                                             and verify that the facility is, in fact, a
                                                                                                of renewable fuel being transferred. On
                                        clearly mark the information you claim                                                                        cellulosic biomass or waste-derived
                                                                                                each occasion any person transfers
                                        as proprietary. We will treat information                                                                     ethanol production facility and that the
                                                                                                ownership of renewable fuels subject to               ethanol producer is producing cellulosic
                                        covered by such a claim in accordance
                                                                                                this regulation, that transferor must                 biomass or waste-derived ethanol. The
                                        with the regulations at 40 CFR part 2
                                                                                                provide the transferee with documents                 independent third party must be a
                                        and other Agency procedures for
                                                                                                identifying the renewable fuel and                    licensed Professional Engineer (P.E.) in
                                        handling proprietary information.
                                                                                                containing the identifying information                the chemical engineering field.
                                        8. How Are Spilled Volumes With                         that includes: The name and address of                Domestic ethanol producers are not
                                        Associated Lost RINs To Be Handled in                   the transferor and transferee, the EPA-               required obtain prior approval of the
                                        Reports?                                                issued company identification number                  independent third party P.E. or submit
                                           Since spills can happen whenever                     of the transferor and transferee, the                 the engineering verification to EPA,
                                        renewable fuel with assigned RINs is                    volume of renewable fuel that is being                however, the ethanol producer and the
                                        held, owners have two options if the                    transferred, the date of transfer, and                P.E. are required to keep records related
                                        spill causes their organization to be out               each associated RIN. These types of                   to the required engineering verification
                                        of compliance. The owners of the                        documents must be used by all parties                 and to produce them upon request of
                                        spilled fuel may either retire RINs lost                in the distribution chain down to the                 the Administrator or the Administrator’s
                                        in reported spills or purchase and sell                 point where the renewable fuel is                     authorized representative.
                                        a volume of renewable fuel equal to the                 blended into conventional gasoline or                    A foreign ethanol producer may apply
                                        reported volume and not associated                      diesel.                                               to us to have its cellulosic biomass or
                                        with RINs in order to meet compliance.                     Except for transfers to truck carriers,            waste-derived ethanol treated in the
                                        Reportable spills for the purposes of this              retailers or wholesale purchaser-                     same manner as domestic cellulosic
                                        rule refers to spills of renewable fuel                 consumers, product codes may be used                  biomass or waste-derived ethanol under
                                        with assigned RINs and a requirement                    to convey the information required, as                the RFS program. A foreign ethanol
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                                        by a federal, state, or local authority to              long as the codes are clearly understood              producer with an approved application
                                        report said spills. The party that owns                 by each transferee. However, the RIN                  will be required to comply with all of
                                        the spilled renewable fuel must retire a                must always appear in its entirety before             the requirements that apply to domestic
                                        number of gallon-RINs corresponding to                  it is separated from a batch, since it is             ethanol producers, including
                                        the volume of spilled renewable fuel                    a unique identification number that                   registration, recordkeeping, reporting,

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                                        attest engagements, and the                             E. Attest Engagements                                 other fuels programs. We have
                                        independent third party verification                                                                          considered these comments but
                                                                                                1. What Are the Attest Engagement
                                        discussed above. The attest engagements                                                                       continue to believe that the attest
                                                                                                Requirements Under the RFS Program?
                                        for a foreign ethanol producer must be                                                                        engagements are an appropriate means
                                        conducted by a U.S. auditor (if not a                      Attest engagements are similar to                  of verifying the accuracy of the
                                        U.S. based auditor, the auditor must be                 financial audits and consist of an                    information reported to us by obligated
                                                                                                independent, professional review of                   parties. In addition to documentation of
                                        approved in advance by EPA). Similar
                                                                                                compliance records and reports. Similar               RIN transactions and use, the reports
                                        to other fuels programs, the foreign
                                                                                                to other fuels programs, the RFS                      include information on production and
                                        ethanol producer will be required to                    program requires reporting parties to
                                        comply with additional requirements                                                                           import volumes and calculation of the
                                                                                                arrange for annual attest engagements to              party’s RFS obligation. We believe that
                                        designed to ensure that enforcement of                  be conducted by an auditor that is                    attest engagements are necessary in
                                        the regulations at the foreign ethanol                  ‘‘independent’’ under the criteria                    order to verify that the underlying data
                                        facility will not be compromised. The                   specified in the regulations. We believe              regarding production and import
                                        independent third party P.E. conducting                 that the attest engagements provide an                volumes and RFS obligation, as well as
                                        the facility verification must be                       appropriate and useful tool for verifying             the underlying data regarding RIN
                                        approved by EPA before the foreign                      the accuracy of the information reported              transactions and use, support the
                                        entity will be allowed to treat its                     to us. Attest engagements are performed               information included in the reports. As
                                        cellulosic biomass or waste-derived                     in accordance with standard procedures                a result, the final rule includes an attest
                                        ethanol in the same manner as domestic                  and standards established by the                      engagement requirement for obligated
                                        producers. The foreign ethanol producer                 American Institute of Certified Public                parties.
                                        must arrange for the P.E. to inspect the                Accountants and the Institute of Internal                We also received several comments
                                        facility and submit a report to us which                Auditors. The attest engagement                       that the attest engagement auditor
                                        describes the physical plant and its                    consists of an outside certified public               should be required to examine only
                                        operation and includes documentation                    accountant (CPA) or certified                         representative samples of the party’s
                                        of the P.E.’s qualifications. The foreign               independent auditor (CIA) following                   RIN transaction documents rather than
                                        ethanol producer must agree to provide                  agreed upon procedures to determine                   the documents for each RIN transaction,
                                        access to EPA personnel for the                         whether underlying records, reported                  as required in the proposed regulations.
                                                                                                items, and transactions agree, and                    We agree that examination of
                                        purposes of conducting inspections and
                                                                                                issuing a report as to their findings.                representative samples of RIN
                                        audits, post a bond, and arrange for an
                                                                                                Attest engagements are performed on an                transaction documents would provide
                                        independent inspector to monitor ship                   annual basis.                                         sufficient oversight and that the
                                        loading and offloading records to ensure                                                                      requirement included in the proposed
                                        that volumes of ethanol do not change                   2. Who Is Subject to the Attest
                                                                                                                                                      regulations may be unnecessarily
                                        from port of shipping to port of entry.                 Engagement Requirements for the RFS
                                                                                                                                                      burdensome. As a result, the attest
                                        The independent inspector must be                       Program?
                                                                                                                                                      engagement provisions have been
                                        approved by EPA prior to the shipment                      Obligated parties, producers,                      modified to require the auditor to
                                        of any ethanol designated by the foreign                exporters and importers of renewable                  examine only representative samples of
                                        ethanol producer as ethanol which is to                 fuel, and any party who own RINs are                  RIN transaction documents. However, in
                                        be treated as cellulosic biomass or                     all subject to the attest engagement                  the case of attest engagements applied to
                                        waste-derived ethanol. Cellulosic                       requirements.                                         RIN generation by producers or
                                        biomass or waste-derived ethanol                        3. How Are the Attest Engagement                      importers of renewable fuel, or the use
                                        produced by a foreign ethanol producer                  Requirements in This Final Rule                       of RINs for compliance purposes by
                                        must be identified as such on product                   Different From Those Proposed?                        obligated parties or exporters, the
                                        transfer documents that accompany the                                                                         auditor must examine documentation
                                                                                                   We had proposed that obligated                     for all RINs generated or used. We
                                        ethanol to the importer. (These
                                                                                                parties, exporters, and renewable fuels               believe this requirement is necessary to
                                        additional provisions for foreign ethanol               producers be subject to attest
                                        producers are contained in § 80.1166.)                                                                        ensure that obligated parties and
                                                                                                engagement requirements. We received                  exporters are meeting their RFS
                                           The provisions for foreign ethanol                   several comments on this proposal.                    obligation and that ethanol producers
                                        producers are optional and are available                Some commenters suggested that the                    and importers are assigning RINs to
                                        only to foreign producers of cellulosic                 attest engagements should be required                 each batch of renewable fuel produced
                                        biomass or waste-derived ethanol.                       for renewable fuels producers and                     or imported as required under the
                                        Ethanol or other renewable fuels                        importers, but not for obligated parties.             regulations.
                                        produced and exported to the United                     These commenters believe that attest                     The proposed attest engagement
                                        States by other foreign producers are                   engagements are needed for renewable                  regulations at § 80.1164(b) did not
                                        regulated through the importer. An                      fuel producers and importers in order to              include importers of renewable fuels.
                                        importer that receives ethanol identified               verify reported production and RIN                    One commenter pointed out these
                                        as cellulosic biomass or waste-derived                  volumes, whereas we can monitor                       procedures should apply to both
                                        ethanol produced by a foreign producer                  compliance by obligated parties by                    renewable fuels producers and
                                        with an approved application would not                  cross-checking their reports regarding                importers. Renewable fuel importers
                                        assign RINs to the ethanol, as RINs for                 RIN transactions and use with the                     have the same reporting requirements as
                                        such ethanol will be assigned by the                    reports from other parties. These                     renewable fuel producers, and,
                                                                                                commenters also believe that the                      therefore, there is the same need for
                                        foreign ethanol producer. The importer,
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                                                                                                information required by obligated                     verification of the information given on
                                        like any other marketer, would transfer
                                                                                                parties under the RFS program is not                  the reports through attest engagements.
                                        the RINs assigned by the foreign                        such that an attest engagement is                     It was an inadvertent oversight that
                                        producer with a volume of ethanol and                   needed because the rule does not                      renewable fuel importers were not
                                        report the transactions to us.                          require verification of raw data as with              included in the parties required to

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                                        23950                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        comply with the attest engagement                       for improperly transferring renewable                 conduct in the creation and transfer of
                                        procedures in proposed § 80.1164(b),                    fuel volumes without RINs or retaining                RINs.
                                        and that applying the requirements in                   more RINs during a quarter than the                      Any obligated party that reports the
                                        § 80.1164(b) to renewable fuel importers                party’s inventory of renewable fuels.                 use of invalid RINs to meet its
                                        is a logical outgrowth of the proposed                  Any party may be liable for creating,                 renewable fuels obligation may be liable
                                        regulations. As a result, the regulations               transferring, or using an invalid RIN, or             for a regulatory violation for use of
                                        have been modified to include                           transferring a RIN that is not properly               invalid RINs. If the obligated party fails
                                        renewable fuel importers in the parties                 identified.                                           to meet its renewable fuels obligation
                                        required to comply with the attest                         In addition, any person who is subject             without the invalid RINs, the party may
                                        procedures in § 80.1164(b).                             to an affirmative requirement under the               also be liable for not meeting its
                                           In addition to obligated parties,                    RFS program will be liable for a failure              renewable fuels obligation. In addition,
                                        exporters and renewable fuel producers                  to comply with the requirement. For                   the transfer of invalid RINs is
                                        and importers, we believe that an attest                example, an obligated party will be                   prohibited, so that any party or parties
                                        engagement requirement is necessary for                 liable for a failure to comply with the               that transfer invalid RINs may be liable
                                        any party who takes ownership of a RIN.                 annual compliance reporting                           for a regulatory violation for transferring
                                        As discussed above, attest engagements                  requirements. A renewable fuel                        the invalid RINs. In a case where invalid
                                        provide an appropriate and useful tool                  producer or importer will be liable for               RINs are transferred and used, EPA
                                        for verifying the accuracy of the                       a failure to comply with the applicable               normally will hold each party that
                                        information reported to us. Like                        renewable fuel batch reporting                        committed a violation responsible,
                                        obligated parties and renewable fuel                    requirements. Any party subject to                    including both the user and the
                                        producers and importers, the final rule                 recordkeeping or product transfer                     transferor of the invalid RINs. For this
                                        requires RIN owners to submit                           document requirements would be liable                 reason, obligated parties and RIN
                                        information regarding RIN transaction                   for a failure to comply with these                    brokers should use good business
                                        activity to us. We believe that attest                  requirements. Like other EPA fuels                    judgment when deciding whether to
                                        engagement audits are necessary to                      programs, the final rule provides that a              purchase RINs from any particular seller
                                        verify the accuracy of the information                  party who causes another party to                     and should consider including prudent
                                        included in these reports. Therefore,                   violate a prohibition or fail to comply               business safeguards in RIN transactions,
                                        this final rule includes an attest                      with a requirement may be found liable                such as requiring RIN sellers to sign
                                        engagement requirement for RIN owners                   for the violation.                                    contracts with indemnity provisions to
                                        who are not obligated parties or                                                                              protect the purchaser in the event
                                                                                                   The Energy Act amended the penalty
                                        renewable fuel producers or importers.                                                                        penalties are assessed because we find
                                                                                                and injunction provisions in section
                                        We believe that inclusion of the                                                                              the RINs are invalid. Similarly, parties
                                                                                                211(d) of the Clean Air Act to apply to
                                        requirement in the final rule is a logical                                                                    that sell RINs should take steps to
                                        outgrowth of the proposed attest                        violations of the renewable fuels                     ensure any RINs that are sold were
                                        engagement requirements for other                       requirements in section 211(o).42                     properly created to avoid penalties that
                                        parties who are required to submit                      Accordingly, under the final rule, any                result from the transfer of invalid RINs.
                                        similar information regarding RIN                       person who violates any prohibition or                   As in other motor vehicle fuel credit
                                        transaction activity to us.                             requirement of the RFS program may be                 programs, the regulations address the
                                                                                                subject to civil penalties for every day              consequences if an obligated party is
                                        V. What Acts Are Prohibited and Who                     of each such violation and the amount                 found to have used invalid RINs to
                                        Is Liable for Violations?                               of economic benefit or savings resulting              demonstrate compliance with its RVO.
                                           The prohibition and liability                        from the violation. Under the final rule,             In this situation, the obligated party that
                                        provisions applicable to the RFS                        a failure to acquire sufficient RINs to               used the invalid RINs will be required
                                        program are similar to those of other                   meet a party’s renewable fuels                        to deduct any invalid RINs from its
                                        gasoline programs. The final rule                       obligation will constitute a separate day             compliance calculations. As discussed
                                        identifies certain prohibited acts, such                of violation for each day the violation               above, the obligated party will be liable
                                        as a failure to acquire sufficient RINs to              occurred during the annual averaging                  for not meeting its renewable fuels
                                        meet a party’s renewable fuel obligation                period.                                               obligation if the remaining number of
                                        (RVO), producing or importing a                            Because there are no standards under               valid RINs is insufficient to meet its
                                        renewable fuel without properly                         the RFS rule that may be measured                     RVO, and the obligated party may be
                                        assigning a RIN, creating, transferring or              downstream, we believe that a                         subject to monetary penalties if it used
                                        using invalid RINs, improperly                          presumptive liability scheme, i.e., a                 invalid RINs in its compliance
                                        transferring renewable fuel volumes                     scheme in which parties upstream from                 demonstration. In determining an
                                        without RINs, improperly separating                     the facility where the violation is found             appropriate penalty, EPA will consider
                                        RINs from renewable fuel, retaining                     are presumed liable for the violation,                a number of factors, including whether
                                        more RINs during a quarter than the                     would not be applicable under the RFS                 the obligated party did in fact procure
                                        party’s inventory of renewable fuel, or                 program. As a result, the RFS rule does               sufficient valid RINs to cover the deficit
                                        transferring RINs that are not identified               not contain such a scheme.                            created by the invalid RINs. A penalty
                                        by proper RIN numbers. Any person                          The regulations prohibit any party                 may include both the economic benefit
                                        subject to a prohibition will be held                   from creating, transferring or using                  of using invalid RINs and a gravity
                                        liable for violating that prohibition.                  invalid RINs. These invalid RIN                       component.
                                        Thus, for example, an obligated party                   provisions apply regardless of the good                  Although an obligated party may be
                                        will be liable if the party fails to acquire            faith belief of a party that the RINs are             liable for a violation if it uses invalid
                                        sufficient RINs to meet its RVO. A party                valid. These enforcement provisions are               RINs for compliance purposes, we
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                                        who produces or imports renewable                       necessary to ensure the RFS program                   normally will look first to the generator
                                        fuels will be liable for a failure to                   goals are not compromised by illegal                  or seller of the invalid RINs both for
                                        properly assign RINs to batches of                                                                            payment of penalty and to procure
                                        renewable fuel produced or imported. A                    42 Section 1501(b) of the Energy Policy Act of      sufficient valid RINs to offset the invalid
                                        renewable fuels marketer will be liable                 2005.                                                 RINs. However, if EPA is unable to

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                                        obtain relief from that party, attention                                     a violation unless the party knowingly                                      VI. Current and Projected Renewable
                                        will turn to the obligated party who may                                     used the invalid RINs to demonstrate                                        Fuel Production and Use
                                        then be required to obtain sufficient                                        compliance. Where the suspect RINs are                                        While the definition of renewable fuel
                                        valid RINs to offset the invalid RINs.                                       later proved to be valid, the party                                         does not limit compliance with the
                                           We received several comments on the                                       should be able to use the RINs in the                                       standard to any one particular type of
                                        prohibition regarding use of invalid                                         subsequent year regardless of the year of                                   renewable fuel, ethanol is currently the
                                        RINs. Some commenters believe that an                                        generation or any rollover cap. For the                                     most prevalent renewable fuel blended
                                        obligated party that uses RINs which are                                     reasons stated above, we believe that it                                    into gasoline today. Biodiesel represents
                                        later found to be invalid should be given                                    is appropriate to hold an obligated party                                   another renewable fuel which, while not
                                        an opportunity to ‘‘cure’’ the shortfall                                     responsible for using invalid RINs even                                     as widespread as ethanol use (in terms
                                        caused by the invalid RINs without
                                                                                                                     where the party in good faith believed                                      of volume), has been increasing in
                                        penalty. As indicated above, a penalty
                                                                                                                     the RINs to be valid. Normally, suspect                                     production capacity and use over the
                                        for a good faith purchaser is not
                                                                                                                     RINs will be not be replaced until the                                      last several years. This section provides
                                        automatic. Where an invalid RIN was
                                                                                                                     RINs are proved to be invalid. In the                                       a brief overview of the ethanol and
                                        created by another party, such as the
                                                                                                                     unlikely circumstance that a RIN is first                                   biodiesel industries today and how they
                                        producer or marketer of the renewable
                                                                                                                     determined to be invalid and then later                                     are projected to grow into the future.
                                        fuel, the party responsible for the
                                        existence of the invalid RIN would be                                        found to be valid, the ability to use the                                   A. Overview of U.S. Ethanol Industry
                                        liable and would be required to                                              RIN in a subsequent year would be                                           and Future Production/Consumption
                                        purchase a RIN to make up for the                                            determined in the context of the
                                                                                                                     enforcement action.                                                         1. Current Ethanol Production
                                        invalid RIN and pay an appropriate
                                        penalty. If the responsible party cannot                                        Finally, parties that are predominately                                     As of October 2006, there were 110
                                        be identified or is out of business, or if                                   renewable fuel producers or importers,                                      ethanol production facilities operating
                                        EPA is otherwise unable to obtain relief                                     but which must be designated as                                             in the United States with a combined
                                        from the party, then the obligated party                                     obligated parties due to the production                                     production capacity of approximately
                                        that used the RIN would be required to                                       or importation of a small amount of                                         5.2 billion gallons per year.43 All of the
                                        purchase a RIN to make up for the                                            gasoline, should not be able to separate                                    ethanol currently produced comes from
                                        invalid RIN. However, any penalty for a                                      RINs from all renewable fuels that they                                     grain or starch-based feedstocks that can
                                        good faith purchaser would likely be                                                                                                                     easily be broken down into ethanol via
                                                                                                                     own. To address such circumstances,
                                        small, particularly where EPA is able to                                                                                                                 traditional fermentation processes. The
                                                                                                                     we are prohibiting obligated parties
                                        obtain relief from the party that was                                                                                                                    majority of ethanol (almost 92 percent
                                                                                                                     from separating RINs that they generate
                                        responsible for the invalid RIN. Where                                                                                                                   by volume) is produced exclusively
                                                                                                                     from volumes of renewable fuel in                                           from corn. Another 7 percent comes
                                        a RIN was originally believed to be valid
                                        but is later found to be invalid, whether                                    excess of their RVO. However, obligated                                     from a blend of corn and/or similarly
                                        a current year RIN may be used to make                                       parties must separate any RINs                                              processed grains (milo, wheat, or barley)
                                        up for the prior-year invalid RIN would                                      generated by other parties from                                             and less than 1 percent is produced
                                        be determined in the context of the                                          renewable fuel if they own the                                              from waste beverages, cheese whey, and
                                        enforcement action.                                                          renewable fuel.                                                             sugars/starches combined. A summary
                                           Another commenter suggested that an                                                                                                                   of ethanol production by feedstock is
                                        obligated party should not be liable for                                                                                                                 presented in Table VI.A.1–1.

                                                                                         TABLE VI.A.1–1.—2006 U.S. ETHANOL PRODUCTION BY FEEDSTOCK
                                                                                                                                                                                                 Capacity                   Number        Percent
                                                                                                      Plant feedstock                                                                                             of
                                                                                                                                                                                                  MMgy                      of plants     of plants

                                        Cheese Whey ..................................................................................................................................                   8           0.1             2          1.8
                                        Corn a ...............................................................................................................................................       4,780          91.6            90         81.8
                                        Corn, Barley .....................................................................................................................................              40           0.8             1          0.9
                                        Corn, Milo b ......................................................................................................................................            244           4.7             8          7.3
                                        Corn, Wheat .....................................................................................................................................               90           1.7             2          1.8
                                        Milo, Wheat ......................................................................................................................................              40           0.8             1          0.9
                                        Sugars, Starches .............................................................................................................................                   2           0.0             1          0.9
                                        Waste Beverages c ...........................................................................................................................                   16           0.3             5          4.5

                                              Total ..........................................................................................................................................       5,218         100.0          110         100.0
                                          a Includes two facilities processing seed corn and another facility processing corn which intends to transition to corn stalks, switchgrass, and
                                        biomass in the future.
                                          b Includes one facility procesisng small amounts of molasses in addition to corn and milo.
                                          c Includes two facilities processing brewery waste.

                                          43 The October 2006 ethanol production capacity                            publications (June 2006 through October 2006); ICF                          since transitioned into the fuel-grade ethanol
                                        baseline was generated based on the June 2006                                International, Ethanol Industry Profile (September                          market. Where applicable, current ethanol plant
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                                        NPRM plant list and updated on October 18, 2006                              30, 2006); BioFuels Journal, News & Information for                         production levels have been used to represent plant
                                        based on a variety of data sources including:                                the Ethanol and BioFuels Industries (breaking news                          capacity, as nameplate capacities are often
                                        Renewable Fuels Association (RFA), Ethanol                                   posted June 16, 2006 through October 18, 2006);
                                                                                                                                                                                                 underestimated. This analysis does not consider
                                        Biorefinery Locations (updated October 16, 2006);                            and ethanol producer Web sites. The baseline
                                        Ethanol Producer Magazine (EPM), plant list                                  includes small-scale ethanol production facilities as                       ethanol plants that may be located in the Virgin
                                        (downloaded October 18, 2006) and monthly                                    well as former food-grade ethanol plants that have                          Islands or U.S. territories.

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                                          There are a total of 102 plants                                                In addition to grain and starch-to-                                         or biomass into ethanol. For a more
                                        processing corn and/or other similarly                                        ethanol production, another method                                             detailed discussion on future cellulosic
                                        processed grains. Of these facilities, 92                                     exists for producing ethanol from a                                            ethanol plants and production
                                        utilize dry-milling technologies and the                                      more diverse feedstock base. This                                              technologies, refer to RIA Sections
                                        remaining 10 plants rely on wet-milling                                       process involves converting cellulosic                                and 7.1.2, respectively.
                                        processes. Dry mill ethanol plants grind                                      materials such as bagasse, wood, straw,                                          Ethanol production is a relatively
                                        the entire kernel and produce only one                                        switchgrass, and other biomass into                                            resource-intensive process that requires
                                        primary co-product: Distillers’ grains                                        ethanol. Cellulose consists of tightly-                                        the use of water, electricity, and steam.
                                        with solubles (DGS). The co-product is                                        linked polymers of starch, and                                                 Steam needed to heat the process is
                                        sold wet (WDGS) or dried (DDGS) to the                                        production of ethanol from it requires                                         generally produced onsite or by other
                                        agricultural market as animal feed. In                                        additional steps to convert these                                              dedicated boilers. Of today’s 110
                                        contrast to dry mill plants, wet mill                                         polymers into fermentable sugars.                                              ethanol production facilities, 101 burn
                                        facilities separate the kernel prior to                                       Scientists are actively pursuing acid and                                      natural gas, 7 burn coal, 1 burns coal
                                        processing and in turn produce other                                          enzyme hydrolysis as well as                                                   and biomass, and 1 burns syrup from
                                        co-products (usually gluten feed, gluten                                      gasification to achieve this goal, but the                                     the process to produce steam.44 Our
                                        meal, and oil) in addition to DGS. Wet                                        technologies are still not fully                                               research suggests that 11 plants
                                                                                                                      developed for large-scale commercial                                           currently utilize cogeneration or
                                        mill plants are generally more costly to
                                                                                                                      production. As of October 2006, the                                            combined heat and power (CHP)
                                        build but are larger in size on average.
                                                                                                                      only known cellulose-to-ethanol plant                                          technology, although others may exist.
                                        As such, nearly 22 percent of the
                                                                                                                      in North America was Iogen in Canada,                                          CHP is a mechanism for improving
                                        current overall ethanol production
                                                                                                                      which produces approximately one                                               overall plant efficiency. Whether owned
                                        comes from the 10 previously-
                                                                                                                      million gallons of ethanol per year from                                       by the ethanol facility, their local utility,
                                        mentioned wet mill facilities.                                                wood chips. Several companies have                                             or a third party; CHP facilities produce
                                          The remaining 8 plants which process                                        announced plans to build cellulose-to-                                         their own electricity and use the waste
                                        waste beverages, cheese whey, or                                              ethanol plants in the U.S., but most are                                       heat from power production for process
                                        sugars/starches, operate differently than                                     still in the research and development or                                       steam, reducing the energy intensity of
                                        their grain-based counterparts. These                                         pre-construction planning phases. The                                          ethanol production. A summary of the
                                        facilities do not require milling and                                         majority of the plans involve converting                                       energy sources and CHP technology
                                        instead operate a simpler enzymatic                                           bagasse, rice hulls, wood, switchgrass,                                        utilized by today’s ethanol plants is
                                        fermentation process.                                                         corn stalks, and other agricultural waste                                      found in Table VI.A.1–2.

                                                                                    TABLE VI.A.1–2.—2006 U.S. ETHANOL PRODUCTION BY ENERGY SOURCE
                                                                                                                                                                                  Capacity                       Number      Percent      CHP
                                                                                          Plant energy source                                                                                           of
                                                                                                                                                                                   MMgy                          of plants   of plants    tech.

                                        Coal ..............................................................................................................................              1,042            20.0          7          6.3            2
                                        Coal, Biomass ..............................................................................................................                        50             1.0          1          0.9            0
                                        Natural Gas a ................................................................................................................                   4,077            78.1        101         91.8            9
                                        Syrup ............................................................................................................................                  48             0.9          1          0.9            0

                                              Total ......................................................................................................................               5,218          100.0         110       100.0             11
                                           a Includes      three facilities burning natural gas which intend to transition to coal or biomass in the future.

                                           The majority of domestic ethanol is                                        production facilities, 100 are located in                                      production, as shown in Table VI.A.1–
                                        currently produced in the Midwest                                             PADD 2. As a region, PADD 2 accounts                                           3.
                                        within PADD 2—where most of the corn                                          for 96 percent (or over five billion
                                        is grown. Of the 110 U.S. ethanol                                             gallons) of the annual domestic ethanol

                                                                                               TABLE VI.A.1–3.—2006 U.S. ETHANOL PRODUCTION BY PADD
                                                                                                                                                                                                     Capacity                Number      Percent
                                                                                                               PADD                                                                                                 of
                                                                                                                                                                                                      MMgy                   of plants   of plants

                                        PADD      1   ............................................................................................................................................         0.4         0.0          1          0.9
                                        PADD      2   ............................................................................................................................................      5,012         96.0        100         90.9
                                        PADD      3   ............................................................................................................................................         30          0.6          1          0.9
                                        PADD      4   ............................................................................................................................................        105          2.0          4          3.6
                                        PADD      5   ............................................................................................................................................         71          1.4          4          3.6

                                              Total ..........................................................................................................................................          5,218        100.0        110       100.0
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                                          44 Facilities were assumed to burn natural gas if

                                        the plant fuel type was not mentioned or

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                                          Leading the Midwest in ethanol                        feedstocks, while others rely on a                    2. Expected Growth in Ethanol
                                        production are Iowa, Illinois, Nebraska,                combination of both.                                  Production
                                        Minnesota, and South Dakota with a                        The U.S. ethanol industry is currently                Over the past 25 years, domestic fuel
                                        combined capacity of nearly four billion                comprised of a mixture of corporations                ethanol production has steadily
                                        gallons per year. Together, these five                  and farmer-owned cooperatives (co-                    increased due to environmental
                                        states’ 70 ethanol plants account for 76                ops). More than half (or 60) of today’s               regulation, federal and state tax
                                        percent of the total domestic product.                  plants are owned by corporations and,                 incentives, and market demand. More
                                        However, although the majority of                       on average, these plants are larger in                recently, ethanol production has soared
                                        ethanol production comes from PADD 2,                   size than farmer-owned co-ops.                        due to the phase out of MTBE, an
                                        there are a growing number of plants                    Accordingly, company-owned plants                     increasing number of state ethanol
                                        located outside the traditional corn belt.              account for almost 64 percent of the                  mandates, and elevated crude oil prices.
                                        In addition to the 15 states comprising                 total U.S. ethanol production capacity.               As shown in Figure VI.A.2–1, over the
                                        PADD 2, ethanol plants are currently                    Further, more than 50 percent of the                  past three years, domestic ethanol
                                        located in California, Colorado, Georgia,               total domestic product comes from                     production has nearly doubled from 2.1
                                        New Mexico, and Wyoming. Some of                        plants owned by just 6 different                      billion gallons in 2002 to 4.0 billion
                                        these facilities ship in feedstocks                     companies—Archer Daniels Midland,                     gallons in 2005. For 2006, the
                                        (namely corn) from the Midwest, others                  Broin, VeraSun, Hawkeye Renewables,                   Renewable Fuels Association is
                                        rely on locally grown/produced                          Global/MGP Ingredients, and Aventine                  anticipating about 4.7 billion gallons of
                                                                                                Renewable Energy.45                                   domestic ethanol production.46

                                          EPA forecasts that domestic ethanol                   impacts of federal and state tax                      the removal of MTBE from all U.S.
                                        production will continue to grow into                   incentives, as well as the more recent                gasoline, crude oil prices are expected
                                        the future. In addition to the past                     impacts of state ethanol mandates and                 to continue to drive up demand for
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                                          45 Includes Broin’s minority ownership in 18 U.S.       46 Based on RFA comments received in response

                                        ethanol plants.                                         to the proposed rulemaking, 71 FR 55552
                                                                                                (September 22, 2006).

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                                        23954                       Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        ethanol. As a result, the nation is on                                      exceeding the 2007 renewable fuel                         summary of the new construction and
                                        track to exceed the renewable fuel                                          requirement (4.7 billion gallons). In                     plant expansion projects currently
                                        volume requirements contained in the                                        addition, there is another 3.4 billion                    underway (as of October 2006) is found
                                        Act. Today’s ethanol production                                             gallons of ethanol production capacity                    in Table VI.A.2–1.
                                        capacity (5.2 billion gallons) is already                                   currently under construction.47 A

                                                                            TABLE VI.A.2–1.—UNDER CONSTRUCTION U.S. ETHANOL PRODUCTION CAPACITY
                                                                                                                                   Oct. 2006 baseline                    Under const.                 Base + under const.
                                                                                                                                  MMgy              Plants           MMgy a           Plants          MMgy a           Plants

                                        PADD    1   ..........................................................................             0.4                  1          115                  1            115               2
                                        PADD    2   ..........................................................................         5,012                  100        2,764                 39          7,776             139
                                        PADD    3   ..........................................................................            30                    1          230                  3            260               4
                                        PADD    4   ..........................................................................           105                    4           50                  1            155               5
                                        PADD    5   ..........................................................................            71                    4          198                  3            269               7

                                             Total ........................................................................            5,218                  110        3,357                 47          8,575             157
                                           a Includes    plant expansions.

                                          A select group of builders, technology                                    construction projects described in Table                  approximately 18 months, resulting in
                                        providers, and construction contractors                                     VI.A.2–1. As such, the completion dates                   the gradual phase-in of ethanol
                                        are completing the majority of the                                          of these projects are staggered over                      production shown in Figure VI.A.2–2.48

                                          47 Under construction plant locatons, capacities,                         construction plant list (downloaded October 18,           Web sites. This analysis does not consider ethanol
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                                        feedstocks, and energy sources as well as planned/                          2006) and monthly publications (June 2006 through         plants under construction or planned for the Virgin
                                        proposed plant locations and capacities were                                October 2006); ICF International, Ethanol Industry        Islands or U.S. territories.
                                        derived from a variety of data soruces including                            Profile (September 30, 2006); BioFuels Journal,              48 Construction timelines based on information
                                        Renewable Fuels Association (RFA), Ethanol                                  News & Information for the Ethanol and BioFuels
                                        Biorefinery Locations (updated October 16, 2006);                           Industries (breaking news posted June 16, 2006            obtained from press releases and ethanol producer
                                        Ethanol Producer Magazine (EPM), under                                      through October 18, 2006); and ethanol producer           Web sites.

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                                                                    Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                                                               23955

                                          As shown in Table VI.A.2–1 and                                            VI.B.1), this would be more than enough                                       gaining local approval to applying for
                                        Figure VI.A.2–2, once all the                                               renewable fuel to satisfy the 2012 RFS                                        permits to financing/fundraising to
                                        construction projects currently                                             requirements (7.5 billion gallons).                                           obtaining contractor agreements.
                                        underway are complete (estimated by                                         However, ethanol production is                                                Together these potential projects could
                                        March 2008), the resulting U.S. ethanol                                     expected to continue to grow. There are                                       result in an additional 21 billion gallons
                                        production capacity would be about 8.6                                      more and more ethanol projects being                                          of ethanol production capacity as shown
                                        billion gallons. Without even                                               announced each day. These potential                                           in Table VI.A.2–2.
                                        considering forecasted biodiesel                                            projects are at various stages of planning
                                        production (described below in Section                                      from conducting feasibility studies to

                                                                                TABLE VI.A.2–2.—OTHER POTENTIAL U.S. ETHANOL PRODUCTION CAPACITY
                                                                                                                                                            Base + under const.                         Planned              Proposed
                                                                                                                                                            MMgy a               Plants           MMgy a      Plants     MMgy a     Plants

                                        PADD    1   ....................................................................................................            115                    2         548.0          8        934         21
                                        PADD    2   ....................................................................................................          7,776                  139         4,633         44     11,722        136
                                        PADD    3   ....................................................................................................            260                    4           250          4        876         14
                                        PADD    4   ....................................................................................................            155                    5           100          1        783         14
                                        PADD    5   ....................................................................................................            269                    7           232          8        775         23

                                                    Subtotal ......................................................................................               8,575                  157         5,763         65     15,090        208

                                                    Total b .........................................................................................      ................    ................     14,339        222     29,428        430
                                           a Includes  plant expansions.
                                           b Total including existing plus under construction plants.
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                                           Although there is clearly a great                                        announced projects would actually                                             the large number of projects moving
                                        potential for ethanol production growth,                                    reach completion in a reasonable                                              forward. Since there is no precise way

                                        it is highly unlikely that all the                                          amount of time, or at all, considering                                        to know exactly which plants will come

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                                        to fruition in the future, we have chosen                                     (refer to Table VI.A.2–1) or in the final                                      fundraising/financing, and had builders
                                        to focus our subsequent discussion on                                         planning stages (denoted as ‘‘planned’’                                        assigned with definitive construction
                                        forecasted ethanol production on plants                                       in Table VI.A.2–2). The distinction                                            timelines whereas proposed projects did
                                        which are likely to be online by 2012.49                                      between ‘‘planned’’ versus ‘‘proposed’’                                        not.
                                        This includes existing plants as well as                                      is that as of October 2006 planned
                                        projects which are under construction                                         projects had completed permitting,

                                                                                       TABLE VI.A.2–3.—FORECASTED 2012 ETHANOL PRODUCTION BY PADD
                                                                                                                                                                                                     Capacity               Number      Percent
                                                                                                               PADD                                                                                                of
                                                                                                                                                                                                      MMgy                  of plants   of plants

                                        PADD      1   ............................................................................................................................................        663         4.6         10          4.5
                                        PADD      2   ............................................................................................................................................     12,409        86.5        183         82.4
                                        PADD      3   ............................................................................................................................................        510         3.6          8          3.6
                                        PADD      4   ............................................................................................................................................        255         1.8          6          2.7
                                        PADD      5   ............................................................................................................................................        501         3.5         15          6.8

                                              Total ..........................................................................................................................................         14,339       100.0        222       100.0

                                           As shown above in Table VI.A.2–3,                                          According to a current report by F.O.                                          feedstocks and two would start off
                                        once all the under construction and                                           Licht, U.S. net import demand is                                               processing corn and later transition to
                                        planned projects are complete the                                             estimated to be around 300 million                                             cellulosic materials. Of the four
                                        resulting ethanol production capacity                                         gallons per year by 2012, being supplied                                       dedicated cellulosic plants, one would
                                        would be 14.3 billion gallons. The                                            primarily through the Caribbean Basin                                          process bagasse, one would process a
                                        majority of which would still originate                                       Initiative (CBI), with some direct                                             combination of bagasse and wood, and
                                        from PADD 2. This volume, expected to                                         imports from Brazil during times of                                            two would process biomass. Of the two
                                        be online by 2012, exceeds the EIA AEO                                        shortfall or high price. For more                                              transitional corn/cellulosic plants, one
                                        2006 demand estimate (9.6 billion                                             information on ethanol imports, refer to                                       would ultimately process a combination
                                        gallons by 2012, discussed more in RIA                                        RIA Section 1.5.
                                                                                                                                                                                                     of bagasse, rice hulls, and wood and the
                                        Section 2.1). The forecasted growth                                             Of the 112 forecasted new ethanol
                                                                                                                      plants (47 under construction and 65                                           other would ultimately process wood
                                        would nearly triple today’s production
                                        capacity and greatly exceed the 2012                                          planned), 106 would rely on grain-based                                        and other agricultural residues. In
                                        RFS requirement (7.5 billion gallons).                                        feedstocks. More specifically, 89 would                                        addition to the forecasted new plants,
                                        While our forecast represents ethanol                                         rely exclusively on corn, 13 would                                             an existing corn ethanol plant plans to
                                        production capacity (actual production                                        process a blend of corn and/or similarly                                       expand production and transition to
                                        could be lower), we believe it is still a                                     processed grains (milo or wheat), 3                                            corn stalks, switchgrass, and biomass in
                                        good indicator of what domestic ethanol                                       would process molasses, and 1 would                                            the future. A summary of the resulting
                                        production could look like in the future.                                     process a combination of molasses and                                          overall feedstock usage (including
                                        In addition, we predict that domestic                                         sweet sorghum (milo). Of the remaining                                         current, under construction, and
                                        ethanol production will continue to be                                        six plants (all in the planned stage), four                                    planned projects) is found in Table
                                        supplemented by imports in the future.                                        would process cellulosic biomass                                               VI.A.2–4.
                                                                            TABLE VI.A.2–4.—FORECASTED 2012 U.S. ETHANOL PRODUCTION BY FEEDSTOCK
                                                                                                                                                                                                     Capacity               Number      Percent
                                                                                                        Plant feedstock                                                                                            of
                                                                                                                                                                                                      MMgy                  of plants   of plants

                                        Bagasse ...........................................................................................................................................                 7         0.1          1          0.5
                                        Bagasse, Wood ...............................................................................................................................                       2         0.0          1          0.5
                                        Bagasse, Wood, Rice Hulls a ...........................................................................................................                           108         0.8          1          0.5
                                        Biomass ...........................................................................................................................................                55         0.4          2          0.9
                                        Cheese Whey ..................................................................................................................................                      8         0.1          2          0.9
                                        Corn b ...............................................................................................................................................         12,495        87.1        178         80.2
                                        Corn, Barley .....................................................................................................................................                 40         0.3          1          0.5
                                        Corn, Milo c ......................................................................................................................................             1,132         7.9         20          9.0
                                        Corn, Wheat .....................................................................................................................................                 235         1.6          3          1.4
                                        Corn Stalks, Switchgrass, Biomass a ...............................................................................................                                40         0.3          1          0.5
                                        Milo, Wheat ......................................................................................................................................                 40         0.3          1          0.5
                                        Molasses d ........................................................................................................................................                52         0.4          4          1.8
                                        Sugars, Starches .............................................................................................................................                      2         0.0          1          0.5
                                        Waste Beverages e ..........................................................................................................................                       16         0.1          5          2.3
                                        Wood Agricultural Residues a ..........................................................................................................                           108         0.8          1          0.5
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                                              Total ..........................................................................................................................................         14,339       100.0        222       100.0
                                           a Facilities     plan to start off processing corn.

                                          49 A more detailed summary of the plants we                                 docket titled: RFS Industry Characterization—
                                        considered is found in a March 5, 2007 note to the                            Ethanol Production.

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                                           b Includes two facilities processing seed corn.
                                           c Includes one facility processing small amounts of molasses in addition to corn and milo.
                                           d Includes one facility planning to process sweet sorghum (milo) in addition to molasses.
                                           e Includes two facilities processing brewery waste.

                                          Of the 112 forecasted new plants, 100                                      burn a combination of coal and biomass;                               plants would burn natural gas, three
                                        would burn some amount of natural                                            and 1 would burn a combination of coal,                               would burn coal, and one would burn
                                        gas—at least initially. More specifically,                                   tires and biomass. In addition to the                                 a combination of coal, tires, and
                                        91 plants would rely exclusively on                                          new ethanol plants, three existing plants                             biomass. Among the existing CHP
                                        natural gas; 2 would rely on a                                               currently burning natural gas are                                     plants, two are predicted to transition
                                        combination of natural gas, bran and                                         predicted to transition to alternate boiler                           from natural gas to coal or biomass at
                                        biomass; 1 would burn a combination of                                       fuels in the future. More specifically,                               this time. Overall, the net number of
                                        natural gas, distillers’ grains and syrup;                                   two plants plan to transition to biomass                              CHP ethanol plants would increase from
                                        and 6 would start off burning natural                                        and one plans to start burning coal. Our                              11 to 18. A summary of the resulting
                                        gas and later transition to coal. As for                                     research suggests that 7 of the new
                                                                                                                                                                                           overall plant energy source utilization is
                                        the remaining 12 plants, 3 would burn                                        plants would utilize combined heat and
                                                                                                                                                                                           found below in Table VI.A.2–5.
                                        manure-derived methane (biogas); 7                                           power (CHP) technology, although
                                        would rely exclusively on coal; 1 would                                      others may exist. Three of the new CHP

                                                                       TABLE VI.A.2–5.—FORECASTED 2012 U.S. ETHANOL PRODUCTION BY ENERGY SOURCE
                                                                                                                                                                                Capacity                Number       Percent         CHP
                                                                                         Plant energy source                                                                                   of
                                                                                                                                                                                 MMgy                   of plants    of plants       tech.

                                        Biomass a .....................................................................................................................              112         0.8            2           0.9               1
                                        Coal b ............................................................................................................................        2,095        14.6           21           9.5               6
                                        Coal, Biomass ..............................................................................................................                  75         0.5            2           0.9               0
                                        Coal, Biomass, Tires ....................................................................................................                    275         1.9            1           0.5               1
                                        Manure Biogas c ...........................................................................................................                  144         1.0            3           1.4               0
                                        Natural Gas ..................................................................................................................            11,275        78.6          189          85.1              10
                                        Natural Gas, Bran, Biomass ........................................................................................                          264         1.8            2           0.9               0
                                        Natural Gas, Distiller’s Grain, Syrup ............................................................................                            50         0.3            1           0.5               0
                                        Syrup ............................................................................................................................            49         0.3            1           0.5               0

                                              Total ......................................................................................................................        14,339       100.0          222        100.0               18
                                           a Represents   two existing natural gas-fired plants that plan to transition to biomass.
                                           b Includes two plants planning on burning lignite coal or coal lines. Includes one existing plant currently burning natural gas that plans to transi-
                                        tion to coal. Includes six new plants that will start off burning natural gas and later transition to coal.
                                           c Includes one facility planning on burning cotton gin in addition to manure biogas.

                                           The Energy Policy Act of 2005                                             Act’s cellulosic biomass ethanol                                      3. Current Ethanol and MTBE
                                        requires that 250 million gallons of the                                     requirement. However, as shown in                                     Consumption
                                        renewable fuel consumed in 2013 and                                          Table VI.A.2–5, there are 12 facilities
                                        beyond meet the definition of cellulosic                                     that burn or plan to burn waste                                         To understand the impact of the
                                        biomass ethanol. The Act defines                                                                                                                   increased ethanol production/use on
                                                                                                                     materials to power their ethanol plants.
                                        cellulosic biomass ethanol as ethanol                                                                                                              gasoline properties and in turn overall
                                                                                                                     Depending on how much fossil fuel is
                                        derived from any lignocellulosic or                                                                                                                air quality, we first need to gain a better
                                                                                                                     displaced, these facilities (with a
                                        hemicellulosic matter that is available                                                                                                            understanding of where ethanol is used
                                                                                                                     combined ethanol production capacity                                  today and how the picture is going to
                                        on a renewable or recurring basis                                            of 969 million gallons per year) could
                                        including dedicated energy crops and                                                                                                               change in the future. As such, in
                                                                                                                     also meet the definition of cellulosic                                addition to the production analysis
                                        trees, wood and wood residues, plants,
                                                                                                                     biomass ethanol under the Act.                                        presented above, we have completed a
                                        grasses, agricultural residues, fibers,
                                        animal wastes and other waste                                                Considering both feedstock and waste                                  parallel consumption analysis
                                        materials, and municipal solid waste.                                        energy plants, the total cellulosic                                   comparing current ethanol consumption
                                        The term also includes any ethanol                                           ethanol potential could be as high as 1.3                             to future predictions.
                                        produced in facilities where animal or                                       billion gallons. Even if only one fifth of
                                                                                                                                                                                             In the 2004 base case, 3.5 billion
                                        other waste materials are digested or                                        this ethanol were to end up qualifying                                gallons of ethanol 51 and 1.9 billion
                                        otherwise used to displace 90 percent of                                     as cellulosic biomass ethanol or come to                              gallons of MTBE 52 were blended into
                                        more of the fossil fuel normally used in                                     fruition by 2013, it would be more than                               gasoline to supply the transportation
                                        the production of ethanol.                                                   enough to satisfy the 250 million gallon                              sector with a total of 136 billion gallons
                                           As shown in Table VI.A.2–4, there are                                     requirement specified in the Act.50                                   of gasoline.53 A breakdown of the 2004
                                        seven ethanol plants planning to utilize
                                        cellulosic feedstocks in the future.                                           50 We anticipate a ramp-up in cellulosic ethanol                      51 EIA Monthly Energy Review, June 2006 (Table

                                        These facilities have a combined                                             production in the years to come so that capacity                      10.1: Renewable Energy Consumption by Source,
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                                        ethanol production capacity of 320                                           exists to satisfy the Act’s 2013 requirement (250                     Appendix A: Thermal Conversion Factors).
                                        million gallons per year. It is unclear                                      million gallons of cellulosic biomass ethanol).                         52 File containing historical RFG MTBE usage

                                                                                                                     Therefore, for subsequent analysis purposes, we                       obtained from EIA representative on March 9, 2006.
                                        whether these plants would be online                                         have assumed that 250 million gallons of ethanol                        53 EIA 2004 Petroleum Marketing Annually (Table
                                        and capable of producing 250 million                                         would come from cellulosic biomass sources by                         48: Prime Supplier Sales Volumes of Motor
                                        gallons of ethanol by 2013 to meet the                                       2012.                                                                                                          Continued

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                                        gasoline and oxygenate consumption by                                      PADD is found below in Table VI–A.3–
                                        PADD is found below in Table VI–A.3–                                       1.

                                                                             TABLE VI.A.3–1.—2004 U.S. GASOLINE & OXYGENATE CONSUMPTION BY PADD
                                                                                                                                                                                   Ethanol                        MTBE a
                                                                                         PADD                                                              MMgal                           Percent of                    Percent of
                                                                                                                                                                           MMgal                           MMgal
                                                                                                                                                                                            gasoline                      gasoline

                                        PADD 1 ....................................................................................................           49,193             660               1.3         1,360              2.8
                                        PADD 2 ....................................................................................................           38,789           1,616               4.2             1              0.0
                                        PADD 3 ....................................................................................................           20,615              79               0.4           498              2.4
                                        PADD 4 ....................................................................................................            4,542              83               1.8             0              0.0
                                        PADD 5 b ..................................................................................................            7,918             209               2.6            19              0.2
                                        California ..................................................................................................         14,836             853               5.8             0              0.0

                                              Total ..................................................................................................       135,893           3,500               2.6         1,878              1.4
                                           a MTBE      blended into RFG.
                                           b PADD      5 excluding California.

                                          As shown above, nearly half (or about                                    in CG, and 5 percent was used in winter                         has been a progression over the past few
                                        45 percent) of the ethanol was                                             oxy-fuel.55                                                     years. From 2001 to 2004, ethanol
                                        consumed in PADD 2 gasoline, where                                            As shown above in Table VI.A.3–1, 99                         consumption more than doubled (from
                                        the majority of ethanol was produced.                                      percent of MTBE use occurred in                                 1.7 to 3.5 billion gallons), while MTBE
                                        The next highest region of use was the                                     PADDs 1 and 3. This reflects the high                           use (in RFG) was virtually cut in half
                                        State of California which accounted for                                    concentration of RFG areas in the                               (from 3.7 to 1.9 billion gallons). A plot
                                        about 25 percent of domestic ethanol                                       northeast (PADD 1) and the local                                of oxygenate use over the past decade is
                                        consumption. This is reasonable                                            production of MTBE in the gulf coast                            provided below in Figure VI.A.3–1.
                                        because California alone accounts for                                      (PADD 3). PADD 1 receives a large                                  The nation’s transition to ethanol is
                                        over 10 percent of the nation’s total                                      portion of its gasoline from PADD 3                             linked to states’ responses to recent
                                        gasoline consumption and all the fuel                                      refineries who either produce the fossil-                       environmental concerns surrounding
                                        (both Federal RFG and California Phase                                     fuel based oxygenate or are closely                             MTBE groundwater contamination.
                                        3 RFG) has been assumed to contain                                         affiliated with MTBE-producing                                  Resulting concerns over drinking water
                                        ethanol (following their recent MTBE                                       petrochemical facilities in the area.                           quality have prompted several states to
                                        ban) at 5.7 volume percent.54 The bulk                                     Overall, 100 percent of MTBE in 2004                            significantly restrict or completely ban
                                        of the remaining ethanol was used in                                       was assumed to be used in reformulated                          MTBE use in gasoline. At the time of
                                        reformulated gasoline (RFG) and winter                                     gasoline.56                                                     this analysis, 19 states had adopted
                                        oxy-fuel areas requiring oxygenated                                           In 2004, total ethanol use exceeded                          MTBE bans. A list of the states with
                                        gasoline. Overall, 62 percent of ethanol                                   MTBE use. Ethanol’s lead oxygenate                              MTBE bans is provided in RIA Table
                                        was used in RFG, 33 percent was used                                       role is relatively new, however the trend                       2.1–4.

                                        Gasoline by Grade, Formulation, PAD District, and                          ethanol based on a conversation with Dean                         56 2004 MTBE consumption was obtained from
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                                        State).                                                                    Simeroth at California Air Resources Board (CARB).              EIA. The data received was limited to states with
                                          54 Current California gasoline regualtions make it                         55 For the purpose of this analysis, except where             RFG programs, thus MTBE use was assumed to be
                                        very difficult to meet the NOX emissions                                   noted, the term ‘‘RFG’’ pertains to Federal RFG plus            limited to RFG areas for the purpose of this
                                        performance standard with ethanol content higher                                                                                           analysis.
                                                                                                                   California Phase 3 RFG (CaRFG3) and Arizona
                                        than about 6 vol%. For our analysis, all California
                                        RFG was assumed to contain 5.7 volume percent                              Clean Burning Gasoline (CBG).

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                                        4. Expected Growth in Ethanol                           conventional gasoline. More important                 VI.A.2, production capacity would be
                                        Consumption                                             than the removal of MTBE over the long                sufficient.
                                           As mentioned above, ethanol demand                   term, however, is the impact that the                    In assessing the impacts of expanded
                                        is expected to increase well beyond the                 rise in crude oil price is having on                  renewable fuel use, we have chosen to
                                        levels contained in the renewable fuels                 demand for renewable fuels, both                      evaluate two different future ethanol
                                        standard (RFS) under the Act. With the                  ethanol and biodiesel. This has                       consumption levels, one reflecting the
                                        removal of the RFG oxygenate                            dramatically improved the economics                   statutory required minimum, and one
                                        mandate,57 all U.S. refiners are taking                 for renewable fuel use, leading to a                  reflecting the higher levels projected by
                                        steps to eliminate the use of MTBE as                   surge in demand that is expected to                   EIA. For the statutory consumption
                                        quickly as possible. In order to complete               continue. In the Annual Energy Outlook                scenario we assumed 6.7 billion gallons
                                        this transition quickly (by 2007 at the                 (AEO) 2006, EIA forecasted that by                    of ethanol use (0.25 billion gallons of
                                        latest) while maintaining gasoline                      2012, total ethanol use (corn, cellulosic,            which was assumed to be cellulosic)
                                        volume, octane, and mobile source air                   and imports) would be about 9.6 billion               and 0.3 billion gallons of biodiesel. This
                                        toxics emission performance standards,                  gallons and biodiesel use would be                    figure is lower than the 7.2 billion
                                        refiners have elected to blend ethanol                  about 0.3 billion gallons at a crude oil              gallons of ethanol we modeled in the
                                        into virtually all of their RFG.58 This has             price forecast of $48 per barrel.59 This              proposal because it considers the
                                        caused a dramatic increase in demand                                                                          renewable fuel equivalence values we
                                                                                                ethanol projection was not based on
                                        for ethanol which, in 2006, was met by                                                                        are finalizing for corn ethanol (1),
                                                                                                what amount the market would demand
                                        temporarily shifting large volumes of                                                                         biodiesel (1.5) and cellulosic ethanol
                                        ethanol out of conventional gasoline                    (which could be higher), but rather on
                                                                                                the amount that could be produced by                  (2.5). For the higher projected renewable
                                        and into RFG areas. By 2012, however,                                                                         fuel consumption scenario, we assumed
                                        ethanol production will have grown to                   2012. Others are making similar
                                                                                                predictions, and as discussed above in                9.6 billion gallons of ethanol (0.25
                                        accommodate the removal of MTBE                                                                               billion gallons of which was assumed to
                                        without the need for such a shift from
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                                                                                                  59 In AEO 2007, EIA is forecasted an even higher
                                                                                                                                                      be cellulosic) and 0.3 billion gallons of
                                          57 Energy                                             ethanol consumption of 11.2 billion gallons by
                                                                                                                                                      biodiesel. Although the actual
                                                     Act Section 1504, promulgated on May
                                        8, 2006 at 71 FR 26691.                                 2012. The draft report was issued on December 5,      renewable fuel volumes consumed in
                                           58 Based on discussions with the refining            2006 and we could not incorporate it into the         2012 may differ from both the required

                                        industry.                                               refinery modeling used to conduct our analyses.       and projected volumes, we believe that

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                                        these two scenarios provide a                                              programming (LP) refinery cost model                  post-processing involved to ensure that
                                        reasonable range for analysis purposes.                                    (discussed in more detail in Section                  all state ethanol mandates and winter
                                        For more information on how the                                            VII). For both future ethanol                         oxy-fuel requirements were satisfied.
                                        renewable fuel usage scenarios we                                          consumption scenarios discussed above,                The adjusted results for the 6.7 Bgal RFS
                                        considered, refer to RIA Section 2.1.                                      the modeling provided us with a                       case and the 9.6 Bgal EIA case are
                                          To estimate where ethanol would be                                       summary of ethanol usage by PADD,                     presented below in Tables VI.A.4–1 and
                                        consumed in 2012, we used a linear                                         fuel type, and season. There was some                 VI.A.4–2, respectively.

                                                           TABLE VI.A.4–1.—FORECASTED 2012 U.S. ETHANOL CONSUMPTION (MMGAL) 6.7 BGAL RFS CASE
                                                                                                                                        Summer ethanol use                          Winter ethanol use                              Total
                                                                               PADD                                                                                                                                                ethanol
                                                                                                                                     CG a        RFG b          Total       CG a               RFG b               Total

                                        PADD 1 ................................................................................         399           679        1,078         350                    706              1,057          2,134
                                        PADD 2 ................................................................................       1,667            59        1,726       1,082                    288              1,370          3,096
                                        PADD 3 ................................................................................         161            47          208         146                      0                146            354
                                        PADDs 4/5 c .........................................................................           135             0          135         138                      0                138            274
                                        California ..............................................................................         0           414          414           0                    398                398            813

                                              Total ..............................................................................    2,362         1,200        3,562       1,717                 1,392               3,109          6,671
                                           a Includes     Arizona CBG and winter oxy-fuel.
                                           b Federal     RFG and California Phase 3 RFG.
                                           c PADDS       4 and 5 excluding California.

                                                 TABLE VI.A.4–1.—FORECASTED 2012 U.S. ETHANOL CONSUMPTION BY SEASON (MMGAL) 9.6 BGAL EIA CASE
                                                                                                                                        Summer ethanol use                          Winter ethanol use                              Total
                                                                               PADD                                                                                                                                                ethanol
                                                                                                                                     CG a        RFG b          Total       CG a               RFG b               Total

                                        PADD1 .................................................................................         610           630        1,240         267                    973              1,240          2,481
                                        PADD2 .................................................................................       1,735           185        1,919       1,631                    366              1,998          3,917
                                        PADD3 .................................................................................         901            47          949         856                      0                856          1,805
                                        PADD 4/5 c ...........................................................................          339             0          339         154                      0                154            492
                                        California ..............................................................................         0           435          435           0                    470                470            905

                                              Total ..............................................................................    3,584         1,298        4,882       2,908                 1,809               4,718          9,600
                                           a Includes     Arizona CBG and winter oxy-fuel.
                                           b Federal     RFG and California Phase 3 RFG.
                                           c PADDs       4 and 5 excluding California.

                                          As shown above, the LP modeling                                          fuel, even with the subsidies and credits             biodiesel production in the U.S. are
                                        predicts that the majority of ethanol will                                 provided by federal and state programs.               presented in Table VI.B.1–1 below.
                                        be consumed in PADD 2, where most of                                       Much of the demand occurred as a
                                        the ethanol is produced. The results                                       result of mandates from states and local                       TABLE VI.B.1–1.—ESTIMATED
                                        show varying levels of ethanol usage in                                    municipalities, that required the use of                         BIODIESEL PRODUCTION
                                        RFG in response to the removal of the                                      biodiesel. However, over the past couple
                                        oxygenate requirement. For the higher                                      of years biodiesel production has been                                                                           Million
                                        ethanol consumption scenario, the                                          increasing rapidly. The combination of                                       Year                               gallons
                                                                                                                                                                                                                                   per year
                                        modeling suggests that the majority of                                     higher crude oil prices and greater
                                        additional ethanol would be absorbed in                                    federal tax subsidies has created a                   2001     ..............................................          5
                                        PADD 3 conventional gasoline. With                                         favorable economic situation. The                     2002     ..............................................         15
                                        respect to seasonality, in both cases, the                                 Biodiesel Blenders Tax Credit programs                2003     ..............................................         20
                                        modeling predicts that a greater fraction                                  and the Commodity Credit Commission                   2004     ..............................................         25
                                        of ethanol use would occur in the                                          Bio-energy Program, both subsidize                    2005     ..............................................         91
                                        summertime due to the 1psi RVP                                                                                                   2006     ..............................................        150
                                                                                                                   producers and offset production costs.                2007     ..............................................        414
                                        waiver. For a more detailed discussion                                     The Energy Policy Act extended the                    2012     ..............................................        303
                                        on future ethanol consumption, refer to                                    Biodiesel Blenders Tax Credit program
                                        Chapter 2 of the RIA.                                                      to 2008. This credit provides about one                  Source: Historical data from 2001–2004 ob-
                                                                                                                                                                         tained from estimates from John Baize ‘‘ The
                                        B. Overview of Biodiesel Industry and                                      dollar per gallon in the form of a federal            Outlook and Impact of Biodiesel on the Oil-
                                        Future Production/Consumption                                              excise tax credit to biodiesel blenders               seeds Sector’’ USDA Outlook Conference 06.
                                                                                                                   from virgin vegetable oil feedstocks and              Year 2005 data from USDA Bioenergy Pro-
                                        1. Characterization of U.S. Biodiesel                                      50 cents per gallon to biodiesel                      gram
                                        Production/Consumption                                                                                                           2005/FY2005ProductPayments, Year 2006
                                                                                                                   produced from recycled grease and                     data from verbal quote based on projection by
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                                           Historically, the cost to make                                          animal fats. The program was started in               NBB in June of 2006. Production data for
                                        biodiesel was an inhibiting factor to                                      2004 under the American Jobs Act,                     years 2007 and higher are from EIA’s AEO
                                        production in the U.S. The cost to                                         spurring the expansion of biodiesel                   2006.
                                        produce biodiesel was high compared to                                     production and demand. Historical                       With the increase in biodiesel
                                        the price of petroleum derived diesel                                      estimates and future forecasts of                     production, there has also been a

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                                        corresponding rapid expansion in                                             and 2006, and was first available to                                         biodiesel. The excess capacity, though,
                                        biodiesel production capacity.                                               produce fuel in the later part of 2005                                       may be from biodiesel plants that do not
                                        Presently, there are 85 biodiesel plants                                     and in 2006. Though the capacity has                                         operate full time and from production
                                        in operation with an annual production                                       grown, historically the biodiesel                                            capacity that is primarily devoted to
                                        capacity of 580 million gallons per                                          production capacity has far exceeded                                         making esters for the ole-chemical
                                        year.60 The majority of the current                                          actual production with only 10–30                                            markets, see Table VI.B.1–2.
                                        production capacity was built in 2005                                        percent of this being utilized to make

                                                                                                   TABLE VI.B.1–2.—U.S. PRODUCTION CAPACITY HISTORY a
                                                                                                                                                                                                         2001   2002      2003      2004    2005   2006

                                        Plants .......................................................................................................................................................      9       11       16       22      45     85
                                        Capacity (million gal/yr) ...........................................................................................................................              50       54       85      157     290    580
                                          a Capacity Data based on surveys conducted around the month of September for most years, though the 2006 information is based on a sur-
                                        vey conducted in January 2006.61

                                        2. Expected Growth in U.S. Biodiesel                                         phase and 13 existing plants that are                                        these plants should be completed by
                                        Production/Consumption                                                       expanding their capacity, which when                                         late 2007. As shown in Table VI.B.2–1
                                           In addition to the 85 biodiesel plants                                    completed would increase total                                               if all of this capacity came to fruition,
                                        already in production, as of early 2006,                                     biodiesel production capacity to over                                        U.S. biodiesel capacity would exceed
                                        there were 65 plants in the construction                                     one billion gallons per year. Most of                                        1.4 billion gallons.

                                                                                            TABLE VI.B.2–1.—PROJECTED BIODIESEL PRODUCTION CAPACITY
                                                                                                                                                                                                                         Existing          Construction
                                                                                                                                                                                                                          plants             phase

                                        Number of plants .....................................................................................................................................................                     85                 78
                                        Total Plant Capacity, (MM Gallon/year) ..................................................................................................................                                 580              1,400

                                           For cost and emission analysis                                            C. Feasibility of the RFS Program                                            strong demand. We estimate that this
                                        purposes, three biodiesel usage cases                                        Volume Obligations                                                           will require a maximum of 2,100
                                        were considered: A 2004 base case, a                                            This section examines whether there                                       construction workers and 90 engineers
                                        2012 reference case, and a 2012 control                                      are any feasibility issues associated with                                   on a monthly basis through 2012.
                                        case. The 2004 base case was formed                                          the meeting the minimum renewable                                            2. Technology Available To Produce
                                        based on historical biodiesel usage (25                                      fuel requirements of the Energy Act.                                         Cellulosic Ethanol
                                        million gallons as summarized in Table                                       Issues are examined with respect to
                                        VI.B.1.1). The reference case was                                            renewable production capacity,                                                  There are a wide variety of
                                        computed by taking the 2004 base case                                        cellulosic ethanol production capacity,                                      government and renewable fuels
                                        and growing it out to 2012 by applying                                       and distribution system capability. Land                                     industry research and development
                                        the 2004–2012 EIA diesel fuel growth                                         resource requirements are discussed in                                       programs dedicated to improving our
                                                                                                                     Chapter 7 of the RIA.                                                        ability to produce renewable fuels from
                                        rate.62 The resulting 2012 reference case
                                                                                                                                                                                                  cellulosic feedstocks. In this discussion,
                                        consisted of 30 million gallons of                                           1. Production Capacity of Ethanol and                                        we deal with at least three completely
                                        biodiesel. Finally, for the 2012 control                                     Biodiesel                                                                    different approaches to producing
                                        case, forecasted biodiesel use was                                                                                                                        ethanol from cellulosic biomass. The
                                                                                                                        As shown in Sections VI.A. and VI.B.,
                                        assumed to be 300 million gallons based                                      increases in renewable fuel production                                       first is based on what NREL refers to as
                                        on EIA’s AEO 2006 report (rounded                                            capacity are already proceeding at a                                         the ‘‘sugar platform,’’ 63 which refers to
                                        value from Table VI.B.1.1). Unlike                                           pace significantly faster than required to                                   pretreating the biomass, then
                                        forecasted ethanol use, biodiesel use                                        meet the 2012 mandate in the Act of 7.5                                      hydrolyzing the cellulosic and
                                        was assumed to be constant at 300                                            billion gallons as well as the mandate                                       hemicellulosic components into sugars,
                                        million gallons under both the statutory                                     (starting in 2013) of a minimum of 250                                       and then fermenting the sugars into
                                        and higher projected renewable fuel                                          million gallons of cellulosic ethanol.                                       ethanol.
                                        consumption scenarios described in                                           The combination of ethanol and                                                  Corn grain is a nearly ideal feedstock
                                        VI.A.4. EIA’s projection is based on the                                     biodiesel plants in existence and                                            for producing ethanol by fermentation,
                                        assumption that the blender’s tax credit                                     planned or under construction is                                             especially when compared with
                                        is not renewed beyond 2008. If the tax                                       expected to provide a total renewable                                        cellulosic biomass feedstocks. Corn
                                        credit is renewed, the projection for                                        fuel production capacity of over 9.6                                         grain is easily ground into small
                                        biodiesel demand would increase.                                             billion gallons by the end of 2012.                                          particles, following which the exposed
                                                                                                                     Production capacity is expected to                                           starch which has a-linked saccharide
                                                                                                                     continue to increase in response to                                          polymers is easily hydrolyzed into
sroberts on PROD1PC70 with RULES

                                          60 NBB Survey September 13, 2006 ‘‘U.S.                                       62 EIA
                                                                                                                             Annual Energy Outlook 2006, Table 1.                                 Institute • B NREL, Golden, Colorado, May 1–2,
                                        Biodiesel Production Capacity’’.                                                63 EnzymeSugar Platform (ESP), Project Next                               2003; U.S. Department of Energy by Midwest
                                          61 From Presentation ‘‘Biodiesel Production                                Steps National Renewable Energy, Dan Schell, FY03                            Research Institute • Battelle • Bechtel.
                                        Capacity,’’ by Leland Tong, National Biodiesel                               Review Meeting; Laboratory Operated for the U.S.
                                        Conference and Expo, February 7, 2006.                                       Department of Energy by Midwest Research

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                                        23962                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        simple, single component sugar which                    hydrolysis. The most common chemical                  cellulose to glucose (6-carbon) and
                                        can then be easily fermented into                       pretreatments for cellulosic feedstocks               hemicellulose to xylose (5-carbon)
                                        ethanol. By comparison, the biomass                     are strong acid, dilute acid, caustic,                sugar, with little degradation to furfural;
                                        lignin structure must be either                         organic solvents, ammonia, sulfur                     the reaction times are typically slower
                                        mechanically or chemically broken                       dioxide, carbon dioxide or other                      than those of the dilute acid process.
                                        down to permit hydrolyzing chemicals                    chemicals which make the biomass                      The critical factors needed to make this
                                        and enzymes access to the saccharide                    more accessible to the enzymes.                       process economically viable are to
                                        polymers. The central problem is that                   Following pretreatment, acidic (dilute                optimize sugar recovery and cost
                                        the cellulose/hemicellulose saccharide                  and concentrated) and enzymatic                       effectively recover the acid for
                                        polymers are b-linked which makes                       hydrolysis are the two process types                  recycling. The concentrated acid
                                        hydrolysis much more difficult. Simple                  commonly used to hydrolyze cellulosic                 process is somewhat more complicated
                                        microbial fermentation used in corn                     feedstocks before fermentation into                   and requires more time, but it has the
                                        sugar fermentation is also not possible,                ethanol.64                                            primary advantage of yielding up to
                                        since the cellulose and hemicellulose (6                                                                      about 90% of both hemicellulosic and
                                                                                                ii. Dilute Acid Hydrolysis
                                        & 5 carbon molecules, respectively)                                                                           cellulosic sugars.66 In addition, a
                                        have not been able to be fermented by                      Dilute acid hydrolysis is the oldest               significant advantage of the
                                        the same microbe. We discuss various                    technology for converting cellulose                   concentrated acid process is that it is
                                        pretreatment, hydrolysis and                            biomass to ethanol. The dilute acid                   carried out at relatively low
                                        fermentation technologies, below. The                   process uses a 1-percent sulfuric acid in             temperatures, about 212 °F, and low
                                        second and third approaches have                        a continuous flow reactor at about                    pressure, such that fiberglass reactors
                                        nothing to do with pretreatment, acids,                 420 °F; reaction times are measured in                and piping can be used.
                                        enzymes, or fermentation. The second is                 seconds and minutes, which facilitates
                                                                                                continuous processing. The process                    iv. Enzymatic hydrolysis
                                        sometimes referred to as the ‘‘syngas’’ or
                                        ‘‘gas-to-liquid’’ approach; we will call it             involves two reactions with a sugar                      Enzymatic hydrolysis is not
                                        the ‘‘Syngas Platform.’’ Briefly, the                   conversion efficiency of about 50                     necessarily a recent discovery. We
                                        cellulosic biomass feedstock is steam-                  percent. The process conditions at                    found reports of research conducted by
                                        reformed to produce syngas which is                     which the cellulosic molecules are                    a variety of companies and government
                                        then converted to ethanol over a                        converted into sugar are also those at                agencies going back to at least
                                        Fischer-Tropsch catalyst. The third                     which the sugar is almost immediately                 1991. 67 68 69 The enzymatic hydrolysis
                                        approach uses plasma technology.                        converted into other chemicals,                       of cellulose was reportedly discovered
                                                                                                principally furfural. The rapid                       when a fungus, trichoderma reesei, was
                                        a. Sugar Platform                                       conversion to furfural reduces the sugar              identified which produced cellulase
                                           Plant cell walls are made up of                      yield, which along with other by-                     enzymes that broke down cotton
                                        cellulose and hemicellulose polymers                    products inhibits the fermentation                    clothing and tents in the South Pacific
                                        embedded in a lignin matrix. This                       process. One way to decrease sugar                    during World War II. Since then,
                                        complex structure prevents both the                     degradation is to use a two-stage process             generations of cellulases have been
                                        first step, hydrolyzation of the cellulose              which takes advantage of the fact that                developed through genetic
                                        and hemicellulose polymers, and the                     hemicellulose (5-carbon) sugars degrade               modifications of the fungus strain. As in
                                        second step, fermentation of the                        more rapidly than cellulose (6-carbon)                acid hydrolysis, the hydrolyzing
                                        hydrolyzed sugars into ethanol.                         sugars. The first stage is conducted                  enzymes must have access to the
                                                                                                under mild process conditions to                      cellulose and hemicellulose in order to
                                        i. Pretreatment
                                                                                                recover the 5-carbon sugars, while the                work efficiently. Although enzymatic
                                           Those who wish to use cellulosic                     second stage is conducted under harsher               hydrolysis requires some kind of
                                        biomass feedstocks to produce ethanol                   conditions to recover the 6-carbon                    pretreatment, purely physical
                                        face several, difficult problems. The                   sugars. Both hydrolyzed solutions are                 pretreatments are typically not
                                        lignin sheath, present in all cellulosic                then fermented to ethanol. Lime is used               adequate. Furthermore, the chemical
                                        materials, prevents, or at the very least,              to neutralize the residual acid before the            method uses dilute sulfuric acid, which
                                        severely restricts hydrolysis. To produce               fermentation stage. Regardless, some                  is poisonous to the fermentation
                                        ethanol from cellulosic biomass                         sugar degrades to furfural, which
                                        feedstocks by fermentation, some type                   naturally limits the net yield of ethanol.              66 Ibid.
                                        of thermo-mechanical, mechanical,                       The residual cellulose and lignin are                   67 Technical and Economic Analysis Of An

                                        chemical or a combination of these                      used as boiler fuel for electricity or                Enzymatic Hydrolysis Based Ethanol Plant, Fuels
                                        pretreatments is always necessary before                steam production.65                                   and Chemicals Research and Engineering Division,
                                                                                                                                                      Solar Energy Research Institute, Golden CO, 80401,
                                        the cellulosic and hemicellulosic                                                                             June 1991 • DRAFT • SERI Protected Proprietary
                                        polymers can be hydrolyzed. In effect,                  iii. Concentrated acid hydrolysis
                                                                                                                                                      Information • Do Not Copy.
                                        the lignin structure must be ‘‘opened’’ to                 Concentrated acid hydrolysis uses a                  68 Biomass to Ethanol Process Evaluation, A

                                        allow efficient and effective strong acid               70-percent sulfuric acid solution,                    report prepared for National Renewable Energy
                                        hydrolysis, weak acid hydrolysis, or                    followed by water hydrolysis to convert               Laboratory, December 1994; Chem Systems Inc. 303
                                                                                                                                                      South Broadway, Tarrytown, New York, 10591.
                                        weak acid enzymatic hydrolysis of the                   the cellulose into sugar. The process                   69 Lignocellulosic Biomass to Ethanol Process
                                        cellulose/hemicellulose to their glucose                rapidly, and nearly completely, converts              Design and Economics Utilizing Co-Current Dilute
                                        and xylose sugar components. Over                                                                             Acid Prehydrolysis and Enzymatic Hydrolysis
                                        time, many pretreatment methods or                        64 Appendix B, Overview of Cellulose-Ethanol        Current and Futuristic Scenarios, July 1999 • NREL/
                                                                                                Production Technology; OREGON CELLULOSE-              TP–580–26157; Robert Wooley, Mark Ruth, John
                                        combinations of methods have been                       ETHANOL STUDY, An evaluation of the potential         Sheehan, and Kelly Ibsen, Biotechnology Center for
                                        tried, some with more success than                      for ethanol production in Oregon using cellulose-     Fuels and Chemicals; Henry Majdeski and Adrian
sroberts on PROD1PC70 with RULES

                                        others. Usually, intense physical                       based feedstocks; Prepared by: Angela Graf, Bryan     Galvez, Delta-T Corporation; National Renewable
                                        pretreatments such as steam explosion                   & Bryan Inc., 5015 Red Gulch, Cotopaxi, Colorado      Energy Laboratory, 1617 Cole Boulevard, Golden,
                                                                                                81223; Tom Koehler, Celilo Group, 2208 S.W. First     Colorado 80401–3393; NREL is a U.S. Department
                                        are required; grasses and forest                        Ave, #320, Portland, Oregon 97204; For submission     of Energy Laboratory Operated by Midwest
                                        thinnings usually need to be chipped,                   to: The Oregon Office of Energy.                      Research Institute • Battelle • Bechtel; Contract No.
                                        prior to chemical or enzymatic                            65 Ibid.                                            DE–AC36–98–GO10337.

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                                                             Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                                 23963

                                        microorganisms and must be detoxified.                  ‘‘syngas’’ consisting primarily of carbon             underway for creating a syngas from
                                        While original enzymatic hydrolysis                     monoxide and hydrogen. The syngas is                  which ethanol is produced. A plasma
                                        processes used separate hydrolysis and                  then passed over in a Fischer-Tropsch                 ‘‘reactor,’’ generates an ionized gas
                                        fermentation steps, recent process                      catalyst to produce ethanol.                          (plasma) which serves as an electrical
                                        improvements integrate saccharification                    The biomass feedstock is dried to                  conductor to transfer intense radiant
                                        and fermentation by combining the                       about 15% moisture content and ground                 energy to a biomass or waste material.
                                        cellulase enzymes and fermenting                        small enough to be efficiently burned                 This intense energy is said to actually
                                        microbes in one vessel. This results in                 and reacted in the reformer. The                      breakdown the various materials in the
                                        a one-step process of sugar production                  reformer, an important upstream                       biomass or waste into their atomic
                                        and fermentation, referred to as the                    element of the process, is essentially a              components. Anything present in the
                                        simultaneous saccharification and                       common solid-fuel gasifier, which with                feed-mass that doesn’t gasify, is
                                        fermentation (SSF) process. One                         some modification and steam injection                 essentially ‘‘vitrified.’’ This vitrified
                                        disadvantage is that the cellulase                      becomes what is sometimes referred to                 stream is reportedly inert and can be
                                        enzyme and fermentation organism                        as the ‘‘primary reformer.’’                          used as aggregate in paving materials.
                                        must operate under the same process                        When any fuel is completely burned,                Following gasification, the syngas is
                                        conditions, which could decrease the                    all of its potential energy is released as            cooled, impurities are removed, and the
                                        sugar and, ultimately, the ethanol                      heat which can be recovered for                       gas is sent to ethanol production as with
                                        yields. An alternative to the SSF                       immediate use. In a common                            the syngas platform described above.72
                                        technology is the sequential hydrolysis                 gasification process, the partially
                                        and fermentation (SHF) process. The                     burned fuel (wood or coal) releases a                 d. Feedstock Optimization
                                        separation of hydrolysis and                            small amount of heat, but leaves some
                                                                                                uncombusted, gaseous products.                          Cellulosic biomass can come from a
                                        fermentation enables enzymes to                                                                               variety of sources. Because the
                                        operate at higher temperatures in the                   Ordinarily, the hot product gases are fed
                                                                                                directly to a nearby boiler or gas turbine,           conversion of cellulosic biomass to
                                        hydrolysis step to increase sugar                                                                             ethanol has not yet been commercially
                                        production and more moderate                            to do work; it has been reported that for
                                                                                                a well-designed system, the overall                   demonstrated, we cannot say at this
                                        temperatures in the fermentation step to                                                                      time which feedstocks are superior to
                                        optimize the conversion of sugar into                   efficiency may approach that of a solid
                                                                                                fuel boiler. However, when steam is                   others. A few of the many resources are:
                                                                                                injected into the gasifier, it reacts with            Post-sorted municipal waste, rice and
                                          Cost-effective cellulase enzymes must
                                        also be developed for this technology to                the burning solid fuel to produce more                wheat straw,73 soft-woods, hardwood,
                                        be completely successful.70 Several                     gaseous product. The primary reaction                 switch grass, and bagasse. Regardless,
                                        companies are using variations of these                 is between carbon and water which                     each feedstock requires a specific
                                        technologies to develop processes for                   produces hydrogen and carbon                          combination of pretreatment methods
                                        converting cellulosic biomass into                      monoxide and an inorganic ash. The ash                and enzyme ‘‘cocktails’’ to optimize the
                                        ethanol by way of fermentation. A few                   and heavy hydrocarbon-tars are                        operation and maximize the ethanol
                                        groups, using recently developed                        removed from the raw syngas before it                 yield. One of the many challenges for
                                        genome modifying technology, have                       is compressed and passed over Fisher-                 the cellulose-ethanol industry is to find
                                        been able to produce a variety of new                   Tropsch catalyst to produce ethanol.                  the best feedstocks and then develop the
                                        or modified enzymes and microbes that                   Fisher-Tropsch technology has been                    most cost-effective ways for converting
                                        show promise for use in weak- or dilute-                used for many years in the chemical and               them into ethanol.
                                        acid enzymatic-prehydrolysis. Another                   refining industries, most notably to                  3. Renewable Fuel Distribution System
                                        problem with cellulosic feedstocks is, as               produce gasoline and diesel fuel from                 Capability
                                        previously described, that the                          syngas produced by coal gasification.
                                        hydrolysis reactions produce both                       Whether the Fischer-Tropsch reaction                     Ethanol and biodiesel blended fuels
                                        glucose, the six-carbon sugar, and                      produces diesel or ethanol is primarily               are currently not shipped by petroleum
                                        xylose, the five-carbon sugar (pentose                  the result of changes to process                      product pipeline due to operational
                                        sugar, C5H10O5; sometimes called ‘‘wood                 pressure, temperature and in some cases               issues and additional cost factors.
                                        sugar’’). Early conversion technology                   the use of custom catalysts. In most                  Hence, a separate distribution system is
                                        required different microbes to ferment                  cases, the Fischer-Tropsch process did                needed for ethanol and biodiesel up to
                                        each sugar. Recent research has                         not produce pure ethanol in the first                 the point where they are blended into
                                        developed better fermenting organisms.                  pass through the system. Rather, a                    petroleum-based fuel as it is loaded into
                                        Now, glucose and xylose can be co-                      stream of mixed chemicals was                         tank trucks for delivery to retail and
                                        fermented—hence, the present-day                        produced, including gasoline, diesel,                 fleet operators. In cases where ethanol
                                        terminology: Weak-acid enzymatic                        and oxygenated hydrocarbons                           and biodiesel are produced within 200
                                        hydrolysis and co-fermentation.                         (alcohol).71                                          miles of a terminal, trucking is often the
                                                                                                                                                      preferred means of distribution. For
                                        b. Syngas Platform                                      c. Plasma Technology
                                                                                                                                                      longer shipping distances, the preferred
                                           The second platform for producing                       The development of another
                                        cellulosic ethanol is to convert the                    technology, called plasma, is also                      72 Ethanol From Tires Via Plasma Converter Plus

                                        biomass into a syngas which is then                                                                           Fischer Tropsch, March 15, 2006; http://
                                        converted into ethanol. A ‘‘generic’’                     71 Gridley Ethanol Demonstration Project  
                                                                                                Utilizing Biomass Gasification Technology: Pilot      ethanol_from_ti.html.
                                        syngas process is essentially a ‘‘steam
                                                                                                Plant Gasifier and Syngas Conversion Testing,           73 Wheat Straw for Ethanol Production in
                                        reformer,’’ which ‘‘gasifies’’ biomass                  August 2002–June 2004; February 2005 • NREL/SR–       Washington: A Resource, Technical, and Economic
                                        and other carbon based substances                       510–37581; TSS Consultants, For the City of           Assessment, September 2001, WSUCEEP2001084;
sroberts on PROD1PC70 with RULES

                                        including wastes, in a reduced-oxygen                   Gridley, California, 1617 Cole Boulevard, Golden,     Prepared by: James D. Kerstetter, Ph.D., John Kim
                                        environment and reacts them with                        Colorado 80401–3393, 303–275–3000 • http://           Lyons, Washington State University Cooperative
                                                                                      ; Operated for the U.S. Department of     Extension Energy Program, 925 Plum Street, SE.,
                                        steam to produce a synthesis gas or                     Energy Office of Energy Efficiency and Renewable      P.O. Box 43165, Olympia, WA 98504–3165;
                                                                                                Energy by Midwest Research Institute • Battelle       Prepared for: Washington State Office of Trade and
                                          70 Ibid.                                              Contract No. DE–AC36–99–GO10337.                      Economic Development.

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                                        23964                Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations

                                        method of bringing renewable fuels to                   requirements. As such, the changes in                 and RVP caused by these fuel changes.
                                        terminals is by rail and barge.                         the use of renewable fuels and their                  That analysis, however, could not
                                           Modifications to the rail, barge, tank               related cost impacts are not directly                 properly balance octane and other
                                        truck, and terminal distribution systems                attributable to the RFS rule. Rather, our             gasoline qualities. For this final rule, we
                                        will be needed to support the transport                 analysis assesses the broader fuels                   have therefore used the services of
                                        of the anticipated increased volumes of                 impacts of the growth in renewable fuel               Jacobs Consultancy to run their refinery
                                        renewable fuels. These modifications                    use in the context of corresponding                   LP model to estimate the cost impacts
                                        include the addition of terminal                        changes to the makeup of gasoline.                    of the RFS rule.
                                        blending systems for ethanol and                        These fuel impacts include the                           The results from the refinery LP
                                        biodiesel, additional storage tanks at                  elimination of the reformulated gasoline              model indicate that the impacts on
                                        terminals, additional rail delivery                     (RFG) oxygen standard which has                       overall gasoline costs from the increased
                                        systems at terminals for ethanol and                    resulted in the refiners ceasing to use               use of ethanol and the corresponding
                                        biodiesel, and additional rail cars,                    the gasoline blendstock methyl tertiary               changes to the other aspects of gasoline
                                        barges, and tank trucks to distribute                   butyl ether (MTBE) and replacing it                   would be 0.49 cents per gallon for the
                                        ethanol and biodiesel to terminals.                     with ethanol. Thus, in this analysis, we              RFS case. The EIA case would result in
                                        Terminal storage tanks for 100 percent                  are assessing the impact on the cost of               increased total cost of 1.03 cents per
                                        biodiesel will also need to be heated                   gasoline and diesel fuel of increased use             gallon. The actual cost at the fuel pump,
                                        during cold months to prevent gelling.                  of renewable fuels, the cost savings                  however, will be decreased due to the
                                        The most comprehensive study of the                     resulting from the phase out of MTBE                  effect of State and Federal tax subsidies
                                        infrastructure requirements for an                      and the increased cost due to the other               for ethanol. Taking this into
                                        expanded fuel ethanol industry was                      changes in fuel quality that result.                  consideration results in ‘‘at the pump’’
                                        conducted for the Department of Energy                     As discussed in Section II, we chose               decreased costs (cost savings) of ¥0.47
                                        (DOE) in 2002.74 The conclusions                        to analyze a range of renewable fuel use.             cents per gallon for the RFS case and ‘‘at
                                        reached in that study indicate that the                 In the case of ethanol’s use in gasoline,             the pump’’ decreased cost of ¥0.83
                                        changes needed to handle the                            the lower end of this range is based on               cents per gallon for the EIA case.
                                        anticipated increased volume of ethanol                 the minimum renewable fuel volume                     Section 7 of the RIA contains more
                                        by 2012 will not represent a major                      requirements in the Act, (the RFS case)               detail on the cost analysis used to
                                        obstacle to industry. While some                        and the higher end is based on AEO                    develop these costs.
                                        changes have taken place since this                     2006 (the EIA case). At both ends of this
                                                                                                                                                      A. Renewable Fuel Production and
                                        report was issued, including an                         range, we assume that biodiesel
                                                                                                                                                      Blending Costs
                                        increased reliance on rail over marine                  consumption will be the level estimated
                                        transport, we continue to believe that                  in AEO 2006. We analyzed the projected                1. Ethanol Production Costs
                                        the rail and marine transportation                      fuel consumption scenario and                         a. Corn Ethanol
                                        industries can manage the increased                     associated program costs in 2012, the
                                                                                                year that the RFS is fully phased-in. The                A significant amount of work has
                                        growth in demand in an orderly fashion.                                                                       been done in the last decade on
                                        This belief is supported by the                         volumes of renewable fuels consumed
                                                                                                in 2012 at the two ends of the range are              surveying and modeling the costs
                                        demonstrated ability for the industry to                                                                      involved in producing ethanol from
                                        handle the rapid increases and                          summarized in Table II.A.1–1.
                                                                                                   We have estimated an average corn                  corn to serve business and investment
                                        redistribution of ethanol use across the                                                                      purposes as well as to try to educate
                                        country over the last several years as                  ethanol production cost of $1.26 per
                                                                                                gallon in 2012 (2004 dollars) for the RFS             energy policy decisions. Corn ethanol
                                        MTBE was removed. The necessary                                                                               costs for our work were estimated using
                                        facility changes at terminals and at retail             case and $1.32 per gallon for the EIA
                                                                                                case. For cellulosic ethanol, we estimate             a model developed by USDA in the
                                        stations to dispense ethanol containing                                                                       1990s that has been continuously
                                        fuels have been occurring at a record                   it will cost approximately $1.65 in 2012
                                                                                                (2004 dollars) to produce a gallon of                 updated by USDA. The most current
                                        pace. Given that future growth is                                                                             version was documented in a peer-
                                        expected to progress at a steadier pace                 ethanol using corn stover as a cellulosic
                                                                                                feedstock. In this analysis, however, we              reviewed journal paper on cost
                                        and with greater advance warning in                                                                           modeling of the dry-grind corn ethanol
                                                                                                assume that the cellulosic requirement
                                        response to economic drivers, we                                                                              process, and it produces results that
                                                                                                will be met by corn-based ethanol
                                        anticipate that the distribution system                                                                       compare well with cost information
                                                                                                produced by energy sourced from
                                        will be able to respond appropriately. A                                                                      found in surveys of existing plants.75 76
                                                                                                biomass (animal and other waste
                                        discussion of the costs associated                                                                            We made some minor modifications to
                                                                                                materials as discussed in Section III.B of
                                        making the changes discussed above is                                                                         the USDA model to allow scaling of the
                                                                                                today’s preamble) and costing the same
                                        contained in Section VII.B of today’s                                                                         plant size, to allow consideration of
                                                                                                as corn based ethanol produced by
                                        preamble.                                                                                                     plant energy sources other than natural
                                                                                                conventional means.
                                        VII. Impacts on Cost of Renewable                          We estimated production costs for                  gas, and to adjust for energy prices in
                                        Fuels and Gasoline                                      soy-derived biodiesel of $2.06 per gallon             2012, the year of our analysis.
                                                                                                in 2004 and $1.89 per gallon in 2012.                    The cost of ethanol production is
                                          This section examines the impact on
                                                                                                For yellow grease derived biodiesel, we               most sensitive to the prices of corn and
                                        fuel costs resulting from the growth in
                                                                                                estimate an average production cost of                the primary co-product, DDGS. Utilities,
                                        renewable fuel use between a base year
                                                                                                $1.19 per gallon in 2004 and $1.11 in                 capital, and labor expenses also have an
                                        of 2004 and 2012. We note that based
                                                                                                2012.                                                 impact, although to a lesser extent. Corn
                                        on analyses conducted by the Energy
                                                                                                   For the proposed rule, we estimated                feedstock minus DDGS sale credits
                                        Information Administration (EIA),
                                                                                                the cost of increased use of renewable
                                        renewable fuels will be used in gasoline
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                                                                                                fuel and other major cost impacts by                    75 Kwaitkowski, J.R., McAloon, A., Taylor, F.,
                                        and diesel fuel in excess of the RFS                                                                          Johnston, D.B., Industrial Crops and Products 23
                                                                                                developing our own cost spreadsheet
                                                                                                                                                      (2006) 288–296.
                                          74 ‘‘Infrastructure Requirements for an Expanded      model. That analysis considered the                     76 Shapouri, H., Gallagher, P., USDA’s 2002

                                        Fuel Ethanol Industry,’’ Downstream Alternatives        production cost, distribution cost as                 Ethanol Cost-of-Production Survey (published July
                                        Inc., January 15, 2002.                                 well as the cost for balancing the octane             2005).

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                                        represents about 48% of the final per-                  will be significant, thus making overall              similar basis.83 It is also reasonable to
                                        gallon cost, while utilities, capital and               production costs at these plants similar              expect that the cost of cellulosic ethanol
                                        labor comprise about 19%, 9%, and 6%,                   to gas-fired ethanol plants. As of the                would be higher than corn ethanol
                                        respectively. For this work, we used                    time of this writing, we know of only a               because of the complexity of the
                                        corn prices of $2.50/bu and $2.71/bu for                few operating plants of this type, and                cellulose conversion process. Recently,
                                        the RFS and EIA cases, respectively,                    expect the quantity of ethanol produced               process improvements and
                                        with corresponding DDGS prices at                       this way to remain a relatively small                 advancements in corn production have
                                        $83.35/ton and $85.16/ton (2004                         fraction of the total ethanol demand.                 considerably reduced the cost of
                                        dollars). These estimates are from                      Thus, the sensitivity of the overall                  producing corn ethanol. We also believe
                                        modeling work done for this rulemaking                  analysis to this assumption is also very              it is realistic to assume that cellulose-
                                        using the Forestry and Agricultural                     small.81 Based on these factors, we have              derived ethanol process improvements
                                        Sector Optimization Model, which is                     assigned starch ethanol made using this               will be made and that one can likewise
                                        described in more detail in Chapter 8 of                cellulosic criteria the same cost as                  reasonably expect that, as the industry
                                        the RIA. Energy prices were derived                     ethanol produced from corn using                      matures, the cost of producing ethanol
                                        from historical data and projected to                   conventional means.                                   from cellulose will also decrease.
                                        2012 using EIA’s AEO 2006. More                         b. Cellulosic Ethanol                                    We calculated fixed and variable
                                        details on how the ethanol production                                                                         operating costs using percentages of
                                        cost estimates were made can be found                      In 1999, the National Renewable
                                                                                                Energy Laboratory (NREL) published a                  direct labor and total installed capital
                                        in Chapter 7 of the RIA.                                                                                      costs. Following this methodology, we
                                           The estimated average corn ethanol                   report outlining its work with the USDA
                                                                                                to design a computer model of a plant                 estimate that producing a gallon of
                                        production cost of $1.26 per gallon in
                                                                                                to produce ethanol from hard-wood                     ethanol using corn stover as a cellulosic
                                        2012 (2004 dollars) in the RFS case and
                                                                                                chips.82 Although the model was                       feedstock would cost $1.65 in 2012
                                        $1.32 per gallon in the EIA case
                                                                                                originally prepared for hardwood chips,               (2004 dollars).
                                        represents the full cost to the plant
                                        operator, including purchase of                         it was meant to serve as a modifiable-                2. Biodiesel Production Costs
                                        feedstocks, energy required for                         platform for ongoing research using
                                        operations, capital depreciation, labor,                cellulosic biomass as feedstock to                       We based our estimate for the cost to
                                        overhead, and denaturant, minus                         produce ethanol. Their long-term plan                 produce biodiesel on the use of USDA’s,
                                        revenue from sale of co-products. It                    was that various indices, costs,                      NREL’s and EIA’s biodiesel computer
                                        assumes that 86% of new plants will                     technologies, and other factors would be              models, along with estimates from
                                        use natural gas as a thermal energy                     regularly updated.                                    engineering vendors that design
                                        source, at a price of $6.16/MMBtu (2004                    NREL and USDA used a modified                      biodiesel plants. Biodiesel fuel can be
                                        dollars).77 It does not account for any                 version of the model to compare the cost              made from a wide variety of virgin
                                        subsidies on production or sale of                      of using corn-grain with the cost of                  vegetable oils such as canola, corn oil,
                                        ethanol. Note that the cost figure                      using corn stover to produce ethanol.                 cottonseed, etc. though, the operating
                                        generated here is independent of the                    We used the corn stover model from the                costs (minus the costs of the feedstock
                                        market price of ethanol, which has been                 second NREL/USDA study for the                        oils) for these virgin vegetable oils are
                                        related closely to the wholesale price of               analysis for this rule. Because there                 similar to the costs based on using soy
                                        gasoline for the past decade.78 79                      were no operating plants that could                   oil as a feedstock, according to an
                                           Under the Energy Act, starch-based                   potentially provide real world process                analysis by NREL Biodiesel costs are
                                        ethanol can be counted as cellulosic if                 design, construction, and operating data              therefore determined based on the use
                                        at least 90% of the process energy is                   for processing cellulosic ethanol, NREL               of soy oil, since this is the most
                                        derived from renewable feedstocks,                      had considered modeling the plant                     commonly used virgin vegetable
                                        which include plant cellulose,                          based on assumptions associated with a                feedstock oil, and the use of recycled
                                        municipal solid waste, and manure                       first-of-a-kind or pioneer plant. The                 cooking oil (yellow grease) as a
                                        biogas.80 It is expected that the vast                  literature indicates that such models                 feedstock. Production costs are based on
                                        majority of the 250 million gallons per                 often underestimate actual costs since                the process of continuous
                                        year of cellulosic ethanol production                   the high performance assumed for                      transesterification, which converts these
                                        required by 2013 will be made using                     pioneer process plants is generally                   feedstock oils to esters, along with the
                                        this provision. While we have been                      unrealistic.                                          ester finishing processes and glycerol
                                        unable to develop a detailed production                    Instead, the NREL researchers                      recovery. The models and vendors data
                                        cost estimate for corn ethanol meeting                  assumed that the corn stover plant was                are used to estimate the capital, fixed
                                        cellulosic criteria, we assume that the                 an Nth generation plant, e.g., not a                  and operating costs associated with the
                                        costs will not be significantly different               pioneer plant or first-or-its kind, built             production of biodiesel fuel,
                                        from conventionally produced corn                       after the industry had been sufficiently              considering utility, labor, land and any
                                        ethanol. We believe this is reasonable                  established to provide verified costs.                other process and operating
                                        because the costs of hauling, storing,                  The corn stover plant was normalized to               requirements, along with the prices for
                                        and processing this low or zero cost                    the corn kernel plant, e.g., placed on a
                                                                                                                                                         83 Determining the Cost of Producing Ethanol
                                        waste material in order to combust it                     81 See Table VI.A.1–2 for more details on number    from Corn Starch and Lignocellulosic Feedstocks; A
                                                                                                of operating ethanol plants and their fuel sources.   Joint Study Sponsored by: USDA and USDOE,
                                           77 For more details on fuel sources and costs of
                                                                                                  82 Lignocellulosic Biomass to Ethanol Process       October 2000 • NREL/TP–580–28893 • Andrew
                                        production, see RIA Chapter 1.2.2 and          Design and Economics Utilizing Co-Current Dilute      McAloon, Frank Taylor, Winnie Yee, USDA,
                                           78 Whims, J., Sparks Companies, Inc. and Kansas
                                                                                                Acid Prehydrolysis and Enzymatic Hydrolysis           Eastern Regional Research Center Agricultural
                                        State University, ‘‘Corn Based Ethanol Costs and        Current and Futuristic Scenarios, Robert Wooley,      Research Service; Kelly Ibsen, Robert Wooley,
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                                        Margins, Attachment 1’’ (Published May 2002).           Mark Ruth, John Sheehan, and Kelly Ibsen,             National Renewable Energy Laboratory,
                                           79 Piel, W.J., Tier & Associates, Inc., March 9,
                                                                                                Biotechnology Center for Fuels and Chemicals,         Biotechnology Center for Fuels and Chemicals,
                                        2006 report on costs of ethanol production and          Henry Majdeski and Adrian Galvez, Delta-T             1617 Cole Boulevard, Golden, CO, 80401–3393;
                                        alternatives.                                           Corporation; National Renewable Energy                NREL is a USDOE Operated by Midwest Research
                                           80 Energy Policy Act of 2005, Section 1501           Laboratory, Golden, CO, July 1999, NREL/TP–580–       Institute • Battelle • Bechtel; Contract No. DE–
                                        amending Clean Air Act Section 211(o)(1)(A).            26157.                                                AC36–99–GO10337.

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                                        feedstock oils, methanol, chemicals and                 models and sources of information. For                transport fuel, neglecting minor uses in
                                        the byproduct glycerol.                                 yellow grease derived biodiesel, we                   the heating oil market.
                                          The USDA, NREL and EIA models are                     used the EIA and vendor estimates to                     For RFS cases, the net effect of
                                        based on a medium sized biodiesel                       generate total production costs which                 biodiesel production on diesel fuel
                                        plant that was designed to process raw                  range from $1.11 to $1.56 for year 2012.              costs, including the biodiesel blenders’
                                        degummed virgin soy oil as the                            With the current Biodiesel Blender                  subsidy, is a reduction in the cost of
                                        feedstock. Additionally, the EIA model                  Tax Credit Program, producers using                   transport diesel fuel costs by $114
                                        also contains a representation to                       virgin vegetable oil stocks receive a one             million per year, which equates to a
                                        estimate the biodiesel production cost                  dollar per gallon tax subsidy while                   reduction in fuel cost of about 0.20
                                        for a plant that uses yellow grease as a                yellow grease producers receive 50                    cents per gallon.84 Without the subsidy,
                                        feedstock. In the USDA model, the                       cents per gallon, reducing the net                    the transport diesel fuel costs are
                                        equipment needs and operating                           production cost to a range of 89 to 115               increased by $91 million per year, or an
                                        requirements for their biodiesel plant                  cents per gallon for soy oil and 61 to 106            increase of 0.16 cents per gallon for
                                        was estimated through the use of                        cents per gallon for yellow greased                   transport diesel fuel.
                                        process simulation software. This                       derived biodiesel fuel in 2012. This
                                        software determines the biodiesel                                                                             B. Distribution Costs
                                                                                                compares favorably to the projected
                                        process requirements based on the use                   wholesale diesel fuel prices of 138 cents             1. Ethanol Distribution Costs
                                        of established engineering relationships,               per gallon in 2012, signifying that the
                                        process operating conditions and                                                                                 There are two components to the costs
                                                                                                economics for biodiesel are positive                  associated with distributing the volumes
                                        reagent needs. To substantiate the                      under the effects of the blender credit
                                        validity and accuracy of their model,                                                                         of ethanol necessary to meet the
                                                                                                program, though the tax credit program                requirements of the Renewable Fuels
                                        USDA solicited feedback from major                      will expire in 2008 if it is not extended.
                                        biodiesel producers. Based on                                                                                 Standard (RFS): (1) The capital cost of
                                                                                                Congress may later elect to extend the                making the necessary upgrades to the
                                        responses, they then made adjustments                   blender credit program following the
                                        to their model and updated their input                                                                        fuel distribution infrastructure system,
                                                                                                precedence used for extending the                     and (2) the ongoing additional freight
                                        prices to year 2005. The NREL model is                  ethanol blending subsidies.
                                        also based on process simulation                                                                              costs associated with shipping ethanol
                                                                                                Additionally, the Small Biodiesel                     to terminals. The most comprehensive
                                        software, though the results are adjusted               Blenders Tax credit program and state
                                        to reflect NREL’s modeling methods,                                                                           study of the infrastructure requirements
                                                                                                tax and credit programs offer some                    for an expanded fuel ethanol industry
                                        using prices based on year 2002. The
                                                                                                additional subsidies and credits, though              was conducted for the Department of
                                        output for all of these models was
                                                                                                the benefits are modest in comparison to              Energy (DOE) in 2002.85 That study
                                        provided in spreadsheet format. We also
                                                                                                the Blender’s Tax credit.                             provided the foundation for our
                                        use engineering vendor estimates as
                                        another source to generate soy oil and                  3. Diesel Fuel Costs                                  estimates of the capital costs associated
                                        yellow grease biodiesel production                                                                            with upgrading the distribution
                                                                                                   Biodiesel fuel is blended into                     infrastructure system as well as the
                                        costs. These firms are primarily engaged
                                                                                                highway and nonroad diesel fuel, which                freight costs to handle the increased
                                        in the business of designing biodiesel
                                                                                                increases the volume and therefore the                volume of ethanol needed to meet the
                                          The production costs are based on an                  supply of diesel fuel and thereby                     requirements of the RFS in 2012.
                                        average biodiesel plant located in the                  reduces the demand for refinery-                      Distribution costs are evaluated here for
                                        Midwest using feedstock oils and                        produced diesel fuel. In this section, we             both the RFS case and for the EIA case.
                                        methanol, which are catalyzed into                      estimate the overall cost impact,                     The 2012 reference case against which
                                        esters and glycerol by use of sodium                    considering how much refinery based                   we are estimating the cost of
                                        hydroxide. Because local feedstock                      diesel fuel is displaced by the forecasted            distributing the additional volume of
                                        costs, distribution costs, and biodiesel                production volume of biodiesel fuel.                  ethanol needed to meet the
                                        plant type introduce some variability                   The cost impacts are evaluated                        requirements of the RFS is 3.9 billion
                                        into cost estimates, we believe that                    considering the production cost of                    gallons.
                                        using an average plant to estimate                      biodiesel with and without the subsidy
                                                                                                from the Biodiesel Blenders Tax credit                a. Capital Costs To Upgrade Distribution
                                        production costs provides a reasonable                                                                        System for Increased Ethanol Volume
                                        approach. Therefore, we simplified our                  program. Additionally, the diesel cost
                                        analysis and used costs based on an                     impacts are quantified with refinery                     The 2002 DOE study examined two
                                        average plant and average feedstock                     diesel prices as forecasted by Jacob’s                cases regarding the use of renewable
                                        prices since the total biodiesel volumes                which is based on EIA’s AEO 2006.                     fuels for estimating the capital costs for
                                        forecasted are not large and represent a                   We estimate the net effect that                    distributing additional ethanol. The first
                                        small fraction of the total projected                   biodiesel production has on overall cost              assumed that 5.1 billion gal/yr of
                                        renewable volumes.                                      for diesel fuel in year 2012 using total              ethanol would be used in 2010, and the
                                          The models and vendor estimates are                   production costs for biodiesel and diesel             second assumed that 10 billion gal/yr of
                                        further modified to use input prices for                fuel. The costs are evaluated based on                ethanol would be used in the 2015
                                        feedstocks, byproducts and energy that                  how much refinery based diesel fuel is                timetable. We interpolated between
                                        reflect the effects of the fuels provisions             displaced by the biodiesel volumes as                 these two cases to provide the
                                        in the Energy Act. In order to capture a                forecasted by EIA, accounting for energy              foundation for our estimate of the
                                        range of production costs, we generated                 density differences between the fuels.                capital costs to support the use of 6.7
                                        cost projections from all of the models                 The cost impact is estimated from a                   billion gal/yr of ethanol in 2012 for the
                                        and vendors. We present the details on                  2004 year basis, by multiplying the
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                                        these estimates in Chapter 7 of the RIA.                production costs of each fuel by the                    84 Based on EIA’s AEO 2006, 58.9 billion gallons

                                          For soy oil biodiesel production, we                  respective changes in volumes for                     of highway and off-road diesel fuel is projected to
                                                                                                                                                      be consumed in 2012.
                                        estimate a production cost ranging from                 biodiesel and estimated displaced diesel                85 Infrastructure Requirements for an Expanded
                                        $1.89 to $2.15 per gallon in 2012 (in                   fuel. We further assume that all of the               Fuel Ethanol Industry, Downstream Alternatives
                                        2004 dollars) using these different                     forecasted biodiesel volume is used as                Inc., January 15, 2002.

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                                        RFS case.86 The 10 billion gal/yr case         For this final rule, we translated the EIA                       during the winter months.95 In the
                                        examined in the DOE study was used as          projections into State-by-State and                              proposal, we estimated that these
                                        the foundation in estimating the capital       national average freight costs to align                          capital costs would be approximately
                                        costs under the EIA projected case             with our State-by-State ethanol use                              $50,000,000. We adjusted our estimate
                                        examined in today’s rule of 9.6 billion        estimates. Not including capital                                 of these capital costs for this final rule
                                        gal/yr of ethanol.87 Our estimated             recovery, we estimate that the freight                           based on additional information
                                        capital costs in this final rule differ from   cost to transport ethanol to terminals                           regarding the cost to install necessary
                                        those in the proposed rule for several         would range from 4 cents per gallon in                           storage and blending equipment at
                                        reasons. We adjusted our capital costs         the Midwest to 25 cents per gallon to                            terminals and the need for additional
                                        from those in the proposal to reflect an       the West Coast. On a national basis, this                        rail tank cars for biodiesel.96 As
                                        increase in the cost of tank cars and          averages to 11.3 cents per gallon of                             discussed in the RIA, we now estimate
                                        barges used to ship ethanol since the          ethanol under the RFS case and 11.9                              that handling the increased biodiesel
                                        DOE study was conducted. In addition,          cents per gallon under the EIA case.91                           volume will require a total capital cost
                                        we are assuming an increased reliance          We adjusted the estimated ethanol                                investment of $145,500,000 which
                                        on rail transport over that projected in       freight costs from those in the proposal                         equates to about 6 cents per gallon of
                                        the DOE study.88                               by increasing the cost of shipping                               new biodiesel volume.97
                                           Table VII.B.1.a–1contains our               ethanol to satellite versus hub terminals,                          In the proposal, we estimated that the
                                        estimates of the infrastructure changes        by increasing the cost of gathering                              freight costs for ethanol may adequately
                                        and associated capital costs for the two       ethanol for large volume shipments to                            reflect those for biodiesel as well. In
                                        ethanol use scenarios examined in              hub terminals, and by increasing the                             response to comments, we sought
                                        today’s rule. Amortized over 15 years          percentage of ethanol delivered to large                         additional information regarding the
                                        with a 7 percent cost of capital, the total    volume terminals versus the volume                               freight costs for biodiesel. This
                                        capital costs equate to approximately          delivered to lesser volume terminals.92                          information indicates that freight costs
                                        1.4 cents per gallon of ethanol under the         Including the cost of capital recovery                        for biodiesel are typically 30 percent
                                        RFS case and 1.2 cents per gallon under        for the necessary distribution facility                          higher than those for ethanol which
                                        the EIA case.89                                changes, we estimate the national                                translates into an estimate of 15.5 cents
                                                                                       average cost of distributing ethanol to be                       per gallon for biodiesel freight costs on
                                         TABLE VII.B.1.A–1.—ESTIMATED ETH- 12.7 cents per gallon under the RFS case                                     a national average basis.98
                                           ANOL DISTRIBUTION INFRASTRUC- and 13.1 cents per gallon under the EIA                                           Including the cost of capital recovery
                                           TURE CAPITAL COSTS ($M) *                   case.93 Thus, we estimate the total cost                         for the necessary distribution facility
                                                                                       for producing and distributing ethanol                           changes, we estimate the cost of
                                                               RFS case     EIA case   to be between $1.39 and $1.45 per                                distributing biodiesel to be 21.5 cents
                                                               6.7 Bgal/yr 9.6 Bgal/yr gallon of ethanol, on a nationwide                               per gallon. Depending on whether the
                                                                                       average basis. This estimate includes                            feedstock is waste grease or virgin oil,
                                        Fixed Facilities:                                                                                               we estimate the total cost for producing
                                          Retail .............          20          44 both the capital costs to upgrade the                            and distributing biodiesel to be between
                                          Terminals ......            115         241 distribution system and freight costs.
                                        Mobile Facilities:                                                                                              $1.33 and $2.11 per gallon of biodiesel,
                                                                                       2. Biodiesel Distribution Costs                                  on a nationwide average basis.99 This
                                           Trucks ........               24               The volume of biodiesel used by 2012
                                                                                            50                                                          estimate includes both the capital costs
                                         Barges ...........              21            under the RFS is estimated at 300
                                                                                            43                                                          to upgrade the distribution system and
                                         Rail Cars .......              172                297
                                                                                       million gallons per year. The 2012                               freight costs, and the wide range reflects
                                                                                       baseline case against which we are                               differences in different types of
                                             Total Cap-                                estimating the cost of distributing the                          production feedstocks.
                                               ital Costs           352            675
                                                                                       additional volume of biodiesel is 30                             C. Estimated Costs to Gasoline
                                          * Relative to a 3.9 billion gal/yr reference million gallons.94
                                        case.                                             The capital costs associated with                               To estimate the cost of increased use
                                                                                       distribution of biodiesel are higher per                         of renewable fuels, the cost savings from
                                        b. Ethanol Freight Costs
                                                                                       gallon than those associated with the                            the phase out of MTBE and the
                                           The Energy Information                      distribution of ethanol due to the need                          production cost of alkylate, we relied on
                                        Administration (EIA) translated the            for storage tanks, blending systems,
                                        ethanol freight cost estimates in the          barges, tanker trucks and rail cars to be                          95 See Chapter 1.3 of the Regulatory Impact

                                        DOE study to a census division basis.90        insulated and in many cases heated
                                                                                                                                                        Analysis associated with today’s rule for a
                                                                                                                                                        discussion of the special handling requirements for
                                          86 See chapter 7.3 of the Regulatory Impact                                                                   biodiesel under cold conditions.
                                                                                                 059 (2006),            96 Biodiesel rail tank cars typically have a
                                        Analysis associated with today’s rule for additional
                                        discussion of how the results of the DAI study were      modeldoc/m059(2006)-2.pdf.                             capacity of 25,500 gallons as opposed to 30,000
                                                                                                    91 See Chapter 7.3 of the RIA.                      gallons for an ethanol tank car. Thus, additional
                                        adjusted to reflect current conditions in estimating
                                        the ethanol distribution infrastructure capital costs       92 Hub terminals refer to those terminals where     tank cars are needed to transport a given volume
                                        under today’s rule.                                      ethanol is delivered in large volume shipments         of biodiesel relative to the same volume of ethanol.
                                          87 For both the 6.7 bill gal/yr and 9.6 bill gal/yr    such as by unit train (consisting of 70 tank cars or     97 Capital costs will be incurred incrementally

                                        cases, the baseline from which the DOE study cases       more) or marine barges/tanker. Satellite terminals     over the period of 2007–2012 as biodiesel volumes
                                        were projected was adjusted to reflect a 3.9 bill gal/   are those terminals that are either supplied from a    increase. For the purpose of this analysis, all capital
                                        yr 2012 baseline.                                        hub terminal or receive ethanol shipments in           costs were assumed to be incurred in 2007 and were
                                          88 This increased reliance on rail transport was       smaller quantities directly from the producer. See     amortized over 15 years at a 7 percent cost of
                                        the subject of a sensitivity analysis conducted for      Chapter 7 of the RIA regarding how these estimates     capital.
                                        the proposed rule.                                       were adjusted from those in the proposal and the         98 The estimated ethanol freight costs were

                                          89 These capital costs will be incurred                check of our estimates against current ethanol         increased by 30 percent to arrive at the estimate of
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                                        incrementally during the period of 2007–2012 as          freight rates.                                         biodiesel freight costs.
                                                                                                    93 All capital costs were assumed to be incurred
                                        ethanol volumes increase. For the purpose of this                                                                 99 See Section VII.A.2. of this preamble regarding

                                        analysis, we assumed that all capital costs were         in 2007 and were amortized over 15 years at a 7        biodiesel production costs. We estimated 2012
                                        incurred in 2007.                                        percent cost of capital.                               production costs of $1.89 per gal for soy-derived
                                          90 Petroleum Market Model of the National Energy          94 2004 baseline of 25 million gallons grown with   biodiesel and $1.11 per gal for yellow grease
                                        Modeling System, Part 2, March 2006, DOE/EIA–            diesel demand to 2012.                                 derived biodiesel.

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                                        refinery modeling conducted by Jacob’s                  it is assumed that no MTBE is in                      reduce the RVP of the gasoline pool
                                        Consultancy that established baselines                  gasoline, MSAT1 is in place, the psi                  from which it comes, helping to offset
                                        based on 2004 volumes, which were                       waiver for conventional gasoline                      the RVP impacts of ethanol. Also, the
                                        then used to project a reference case and               containing 10 volume percent ethanol is               increased production of alkylate
                                        2 control cases for 2012. The contractor                in effect, the RFS is in effect, and there            provides a low RVP gasoline blendstock
                                        developed a five region, U.S. demand                    is no RFG oxygenate mandate.                          which offsets a portion of the cracked
                                        model in which specific regional clean                     Control Case 2 (EIA case): Same as                 stocks produced by the fluidized
                                        product demands are sold at                             Control Case 1, except the ethanol                    catalytic cracker unit. Other means that
                                        hypothetical regional terminals.                        volume in gasoline is 9.6 BGY.                        the refinery model used to offset the
                                        1. Description of Cases Modeled                         2. Overview of Cost Analysis Provided                 high blending RVP of ethanol included
                                                                                                by the Contractor Refinery Model                      purchasing gasoline components with
                                        a. Base Case (2004)                                                                                           lower RVP, producing more poly
                                                                                                   The estimated cost of increased use of
                                           The baseline case was established by                                                                       gasoline which has low RVP and selling
                                                                                                renewable fuels, the cost savings from
                                        modeling fuel volumes for 2004, with                                                                          more high-RVP naphtha to
                                                                                                the phase out of MTBE and the cost of
                                        data on fuel properties provided to the                                                                       petrochemical sales.
                                                                                                converting some of the former MTBE
                                        contractor by EPA. Fuel property data                   feedstocks to produce alkylate,                       3. Overall Impact on Fuel Cost
                                        for this base case was built off of 2004                isooctane, and isooctene is provided by
                                        refinery batch reports provided to EPA;                 the output of the refinery model. As                    Based on the refinery modeling
                                        however, the base case assumed sulfur                   described in VII.C.1, the cost analysis               conducted for today’s rule, we have
                                        standards based on gasoline data in                     was conducted by comparing the 2012                   calculated the costs of these fuels
                                        2004, not with fully phased in Tier 2                   reference case with the two control                   changes that will occur for the RFS and
                                        gasoline standards at the 30 ppm level.                 cases which are assumed to take place                 EIA cases. The costs are expressed two
                                        In addition we assumed the phase-in of                  in 2012.                                              different ways. First, we express the cost
                                        15 ppm sulfur standards for highway,                       The major factors which impact the                 of the program without the ethanol
                                        nonroad, locomotive and marine diesel                   costs in the refinery model are (1)                   consumption subsidies in which the
                                        fuel. The supply/demand balance for                     blending in more ethanol, (2) adjusting               costs are based on the total accumulated
                                        the U.S. was based on gasoline volumes                  the gasoline blending to lower RVP, (3)               cost of each of the fuels changes.
                                        from EIA and the California Air                         removing the MTBE, (4) converting                     Second, we express the cost with the
                                        Resources Board (CARB). Our decision                    MTBE feedstocks to other high quality                 ethanol consumption subsidies
                                        to use 2004 rather than 2005 as the                     replacement, and (5) adjusting for the                included since the subsidized portion of
                                        baseline year was because of the                        change in gasoline energy density. The                the renewable fuels costs will not be
                                        refinery upset conditions associated                    first is the addition of ethanol to the               represented to the consumer in its fuels
                                        with the Gulf Coast hurricanes in 2005.                 gasoline pool. The refinery model                     costs paid at the pump, but instead by
                                        b. Reference Case (2012)                                estimates the cost impact of increasing               being paid through the state and federal
                                                                                                the volume of ethanol in the reference                tax revenues. In all cases, the capital
                                           The reference case was based on                      case from 3.94 billion gallons to 6.67                costs are amortized at 7 percent return
                                        modeling the base case, using 2012 fuel                 and 9.60 billion gallons in the RFS and               on investment (ROI), and based on 2006
                                        prices, and scaling the 2004 fuel                       EIA modeled cases, respectively. The                  dollars.
                                        volumes to 2012 based on growth in fuel                 estimated production prices for ethanol
                                        demand. In addition, we scaled MTBE                     for the RFS and EIA cases are provided                a. Cost Without Ethanol Subsidies
                                        and ethanol upward, in proportion to                    above in Section VII.A. We also show
                                        gasoline growth, and assumed the RFS                    the results with the federal and state                  Table VII.C.3.a–1 summarizes the
                                        program would not be in effect. For                     subsidies applied to the production                   costs without ethanol subsidies for each
                                        example, if the PADD 1 gasoline pool                    price of ethanol.                                     of the two control cases, including the
                                        MTBE oxygen was 0.5 wt% in 2004, the                       The addition of ethanol to wintertime              cost for each aspect of the fuel changes,
                                        reference case assumed it should remain                 gasoline, and to summertime RFG, will                 and the aggregated total and the per-
                                        at 0.5 wt%. Finally, we assumed the                     cause an increase of approximately 1 psi              gallon costs for all the fuel changes.100
                                        MSAT 1 standards would remain in                        in RVP which needs to be offset to                    This estimate of costs reflects the
                                        place as would the RFG oxygen                           maintain constant RVP levels. One                     changes in gasoline that are occurring
                                        mandate. We assumed the crude slate                     method that refiners could choose to                  with the expanded use of ethanol,
                                        quality in 2012 is the same as the                      offset the increase in RVP is to reduce               including the corresponding removal of
                                        baseline case.                                          the butane levels in their gasoline. To               MTBE. These costs include the labor,
                                                                                                some extent, the modeling results                     utility and other operating costs, fixed
                                        c. Control Cases (2012)                                                                                       costs and the capital costs for all the
                                                                                                showed some occurrences of that, but it
                                           Two control cases were run for 2012.                 also did not report an overall increase               fuel changes expected. The per-gallon
                                        The assumptions for each of the control                 in butane sales as a result of the                    costs are derived by dividing the total
                                        cases are summarized below                              increased use of ethanol.                             costs over all U.S. gasoline projected to
                                           Control Case 1 (RFS case): 6.7 billion                  To convert the captive MTBE over to                be consumed in 2012. We excluded
                                        gallons/yr (BGY) of ethanol in gasoline;                alkylate, after the rejection of methanol,            federal and state ethanol consumption
                                        it reflects the renewable fuel mandate.                 refiners will need to combine refinery-               subsidies which avoids the transfer
                                        We have also assumed that 0.3 billion                   produced isobutane with the                           payments caused by these subsidies that
                                        gallons of biodiesel will be consumed as                isobutylene that was used as a feedstock              would hide a portion of the program’s
                                        reflected in Table II.A.1–1. In addition,               for MTBE. The use of the isobutane will               costs.
sroberts on PROD1PC70 with RULES

                                          100 EPA typically assesses social benefits and        cost of production of ethanol and gasoline without    tend to distort the market price of agricultural
                                        costs of a rulemaking. However, this analysis is        accounting for the effects of farm subsidies that     commodities.
                                        more limited in its scope by examining the average

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                                                                    Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Rules and Regulations                                                                             23969

                                                                       TABLE VII.C.3.A–1.—ESTIMATED COST WITHOUT ETHANOL CONSUMPTION SUBSIDIES
                                                                                                    [Million dollars and cents per gallon; 7% ROI and 2006 dollars]

                                                                                                                                                                                     RFS case 6.8        EIA case 9.6       EIA case 9.6
                                                                                                                                                                                     billion gals in-    billion gals in-   billion gals in-
                                                                                                                                                                                      cremental to        cremental to       cremental to
                                                                                                                                                                                    reference case      reference case        RFS case

                                        Capital Costs ($MM) ....................................................................................................................            ¥5,878              ¥7,311             ¥1,433
                                        Amortized Capital Costs ($MM/yr) ..............................................................................................                      ¥647                ¥804               ¥158
                                        Fixed Operating Cost ($MM/yr) .................................................................................