NATSO ANALYSIS: Trump Administration Pursuing Year-Round E15, RIN Transparency Measures

Over the last two years, there has been an extraordinary amount of uncertainty and volatility in renewable fuels and Renewable Identification Number (RINs) markets. This largely has been due to the Trump Administration's desire to "thread the needle" and develop a policy solution that makes both the renewable fuels community and the refining industry happy. NATSO and the retail fuels community have generally been stuck in the middle. The latest iteration of this discussion involves President Trump directing the Environmental Protection Agency (EPA) to eliminate restrictions on E-15 being sold year-round in certain parts of the country, in conjunction with enhanced "transparency" measures to govern RIN markets. NATSO is concerned that this effort is guided more by politics than policy, and will likely only result in further uncertainty and volatility.  
 
Trump Administration Proposal
 
President Trump recently instructed EPA to pursue two regulatory initiatives (though both would be a part of the same formal rulemaking process):  First, he instructed EPA to initiate a rulemaking to expand reid vapor pressure (RVP) waivers for E-15, or gasoline containing 15 percent ethanol.  Second, he instructed EPA to consider a number of different policies (all of which in NATSO's view are unnecessary and, in some instances, counter-productive) purportedly designed to "increase transparency in the RIN market."
 
Background on E-15 Proposal
 
In 2011, EPA approved the sale of E-15 in the United States for all 2001 and newer model year vehicles. E-15 has an octane rating of 88, one point higher than E-10. Importantly, E-15 has a high chemical volatility because ethanol at low blend percentage formulations has a high level of volatility. Thus, E-10 and E-15 tend to evaporate more easily, which results in undesirable emissions and environmental consequences.  
 
Volatility of gasoline is measured by RVP. Volatility is highest in the summer because temperatures are highest in the summertime, and this heat leads to higher pressure and greater evaporative emissions. Congress has directed EPA to regulate gasoline vapor pressure in the summer months (June 1 to Sept. 15) to reduce evaporative fuel emissions. 
 
In 1992, Congress granted E-10 a one pound per square inch (psi) waiver (the "one pound waiver") from these requirements in non-reformulated gasoline (RFG) areas. This allowed E-10 to be sold year-round everywhere despite the fact that it was more volatile than the RVP restrictions applicable to neat gasoline. Congress defined E-10 for this purpose as gasoline-ethanol blends with 10 percent ethanol. EPA has regulations on the books similarly defining E-10 blends as blends containing 9 to 10 vol% ethanol; EPA explicitly prohibits the waiver from being applied to any blend other than E-10.
 
As a practical matter, therefore, E-15 today cannot be sold year-round throughout the entire United States: In non-RFG areas, it cannot be sold as a gasoline (but only as a "flex-fuel" that can lawfully only be used in flex-fuel vehicles) during summer months. The ethanol community has long viewed this constraint as the primary obstacle preventing growth in ethanol consumption. (NATSO maintains that lack of strong consumer demand, in conjunction with retailers being subject to misfueling and infrastructure liability, also plays an important role because these things make retailers less inclined to sell E-15.)
  
What the Trump Administration is Proposing
 
President Trump has directed EPA to initiate a rulemaking to consider expanding RVP waivers for fuel blends containing gasoline and up to 15 percent ethanol. Under the proposed expansion, E-15 would be allowed to be sold year round (rather than just eight months of the year) in all areas, including non-RFG areas.
 
The refining community has promised to sue EPA if it finalizes such a proposal. Their argument will be that only Congress can expand the E-10 waiver to E-15; EPA has no authority to initiate such action on its own.  NATSO's analysis of the Clean Air Act is that refiners have a strong argument here.  Although there is no sound intellectual basis for providing a 1 pound waiver to E-10 and not E-15, EPA cannot act without Congressional authority and Congress does not appear to have given EPA this authority.  (The ethanol community counters, however, Congress's waiver for gasoline-ethanol blends containing 10 percent ethanol encompasses E-15, since after all E-15 does contain 10 percent ethanol -- plus another 5 percent.)
 
What Does This Mean for Fuel Retailers
 
EPA has indicated that it plans to propose a rule implementing the E-15 waiver by February, which would give the agency just over three months to receive and analyze public comment and finalize the rule in time for the 2019 summer driving season.  This is an extraordinarily aggressive timeline given the number of comments the agency is likely to receive.  On top of this, refiners undoubtedly will sue the agency and ask the courts to halt implementation of the rule pending the lawsuit's resolution.  Although nothing is certain, refiners will be in a relatively strong legal position to succeed on this front. If they succeed in halting the rule pending the lawsuit's resolution, it would prevent the E-15 waiver from taking effect in time for the 2019 summer driving season.
 
Thus, although it is undoubtedly possible that the E-15 waiver will be in place in time for the 2019 summer driving season, there are a number of obstacles that must be overcome in order for this to occur.
 
Background on RIN Transparency Proposals
 
President Trump also directed EPA to consider, in the same rulemaking as the E-15 proposal, regulations that are purportedly designed to increase transparency in the RIN market. Before examining the specific policy measures that President Trump has directed EPA to consider, it is worth reiterating that these "transparency" measures are simply designed to counter-balance the political benefit the Administration is providing to the renewable fuels community with the E-15 waiver by providing certain refiners (generally merchant refiners without a strong downstream / retail presence) a gift of their own.  In fact, these measures have all been concocted by the merchant refining community, explicitly designed to lower RIN prices (and thus retailers' incentives for buying, blending, and selling renewable fuels). They illustrate the extraordinary difficulty of seeking to appease both the biofuels and refining community.
 
The potential reforms that President Trump has directed EPA to consider include:
 
1) Prohibiting entities other than obligated parties from purchasing separated RINs;
 
2) Requiring public disclosure when RIN holdings held by an individual actor exceed specified limits;
 
3) Limiting the length of time a non-obligated party can hold RINs;
 
4) Requiring the retirement of RINs for the purpose of compliance be made in real time (i.e., not permitting obligated parties to hold RINs for any period of time and requiring RINs be turned in daily);
 
As should be apparent to NATSO members who are active in RIN markets, these proposals are all undesirable and run counter to the purpose of the Renewable Fuel Standard: The RFS is supposed to encourage retailers to buy, blend, and sell more renewable fuel; these proposals would discourage such activities. 
 
[ANYONE INTERESTED IN LEARNING MORE ABOUT HOW TO PROFITABLY INCORPORATE RENEWABLE FUELS INTO THEIR PRODUCT SUPPLY ARE ENCOURAGED TO CONTACT NATSO'S ALTERNATIVE FUELS COUNCIL, WHICH WAS ESTABLISHED EXPLICITLY FOR THIS PURPOSE.] 
 
It is unclear which, if any, of these concepts EPA will pursue. NATSO will continue analyzing information coming out of EPA and, in consultation with its membership and government affairs committee, provide comments to EPA on these proposals. 
 
Next Steps
 
The above proposals (both E-15 waiver and transparency measures) are scheduled to be proposed in February 2019.  In addition, EPA will be finalizing its 2019 renewable volume obligations between now and the end of 2018.  On top of this, Members of Congress are actively exploring RFS reform measures for consideration in 2019. As a general matter, NATSO thinks that the best vehicle for RFS policy changes is Congress rather than EPA since, as we are continuing to see, EPA actions tend to result in litigation and more uncertainty. 
 
Thus 2019, like 2018, is shaping up to be an extraordinarily active year on renewable fuels policy.  NATSO will continue keeping members apprised of the latest developments and fighting for its their interests in Washington, D.C. 
 

 

 


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