v>EPA
United States Office of Transportation EPA420-F-05-057
Environmental Protection ^ \-rr\-t*.v
Agency and Air Quality December 2005
Regulatory
Announcement
EPA Completes Regulations
Clarifying the Default Standard for
2006 Under the Renewable Fuel
Standard Program
The U.S. Environmental Protection Agency (EPA) is adopting the default
standard for renewable fuel as set forth in the Energy Policy Act of
2005. The Energy Policy Act amended the Clean Air Act by establishing
a national renewable fuel program designed to significantly increase
the volume of renewable fuel that is blended into gasoline, starting with
calendar year 2006. The Act directs EPA to issue regulations by August
8, 2006, and provides that if EPA has not adopted such regulations
by that date, then 2.78 percent of the gasoline sold or dispensed to
consumers for calendar year 2006 must be renewable fuel. Given
the short time frame available and the need to provide certainty to
industry, EPA is finalizing a limited set of regulations that would interpret
and clarify the statutory default provision of 2.78 percent so it can be
implemented as intended for 2006.
Background
Section 1501 of the Energy Policy Act of 2005 (Energy Act or the Act)
amended the Clean Air Act by adding a new provision establishing a na-
tional renewable fuel program (also known as the Renewable Fuel Stan-
dard program or RFS program). This program is designed to significantly
increase the volume of renewable fuel that is blended into gasoline,
starting with calendar year 2006. The Act directs EPA to issue regulations
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by August 8, 2006, and provides that if EPA has not adopted such regula-
tions by that date, then 2.78 percent of the gasoline sold or dispensed to
consumers for calendar year 2006 must be renewable fuel.
EPA does not believe that it can meet the August 2006 statutory dead-
line. The issues that need to be resolved in adopting such comprehensive
regulations are complex, making it important for EPA to receive input
from the various stakeholders which will require significant amounts of
time and effort, including analysis of important issues such as feasibil-
ity, costs, emissions inventory impacts, and benefits. This work cannot
be completed in the context of a final rulemaking by August 2006 which
must be preceded by a notice and comment period. At the same time, it
is critical that industry be informed of how to demonstrate compliance
prior to August 2006 since the program begins in January 2006. The
default provisions in the Act are not self-explanatory, nor do they identify
the responsible parties or the method by which they must demonstrate
compliance. EPA is therefore establishing a limited set of regulations
that would interpret and clarify the statutory default provision for 2006.
The rule would provide certainty to the parties involved as to what their
responsibilities are for 2006, and will help to provide a smooth transition
to the long-term RFS program.
Action EPA is Taking in 2006
EPA interprets the default standard for 2006 with regulations identify-
ing the liable parties as refineries, importers, and blenders of gasoline.
Compliance with the default standard, however, will be determined on a
collective, rather than an individual, basis for 2006. Under this approach,
refineries, blenders, and importers together will be responsible for meet-
ing the default 2.78 percent standard, and compliance with this standard
will be calculated over the pool of gasoline sold to consumers. An in-
dividual refinery, blender, or importer will not be responsible for meet-
ing the 2.78 percent standard for the specific gasoline it produces. EPA
will determine compliance after 2006 using gasoline and renewable fuel
consumption data available from the Energy Information Administration,
supplemented by information readily available from other sources. If EPA
determines that the default standard had not been met in 2006 on this col-
lective basis, any deficit will be carried forward and applied as an adjust-
ment to the standard for 2007. The regulations implementing the default
standard for 2006 will not include any provisions for credit generation or
trading, given the collective nature of the obligation.
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Reason for EPA's Action
The rulemaking required to implement the full RFS program, including
both program design and the various analyses necessary, will require
a substantial effort involving many stakeholders. For instance, it will
require EPA to undertake an analysis of small business impacts under the
Small Business Regulatory Enforcement Flexibility Act (SBREFA), pro-
vide public notice and an opportunity for comment, including an opportu-
nity for a public hearing, a Regulatory Impact Analysis, and ultimately a
final rule. This process cannot occur prior to the start of the RFS program
in January 2006, nor does EPA anticipate that it can be completed by the
one-year deadline set in the Act. Therefore, the statutory default standard
of 2.78 percent will apply to calendar year 2006.
The regulated community may not be able to interpret and implement the
default standard provided in the Act without additional guidance from
EPA. For example, although the Act provided that the default standard
of 2.78 percent apply in 2006, in the event that EPA did not complete
regulations implementing the full renewable fuel program, the default
standard provision does not specify the liable parties. Absent an EPA
rulemaking, the resulting uncertainty associated with the default standard
would create confusion and risks a problematic initial implementation of
the RFS program. Allowing the default standard to go into effect with-
out EPA guidance could potentially result in significant disruptions in
the gasoline and renewable fuel production, blending, and distribution
systems.
In addition to meeting the need for clarity in the limited time frame avail-
able, we believe that the collective approach to compliance for 2006 is
reasonable given our expectation that the default standard will be met on
a collective basis in 2006 even without imposition of any RFS obliga-
tions. Estimates from the U.S. Department of Agriculture and Depart-
ment of Energy project total ethanol production for 2006 to be above 4.0
billion gallons, which also meets the 2.78 percent default standard. The
Renewable Fuel Association has also indicated that total ethanol produc-
tion capacity already exceeds 4 billion gallons and that additional pro-
duction capacity currently under construction exceeds 1.2 billion gallons.
If the default standard is not met on a collective basis for 2006, a deficit
carryover provision will allow for make-up of any shortfall by adjusting
the applicable collective industry standard in 2007 commensurately.
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EPA's Action for 2007 and Beyond
The default standard of 2.78 percent provided in the Act applies exclu-
sively to calendar year 2006, and the collective compliance approach will
likewise apply only to 2006. For 2007 and beyond, EPA will determine
and publish the applicable renewable fuel standard for each year and
develop a RFS credit trading program per statutory direction. This rule
will specifically identify liable parties, lay out the compliance program
including record-keeping and reporting requirements, and delineate all
elements of the credit trading program. All these and many other issues
impacting the full RFS program will be addressed in a subsequent EPA
rulemaking and are not discussed in the direct final rule.
Public Participation Opportunities
This rule is being released as a direct final rule because we view it as a
non-controversial action and anticipate no adverse comment. However,
comments can be submitted under a parallel NPRM. For instructions on
submitting written comments, please see the Federal Register notice,
which is available from the Web site below or from the EPA Air Docket
(202-566-1742; please refer to Docket No. OAR-2005-0161). You can
access the rule and related documents on EPA's Office of Transportation
and Air Quality (OTAQ) Web site at:
www.epa.gov/otaq/renewablefuels
For More Information
For more information on this direct final rule, please contact
David Korotney at:
U.S. Environmental Protection Agency
Office of Transportation and Air Quality
2000 Traverwood Drive
Ann Arbor, MI 48105
(734)214-4507
E-mail: korotney.david@epa.gov
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