D.C. Circuit 2019 RVO Decision is a Mixed Bag for Biofuels

The biofuels industry has had a challenging season in the courts. Several weeks ago, the U.S. Supreme Court overturned a decision by the U.S. Court of Appeals for the Tenth Circuit that had limited EPA’s ability to grant waivers to small refiners that allow them to escape compliance obligations under the federal Renewable Fuel Standard (RFS) Program. Then, the U.S. Court of Appeals for the District of Columbia Circuit (the D.C. Circuit) more recently invalidated an EPA rule that allowed 15% ethanol blends to be sold under the same vapor pressure restrictions as 10% blends (a decision which, ironically, increases the vapor pressure of fuel sold on the market).

The most recent bout of biofuels legal drama had more mixed results. On July 16, 2021, the D.C. Circuit issued a decision that resolved several challenges to its 2019 Renewable Volume Obligations (RVO) rulemaking. The RVO represents the amount of renewable fuel on a percentage basis that must be added to gasoline in a given year under the RFS Program, which is designed to reduce carbon emissions from the transportation sector. As is typical, the annual rulemaking was accompanied by challenges from all sides – environmental groups, biofuel producers, and petroleum interests. Renewable fuel producers challenged the volume requirements set in the 2019 RVOs as too low; petroleum groups challenged the 2019 RVOs as too high; and the environmental groups challenged the 2019 RVOs as harmful to the environment.

The Court ruled in favor of an environmental group’s claim that EPA failed to adequately consider the potential effects of its 2019 RVOs on endangered species.  The court went to great lengths to detail the inadequacy of EPA’s “no effects” finding – which was based on EPA’s conclusion that there is no relationship between the RFS Program, biofuel feedstock production, and land use changes that may harm listed species or critical habitat, despite prior EPA reports to the contrary – and ruled that because that finding was based on inadequate analyses, EPA ought to have consulted with the National Marine Fisheries Service (NMFS) and the Fish and Wildlife Service (FWS) about the potential impact of the rule. The court, however, stopped short of ordering EPA to engage in such consultation, and it did not vacate the 2019 RVOs. As a result, the renewable fuel standards set for that year remain in place, and EPA has an opportunity to go back and fix the 2019 analysis. EPA also has a better sense of what not to do in future years in its RVO Endangered Species Act analysis: make conclusory “no effects” findings that are undermined by prior scientific studies. Whether EPA will take a different route to the same no effects finding, or engage in consultation with the wildlife agencies, remains to be seen. The latter option would add additional layers of complexity and delay to an annual process that is already cumbersome and difficult to execute.

With respect to the biofuel challenges, the biofuel parties argued that EPA’s 2019 RVOs failed to account for billions of gallons of biofuels lost to small-refinery exemptions in 2018. In other words, the argument went, when EPA adjusted the required volume of biofuels down last year due to the inability of small refineries to meet their volume obligations, other refineries should have made up the difference the next year. The Court recently evaluated this question in the context of the 2018 RVOs and upheld the EPA’s adjustment methodology. The Court found that EPA’s approach to the small-refinery exemption was also reasonable here.

According to the petroleum groups, the 2019 RVOs should have been lowered because the cost of implementing the RFS is an economic hardship to the industry. The Court concluded that there was insufficient evidence to support such those claims, noting that a severe economic harm waiver requires “a high degree of confidence that severe harm would occur, as well as a demonstration that implementation of the RFS Program itself would cause severe economic harm”. As such, the Court found that EPA reasonably concluded that refiners can recover the cost of the RFS Program by increasing costs at the pump. Whatever the cause of the industries’ recent economic hit, it is not a result of carrying out the RFS Program. This finding comes as a win for the biofuels groups.

As the EPA is expected to issue the 2021 and 2022 RVOs in the coming weeks, biofuel producers and petroleum interests will watch to see how EPA implements the Court’s ruling. Environmental groups will be interested to see whether the EPA builds regular consultation with FWS and NMFS into the annual RVO process to withstand further judicial scrutiny. Proponents argue that the RFS Program must pick up speed if the U.S. is going to meaningfully decarbonize the transportation sector.

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