[Federal Register Volume 59, Number 147 (Tuesday, August 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17649]


[[Page Unknown]]

[Federal Register: August 2, 1994]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[AMS-FRL-5017-1]

 

Regulation of Fuels and Fuel Additives: Renewable Oxygenate 
Requirement for Reformulated Gasoline

AGENCY: Environmental Protection Agency.

ACTION: Final rule.

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SUMMARY: EPA's regulations for reformulated gasoline (RFG) based on the 
Clean Air Act, as amended, requires that gasoline sold in certain areas 
be reformulated to achieve the greatest possible reductions in vehicle 
emissions of toxic and ozone-forming compounds. Among other things, 
EPA's regulations establish standards requiring a specified oxygen 
content in reformulated gasoline. This rule promulgates additional 
regulations which require that 30 percent of the oxygen required by the 
Clean Air Act to be used in reformulated gasoline be derived from 
renewable feedstocks. This renewable oxygenate requirement will assure 
that implementation of the RFG program is consistent with the 
longstanding federal policy of promoting renewable fuels. The renewable 
oxygenate requirement is expected to have a positive energy impact by 
reducing the amount of fossil energy needed to meet the requirements of 
the reformulated gasoline program. In addition, this program is 
expected to stimulate the development of new technologies which would 
lead to reduced emissions of greenhouse gases and further reductions in 
fossil energy consumption.

EFFECTIVE DATE: This rule is effective on September 1, 1994, except 
Secs. 80.83 (g) and (h) are not effective until OMB has approved the 
Information Collection Requirements contained in them. EPA will publish 
a document in the Federal Register following OMB approval of the 
information collection requirements.

ADDRESSES: Materials relevant to this final rule (FRM) are contained in 
Public Docket A-93-49, located at Room M-1500, Waterside Mall (ground 
floor), U.S. Environmental Protection Agency, 401 M Street SW., 
Washington, DC 20460. Information relevant to this rulemaking may also 
be found in dockets A-91-02 and A-92-12, which are hereby incorporated 
into docket A-93-49 for the purposes of this rulemaking. The docket may 
be inspected from 8 a.m. until 4 p.m. Monday through Friday. A 
reasonable fee may be charged by EPA for copying docket materials.

FOR FURTHER INFORMATION CONTACT:
Paul Machiele, Regulation Development and Support Division, U.S. EPA 
(RDSD-12), 2565 Plymouth Road, Ann Arbor, MI 48105, Telephone: (313) 
668-4264.
Joann Jackson Stephens, Regulation Development and Support Division, 
U.S. EPA (RDSD-12), 2565 Plymouth Road, Ann Arbor, MI 48105, Telephone: 
(313) 668-4276.

    To request copies of this rule contact: Delores Frank, Regulation 
Development and Support Division, U.S. EPA (RDSD-12), 2565 Plymouth 
Road, Ann Arbor, MI 48105, Telephone: (313) 668-4295.

SUPPLEMENTARY INFORMATION: A copy of this action is available on the 
OAQPS Technology Transfer Network Bulletin Board System (TTNBBS). The 
TTNBBS can be accessed with a dial-in phone line and a high-speed modem 
(PH# 919-541-5742). The parity of your modem should be set to none, the 
data bits to 8, and the stop bits to 1. Either a 1200, 2400, 9600, or 
14400 baud modem should be used. When first signing on, the user will 
be required to answer some basic informational questions for 
registration purposes. After completing the registration process, 
proceed through the following series of menus:
    (M) OMS
    (K) Rulemaking and Reporting
    (3) Fuels
    (9) Reformulated gasoline.

A list of ZIP files will be shown, all of which are related to the 
reformulated gasoline rulemaking process. Today's action, as well as 
the Regulatory Impact Analysis & Response to Comments Document, will be 
in the form of ZIP files and can be identified by the following titles: 
ROXY-PRE.ZIP, ROXY-REG.ZIP, and ROXY-RIA.ZIP. To download these files, 
type the instructions below and transfer according to the appropriate 
software on your computer:

ownload, rotocol, xamine, ew, ist, or elp Selection 
or  to exit: D filename.zip

    You will be given a list of transfer protocols from which you must 
choose one that matches with the terminal software on your own 
computer. The software should then be opened and directed to receive 
the file using the same protocol. Programs and instructions for de-
archiving compressed files can be found via ystems Utilities from 
the top menu, under rchivers/de-archivers.
    Please note that due to differences between the software used to 
develop the document and the software into which the document may be 
downloaded, changes in format, page length, etc. may occur.

I. Background

A. Clean Air Act Requirements

    The primary purpose of the federal reformulated gasoline program is 
to improve air quality by reducing motor vehicle emissions of toxic and 
tropospheric ozone-forming compounds, as prescribed by section 211(k) 
of the Clean Air Act as amended (CAA or the Act). The Act mandates 
certain requirements for the reformulated gasoline program. Section 
211(k)(2) requires a minimum content of 2.0 weight percent oxygen and 
maximum content of 1.0 volume percent benzene, and section 211(k)(3) 
sets minimum performance standards for emissions of ozone forming 
volatile organic compounds (VOC), oxides of nitrogen (NOX), and 
air toxics. To meet the oxygen content requirement, oxygenates must be 
added to gasoline. The two most common oxygenates used today are methyl 
tertiary-butyl ether (MTBE) and ethanol. MTBE is an ether derived 
primarily from isobutylene, a product typically produced from natural 
gas or petroleum, and methanol, which in turn is also produced 
primarily from natural gas. Ethanol is an alcohol produced primarily 
from corn, though it can be produced from other feedstocks as well. A 
third oxygenate, ethyl tertiary butyl ether (ETBE), is an ether derived 
from ethanol and isobutylene. A number of other oxygenates such as 
tertiary amyl methyl ether (TAME) and tertiary amly ethyl ether (TAEE) 
are currently under consideration by the industry as well. Their 
ultimate use will depend on their relative economics compared to those 
oxygenates currently in use.
    Section 211(k)(1) of the Act directs EPA to promulgate regulations 
establishing requirements for reformulated gasoline. It also provides 
that such regulations require the greatest reductions in VOC and toxics 
emissions, taking into consideration the cost of achieving such 
emission reductions, non-air-quality and other air-quality related 
health and environmental impacts and energy requirements.

B. Historical Background

    There is considerable history behind EPA's decision to promulgate a 
renewable oxygenate requirement. Congress and both the past and the 
present Administrations have long supported the development and use of 
renewable fuels for a variety of reasons, including a desire to reduce 
oil imports, save fossil energy, reduce global warming emissions, and 
develop domestic sources of fuel. This support has taken the form of a 
number of legislative and policy initiatives. For example, since 1978 
renewable fuels have been eligible for an excise tax credit which today 
is set at 54 cents/gallon. The Departments of Energy and Agriculture 
have invested hundreds of millions of dollars in research and 
development related to the production and commercialization of 
renewable fuels. As a result of these programs, the ethanol industry 
developed into a significant industry which by 1990 represented roughly 
one percent of the nation's gasoline consumption.
    The 1990 amendments to the Clean Air Act provided ethanol blends 
with a limited waiver from vapor pressure limits placed on the 
volatility of conventional gasolines, in order to maintain the ease 
with which ethanol could be blended with gasoline. Furthermore, the 
1990 amendments to the Clean Air Act included several provisions which 
many expected to further stimulate demand for renewable oxygenates such 
as ethanol. These provisions included the wintertime oxygenated fuels 
program which began in 1992 and has already considerably increased the 
demand for ethanol, and the year-round reformulated gasoline program 
which is to begin in December of 1994. EPA promulgated final 
regulations for RFG on December 15, 1993 (59 FR 7716, February 16, 
1994).
    In the process of developing the regulations for the RFG program, 
EPA entered into a regulatory negotiation with interested parties 
shortly after passage of the Clean Air Act Amendments of 1990. Included 
in the negotiations were representatives of the States, oxygenate 
producers, farm interests, environmental groups, the oil industry, the 
automobile industry, the driving public, the EPA, and the Department of 
Energy. (See 56 FR 31176, July 9, 1991, for an explanation of the 
members of the negotiating committee and a discussion of the process 
for selecting them.) After extensive discussions, an Agreement in 
Principle was signed by all members of the advisory committee in August 
of 1991.
    The 1991 regulatory negotiation agreement formed the basis for 
EPA's April 1992 Supplemental Notice of Proposed Rulemaking (SNPRM) (57 
FR 13416, April 16, 1992) for reformulated gasoline. In order to ensure 
compliance with the minimum reductions in ozone forming volatile 
organic compounds (VOCs) required by Congress for the RFG program, this 
proposal did not extend the volatility waiver for ethanol-blended 
conventional gasoline to RFG. In response, members of the ethanol 
industry submitted comments to EPA which expressed their concern that 
the proposed reformulated gasoline rules would effectively exclude 
ethanol from the reformulated gasoline market.
    Ethanol, when added to gasoline in the amount needed to satisfy the 
oxygen content requirement of the Act, raises the Reid vapor pressure 
(RVP) of the resulting blend by about 1 psi, making it more difficult 
for ethanol blends to meet the mass VOC performance standards than 
blends using other oxygenates. For ethanol to be used in summertime 
RFG, a gasoline blendstock with an RVP low enough to offset the 
increase resulting from adding ethanol would have to be obtained. The 
contention was that obtaining such blendstocks would be both difficult 
and expensive, because ``sub-RVP'' blendstocks would be more costly to 
refine and distribute and because blendstock production would be 
controlled by petroleum refiners. The ethanol industry representatives 
believed that the oil industry would have a tendency to rely almost 
exclusively on MTBE over ethanol because MTBE does not boost a fuel's 
RVP and is readily blended at the refinery and distributed through the 
existing gasoline infrastructure, since, unlike ethanol, it does not 
raise materials compatibility or water adsorption concerns with the 
existing gasoline distribution infrastructure. Thus, there would be 
little incentive to make the sub-RVP blendstock necessary for ethanol 
blending into summertime RFG. The ethanol industry representatives also 
contended that refiners would not want to switch oxygenates during the 
course of the year and would therefore utilize MTBE year-round, thereby 
eliminating any RFG market for ethanol.
    For this reason, ethanol and farm interests sought a summer 
volatility waiver for ethanol-based reformulated gasolines. Other 
signatories to the regulatory negotiation agreement, such as the oil 
industry, methanol and ether producers, states, and environmental 
groups, opposed such a waiver because it could eliminate most or all of 
the VOC benefits of the RFG program if ethanol was used in large 
volumes. At the request of ethanol and farm interests, the Agency held 
a public hearing to receive testimony on this and other issues in June 
of 1992 in Chicago.
    In an attempt to address the role of ethanol, the Agency 
subsequently proposed a renewable oxygenate program (ROP) (58 FR 11722, 
February 26, 1993) to provide incentives for the use of ethanol and 
other renewable oxygenates in reformulated gasoline. The objective of 
the ROP was to provide incentives for the use of renewable oxygenates 
in the reformulated gasoline program in the summer while maintaining 
the overall environmental benefits of the program. Ethanol was 
considered a renewable oxygenate because it is produced primarily from 
agricultural sources such as corn, which can be regenerated. Other 
oxygenates such as MTBE are produced primarily from nonrenewable 
resources, such as petroleum and/or natural gas.
    For a variety of reasons, as explained in section II of the 
preamble and section I of the Regulatory Impact Analysis (RIA) for the 
reformulated gasoline final rule, EPA decided not to promulgate the 
ROP. First, EPA received comments from virtually all constituencies 
affected by the rulemaking, including the ethanol industry, stating 
that the ROP as proposed was neither feasible nor workable. While EPA 
believed that a feasible program could be structured, EPA also 
acknowledged that it could represent a considerable burden on the 
industry. Second, the ROP would have reduced the RFG program's VOC 
emission control benefits because it provided an incentive for the use 
during the summer months of an oxygenate which exhibited commingling-
related emission increases. (Combining ethanol blends and non-ethanol 
blends in consumer fuel tanks, even if both have identical low RVPs, 
results in a mixture with significantly higher fuel volatility and 
hence significantly higher VOC emissions. This effect is referred to as 
commingling.) The commingling effect, along with other unique 
distillation effects of ethanol on evaporative emissions and other 
provisions of the ROP as proposed, were estimated in the RIA for the 
RFG final rule to result in approximately a 6.0-7.5 percent increase in 
VOC emissions compared to an RFG program without such incentives. While 
difficult to estimate due to uncertainty in future ethanol and ETBE 
market shares and lack of sufficient data to reliably quantify the 
distillation effects, such an increase in VOC emissions amounts to a 
loss of about 40 to 50 percent of the minimum VOC control that is 
required under section 211(k)(3) for reformulated gasoline during the 
summer, even though the average RVP of the RFG produced by refiners 
remained the same. Thus, EPA's analysis indicated that the proposal 
would not maintain the environmental benefits of reformulated gasoline. 
A third concern with the ROP was that the program would have created an 
incentive for the use of renewables but in no way assured their use. 
Upon consideration of these and other factors, the Agency decided not 
to finalize the ROP. Other options considered did not resolve the 
concerns raised with the ROP as proposed. (The reader is referred to 
section II of the Preamble and section I of the RIA for the 
reformulated gasoline final rule for a description of the options and 
alternatives to the ROP considered.)
    Hence, the final rule for reformulated gasoline does not include 
provisions to provide incentives for the use of renewable oxygenates. 
This left substantial uncertainty regarding the magnitude of the role 
renewable oxygenates would play in the roughly 35 percent of the U.S. 
gasoline market expected to be covered by the RFG program.

C. Renewable Oxygenate Requirement Proposal

    To address the issues discussed above, at the same time EPA issued 
the final rules for RFG, it also proposed (58 FR 68343) a year-round 
requirement that 30 percent of the mandatory oxygen content 
specification for reformulated gasoline be obtained from renewable 
oxygenates. To ensure that the ozone benefits from the reformulated 
gasoline program are not adversely affected by that requirement, EPA 
proposed that during the VOC control period (i.e., the summer months) 
only renewable oxygenates that do not exhibit volatility-related 
commingling effects when mixed with gasoline would receive renewable 
oxygenate credit. All approved renewable oxygenates, including ethanol, 
were expected to be acceptable during the non-summer months when 
commingling-related volatility increases have relatively little effect 
on VOC emissions and when ozone exceedances are rare. Also included in 
the proposal were provisions for averaging and credit trading in order 
to provide maximum flexibility to refiners and fuel importers in 
complying with the program.
    EPA presented several justifications for proposing a renewable 
oxygenate requirement for reformulated gasoline. The Agency concluded 
that expanding the use of renewable fuels produced from resources such 
as corn, grain, wood, organic waste products, and municipal solid waste 
could help cut dependence on foreign oil and reduce primary energy use 
by 20% or more as compared to nonrenewable oxygenates. The Agency also 
believed that renewable oxygenates offered potential air quality 
advantages (such as lower emissions of VOCs and greenhouse gases) as 
well as jobs-creation benefits. The Agency also stated its belief that 
the 30 percent requirement for renewable oxygenates was an appropriate 
level to ensure that renewables were not excluded from the reformulated 
gasoline oxygenate market while allowing the remaining 70 percent of 
the market to be open to all fuels, regardless of their renewables 
content.
    The proposed renewable oxygenate requirement would be applied in 
conjunction with the reformulated gasoline program. It did not alter 
the performance standards or other provisions for the reformulated 
gasoline outlined in the final rulemaking for reformulated gasoline. In 
addition, the proposal did not mandate the use of any particular 
oxygenate, but rather ensured some minimum use of the class of 
oxygenates deemed renewable, defined in the proposal as ethanol and 
methanol from renewable sources, and their ether derivatives. This 
proposal was designed to supplement and not negate the Agreement in 
Principle arrived at through regulatory negotiation.
    EPA received over 12,000 comments in response to the renewable 
oxygenate proposal. The vast majority of these comments were letters 
supporting the proposal written by farmers, ethanol producers, and 
their supporters. Several hundred responses containing detailed, 
substantive, technical comments were received from representatives of 
the oil industry, the ethanol industry, corn farming and other 
agricultural interests, methanol producers, environmental groups, 
federal agencies, and state and local governments. Some of these 
comments supported the proposal while others opposed it. Detailed 
responses to many of the comments are provided in subsequent sections 
of this preamble and in the Regulatory Impact Analysis (RIA) in the 
docket.
    The remainder of this preamble is organized into the following 
sections:

    II. Overview of the Renewable Oxygenate Requirement
    III. Renewable Oxygenate Requirement for Reformulated Gasoline
    IV. Enforcement of the Renewable Oxygenate Requirement
    V. Federal Preemption
    VI. Environmental, Energy, and Economic Impacts
    VII. Public Participation
    VIII. Compliance with Regulatory Flexibility Act
    IX. Statutory Authority
    X. Administrative Designation and Regulatory Analysis
    XI. Compliance with the Paperwork Reduction Act

II. Overview of the Renewable Oxygenate Requirement

    EPA is hereby promulgating a renewable oxygenate requirement for 
reformulated gasoline similar to that proposed on December 15, 1993 (58 
FR 68343, December 27, 1993). EPA believes that this action will ensure 
that the requirements for the reformulated gasoline program promulgated 
on December 15, 1993 (59 FR 7716, February 16, 1994) are consistent 
with existing government programs and initiatives supporting renewable 
fuels. For many years, both Congress and the Executive Branch have 
promoted through various actions the use of renewable fuels and the 
development of the renewable fuels industry for various energy, 
economic, environmental, and agricultural policy objectives. Renewable 
fuels have been viewed as a key element of policies to enhance domestic 
energy security, reduce oil imports, conserve fossil energy resources, 
and reduce emissions of greenhouse gases.
    Congress, along with present and past Administrations, has 
supported these goals through a variety of mechanisms. The Departments 
of Energy (DOE) and Agriculture (USDA) have invested hundreds of 
millions of dollars over the past 20 years to research and develop 
renewable fuel feedstocks and production techniques. Congress has 
supported the increased use of renewable fuels since the late 1970's 
through various legistative actions. The Energy Security Act of 1980 
established a number of federal policies to expand fuel ethanol 
production and use. The Omnibus Budget Reconciliation Act of 1987 
stated the intent of Congress to expand ethanol use. Under the 
Alternative Motor Fuels Act (AMFA) of 1988, the Alternative Fuels 
Council identified a significant role for ethanol. The National Energy 
Policy Act (EPACT) of 1992 includes provisions to stimulate the use of 
a wide-range of alternative (nonpetroleum) fuels, including several 
renewable fuels. Congress and prior Administrations have also 
stimulated renewable fuel use through mechanisms such as the 1.0 psi 
volatility waiver in the CAAA for gasoline (other than reformulated 
gasoline) blended with ethanol (the major renewable fuel in use today), 
the oxygen content requirements of the wintertime oxygenated gasoline 
and reformulated gasoline programs, and various economic incentives 
such as tax credits since 1978 (currently equal to 54 cents per gallon 
of renewable fuel).
    These programs, combined with additional tax incentives in many 
states and continued innovation in production techniques, have helped 
the renewable fuels industry develop and grow. It has become 
economically attractive to add ethanol to conventional gasoline in many 
areas of the country, primarily by splash-blending ethanol with 
gasoline. This process involves mixing ethanol into finished gasoline 
at the terminal. (Due to materials compatibility concerns and the 
hygroscopic properties of ethanol, ethanol generally is not added into 
the existing gasoline distibution system at the refineries.) The 
resulting ethanol blend, commonly known as gasohol, has higher 
volatility than either the ethanol or the original gasoline in 
isolation.
    Until EPA's Phase I volatility controls went into effect in 1989, 
gasoline volatility was essentially unregulated. EPA's volatility 
control program reversed the upward trend in gasoline volatility, and 
the resulting considerable increase in evaporative VOC emissions, by 
establishing limits on the volatility of summer gasoline. In 
promulgating the volatility control program, however, EPA granted a one 
pound per square inch (psi) volatility waiver for ethanol-containing 
blends. This waiver permitted continuation of splash blending of 
ethanol into gasoline without regulatory impediment, thereby avoiding 
what could have been a significant disruption to the existing market 
for fuel ethanol. For ethanol to continue to be blended in the absense 
of the waiver, refiners would have had to produce and market a special 
low volatility gasoline specifically for blending with ethanol. Since 
there was no assurance refiners would be willing to do so, the rule 
could have caused a dramatic decrease in the market share for ethanol 
blends that had developed under the existing Congressional and 
Administration programs. EPA believed it was important to avoid such a 
disruption to the ethanol industry, and as a result, granted a 1.0 psi 
volatility waiver.
    EPA believed that such a waiver would not significantly jeopardize 
the rule's air quality objectives for several reasons. First, even with 
the waiver the volatility of ethanol blends would be reduced 
considerably. In fact, the volatility of the ethanol blends would be 
reduced by the same amount (though not to the same level) as that of 
non-ethanol blends. Second, ethanol's market share was small, 
particularly in most ozone nonattainment areas, so the potential impact 
on ozone levels was thought to be small. At the then existing market 
share for ethanol, the waiver reduced by only about 3 percent the 
volatility control that otherwise would have been achieved by both 
phases of the volatility control program. Third, the rulemaking neither 
required the use of oxygenates such as ethanol in gasoline nor was it 
expected to increase their use. Were this not the case, the 
environmental impacts of the waiver could have been considerably 
greater. Congress later incorporated a similar volatility waiver in the 
1990 amendments to the Clean Air Act, when it established statutory 
limits on the volatility of conventional gasoline.
    As a result of the Federal and State initiatives and with the 
continued blending flexibility afforded by the volatility waiver, the 
market for ethanol grew from a fledgling industry in 1978 to a market 
which stabilized at approximately 0.8 billion gallons per year by 1990, 
an amount equivalent to slightly less than 1% of nationwide gasoline 
consumption.
    With the passage of the CAAA of 1990, the industry once again began 
to expand considerably. The oxygenated fuels program required by 
section 211(m) of the CAA requires that, during the winter months, all 
gasoline sold in certain cities with a history of exceedences of EPA's 
national ambient air quality standard (NAAQS) for carbon monoxide (CO) 
must contain oxygenates. Under this program (which began with the 
winter of 1992-93), ethanol has captured approximately 30% of the 
resulting oxygenate market. As a result, the demand for ethanol has 
grown by roughly 50% to an estimated 1.25 billion gallons in 1993.
    The oxygenate requirements of the reformulated gasoline program 
contained in section 211(k) of the CAA also provide the potential to 
expand considerably the market for ethanol and other renewable 
oxygenates. RFG is required in the nine cities with the nation's worst 
ozone pollution problem and has been adopted for many other ozone 
nonattainment areas as well as a key component in their efforts to 
improve air quality. The areas which will use RFG are estimated to 
represent 35% of all gasoline sold in the United States.
    The VOC emission performance standards for reformulated gasoline 
raised concerns in the ethanol industry that just as under the gasoline 
volatility control program, they will be unable to compete in the RFG 
market without a volatility waiver. However, section 211(k)(3) of the 
CAA establishes minimum emission performance standards that RFG must 
meet, with no allowance for a volatility waiver for ethanol-blended 
RFG. Furthermore, as discussed in the RFG final rule (59 FR 7716), 
providing such a waiver for ethanol-containing RFG would have 
jeopardized the emission benefits which Congress mandated the RFG 
program to achieve. For these reasons, the final regulations for 
reformulated gasoline do not contain such a volatility waiver for 
summer RFG.
    Thus, ethanol cannot be splash-blended into unmodifed gasoline 
blendstocks and still have the resulting blend comply with the RFG 
emission performance standards. Instead, either special reduced-
volatility (``sub-RVP'') blendstocks would be necessary during the 
summer, or the ethanol would have to be converted into ETBE. Many in 
the ethanol industry have continued to express concern that refiners 
would not produce such blendstocks. If that were to occur, ethanol 
producers would lose access during the summer months to those current 
markets which will be covered by the RFG program. This loss of access, 
the ethanol industry contends, could also lead to a reduced market 
share in RFG areas in the winter months, even though no volatility 
restrictions apply during those months. EPA has received numerous 
letters from various members of Congress emphasizing their belief that 
the RFG program was intended to provide a significant new market for 
ethanol and other renewable oxygenates. EPA has also received numerous 
letters from members of Congress opposing a renewable oxygenate 
requirement. In general, they were not opposed to the use of renewable 
oxygenates, but rather to EPA requiring their use. As discussed in 
section III.A, there was also a considerable amount of discussion 
concerning this issue during the Congressional debate over the 1990 
CAAA.
    As stated in the RFG final rule, EPA continues to believe that 
ethanol will not be excluded from the oxygenate market under the RFG 
program. Rather, EPA believes that many refiners will find it 
economically attractive to blend ethanol in RFG. As a result, EPA 
believes a market for ethanol will continue following implementation of 
the RFG program. The RFG program represents a major new market for 
oxygenates such as ethanol. Nevertheless, EPA has received comments 
stating that without promulgation of today's rulemaking or other 
similar measures, creation of additional ethanol and renewable 
oxygenate blending capacity beyond that currently underway is in doubt. 
EPA recognizes that concerns over the marketability of ethanol in RFG 
have created substantial uncertainty for ethanol producers and 
investors.
    EPA believes that today's action will reduce that uncertainty and 
make the RFG program consistent with long-running Congressional and 
Administration policies to promote renewable fuels. This program 
represents an attempt to harmonize the goals of greater reliance on 
renewable fuels and air quality improvements through the use of RFG. 
Specifically, the renewable oxygenate requirement will ensure that RFG 
regulations do not inappropriately limit the growth of the renewable 
oxygenate industry. It will ensure that several oxygenates will be used 
in the RFG program and provide the renewable oxygenates a minimum 
market.
    It should be noted that the program encourages the use of all 
renewable oxygenates, not any one renewable oxygenate (as discussed 
more fully in section III). By providing market certainty the program 
will encourage expanded private investment in new, more efficient and 
environmentally beneficial renewable fuel production technologies. Such 
potential renewable oxygenates include ethanol from cellulosic plant 
material and waste cellulose and MTBE derived from methanol which was 
produced from municipal solid waste, landfill gas, or sewage sludge.
    The program establishes a minimum 30% market share for renewable 
oxygenates. This level represents a market share for renewables that 
EPA believes would likely have been achieved through open competition 
with nonrenewable oxygenates in the absence of VOC emission 
restrictions, based on experience under the oxygenated fuels program. 
At this market share an estimated 1.7 volume percent (on an ethanol 
equivalent basis) of reformulated gasoline will be derived from 
renewable resources.
    EPA is promulgating the renewable oxygenate program because of the 
important benefits of the program. First, EPA believes the program will 
help conserve fossil energy resources and minimize any detrimental 
effects the reformulated gasoline program may have on energy 
consumption. Second, EPA believes that the program has the potential to 
provide global warming benefits by providing stimulus to the market to 
develop new, more efficient production processes for renewable 
oxygenates and their feedstocks. In addition, EPA believes that the 
program as structured maintains the environmental benefits of the 
reformulated gasoline program as promulgated on December 15, 1993, and 
has the potential to increase these benefits through the incentives it 
provides for increased ETBE use during the summer months.
    The reformulated gasoline program promulgated in December of 1993 
is projected to cause an increase in fossil energy consumption, as 
discussed in more detail in sections III.H and VI of this notice. 
Today's action is intended to mitigate to some extent the increase in 
fossil fuel consumption that otherwise would result from implementation 
of the RFG program. Today's action also provides the certainty needed 
to encourage private investment in more advanced and energy-efficient 
production facilities and more diverse feedstock utilization. This will 
not only increase the fossil energy benefits of this program, but also 
provide the opportunity for reductions in greenhouse gas emissions.
    Today's action will also create incentives to utilize ETBE during 
the summer months. Its use, relative to MTBE or ethanol, has the 
potential to achieve slightly greater VOC emission reductions beyond 
those required by the final rule for RFG. Ethanol-containing gasoline, 
when mixed with other gasoline, causes the mixture to produce greater 
VOC emissions than the original fuels would produce. This can occur 
even in a vehicle fuel tank. This effect is called commingling and is 
discussed in sections III.C and VI of this notice and in the Regulatory 
Impact Analysis for the reformulated gasoline final rule. The effect of 
such commingling on VOC emissions is not controlled directly by the RFG 
program. As a result, to the extent that ETBE use displaces ethanol use 
during the summer months, additional VOC emission benefits are 
possible. In addition, ETBE possesses front-end distillation 
characteristics relative to both ethanol and MTBE which are also not 
controlled in the reformulated gasoline final rule, and which may 
provide further (though not quantifiable with any certainty at the 
present time) VOC emission benefits during the summer should its use 
increase as a result of the incentives created by today's program.
    Finally, EPA believes that this program is designed in a way which 
provides maximum compliance flexibility for refiners and minimizes 
their burden. The program is an annual program with provisions for a 
refiner to average over the course of the year or trade credits with 
other refiners anywhere in the country. EPA believes that by designing 
the program in such a way, the objectives can be met at a minimum cost. 
These provisions are especially important during the initial startup of 
the program. While the renewable oxygenate program takes effect for 
refiners beginning December 1, 1994, individual refiners do not need to 
blend any renewable oxygenate into their gasoline until later in the 
year or at all if they so desire. They will just have to demonstrate 
that they met the requirements over the course of the entire year 
through either the blending of greater than 15% renewable oxygenates in 
the latter part of the year, or the purchase of credits from other 
refiners. As a result, the averaging and trading provisions effectively 
provide refiners with additional time to meet the initial requirements 
of the program.

III. Renewable Oxygenate Requirement for Reformulated Gasoline

A. Legal Authority

1. Introduction
    The final rule adopted today is a reasonable exercise of the 
discretionary authority granted the agency under section 211(k)(1) of 
the Act. EPA interprets the first sentence of section 211(k) as broad 
authority to adopt reasonable requirements for reformulated gasoline, 
unless otherwise prohibited by the Clean Air Act or other statutory 
provision. EPA interprets the second sentence of section 211(k)(1) as 
authorizing EPA to adopt regulations for the reformulated gasoline 
program that result in the greatest emission reductions achievable, and 
at the same time tend to optimize the resulting impacts on cost, energy 
requirements, and other health and environmental impacts. In effect, 
EPA has full authority to adopt emission reduction standards and other 
requirements that achieve this result.1
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    \1\Various commenters argued that statements in the Regulatory 
Impact Analysis supporting the FRM signed on 12/15/93 showed that 
EPA believed it did not have the legal authority to require the use 
of renewable oxygenates. To the contrary, EPA's proposal, also 
signed on 12/15/93, clearly described EPA's view that it did have 
the authority to require the use of renewable oxygenates. The 
statements in the RIA address renewable oxygenate requirements that 
would be significantly different from that proposed in December and 
would raise many of the same concerns described in the preamble to 
the final rule, such as increased emissions in the summertime from 
increased use of ethanol in the summertime. The prior statements in 
the RIA are not relevant to the proposal issued by EPA in December.
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2. Analysis of the Text of the Statute
    An analysis of EPA's authority starts with the text of the statute. 
Under the first sentence of that paragraph, EPA is authorized to:

promulgate regulations under this section establishing requirements 
for reformulated gasoline to be used in gasoline-fueled vehicles in 
specified nonattainment areas.

Under the second sentence of section 211(k)(1), EPA's regulations are 
to:

require the greatest achievable reduction in emissions of ozone 
forming volatile organic compounds (during the high ozone season) 
and emissions of toxic air pollutants (during the entire year) 
achievable through the reformulation of conventional gasoline, 
taking into consideration the cost of achieving such emission 
reductions, any nonair-quality and other air-quality related health 
and environmental impacts and energy requirements.

    Section 211(k)(1) provides EPA general authority to establish 
reasonable requirements for reformulated gasoline, including emissions 
reduction requirements. Other provisions in section 211(k) address 
various specific elements of the program, such as minimum requirements 
for various fuel parameters (section 211(k)(2)), minimum emissions 
reduction requirements (section 211(k)(3)), certification requirements 
(section 211(k)(4)), prohibited acts (section 211(k)(5)), state opt-
ins, (section 211(k)(6)), and credit programs (section 211(k)(7)).
    This interpretation of section 211(k)(1) is supported by the plain 
meaning of that provision. On its own terms, the first sentence stands 
as a general grant of authority to establish any reasonable requirement 
for reformulated gasoline, with no explicit restriction on this 
authority other than a one year deadline for agency action.
    The first sentence of section 211(k)(1) both grants authority to 
the agency and establishes a deadline for agency action. This structure 
is not at all uncommon, and was employed by Congress in several similar 
provisions adopted in 1990. See, e.g., section 211(h)(1) (regulation of 
Reid vapor pressure), section 211(i)(2) (regulation of motor vehicle 
diesel fuel), section 211(l) (regulation of gasoline detergent 
additives), and section 202(a)(6) (regulation of refueling emissions 
from motor vehicles). The general framework of section 211(k) is also 
not unique--a grant of broad general authority in (k)(1) followed by 
several detailed provisions that ensure certain minimum actions are 
taken. This is consistent with the approach taken by Congress in 
various other provisions of Title II of the Clean Air Act. For example, 
Congress granted EPA broad, general authority to regulate motor 
vehicles and their fuels, as in section 202(a) and section 211(c)(1). 
These grants of broad, general authority were then supplemented by 
detailed provisions providing specific actions that Congress expected 
in these areas. See, e.g., section 202(b), (f), (g), (h), and (i), as 
well as sections 211(c)(2), 211(g), prior to the 1990 amendments, and 
the various paragraphs of section 211 cited above.
    The regulations adopted today are a reasonable exercise of this 
discretionary authority. They further Congressional goals by fostering 
achievement of the important benefits that Congress expected to flow 
from this program. They are not prohibited by any provision of the Act 
or any other law, and are well within the range of authority granted by 
Congress.
    The plain meaning of the second sentence of section 211(k)(1) 
corroborates EPA's view on it authority to issue this rule. This 
provision requires promulgation of regulations that require a certain 
result. The result desired by Congress is clear--the greatest 
achievable reductions, taking into consideration cost, energy, 
environmental and other impacts. There is no indication that EPA's 
authority is limited to establishing emissions reduction standards. In 
fact, this provision would authorize EPA to adopt all reasonable 
requirements designed to achieve the required result. The regulation 
adopted today is designed to ensure that the emissions reduction 
requirements for reformulated gasoline are achieved in a manner that 
reasonably optimizes the energy, cost, environmental, and other impacts 
of this program. The regulations adopted today, in combination with the 
regulations promulgated in December 1993, act together to achieve this 
result.
    Finally, EPA believes that section 211(k)(4) does not preclude the 
renewable oxygenate provisions proposed herein. Section 211(k)(4) 
states that the Administrator ``shall certify a fuel formulation or 
slate of fuel formulations as complying with this subsection if such 
fuel or fuels--(i) comply with the requirements of paragraph (2), and 
(ii) achieve equivalent or greater reductions * * * than are achieved 
by a reformulated gasoline meeting the applicable requirements of 
paragraph (3).'' This could be interpreted as requiring certification 
of a fuel that met the oxygen and other requirements of paragraph (2) 
and the emissions requirements of paragraph (3) even if it did not 
comply with the proposed renewable oxygenate requirement. Section 
211(k)(1), however, authorizes EPA to establish requirements above and 
beyond those required under paragraph (2) and (3), and section 
211(k)(1) and (4) must be read together to provide a meaningful 
interpretation to both provisions. EPA believes that a reasonable 
interpretation requires certification of a fuel as reformulated as long 
as it complies with the requirements of paragraphs (2) and (3), as well 
as any additional requirements established under paragraph (1). Since 
the renewable oxygenate provision is an additional requirement 
established under section 211(k)(1), certification is not required 
under section 211(k)(4)(B) unless a fuel or slate of fuels complies 
with the requirement.
3. Analysis of the Legislative History
    The legislative history of the reformulated gasoline provision 
supports and is consistent with EPA's interpretation of section 211(k). 
Changes made to various bills during the course of congressional 
review, as well as floor debates in the respective houses, indicate EPA 
was provided broad general authority to adopt requirements designed to 
achieve the objectives for this program. EPA's renewables requirement 
does just that, without inappropriately impinging on refiners' and 
importers' operational flexibility.
    a. House of Representatives--The bill reported by the House 
Committee on Energy and Commerce included provisions on reformulated 
gasoline that roughly paralleled the current provisions of section 
211(k)(1). Under that provision, EPA was required to:

promulgate regulations under section 211 establishing specifications 
for cleaner gasoline to be used in conventional gasoline fueled 
vehicles. Such standards shall require the greatest reduction in 
ozone-forming volatile organic compounds and air toxic emissions 
achievable through the reformulation of conventional gasoline, 
taking into consideration the cost of achieving such emission 
reductions, and health, environmental and energy impacts.2
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    \2\H. Rep. No. 101-490, 101st Cong. 2d Sess. 60 (1990); 
reprinted at 1 A Legislative History of the Clean Air Act Amendments 
of 1990 at 3021 (1993) (`` Leg. Hist.'').

    This provision is similar to current section 211(k)(1) in that it 
provides general authority to establish ``specifications'' for 
reformulated gasoline, and separately requires that these regulations 
include requirements to obtain the greatest achievable reductions in 
VOCs and air toxics. The Committee Report's description of this 
provision is fairly brief, with no indication that this general 
authority is limited to establishing emission reduction 
requirements.3
---------------------------------------------------------------------------

    \3\2 Leg. Hist. at 3321-21.
---------------------------------------------------------------------------

    Certain changes were made to this provision prior to its adoption 
by the House, reflecting an intent to expand at least somewhat the 
scope of agency authority. First, while the Committee bill authorized 
EPA to establish ``specifications'' for cleaner gasoline, the House 
bill used broader language authorizing EPA to establish 
``requirements,'' as currently found in section 211(k)(1). Likewise, 
the second sentence of the Committee bill provision referred to ``such 
standards,'' while the House bill broadened this to ``such 
requirements.''4 The House intended to broaden EPA's authority, 
not limit it, and these changes were eventually adopted by Congress.
---------------------------------------------------------------------------

    \4\S.1630 as passed by the House of Representatives; 2 Leg. 
Hist. at 2059.
---------------------------------------------------------------------------

    The Committee bill was amended in several other significant ways 
prior to final passage by the House. For example, many of the specific 
reformulated gasoline requirements now found in section 211(k)(2) 
through (10) were first debated and adopted on the floor of the House. 
Nonetheless, the general structure of section 211(k)(1) stayed the same 
with the exceptions noted above. This indicates that from the very 
beginning the House intended to provide EPA with broad general 
authority to establish reasonable requirements for a reformulated 
gasoline program. The vast bulk of the legislative history in the House 
is directed at the subsequent adoption of fairly specific minimum 
requirements for reformulated gasoline, with no indication that 
Congress intended to otherwise limit this broad, general grant of 
agency authority.
    b. Senate--The legislative history in the Senate likewise shows a 
desire to broaden EPA's authority in this area. The bill reported out 
of the Senate Committee on Environment and Public Works started from a 
more restrictive position and authorizing EPA to:

    (1) * * * promulgate regulations establishing specifications for 
fuel quality which will minimize, to the extent economically and 
technically achievable, emissions [of various pollutants] * * *. (2) 
In order to achieve and maintain attainment of ambient air quality 
standards, the Administrator may promulgate regulations * * * 
establishing specifications for fuels (including regulations 
requiring the availability or sale of fuels meeting the 
specifications in a nonattainment area or areas) to reduce emissions 
of pollutants subject to a standard under this title or hazardous 
air pollutants from motor vehicles. In establishing such 
specifications and availability requirements the Administrator shall 
consider other environmental effects which would result from 
production and use of fuels meeting the specifications.5
---------------------------------------------------------------------------

    \5\S. Rep. at 639-40. The relevant portions of the Mitchell-Dole 
substitute, Amendment No. 1293, debated on the floor of the Senate, 
were identical to the bill reported out of the Senate Committee. 5 
Leg. Hist. at 7552-54.

    This provision is much narrower than that reported out of the House 
Committee. The authority to establish ``specifications'' is clearly 
limited to specifications to reduce emissions of specified pollutants, 
and the specifications are limited to those aimed at achieving and 
maintaining attainment of the NAAQS. It also clearly requires that such 
specifications and requirements be written as performance standards.
    Most of the amendments and debate on this provision focused on a 
number of detailed minimum requirements that parallel the current 
reformulated gasoline provisions found in section 211(k)(2) though 
(10). However, certain very important changes were made to the general 
authority provisions. First, the second paragraph of the provision was 
replaced in its entirety with broader language that more closely 
parallels the version adopted by the House. The Senate approved a floor 
amendment by Senator Daschle requiring that:

    The Administrator, pursuant to paragraph (1) * * * promulgate 
regulations establishing specifications for reformulated gasoline to 
be used in conventional gasoline fueled vehicles [in specified ozone 
nonattainment areas].6
---------------------------------------------------------------------------

    \6\3 Leg. Hist. at 4383-88, 4 Leg. Hist. at 6816-18.

    This amendment removed the limitation that the specifications could 
only be designed to reduce emissions and achieve and maintain 
attainment, significantly broadening EPA's authority. Nonetheless, the 
provision passed by the Senate was narrower than the House bill. Even 
though paragraph one of the provision was somewhat similar to the 
second sentence of current section 211(k)(1), the Senate bill did not 
contain a general grant of authority as found in the first sentence of 
section 211(k)(1). It also more narrowly authorized EPA to establish 
specifications, instead of requirements.
    c. Conference Committee Bill--The Conference Committee on the House 
and Senate bills rejected the Senate's narrower limits on general 
authority and instead reported out the broader, more general authority 
provision found in the House bill.7 This provision was then 
adopted in the final bill. This legislative history indicates that both 
houses, to different degrees, moved to broaden the agency's authority 
to implement the reformulated gasoline program. The final bill adopted 
by Congress rejected the narrower approach from the Senate and instead 
approved the more general language from the House. While there was 
little discussion of this, the textual changes described above lead to 
the conclusion that Congress intended to provide EPA with broad general 
authority to establish regulatory requirements for reformulated 
gasoline. There are no indications that Congress intended otherwise. 
EPA's interpretation is therefore fully consistent and supported by 
this legislative history.
---------------------------------------------------------------------------

    \7\1 Leg. Hist. at 1548.
---------------------------------------------------------------------------

    d. Floor debates in the two houses--The legislative history does 
contain extensive floor debate about the reformulated gasoline 
provisions. While these focus primarily on the specific requirements 
found in section 211(k)(2) though (10), they still provide important 
insight on overall Congressional intent for this program.8 First, 
Congress expected that this motor vehicle fuel program would provide 
several important benefits for the nation. Most obviously it would lead 
to major reductions in air pollution in the largest metropolitan areas 
with the worst ozone nonattainment problems, reducing ozone forming 
VOCs and toxic pollutants. Reformulating the gasoline used in 
conventional vehicles would constitute a significant component of the 
federal program to control motor vehicle pollution. There was a clear 
concern that gasoline had gotten more polluting over the prior twenty 
years, primarily through increased levels of aromatic compounds in 
gasoline, used to replace the octane previously obtained from lead 
additives. Benzene and aromatics were seen as the predominant air toxic 
threat.
---------------------------------------------------------------------------

    \8\The Conference Committee Report contains limited discussion 
of the reformulated gasoline program, and the Reports for the bills 
reported out of the respective House and Senate Committee's are of 
limited use as these bills were changed significantly prior to 
passage. The floor debates, however, do contain extensive discussion 
of the bills.
---------------------------------------------------------------------------

    Second, Congress emphasized that reformulated gasoline would 
provide benefits in the form of improving our energy security, reducing 
our reliance on foreign oil, and providing a major opportunity for the 
agricultural sector of our economy to market renewable alcohols and 
their derivatives. This would come from the use of oxygenates as 
gasoline additives, including renewable oxygenates like ethanol and 
ETBE. In effect, Congress intentionally designed the reformulated 
gasoline program to obtain emissions reductions benefits in a way that 
would promote these other very important benefits.9
---------------------------------------------------------------------------

    \9\For example, the following statements are from the floor 
debate on the Conference Committee bill: 1 Leg. Hist. at 851-856 
(Sen. Durenberger); 1 Leg. Hist. at 1154-71 (Sen. Simpson); 1 Leg. 
Hist. at 969 (Sen. Baucus); 1 Leg. Hist. at 1073 (Sen. Dole); 1 Leg. 
Hist. at 1187 (Rep. Dingell); 1 Leg. Hist. at 1195 (Rep. Waxman); 1 
Leg. Hist. at 1209 (Rep. Sharp); 1 Leg. Hist. at 1263-67 (Rep. 
Madigan); 1 Leg. Hist. at 1315 (Rep. Hall); 1 Leg. Hist. at 1435 
(Rep. Richardson). Similar statements were made during consideration 
of the respective House and Senate bills.
---------------------------------------------------------------------------

    Third, the structure developed by Congress to obtain these various 
benefits involved a complex balance between imposing detailed 
requirements and preserving refiner flexibility.10 The floor 
debates include detailed responses by individual members of Congress to 
various arguments that Congress was mandating ``government gas'' or a 
``recipe,'' or was mandating use of only one oxygenate, such as 
ethanol.11 The floor debates also show there was no common 
understanding of terms such as ``fuel neutral,'' or ``government gas,'' 
or even whether certain provisions did or did not require the use of a 
specific oxygenate such as ethanol. These debates do make clear, 
however, that Congress designed the detailed provisions in section 
211(k)(2) through (10) to ensure achievement of various benefits from 
this program, while retaining an appropriate degree of refiner 
flexibility.
---------------------------------------------------------------------------

    \1\0This complex balance can be seen in the various specific 
requirements of section 211(k). Congress established both specific 
content requirements (section 211(k)(2)) and minimum requirements 
for either a performance standard or a ``formula,'' whichever EPA 
determined to be more stringent (section 211(k)(3)(A) and (B)). A 
certification program was also established, with EPA to certify any 
fuel that obtained emissions reductions of a fuel that met the 
requirements of section 211(k)(2) and (3). A credit program was also 
established for the three specific content requirements established 
in section 211(k)(2) and (3). Both the emissions performance 
standards and content requirements of section 211(k)(2) and (3) act 
as performance standards in light of the certification equivalency 
provision of section 211(k)(4). For example, the ``formula'' of 
section 211(k)(3)(A) acts as a performance standard based on section 
211(k)(4).
    \1\1From the debate on the Conference Committee: 1 Leg. Hist. at 
853, 855 (Sen. Durenberger); 1 Leg. Hist. at 1233 (Rep. Fields); 1 
Leg. Hist. at 1263 (Rep. Madigan); 1 Leg. Hist. at 1270 (Rep. 
Synar); 1 Leg. Hist. at 1325 (Rep. Hall); 1 Leg. Hist. at 1395-7 
(Rep. Moorehead). From the debate on the House bill: 2 Leg. Hist. at 
2606, 2694-7, 2701-2, 2750-58 (Rep. Richardson); 2 Leg. Hist. at 
2716 (Rep. Dingell); 2 Leg. Hist. at 2717 (Rep. Lent); 2 Leg. Hist. 
at 2722 (Rep. Michel); 2 Leg. Hist. at 2733-34 (Rep. Synar). From 
the debate on the Senate bill: 4 Leg. Hist. at 6812, 15, 19 (Sen. 
Daschle); 4 Leg. Hist. at 6820-21 (Sen. McClure); 4 Leg. Hist. at 
6824 (Sen. Grassley); 4 Leg. Hist. at 6825 (Sen. Nickles); 4 Leg. 
Hist. at 6829-30 (Sen. Wirth); 4 Leg. Hist. at 6836 (Sen. Dole); 4 
Leg. Hist. at 6836 (Sen. Johnston).
---------------------------------------------------------------------------

    Various statements were made by different members of Congress that 
any oxygenate could be used that met the oxygen content and emissions 
reduction requirements for reformulated gasoline.12 These 
statements reflect Congress' interest in retaining appropriate refiner 
flexibility. However, they only address compliance with the oxygen 
content requirement mandated under section 211(k)(2) and the emissions 
reduction requirements mandated under section 211(k)(1) and (3), and do 
not address compliance with additional requirements established under 
section 211(k)(1). They do not indicate an intention to preclude EPA 
from appropriately exercising its authority under section 211(k)(1) to 
either require greater than the minimum reductions called for in 
section 211(k)(3) or to establish additional requirements like the 
renewable requirements. Given the ambiguity in the debates on this 
issue and the Act's provision that the requirements of (k)(2) be issued 
under the (k)(1) rulemaking authority, EPA believes this rule may also 
be considered a reasonable implementation of the (k)(2) oxygen content 
requirement.
---------------------------------------------------------------------------

    \1\2See, e.g., 4 Leg. Hist. at 6812 (Sen. Daschle), and 1 Leg. 
Hist. at 1216 (Rep. Sharp, noting that ``[t]he Administrator may not 
discriminate among these different oxygenates, and should encourage 
fair competition among them. As long as the percentage weight 
requirement is met, and other requirements of new 211(k) . . . are 
satisfied, any oxygenate should be allowed to satisfy new United 
States needs.'') Also see 1 Leg. Hist. at 1325 (Rep. Hall). EPA's 
renewables requirement is fully consistent with this--refiners may 
use any oxygenate as long as the resulting gasoline meets the oxygen 
content and renewable requirements established under section 211(k).
---------------------------------------------------------------------------

    This legislative history indicates that while Congress itself did 
not choose to mandate any one oxygenate or class of oxygenate, it also 
did not restrict EPA's ability to require the use of a class or 
category of oxygenates if that would reasonably ensure achievement of 
these benefits and would not inappropriately limit the operational 
flexibility of refiners and importers. The renewables requirement is 
entirely consistent with this approach. It is designed to achieve 
important goals, and includes provisions specifically designed to 
maximize the flexibility of refiners in meeting the requirement.13
---------------------------------------------------------------------------

    \1\3Certain commenters claimed that the requirement was 
inconsistent with Congressional intent as expressed in the debate 
over the Energy Policy Act of 1992. Congress rejected an amendment 
to that bill which would have required that an increasing portion of 
the octane in all gasoline be obtained from domestically produced, 
renewable, nonpetroleum sources. The floor debate on this amendment 
indicates several reasons various members of Congress were opposed 
to this amendment, including concern that there would not be enough 
supply of ethanol, concern over possible interference with 
implementation of the Clean Air Act (based on a confusing provision 
addressing the interrelationship of the two laws and authority under 
the amendment for DOE to waive the requirement for air quality 
reasons), as well as concern over not being fuel neutral. EPA 
therefore believes that the rejection by the House of 
Representatives in 1992 of an amendment to an unrelated statutory 
provision, apparently based on a wide number of different reasons, 
is not relevant to Congress's prior intent in 1990 when it amended 
the Clean Air Act. Section 1508 of the Omnibus Budget Reconciliation 
of 1987 is much more relevant on the issue of Congressional intent 
and supports EPA's interpretation and rule. 42 U.S.C. 7545. In that 
provision, Congress found that the United States was increasingly 
dependent on the Middle East for its energy needs, that ethanol 
could be used in gasoline to produce a cleaner burning fuel and 
reduce pollution, and that ethanol was a renewable resource and its 
increased use would reduce farm program costs and grain surpluses 
and create new jobs. That bill explicitly states the sense of 
Congress that EPA should use its authority under the Clean Air Act 
to require greater use of ethanol as a motor fuel. EPA's renewable's 
requirement is fully consistent with this statutory provision.
---------------------------------------------------------------------------

    Most of the congressional debate focused on the various detailed 
requirements of section 211(k) such as the content requirements of 
section 211(k)(2), and the emissions standards of section 211(k)(3). 
There was relatively little debate or discussion concerning the scope 
of EPA's general authority in section 211(k)(1). However, there are 
indications that this was considered a reservoir of broad, general 
authority.14 There was no indication that section 211(k)(1) did 
not mean what its plain language indicates--that Congress provided EPA 
with broad, general authority to establish the requirements for 
reformulated gasoline, including requirements that tend to optimize the 
energy and other benefits obtained by the emission reductions 
requirements.
---------------------------------------------------------------------------

    \1\4From the debate on Conference Committee bill: 1 Leg. Hist. 
at 855-6 (Sen. Durenberger noted that the performance standards and 
the formula were minimum requirements, and EPA had authority to 
require greater emissions reductions if appropriate); 1 Leg. Hist. 
at 968-69 (colloquy between Sen. Durenberger and Sen. Baucus on same 
point); 1 Leg. Hist. at 1219 (Rep. Sharp discusses the threat that 
EPA could exercise its authority to reinstate a program akin to the 
1970's oil price and allocation controls); 1 Leg. Hist. at 128-9 
(Rep. Bliley) (``It is vital that [section 211(k)(1)] be viewed as 
residual authority to modify the more specific requirements 
throughout. . . .''). From the debate on the Senate bill: 4 Leg. 
Hist. at 5052-3 (Sen. Symms recognized that the bill reported out of 
the Committee on Environment and Public Works provided EPA broad, 
general authority when he noted that ``the bill directs the 
Administrator . . . to promulgate regulations establishing 
specifications for fuel quality. This, in essence, would give the 
Administrator the authority to mandate specific fuel formulations. . 
. .'').
---------------------------------------------------------------------------

4. Conclusion
    EPA's interpretation of its authority under section 211(k)(1) is a 
reasonable interpretation based on the plain language of the provision. 
The legislative history supports this interpretation and fails to show 
a contrary intent. The changes made in the reformulated gasoline 
provisions, and textual changes made in the two houses and in 
conference indicate an intent to broaden EPA's general authority. The 
floor debates support this and fail to show a contrary intent.
    EPA's exercise of authority under section 211(k)(1) also helps to 
obtain the important benefits identified by Congress for reformulated 
gasoline. The legislative history makes it clear that in addition to 
emissions reductions, Congress expected that reformulated gasoline 
would benefit the nation by obtaining various energy and other benefits 
from the expanded use of oxygenates, including specifically the 
benefits from using renewable oxygenates like ethanol and ETBE. EPA's 
interpretation and this rule are fully consistent with this 
Congressional goal.
    Congress established a complex statutory structure to ensure 
achievement of these various goals while retaining an appropriate 
degree of refiner flexibility. EPA's final rule is carefully designed 
with refiner flexibility in mind, and draws an appropriate balance 
between obtaining the benefits from using renewable oxygenates and 
retaining refiner flexibility. For example, the rule establishes as 
close to a performance standard as is currently possible, does not 
mandate one specific fuel or fuel additive, allows for a phase-in over 
two years to minimize disruption, allows averaging over a long time 
period, and allows for generation, use and trading of credits to show 
compliance. It also is carefully designed to minimize any adverse 
environmental impacts.
    EPA's interpretation of its authority is consistent with the plain 
language of the statute and its legislative history, and furthers the 
goals identified by Congress for this program. As such it is a lawful 
exercise of agency authority under section 211(k).

B. Program Overview

    The renewable oxygenate requirement is one component of the 
reformulated gasoline program. It does not alter the emission 
performance standards or other provisions for the reformulated gasoline 
program contained in the final rule for reformulated gasoline (See 59 
FR 7716; February 16, 1994). In addition, it does not mandate the use 
of any particular oxygenate, but rather ensures a specified minimum use 
of a range of oxygenates derived from renewable resources.
    As mentioned previously, EPA is requiring that 30 percent of the 
required 2.0 weight percent oxygen content of all reformulated gasoline 
be produced using renewable oxygenates. Renewable oxygenates must meet 
two criteria for them to be used to comply with the requirements of the 
program. First, they must be produced from non-fossil fuel feedstocks 
(i.e., other than petroleum, natural gas, coal, or peat), or their 
oxygen content must derive from oxygenates produced from such 
feedstocks, as described more fully in section III.C.1 of this notice. 
Second, to be considered ``renewable'' when blended into VOC-controlled 
RFG, the oxygenate must not cause commingling-related increases in fuel 
volatility (i.e., the oxygenate must have a linear vapor pressure 
blending curve). In addition to the requirements of this program, 
renewable oxygenates must also be approved for use in gasoline in 
keeping with the provisions of section 211(f) of the Act, and must be 
approved for use in reformulated gasoline (i.e., certifiable under 
either the Simple or Complex Model, as discussed in the final rule for 
the RFG program).
    The oxygenates which are expected to meet these requirements, at 
least in the near term include: (1) Any alcohols derived from biomass 
or waste products other than untransformed fossil fuels, except when 
used in RFG designated as ``VOC-controlled,'' and (2) all approved 
ethers produced from renewable feedstocks, when used in either VOC-
controlled or non-VOC-controlled RFG. EPA recognizes that some non-
ether oxygenates, including some alcohols, may not cause commingling-
related increases in fuel volatility. Upon submittal of sufficient data 
demonstrating that addition of a non-ether renewable oxygenate does not 
cause a nonlinear increase in RVP, the Administrator may permit the 
oxygenate in question to receive credit under today's renewable 
oxygenate program when blended into VOC-controlled RFG. However, 
methanol and ethanol will not be granted such permission, since the 
nonlinearity of their effect on RVP is well-established at the present 
time.
    The program will be phased in over the course of two years. Fifteen 
percent of the minimum 2.0 weight percent oxygen content of 
reformulated gasoline is required in the form of renewable oxygenates, 
as defined above, from December 1, 1994 through December 31, 1995 
(hereafter referred to as the ``first year of the program''). Thirty 
percent of the minimum oxygen content in reformulated gasoline is 
required to be from renewable oxygenates in 1996 and each year 
thereafter. As a result, on average reformulated gasoline will be 
required to have at least 0.30 weight percent oxygen content (15 
percent of 2.0 weight percent) provided by renewable oxygenates in the 
first year of the program and 0.60 weight percent oxygen content 
provided by renewable oxygenates in subsequent years.
    A program phase-in is necessary because the reformulated gasoline 
program takes effect at refineries December 1, 1994. As discussed more 
fully in section III.F of this notice, EPA is concerned that 
insufficient time is available for ethanol producers to adjust their 
production schedules, for ether suppliers to set up contracts for the 
purchase of renewable alcohols, for fuel producers to obtain supplies 
of renewable oxygenates for addition at the refinery or for blending 
with refinery-produced reformulated blendstock for oxygenate blending 
(RBOB), and for terminal operators to build and obtain permits for 
sufficient ethanol and ether storage and blending facilities in order 
to meet the full 30 percent requirement in 1995. Reformulated gasoline 
producers may also have to adjust their gasoline production plans to 
accommodate a different mix of oxygenates than they might have used in 
the absence of today's rule. The phase-in addresses these leadtime 
concerns, ensures a more orderly startup of the program, and minimizes 
the risk of any market disruptions.
    The applicable renewable oxygenate requirement (15 percent or 30 
percent) applies year-round. The requirement is measured on an oxygen-
equivalent basis (i.e., credit given according to the oxygenate content 
of the RFG) and is based on a per gallon oxygen content of 2.0 weight 
percent which is consistent with the minimum per gallon oxygen content 
standard in the RFG program. However, the renewable oxygenate 
requirement must be met on an annual average basis and need not be met 
on a per-gallon basis. This requirement applies to all refiners or 
importers of reformulated gasoline and/or RBOB. It does not apply to 
oxygenate blenders, pipeline operators, or terminal operators, though 
such parties are required to abide by any restrictions regarding the 
type of oxygenate that may be blended into RBOB provided by refiners. 
Specifically oxygenate blenders, pipeline operators and terminal 
operators will have to adhere to the RBOB blending limitations not only 
of the RFG final rulemaking, but also the additional limitations 
resulting from today's rulemaking. If a state exercises the option 
discussed in section III.G of this notice to address shoulder season 
concerns, the enforcement requirements on terminal operators may be 
slightly altered.
    Refiners and importers of reformulated gasoline are also permitted 
to generate and trade, on a nationwide basis, credits earned from use 
of renewable oxygenates in excess of the applicable minimum requirement 
to other producers desiring to use a lesser volume of renewable 
oxygenates. Such credits can be used to satisfy part or all of a 
refiner's renewable oxygenate requirement for the same calendar year 
that the credits are earned. No banking of credits between calendar 
years is allowed. The averaging and trading provisions established 
today for the renewable oxygenate program will have no adverse 
environmental impact since today's action does not alter the VOC, 
toxics, and NOX emission performance standards for reformulated 
gasoline.
    The effect of these averaging and trading provisions is to greatly 
expand the flexibility afforded refiners, particularly during the 
initial startup of the program. While the renewable oxygenate program 
takes effect for refiners beginning December 1, 1994, individual 
refiners do not need to blend any renewable oxygenate into their 
gasoline until later in the year or at all if they so desire. They will 
just have to demonstrate that they met the requirements over the course 
of the entire year through either the blending of greater than 15% 
renewable oxygenates in the latter part of the year, or the purchase of 
sufficient credits from other refiners. As a result, the averaging and 
trading provisions effectively provide refiners with additional time to 
meet the initial requirements of the program, and allows them to 
smoothly ramp up their use of renewable oxygenates during the course of 
the first year to the full 30% requirement in 1996.
    The renewable oxygenate requirements are placed at the refinery 
level and will apply to reformulated gasoline sold in all the covered 
areas, including the opt-in areas and the two covered areas in the 
State of California (Los Angeles and San Diego). Details of the 
enforcement program are discussed in section IV of this notice. 
Refiners who produce reformulated gasoline for use in California 
beginning in March 1996 are exempt from most federal reformulated 
gasoline reporting, recordkeeping, and similar enforcement 
requirements. As a result, refiners producing California reformulated 
gasoline are not currently required to distinguish between gasoline 
volumes sold in Los Angeles or San Diego and gasoline sold in other 
parts of California. However, the renewable oxygenate provisions 
promulgated today will apply to reformulated gasoline sold in Los 
Angeles and San Diego, as discussed in section IV of this notice in 
greater detail.
    The Agency received a number of comments concerning impacts of the 
program on VOC emissions during the ``shoulder season.'' After 
considering the issue, EPA has decided that a limited change to the 
program to address the shoulder season concerns is warranted. As 
discussed in section III.G, EPA has included in the final rule a 
provision which would allow EPA to extend the limitations on the 
blending of certain renewable oxygenates which exhibit volatility-
related commingling effects to the shoulder season within individual 
states upon receipt of a petition from the Governors of the states if 
certain requirements are met.

C. Renewables Requirement and Definition

1. Renewables Definition
    The definition of renewable oxygenates adopted in this final rule 
has been expanded from that contained in the proposal, but nevertheless 
it is intended to limit credit toward the renewable oxygenate 
requirement to those oxygenates which EPA expects to yield net fossil 
fuel savings. The final definition is structured so as to exclude from 
the renewables definition oxygenates produced in their entirety from 
nonrenewable sources such as coal, oil, peat, and natural gas due to 
their non-renewable, fossil nature. The definition includes oxygenates 
derived wholly from renewable biomass sources including but not limited 
to corn and other grains, other food products, and cellulosic plant 
material. It also includes oxygenates derived from waste products such 
as waste cellulose and plastics, sewage, sawdust, scrap tires, and 
methane recovered from landfills. EPA recognizes that some of these 
waste products may have been derived from fossil hydrocarbon sources. 
Including these sources in the set of permissible feedstocks will not 
by itself result in increased generation of such wastes, however, and 
hence will not increase consumption of materials which can be used as 
fossil fuels.
    The definition excludes waste products that are untransformed from 
their original fossil fuel form. As a result, methane captured from 
landfills would qualify as a renewable feedstock but natural gas 
currently flared at the wellhead or refinery would not qualify as a 
renewable feedstock, since it would be used in its untransformed state 
as an oxygenate feedstock and is in fact a fossil fuel.
    It should be noted, however, that the definition includes 
oxygenates whose oxygen content comes from another renewable oxygenate. 
As a result, ethers derived from renewable alcohols and isobutylene 
which was produced from oil or natural gas would qualify as a renewable 
oxygenate, whereas ethers derived from nonrenewable alcohols would not 
qualify regardless of the source of isobutylene.
    Like all gasoline additives, renewable oxygenates must meet the 
requirements of section 211(f) of the Clean Air Act or be waived from 
those requirements. In addition, reformulated gasoline containing 
renewable oxygenates must be certifiable under the appropriate RFG 
emission model (as set forth in Sec. 80.42 and Sec. 80.45 of the Code 
of Federal Regulations).
2. Renewable Oxygenates for Summer RFG
    Alcohols and other oxygenates which cause commingling-related 
volatility increases used in VOC-controlled reformulated gasoline will 
not receive credit toward the 30 percent renewable oxygenate 
requirement for two reasons. First, EPA does not want incentives 
created by the renewable oxygenate program to diminish the VOC benefits 
of the RFG program during the high ozone season. As discussed in the 
RFG final rule and RIA and elsewhere in this notice, a program which 
would encourage increased use of ethanol (and by extension any other 
oxygenates with a similar non-linear vapor pressure blending curve) in 
summer RFG introduces a number of serious concerns related to increased 
VOC emissions. Second, as discussed in the proposal, the process energy 
needed to offset the direct vapor pressure boost from ethanol, the 
primary renewable oxygenate used in gasoline today, negates the fossil 
energy savings from ethanol. The vapor pressure boost must be offset to 
comply with the VOC emission performance standards for summer RFG. EPA 
would expect a similar situation to apply to other oxygenates that 
increase the vapor pressure of gasoline.
    Direct RVP increases are controlled and accounted for in summer 
reformulated gasoline by the RFG program. However, alcohols such as 
ethanol and methanol can create commingling problems in vehicle fuel 
tanks which are not reflected in the RFG emission models. Commingling 
can significantly increase average in-use fuel volatility which leads 
to higher emissions of VOCs, an ozone precursor. EPA believes that by 
not granting credit toward the renewable oxygenate requirement during 
the summer for commingling oxygenates, today's program will not 
encourage increased use of these oxygenates during the high ozone 
season, thereby avoiding the VOC emission increases that would result 
from such increased use. In fact, today's provision has the potential 
to stimulate the use of ETBE during the summer months, which could 
displace ethanol use that otherwise may have existed under the RFG 
program, thereby reducing commingling related emission increases during 
the high ozone season.
    As discussed in the Regulatory Impact Analysis\15\ (RIA) for the 
RFG Final Rule, a thirty percent ethanol blend market share in a Phase 
I VOC-controlled gasoline pool in VOC Control Region 1 would increase 
the effective average RVP of the gasoline pool (even if the ethanol 
blends and non-ethanol blends have the same RVP) and thereby increase 
total VOC emissions (including both exhaust and non-exhaust VOC 
emissions) relative to a scenario in which ethanol blends had zero 
market share. EPA estimated in the RIA for the RFG Final Rule that the 
commingling-related increase in VOC emissions from a thirty percent 
market share for ethanol-blended RFGs would result in a VOC increase of 
approximately two to three percent. In other words, the commingling 
effect would reduce RFG's Phase I VOC benefits by up to twenty percent. 
While EPA was aware of the commingling effect during the development of 
the Complex Model, the effects could not be reliably estimated in time 
for proposal and, since adding the commingling effect to the Complex 
Model would have represented a considerable change to the model, EPA 
deferred adding the effect to the Complex Model at the time of the RFG 
final rule.
---------------------------------------------------------------------------

    \15\Final Regulatory Impact Analysis for the Reformulated 
Gasoline Program, FSSB, RDSD, OMS, OAR, US EPA, December 1993, 
document number V-B-1, EPA Docket A-92-12.
---------------------------------------------------------------------------

    The commingling effect does not occur when ethers are blended with 
gasoline. Furthermore, such blends are projected by DOE\16\ to require 
less fossil energy than would RFG containing nonrenewable oxygenates. 
As a result, this program allows renewable ethers blended into VOC-
controlled RFG to receive renewable oxygenate credit during the high 
ozone season. Under the final rule, the Administrator may allow 
renewable alcohols other than ethanol and methanol and renewable 
oxygenates other than alcohols and ethers to receive such credit if 
sufficient information demonstrating the absence of any commingling 
effects is submitted for the approval of the Administrator. As with any 
fuel additive, they would also have to meet the requirements of section 
211(f) of the CAA, and the RFG containing such an additive must be 
certifiable under the Simple Model or Complex Model, whichever is 
applicable.
---------------------------------------------------------------------------

    \16\``Energy Requirements and CO2-Equivalent Emissions of 
RFG,'' U.S. Department of Energy, June 6, 1994 and March 17, 1994 
(draft).
---------------------------------------------------------------------------

    Outside of the ozone season, VOC reductions are not required in 
reformulated gasoline for ozone control and RVP is not controlled. At 
such times, renewable alcohol blends would produce the desired fossil 
energy savings and potential greenhouse gas emission reductions. 
Therefore, EPA will give credit to renewable alcohols blended into non-
VOC-controlled RFG, the use of which is restricted to the non-high 
ozone season. The only exception to this, as discussed in section 
III.G, is during shoulder season months where based on a request from 
the Governor of a State, EPA has extended the non-commingling season 
beyond the VOC control season. Should that occur, oxygenates which 
exhibit commingling effects would not be given credit toward the 
renewables requirement in that State during the shoulder season as 
well.
3. Performance-Based Definition of Renewable
    In its proposal, EPA solicited comments on the proposed definition 
of renewable oxygenates and, in particular, on the potential for 
establishing a performance requirement based on energy consumption and/
or greenhouse gas emissions to define renewable oxygenates. After 
further consideration and evaluation of the comments received, EPA has 
decided not to promulgate a numerical type of performance-based 
standard for renewable oxygenates for a number of reasons. First, the 
degree of scientific uncertainty associated with quantifying energy 
consumption and emissions of different greenhouse gases throughout the 
entire life cycle of various oxygenates is considerable. Second, even 
if life cycle emissions could be estimated, based on comments on the 
proposal and discussions with EPA's Global Change Division there is 
currently insufficient scientific consensus on the relative warming 
potential of various greenhouse gases, notably VOC and NOX (the 
bulk of the emissions other than CO2), to provide reliable 
comparisons. Third, EPA has concluded that at the present time it would 
be difficult and costly to collect and verify the necessary data to 
implement a performance-based standard for renewable oxygenates, to the 
point where the recordkeeping and reporting burden could discourage 
new, more efficient feedstock and oxygenate production practices. 
Fourth, EPA believes that the definition of renewable oxygenates 
contained in this rule is sufficient to provide certainty that fossil 
energy savings are being achieved without the establishment of a 
numerical performance standard. As discussed below in section III.C.4, 
the group of oxygenates derived from renewable sources are expected to 
achieve energy and greenhouse gas emission performance levels roughly 
equivalent to or better than those achieved by ethanol alone. For these 
reasons, EPA does not believe it to be appropriate at the present time 
to institute a performance standard for renewable oxygenates. However, 
the Agency reserves the right to alter its definition of ``renewable'' 
to a performance-based standard in the future if a reasonable, 
workable, and enforceable definition can be developed.
4. Renewable Alcohols/Ethers Limitation
    In the December NPRM, the only oxygenates included in the proposed 
definition of renewable oxygenates were ethanol and methanol produced 
from renewable feedstocks and their ether derivatives. However, EPA 
recognizes that for a number of reasons the production of other 
oxygenates from renewable feedstocks is likely to produce fossil energy 
savings similar to that for renewable methanol and ethanol. First, many 
of these other oxygenates may at times be produced as co-products or 
by-products of methanol or ethanol production. As a result, they should 
have similar fossil energy balances. In fact, if by including them in 
today's definition they are not forced to be separated out from the 
ethanol and/or methanol to make them pure, it could help reduce energy 
expenditures. Second, even if not co-products, they are likely to be 
produced from similar feedstocks using similar production practices as 
those currently used for renewable ethanol and methanol. As a result, 
the energy balance should not be significantly different. In fact, the 
energy balance could very well be better, since the energy balance of 
either the oxygenate production itself, or that associated with 
blending it into RFG, may be the reason prompting the production of the 
other oxygenates in lieu of ethanol or methanol. Third, in order for 
these other oxygenates to compete in the marketplace with renewable 
ethanol or methanol they will need to be cost competitive. Since the 
energy inputs represent a significant portion of the costs of renewable 
oxygenate production, these other oxygenates are unlikely to be 
produced (unless they are co-products as discussed above) unless they 
are at least as energy efficient as the alternatives. Furthermore, if 
they are able to compete, the oxygenate they are likely to displace 
from the marketplace will be the marginal renewable oxygenate 
production which is the most costly and inefficient to produce and 
therefore provides the least energy savings to begin with. Fourth, 
while EPA does not expect these oxygenates to represent a large portion 
of the renewable oxygenate market, their exclusion from the definition 
might hinder their entry into the market and hinder the development of 
new, energy efficient renewable oxygenate production technologies.
    As a result, EPA is including other oxygenates produced from 
renewable feedstocks in its definition of permitted renewable 
oxygenates under today's rule. As discussed above, however, such 
oxygenates cannot be blended during the high ozone season unless either 
they are converted to an ether form, or it can be demonstrated that 
they do not cause a volatility increase when commingled with other 
gasoline blends.
    Although several commenters supported the petition process which 
EPA proposed as an optional means to respond to future developments in 
oxygenate technology, the Agency is limiting this petition process to 
determining whether the renewable oxygenate exhibits commingling 
effects which are relevant to their use under this program during the 
summer months. As discussed above, EPA is extending the definition of 
renewable oxygenate based on its determination that all oxygenates 
derived from renewable sources and expected to be used to comply with 
this program should exhibit energy benefits similar to those resulting 
from ethanol use.

D. Averaging and Trading

    EPA is promulgating averaging and trading provisions, as proposed, 
for the oxygenates in reformulated gasoline receiving renewable credit 
under today's program. Refiners are allowed to average the renewable 
oxygen content of reformulated gasoline over the calendar year. During 
the first year, however, the averaging period will run for 13 months, 
from December 1, 1994 through December 31, 1995, to track the time 
period for the other RFG requirements. Refiners are also allowed to 
trade credits earned by exceeding the renewable oxygenate requirement 
to other refiners. No banking of credits from one year to the next, 
however, is allowed, in order to keep the program as simple as 
possible.
    Averaging and trading provide refiners many benefits. For example, 
averaging provides refiners with production flexibility, since every 
gallon need not meet the renewable oxygenate requirement. Trading 
provides additional flexibility by permitting refiners to specialize: 
it may be more cost-effective for some refiners than others to produce 
reformulated gasoline with a renewable oxygenate content. Trading 
enables those refiners for whom it is less cost-effective to buy 
renewable credits from those who find it more cost-effective to blend 
renewable oxygenates. Averaging and trading also allow refiners to 
avoid any cost associated with compliance margins, since refiners will 
not need to blend renewable oxygenates in excess of the 30 percent 
requirement to assure compliance.
    These provisions are especially important during the initial 
startup of the program. While the renewable oxygenate program takes 
effect for refiners beginning December 1, 1994, individual refiners do 
not need to blend any renewable oxygenate into their gasoline until 
later in the year, or at all if they so desire. They will just have to 
demonstrate that they met the requirements over the course of the 
entire year through either the blending of greater than 15% renewable 
oxygenates in the latter part of the year, or the purchase of credits 
from other refiners. As a result, the averaging and trading provisions 
effectively provide refiners with additional time to meet the initial 
requirements of the program, and allows them to smoothly ramp up their 
use of renewable oxygenates during the course of the first year to the 
full 30% requirement in the second year (1996).
1. Averaging Period
    USDA submitted comments to the Agency encouraging a season-specific 
averaging program, rather than an annual averaging program. USDA argued 
that requiring the renewables requirement to be met separately for VOC-
controlled and non-VOC-controlled gasoline would increase the energy 
and environmental benefits. Specifically, USDA suggested that a season-
specific program would provide additional incentives to convert ethanol 
that would otherwise have been blended directly into summer RFG into 
the form of ETBE. USDA argued that the resulting reduction in summer 
ethanol use would further reduce commingling effects and lead to 
additional VOC emission reductions due to the distillation 
characteristics of ETBE. USDA suggested that a season-specific program 
would provide the potential for ethanol market share to expand beyond 
30 percent in future years. The reader is referred to the RIA for a 
detailed discussion of the seasonal averaging program suggested by 
USDA.
    EPA has considered the issues raised by USDA, and has decided to 
retain the annual averaging period proposed in the December NPRM, based 
on an analysis of the logistical, energy, environmental, and cost 
impacts of splitting the summer and winter seasons. First, seasonal 
averaging would require ETBE use in VOC-controlled reformulated 
gasoline, which presents serious capacity problems in the short-term. 
Although only minor modifications are necessary in order to produce 
ethers from ethanol rather than methanol, it will take some time to 
make those ether production facility conversions and to acquire the 
necessary construction and operating permits. EPA's analysis indicates 
that insufficient ETBE capacity would be available to fully meet the 
summer requirements of a season-specific renewable program in 1995 and 
likely also 1996. As a result, a seasonal averaging program would have 
to be delayed and/or phased in. Since, as discussed below, EPA 
anticipates the Phase II RFG requirements to stimulate the use of ETBE, 
a phased-in requirement might have little actual impact on ETBE use. In 
addition, a split season program would introduce additional complexity 
and expense to the renewable oxygenate and reformulated gasoline 
programs. ETBE is more expensive on an oxygen content basis than either 
MTBE or ethanol, and ETBE provides smaller toxics emission reductions 
than other oxygenates included in EPA's RFG emission models, which 
refiners would have to offset through other fuel controls. Thus, 
forcing ETBE use in summer gasoline in order to meet a season-specific 
renewable oxygenate requirement could have increased the cost of 
compliance with the annual toxics requirement of the reformulated 
gasoline rule, especially under Phase I of the RFG program, and 
complicated implementation of the RFG program given the short leadtime 
available. This problem would have been particularly severe during the 
initial years of the program, since the refinery modifications 
necessary to offset the increase in toxics emissions can require 
several years to complete, and since the value of ETBE's RVP benefits 
will increase only when the Phase II RFG standards are implemented.
    Furthermore, EPA concluded that the purposes of the program could 
be achieved without a season-specific program. The renewable oxygenate 
program is being promulgated to provide two primary benefits: reducing 
the fossil energy impact of RFG, and stimulating the development of 
renewable fuels which can lead to greenhouse gas emission benefits, 
this would supplement the VOC and toxics emissions reduction benefits 
from RFG. ETBE use per se is not required to obtain these benefits. 
Based on the DOE analysis, ETBE use during the summer does not provide 
any additional fossil energy benefit than ethanol use in the winter, 
and in fact, results in a slightly smaller fossil energy savings. The 
program may also achieve some marginal crude oil savings and some 
additional VOC emission benefits with the use of ETBE during the summer 
months (due to the favorable front-end distillation characteristics of 
ETBE relative to ethanol and MTBE). However, EPA does not believe a 
split season is necessary to stimulate the use of ETBE in the summer 
months, particularly when the Phase II RFG standards take effect.
    In summary, EPA believes that a season-specific program would offer 
minimal energy and environmental benefits, would increase complexity 
and impair compliance flexibility resulting in increased costs in 
complying with the program, would likely run into near-term capacity 
limitations, and would have no impact on the overall use of renewable 
fuels. As a result, EPA considers a season-specific program to be 
unnecessary in order to achieve the objectives of this program.

E. Level of Renewables Required

1. Existing Renewables Market Share
    During the rulemaking process, EPA considered requiring greater and 
lesser levels of renewable oxygenates and requested comment on the 
appropriateness of the proposed 30 percent level for renewables. Under 
the winter oxygenated fuels program, which began in 1992, ethanol has 
been used in approximately 30 percent of the oxygenated gasoline. That 
program includes certain areas that will require RFG, but in general it 
focuses on non-RFG areas with wintertime carbon monoxide (CO) problems. 
Based on this experience, it appears that splash-blended ethanol can be 
expected to be used in at least thirty percent of the oxygenate market 
when the RVP increase resulting from the blend is not constrained, 
given existing incentives for the use of ethanol and other renewable 
oxygenates. The 30 percent requirement for the renewable oxygenate 
program helps assure that, at minimum, renewable oxygenates will be 
used to an extent similar to what would have occurred in the RFG-
related oxygenate market had the air quality imperatives of the RFG 
program not required constraints on RVP levels. This will avoid a 
situation where the requirements and complexity of the RFG program 
limit the growth of renewable oxygenate use. Today's renewable 
oxygenate requirement will in effect set a floor to avoid reduced use 
of renewable oxygenates in the future. It does not set a ceiling, and 
should not interfere with growth of renewable oxygenate use. There are 
no similar restrictions placed on the remaining 70 percent of the RFG 
oxygenate market. As discussed below in section III.E.4, if MTBE 
dominates this portion of the RFG oxygenate market as anticipated, MTBE 
use will still grow dramatically over its current demand.
2. Renewables Production Capacity
    In the December proposal, EPA stated that given the current absence 
of renewable methanol capacity, ethanol and its ether derivatives were 
likely to be the primary oxygenates used to meet the renewable 
oxygenate requirement in the short term. Based on 1990 data, EPA 
estimated that the 30 percent renewable oxygenate requirement would 
require an average production of roughly 630 million gallons of ethanol 
per year, or about 60 percent of EPA's estimate of current ethanol 
production capacity of roughly one billion gallons per year. EPA has 
updated these estimates, as discussed more fully in the RIA, and now 
estimates that approximately 670 million gallons per year of ethanol 
will be needed to meet the requirements of the renewables program alone 
in the 1995-1996 time frame. Other analyses have reached similar 
conclusions; for example, USDA's analysis indicates that the 30 percent 
renewable oxygenate requirement would require an average production of 
680 million gallons per year. As discussed below in section III.F, EPA 
believes that this new demand can be met, provided there is a phase-in 
of the program in 1995. A phase-in will give oxygenate producers, 
refiners, and terminals one additional year to obtain permits, 
construct facilities and negotiate contracts before the full program 
goes into effect in 1996.
3. Comments Regarding the Level of Renewables
    The majority of comments from ethanol suppliers and feedstock 
producers who addressed the appropriate level of renewable oxygenates 
supported the 30 percent requirement. The primary rationale for their 
support was that the current market share for ethanol in the oxygenated 
fuels program should be maintained.
    Comments were received recommending both higher and lower levels of 
renewable oxygenates. Higher levels were suggested in the belief that 
the ethanol industry needed the additional encouragement through just 
such an incentive to grow at a more desirable rate. At this point in 
time, however, the 30 percent renewables requirement in those areas 
covered by the RFG program represents a considerable stimulus to the 
renewable oxygenate industry. EPA believes that a larger renewable 
oxygenate requirement would call into question the near-term 
feasibility of the renewables program. Furthermore, EPA believes that 
the 30 percent level is all that is necessary to overcome the ethanol 
blending limitations in RFG caused by the VOC performance standard, 
since this is the level ethanol was able to achieve absent any blending 
restrictions under the winter oxygenated fuels program. In addition, 
the 30 percent renewables requirement being promulgated today is a 
minimum requirement. It does not prevent renewable oxygenates from 
increasing their share of the gasoline oxygenate market.
    Many of those opposing the 30 percent requirement argued that it 
could create the potential for supply disruption and significant cost 
increases in the short-term. The oil and MTBE industries objected to 
the necessity for a renewable oxygenate program out-of-hand. They 
argued that since ethanol already has a large portion of the current 
wintertime oxygenated fuel market and since the market for ethanol 
would likely increase when the RFG program begins in 1995, the 30 
percent renewable oxygenate program was unnecessary. Others, notably 
state air pollution control officials, recommended that the 30 percent 
requirement be lowered to 10 percent in order to mitigate any 
potentially negative environmental and energy impacts, as well as to 
allow the market more input in selecting the oxygenates used in the 
program. EPA has considered these comments but continues to believe 
that the 30 percent requirement is appropriate and feasible given the 
energy and environmental benefits of the renewables requirement and 
long-running governmental policies to promote renewable fuels. The 
basis for these conclusions is discussed elsewhere in this notice and 
in the RIA.
4. Implications for Non-Renewable Oxygenates
    EPA believes the 30 percent level will provide the benefits 
identified above and stimulate the development of a diverse supply of 
oxygenates for the oxygenate market. The 30 percent requirement will 
ensure a strong role for renewable oxygenates in the RFG program while 
still permitting the majority of the RFG oxygenate market share to be 
open to any oxygenate, regardless of the feedstocks used to produce it. 
Even with today's rule, production of MTBE and its methanol feedstock 
is projected to increase because of the increased demand for oxygenates 
in the United States as the RFG program takes effect. MTBE demand would 
increase by 3.1 billion gallons annually if it is used in all of the 
remaining 70 percent of the RFG oxygenate market. Such an expansion 
equals an approximate increase of 170 percent from current MTBE usage 
levels. While EPA acknowledges that MTBE and methanol demand might be 
even greater in the absence of today's rule, it is important to note 
that the RFG program is likely to result in dramatic growth in MTBE, 
methanol, and ethanol production. Furthermore, MTBE producers can 
modify their facilities at relatively modest expense to produce ETBE if 
its use should prove economically advantageous given the requirements 
of the RFG program and today's rule.
    Similar conclusions hold true for the natural gas industry. Natural 
gas is used to produce methanol and isobutylene, which in turn are used 
to produce MTBE. Since MTBE production is projected to grow from 
current levels as a result of the RFG program, EPA expects the demand 
for natural gas for oxygenate production to grow as well. Furthermore, 
isobutylene derived from natural gas is expected to play a major role 
in ETBE production. It should also be noted that oxygenate production 
represents a small portion of total demand for natural gas.
    For these reasons, EPA does not believe that today's action will 
result in significant adverse effects on the MTBE, methanol, or natural 
gas industries, as their markets will dramatically increase with or 
without today's action. This is particularly the case since a 
considerable amount of ethanol was likely to have been used to satisfy 
the RFG program requirements absent today's rule. As discussed in 
section III.F, based on the expansion of ethanol production capacity 
planned prior to this rule, ethanol could potentially have been used to 
fulfill 15 percent of the oxygenate requirement of the RFG program.

F. Timing and Phase-In

1. Introduction
    In the NPRM, EPA proposed to require that renewable oxygenates be 
used to meet 30 percent of the 2.0 weight percent oxygen requirement 
for the RFG program. However, at that time EPA was concerned whether 
adequate supplies of renewable oxygenates would be available and 
whether the distribution infrastructure was sufficient during the 
initial years of the program without disrupting existing markets for 
such oxygenates or incurring excessive costs. With that in mind, the 
proposal requested comments concerning these issues. More specifically, 
comments were requested on the appropriate level of the renewable 
oxygenate requirement, leadtime requirements associated with providing 
adequate renewable oxygenate supplies, the potential need for a phase-
in period, and any other supply-related issues. In response, EPA 
received considerable information on the current and projected supply 
of renewable oxygenates, as well as less complete information regarding 
the logistics of renewable oxygenate distribution. The detailed 
analysis is contained in the Regulatory Impact Analysis (RIA), and is 
summarized below. Based on the projected supply of renewable oxygenates 
over time and the leadtime required to establish blending and storage 
facilities, EPA has concluded that, while the market can readily bear a 
30 percent requirement given adequate leadtime, a phase-in of the 30 
percent requirement is necessary. Therefore, EPA is requiring that 15 
percent of the RFG program's 2.0 weight percent oxygen requirement be 
met from renewable oxygenate sources in 1995, and that the full 30 
percent of the oxygen requirement be met from such sources in 1996 and 
thereafter.
    The purpose of EPA's analysis was to determine whether sufficient 
renewable oxygenate supply, distribution, tankage, and blending 
capacity would be available in 1995 and 1996 to meet the program 
requirements. Failure to have sufficient supply, distribution, tankage, 
or blending capacity for the considerable increase in renewable 
oxygenate demand could result in shortages or price spikes and could 
interfere with the orderly implementation of the reformulated gasoline 
program.
    In addition, EPA considered it to be desirable for a variety of 
reasons to limit to the extent possible any need to displace 
substantial amounts of ethanol from existing markets. First, displacing 
ethanol from existing markets would do nothing to expand the use of 
renewable oxygenates and achieve the resulting benefits. Second, 
shifting ethanol from existing markets to RFG markets would not 
stimulate the introduction of more advanced renewable fuels production 
technology. Third, as described in sections III.H and VI of this 
notice, the use of ethanol from new or expanded plants is projected to 
displace more fossil energy than would ethanol from existing plants. 
Fourth, relatively high prices for ethanol would be needed to displace 
it from existing markets, leading to higher than necessary price 
increases for RFG during the initial years of the program. Ethanol 
purchase contracts may already be established for 1995, and breaking 
such agreements in order to shift ethanol from existing gasoline 
markets to RFG markets might be difficult and costly. Furthermore, 
approximately half of current ethanol consumption occurs in states 
which offer substantial tax credits for ethanol blends. These credits 
are equal in value to between 10 and 20 cents per gallon of ethanol. To 
induce ethanol suppliers to shift ethanol from such markets to 
unsubsidized markets would likely require a purchase price in excess of 
current market prices for ethanol equal to or greater than the value of 
the tax credits available in existing markets. In addition, ethanol is 
currently used in many markets to provide the added octane for mid-
grade and premium gasolines. These gasoline grades enjoy a considerable 
retail price premium which can be reflected in the price paid for the 
ethanol. These price premiums for ethanol blended mid-grade and premium 
gasolines may not be available to the same extent in the new renewable 
oxygenate markets, particularly for the full amount of ethanol expected 
to be blended under the renewable oxygenate program.
    The analysis examined each element of the renewable oxygenate 
supply process separately. First EPA evaluated which renewable 
oxygenates would be likely to be used to fulfill the program 
requirements during the early years of the program and what volume of 
oxygenate that represented. Second, feedstocks for the production of 
these oxygenates were examined to determine whether sufficient 
feedstock supplies would be available. Third, EPA examined the adequacy 
of projected production capacity for the dominant oxygenates for the 
first years of the program. Fourth, EPA investigated whether 
transportation and distribution networks were adequate to support the 
program during the initial years. Fifth, EPA examined the projected 
storage and blending capability during this time frame. EPA examined 
the capability over time of each link in the renewable oxygenate 
production and distribution chain to handle the demands of the 
renewable oxygenate program, and concluded that a phase-in of the 30 
percent requirement is necessary and that the phase-in being 
promulgated today is an appropriate response to leadtime concerns.
2. Likely Renewable Oxygenates
    Ethanol is likely to be the dominant renewable oxygenate used to 
meet the renewable oxygenate requirements, especially during the 
initial years of the program, since it is the only renewable oxygenate 
currently produced in large quantities. Since ethanol cannot be blended 
during the summer months to meet the requirements of the program, its 
use will be concentrated during the winter months. ETBE, the simplest 
ether derived from ethanol, also is likely to be used in significant 
quantities since it, unlike ethanol, can be blended during the summer 
months to meet the requirements of the program. As discussed below in 
section III.F.6, however, ETBE production capacity is expected to be 
virtually non-existent in 1995 due to construction and permitting time 
constraints. Its use is expected to increase by 1996 through the 
conversion of existing MTBE facilities so that the requirements of the 
program are met by a combination of ethanol use in the winter and ETBE 
use year-round. Other renewable oxygenates are not expected to be 
available in significant quantities before 1997 given the leadtime 
required to design and construct new renewable production facilities. 
ETBE use is expected to increase further during the summer months once 
the Phase II RFG standards take effect in the year 2000, since ETBE use 
will make it easier (relative to MTBE) for refiners to achieve the more 
stringent VOC performance standards.
3. New Renewable Oxygenate Demand
    Before EPA could evaluate the adequacy of the renewable oxygenate 
supply, distribution, and blending capacity, it was necessary to 
estimate the program's demand for renewable oxygenates. The estimate 
was derived in terms of new ethanol demand, since as discussed above 
only ethanol or ETBE are expected to be used in significant quantities 
during the first few years of the program, and since the use of ETBE 
would not alter the total amount of ethanol required by today's rule 
because the oxygen in ETBE is derived solely from ethanol. The ethanol 
demand created by the program was estimated by multiplying the 
projected 1995 volume of reformulated gasoline covered by the Federal 
RFG program (including the two covered California areas) of 38.7 
billion gallons per year by the volume percent of ethanol (5.76 
percent) necessary to meet to 2.0 weight percent oxygen requirement in 
30 percent of RFG. As a result, today's program is estimated to require 
about 670 million gallons of ethanol to meet the full 30 percent 
requirement. In actual practice, refiners may blend greater or lesser 
amounts of ethanol in any individual gallon of RFG, depending on such 
factors as tax credits and price and availability of various 
oxygenates.
    The actual amount of new ethanol production required by today's 
rule is smaller than 670 million gallons because some ethanol is 
currently sold in areas covered by the RFG program. Based on the 
monthly reporting by Information Resources, Inc. (IRI) for 1993, it 
appears that as much as 280 million gallons of ethanol is already being 
used in areas covered by the reformulated gasoline program (State-wide 
data was weighted based on population to reflect ethanol consumption 
only in the RFG areas within the State). Not all of this can be 
credited toward the renewable oxygenate program, however, unless the 
summertime use is converted to ETBE. Based on the IRI data, as much as 
180 million gallons of ethanol is currently being used during those 
months of the year in which EPA would expect non-VOC-controlled 
gasoline to be produced (on average September 15 through March 31). 
Thus, the amount of additional wintertime ethanol production required 
to meet a 30 percent renewable oxygenate requirement in 1995 would be 
approximately 490 million gallons (390 million gallons in new, year-
round capacity in later years once ETBE production capacity can be 
brought on-line). A 15 percent phase-in of the program would require 
approximately 155 million gallons of additional ethanol production. 
While this volume of ethanol could be met using existing capacity by 
displacing ethanol from existing ethanol markets, EPA believes, for 
reasons discussed earlier, it is desirable to minimize displacing 
significant amounts of ethanol from existing markets.
4. Feedstock Capacity
    The next step in EPA's analysis was to determine whether sufficient 
feedstocks were available to permit this increase in renewable 
oxygenate production. According to comments received from agricultural 
interests, corn is the feedstock for 90 percent of current ethanol 
production and is expected to provide the vast bulk of the feedstock 
for new ethanol capacity added in the near term. Of the total 8.7 
billion bushels of corn produced in an average year,17 
approximately 360 million bushels (approximately 4 percent of average 
annual corn production) was used to produce an estimated 900 million 
gallons of ethanol. Therefore, the estimated 490 million gallons of new 
ethanol demand resulting from today's rule would increase corn demand 
by approximately 195 million bushels, or about 2 percent. Based on this 
analysis, EPA has concluded that the feedstock demands for this program 
can be satisfied solely with corn without significant difficulty. In 
addition, other feedstocks can be used to produce renewable oxygenates, 
including waste products from farms, dairy operations, bakeries, and 
the soft drink industry; from cellulosic sources such as grasses and 
fast-growing energy crops, and from such sources as municipal solid 
waste. Based on the diversity and immense supply of these potential 
feedstocks, EPA has concluded that feedstock supplies are sufficient to 
support the requirements of the renewable oxygenate program being 
promulgated today.
---------------------------------------------------------------------------

    \1\7According to information provided by John W. McClelland of 
USDA, ``Memorandum for Richard Wilson, Director, Office of Mobile 
Sources, U.S. Environmental Protection Agency,'' June 20, 1994.
---------------------------------------------------------------------------

5. Ethanol Supply and Production Capacity
    Current (1993) ethanol operating production capacity nationwide has 
been estimated by DOE to be approximately 1.15 billion gallons. Data 
from IRI for 1993 estimates ethanol consumption at roughly 1.25 billion 
gallons, and EPA received comments from an ethanol producer that 1994 
ethanol production was projected to be 1.25 billion gallons. As a 
result, current ethanol production would be more than sufficient to 
meet the requirements of today's rulemaking as long as no constraints 
were placed on the volume of ethanol that could be diverted from 
existing markets. However, as discussed above, there are several 
reasons why EPA considers it appropriate to minimize to the extent 
possible diverting ethanol from existing markets to satisfy the 
renewable oxygenate program. As a result, EPA examined the amount of 
current excess ethanol capacity and projected new ethanol capacity to 
determine the amount of renewable oxygenates that would be available to 
supply the needs of the program being promulgated today during the 
initial years of the program.
    The U.S. Department of Agriculture estimates that the current 
ethanol production capacity is as high as 1.4 billion gallons per year. 
One commenter representing the ethanol industry submitted a list of 
existing ethanol plants and their operational capacity which suggested 
that current ethanol production capacity is also nearly 1.4 billion 
gallons per year. Based on this production capacity information and on 
the current domestic ethanol consumption estimates, it appears that 
there may be approximately 150 million gallons of excess ethanol 
production capacity (some of which may currently be exported) currently 
available that could be used to supply the requirements of the 
renewable oxygenate program. However, not all of this production could 
be used to supply ethanol for blending during the winter; only 
approximately 80 million gallons could be supplied from current excess 
capacity during the winter months.
    In addition to current excess capacity, a considerable amount of 
new capacity is expected to come on-line in the remainder of 1994, 
1995, and 1996, according to information supplied by the Renewable 
Fuels Association and USDA. This information suggests that 
approximately 305 million gallons per year of additional ethanol 
capacity is currently under construction and will become available in 
1995. (Additional amounts are possible, but more speculative.) 
Furthermore, plans were being made for another 304 million gallons of 
annual capacity to be brought on line in 1996, though much of that 
apparently depended on the outcome of today's rulemaking. USDA 
estimated similar increases in ethanol capacity over this time period. 
It should be noted that not all of the additional capacity available in 
1995 would be available at the beginning of the year, and not all of it 
could be dedicated to production only during the winter months as would 
be required until ETBE production capacity comes on-line. A similar 
situation would occur in 1996. After considering these factors, EPA has 
concluded that approximately 93 million gallons of additional ethanol 
production from new capacity will be available for blending during the 
winter months to meet the program requirements in 1995, and an 
additional 157 million gallons to meet the program requirements during 
the winter months in 1996.
    It should be noted that additional ethanol capacity also may become 
available from corn processors, many of whom already have feedstock 
processing facilities in operation and would only need to install the 
capital equipment necessary to ferment the starch and separate the 
ethanol. Such processors may be able to install ethanol production 
capacity relatively quickly. Based on comments received, however, EPA 
cannot conclude with any degree of assurance that such additional 
capacity will become available.
    Based on the foregoing analysis, EPA believes that as much as 173 
million gallons of new ethanol production can be made available during 
the winter months to meet 1995 program requirements and 330 million 
gallons during the winter months to meet the 1996 requirements. After 
taking into consideration the 180 million gallons of ethanol currently 
blended in the RFG markets during the winter months, a total of 353 
million and 510 million gallons of ethanol should be available for 
blending during the winter months in both 1995 and 1996, respectively. 
As shown in the following table, absent a phase-in and ETBE production 
capacity, 317 million gallons of ethanol would have to be diverted from 
existing markets in 1995 and 160 million gallons would have to be 
diverted in 1996.

  Summary of Ethanol Supply/Demand (MM gal) and Need for Displacement   
------------------------------------------------------------------------
                                    1995 (15%     1995 (No              
                                    Phase-in)    Phase-in)       1996   
------------------------------------------------------------------------
New Renewable Oxygenate Ethanol                                         
 Demand..........................          335          670          670
Existing EtOH Demand in RFG Areas                                       
 During Winter\1\................          180          180          180
Net New Winter Capacity Required.          155          490          490
Current Winter Excess Capacity...           80           80           80
1995 New Winter Capacity\2\\3\...           93           93          164
1996 New Winter Capacity\2\\3\...            0            0           89
Shortfall (Displaced from                                               
 Existing Markets)...............  ...........          317       157\4\
------------------------------------------------------------------------
\1\Based on IRI estimates.                                              
\2\If additional summer production can be stored until the winter, then 
  this estimate could be increased slightly.                            
\3\Annual available new capacity is derived from expected capacities of 
  ethanol plants under design/construction prorated by their projected  
  start-up dates.                                                       
\4\Will be reduced to the extent ETBE capacity can come online.         

    To the extent that existing ethanol storage capacity can be used to 
store ethanol produced during the summer for use in the winter, and to 
the extent that ETBE can be produced from ethanol produced during the 
summer and be blended into summer RFG, the amount of ethanol displaced 
from existing markets would be reduced. Based on comments received by 
EPA, the amount of ethanol storage capacity appears to be approximately 
116 million gallons. If this storage capacity were devoted to storing 
summer ethanol for use in winter RFG, then ethanol displacements from 
existing markets would fall to 201 million gallons in 1995 (with no 
phase-in) and 41 million gallons in 1996. As discussed in the next 
section, EPA does not anticipate that significant amounts of ETBE can 
be available in 1995, though sufficient amounts to meet the needs of 
the program could potentially be available in 1996. ETBE blended into 
VOC-controlled RFG receives credit under today's rule, so its 
availability would allow the new summer ethanol production capacity to 
satisfy part of the renewable oxygenate requirement and would reduce 
the displacement of winter ethanol from existing, non-RFG markets. 
Based on this analysis, EPA believes that insufficient renewable 
oxygenate production capacity is likely to be available to supply the 
30 percent renewables requirement by 1995 without a considerable shift 
of supply from existing markets, but that adequate capacity should 
exist by 1996.
6. ETBE Capacity
    ETBE, the simplest ether derived from ethanol, offers several 
advantages to refiners over ethanol or MTBE. Unlike ethanol blends, 
ETBE blends can be shipped through pipelines. ETBE has a higher octane 
value than MTBE or ethanol, which would be valuable to refiners 
struggling to satisfy octane demand while simultaneously reducing high-
octane components such as aromatics and olefins in order to comply with 
the RFG toxics and NOx requirements. Like MTBE, ETBE does not produce 
commingling-related increases in RVP levels and hence is eligible for 
credit year-round under today's rule. ETBE also has a lower blending 
RVP than ethanol or MTBE, which in the near term would permit refiners 
who use ETBE to remove less butane to reach a desired RVP level. 
Beginning in the year 2000, ETBE's low blending RVP should be even more 
attractive when the more stringent Phase II performance requirements 
for RFG take effect. Finally, larger amounts of ETBE than MTBE or 
ethanol are needed to satisfy RFG's oxygen requirement, and these 
larger amounts of ETBE would dilute undesirable gasoline properties 
such as sulfur to a greater extent than would the other two oxygenates.
    However, ETBE typically costs more to produce than MTBE or ethanol 
per unit oxygen. Because of these cost disadvantages current ETBE 
production levels are very low. EPA expects ETBE production to grow 
even without today's rule in order to achieve the low RVP levels needed 
to meet RFG's Phase II VOC performance standards. Today's rule will 
make ETBE production even more attractive, since ETBE-blended RFG can 
receive renewables credit throughout the year. However, EPA has 
concluded that large amounts of additional ETBE capacity cannot be 
expected for 1995. At least one year and perhaps longer is expected to 
be required before significant volumes of ETBE become available. 
According to current ether producers, existing MTBE plants are likely 
to require one to three years to convert to ETBE production. Up to a 
full year is needed to acquire construction permits and complete the 
requisite engineering work. Conversion of the MTBE plant to produce 
ETBE is estimated to require from six months to two years, and several 
months of trial production may be needed before full production of ETBE 
can commence. Furthermore, ETBE production is also dependent on the 
development of adequate ethanol production, unless the ethanol is 
merely diverted from existing markets. Based on this information, EPA 
does not expect significant amounts of ETBE production to be possible 
until the summer of 1996.
    Furthermore, ether production process licensers also indicated that 
plant conversion to ETBE production could reduce throughput (relative 
to MTBE throughput), depending on the plant and the type of equipment 
installed. The reduction is caused by differing reaction conditions and 
the different nature of the reactants involved. Since considerable MTBE 
capacity would have to be converted to ETBE production to satisfy the 
full 30 percent renewables requirement, EPA is concerned that this loss 
of throughput might create shortages of oxygenates during the first 
year of the RFG program. EPA believes that phasing in the renewables 
requirement will reduce the risk of such shortages and allow a more 
orderly phase-in of ethanol and ETBE production capacity.
7. Transportation
    EPA has also analyzed whether the additional ethanol produced under 
today's rule can be transported from where it would be produced to 
where it would be consumed. According to the Army Corps of Engineers 
(Corps), water-based transportation is the most economical method of 
shipping ethanol both within the Midwest and from the Midwest to East 
Coast and West Coast markets. For plants and markets without access to 
water-based transportation, railway transportation is the most likely 
transportation mode. EPA has analyzed each piece of the transportation 
network, specifically: (1) The river barge capacity on the Mississippi 
River, (2) the ship or ocean barge capacity between the Gulf of Mexico 
and East and West Coast markets, and (3) the transportation capacity 
for ethanol movement from ports to retail markets.
    Based on a 1992 report by the Army Corps of Engineers regarding 
barge traffic on U.S rivers, it appears that transportation by barge of 
all of the new ethanol production resulting from today's renewable 
oxygenates program would represent less than 1 percent of U.S. river 
barge capacity. As a result, EPA has concluded that today's program is 
unlikely to cause noticeable changes in shipping patterns or shipping 
prices. Based on current barge shipping prices, the cost for shipping 
ethanol from the Midwest to the Gulf of Mexico is estimated to cost 4-5 
cents per gallon.
    The barges used on inland waterways cannot be used on the open 
ocean. Hence ethanol destined for East Coast or West Coast markets must 
be transferred to ocean-going freighters or tankers. Nevertheless, 
based on conversations with New Orleans port officials, current 
shipping capacity should be more than adequate to supply the shipping 
requirements demanded by today's rule. Transportation from the Gulf to 
either Coast is expected to cost 5-7 cents per gallon.
    Not all the ethanol shipped from the Midwest to other markets would 
have to be shipped by ocean-going vessels, however, since some of the 
ethanol could be used in ether plants located in the Gulf area to 
produce ETBE, which then would be blended into gasoline and shipped by 
pipeline to markets in Texas, the Midwest, or the East Coast. Pipelines 
are considered the most economical method of transporting liquids, and 
the costs of shipping ETBE to RFG markets by pipeline would be 
comparable to the costs of shipping MTBE to such markets.
    Furthermore, the averaging and trading provisions incorporated into 
today's action can be used to limit to some extent the amount of 
oxygenate transportation that is necessary. As much as 12 percentage 
points out of the total 30% renewable oxygenate requirement could 
theoretically be met with ethanol blended in the Midwest RFG markets 
where transportation constraints are limited, and the credits traded to 
refiners marketing RFG in more distant markets.
    Given the foregoing analysis (which is discussed more fully in the 
RIA), EPA does not believe that transportation presents a bottleneck to 
implementation of today's rule, although there are cost implications. 
Furthermore, EPA did not receive any comments suggesting that 
transportation would present implementation problems for the renewable 
oxygenate rule.
8. Storage and Blending Capacity
    Given sufficient production of ethanol and adequate transportation 
from the point of production to their final markets, the remaining 
lead-time issue is that associated with adequate ethanol storage and 
blending capacity at the terminals where it is blended with gasoline. 
When the ethanol is offloaded at its end-use market, it must be stored 
in large terminal storage tanks. The capacity of these tanks must be 
sufficient to offload the entire shipment. Once offloaded, the ethanol 
then must be blended with gasoline. Some terminals splash-blend ethanol 
with essentially no additional equipment or facilities, while others 
use more sophisticated blending equipment. EPA did not receive comments 
of a nature sufficient to evaluate the adequacy or inadequacy of 
current ethanol storage and blending facilities. In order to determine 
whether adequate storage and blending capacity to support the renewable 
oxygenates program exists, EPA estimated the storage and blending 
capacity being used to meet the current demand for ethanol in the RFG 
areas and compared that with the storage and blending capacity that 
would be necessary to meet the program requirements. In order to 
estimate the current storage and blending capacity, EPA examined the 
peak monthly ethanol blending rates reported by IRI for each RFG market 
during 1993. EPA extrapolated this peak blending rate over the entire 
non-VOC control season to estimate the current blending capacity 
available to support the renewable oxygenate program. The results of 
this analysis are shown in the following table.

          Ethanol Storage and Blending Capacity in RFG Markets          
------------------------------------------------------------------------
                                                     Winter       % of  
                                                    Ethanol    total RFG
                                     Peak Market    Blending      that  
       State (RFG areas only)        Share\1\\4\    Capacity    contains
                                                      (MM      renewable
                                                  gals)\2\\3\    O2\5\  
------------------------------------------------------------------------
Illinois/Indiana...................         36           59         2.6 
Kentucky...........................         16            9         0.4 
Wisconsin..........................         13           18         0.8 
  Midwest Total....................  ...........         86        3.8  
                                    ------------------------------------
Connecticut........................         13           10         0.5 
Delaware...........................         36            7         0.3 
D.C................................         36            5         0.2 
Maryland...........................          3            4         0.2 
New Jersey.........................          8           10         0.5 
New York...........................         29           60         2.7 
Pennsylvania.......................         19           38         1.7 
Virginia...........................         17           19         0.9 
  Northeast Total..................  ...........        153         7.0 
                                    ------------------------------------
Texas..............................          4            9         0.4 
California.........................          5           20         0.9 
      Total........................  ...........        268        12.1 
                                    ====================================
                                                                        
------------------------------------------------------------------------
\1\Peak market share for ethanol blended in any month in 1993 based on  
  IRI data (assuming ethanol blended at 10 vol%).                       
\2\Wintertime ethanol only and no ETBE capacity.                        
\3\Peak ethanol volume blended in any month in 1993 (based on IRI data) 
  extrapolated over the winter season, expressed as millions of gallons.
\4\Assumes ethanol blended at 3.5 wt% oxygen.                           
\5\Phase-in would require total of 15% in 1995 and 30% in 1996;         
  percentages are based on proration of ethanol content to 2.0 wt%      
  oxygen.                                                               

    Based on this analysis, adequate tankage and blending equipment 
exists for roughly 12 percent of the oxygenate required by the 
reformulated gasoline program to be supplied by ethanol during the 
winter months only. This is well short of the total 30 percent required 
by the program, and even short of a 15 percent phase-in level. In order 
to implement the program smoothly, this shortfall will have to be made 
up by one of three means: first, pass a greater volume of ethanol 
through existing tankage and blending equipment; second, construct new 
ethanol storage and blending capacity at terminals; or third, 
supplement ethanol blended at terminals with ETBE blended at 
refineries.
    It is reasonable to assume that some additional ethanol could be 
blended at the existing facilities by increasing the throughput of 
storage tanks and blending equipment, particularly in the Midwest where 
the close proximity to ethanol production facilities allows for greater 
flexibility in receiving and blending ethanol shipments. EPA does not 
believe it unreasonable to assume that ethanol throughput could be 
increased by 25 percent or more in 1995, since it is unlikely that 
existing facilities were all designed to operate at their current peak 
levels with no provisions made for market growth. To the extent 
throughput can be increased by even more than 25 percent in some 
markets it could be used to offset (through credit trading) any 
shortfall in other markets. As a result, a phase-in level of 15 percent 
should be achievable in 1995 even without expanding ethanol storage and 
blending facilities. Even if this were not the case, it is reasonable 
to assume that some additional storage and blending capacity beyond 
that available in 1993 may have been planned to be available in 1995 to 
keep up with the planned increases discussed above in ethanol 
production by 1995.
    It is not reasonable, however, to assume that existing facilities 
could increase their throughput by the 150 percent necessary to achieve 
the full 30 percent requirement of today's program. Furthermore, as 
discussed above, no appreciable ETBE production capacity is expected to 
be available until the summer of 1996. As a result, the only way to 
meet the full 30 percent requirement of the program in 1995 would be 
through the addition of new ethanol storage and blending capacity. 
Current estimates of the time necessary to obtain permits, construct 
new storage and blending facilities, and make them fully operational 
vary, but range between approximately 6 and 18 months. Thus, sufficient 
time would not be available to bring on-line additional ethanol storage 
and blending facilities for use until the fall of 1995. The expanded 
ethanol blending capacity available by this time is unlikely to be 
sufficient to supply the full 30 percent requirement over the course of 
the entire year. Even if it were sufficient, it would not have been 
available for the entire year and hence would not be sufficient to 
satisfy the 30 percent requirement. In order to meet the full 30 
percent requirement in 1995, storage and blending capacity in excess of 
what would be needed in subsequent years would have to be built in 
1995. While it is very difficult to predict specific market responses, 
especially given the compliance flexibilities built into the program, 
it does not appear that sufficient ethanol storage and blending 
capacity is likely to exist for 1995 without either a phase-in of the 
program or extraordinary measures to provide additional blending 
capacity (e.g., tanker truck shipments from terminals outside the RFG 
areas).
    The situation is different for 1996, however. It may be possible by 
1996 for a considerable amount of ETBE to be blended at the refineries 
during both summer and winter months. Since refinery-blended ETBE would 
not require specialized blending facilities at terminals, increased 
ETBE use might reduce considerably the 150% increase in ethanol 
blending capacity that would otherwise be necessary. Furthermore, the 
additional time provided by a phase-in would allow for the construction 
of additional ethanol storage and blending facilities, most of which 
could be in place at the beginning of the annual averaging program in 
January of 1996. Much of this additional ethanol blending capacity is 
likely to be added in the Midwest to take advantage of lower ethanol 
transportation costs and State tax exemptions. However, even if every 
gallon of RFG in the Midwest contained 10 volume percent ethanol, only 
40% of the renewable oxygenates required by the program could be met by 
Midwest ethanol usage in RFG. As a result, until a significant amount 
of ETBE production comes on-line, ethanol storage and blending capacity 
in RFG markets outside the Midwest will have to expand by as much as 
100 percent (i.e., capacity would have to double).
9. Summary and Conclusions
    Based on the foregoing analyses, EPA believes that given the 
compliance flexibilities built into the program it is feasible for 
sufficient feedstocks, production capacity, transportation capacity, 
and blending capacity to be available to meet the full 30 percent 
renewables requirement by 1996. However, EPA is concerned that neither 
supply nor blending capacity will be adequate in 1995 to satisfy the 
full 30 percent requirement. While a supply shortfall could be filled 
by diverting ethanol from its current markets to RFG markets, such 
diversions would be costly and would not meet any of the objectives of 
today's rule, as has been discussed earlier in this notice. 
Furthermore, even if such diversions were to occur, EPA is concerned 
that insufficient blending capacity would be in place in 1995 to blend 
the requisite volumes of ethanol into non-VOC-controlled RFG. The risks 
of this are significant and the consequences could be dramatic with 
shortages, price spikes, and other market disruptions. For these 
reasons, EPA has decided that a phase-in of the 30 percent renewables 
requirement is both necessary and prudent. During the first year of the 
program (December 1, 1994 through December 31, 1995), 15 percent of the 
RFG program's minimum 2.0 weight percent oxygen requirement must be met 
by renewable oxygenates. In 1996 and subsequent years, the minimum 
renewables content will increase to 30 percent of the RFG program's 
minimum oxygen content. Even with such a phase-in, it is still likely 
that some shifting will occur from current markets into the markets 
created by today's program as a result of local economic conditions and 
logistical considerations. However, these shifts are likely to be small 
relative to the overall size of the renewable oxygenate program and 
would not materially alter the benefits of today's rule.

G. Shoulder Season/Non-commingling Season

1. Summary of the Issue and Comments
    EPA received comment on the ozone impacts of the renewable 
oxygenate proposal, particularly during the ``shoulder season'' periods 
of April 1 through May 31 and September 16 through October 31 when the 
reformulated gasoline high ozone period is not in effect. During these 
periods, VOC-controlled RFG is not required at the retail level. 
Commenters expressed concern that the likely increase in ethanol market 
share in non-VOC-controlled RFG would increase VOC emissions both 
directly (since the RVP increase from splash-blended ethanol would not 
be constrained by vapor pressure limits in non-VOC-controlled RFG) and 
indirectly (since greater commingling effects would occur as the market 
share for ethanol-blended RFG increases). Commenters representing state 
air quality regulators (NESCAUM, STAPPA/ALAPCO, and CARB), argued that 
the net result of such increases in average RVP levels during the 
shoulder season would be increased VOC emissions and higher ozone 
levels, especially in the Northeast and California. NESCAUM suggested 
that EPA extend the season in which volatility-increasing alcohols 
would not receive renewable credit to April 1st through October 31st in 
order to eliminate the risk of any potential ozone increases.
    Other commenters such as the Clean Fuels Development Coalition and 
the Ethanol Ad-Hoc Committee argued that the use of ethanol-blended 
RFGs during the shoulder season would not cause additional ozone 
exceedances for two reasons. First, the spillover of VOC-controlled 
RFG, primarily ether-containing RFG, would reduce shoulder season RVP 
levels below current levels. Second, they believed other pollution 
reduction programs being implemented over the next several years would 
reduce ozone precursor emissions during the shoulder season. The 
combined effect would reduce such precursors by more than any increases 
due to increased ethanol use, thereby negating any detrimental 
environmental effects.
2. EPA Analysis of the Renewable Program's Shoulder Season Emission 
Impact
    Although EPA agrees that increased ethanol use in non-VOC-
controlled gasoline is likely, the Agency's analysis indicates that any 
detrimental environmental effects should be negligible. The 
reformulated gasoline program requires VOC-controlled fuel at the 
terminal from May 1-September 15. Refiners have indicated that they 
would begin shipping such fuel as early as March 1 in order to assure 
that low-volume terminals and retail stations have fully converted to 
VOC-controlled RFG by May 1 and June 1, respectively, as required by 
the RFG program.
    Since most fuel is sold at high-turnover retail outlets, EPA's 
analysis shows that many vehicles will begin operating on VOC-
controlled RFG during April. Also, most vehicles will continue to 
operate on VOC-controlled RFG until late September or early October, 
since the fuel distribution system requires some time to replace summer 
fuel with winter fuel after terminals are permitted to switch to winter 
fuel on September 16. Experience with the federal volatility program 
supports these conclusions, as discussed in the RIA.
    EPA concludes that while increased ethanol use is likely in RFG 
sold from mid-October through late March, increased ethanol use 
resulting from this program will be essentially zero in May and will be 
minimal in April, late September, and early October. Furthermore, 
ethanol's commingling effect changes relatively little at ethanol 
market shares between 30 and 70 percent and decreases at higher market 
shares. As discussed in section III.F, a number of States in the 
Midwest and Northeast which will participate in the RFG program already 
have peak ethanol market shares approaching or even above 30 percent. 
In addition, experience with the winter oxygenated fuels program 
indicates that ethanol blends may well have represented 30 percent or 
more of the winter RFG demand in some RFG markets without today's rule 
(including some midwestern and northeastern RFG markets), suggesting 
that any increase in ethanol use which might occur during the shoulder 
season would cause little if any increase in commingling effects. Both 
of these factors suggest that emission impacts resulting from ethanol's 
vapor pressure boost and commingling effects during the shoulder season 
will be less than otherwise anticipated. Since ETBE use in summer RFG 
would likely reduce ethanol use in winter RFG, the extent of any 
ethanol-related VOC increase during the shoulder season is likely to 
decrease as ETBE capacity and usage increase. Finally, it should be 
noted that VOC emissions are unconstrained during the non-VOC control 
season under both the RFG and volatility control programs since such 
emissions are not associated with ozone exceedances because they do not 
occur outside the summer months in most of the country. Thus, today's 
rule is unlikely to result in increased VOC emissions during the period 
when such emissions are controlled under current EPA fuel programs.
3. EPA Analysis of the Extent of the Shoulder Season Air Quality 
Problem
    In examining the shoulder season issue, EPA evaluated the extent of 
the air quality problem during the shoulder season. EPA has found that 
ozone violations outside the May 1 to September 15 period (the period 
during which all gasoline at terminals, and much of the gasoline at 
retail stations, is expected to be VOC-controlled) are minimal for 
those RFG areas outside of California and Texas. Ozone monitor 
exceedances during September 16-October 31 and the month of April in 
the Northeast comprised fewer than 4 percent of all such exceedances 
recorded in RFG areas in 1986-1988. More recent 1990-1992 data for the 
Northeast confirm the earlier results: less than 2 percent of all ozone 
monitor exceedances recorded in RFG areas occurred in the Northeast in 
April, late September, and October (and none in other winter months). 
Further examination of the 1990-1992 data revealed that the documented 
ozone violations involve just two distinct ozone episodes. These 
episodes (one in late April and one in mid-September) happened very 
near the time of year when much of the RFG sold at retail stations is 
expected to be VOC-controlled. The various control measures that apply 
year-round that will be implemented to attain the ozone standard on the 
highest exceedance days should reduce ozone concentrations below the 
National ambient air quality standard for ozone in the shoulder season. 
Furthermore, given the analysis of fuel turnover discussed previously, 
EPA believes that the renewable oxygenate program is unlikely to 
contribute to increased ozone exceedances or additional high ozone 
episodes in the Northeast.
    However, the 1990-1992 data also indicate that a substantial number 
of ozone violations occurred during the shoulder seasons in the 
reformulated gasoline areas in California and Texas. Violations appear 
to occur throughout the year in both states. However, the state of 
California has imposed additional fuel regulations within its borders 
to address air quality problems, and more stringent volatility 
requirements go into effect throughout the state of California in 1996. 
These controls will already cover the April-October time frame in 
southern California, and the state of California can extend this if 
they believe additional volatility controls during the period are 
appropriate.
    Although Texas did not submit comments to the Agency on this issue, 
the possibility does exist that the renewable oxygenate program may 
increase VOC emissions outside the high ozone season in Houston and 
Dallas-Fort Worth. To address this problem, EPA has considered further 
restricting the times during which ethanol would receive renewables 
credit in this rule. However, the year-round nature of Texas' current 
ozone exceedances could make such a solution impractical. Furthermore, 
EPA's analysis of ethanol production and blending capacity indicates 
that further restrictions on the times when ethanol would receive 
renewables credit could exacerbate the supply, distribution, and 
blending concerns for 1995 and 1996 discussed in section III.F. As a 
result, EPA does not believe at this time that revising the design of a 
national program (through such means as extending the period when 
alcohols do not receive credit toward the renewables requirement on a 
nationwide basis) is appropriate. Furthermore, EPA believes that 
revising the design of the program on less than a national basis (e.g., 
just for Texas and/or California), would be inappropriate at this point 
in time without taking into consideration the unique requirements 
within each State.
4. Provisions of Today's Rule Regarding the Shoulder Season
    As discussed above, EPA does not expect today's rule to result in 
increased ozone exceedances during the shoulder season. However, EPA 
recognizes that States may wish to further restrict the times during 
which ethanol blended into RFG would receive credit toward the 
renewable oxygenate requirement in order to address their unique air 
quality problems. As a result, EPA will extend the non-commingling 
season, during which oxygenates such as ethanol which demonstrate 
commingling-related increases in RVP will not receive credit toward the 
renewable oxygenate requirement, to any or all covered areas within a 
State at the State's request, subject to certain limitations as 
discussed below.
    California is not subject to the preemption of state and local fuel 
controls under section 211(c)(4) of the Act and, therefore, has broad 
flexibility in adopting its own state fuel control programs. While 
other states are subject to these provisions, they can also implement 
their own fuel control programs if they are approved as part of their 
state implementation plan (SIP) as being necessary to attain the 
national ambient air quality standards. As a result, the states could 
take action on their own without petitioning EPA to modify its program. 
However, this petition provision allows the states the additional 
flexibility of having the federal fuel control program modified (in 
this limited manner) to adjust to their unique air quality needs.
    The request for extension of the non-commingling season must be 
signed by the Governor of the State for which the extension is to 
apply. The petition must include evidence demonstrating that each of 
four criteria have been met. First, the petition must include data 
collected subsequent to the implementation of the renewable oxygenate 
program showing that an increase in oxygenates which produce 
commingling-related RVP increases (such as ethanol) has occurred in the 
fuel sold in the petitioning State during the shoulder season, and that 
this increase is likely to continue. Second, the petition must include 
evidence demonstrating a pattern of violations during the shoulder 
season of the ozone National Ambient Air Quality Standards over the 
previous three years, based on ozone monitoring data, which would 
warrant the extension being requested. In effect, this second criterion 
would require that the pattern of ozone violations extend into the 
shoulder season. Third, the petition must include an analysis 
demonstrating that the pattern of ozone violations is likely to 
continue even with implementation of all other ozone air quality 
control measures and programs currently planned by the State. Fourth, 
the petition must demonstrate that its findings were made by the 
Governor through a process that was responsive to public input and that 
included public notice and an opportunity for a public hearing. These 
provisions are intended to provide States with air quality concerns the 
ability to prevent any direct or indirect increase in VOC emissions 
during the non-summer season, while simultaneously providing assurance 
that any such extension is granted only for those areas where 
restrictions on blending ethanol and other commingling oxygenates may 
help address a genuine air quality problem.
    Once a valid petition is received satisfying the noted criteria, 
EPA will publish a notice in the Federal Register and tentatively 
establish the non-commingling season as requested by the governor and 
the effective date for the new restrictions on blending of commingling 
oxygenates. These restrictions will take effect on the first day of the 
next complete non-commingling season beginning one full year after the 
petition is received. If a petition is received within three months of 
the publication of the notice in the Federal Register which 
demonstrates to the satisfaction of the Administrator either that the 
four criteria were not met or that the change to the non-commingling 
season is not feasible by the effective date in the notice, EPA retains 
the right to either reject the State's request for an extension or 
extend the effective date by up to two additional years, based on 
analysis of the information contained in both petitions (the State 
petition and the opposing petition). For example, a satisfactory 
request to extend the non-commingling season to encompass April which 
is received by the Administrator on April 20 of, say, 1997 would take 
effect on April 1, 1999 if no opposing petitions were submitted.
    Any changes in the duration of the non-commingling season as a 
result of these provisions will be enforced at the terminal, as 
discussed in section IV. It should be noted that the criteria discussed 
above imply that the non-commingling season will not be extended prior 
to 1997 for any State.

H. Program Benefits

    The reformulated gasoline program promulgated December 15, 1993 
will increase fossil energy use due to the need to reduce RVP, the 
increased production and use of oxygenates, and fuel economy losses 
resulting from fuel reformulation (as discussed in 59 FR 7716, February 
16, 1994, and the Regulatory Impact Analysis found in Public Docket No. 
A-92-12). As explained below, the use of renewable oxygenates in 
reformulated gasoline under the renewable oxygenate program being 
promulgated today should reduce the fossil energy used by the 
reformulated gasoline program, particularly in the long term. Today's 
renewable oxygenate program also helps assure that the RFG program is 
compatible with long-running national policies and programs to obtain 
the benefits associated with the use of renewable fuels and could, 
according to the Renewable Fuels Association, result in decreased 
imports of MTBE. Furthermore, the renewable oxygenate requirement will 
help assure that the environmental benefits of the reformulated 
gasoline program will be achieved and has the potential to enhance 
those benefits, as discussed more fully below. And finally, the 
renewable oxygenate program offers the potential for reduced greenhouse 
gas emissions in the future as more efficient renewable oxygenate 
production technologies are introduced.
1. Energy Benefits
    The energy benefits of the renewable oxygenate program are strongly 
dependent on the oxygenates used and the timeframe considered. 
Technical and economic factors suggest that in the early years of the 
program, the renewable oxygenate requirement will be met primarily with 
ethanol. According to a study prepared by the Department of 
Energy,18 if the 30 percent renewables requirement is met by 
either using ethanol produced in current-technology ethanol plants in 
winter RFG, or ETBE in summer RFG, the overall fossil energy consumed 
in RFG production and use would be smaller than would be the case if 
nonrenewable MTBE (the other oxygenate currently expected to capture a 
large share of the RFG oxygenate market) were the only oxygenate used 
in RFG.
---------------------------------------------------------------------------

    \1\8``Analysis Memorandum: Energy Requirements and CO2-
Equivalent Emissions of RFG,'' prepared by Margaret Singh, Argonne 
National Laboratory, for Barry McNutt, U.S. Department of Energy, 
June 6, 1994 and March 17, 1994 (draft). Other comments and studies 
were also provided to EPA claiming vastly different energy and 
global warming impacts than the DOE report. However, these other 
comments tended to focus on comparisons of ethanol and ETBE-blended 
RFG with conventional gasoline, instead of focusing on comparisons 
of ethanol and ETBE-blended RFG with MTBE-blended RFG. As a result, 
the DOE analysis contains the most relevant information regarding 
the impact of today's rule on fossil energy consumption and global 
warming emissions.
---------------------------------------------------------------------------

    The renewable oxygenate program will also help to diversify the 
country's transportation energy supply away from fossil energy 
(predominantly oil and natural gas) towards renewable energy by 
stimulating production of renewable fuels such as ethanol and renewable 
methanol. This program will have a large impact on the renewable energy 
industry in general and the ethanol industry in particular because the 
amounts of renewable fuels involved are large relative to historical 
production levels.
    The energy benefits of this program become more pronounced in later 
years. Improvements in the energy efficiency of ethanol production, 
achieved through such means as the use of cogeneration or waste 
products to provide process energy, will further reduce the fossil 
energy required to produce ethanol. Additional gains can be achieved by 
reducing energy consumption and fertilizer use in corn farming through 
changes in farming practices, using more energy-efficient equipment, 
increasing per-acre crop yields, and decreasing fertilizer use. 
Comments submitted by the Department of Agriculture and others, as well 
as previous studies by DOE and EPA cited in the proposal, indicate that 
as new feedstocks for ethanol such as cellulose are commercialized, and 
as renewable methanol production becomes viable, the fossil energy 
benefits of this program would increase substantially relative to 
nonrenewable MTBE use. By providing a secure minimum market for 
renewable oxygenates, today's program will help provide the certainty 
needed to encourage private investments in modern, high-efficiency 
agricultural practices and renewable oxygenate production technology.
2. Environmental Benefits
    a. Summer Ozone-Related Benefits. In addition to the energy 
benefits cited above, EPA believes this program has the potential to 
provide environmental benefits in the near term, with the potential for 
even greater environmental benefits in the future. These potential 
benefits stem from the incentives this program creates for the use of 
ETBE in summer RFG. Short-term limitations in ETBE capacity suggest 
that most of the near-term program requirements will be met through the 
use of ethanol blended into winter RFG. In the short term, summer RFG 
will not be affected by the program except to the extent that (1) 
renewable MTBE is substituted for nonrenewable MTBE, and (2) small 
amounts of ETBE capacity become available. Replacing nonrenewable MTBE 
with renewable MTBE would not alter the emission benefits of the RFG 
program. However, ETBE use helps assure that the VOC emission 
reductions sought by the RFG program are achieved or exceeded in-use. 
Since ETBE production consumes ethanol, ETBE use in summer RFG is 
likely to reduce direct ethanol use in summer RFG. (Even though ethanol 
used in summer RFG would not receive credit toward the 30% renewables 
requirement, such use is still permitted under the RFG program.) 
Ethanol's commingling effect discussed in section I tends to increase 
VOC emissions, so conversion of summer ethanol to ETBE (which does not 
have a commingling effect) should reduce VOC emissions.
    Replacing summer ethanol with ETBE may yield other benefits as 
well. ETBE-blended fuels with a given Reid vapor pressure (RVP) produce 
less vapor (and hence smaller nonexhaust VOC emissions) when heated 
above 100 degrees Fahrenheit than do ethanol fuels with the same RVP. A 
large fraction of summer VOC emissions are generated when gasoline is 
heated beyond 100 degrees Fahrenheit, so replacing ethanol or MTBE with 
ETBE in summer reformulated gasolines may yield additional VOC emission 
reductions. These reductions, which are related to the front-end 
distillation properties of different oxygenated fuel blends, have not 
been included in EPA's Simple or Complex Models for reformulated 
gasoline since sufficient data to quantify accurately the size of these 
reductions is not yet available. However, sufficient data is available 
to confirm expectations based on scientific theory that such reductions 
would occur.
    The size of the commingling and distillation benefits resulting 
from substitution of ETBE for ethanol in summer RFG depends on the 
market share of ethanol-blended gasolines in each market. As discussed 
above, EPA cannot quantify such benefits with certainty; however, the 
Agency estimates that if a 30 percent market share for ethanol blends 
in summer RFG were replaced entirely by ETBE blends, total VOC 
emissions could be reduced by as much as 5 percent beyond the 
reductions that would have occurred without changes in the market share 
for ethanol blends. Thus, by encouraging the conversion of summer 
ethanol into ETBE, the renewable oxygenate requirement will help assure 
that the RFG program achieves the maximum possible VOC reduction.
    b. Shoulder Season Environmental Impacts. EPA received comments 
raising the concern that the use of ethanol in the ``shoulder season'' 
(the months bordering the high-ozone season) could lead to ozone 
violations in certain areas. The comments raise two separate mechanisms 
by which ethanol use could increase emissions of ozone precursors. 
First, ethanol addition to gasoline causes fuel volatility to increase 
by approximately 1 psi, and during the shoulder season this increase is 
not constrained by the RFG program. Second, ethanol-blended fuels can 
produce emission increases due to the commingling and distillation 
effects described in the preceding section.
    EPA has considered the shoulder season issue in detail and has 
concluded that the emission reductions anticipated as a result of the 
RFG program should in most cases more than offset any emission 
increases due to the increased use of ethanol in the shoulder season. 
The basis for this conclusion is presented in section III.G of this 
notice and is discussed in detail in the RIA. Nevertheless, EPA has 
decided to allow States to petition the Administrator to extend the 
season during which ethanol blended into gasoline would not receive 
credit toward today's rule. The provisions governing the petition 
process are described in detail in sections III.B and III.G of this 
notice.
    c. Global Warming Benefits. In addition to the potential to reduce 
summer VOC emissions, the proposal for this rule stated that the 
renewable oxygenate requirement has the potential to reduce emissions 
of carbon dioxide (and possibly other greenhouse gases) resulting from 
the production and use of reformulated gasolines. However, the study by 
the Department of Energy cited previously indicates that with current 
technology, the use of renewable oxygenates leads to similar carbon 
dioxide-equivalent emissions (global warming potential of all emissions 
expressed as an equivalent mass of CO2 emissions) as those 
resulting from the use of nonrenewable MTBE. Testimony from the Oak 
Ridge National Laboratory on behalf of the National Corn Growers 
Association given at the January 14, 1994 public hearing on this rule 
also indicated that the use of renewable oxygenates (ethanol in 
particular) would have no impact on, and in some cases could lead to a 
reduction in, the greenhouse gas emissions associated with the use of 
gasoline. Overall, current technologies for ethanol production and use 
appear to have at best minimal benefits relative to nonrenewable MTBE 
production and use.
    But as noted by EPA in the proposal and as supported by comments 
received from the Department of Agriculture (see sections II and VI of 
this notice) and others, the use of new feedstocks (particularly 
agricultural and municipal waste products) and new, more efficient 
production technologies is likely to result in reduced emissions of 
CO2 related to fuel ethanol use. In addition, improved farming 
techniques can reduce emissions of other greenhouse gases, particularly 
N2O. EPA expects that expanding the market for renewable 
oxygenates such as ethanol will accelerate the introduction of more 
efficient feedstock and oxygenate production technologies. Improved 
efficiencies in these processes would result in reduced emissions of 
CO2 and other greenhouse gases. Hence, EPA believes that while the 
renewable oxygenate program may not provide global warming benefits 
currently, it will help stimulate the implementation of more efficient 
agricultural and oxygenate production practices, leading to reduced 
emissions of greenhouse gases than would occur with nonrenewable 
oxygenates.

IV. Enforcement

A. Overview of Enforcement Scheme

1. General Requirements
    The enforcement scheme for the renewable oxygenate requirements is 
similar to that used for the other reformulated gasoline requirements. 
The renewable oxygenate average standard applies to importers, and to 
refiners separately for each refinery,19 and has a calendar year 
averaging period.20 No per-gallon standard is included. Renewable 
oxygen credits may be created by any refiner who uses more renewable 
oxygenate than is required, and renewable oxygen credits could be used 
by any refiner to achieve compliance with this standard. The conditions 
and requirements for credit creation, transfer and use that would apply 
to renewable oxygen credits are the same as the conditions and 
requirements that apply under reformulated gasoline for benzene and 
oxygen credits.
---------------------------------------------------------------------------

    \1\9The remainder of this preamble section refers to refiners 
and importers collectively as refiners, but all references to 
refiners apply equally to importers unless otherwise noted. Note 
that downstream oxygenate blenders would not be not subject to the 
renewable oxygenate requirements.
    \2\0Reformulated gasoline produced during 1994 for use in 1995 
will be averaged with gasoline produced in 1995 under the 
reformulated gasoline regulations. This approach to averaging of 
gasoline produced during 1994 would be followed for renewable 
oxygenate averaging, creating an averaging period that is longer 
than one year for 1994-1995 only.
---------------------------------------------------------------------------

    The renewable oxygenate standard will be subject to a phase-in 
schedule. Under Sec. 80.83(b)(1), reformulated gasoline and 
reformulated gasoline blendstock for oxygenate blending (RBOB), on 
average, must have an oxygen content from renewable oxygenate that is 
equal to or greater than 0.30 weight percent from December 1, 1994 
through December 31, 1995. The 0.60 weight percent standard shall apply 
beginning on January 1, 1996.
    The renewable oxygenate regulation adds two types of RBOB that were 
not included previously in the reformulated gasoline regulation. These 
two generic RBOB types are ``any renewable oxygenate,'' and ``renewable 
ether only'' RBOB. A third type of RBOB, ``non VOC controlled renewable 
ether only'' RBOB has also been added and is appropriately used in 
those areas which have been granted extended non-commingling seasons 
(see ``D. Shoulder Season,'' below). The proposed renewable oxygenate 
rule allowed refiners to take credit for downstream blending of 
renewable oxygenate only if a contractual relationship between blender 
and refiner exists and if the refiner conducted a quality oversight and 
sampling program. EPA received several comments from parties who felt 
that the renewable oxygenate regulation could contain more flexibility. 
EPA agrees with these comments and adopted the approach described in 
the following paragraphs.
    Refiners are responsible for meeting the renewable oxygen standard 
for reformulated gasoline and RBOB and have two options for including 
renewable oxygenate in the compliance calculations required by 
Sec. 80.83(d). Under the first option, a refiner may claim credit for 
downstream renewable oxygenate blending only if there is a contractual 
relationship between the refiner and blender and the refiner carries 
out a suitable oversight program over the blender. The requirements for 
a downstream oxygenate blending oversight program are the same as those 
contained in Secs. 80.69 (a) (5) through (7) of the reformulated 
gasoline regulations. Among other requirements, the refiner must have a 
contractual relationship with the oxygenate blender and must comply 
with sampling and testing requirements.
    Under the second option, a refiner may assume that 2.0 weight 
percent oxygen from ethanol is blended with ``any renewable oxygenate'' 
RBOB. For ``renewable ether only'' RBOB, the refiner may assume that 
ETBE resulting in 2.0 oxygen by weight is to be blended. EPA has chosen 
the 2.0 weight percent assumption because it is consistent with the 
final reformulated gasoline RBOB provisions at Sec. 80.69(D). 
Additionally, a refiner may chose to produce ``any renewable 
oxygenate'' RBOB in lieu of ``any oxygenate'' RBOB for blending with 
ethanol, effectively reducing the number of RBOBs it produces to three 
types.
    Under the final reformulated gasoline regulation, downstream 
blenders are prohibited from violating the assumptions/instructions for 
RBOB used by refiners. Blenders, although not responsible for 
compliance with the renewable oxygenate mandate, are still responsible 
for adding appropriate oxygenate of the type specified in the RBOB 
transfer documentation under the final renewable oxygenate regulations. 
Under Sec. 80.83(c)(2)(i)-(ii), no person may combine any oxygenate 
with ``any renewable oxygenate'' RBOB, ``non-VOC controlled renewable 
ether only'' RBOB, ``renewable ether only'' RBOB unless the oxygenate 
meets the ``renewable oxygenate'' definition. The ``renewable 
oxygenate'' definition is discussed in greater detail in section III of 
this preamble.
    Sections 80.83 (d) and (e) specify compliance calculations and 
conditions for the creation and transfer of credits. These criteria for 
creation of credits are the same as those specified in 
Secs. 80.67(h)(1)(i) through (iv) and Secs. 80.67(h) (2) and (3) of the 
reformulated gasoline regulations.
    The renewable oxygenate rule includes recordkeeping requirements, 
specified in Sec. 80.83(f). Refiners are required to maintain records 
demonstrating the renewable nature, volume, type, and purity of the 
oxygenate used and product transfer documentation for all renewable 
oxygenate, reformulated gasoline, or RBOB for which the refiner is the 
transferor or transferee. These same recordkeeping requirements also 
apply to oxygenate blenders who blend oxygenate with RBOB designated as 
``any renewable oxygenate,'' ``non-VOC controlled renewable ether 
only'' or ``renewable ether only.'' The records required by 
Sec. 80.83(f) must be retained for a period of five years and must be 
delivered to the Administrator or the Administrator's designated 
representative upon request.
    In today's final rule, EPA is requiring that refiners maintain 
records showing the renewable nature of all oxygenates. Under the 
proposed rule, records demonstrating the renewable nature of renewable 
ethanol were not required. However, today's final rule seeks to ensure 
that all oxygenates claimed as renewable do, in fact, come from 
renewable sources.
    Section 80.83(g) deals with reporting requirements. All refiners 
are required to submit reports related to compliance with the renewable 
oxygenate standard for reformulated gasoline, compliance calculations 
for the renewable oxygenate standard, and the transfer of renewable 
oxygen credits. These renewable oxygenate reports go beyond the 
reporting requirements included in the reformulated gasoline final rule 
issued in December 1993.
    Refiners are required to report, on a per-batch basis, the total 
weight percent oxygen and weight percent oxygen attributable to 
renewable oxygenates contained in the gasoline they produce. For all 
types of renewable RBOB, the refiner must report the weight percent 
oxygen subsequent to oxygenate blending, subject to the conditions set 
forth in Sec. 80.83(c). These requirements supplement the quarterly 
reports requirements found in existing Sec. 80.75(a) of the 
reformulated gasoline regulations.
    Refiners are also required to submit, on an annual basis, a report 
for all reformulated gasoline and RBOB produced during the previous 
calendar year averaging period. These requirements supplement the 
fourth quarterly report requirements found in existing Sec. 80.75(a). 
The fourth quarterly report must include (among other specified items) 
information regarding the total volume of reformulated gasoline and 
RBOB, the compliance total for renewable oxygen, the actual total for 
renewable oxygen, information about credits generated and transferred, 
and information about the party to whom (or from whom) credits were 
transferred.
    EPA intends that the attest engagement requirements for 
reformulated gasoline will apply to the renewable oxygenate standard. 
Sections 80.128 and 80.129 contain agreed upon procedures for refiners 
and importers and downstream blenders, respectively. These new 
provisions supplement the reformulated gasoline attest engagement 
requirements found in subpart F of that regulation. Furthermore, other 
provisions contained in the reformulated gasoline regulations, and not 
specifically discussed in this preamble, would apply to the renewable 
oxygenate standard in the same manner as they apply to other 
reformulated gasoline standards. These include, among other things, the 
definitions of parties; the designation requirements; testing 
requirements, including sampling and testing; and controls, 
prohibitions, liabilities, and defenses.
    There are no gasoline survey requirements associated with the 
renewable oxygenate requirement, because there is no covered area-
specific standard associated with this program.
2. Requirements Specific to the State of California
    Today's renewable oxygenate rule also applies to all gasoline that 
is sold in the Federal reformulated gasoline areas of Los Angeles and 
San Diego. Refiners of California gasoline, as defined in Sec. 80.81 of 
the reformulated gasoline regulation, are responsible for all renewable 
oxygenate provisions (including recordkeeping and reporting), except 
where a specific enforcement exemption has been granted under 
Sec. 80.81 of the reformulated gasoline regulation. Today's regulation 
specifically provides that California gasoline must meet, to the extent 
the requirements relate to the renewable oxygenate rule, the 
designation of gasoline requirements for the two types of renewable 
RBOB; the annual attest engagement requirements; and downstream 
blending requirements of Sec. 80.69. Section 80.84(h) of the renewable 
oxygenate regulation includes specific provisions for California 
gasoline sold within reformulated gasoline covered areas as specified 
in Sec. 80.70. Under Sec. 80.83(h)(2), California gasoline is presumed 
to be used in the Los Angeles or San Diego covered area if the gasoline 
is produced by a refinery located within Los Angeles or San Diego. 
Gasoline is also presumed to be used in the Los Angeles or San Diego 
covered area if the gasoline is transported to a facility within one of 
these areas or to a facility from which gasoline is transported within 
one of these areas. Refiners may refute these presumptions through the 
production of appropriate documentation showing that the gasoline, in 
fact, is transported for use outside of the Los Angeles or San Diego 
reformulated gasoline areas. These areas are specified in Sec. 80.70.
    Under Sec. 80.83(h)(3), California gasoline is considered to be 
designated as VOC-controlled if the Reid Vapor Pressure (RVP) of the 
gasoline, or RBOB subsequent to oxygenate blending, is or is intended 
to meet a standard of 7.8 pounds per square inch (psi) or less in the 
case of gasoline intended for use before March 1, 1996, or 7.0 psi or 
less in the case of gasoline intended for use on or after March 1, 
1996.21
---------------------------------------------------------------------------

    \2\1 Beginning March 1, 1996, the California Air Resources Board 
(CARB) will enforce regulations which set the maximum RVP for the 
air basin containing the Federal reformulated gasoline areas of Los 
Angeles and San Diego at 7.0 pounds per square inch (psi). These 
requirements apply during the period of April 1 through October 31 
(March 1 for upstream parties).
---------------------------------------------------------------------------

B. Blendstock Issues

    EPA's proposed oxygenate rule would have only allowed refiners to 
include in renewable oxygenate compliance calculations the renewable 
oxygenate that is added by downstream oxygenate blenders where the 
refiner carried out an appropriate quality assurance program over 
downstream oxygenate blenders. A quality assurance program is intended 
to ensure that when refiners claim credit for downstream blending of 
renewable oxygenate that the oxygenate added is renewable, that the 
renewable oxygenate is added to the RBOB produced by the refiner, and 
that the volume of renewable oxygenate claimed is correct.
    EPA received several comments from refiners regarding renewable 
oxygenate blendstocks in response to this proposal. Some commenters 
felt that the proposed renewable oxygenate requirement would be 
difficult, if not impossible, to implement as it would force refiners 
and importers to implement costly oversight programs over independent 
blenders.
    A commenter also stated that the proposed renewable oxygenate 
rule's reliance on RBOB availability is ``at odds with'' the 
reformulated gasoline program requirements for RBOB production and 
handling. Under the final reformulated gasoline rule, the commenter 
notes, RBOBs having different oxygenate requirements are segregated to 
the point of oxygenate blending. For example, the commenter points out, 
``any oxygenate'' RBOB must be segregated from ``ether-only'' RBOB. The 
segregation requirements, combined with the renewable oxygenate 
mandate, will (according to the commenter) exacerbate the problems 
associated with supplying the needed amount of RBOB.
    EPA agrees for the most part with these comments and has provided 
for greater downstream oxygenate blending of renewables similar to the 
final reformulated gasoline rule. As explained in greater detail in the 
general overview section (``A,'' above), the final renewable oxygenate 
regulations allow for two compliance options. The first option permits 
the refiner to claim the actual amount of renewable oxygenate added by 
the downstream blender and requires that both a contractual 
relationship and a testing and oversight program exist. The second 
option allows the refiner to designate RBOB as one of two generic 
renewable types22 and to claim credit for downstream blending of 
renewable oxygenate based on specified assumptions.
---------------------------------------------------------------------------

    \2\2 For areas which have been granted an extended non-
commingling season, there are three generic RBOB types.
---------------------------------------------------------------------------

    Under Sec. 80.83(f), oxygenate blenders are required to maintain 
and, upon request, deliver to the EPA Administrator, or the 
Adminstrator's designated representative, records demonstrating the 
renewable nature and source of the oxygenate used; characteristics in 
terms of volume, type, and purity; and product transfer documentation 
for renewable oxygenate, reformulated gasoline, or RBOB for which the 
blender acts as transferor or transferee. Although these blender 
recordkeeping requirements vary from the renewable oxygenate proposal, 
they are consistent with recordkeeping requirements associated with 
other reformulated gasoline requirements and will not impose a 
significant additional recordkeeping burden. As discussed in greater 
detail in ``A. Overview of the Enforcement Scheme,'' above, EPA has 
created new categories of renewable RBOB to allow greater refiner 
flexibility in the renewable oxygenate requirement.

C. The Renewable Oxygenate Requirement for California Areas

    The renewable oxygenate requirements apply to Federal reformulated 
gasoline sold in the two covered areas in the State of California, Los 
Angeles and San Diego. However, refiners who produce reformulated 
gasoline for use in California are exempt from most reformulated 
gasoline enforcement mechanisms beginning in 1995. See Sec. 80.81. This 
California exemption is based on the fact that beginning in March 1996, 
all gasoline used in California will be subject to the California Phase 
II reformulated gasoline standards (``California gasoline''), which EPA 
has concluded are at least as stringent as the federal Phase I 
reformulated gasoline emissions standards. As a result, refiners who 
produce California gasoline are exempt from most federal reformulated 
gasoline enforcement requirements, including designating gasoline as 
either reformulated or conventional gasoline, recordkeeping23 and 
reporting. Refiners of California gasoline are not exempt, however, 
from meeting the federal reformulated gasoline standards, including the 
renewable oxygenate standard.
---------------------------------------------------------------------------

    \2\3 Refiners of California gasoline are required to keep 
records required by California State law for five years, however.
---------------------------------------------------------------------------

    In the proposed rule, EPA suggested a simple method to ensure that 
an appropriate volume of California gasoline meets the renewable 
oxygenate requirement. Specifically, EPA proposed that each refiner who 
produces California gasoline be required to meet the renewable oxygen 
standard for 54% of its volume California gasoline. The 54% figure was 
derived from the historical volume of gasoline used in the Los Angeles 
and San Diego markets as a portion of the entire state's market.
    EPA received several comments with respect to the ``54% proposal.'' 
Some commenters, including industry and trade associations, felt that 
EPA has no legal authority under Sec. 211(k) of the Clean Air Act to 
require all California refiners to meet the renewable oxygenate 
standard for 54% of their entire volume of California gasoline. These 
commenters argued that imposing the renewable oxygenate requirement in 
this manner would amount to requiring renewable oxygenate in Federal 
non-reformulated as well as reformulated gasoline. Two other commenters 
expressed support for EPA's 54% proposal, however, as a simple solution 
to a difficult program issue.
    EPA also received comments indicating that the Northern and 
Southern California markets are truly distinct and that the burden on 
refiners to account for gasoline they market in the Los Angeles and San 
Diego area would not be great. One commenter stated that EPA may be 
able to make a rebuttable presumption that all gasoline produced in the 
Los Angeles and San Diego areas or imported into those areas is 
reformulated gasoline for the purpose of the renewable oxygenate 
mandate. However, this commenter also stated that refiners should be 
able to rebut the presumption with respect to gasoline exported out of 
the Los Angeles and San Diego area.
    After consideration of the comments received, and as discussed 
above, EPA has decided to impose the renewable oxygenate requirement 
only for gasoline used in the Los Angeles and San Diego areas. EPA 
believes that it is possible to have an effective renewable oxygenate 
program for the two Federal reformulated gasoline program areas, and 
recognizes that its authority under section 211(k)(1) is limited to 
reformulated gasoline areas.
    EPA received comments from a California state agency which 
recommended a change in the proposed implementation date of January 1, 
1995 to coincide with the March 1, 1996 refinery production deadline 
for California reformulated gasoline. Combined with this was a request 
to phase in the proposal over a 22 month period as follows: 10% on 
March 1, 1996, 20 percent on January 1, 1997, and 30% on January 1, 
1998. EPA does not believe that a three year phase-in or delay is 
necessary and has received no compelling evidence that California 
refiners would be particularly disadvantaged with respect to lead time. 
EPA has included a phase-in schedule in today's rule for all covered 
areas.
    Various comments related to California's air quality outside of the 
Federal VOC-controlled gasoline season are discussed elsewhere in this 
preamble. One commenter suggested that, since California has been 
allowed to develop its own reformulated gasoline regulations ``it might 
make sense'' to let California decide which renewable oxygenates 
qualify for the renewable oxygenate requirement and when they qualify. 
The commenter felt that California officials might conclude, after 
modeling air quality effects, to allow ethanol even during the summer 
months.
    EPA responds that California is subject to the reformulated 
gasoline requirements of Sec. 211(k) of the Clean Air Act, although an 
exemption from certain recordkeeping and enforcement requirements has 
been granted for purposes of the California program. To ensure that the 
objectives of the renewable oxygenate program are met, EPA believes 
that it is important that the Federal reformulated gasoline areas 
located within the State of California to be subject to this program. 
EPA has a strong interest in consistent application of the renewable 
oxygenate requirements across all reformulated gasoline areas and does 
not believe that it is appropriate for state officials to decide which 
oxygenates satisfy the Federal requirement.
    EPA received other comments specifically related to application of 
the renewable oxygenate rule to California. A few commenters felt that 
California should be exempt from the renewable oxygenate requirement as 
an outgrowth of California's exemption from most reformulated gasoline 
enforcement mechanisms. EPA does not agree. Although refiners of 
California gasoline have been exempted from many enforcement 
requirements, they are not exempt from the requirement that their 
gasoline meet Federal reformulated gasoline standards. Likewise, EPA 
believes that Federal reformulated gasoline in California should be 
subject to the renewable oxygenate standard, with appropriate exemption 
from certain enforcement procedures.
    Comments received from a California state agency indicated that 
oversight should rest with the California Air Resources Board (CARB). 
EPA responds that there is currently no state mandate to correspond to 
the renewable oxygenate mandate contained in these regulations, thus, 
this appears to be a moot issue.

D. Shoulder Season

    EPA received some comments from parties concerned that the 
renewable oxygenate requirement might lead to exceedances of the ozone 
standard during the ``shoulder season'' (i.e. the time period 
immediately before and after the Federal VOC control season) due to 
increased use of ethanol. These comments, and EPA's response, i.e., a 
petition process which would allow the Governor of any state affected 
by the reformulated gasoline program to request an extension of the 
non-commingling season beyond the VOC control season, are addressed 
elsewhere in section III.G of this preamble.
    To ensure that the state shoulder season petitions are implemented 
effectively, Sec. 80.83(i) creates a category of RBOB, called ``non VOC 
controlled renewable ether only'' which may be blended with ETBE or 
another oxygenate that does not exhibit commingling effects when 
blended with other gasolines. If a Governor's petition for an extended 
non-commingling season is granted, terminals will be required to keep 
``non VOC controlled renewable ether only'' RBOB on hand for blending 
with appropriate oxygenates during the extended non-commingling season.

E. Other Issues

    Some commenters asserted that EPA should allow temporary ``good 
faith exemptions'' to refiners that make a showing that complying with 
this proposal would ``result in extraordinary economic hardship.'' The 
reformulated gasoline rule contains an exemption for ``inability to 
produce conforming gasoline in extraordinary circumstances.'' See 
Sec. 80.73 of the reformulated gasoline regulations. This exemption 
does cover extreme and unusual circumstances outside of the control of 
the refiner and would encompass such circumstances as ``Acts of God'' 
or natural disasters. EPA recognizes that this exemption may apply to 
the renewable oxygenate mandate. EPA does not believe that an 
additional exemption for purely economic reasons is appropriate, 
particularly given that the renewable oxygenate mandate is a year 
'round credit program.

V. Federal Preemption

    This program is based on section 211(k) of the CAA. The provisions 
for the prohibition of state and local controls under section 211(c)(4) 
therefore do not apply.

VI. Environmental, Energy, and Economic Impacts

A. Environmental Impacts

1. Overview
    Today's renewable oxygenate rule is projected to have a number of 
direct and indirect environmental impacts resulting from changes in the 
type of oxygenates that likely would have been used to fulfill the 
requirements of the RFG program. Determining the precise nature of 
these impacts is difficult because the renewables program provides 
considerable flexibility in meeting the 30 percent renewables 
requirement. In the case of VOC, NOx and air toxics, however, the 
impact of today's rule is constrained because the renewables program 
will take place within the context of the reformulated gasoline 
program. Today's rule may also have effects on carbon monoxide, global 
warming, and non-air quality aspects of the environment since these 
effects are not constrained by the RFG emission models or performance 
standards.
    Today's rule does not alter the VOC, NOx, or toxics emission 
performance standards for reformulated gasoline. Therefore, the 
emission performance of reformulated gasoline as measured using the 
relevant RFG emission model (the Simple Model in 1995-1997 or the 
Complex Model in 1998 and beyond) will remain essentially unchanged. 
Today's rule will affect VOC, NOx, or toxics emissions only to the 
extent that the effects of fuel changes resulting from today's rule are 
not included in the applicable RFG certification models. These effects 
(predominantly the commingling and front-end distillation effects of 
adding oxygenates to gasoline) should be beneficial for VOC emissions 
to the extent that ETBE displaces either ethanol or MTBE use during the 
summer months. Exact quantification of these benefits is difficult 
because the changes in ETBE use and the quantification methodology are 
both uncertain.
    Health studies of ETBE are being initiated, since virtually no 
health data exist at present. These studies in conjunction with studies 
of potential ETBE related exposures would contribute to our 
understanding of potential public health risk. This work is designed to 
resolve existing uncertainties as to whether unique concerns may exist 
with ETBE as compared to the ethanol, MTBE, and/or other compounds it 
could displace.
    Concerns with respect to potential VOC emission increases outside 
of the VOC control season were raised in the comments on the proposal. 
However, VOC emissions are not directly controlled outside of the VOC-
control season under the RFG program (although some control due to 
early compliance with the requirements is expected based on past 
experience with other programs). The issue of VOC emission increases 
during the ``shoulder season'' is addressed in detail in section III.G.
    The remainder of this section is divided into four parts. First, 
the air quality effects of the renewable oxygenate rule in 1998 and 
later years (when the Complex Model is in effect) are discussed. 
Second, the air quality effects of today's rule during the Simple Model 
years (1995-1997) are discussed. Third, the global warming impact of 
today's rule is discussed. Fourth, the non-air quality effects of 
today's rule is discussed.
2. Air Quality Impacts Under the Complex Model
    As discussed in section III, the renewable oxygenate program is 
expected to stimulate the use of ETBE during the summer months and 
increase the use of ethanol during the winter months. According to the 
Complex Model, these oxygenates provide smaller toxics benefits than do 
MTBE or TAME when used at identical oxygen content levels. Any changes 
in oxygenate type resulting from today's rule will have no effect on 
overall air toxics emission performance, however, since the Complex 
Model will account for the effects of changes in oxygenate type and the 
emission performance standards are unchanged by today's rule. As 
discussed in section VI.C of this notice, however, the increase in 
ethanol and ETBE use may increase the cost of complying with the RFG 
toxics emission performance standards.
    In addition to impacts on toxics compliance, any shifts in 
oxygenate use resulting from today's program will also cause changes in 
the concentrations of other fuel parameters in the final gasoline 
blend, since different oxygenates require different volumes to meet the 
same oxygen content requirement. Changes in these other fuel parameters 
(referred to as the dilution effect) can affect VOC, NOX, and air 
toxics performance. However, the RFG performance standards remain 
unchanged by today's rule, and the Complex Model will account for the 
VOC, NOX, and toxics emission effects of any dilution-related 
changes in the level of aromatics, olefins, sulfur, E200, E300, or 
benzene. As a result, EPA has concluded that today's rule will not 
alter the VOC, NOX, and toxics emission benefits of the RFG 
program. As discussed in section VI.C of this notice, however, refiners 
may experience positive or negative economic impacts in maintaining the 
required emission performance of their reformulated gasoline as a 
result of today's rule.
    Two other effects of today's rule are not reflected in the Complex 
Model and may affect summer nonexhaust VOC and toxics emissions, 
however. First, commingling-related emissions during the VOC control 
season would be reduced to the extent that ETBE replaces ethanol in 
summer RFG.
    Second, increased summer ETBE use (and reduced summer ethanol use) 
would improve the front-end distillation characteristics of summer RFG, 
thereby potentially reducing summer nonexhaust VOC and toxics emissions 
to some degree. These effects, however, are contingent upon changes in 
the amounts of ETBE and ethanol that are blended into RFG during the 
summer months as a result of this rulemaking. Since it is uncertain how 
much ETBE and ethanol would have been used during the summer months 
absent today's rulemaking, and is still uncertain how much of each 
oxygenate will be used as a result of today's rulemaking, it is not 
possible to quantify these benefits. Furthermore, even if the volumes 
of oxygenate use were known, the effect of front-end distillation 
changes (other than RVP) on nonexhaust VOC emissions is not yet 
quantifiable with a sufficient degree of certainty. Limited data and 
scientific theory suggest it is a real effect, as discussed in the 
Regulatory Impact Analysis for the RFG final rule, but reliable 
quantification is not yet possible.
    Carbon monoxide emissions are not regulated directly by either the 
RFG program or today's rule. However, carbon monoxide emissions can be 
affected by gasoline properties. Higher oxygen levels are known to 
result in large reductions in carbon monoxide emissions, and lower RVP 
levels are known to result in small reductions in carbon monoxide at 
temperatures above 45 degrees Fahrenheit. Both of these effects are 
currently incorporated in EPA's MOBILE5a in-use emission model.
    Since the oxygen content requirements of the RFG program are not 
altered by today's rule and since summer RVP levels are controlled by 
the RFG performance standards, no change in CO emission levels is 
anticipated during the summer months. Furthermore, based on EPA's 
MOBILE5.a emission factor model, there would be no effect on CO 
emissions of an increase in RVP levels during the winter months (when 
RVP is not constrained by the RFG program) due to increased ethanol use 
on the colder days when most carbon monoxide exceedances occur, since 
the model does not show an effect of RVP on CO emissions below 45 
degrees Fahrenheit. The only effect of today's rule on CO emissions 
would be a potential small increase due to increased RVP levels 
resulting from increased ethanol use on those winter days with 
temperatures above 45 degrees Fahrenheit.
    Other fuel parameters may also affect carbon monoxide emissions. 
However, a model for CO incorporating other fuel parameters is not yet 
available. Any such effects would be limited by the constraints placed 
on these fuel parameters by the VOC, NOX, and air toxics RFG 
emission performance standards.
3. Air Quality Impacts Under the Simple Model
    The air quality effects of today's rule under the Simple Model are, 
for the most part, expected to be similar to those under the Complex 
Model, since the effects on fuel composition are expected to be similar 
with two main exceptions. First, significant ETBE use is not expected 
to be possible before the summer of 1996. Second, EPA anticipates that 
in order to meet the requirements of today's program and the existing 
RFG program, refiners may find it necessary for the first few years to 
blend additional oxygenates into their RFG beyond the level necessary 
to meet the 2.0 weight percent oxygen requirement. In particular, 
refiners may find it necessary to blend up to 10 percent ethanol by 
volume during the winter months in RFG markets with the supply, 
distribution, and blending capacity to do so. Until the distribution 
and blending infrastructure for ethanol use is expanded, it is unlikely 
that this increase in ethanol use will be offset through oxygenate 
trading given the limitations of the RFG program. Since ETBE use will 
be limited, and since the volume of ethanol used will be similar to the 
volume of MTBE displaced during the winter (10 vs. 11 volume percent), 
dilution effects may be small during the first few years of the 
program.
    While the effects of dilution on emission performance may not be 
reflected fully in Simple Model compliance calculations since it does 
not account for all the fuel effects included in the Complex Model, EPA 
would expect any resulting air quality effects to be minimal for 
several reasons. First, as discussed above, EPA expects the dilution 
effects to be minimal during the first years of the program. Second, 
RFG producers are required under the Simple Model to not exceed their 
1990 baseline levels of sulfur, T90, and olefins. These caps limit the 
risk of any detrimental air quality effects related to differences in 
dilution. Furthermore, the economic incentives of gasoline production 
may result in refiners producing at or near these caps, regardless of 
the type or volume of oxygenate used. Third, refiners are unlikely to 
invest in processing equipment to produce gasoline during 1995-1997 
which will make it more difficult for them to comply with the 1998 
requirements under the Complex Model. Fourth, any remaining risks are 
limited to the three-year period during which the Simple Model is in 
effect. Fifth, some refiners may opt to use the Complex Model prior to 
1998, which would have the effect of controlling any detrimental 
environmental effects related to changes in dilution or oxygenate type.
    As discussed above with regard to the impacts on air toxics 
emissions resulting from changes in oxygenate type, today's rule does 
not alter the performance standards under the Simple Model. 
Nevertheless, EPA does recognize that the reduced toxics emission 
benefits of ethanol and ETBE relative to MTBE under the Simple Model 
(as under the Complex Model) may increase toxics compliance costs, as 
discussed in section III.C. In addition, depending on how refiners 
chose to adjust their fuels to offset the loss in air toxics 
performance, the complex model may suggest some degradation in in-use 
(as opposed to certification) air toxics emissions performance with the 
use of ethanol or ETBE instead of MTBE which is not accounted for by 
the Simple Model. As explained in more detail in the RIA, this 
situation arises due to differences between how the Simple Model and 
Complex model predict air toxics emission performance. If some refiners 
choose to maintain air toxics emission performance by reducing 
aromatics instead of benzene, then the complex model suggests less in-
use emission performance is achieved in-use with ethanol or ETBE than 
with MTBE. However, EPA expects few refiners to choose to maintain air 
toxics emission performance by reducing aromatics for two reasons. 
First, aromatics control is, in general, believed to be the more costly 
of the two approaches. Second, refiners are unlikely to invest in 
processing equipment to comply with the simple model for 1995-1997 
which will not also provide compliance under the complex model in 1998. 
Regardless of which approach refiners take, however, this issue does 
not exist for that fuel certified under early use of the complex model, 
and disappears entirely in 1998 with mandatory use of the complex 
model.
    EPA also believes the commingling and distillation-related emission 
effects of today's rule to be minimal under the first few years of the 
program. The renewable oxygenate program does not provide incentives to 
increase summer ethanol, so commingling- and distillation-related 
nonexhaust VOC and toxics emissions from summer RFG should be 
unaffected.
    As discussed previously, today's rule is not expected to 
significantly increase carbon monoxide emissions in the long term. In 
the short term, however, today's rule may reduce carbon monoxide 
emissions as refiners blend additional oxygenates during the first few 
years of the renewable oxygenate program (as discussed above). This 
increase in oxygenate content would reduce carbon monoxide emissions, 
and such reductions would occur during the winter months when carbon 
monoxide exceedances are most common.
4. Global Warming Impacts
    According to the DOE report, today's rule is unlikely to result in 
global warming benefits in the near term. In the longer term, however, 
today's rule is expected to stimulate investment in higher-efficiency 
renewable oxygenate production processes which could offer significant 
global warming benefits. Additional discussion of the potential global 
warming benefits of today's program is contained in section III.H of 
this notice.
5. Non-Air Quality Impacts
    The Agency is concerned about other environmental impacts of the 
renewables requirement such as water pollution and soil erosion. 
Comments were submitted to the Agency stipulating that, as a result of 
the renewables program, corn may be grown in place of soybeans and hay 
plant rotations which could result in decreased soil quality including 
compaction, salination, acidification, and loss of biological activity. 
New corn production to support increased ethanol demand in response to 
today's rule could also increase soil erosion and affect water quality 
and water flow. Corn farming was alleged to be the primary cause of 
agro-chemical contamination of groundwater. In addition, the increased 
barge shipments of ethanol resulting from this program were alleged to 
increase the environmental risks and clean-up costs associated with 
potential ethanol spills.
    As discussed in section III.F, EPA has concluded that the renewable 
oxygenate program is unlikely to have a significant impact on total 
corn output in the near term. The expected 490 million gallons of new 
ethanol demand resulting from today's rule would require an increase in 
corn production of only approximately 2 percent. Thus, the 
environmental impacts associated with increased corn production are 
also expected to be small. In addition, future farming efficiency 
improvements are expected to reduce the environmental impact of corn 
production. Furthermore, the commercialization of ethanol production 
techniques which rely on agricultural wastes or cellulosic feedstocks 
would eliminate the need to increase corn production to support this 
program. As mentioned previously, EPA expects the renewables 
requirement to help stimulate development and commercialization of such 
technologies.
    EPA also believes that any adverse soil and water impacts from 
today's rule will be adequately addressed through means other than the 
renewable oxygenate program. Concerns related to the water impacts of 
ethanol production will be controlled under the provisions of the Clean 
Water Act. USDA has several programs in place to address soil erosion, 
and the Coastal Zone Act of 1990, which requires a nutrient management 
plan for covered areas, has helped increase farm efficiency and reduce 
nutrient and agrochemical runoff.

B. Energy Impacts

    The energy benefits of the renewable oxygenate program depend on 
the oxygenates used and the production processes used to produce them, 
which can vary depending on the timeframe of interest. As described 
above, in the early years of the program the renewable oxygenate 
requirement is expected to be met primarily with ethanol blended into 
winter RFG. For at least the first two years, this ethanol would be 
produced in existing plants or new plants equipped with current 
technology. Some diversion of ethanol currently being blended into 
conventional gasoline may also occur. Small additional quantities of 
ETBE may be used in summer RFG and ethanol use in summer RFG may 
decrease, but these shifts and their energy impacts will be very small 
relative to the effects of the increase in wintertime ethanol use. 
According to a study prepared by the Department of Energy,24 if 
the 30 percent renewables requirement is met by blending ethanol 
produced from new ethanol plants and ethanol plant expansions (as 
opposed to ethanol produced in existing facilities and displaced from 
its current markets) into winter RFG, the overall fossil energy 
consumed in RFG production and use would be 0.7 percent lower than 
would be the case if MTBE produced from natural gas were the only 
oxygenate used in RFG. This estimate by DOE was reduced to as low as 
0.5 percent when more conservative energy input assumptions were 
incorporated into their calculational methodology, and was increased to 
as high as 0.9% when energy input assumptions from USDA were 
incorporated. The even greater reduction in natural gas use would be 
partially offset by a 2.0 percent increase in crude oil use. It should 
be noted that even with this increase in crude oil use, the total 
amount of crude oil used to produce RFG under today's rule would still 
be 8.6 percent lower than if conventional gasoline were produced 
instead.
---------------------------------------------------------------------------

    \2\4``Analysis Memorandum: Energy Requirements and CO2-
Equivalent Emissions of RFG,'' prepared by Margaret Singh, Argonne 
National Laboratory, for Barry McNutt, U.S. Department of Energy, 
June 6, 1994.
---------------------------------------------------------------------------

    DOE projected that as ETBE capacity becomes available, its use in 
summer RFG would reduce fossil energy use by 1.7 percent relative to 
MTBE used in summer RFG. The DOE study indicates that if ETBE is 
blended into VOC-controlled RFG to meet the 30 percent requirement in 
the summer, and ethanol is still used to meet the requirement during 
the winter, the fossil energy benefits of the program being promulgated 
today program would be approximately 0.6 percent (0.4 to 0.8 using the 
range of input assumptions evaluated in their final report) lower than 
would be the case if MTBE produced from natural gas were the only 
oxygenate used in RFG.
    The energy benefits of this program are expected to become more 
pronounced in later years. Improvements in the energy efficiency of 
ethanol production will further reduce the fossil energy required to 
produce ethanol. Further gains can be achieved by reducing energy 
consumption in corn farming through changes in farming practices, using 
more energy-efficient equipment, increasing per-acre crop yields, and 
decreasing fertilizer use. Comments submitted by USDA and others, as 
well as previous studies by DOE and EPA cited in the proposal, indicate 
that as new feedstocks for ethanol such as cellulose are 
commercialized, and as renewable methanol production becomes viable, 
the fossil energy benefits of this program would increase substantially 
relative to nonrenewable MTBE use. Using current estimates of the 
energy inputs relative to the energy outputs for ethanol from cellulose 
(approximately 1:5), the fossil energy benefits of the program being 
promulgated today program would increase to approximately 1.3 percent 
relative to the case if MTBE produced from natural gas were the only 
oxygenate used in RFG. By providing a secure market for renewable 
oxygenates, today's program will help provide the certainty needed to 
encourage private investments in modern, high-efficiency renewable 
oxygenate production technology.

C. Economic Impacts

1. Oxygenate and Blending Costs of the Program
    The renewable oxygenate program is projected to add $4 million to 
$60 million in cost to the RFG program annually prior to the year 2000 
and $16 million to $60 million in cost to the RFG program annually in 
2000 and beyond. These costs involve three major components: the cost 
of renewable oxygenates relative to nonrenewable oxygenates, 
transportation and blending costs, and toxics compliance costs. The 
cost estimates include the impact of this rule on fuel economy. These 
costs also assume that ethanol is blended at a concentration of 6.04 
volume percent (2.1 weight percent oxygen); to the extent that ethanol 
is blended at higher concentrations, costs (particularly the toxics 
compliance costs) would be reduced. In addition, the renewable 
oxygenate program is projected to add one-time costs of $17.6 million 
for additional tankage, storage, and blending capacity. The derivation 
of the various components of the cost for the renewable oxygenate 
program are described below and in more detail in section IV of the 
Regulatory Impact Analysis for this rule.
    Before estimating the costs for the renewable oxygenate program, 
however, it is necessary to estimate how much additional ethanol will 
be used in RFG compared to the amount of ethanol that would have been 
used in the absence of today's rule. Only those costs resulting from 
the new ethanol demand required by the renewable oxygenate program 
alone are included in the cost estimates determined here. Deriving 
estimates for that amount of ethanol that would have been used under 
the RFG program in the absence of the renewables requirement is 
extremely difficult. However, the amount of new ethanol capacity 
planned or under construction prior to the December proposal, combined 
with the ethanol currently blended in the winter months in RFG areas 
would have enabled ethanol to be used in up to 15 percent of the RFG 
oxygenate market without displacing ethanol from existing markets. 
Based on this information, EPA estimates that today's rule is likely to 
increase ethanol's share of the total oxygenate market by approximately 
15 percentage points, which amounts to 335 million gallons of ethanol.
    With regard to the first component of the cost analysis, renewable 
oxygenate costs, ethanol used in winter RFG is projected to be the low-
cost oxygenate on a per unit oxygen basis (based on EPA's cost analysis 
for the RFG final rule and excluding any additional transportation and 
blending costs as discussed below). Hence EPA expects that if winter 
ethanol is used to meet the the renewable oxygenate requirement, 
today's rule will not impose additional direct costs for oxygenates on 
the RFG program. In fact, assuming 335 million gallons of new ethanol 
demand, today's rule will reduce direct oxygenate costs by $22-72 
million annually.
    To the extent that ETBE is used to meet part of the renewable 
oxygenate requirement, however, today's rule could increase the cost of 
the program. EPA projects that ETBE-blended RFG would cost 0 to 0.8 
cents per gallon more than ethanol-blended or MTBE-blended RFG. This 
estimate, which is highly sensitive to MTBE and ethanol costs, includes 
ETBE's value in reducing RVP and increasing octane but does not fully 
reflect its value in diluting the levels of aromatics and sulfur in 
gasoline. It also assumes that ETBE producers can take advantage of the 
reduced gasoline excise tax for fuels containing ethanol. Without this 
tax reduction, the cost of ETBE-blended RFG would be 3.1 to 3.9 cents 
per gallon higher than MTBE-blended RFG.
    With regard to the second component of the cost analysis, ethanol 
is produced primarily in the Midwest, but RFG will be required in 
California, the Northeast, and Texas in addition to several Midwestern 
markets. As a result, additional transportation costs may be incurred. 
EPA estimates the cost of transporting ethanol to range from 3 to 11 
cents per gallon of ethanol, depending on the markets to which it is 
being shipped. As discussed in detail in the RIA, EPA estimates the 
average cost of transporting a gallon of ethanol to RFG markets to be 
6-8 cents per gallon. Based on the estimate that the renewable 
oxygenate program will increase ethanol demand by 335 million gallons 
per year, the total transportation-related cost due to today's rule 
would range from $20 million to $27 million annually.
    In many parts of the nation, facilities to store and blend ethanol 
have already been constructed. However, adequate facilities are not 
currently in place in many RFG markets. Based on information obtained 
from a draft DOE report,25 EPA estimates the cost of building 
sufficient storage and blending capacity to meet the renewable 
oxygenate requirement to be approximately $17.6 million. This 
represents a one-time cost for additional tankage, storage, and 
blending capacity, however, and not a continuous cost. There may be 
some additional cost for blending beyond the costs of the facilities 
and equipment, however, that is believed to be small.
---------------------------------------------------------------------------

    \2\5''Assessment of Costs and Benefits of Flexible and 
Alternative Fuel Use in the U.S. Transportation Sector, Progress 
Report Three: Vehicle and Fuel Distribution Requirements (DRAFT),'' 
United States Department of Energy, Office of Policy, Planning, and 
Analysis, July 1989.
---------------------------------------------------------------------------

    With regard to the third component of the cost analysis, under both 
the Simple and Complex reformulated gasoline emission models, ethanol 
and ETBE provide smaller toxics emission reduction benefits than do 
MTBE and TAME, the primary nonrenewable oxygenates expected to 
participate in the RFG program. To offset the increase in toxics 
emissions, refiners will have to alter other gasoline properties such 
as aromatics, benzene, or sulfur. Assuming that refiners lower benzene 
levels to offset any worsening in toxics performance, EPA estimates 
that the additional cost could range as high as 0.89 cents per gallon 
of RFG blended with ethanol in 1995-1999 and from 0.32 to 0.88 cents 
per gallon of RFG blended with ethanol in 2000 and beyond. The higher 
minimum costs in 2000 and beyond stem from the more stringent toxics 
standards and the larger contribution of exhaust toxics to total 
toxics; see the RIA for further details. These increased costs would be 
incurred only for the volume of RFG blended with ethanol in excess of 
the volume that would have been blended with these two oxygenates in 
the absence of today's rule. Assuming that ethanol volume increases by 
335 million gallons (as discussed previously and in the RIA) and that 
ethanol is blended at 6.04 volume percent (or 2.1 weight percent 
oxygen), the total volume of RFG involved would be approximately 5.55 
billion gallons. This translates into an annual cost for the program of 
up to $49 million in 1996-1999 and $18 million to $49 million in 2000 
and beyond.
    According to EPA's fuel economy analysis (as discussed in the RIA 
for the RFG final rule), ethanol-blended RFGs provide slightly poorer 
fuel economy than otherwise-identical RFGs which use MTBE or ETBE as 
the oxygenate. The fuel economy penalty amounts to approximately 0.2 
percent for the additional 5.55 billion gallons of RFG that would be 
blended with ethanol as a result of the renewable oxygenate program. 
Based on current wholesale gasoline prices, this reduction in fuel 
economy would add approximately $5.55 million in annual costs to the 
RFG program.
2. Impact on Renewable Fuels Industry
    As discussed in section III of this notice, the renewables program 
will require blending approximately 490 million additional gallons of 
ethanol (or its equivalent) in RFG over and above the amount of ethanol 
blended into gasoline in RFG areas in 1993. This increase represents a 
growth of approximately 40 to 50 percent in renewable fuel demand from 
current levels. EPA is phasing in the renewable oxygenate requirement 
in order to avoid disrupting existing ethanol markets and the RFG 
program. If the renewable oxygenate program causes ethanol to shift out 
of its current markets into RFG markets, the benefits to the renewable 
fuels industry would be reduced and the long-term growth prospects for 
the industry would be jeopardized. Phasing the program in over two 
years permits a more orderly expansion of renewable oxygenate 
production capacity and helps assure that the additional demand created 
by today's rule will occur without causing undesirable logistical 
problems, which could result in supply problems and price spikes and 
might not help stimulate the use of renewable fuels in the United 
States.
    In addition, the certainty provided by today's rule is expected to 
stimulate considerable private investment in renewable fuel production 
technology and capacity. EPA expects this investment to accelerate the 
development and implementation of advanced, high-efficiency production 
processes, which in turn are expected to provide global warming 
benefits and larger fossil fuel energy savings than can be provided by 
existing ethanol production facilities.
3. Impact on Farm Economy
    According to comments submitted by USDA, the renewable oxygenate 
program is expected to increase farm incomes by increasing demand for 
farm products and creating a market for agricultural waste products. 
Based on USDA estimates, the renewable oxygenate program will increase 
corn prices by approximately 4.0-6.7 cents per bushel when fully 
implemented. Based on average annual corn production of 8.7 billion 
bushels, such a price increase would increase farm income by 
approximately $348-583 million.26 However, USDA projects a 
decrease in farm deficiency payments as a result of the increase in 
corn prices of $220-369 million, so the net increase in farm income 
would be $128-214 million per year.27 The reader is referred to 
the RIA for a more detailed discussion of this estimate.
---------------------------------------------------------------------------

    \2\6According to information provided by John W. McClelland of 
USDA, ``Memorandum for Richard Wilson, Director, Office of Mobile 
Sources, U.S. Environmental Protection Agency,'' June 20, 1994.
    \2\7According to information provided by John W. McClelland of 
USDA, ``Memorandum for Richard Wilson, Director, Office of Mobile 
Sources, U.S. Environmental Protection Agency,'' June 20, 1994.
---------------------------------------------------------------------------

    To the extent that this increase in farm incomes results from 
higher prices for corn and other crops, some of the farm income 
benefits may be lost as feed costs for livestock producers increase. 
However, it is unlikely that price increases will account for the 
entire increase in farm incomes. Utilization of agricultural waste 
products and increased crop production are also expected to increase 
farm incomes without increasing the price per bushel for corn and other 
ethanol feedstocks. Hence the impact of the renewable oxygenate program 
is expected to have a net beneficial effect on the farm economy.
4. Impact on Natural Gas, Methanol, and MTBE Sectors
    EPA recognizes that the renewable oxygenate program may affect the 
growth prospects for the natural gas, methanol, and MTBE sectors. To 
the extent that today's rule leads to larger market shares for ethanol 
and other renewable oxygenates than otherwise would occur, the market 
share for nonrenewable oxygenates would be smaller than otherwise would 
occur.
    However, EPA does not believe that today's rule will have a 
significant adverse impact on the natural gas, methanol, and MTBE 
industries for several reasons. First, EPA always has expected ethanol 
and its derivatives to play a role in the RFG program even in the 
absence of today's rule. Second, the advent of the Phase II RFG 
standards in 2000 will create powerful incentives to reduce the RVP of 
summer reformulated gasoline to very low levels. As a result, EPA had 
expected that ETBE and ETAE would be used beginning in 2000 even 
without the promulgation of today's rule. EPA considers it unlikely 
that MTBE, methanol, and natural gas producers would install expensive 
capital equipment to satisfy demand only for Phase I of the program; 
instead, EPA has expected these industries to build capacity to satisfy 
the long-term demand for their product. Since such long-term demand 
would be limited by the growth in ETBE and ETAE demand for Phase II 
RFG, it is not clear to EPA that today's rule will reduce the growth of 
the methanol, MTBE, and natural gas industries below what it otherwise 
would have been.
    Third, even with today's rule, methanol and MTBE production is 
projected to grow quite rapidly. If MTBE captures 70 percent of the RFG 
oxygenate market, annual MTBE demand will grow from 2.3 billion gallons 
in 1993 to 4.1 billion gallons in 1995 and to 4.8 billion gallons by 
1997 (when the Phase II California RFG program takes full effect), an 
increase of approximately 110 percent. As a result, annual methanol 
production is projected to grow by 600 million gallons in 1995 and 1996 
and an additional 200 million gallons by 1997. The demand for natural 
gas will grow even more dramatically in absolute terms, since natural 
gas is an economically attractive source of the isobutylene used to 
produce ETBE and is also used as an energy source in ethanol 
production, according to USDA.
5. Impact on Highway Trust Fund and General Fund
    Renewable fuels blended directly into gasoline qualify either for 
income tax credit or reduced excise tax rates. The reduced excise tax 
rate is the form of the tax subsidy used most frequently and 
effectively reduces the flow of revenue into the Federal Highway Trust 
Fund. The income tax credits reduce the General Fund. At present, 
renewable ethanol and methanol derived from sources other than oil, 
natural gas, coal, and peat qualify for the reduced excise tax rates if 
they are blended into finished gasoline. Renewable ethers may also 
qualify for the reduced excise tax rates, although the mechanism by 
which the tax reduction is received makes it difficult and often 
uneconomical to obtain for potential blenders.
    To the extent that today's rule increases ethanol use in non-VOC-
controlled RFG, it will reduce highway trust fund revenues. As 
discussed above, the amount of new ethanol capacity planned or under 
construction prior to the December proposal, combined with the ethanol 
currently blended in the winter months in RFG areas, would have enabled 
ethanol to be used in up to 15 percent of the RFG oxygenate market 
without displacing ethanol from existing markets. Based on this 
information, EPA estimates that today's rule is likely to increase 
ethanol's share of the total oxygenate market by approximately 15 
percentage points, which amounts to 335 million gallons of ethanol. 
With a $0.54 per gallon tax subsidy for ethanol, EPA has concluded that 
today's rule will result in a loss of highway trust fund revenues of 
approximately $181 million annually once the program is fully 
implemented. In addition, up to 176 million gallons of the currently-
planned additions to ethanol capacity will be eligible for an 
additional tax credit of $0.10/gallon under the small ethanol producer 
credit, which could reduce General Fund revenues by as much as $17.6 
million. Finally, if ethanol is blended at 10 volume percent to meet 
the requirements of the renewable oxygenate program (which is 
especially possible in the early years of the program, as discussed 
elsewhere in this Preamble), then an additional $0.06 per gallon of 
ethanol would be diverted from the highway trust fund to to the General 
Fund. Hence the total loss in annual tax revenues resulting from the 
renewable oxygenate program would be as large as $199 million, while 
the loss in annual highway trust fund revenues is expected to range 
from $181 million to $201 million. These values could change as the 
level of ETBE use changes; depending on the extent to which the 
renewable oxygenate requirement is met via ETBE use, today's rule may 
have less of an impact on highway trust fund revenues. Beginning in 
2000, EPA expects the Phase II RFG requirements to stimulate expanded 
use of ETBE in VOC-controlled gasoline to take advantage of its RVP-
lowering properties. EPA believes this would have happened to some 
extent regardless of the renewable oxygenate requirement. Hence, EPA 
anticipates that beginning in 2000, the reduction in highway trust fund 
revenues resulting from the renewable oxygenate requirement itself 
could decrease significantly below the estimates cited above. A more 
detailed discussion of the highway trust fund impact of today's rule 
can be found in the RIA.
6. Impact on Farm Support Payments
    EPA received comments from farm interests and USDA claiming that 
the renewable oxygenate program would reduce government expenditures on 
farm income and farm price support payments. To the extent that this 
program increases crop prices, it should reduce farm program payments. 
As discussed in section VI.C.3, USDA projects that farm deficiency 
payments will decrease by $220-369 million per year.

VII. Public Participation

    In its NPRM for this rule, EPA requested comment on all aspects of 
the proposal. In addition, EPA specifically invited public comment on 
the following issues: (1) EPA's statutory authority to promulgate this 
rule; (2) the extent to which renewable oxygenates would be used in 
reformulated gasoline absent the proposal; (3) the economic, energy, 
and crude oil import benefits to the nation resulting from the 
proposal; (4) any other approaches which could be used to achieve the 
same objectives; (5) the likelihood that the renewable oxygenate 
requirement would be met with domestically produced oxygenates absent a 
requirement to this effect, whether such a requirement would be 
desirable and legally permissible, and any other suggested approaches 
to ensure the domestic employment benefits of this program; (6) the 
climate change aspects of the proposal; (7) the definition of renewable 
oxygenates; (8) the need for performance-based standards for renewable 
oxygenates based on fossil energy impact or greenhouse gas emissions; 
(9) health effects data regarding renewable oxygenates whose use may be 
encouraged as a result of the program; (10) the appropriate level for 
the renewable oxygenate requirement, the feasibility of the 
requirement, lead-time requirements, the need for a phase-in period, 
and any other supply-related issues; (11) the need and justification 
for a year-round program in lieu of a summer-only program; (12) the 
allowance for year-round averaging of renewable oxygenate content; (13) 
the applicability of the program only to producers of reformulated 
gasoline rather than including downstream blenders; (14) the 
enforcement-related provisions; (15) the impact of the program on the 
already-promulgated reformulated gasoline program, and (16) a petition 
process to include additional renewable oxygenates.
    During the comment period and at the January 1994 public hearing, 
EPA received comments and testimony on various aspects of the proposal 
from numerous parties such as environmental organizations, states, 
environmental regulatory associations, corn growers, and farmers, as 
well as the petroleum, ethanol, and oxygenated fuels industries. The 
Agency has diligently reviewed and considered all written and oral 
comments on the renewable oxygenate proposal.
    For those readers interested in reviewing the comments related to 
the renewable oxygenate proposal for reformulated gasoline, all 
comments received by the Agency are located in the EPA Air Docket, 
Docket A-93-49 (See ``ADDRESSES''). All significant comments were 
considered in revising the provisions in the proposal and/or are 
responded to in the Regulatory Impact Analysis and Response to Comments 
document contained in Docket A-93-49.

VIII. Compliance With Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) of 1980 requires federal 
agencies to examine the effects of regulations and to identify 
significant adverse impacts of federal regulations on a substantial 
number of small entities. Because the RFA does not provide concrete 
definitions of ``small entity,'' ``significant impact,'' or 
``substantial number,'' EPA has established guidelines setting the 
standards to be used in evaluating impacts on small businesses28. 
For purposes of the renewable oxygenate requirement for reformulated 
gasoline, a small entity is any business which is independently owned 
and operated and not dominant in its field as defined by SBA 
regulations under section 3 of the Small Business Act.
---------------------------------------------------------------------------

    \2\8U.S. Environmental Protection Agency, Memorandum to 
Assistant Administrators, ``Compliance with the Regulatory 
Flexibility Act,'' EPA Office of Policy, Planning, and Evaluation, 
1984. In addition, U.S. Environmental Protection Agency, Memorandum 
to Assistant Administrators, ``Agency's Revised Guidelines for 
Implementing the Regulatory Flexibility Act,'' Office of Policy, 
Planning, and Evaluation, 1992.
---------------------------------------------------------------------------

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), the Administrator certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities. The renewable oxygenate program will secure a market for 
oxygenate producers while simultaneously allowing refiners flexibility 
for small refiners to comply with the program's requirements. In 
addition, EPA decided against applying the renewable oxygenate 
requirement to downstream oxygenate blenders (except as discussed 
below), many of which are small entities. As discussed in the proposal, 
this would have required each blender to maintain at least two sources 
of oxygenate, one renewable and one not. Such an approach would have 
proven either uneconomical or to involve significant transaction costs 
related to averaging and trading.
    However, today's program will require additional reporting 
requirements of blenders (beyond the reformulated gasoline 
requirements). The renewable oxygenate program requires that blenders 
maintain records on two additional RBOB categories: any renewable 
oxygenate and renewable ethers. The additional reporting requirements, 
however, are economically insignificant and will not unduly burden 
small entities such as blenders.

IX. Statutory Authority

    EPA believes that the final rule adopted today is a reasonable 
exercise of the discretionary authority granted the Agency under 
sections 211(k) and 301 of the Act. EPA interprets the first sentence 
of section 211(k)(1) as broad authority to adopt reasonable 
requirements for reformulated gasoline, unless otherwise prohibited by 
the Clean Air Act or other statutory provision. EPA interprets the 
second sentence of section 211(k)(1) as authorizing EPA to adopt 
regulations for the reformulated gasoline program that result in the 
greatest emission reductions achievable, and at the same time tend to 
optimize the resulting impacts on cost, energy requirements, and other 
health and environmental impacts. In effect, EPA has full authority to 
adopt emission reduction standards and other requirements that achieve 
this result. For further discussion of the statutory authority for the 
renewable oxygenate program the reader is referred to section III.A.

X. Administrative Designation and Regulatory Analysis

    Under Executive Order 12866, (58 FR 51,735 (October 4, 1993)) the 
Agency must determine whether the regulatory action is ``significant'' 
and therefore subject to OMB review and the requirements of the 
Executive Order. The Order defines ``significant regulatory action'' as 
one that is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    Pursuant to the terms of Executive Order 12866, the Administrator 
has determined that this rule is a ``significant regulatory action'' 
based on the above criteria. As such, this action was submitted to OMB 
for review. Changes made in response to OMB suggestions or 
recommendations have been documented in the public record: EPA Air 
Docket A-93-49.
    A Regulatory Impact Analysis (RIA) for the reformulated gasoline 
program has been prepared and placed in Public Docket No. A-93-49 to 
accompany this EPA notice of final rulemaking. A draft version of the 
Regulatory Impact Analysis was submitted to the Office of Management 
and Budget (OMB) for review as required by Executive Order 12866. Any 
written comments from OMB and EPA response to those comments have also 
been placed in the public docket for this rulemaking. A final version 
of the analysis is available in the docket cited above.

XI. Compliance With the Paperwork Reduction Act

    The information collection requirements in this rule were submitted 
for approval to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act, 44 U.S.C. 3501 et seq. These requirements are 
not effective until OMB approves them and a technical amendment to that 
effect is published in the Federal Register. An Information Collection 
Request document has been prepared by EPA (ICR No. 1591.05) and a copy 
may be obtained from Sandy Farmer, Information Policy Branch; EPA, 401 
M Street, SW. (Mail Code 2136); Washington, DC 20460 or by calling 
(202) 260-2740.
    This collection of information has an estimated reporting burden 
averaging 0.64 hours per response and an estimated annual recordkeeping 
burden averaging 3.44 hours per respondent. If the burden associated 
with quality assurance testing is included these estimates increase to 
22.44 and 5.44, respectively. These estimates include time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information.
    Send comments regarding the burden estimate or any other aspect of 
this collection of information, including suggestions for reducing this 
burden to Chief, Information Policy Branch; EPA; 401 M St., SW. (Mail 
Code 2136); Washington, DC 20460; and to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Washington, DC 
20503, marked ``Attention: Desk Officer for EPA.'' EPA will respond to 
any OMB or public comments on the information collection requirements 
prior to OMB issuing approval.

List of Subjects in 40 CFR Part 80

    Environmental protection, Air pollution control, Fuel additives, 
Gasoline, Motor vehicle pollution, Penalties, Reporting and 
recordkeeping requirements.

    Dated: June 30, 1994.
Carol M. Browner,
Administrator.

    For the reasons set forth in the preamble, part 80 of title 40 of 
the Code of Federal Regulations is amended as follows:

PART 80--REGULATIONS OF FUELS AND FUEL ADDITIVES

    1. The authority citation for part 80 continues to read as follows:

    Authority: Sections 114, 211 and 301(a) of the Clean Air Act as 
amended (42 U.S.C. 7414, 7545 and 7601(a)).
    2. Section 80.2 is amended by adding paragraph (ss) to read as 
follows:


Sec. 80.2  Definitions.

* * * * *
    (ss) Extended non-commingling season means the period during which 
oxygenates which demonstrate commingling-related increases in Reid 
Vapor Pressure (RVP) will not be permitted to receive credit toward the 
renewable oxygenate requirements of Sec. 80.83. Any extended non-
commingling season is limited to that period of time determined by the 
Administrator pursuant to Sec. 80.83(i).
    3. Section 80.65 is amended by revising paragraph (d)(2)(vi) to 
read as follows:


Sec. 80.65  General requirements for refiners, importers, and oxygenate 
blenders.

* * * * *
    (d) * * *
    (2) * * *
    (vi) In the case of RBOB, as RBOB that may be blended with:
    (A) Any oxygenate;
    (B) Ether only;
    (C) Any renewable oxygenate;
    (D) Renewable ether only;
    (E) Non-VOC controlled renewable ether only.
* * * * *
    4. Section 80.81 is amended by revising paragraphs (c)(2), (c)(5), 
(c)(6), and (c)(10) to read as follows:


Sec. 80.81  Enforcement exemptions for California gasoline.

* * * * *
    (c) * * *
    (2) The designation of gasoline requirements contained in 
Sec. 80.65(d), except in the case of RBOB that is designated as ``any 
renewable oxygenate,'' ``non-VOC controlled renewable ether only'', or 
``renewable ether only'';
* * * * *
    (5) The annual compliance audit requirements contained in 
Sec. 80.65(h), except where such audits are required with regard to the 
renewable oxygenate requirements contained in Sec. 80.83;
    (6) The downstream oxygenate blending requirements contained in 
Sec. 80.69, except where such requirements apply to the renewable 
oxygenate requirements contained in Sec. 80.83;
* * * * *
    (10) The compliance attest engagement requirements contained in 
subpart F of this part, except where such requirements apply to the 
renewable oxygenate requirements contained in Sec. 80.83.
* * * * *
    5. Section 80.83 is added to read as follows:


Sec. 80.83  Renewable oxygenate requirements.

    (a) Definition of renewable oxygenate. For purposes of subparts D 
and F of this part, renewable oxygenate is defined as provided in this 
paragraph (a).
    (1) In the case of oxygenate added to reformulated gasoline or RBOB 
that is not designated as VOC-controlled or that is not subject to the 
additional requirements associated with an extended non-commingling 
season pursuant to Sec. 80.83(i), renewable oxygenate shall be:
    (i) An oxygenate that is derived from non-fossil fuel feedstocks; 
or
    (ii) An ether that is produced using an oxygenate that is derived 
from non-fossil fuel feedstocks.
    (2) In the case of oxygenate added to reformulated gasoline or RBOB 
that is designated as VOC-controlled or that is subject to the 
additional requirements associated with an extended non-commingling 
season pursuant to Sec. 80.83(i), renewable oxygenate shall be an ether 
that meets the requirements of paragraph (a)(1)(ii) or (a)(3) of this 
section.
    (3) An oxygenate other than those ethers specified in paragraphs 
(a)(1) or (a)(2) of this section may be considered a renewable 
oxygenate if the Administrator approves a petition to that effect. The 
Administrator may approve such a petition if it is demonstrated to the 
satisfaction of the Administrator that the oxygenate does not cause 
volatility increases in gasoline that are non-linear in nature (i.e., a 
non-linear vapor pressure blending curve). The Administrator may 
approve a petition subject to any appropriate conditions or 
limitations.
    (4)(i) Oxygenate shall be renewable only if the refiner, importer, 
or oxygenate blender who uses the oxygenate is able to establish in the 
form of documentation that the oxygenate was produced from a non-fossil 
fuel feedstock.
    (ii)(A) Any person who produces renewable oxygenate, as defined in 
paragraph (a)(1) of this section, or who stores, transports, transfers, 
or sells such renewable oxygenate, and where such renewable oxygenate 
is intended to be used in the production of gasoline, shall maintain 
documents that state the renewable source of the oxygenate, and shall 
supply to any transferee of the oxygenate documents which state the 
oxygenate is from a renewable source.
    (B) Any person who imports oxygenate that is represented by the 
importer to be renewable oxygenate, as defined in paragraph (a) of this 
section, shall maintain documents, obtained from the person who 
produced the oxygenate, that include a certification signed by the 
owner or chief executive officer of the company that produced the 
oxygenate that states:
    (1) The nature of the feedstock for the oxygenate; and
    (2) A description of the manner in which the oxygenate meets the 
renewable definition under paragraph (a) of this section.
    (iii) No person may represent any oxygenate as renewable unless the 
oxygenate meets the renewable definition under paragraph (a) of this 
section.
    (5) For purposes of this section, an oxygenate shall be considered 
to be derived from non-fossil fuel feedstocks only if the oxygenate is:
    (i) Derived from a source other than petroleum, coal, natural gas, 
or peat; or
    (ii) Derived from a product:
    (A) That was produced using petroleum, coal, natural gas, or peat 
through a substantial transformation of the fossil fuel;
    (B) When the product was initially produced, it was not commonly 
used to generate energy (e.g. automobile tires); and
    (C) The product was sold or transferred for a use other than energy 
generation, and was later treated as a waste product.
    (b) Renewable oxygenate standard. (1) The reformulated gasoline and 
reformulated gasoline produced using RBOB that is produced by any 
refiner at each refinery, or is imported by any importer, shall contain 
a volume of renewable oxygenate such that the reformulated gasoline and 
reformulated gasoline produced using RBOB, on average, has an oxygen 
content from such renewable oxygenate that is equal to or greater than 
0.30 wt% for the period of December 1, 1994 through December 31, 1995, 
and 0.60 wt% beginning on January 1, 1996.
    (2) The averaging period for the renewable oxygenate standard 
specified in paragraph (b)(1) of this section shall be:
    (i) Each calendar year; except that
    (ii)Any reformulated gasoline and RBOB that is produced or imported 
prior to January 1, 1995 shall be averaged with reformulated gasoline 
and RBOB produced or imported during 1995.
    (3) (i) The oxygenate used to meet the standard under paragraph 
(b)(1) of this section may also be used to meet any oxygen standard 
under Sec. 80.41; except that
    (ii) The renewable oxygenate added by a downstream oxygenate 
blender shall not be used by any refiner or importer to meet the oxygen 
standard under Sec. 80.41, except through the transfer of oxygen 
credits.
    (c) Downstream oxygenate blending using renewable oxygenate. (1) In 
the case of any refiner that produces RBOB, or any importer that 
imports RBOB, the oxygenate that is blended with the RBOB may be 
included with the refiner's or importer's compliance calculations under 
paragraph (d) of this section only if:
    (i) The oxygenate meets the applicable renewable oxygenate 
definition under paragraph (a) of this section; and
    (ii) The refiner or importer meets the downstream oxygenate 
blending oversight requirements specified in Secs. 80.69(a)(6) and (7); 
or
    (iii) (A) In the case of RBOB designated for ``any renewable 
oxygenate'' the refiner or importer assumes that ethanol will be 
blended with the RBOB;
    (B) In the case of RBOB designated for ``renewable ether only'' or 
``non-VOC controlled renewable ether only ``, the refiner or importer 
assumes that ETBE will be blended with the RBOB; and
    (C) In the case of ``any renewable oxygenate,'' ``non-VOC 
controlled renewable ether only'' and ``renewable ether only RBOB,'' 
the refiner or importer assumes that the volume of oxygenate added will 
be such that the resulting reformulated gasoline will have an oxygen 
content of 2.0 wt%.
    (2) (i) No person may combine any oxygenate with RBOB designated as 
``any renewable oxygenate'' unless the oxygenate meets the criteria 
specified in paragraph (a) of this section.
    (ii) No person may combine any oxygenate with RBOB designated as 
``renewable ether only'' or ``non-VOC controlled renewable ether only'' 
unless the oxygenate meets the criteria specified in paragraph (a) of 
this section.
    (d) Compliance calculation. (1) Any refiner for each of its 
refineries, and any importer shall, for each averaging period, 
determine compliance with the renewable oxygenate standard by 
calculating:
    (i) Prior to January 1, 1996, renewable oxygen compliance total 
using the following formula:

TR02AU94.000

    (ii) Beginning on January 1, 1996, the renewable oxygen compliance 
total using the following formula:

TR02AU94.001

where
CTro=the compliance total for renewable oxygen
Vi=the volume of reformulated gasoline or RBOB batch i
n=the number of batches of reformulated gasoline and RBOB produced or 
imported during the averaging period

    (iii) The renewable oxygen actual total using the following 
formula:

TR02AU94.002

where
ATro=the actual total for renewable oxygen
Vi=the volume of gasoline or RBOB batch i
ROi=the oxygen content, in wt%, in the form of renewable oxygenate 
of gasoline or RBOB batch i
n=the number of batches of gasoline or RBOB produced or imported during 
the averaging period

    (iv) Compare the renewable oxygen actual total with the renewable 
oxygen compliance total.
    (2) (i) The actual total must be equal to or greater than the 
compliance totals to achieve compliance, subject to the credit transfer 
provisions of paragraph (e) of this section.
    (ii) If the renewable oxygen actual total is less than the 
renewable oxygen compliance total, renewable oxygen credits must be 
obtained from another refinery or importer in order to achieve 
compliance.
    (iii) The total number of renewable oxygen credits required to 
achieve compliance is calculated by subtracting the renewable oxygen 
actual total from the renewable oxygen compliance total.
    (iv) If the renewable oxygen actual total is greater than the 
renewable oxygen compliance total, renewable oxygen credits are 
generated.
    (v) The total number of renewable oxygen credits which may be 
traded to a refiner for a refinery, or to another importer, is 
calculated by subtracting the renewable oxygen compliance total from 
the renewable oxygen actual total.
     (e) Credit transfers. Compliance with the renewable oxygenate 
standard specified in paragraph (b)(1) of this section may be achieved 
through the transfer of renewable oxygen credits, provided that the 
credits meet the criteria specified in Secs. 80.67(h)(1) (i) through 
(iv) and Secs. 80.67(h) (2) and (3).
    (f) Record keeping. Any refiner or importer, or any oxygenate 
blender who blends oxygenate with any RBOB designated as ``any 
renewable oxygenate,'' ``non VOC controlled renewable ether only'' or 
``renewable ether only'' shall for a period of five years maintain the 
records specified in this paragraph (f) in a manner consistent with the 
requirements under Sec. 80.74, and deliver such records to the 
Administrator upon request. The records shall contain the following 
information:
    (1) (i) Documents demonstrating the renewable nature and source of 
the oxygenate used, consistent with the requirements of paragraph 
(a)(3) of this section;
    (ii) The volume, type, and purity of any renewable oxygenate used; 
and
    (iii) Product transfer documentation for all renewable oxygenate, 
reformulated gasoline, or RBOB for which the party is the transferor or 
transferee.
    (2) The requirements of this paragraph (f) shall apply in addition 
to the recordkeeping requirements specified in Sec. 80.74(e).
    (g) Reporting requirements. (1) Any refiner for each refinery, or 
any importer, shall for each batch of reformulated gasoline and RBOB 
include in the quarterly reports for reformulated gasoline required by 
Sec. 80.75(a) the total weight percent oxygen and the weight percent 
oxygen attributable to renewable oxygenate contained in the gasoline, 
or contained in the RBOB subsequent to oxygenate blending if allowed 
under paragraph (c) of this section.
    (2) Any refiner for each refinery, or any importer, shall submit to 
the Administrator, with the fourth quarterly report required by 
Sec. 80.75(a), a report for all reformulated gasoline and RBOB that was 
produced or imported during the previous calendar year averaging 
period, that includes the following information:
    (i) The total volume of reformulated gasoline and RBOB;
    (ii) The compliance total for renewable oxygen;
    (iii) The actual total for renewable oxygen;
    (iv) The number of renewable oxygen credits generated as a result 
of actual total renewable oxygen being greater than compliance total 
renewable oxygen;
    (v) The number of renewable oxygen credits required as a result of 
actual total renewable oxygen being less than compliance total 
renewable oxygen;
    (vi) The number of renewable oxygen credits transferred to another 
refinery or importer;
    (vii) The number of renewable oxygen credits obtained from another 
refinery or importer; and
    (viii) For any renewable oxygen credits that are transferred from 
or to another refinery or importer, for any such transfer:
    (A) The names, EPA-assigned registration numbers and facility 
identification numbers of the transferor and transferee of the credits;
    (B) The number of renewable oxygen credits that were transferred; 
and
    (C) The date of the transaction.
    (h) Renewable oxygenate requirements for reformulated gasoline used 
in the State of California. (1) Any refiner or importer of California 
gasoline, as defined in Sec. 80.81, shall meet the renewable oxygenate 
standard specified in paragraph (a) of this section for all 
reformulated gasoline or RBOB used in any reformulated gasoline covered 
area as specified in Sec. 80.70.
    (2) Any California gasoline shall be presumed to be used in a 
reformulated gasoline covered area:
    (i) (A) If the gasoline is produced at a refinery that is located 
within a reformulated gasoline covered area; or
    (B) If the gasoline is transported to a facility that is located 
within a reformulated gasoline covered area, or to a facility from 
which gasoline is transported by truck into a reformulated gasoline 
covered area; unless
    (ii) The refiner or importer is able to establish with 
documentation that the gasoline was used outside any reformulated 
gasoline covered area.
    (3) Any California gasoline shall be considered to be designated as 
VOC-controlled (for purposes of paragraph (a)(1) of this section) if 
the Reid vapor pressure of the gasoline, or RBOB subsequent to 
oxygenate blending, is intended to meet a standard of:
    (i) 7.8 psi or less in the case of gasoline intended for use before 
March 1, 1996; or
    (ii) 7.0 psi or less in the case of gasoline intended for use on or 
after March 1, 1996.
    (i) Special provisions for shoulder season. (1) The Governor of any 
state may petition for an extension of the non-commingling season for 
any or all reformulated gasoline covered areas within the state 
pursuant to Sec. 80.70.
    (i) Such petition must satisfy the following criteria:
    (A) Evidence showing an increase in the market share and/or use of 
oxygenates which produce commingling-related RVP increases in the 
area(s) that are covered by the petition;
    (B) Evidence demonstrating a pattern of exceedances for the period 
for which the extension is sought, including ozone monitoring data for 
the preceding three(3) years of the reformulated gasoline program;
    (C) An analysis showing that the pattern of ozone exceedances is 
likely to continue even with implementation of other ozone air quality 
control measures and/or programs currently planned by the State; and
    (D) Evidence that the responsible State agency or authority has 
given the public an opportunity for a public hearing and the submission 
of written comments with respect to the petition.
    (ii) Effective data and publication of decision.
    (A) If the Administrator determines that the petition meets the 
requirements of paragraph (i)(1)(i) of this section, to the 
satisfaction of the Administrator, then EPA shall publish a notice in 
the Federal Register announcing its intention to establish the non-
commingling season as requested by the Governor, and specifying a 
tentative effective date.
    (1) The Administrator shall provide the public with an opportunity 
for a hearing and the submission of written comments.
    (2) The tentative effective date will correspond with the first day 
of the next complete non-commingling season beginning not less than one 
year after receipt of the petition.
    (B) If the Administrator receives adverse comments or information 
demonstrating to the satisfaction of the Administrator that the 
criteria of paragraph (i)(1)(i) of this section have not been met, that 
the tentative effective date is not reasonable, or that other good 
reasons exist to deny the petition, then the Administrator may reject 
the Governor's request for an extended non-commingling season, in whole 
or in part, or may delay the effective date by up to two (2) additional 
years. Absent receipt of such adverse comments or information, EPA 
shall publish a notice in the Federal Register announcing its approval 
of the petition and specifying an effective date for the extended non-
commingling season.
    (2) In the case of any refiner that produces RBOB, or any importer 
that imports RBOB, the oxygenate that is blended with the RBOB may be 
included with the refiner's or importer's compliance calculations under 
paragraph (d) of this section only if:
    (i) The oxygenate meets the applicable renewable oxygenate 
definition under paragraph (a) of this section; and
    (ii) In the case of RBOB designated for ``non VOC controlled ether 
only'' the refiner or importer assumes that ETBE or other oxygenate 
that does not exhibit volatility-related commingling effects when mixed 
with other gasolines and approved by the EPA Administrator under 
subparagraph (a)(3) of this section will be blended with the RBOB and 
so labels the transfer documentation.
    6. Section 80.128 is amended by revising paragraphs (a) and (e)(2); 
removing ``and'' at the end of paragraph (e)(4); removing the period at 
the end of paragraph (e)(5) and adding ``; and'' in its place; and 
adding paragraph (e)(6) to read as follows:


Sec. 80.128   Agreed upon procedures for refiners and importers.

* * * * *
    (a) Read the refiner's or importer's reports filed with EPA for the 
previous year as required by Secs. 80.75, 80.83(g), and 80.105.
* * * * *
    (e) * * *
    (2) Determine that the requisite contract was in place with the 
downstream blender designating the required blending procedures, or 
that the refiner or importer accounted for the RBOB using the 
assumptions in Sec. 80.69(a)(8) in the case of RBOB designated as ``any 
oxygenate,'' or ``ether only,'' or using the assumptions in 
Secs. 80.83(c)(1)(ii) (A) and (B) in the case of RBOB designated as 
``any renewable oxygenate,'' ``non VOC controlled renewable ether 
only,'' or ``renewable ether only'';
* * * * *
    (6) In the case of RBOB designated as ``any renewable oxygenate,'' 
``non VOC controlled renewable ether'' or ``renewable ether only'', 
review the documentation from the producer of the oxygenate to 
determine if the oxygenate meets the requirements of Sec. 80.83(a).
* * * * *
    7. Section 80.129 is amended by revising paragraphs (a) and (d)(3) 
(iii) and (iv), and by adding paragraph (d)(3)(v) to read as follows:


Sec. 80.129   Agreed upon procedures for downstream oxygenate blenders.

* * * * *
    (a) Read the oxygenate blender's reports filed with the EPA for the 
previous year as required by Secs. 80.75 and 80.83(g).
* * * * *
    (d) * * * *
    (3) * * * *
    (iii) In the case of RBOB designated as ``any renewable 
oxygenate,'' ``non VOC controlled renewable ether only,'' or 
``renewable ether only,'' review the documentation from the producer of 
the oxygenate to determine if the oxygenate meets the requirements of 
Sec. 80.83(a);
    (iv) Recalculate the actual oxygen content based on the volumes 
blended and agree to the report to EPA on oxygen; and
    (v) Review the time and place designations in the product transfer 
documents prepared for the batch by the blender, for consistency with 
the time and place designations in the product transfer documents for 
the RBOB (e.g., VOC-controlled or non-VOC-controlled, VOC region for 
VOC-controlled, OPRG versus non-OPRG, and simple or complex model).
* * * * *
[FR Doc. 94-17649 Filed 8-1-94; 8:45 am]
BILLING CODE 6560-50-P