[Federal Register Volume 84, Number 55 (Thursday, March 21, 2019)]
[Proposed Rules]
[Pages 10584-10630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05030]
[[Page 10583]]
Vol. 84
Thursday,
No. 55
March 21, 2019
Part II
Environmental Protection Agency
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40 CFR Part 80
Modifications to Fuel Regulations To Provide Flexibility for E15;
Modifications to RFS RIN Market Regulations; Proposed Rule
Federal Register / Vol. 84 , No. 55 / Thursday, March 21, 2019 /
Proposed Rules
[[Page 10584]]
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ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 80
[EPA-HQ-OAR-2018-0775; FRL-9991-04-OAR]
RIN 2060-AU34
Modifications to Fuel Regulations To Provide Flexibility for E15;
Modifications to RFS RIN Market Regulations
AGENCY: Environmental Protection Agency (EPA).
ACTION: Proposed rule.
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SUMMARY: The Environmental Protection Agency (EPA) is proposing
regulatory changes to allow gasoline blended with up to 15 percent
ethanol to take advantage of the 1-pound per square inch (psi) Reid
Vapor Pressure (RVP) waiver that currently applies to E10 during the
summer months. EPA is also proposing an interpretive rulemaking which
defines gasoline blended with up to 15 percent ethanol as
``substantially similar'' to the fuel used to certify Tier 3 motor
vehicles. Finally, EPA is proposing regulatory changes to modify
certain elements of the Renewable Fuel Standard (RFS) compliance
system, in order to improve functioning of the renewable identification
number (RIN) market and prevent market manipulation.
DATES: Comments must be received on or before April 29, 2019. Under the
Paperwork Reduction Act (PRA), comments on the information collection
provisions are best assured of consideration if the Office of
Management and Budget (OMB) receives a copy of your comments on or
before April 22, 2019.
Public Hearing. EPA will announce the public hearing date and
location for this proposal in a supplemental Federal Register document.
ADDRESSES: You may send your comments, identified by Docket ID No. EPA-
HQ-OAR-2018-0775, by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov
(our preferred method) Follow the online instructions for submitting
comments.
Mail: U.S. Environmental Protection Agency, EPA Docket
Center, Office of Air and Radiation Docket, Mail Code 28221T, 1200
Pennsylvania Avenue NW, Washington, DC 20460.
Hand Delivery/Courier: EPA Docket Center, WJC West
Building, Room 3334, 1301 Constitution Avenue NW, Washington, DC 20004.
The Docket Center's hours of operations are 8:30 a.m.-4:30 p.m.,
Monday-Friday (except Federal Holidays).
Instructions: All submissions received must include the Docket ID
No. for this rulemaking. Comments received may be posted without change
to https://www.regulations.gov, including any personal information
provided. For detailed instructions on sending comments and additional
information on the rulemaking process, see the ``Public Participation''
heading of the SUPPLEMENTARY INFORMATION section of this document.
FOR FURTHER INFORMATION CONTACT: Julia MacAllister, Office of
Transportation and Air Quality, Assessment and Standards Division,
Environmental Protection Agency, 2000 Traverwood Drive, Ann Arbor, MI
48105; telephone number: 734-214-4131; email address:
[email protected].
SUPPLEMENTARY INFORMATION:
Potentially Affected Entities. Entities potentially affected by
this proposed rule include those involved with the production,
importation, distribution, marketing, and retailing of transportation
fuels, including gasoline and diesel fuel or renewable fuels such as
ethanol, biodiesel, renewable diesel, and biogas. Potentially affected
categories include:
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Examples of
Category NAICS \1\ codes SIC \2\ codes potentially
affected entities
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Industry........................ 324110 2911 Petroleum
refineries.
Industry........................ 325193 2869 Ethyl alcohol
manufacturing.
Industry........................ 325199 2869 Other basic
organic chemical
manufacturing.
Industry........................ 424690 5169 Chemical and
allied products
merchant
wholesalers.
Industry........................ 424710 5171 Petroleum bulk
stations and
terminals.
Industry........................ 424720 5172 Petroleum and
petroleum
products merchant
wholesalers.
Industry........................ 454319 5989 Gasoline service
stations.
Industry........................ 447190 5541 Marine service
stations.
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\1\ North American Industry Classification System (NAICS).
\2\ Standard Industrial Classification (SIC).
This table is not intended to be exhaustive, but rather provides a
guide for readers regarding entities likely to be affected by this
proposed action. This table lists the types of entities that EPA is now
aware could potentially be affected by this proposed action. Other
types of entities not listed in the table could also be affected. To
determine whether your entity would be affected by this proposed
action, you should carefully examine the applicability criteria in 40
CFR part 80. If you have any questions regarding the applicability of
this proposed action to a particular entity, consult the person listed
in the FOR FURTHER INFORMATION CONTACT section.
Public Participation. Submit your comments, identified by Docket ID
No. EPA-HQ-OAR-2018-0775, at https://www.regulations.gov (our preferred
method), or the other methods identified in the ADDRESSES section. Once
submitted, comments cannot be edited or removed from the docket. EPA
may publish any comment received to its public docket. Do not submit
electronically any information you consider to be Confidential Business
Information (CBI) or other information whose disclosure is restricted
by statute. Multimedia submissions (audio, video, etc.) must be
accompanied by a written comment. The written comment is considered the
official comment and should include discussion of all points you wish
to make. EPA will generally not consider comments or comment contents
located outside of the primary submission (i.e., on the web, cloud, or
other file sharing system). For additional submission methods, the full
EPA public comment policy, information about CBI or multimedia
submissions, and general guidance on making effective comments, please
visit https://www.epa.gov/dockets/commenting-epa-dockets.
Outline of This Preamble
I. Executive Summary
A. Purpose of This Action
[[Page 10585]]
B. Summary of the Major Provisions of This Action
1. E15 RVP
2. RIN Market Reform
II. Extension of the 1-psi Waiver to E15
A. Background
1. Background of E10 and E15 CAA Sec. 211(f)(4) Waivers
2. Background on CAA Sec. 211(h)
B. Proposed Interpretation of CAA Sec. 211(h)(4)
1. Proposed Interpretation
2. Regulatory Amendments
3. Effects on Regulated Parties
C. Proposed Interpretation of ``Substantially Similar'' for
Gasoline
1. Statutory Framework
2. Certification Fuels
3. History of Sub Sim Interpretations
4. Criteria for Determining Whether a Fuel Is ``Substantially
Similar''
5. Technical Rationale and Discussion
6. Other Aspects of the Proposed Interpretative Rulemaking
D. E15 Misfueling Mitigation
E. E15 Emission Impacts
F. E15 Economic Impacts
1. Benefits for E15 RVP
2. Costs for E15 RVP
III. RIN Market Reforms
A. Overview of RFS Compliance
B. RIN Market Assessment
C. President's Directive
D. Objectives
E. Proposed Approach to Individual Regulatory Reforms
1. Reform One: Public Disclosure if RIN Holdings Exceed Certain
Threshold
2. Reform Two: Increase RFS Compliance Frequency
3. Reform Three: Limiting Who Can Purchase Separated RINs
4. Reform Four: Limiting Duration of RIN Holdings by Non-
Obligated Parties
5. Enhancing EPA's Market Monitoring Capabilities
F. RIN Market Reform Economic Impacts
1. Benefits of RIN Market Reform
2. Costs of RIN Market Reform
G. Conclusion
IV. Statutory and Executive Order Reviews
A. Executive Order 12866: Regulatory Planning and Review and
Executive Order 13563: Improving Regulation and Regulatory Review
B. Executive Order 13771: Reducing Regulations and Controlling
Regulatory Costs
C. Paperwork Reduction Act (PRA)
D. Regulatory Flexibility Act (RFA)
E. Unfunded Mandates Reform Act (UMRA)
F. Executive Order 13132: Federalism
G. Executive Order 13175: Consultation and Coordination With
Indian Tribal Governments
H. Executive Order 13045: Protection of Children From
Environmental Health Risks and Safety Risks
I. Executive Order 13211: Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
J. National Technology Transfer and Advancement Act (NTTAA)
K. Executive Order 12898: Federal Actions To Address
Environmental Justice in Minority Populations and Low-Income
Populations
V. Statutory Authority
I. Executive Summary
A. Purpose of This Action
The objectives of this action are twofold. First, this rulemaking
will take steps intended to create parity in the way the RVP of both
E10 and E15 fuels is treated under EPA regulations. Second, this action
proposes reforms to RIN regulations intended to increase transparency
and deter potential manipulative and other anti-competitive behaviors
in the RIN market.
B. Summary of the Major Provisions of This Action
1. E15 RVP
We are proposing to adjust the volatility requirements for E15
during the summer season or the period of May 1 through September
15.1 2 The changed volatility requirements for these blends
will allow E15 to receive the benefit of the provision at CAA sec.
211(h)(4), commonly referred to as ``the 1-psi waiver.'' The 1-psi
waiver allows gasoline-ethanol blends to have a higher RVP \3\ than
would be allowed under CAA sec. 211(h)(1) and the corresponding
volatility regulations, which prohibit the RVP of gasoline from
exceeding 9.0 psi during the summer.\4\ Currently, only blends of
ethanol and gasoline containing at least 9 percent and no more than 10
percent ethanol by volume (E10) are granted the 1-psi waiver.\5\
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\1\ For purposes of this preamble, E15 refers to gasoline-
ethanol blended fuels that contain greater than 10 volume percent
and no more than 15 volume percent ethanol content.
\2\ CAA sec. 211(h)(1) requires EPA to establish volatility
requirements during the high ozone season. To implement these
requirements, EPA defines ``high ozone season'' at 40 CFR 80.27 as
the period from June 1 to September 15. The regulations at 40 CFR
80.27 also specify that all parties except for retailers must make
and distribute gasoline meeting the RVP standards at Sec. 80.27
from May 1 through September 15 and calls this period the
``regulatory control period.'' The E15 partial waivers impose the
9.0 psi RVP limit on E15 from May 1 through September 15. In general
practice by industry and for purposes of this preamble, the high
ozone season and regulatory control period is referred to as the
``summer'' or ``summer season'' and gasoline produced to be used
during the regulatory control period and high ozone season is called
``summer gasoline.'' EPA does not have any volatility requirements
on gasoline outside of the summer season.
\3\ RVP is a measure of the volatility of gasoline. Gasoline
must have volatility in the proper range to prevent driveability,
performance, and emissions problems. Too low and the gasoline will
not ignite properly; too high and the vehicle may experience vapor
lock. Importantly for this proposal, excessively high volatility
also leads to increased evaporative emissions from the vehicle.
Vehicle evaporative emission control systems are designed and
certified on gasoline with a volatility of 9.0 psi RVP. Higher
volatility gasoline may overwhelm the vehicle's evaporative control
system, leading to a condition described as ``breakthrough'' of the
cannister and mostly uncontrolled evaporative emissions.
\4\ In a few areas, specified at 40 CFR 80.27, the RVP standard
is 7.8 psi. In these areas, after application of the 1-psi waiver,
gasoline-ethanol blended fuels covered by the 1-psi waiver could
have an RVP of up to 8.8 psi.
\5\ This applies only to conventional gasoline. E10 reformulated
gasoline does not receive the 1-psi waiver under CAA sec. 211(h)(4),
and neither would E15 reformulated gasoline as a result of this
proposed action. Reformulated blendstock for oxygenate blending
would continue to need to meet a lower RVP level to allow for the
subsequent addition of ethanol.
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EPA is proposing several steps to accomplish this change. First, we
are proposing to modify our interpretation of CAA sec. 211(h)(4).
Second, we are proposing a regulation that would effect two changes:
(1) Remove limitations in our regulations that were put in place in
keeping with the prior interpretation of CAA sec. 211(h)(4) on the
volatility of E15 promulgated in the E15 Misfueling Mitigation Rule
(``MMR''); \6\ and (2) modify the associated product transfer document
(PTD) requirements also promulgated in the MMR. Third, we are proposing
to clarify our interpretation of CAA sec. 211(f), making it clear that
the conditions on the CAA sec. 211(f)(4) waivers granted to E15 in 2010
and 2011 do not restrict the application of the 1-psi waiver to
downstream oxygenate blenders in most circumstances.
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\6\ See 76 FR 44406 (July 25, 2011).
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As a result of this action, parties would be able to make and
distribute E15 made with the same conventional blendstock for oxygenate
blending (CBOB) \7\ that is used to make E10 by oxygenate blenders
during the summer.\8\ E15 would then be held to the same gasoline
volatility standards that currently apply to E10, maintaining
substantially the same level of emissions performance as E10 since E15
made from the same CBOB during the summer would have slightly lower RVP
than E10 and would be expected to have similar emissions performance as
discussed in Sections II.C and II.E.
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\7\ CBOB is the base gasoline made specifically for blending
with 10 percent ethanol in conventional gasoline areas of the
country.
\8\ EPA does not have volatility limitations on gasoline outside
of the summer season. Therefore, E15 can already be made from the
same blendstock used for E10 outside of the summer season. The rest
of the year is commonly referred to as the ``winter season'' or
``winter.''
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As discussed in Section II.C, we are also proposing a
``substantially similar'' (sub sim) interpretative rulemaking for
[[Page 10586]]
gasoline.\9\ We are proposing two alternative sub sim interpretations.
We are proposing that E15 with an RVP of 10.0 psi is sub sim to fuel
used to certify Tier 3 light duty vehicles (i.e., E10 with an RVP of
9.0 psi). We are also proposing and seeking comment on an alternative
interpretation that E15 with an RVP of 9.0 psi is sub sim to fuel used
to certify Tier 3 light duty vehicles. Either of these sub sim
interpretations would enable E15 to be lawfully blended from the same
gasoline blendstock (i.e., CBOB) that is used to make E10 during the
summer by all fuel manufacturers (in addition to oxygenate blenders who
would be able to do so without a new sub sim interpretative
rulemaking).
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\9\ EPA last issued an interpretative rulemaking for what it
considers sub sim for gasoline in 2008. See 73 FR 22281 (April 25,
2008).
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2. RIN Market Reform
EPA takes claims of RIN market manipulation seriously and although
we have yet to see data-based evidence of such behavior, the potential
for manipulation is a concern. Accordingly, we are proposing the four
reforms outlined in President Trump's October 11, 2018 statement \10\
and are requesting comments on additional steps we can take to identify
and prevent RIN market manipulation. Specifically, we are proposing and
seeking comment on the following RIN market reforms outlined by the
President, as well as some additional items identified by EPA:
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\10\ See: https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-expanding-waivers-e15-increasing-transparency-rin-market.
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Requiring public disclosure when RIN holdings held by an
individual actor exceed specified limits.
Requiring the retirement of RINs for the purpose of
compliance be made in real time.
Prohibiting entities other than obligated parties from
purchasing separated RINs.
Limiting the length of time a non-obligated party can hold
RINs.
For the first reform, we are proposing to set two RIN holding
thresholds that would work in tandem to prevent potential accumulation
of market power. These thresholds would apply to holdings of separated
D6 RINs only.\11\ The first threshold would be triggered if a party's
end-of-day separated D6 RIN holdings exceeded three percent of the
total implied conventional biofuel volume requirement. An obligated
party that triggered the first threshold would then apply a second
threshold by comparing its end-of-day separated D6 RIN holdings with
130 percent of its individual implied conventional renewable volume
obligation (RVO). We are proposing that parties make daily calculations
and make a yes/no certification statement to EPA in a quarterly report
and that we would publish on our website the names of any parties that
reported exceeding the thresholds. We seek comment on whether exceeding
the thresholds should be considered a prohibited act. We are also
proposing that the RIN holdings of corporate affiliates be included in
a party's calculations to determine if they trigger a threshold.
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\11\ RINs specify a ``D-code'' corresponding to the renewable
fuel category applicable to the fuel, as determined by the feedstock
used, fuel type produced and GHG emissions of the fuel, among other
characteristics. There are five different D-Codes for RINs in the
RFS program. D3 RINs are cellulosic biofuel RINs. D4 RINs are
biomass-based diesel (including both biodiesel and renewable diesel)
RINs. D5 RINs are advanced biofuel RINs. D6 RINs are conventional
biofuel RINs (primarily corn ethanol). D7 RINs are cellulosic diesel
RINs which meet the requirements for both cellulosic biofuel and
biomass-based diesel.
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For the second reform, we are proposing to establish RIN retirement
requirements for the first three quarters of the compliance year,
calculated by an obligated party as its gasoline and diesel production
and import volume through the end of the quarter multiplied by the
current year renewable fuel standard. We propose to discount the
requirement to 80 percent of the calculated volume to provide necessary
flexibility. Obligated parties would submit reports to EPA 60 days
after the end of the quarter to demonstrate compliance with these
requirements and could use any D-code RINs to do so. This reform would
not impact the current annual RVO calculations or compliance, including
the two-year RIN life, the annual deficit carryover, or the 20 percent
carryover provisions. We propose that an obligated party that fell
short of its quarterly RIN retirement requirement in the current year
would not be able to incur a deficit in its next year annual RVO.
For the third reform, we are proposing that only obligated parties,
exporters, and certain non-obligated parties be allowed to purchase
separated D6 RINs. Non-obligated parties would be exempt from this
proposed restriction if they were a corporate or contractual affiliate
to an obligated party. This would include blenders who could
demonstrate that they had contracts to deliver separated RINs to an
obligated party for the purpose of compliance. Non-obligated parties
that need to replace invalid RINs would also be exempt from this
proposed provision.
For the fourth reform, we are proposing a limit on the duration
that a non-obligated party could hold separated D6 RINs. Specifically,
we are proposing that a non-obligated party would be required to sell
or retire as many RINs as it obtained in a quarter. We are proposing
that parties would make a yes/no certification statement to EPA about
its compliance with this limit in a quarterly report and that auditors
would confirm this statement in the annual attest engagement.
Lastly, we outline our consideration of taking additional steps
beyond those listed in the President's directive to enhance our market
monitoring capabilities. We propose that auditors would include in
their attest engagements to EPA a full list of a party's affiliates,
including affiliates not registered with the RFS program. To improve
our abilities to analyze and publish RIN price data, we propose that
parties would follow certain conventions when reporting RIN prices to
EPA and that they would report whether the RIN transaction was on the
spot market or as the result of a term contract. We also explain that
we plan to update business rules in EMTS to require that both parties
in a RIN transaction enter the same RIN price. Finally, we discuss the
possibility of employing a third-party market monitor to conduct
analysis of the RIN market, including screening for potential anti-
competitive behavior.
II. Extension of the 1-psi Waiver to E15
In this action, we are proposing to adjust the volatility
requirements for E15 during the summer season based on a revised
interpretation of CAA sec. 211(h)(4). The changed volatility
requirements for these blends will allow E15 to receive the benefit of
the 1-psi waiver. The 1-psi waiver, at CAA sec. 211(h)(4), allows
gasoline-ethanol blends to have a higher RVP than would be allowed
under CAA sec. 211(h)(1) and the corresponding volatility regulations
that prohibit the RVP of gasoline from exceeding 9.0 psi during the
summer. Currently, EPA regulations only grant the 1-psi waiver to
blends of ethanol and gasoline containing at least 9 percent and no
more than 10 percent ethanol by volume. The proposed interpretation in
this action is in response to the increased presence of E15 in the
gasoline marketplace, and the conditions that led us to provide the
original 1-psi waiver for E10 in 1990 are equally applicable to E15
today.
The volatility of E15 is also limited by CAA sec. 211(f). CAA sec.
211(f) prohibits the introduction into commerce of fuels and fuel
additives unless they are substantially similar to fuels utilized in
the certification of motor vehicles, or receive a waiver from the sub
sim requirement in accordance
[[Page 10587]]
with CAA sec. 211(f)(4). E15 currently has a sub sim waiver, and the
waiver conditions put in place for E15 set the maximum RVP level at 9.0
psi. In order to allow E15 to receive the 1-psi waiver under CAA sec.
211(h)(4) and introduce E15 at the higher RVP level into commerce, we
must address the statutory provisions under both CAA sec. 211(f) and
(h).
EPA is proposing several steps to accomplish this change. First, we
are proposing to modify our interpretation of CAA sec. 211(h)(4). Under
this new interpretation, ethanol blends containing at least 10 percent
ethanol would receive the 1-psi waiver, including E15. To effectuate
this change, we are proposing the following changes to EPA's fuels
regulations: (1) Remove limitations in our regulations that were put in
place in keeping with the prior interpretation of CAA sec. 211(h)(4) on
the volatility of E15 promulgated in 40 CFR 80.27 and the MMR (i.e., 40
CFR part 80, subpart N); and (2) modify the associated PTD requirements
promulgated in the MMR.
After application of the CAA sec. 211(h)(4) waiver, we must then
ensure that E15 with an RVP of 10 psi can be introduced into commerce.
Therefore, as a second step, in order to allow the introduction into
commerce of E15 at 10.0 RVP in the summer under CAA sec. 211(f), we are
co-proposing two potential mechanisms. The first mechanism clarifies
our interpretation of CAA sec. 211(f), making it clear that the
conditions on the CAA sec. 211(f)(4) waivers granted to E15 in 2010 and
2011 do not restrict the application of the CAA sec. 211(h)(4) 1-psi
waiver to downstream oxygenate blenders, as explained in more detail
later in this notice. We are co-proposing a second mechanism that would
find that E15 is substantially similar to the E10 fuel utilized to
certify Tier 3 light-duty vehicles, thus allowing E15 similar treatment
to E10 with respect to RVP.
The following subsections provide further details on how we will
accomplish this change, as well as impacts on emissions and the
economy.
A. Background
1. Background of E10 and E15 CAA Sec. 211(f)(4) Waivers
CAA sec. 211(f)(1) makes it unlawful for any manufacturer of any
fuel or fuel additive (``fuel or fuel additive manufacturer'') to first
introduce into commerce, or to increase the concentration in use of,
any fuel or fuel additive for use by any person in motor vehicles
manufactured after model year (MY) 1974, which is not substantially
similar (commonly referred to as ``sub sim'') to any fuel or fuel
additive used in the certification of any MY1975, or subsequent model
year, vehicle or engine under CAA sec. 206. Fuels that are not sub sim
to a fuel used in certification cannot be introduced into commerce
unless EPA has granted a waiver under CAA sec. 211(f)(4). CAA sec.
211(f)(4) provides that upon application of any fuel or fuel additive
manufacturer, the Administrator may waive the prohibitions of CAA sec.
211(f)(1) if the Administrator determines that the applicant has
established that such fuel or fuel additive, or a specified
concentration thereof, will not cause or contribute to a failure of any
emission control device or system (over the useful life of the motor
vehicle, motor vehicle engine, nonroad engine or nonroad vehicle in
which such device or system is used) to achieve compliance by the
vehicle or engine with the emission standards to which it has been
certified pursuant to CAA sec. 206 and 213(a).
In 1978, a waiver application was submitted for gasoline containing
ethanol at 10 percent by volume (E10). EPA did not act to grant or deny
the petition for a waiver for E10, and consequently, under the
statutory scheme as it existed at that time, the waiver was deemed
granted by operation of law.\12\ Thus, E10 was granted a waiver under
CAA sec. 211(f)(4) without any conditions, in contrast to prior CAA
sec. 211(f)(4) waivers, which included, for example, conditions on
RVP.\13\
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\12\ See 44 FR 20777 (April 6, 1979).
\13\ See e.g., ``Fuels and Fuel Additives; Waiver Application,''
Octamix Waiver, 53 FR 3636 (February 8, 1988).
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For E15, EPA granted partial waivers under CAA sec. 211(f)(4) in
2010 and 2011.\14\ Specifically, on October 13, 2010, EPA approved a
partial waiver request to allow the introduction of E15 into commerce
for use in MY2007 and newer light-duty motor vehicles subject to
certain waiver conditions.\15\ Subsequently, on January 21, 2011, EPA
extended this partial waiver to include MY2001-2006 light-duty motor
vehicles after receiving and analyzing additional U.S. Department of
Energy (``DOE'') test data and finding that E15 will not cause or
contribute to a failure to achieve compliance with the emissions
standards to which these vehicles were certified over their useful
lives.\16\ EPA also denied the waiver request for MY2000 and older
light-duty motor vehicles, heavy-duty gasoline engines and vehicles,
highway and off-highway motorcycles, and nonroad engines, vehicles, and
equipment. This denial was based on EPA's engineering judgement that
E15 could adversely affect the emissions and emissions controls of
vehicles, engines, and equipment not covered by the partial waivers and
that the applicants had not provided sufficient data or other
information to demonstrate that E15 would not cause or contribute to a
failure to achieve compliance with the emissions standards to which
these vehicles, engines, and equipment were certified over their full
useful lives, as required by CAA sec. 211(f)(4).
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\14\ See 75 FR 68094 (November 4, 2010) and 76 FR 4662 (January
26, 2011), respectively.
\15\ See 75 FR 68094 (November 4, 2010).
\16\ See 76 FR 4662 (January 26, 2011).
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In the October 2010 waiver, for MY2007 and newer motor vehicles,
EPA also concluded that the data and information show that E15 will not
lead to violations of evaporative emissions standards, so long as the
fuel does not exceed an RVP of 9.0 psi in the summer.\17\ Subsequently,
in the January 2011 waiver, EPA imposed identical waiver conditions for
MY2001-2006 motor vehicles, including the requirement that the fuel not
exceed an RVP of 9.0 psi in the summer, based on the same
conclusion.\18\
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\17\ See 75 FR 68149-68150 (November 4, 2010).
\18\ See 76 FR 4682-4683 (January 26, 2011).
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Taken together, these partial waivers permitted E15 to be used in
MY2001 and newer light-duty motor vehicles subject to particular waiver
conditions, including fuel quality conditions and conditions on the
sale and use of E15. These waiver conditions included the prohibition
on the use of E15 in pre-MY2001 motor vehicles, in addition to heavy-
duty gasoline engines or vehicles, or motorcycles, as well as any
nonroad engines or nonroad vehicles. The waiver conditions also placed
limitations on the ethanol that can be added (both the concentration
and quality),\19\ as well as a condition that the RVP of the final fuel
not exceed 9.0 psi.\20\ The waiver conditions also require fuel and
fuel additive manufacturers to submit a misfueling mitigation plan
describing all reasonable precautions for ensuring E15 is only used in
MY2001 and newer motor vehicles, as described in the
[[Page 10588]]
waiver conditions.\21\ EPA is not proposing to revise the E15 partial
waivers under CAA sec. 211(f)(4), and is therefore not soliciting
comments on the waiver itself or any of its conditions.
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\19\ For example, the ethanol used to make E15 must meet ASTM
D4806-10 specifications for ethanol quality. See ASTM D4806-10,
``Standard Specification for Denatured Fuel Ethanol for Blending
with Gasolines for Use as Automotive Spark-Ignition Engine Fuel,''
ASTM International, West Conshohocken, PA, 2010.
\20\ This RVP limit is identical to the limitation under CAA
sec. 211(h)(1) of 9.0 psi RVP during the high ozone season. The high
ozone season was defined by the Administrator via regulation to mean
the period from June 1 to September 15 of any calendar year.
\21\ See 76 FR 4662, 4582 (January 26, 2011).
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To help facilitate the implementation of the waiver conditions and
place requirements on parties other than fuel and fuel additive
manufacturers, EPA promulgated the E15 Misfueling Mitigation Rule (MMR)
in 2011, under CAA sec. 211(c), subsequent to the E15 partial waiver
decisions.\22\ The E15 MMR imposed fuel dispenser labeling, PTD, and
compliance survey requirements on parties that make and distribute E15.
The E15 MMR also promulgated EPA's interpretation of the applicability
of the 1-psi waiver in CAA sec. 211(h)(4) to E15 and certain
regulations designed to effectuate that interpretation.\23\ In this
action, EPA is proposing to revise the interpretation of CAA sec.
211(h)(4) articulated in the MMR and the regulations adopted to
implement that interpretation.
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\22\ See 76 FR 44406 (July 25, 2011).
\23\ As discussed further in the following section, in
promulgating regulations following the enactment of CAA sec.
211(h)(4), EPA interpreted 211(h)(4) to apply to gasoline ethanol
blends containing about 10 percent ethanol. See 56 FR 64708
(December 12, 1991).
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2. Background on CAA Sec. 211(h)
To properly understand this proposed action, it is important to
review the history of EPA's volatility controls both leading up to and
after the enactment of CAA sec. 211(h). Congress enacted CAA sec.
211(h) as part of the CAA Amendments of 1990 to address the volatility
of gasoline. Congress did so in the context of EPA's prior regulatory
actions, under CAA sec. 211(c), which aimed to control the RVP of
gasoline. EPA has historically viewed Congress's enactment of 211(h),
therefore, as a codification of EPA's regulatory actions with regard to
RVP up to that point.\24\ Accordingly, CAA sec. 211(h)(1) prohibits the
sale of gasoline with an RVP in excess of 9.0 psi during the high ozone
season while CAA sec. 211(h)(2) allows EPA to promulgate more stringent
RVP requirements for nonattainment areas. CAA sec. 211(h)(4) further
provides a 1.0 psi RVP allowance for ``fuel blends containing gasoline
and 10 percent'' ethanol and recognizes the existence of the CAA sec.
211(f)(4) waiver for E10--the only ethanol blend which had received
such a waiver at that time--in the ``deemed to comply'' provisions
contained in CAA sec. 211(h)(4)(A-C).
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\24\ See 76 FR 44433 (July 25, 2011).
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a. Pre-Enactment Volatility Regulations
In 1987, prior to the 1990 CAA amendments, EPA for the first time
proposed limitations on the volatility of gasoline under CAA sec.
211(c), which provides EPA with general authority to regulate fuels and
fuel additives. These limitations on gasoline volatility were put into
place to address evaporative emissions from gasoline-fueled vehicles
due to their contribution to ozone formation. The volatility of
gasoline had begun rising significantly in the years preceding EPA's
action, due to vehicle design becoming more tolerant of higher RVP
through fuel injected engines, as well as strong economic incentive to
add butane \25\ to fuel due to favorable blending economics.\26\ This
lead to very high evaporative volatile organic compound (VOC) emissions
from the in-use fleet of gasoline vehicles. EPA believed that matching
the volatility of certification fuel to the volatility of in-use fuel
would reduce evaporative emissions, and would help ensure vehicle were
designed to handle in-use conditions. In particular, limiting the
volatility of gasoline to 9.0 psi RVP, which is the level in the E0
gasoline on which vehicles were certified under CAA sec. 206 at that
time, would reduce emissions from all gasoline-related sources, and
enable additional VOC emission reductions.\27\
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\25\ Butane, in this context, refers to a high-volatility,
relatively inexpensive gasoline blendstock that gasoline refiners
typically add to or remove from gasoline to control RVP.
\26\ 52 FR 31279 (August 19, 1987).
\27\ See 52 FR 31274 at 31278-31287 (August 19, 1987).
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At the time of the 1987 proposal, some parties had begun the
practice of adding ethanol to gasoline after the refinery process has
been completed to make what was then known as ``gasohol.'' \28\ This
practice was known as ``splash blending'' ethanol into gasoline and
generally took place at downstream terminals. At the time, gasohol also
had a tax credit because Congress intended to encourage the use of
ethanol as a means of reducing dependence on foreign oil and making use
of excess agricultural production.\29\ Adding 10 percent ethanol to
gasoline, however, causes roughly a 1.0 psi RVP increase in the blend's
volatility.\30\ At the time, due to the limited amount of ethanol
blended into gasoline, almost no low-RVP gasoline was available into
which 10 percent ethanol could be splash-blended without the gasoline-
ethanol blended fuel exceeding the proposed RVP limit. Unlike E15,
because gasohol was given a CAA sec. 211(f)(4) waiver by operation of
law, no volatility controls had previously been placed on it. Thus,
even though the CAA sec. 211(f)(4) waiver allowed E10 to be lawfully
introduced into commerce, the lowered RVP standards had the potential
to shut down the nascent ethanol blending industry.
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\28\ 52 FR 31292 (August 19, 1987).
\29\ Id.
\30\ Id.
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To address this potential hurdle to continued ethanol blending, EPA
proposed interim regulations for gasohol that allowed it to be 1.0 psi
RVP higher than otherwise required for gasoline.\31\ This is referred
to as the 1-psi waiver.\32\ As a result, 10 percent ethanol could be
blended at downstream terminals into the gasoline that refineries had
already produced. The agency, therefore, designed the 1-psi waiver as a
means of accommodating the CAA sec. 211(f)(4) waiver that was then
applicable to E10 and to address public policy concerns, such as
reducing dependence on foreign oil and making use of excess
agricultural production, as referenced above. The Agency proposed that
the 1-psi waiver be conditioned on sampling and testing the final blend
of gasoline and ethanol for RVP by all regulated parties, including
downstream blenders, that elected to use the waiver.\33\
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\31\ See 52 FR 31274, 31316 (August 19, 1987).
\32\ See 52 FR 31316 (August 19, 1987).
\33\ See 52 FR 31274, proposed 40 CFR 80.27(d)(1) (August 19,
1987). See also 54 FR 11872-73 (March 22, 1989), where we declined
to finalize this approach.
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In 1989, EPA finalized regulations that imposed limits on the
volatility of gasoline and ethanol blends as ``Phase I'' of a two-phase
regulation under CAA sec. 211(c), which is EPA's general authority to
regulate fuels and fuel additives. EPA's regulation established a
maximum RVP limit of 10.5 psi for gasoline sold during the high ozone
season.\34\ In that action, EPA also provided a RVP allowance ``for
gasoline-ethanol blends commonly known as gasohol'' that was 1.0 psi
higher than for gasoline.\35\ This was finalized as an interim measure
with the intent to revisit the issue in ``Phase II'' of the volatility
regulations.\36\
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\34\ See 54 FR 11879 (March 22, 1989).
\35\ Id.
\36\ Id.
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EPA's final regulations in that action provided that in order to
receive the 1-psi waiver, ``gasoline must contain at least 9% ethanol
(by volume),'' and that ``the ethanol content of gasoline shall be
determined by use of one of the testing methodologies specified in
Appendix F to this part.'' The regulations also provided that ``the
maximum ethanol content of gasoline shall not exceed any applicable
waiver conditions under
[[Page 10589]]
section 211(f)(4) of the Clean Air Act.'' \37\
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\37\ 54 FR 11872-73 (March 22, 1989) (codified at 40 CFR
80.27(d)).
---------------------------------------------------------------------------
In that action, EPA did not place limits on the upper bound of the
ethanol content, other than by providing, as quoted above, that the
ethanol content shall not exceed any applicable waiver conditions under
CAA sec. 211(f)(4) (and thereby implicitly incorporating any upper-
bound limit imposed as a condition on any future applicable waiver). At
the time, the highest permissible ethanol content under a CAA sec.
211(f)(4) waiver was 10 percent ethanol, and thus, this provision could
only apply to blends containing 9-10 percent ethanol. In other words,
EPA designed the 1-psi waiver to allow for the continued lawful
introduction into commerce of E10 and, the Phase I RVP regulatory
language would have automatically accommodated future increases in
allowable ethanol concentration in gasoline under a CAA sec. 211(f)(4)
waiver.
In June 1990, in ``Phase II'' of the volatility regulations, EPA
established a maximum RVP limit of 9.0 psi. The regulations also
established an RVP limit of 7.8 psi for gasoline sold during the high
ozone season in both ozone attainment and nonattainment areas in the
southern states of the country. EPA further maintained the 1 psi RVP
allowance for blends of 10 percent ethanol and gasoline and did not
modify the regulations at 40 CFR 80.27(d).\38\ Thus, both the language
stating that the gasoline must contain at least 9 percent ethanol, and
the language stating that the maximum ethanol content of gasoline shall
not exceed any applicable waiver conditions under CAA sec. 211(f)(4),
remained in the regulations.\39\ In doing so the agency reiterated that
this was in recognition of the importance of ethanol to the nation's
energy security as well as the agricultural economy sector. The agency
also addressed air quality impacts of allowing the 1-psi waiver given
that a higher RVP limit for blends of 10 percent ethanol and gasoline
would result in increased evaporative VOC emissions. It ``reflects the
moderation in EPA's concern about negative air quality impact as well
as a reluctance to threaten the motor fuel ethanol production and
blending industries with collapse.'' \40\
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\38\ See 55 FR 23658, 23660 (June 11, 1990).
\39\ Id.
\40\ ``While some believe the industry should not exist . . .
[o]ther agencies and Congress will continue to address related
agricultural, trade and energy issues which have led to federal
support for the existence of the gasohol industry.'' 55 FR 23666
(June 11, 1990).
---------------------------------------------------------------------------
b. Enactment of CAA Sec. 211(h)
In November 1990, Congress enacted the CAA Amendments of 1990,
including CAA sec. 211(h), which provided the first statutory
provisions specifically addressing RVP. CAA sec. 211(h)(1) required EPA
``to promulgate regulations making it unlawful . . . during the high
ozone season to sell . . . or introduce into commerce gasoline with a
Reid Vapor Pressure in excess of 9.0 pounds per square inch.'' Further
in CAA sec. 211(h)(4), Congress, following EPA's lead in the 1989 and
1990 volatility regulations, also allowed fuel blends containing
gasoline and 10 percent ethanol to have 1 psi higher RVP than the RVP
standard otherwise established in CAA sec. 211(h)(1). CAA sec.
211(h)(4) provides the following:
(4) Ethanol waiver. For fuel blends containing gasoline and 10
percent denatured anhydrous ethanol, the Reid vapor pressure
limitation under this subsection shall be one pound per square inch
(psi) greater than the applicable Reid vapor pressure limitations
established under paragraph (1).
According to legislative history, ``[t]his provision was included
in recognition that gasoline and ethanol are mixed after the refining
process has been completed. It was recognized that to require ethanol
to meet a nine pound RVP would require the creation of a production and
distribution network for sub-nine pound RVP gasoline. The cost of
producing and distributing type of fuel would be prohibitive to the
petroleum industry and would likely result in the termination of the
availability of ethanol in the marketplace.'' \41\ EPA has interpreted
CAA sec. 211(h) as largely a codification of our prior RVP
regulations.\42\ Relevant legislative history also indicates that
Congress based the 1.0 psi waiver on technical data showing that
blending gasoline with 9-10 percent ethanol would result in an
approximate 1 psi RVP increase for the final gasoline-ethanol blend.
Hearing testimony provides that ``[t]he certainty of physical chemistry
provides the assurance the addition of 10 percent ethanol to the base
gasoline will not exceed 1.0 psi RVP. . . . [A]nd the Clean Air Act
itself which prohibits addition of more than 10 percent ethanol,
alleviates any concern that the addition of ethanol to gasoline will
result in different volatility levels than already recognized by EPA as
adding less than 1.0 psi RVP to gasoline.'' \43\
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\41\ S. Rep. No. 101-228, at 110 (1989) (Conf. Rep.); reprinted
at 5 Leg. Hist. at 8450 (1993).
\42\ See 76 FR 44433 (July 25, 2011).
\43\ Clean Air Act Amendments: Hearings on H.R. 2521, H.R. 3054
and H.R. 3196 Before the Subcommittee on Health and the Environment
of the Committee On Energy and Commerce, 100th Cong. 1st Sess.
(1987) at 366 (statement of Eric Vaughn, President and CEO of
renewable Fuels Association).
---------------------------------------------------------------------------
Further, Congress also enacted a conditional defense against
liability for violations of the RVP level allowed under the 1-psi
waiver by stating:
[p]rovided; however, that a distributor, blender, marketer,
reseller, carrier, retailer, or wholesale purchaser consumer shall
be deemed to be in full compliance with the provisions of this
subsection and the regulations promulgated thereunder if it can
demonstrate that--(A) The gasoline portion of the blend complies
with the Reid vapor pressure limitations promulgated pursuant to
this subsection; (B) the ethanol portion of the blend does not
exceed its waiver condition under subsection (f)(4) of this section;
and (C) no additional alcohol or other additive has been added to
increase the Reid Vapor Pressure of the ethanol portion of this
blend. CAA sec. 211(h)(4).
This is referred to as the ``deemed to comply'' provision, or the
alternative compliance mechanism for the 1-psi waiver. It is considered
a statutorily mandated defense that allows regulated parties such as
downstream oxygenate blenders to demonstrate compliance with the
relaxed RVP standard instead of complying with the testing provisions
in 40 CFR 80.27(d)(2) (1987). It also reflects Congressional response
to EPA's proposed compliance testing provisions for the 1-psi waiver in
the 1987 proposed rulemaking, which they viewed as complicated and
burdensome; ``the enforcement strategy recently proposed by the Agency
. . . would be totally unworkable for those motor vehicle fuels which
are a blend of gasoline and ethanol and which are allowed a higher RVP
limit under the reported bill.'' \44\
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\44\ S. Rep. No. 100-231, 100th Cong. 1st Sess. at 149 (1987).
---------------------------------------------------------------------------
c. Implementation of CAA Sec. 211(h)(4)
Subsequent to Congress's enactment of CAA sec. 211(h)(4), EPA
modified these regulations to more explicitly align with the new
statutory provisions, but ``did not propos[e] any change to the current
requirement that the blend contain between 9 and 10 percent ethanol (by
volume) to obtain the one psi allowance.'' \45\ However, EPA did modify
its regulations at 40 CFR 80.27 to clarify that ``gasoline must contain
denatured, anhydrous ethanol,'' and that ``[t]he concentration of the
ethanol, excluding the required denaturing
[[Page 10590]]
agent, must be at least 9% and no more than 10% (by volume) of the
gasoline'' (where, as quoted above, the previous version of the
regulations provided that gasoline ``must contain at least 9% ethanol''
to qualify for the 1-psi RVP waiver). We read both the statutory 1-psi
waiver provision and the ``deemed to comply'' provision in CAA sec.
211(h)(4) together to limit the volume concentration of ethanol to
between 9 and 10 percent, as only blends of gasoline and up to 10
percent ethanol had a waiver under CAA sec. 211(f)(4) at the time EPA
promulgated the RVP requirements.\46\ We further stated that ``this is
consistent with Congressional intent [because] the nature of the
blending process . . . further complicates a requirement that the
ethanol portion of the blend be exactly 10 percent ethanol.'' \47\ For
these reasons, the 1-psi waiver reflected Congressional recognition of
the existing CAA sec. 211(f)(4) waiver for E10; Congress intended that
the 1-psi waiver from the 9.0 psi RVP requirement in CAA sec. 211(h)(1)
would allow for E10's continued lawful introduction into commerce.\48\
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\45\ See 56 FR 64708 (December 12, 1991).
\46\ Id.
\47\ Id.
\48\ Id.
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In issuing implementing regulations at 40 CFR 80.28(g)(8) related
to the ``deemed to comply'' provision in CAA sec. 211(h)(4), EPA
allowed parties to demonstrate a defense against liability by making
the showings provided in CAA sec. 211(h)(4), stating that ``EPA
believes this defense is limited to ethanol blends which meet the
minimum 9 percent requirement in the regulations and the maximum 10
percent requirement in the waivers under section 211(f)(4).'' \49\ In
doing so, EPA explicitly specified its applicability to E10. (``The
ethanol portion of the blend does not exceed 10 percent (by volume)''
as compared to CAA sec. 211(h)(4), which merely references the CAA sec.
211(f)(4) waiver. (``[T]he ethanol portion of the blend does not exceed
its waiver condition under subsection (f)(4) of this section'')). We
also stated that the deemed to comply provision was a ``new defense
against liability for violation of the ethanol blend RVP requirement
[and that] EPA believes that this statutorily mandated defense is in
addition to and does not supersede any of the defenses currently
contained in the regulations.'' \50\ We further explained that the
provision would allow ``a party to demonstrate the elements of the new
defense by production of a certification from the facility from which
the gasoline is received.'' \51\ EPA also issued regulations for
additional defenses against liability at 40 CFR 80.28(g)(1-7).
---------------------------------------------------------------------------
\49\ Id. and 40 CFR 80.28(g).
\50\ 56 FR 64708.
\51\ Id.
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d. Enactment of CAA sec. 211(h)(5)
As part of the Energy Policy Act of 2005 (``EPAct''), Public Law
109-58 (2005), Congress added CAA sec. 211(h)(5), which provides:
Upon notification, accompanied by supporting documentation, from
the Governor of a State that the RVP limitation established by
paragraph (4) will increase emissions that contribute to air
pollution in any area in the State, the Administrator shall, by
regulation, apply, in lieu of the RVP limitation established by
paragraph (4), the RVP limitation established by paragraph (1) to
all fuel blends containing gasoline and 10 percent denatured
anhydrous ethanol [sold] in the area during the high ozone season.
EPA also read this provision as consistent with the statutory
scheme of CAA sec. 211(h) to apply to blends of gasoline and 9-10
percent ethanol produced by downstream oxygenate blenders. At the time
CAA sec. 211(h)(4) and 211(h)(5) were enacted, the language ``the
ethanol portion of the blend does not exceed its waiver condition under
subsection (f)(4)'' could only refer to an ethanol portion of up to 10
percent, because only blends of gasoline and up to 10 percent ethanol
had received a waiver under CAA sec. 211(f)(4).
B. Proposed Interpretation of CAA Sec. 211(h)(4)
In this action, we are proposing to interpret CAA sec. 211(h)(4)
recognizing the changed gasoline marketplace since the Agency last
issued implementing RVP regulations in 1990, in a manner that is
consistent with the text of the provision, its context within CAA sec.
211(h), and Congressional intent. The presence of E15 in the
marketplace has increased since EPA interpreted CAA sec. 211(h)(4) in
the MMR from zero retail stations to over 1,300 retail stations.\52\ In
addition to granting partial waivers for E15, we have also promulgated
the Tier 3 Motor Vehicle Emissions and Fuel Standards Rule, which
changed the ethanol content of the vehicle certification test fuel from
``indolene'' (gasoline without any added ethanol at 9.0 psi RVP), to
E10 at 9.0 psi RVP for the certification of all Tier 3 light-duty and
chassis-certified heavy-duty gasoline vehicles.\53\ This change
reflected the near complete transition of the in-use gasoline supply to
E10 in the years following the passage of EPAct and the Energy
Independence and Security Act (``EISA'') and the implementation of the
Renewable Fuel Standard program at CAA sec. 211(o).\54\ E15 has now
entered the marketplace, but the current limitation of the
applicability of the 1-psi waiver to only E10 is one of several hurdles
to the continued entry of E15 into the marketplace.\55\ The same market
limitation that prompted EPA to provide the 1-psi waiver for E10 in
1989 currently exists for E15. Namely, in much of the U.S., there is
very little low-RVP CBOB being produced and made available into which
15 percent ethanol could be blended while still meeting the 9.0 psi RVP
standard for gasoline during the high ozone season.\56\ As a result,
parties that might otherwise consider making and distributing E15 may
choose not to, given the difficulty in obtaining CBOB that when blended
to produce E15 would meet the 9.0 psi RVP during the summer. If we
extend the 1-psi waiver, 15 percent ethanol could be blended using the
same CBOBs currently being distributed for use with 10 percent ethanol,
year-round.\57\ Today's proposal, therefore, is a response to changed
circumstances since the Agency's promulgation of RVP regulations in
1990, which pre-dates EPAct in 2005 and EISA in 2007. Further, because
blending 15 volume percent ethanol into gasoline would result in an
approximate 1.0 psi RVP increase, similar to E10, the resultant RVP for
any gasoline-ethanol blended fuel would be no higher than the RVP
standard plus the 1-psi waiver, which is currently 10.0 psi for a
gasoline-ethanol blended fuel containing 10 percent ethanol.\58\ This
proposed interpretation is consistent with the plain language of CAA
sec. 211(h) and with Congress' intent to promote ethanol blending into
[[Page 10591]]
gasoline, and is not expected to cause significant increases in
emissions as compared to E10 as discussed in Section II.E.
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\52\ See ``Availability of E15 Keeps Growing,'' available at:
https://growthenergy.org/2018/02/28/availability-e15-keeps-growing.
\53\ See 79 FR 23414 (April 28, 2014).
\54\ ``Energy Independence and Security Act,'' P.L. 110-140
(2007).
\55\ See,e.g., Prime the Pump: Driving Ethanol Gallons,
available at: https://growthenergy.org/wp-content/uploads/2019/01/MDEV-19022-PTP-Overview-2019-01-25.pdf.
\56\ Some parties have access to low RVP blendstocks created for
low-RVP areas, however these blendstocks are not widely distributed
in all areas. For a list of state low-RVP areas, see EPA's ``State
Fuels'' website available at: https://www.epa.gov/gasoline-standards/state-fuels.
\57\ In reformulated gasoline areas (approximately one-third of
gasoline nationwide) and certain other areas that do not provide a
1-psi waiver for E10, E15 can already be blended using the same
blendstocks used for E10.
\58\ As discussed further in Section II.B.3.b, this is true for
E15 made from blends of certified gasoline or BOB and ethanol. This
volatility relationship is not maintained when other products (e.g.,
natural gas liquids) are blended to make E15.
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1. Proposed Interpretation
In the MMR, we interpreted CAA sec. 211(h)(4) as providing a 1-psi
waiver for fuel blends of gasoline and at least 9 volume percent
ethanol and not more than 10 volume percent ethanol. As previously
explained, this interpretation was premised on a reading of regulations
and statutory provisions that reflected the highest available ethanol
content in the gasoline marketplace at the time of the 1990 amendments.
Due to changes in the gasoline marketplace, including the increased
presence of gasoline ethanol blends of up to 15 percent ethanol, we
propose to construe CAA sec. 211(h)(4) as specifying the minimum
ethanol content that fuel blends containing ethanol and gasoline must
contain in order to qualify for the 1-psi waiver. We are proposing a
new interpretation of this statutory provision under which the 1-psi
waiver would apply to gasoline containing at least 10 percent ethanol.
In conjunction with CAA sec. 211(f), this would then allow the 1-psi
waiver for any ethanol blend that has received a CAA sec. 211(f)(4)
waiver, which at present are blends up to 15 percent ethanol, based on
EPA's prior issuance of partial waivers under CAA sec. 211(f)(4) for
E15.
It is well settled that EPA has inherent authority to reconsider,
revise, or repeal past decisions to the extent permitted by law so long
as we provide a reasoned explanation. This authority exists in part
because EPA's interpretations of the statutes we administer ``are not
carved in stone.'' \59\ An agency ``must consider varying
interpretations and the wisdom of its policy on a continuing basis.''
\60\ This is true when, as is the case here, review is undertaken ``in
response to changed factual circumstances or a change in
administration.'' \61\ EPA must also be cognizant where we are changing
a prior position that the revised position is permissible under the
statute and must articulate a reasoned basis for the change.\62\ This
proposal reflects changed circumstances that have arisen since we
issued the partial waivers for E15 in 2010 and 2011.
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\59\ Chevron U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837, 863
(1984).
\60\ Id. at 863-64.
\61\ Nat'l Cable & Telecomms. Ass'n v. Brand X internet Servs.,
545 U.S. 967, 981 (2005). See also Nat'l Ass'n of Home Builders v.
EPA, 682 F.3d 1032, 1043 (change in administration is a ``perfectly
reasonable basis'' for an agency's reappraisal of its regulations
and programs).
\62\ FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515.
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The term ``containing'' as used in CAA sec. 211(h)(4) in the phrase
``fuel blends containing gasoline and 10 percent denatured anhydrous
ethanol'' is ambiguous. We interpret this language as establishing a
lower limit, or floor, on the minimum ethanol content for a 1-psi
waiver from the volatility requirements expressed in CAA sec.
211(h)(1), rather than an upper limit on the ethanol content. We can
look to the use of the term ``containing'' in its ordinary sense.
``Containing'' is defined as ``to have within: hold.'' \63\ Under this
interpretation, the statute sets the minimum ethanol content, such that
all fuels which contain at least 10 percent ethanol may receive the 1-
psi waiver, including blends that contain more than 10 percent
ethanol.\64\ Therefore, E15, which has within it 10 percent denatured
anhydrous ethanol, meets this definition, and should receive the 1-psi
waiver specified in CAA sec. 211(h)(4).\65\
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\63\ Webster's Third New International Dictionary 491
(unabridged ed. 1981).
\64\ We are not changing our definition of the term 10 percent,
which includes as little as 9 percent, to continue to provide the
necessary blending flexibility for E10 blends. In promulgating
regulations implementing CAA sec. 211(h)(4), we stated that
requiring exactly 10 percent ethanol ``would place a next to
impossible burden on ethanol blenders,'' and that ``[t]he nature of
the blending process itself . . . further complicates a requirement
that the ethanol portion of the blend be exactly 10 percent
ethanol.'' See 56 FR 24245 (May 29, 1991).
\65\ CAA sec. 211(h)(5) also contains the language ``fuel blends
containing gasoline and ten percent denatured anhydrous ethanol.''
Our changed interpretation of CAA sec. 211(h)(4) also has
implications for CAA sec. 211(h)(5), which allows states to opt out
of the 1-psi wavier provided by CAA sec. 211(h)(4) for particular
areas upon a showing that the 1-psi waiver will increase emissions
that contribute to air pollution. Because the language in CAA sec.
211(h)(5) pertaining to the 1-psi waiver is identical to the
language in CAA sec. 211(h)(4), and both refer to the 1-psi waiver,
we believe that both sections should be read together to apply the
1-psi waiver to E10 and E15. Accordingly, we interpret CAA sec.
211(h)(5) to allow states to opt out of the 1-psi waiver provided by
CAA sec. 211(h)(4) for fuel blends containing gasoline and 9-15
percent denatured anhydrous ethanol.
---------------------------------------------------------------------------
We also acknowledge that Congress can legislate and thus could have
used terms that connote a minimum ethanol content, such as the language
employed in CAA sec. 211(m)(2) (``not less than 2.7 percent'').\66\ But
Congress also used terms connoting a maximum ethanol content, such as
in CAA sec. 211(k)(3) (``shall not exceed 1.0 percent'').\67\ Even more
specifically, in CAA sec. 211(h)(1) Congress instructed EPA to
promulgate regulations prohibiting the introduction into commerce of
``gasoline with a Reid Vapor Pressure in excess of 9.0 pounds per
square inch.'' Therefore, when Congress intended to impose an upper
limit on the content of a particular compound or property of gasoline,
it did so. In contrast, in CAA sec. 211(h)(4), Congress provided a
higher RVP limit for ``fuel blends containing gasoline and ten percent
ethanol.'' This provision lacks terms modifying the term
``containing,'' in contrast to the other statutory provisions
referenced above, supporting our finding that this term is ambiguous.
It is therefore permissible, where Congress has used only the ambiguous
term ``containing'' in CAA sec. 211(h)(4), to interpret ``containing''
to mean ``containing at least.''
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\66\ See, e.g., CAA sec. 211(m)(2) (``gasoline is to be blended
to contain not less than 2.7 percent oxygen by weight'' during the
wintertime carbon monoxide season).
\67\ See, e.g., CAA sec. 211(k)(3)(A)(1) and (ii) (``The benzene
content of reformulated gasoline shall not exceed 1.0 per cent by
volume;'' ``The aromatics hydrocarbon content of the reformulated
gasoline shall not exceed 25 percent by volume.'')
---------------------------------------------------------------------------
Implementing regulations under both CAA sec. 211(c) prior to the
enactment of CAA sec. 211(h) and under CAA sec. 211(h) have reflected
the highest permissible ethanol content at the time EPA's RVP
regulations were issued, which was 10 percent ethanol under a CAA sec.
211(f)(4) waiver. We stated that the 1-psi waiver is ``for blends of
gasoline with about 10 percent ethanol, or gasohol'' \68\ and in
regulations, codified the conditions, providing that ``[t]he maximum
ethanol content . . . in gasoline shall not exceed any applicable
waiver conditions under CAA sec. 211(f)(4) waiver.'' \69\ Additionally,
EPA statements on the imprecise nature of ethanol-gasoline blending
also support the view that neither Congress nor EPA intended to limit
ethanol content for the 1-psi waiver. ``The nature of the blending
process . . . complicates a requirement that the ethanol portion of the
blend be exactly 10 percent ethanol.'' \70\
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\68\ 55 FR 23660 (June 11, 1990).
\69\ 55 FR 23660 (June 11, 1990) and 40 CFR 80.27(d)(2) (1987).
\70\ 56 FR 24245 (May 29, 1991).
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We further note that in the legislative history, Congress employed
the term ``at least'' 10 percent ethanol when discussing the 1-psi
waiver, which suggests this provision is a floor for ethanol content in
gasoline. For example, section 216 of the House bill provided in part
that ``[a] manufacturer or processor of gasoline containing at least 10
percent ethanol shall be deemed in full compliance.'' \71\
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\71\ Clean Air Act Amendments, H.R. 3030 (101st Congress, 1990).
See also H.R. Rep. No. 101-490, at 71 (1990) (Conf. Rep.); reprinted
at 2 Leg. Hist. at 3095 (1993).
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[[Page 10592]]
The Senate Report published along with the enactment of the 1990
CAA Amendments and CAA sec. 211(h)(4) also describes both the purpose
of including CAA sec. 211(h)(4), and general language about ethanol use
---------------------------------------------------------------------------
in the fuel supply. The report states that the 1-psi waiver was:
included in recognition that gasoline and ethanol are mixed
after the refining process has been completed. It was recognized
that to require ethanol to meet a 9 pound RVP would require the
creation of a production and distribution network for sub-nine pound
RVP gasoline. The cost of producing and distributing this type of
fuel would be prohibitive to the petroleum industry and would likely
result in the termination of the availability of ethanol in the
marketplace. Under this provision, the RVP limitations promulgated
pursuant to this subsection for such ethanol/gasoline blends shall
be one pound per square inch greater than the applicable Reid vapor
pressure which apply to gasoline. Senate Report 101-228, at 3495.
Finally, the Senate report states that the 1-psi waiver would
``allow ethanol blending to continue to be a viable alternative fuel,
with its beneficial environmental, economic, agricultural, energy
security and foreign policy implications.'' \72\ While this legislative
history does not speak to the meaning of the word ``containing,'' it
does articulate congressional intent in enacting the provision,
recognizing the role for ethanol in the marketplace. This report and
other relevant legislative history do not explicitly address whether
CAA sec. 211(h)(4) is intended to apply to blends with greater than 10
percent ethanol, but all the reasons it gives for extending the 1-psi
waiver to gasoline ethanol blends up to 10 percent ethanol now would
similarly weigh in favor of interpreting the 1-psi waiver to apply to
E15, given that Congressional action in CAA sec. 211(h) was largely a
ratification of agency regulations for RVP that were initiated
beginning in 1987, under CAA sec. 211(c).
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\72\ See S. Rep. No. 101-228 at 110 (1989).
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Congress designed the 1-psi waiver ``deemed to comply'' language of
CAA sec. 211(h)(4) to adjust to gasoline-ethanol blends with more than
10 volume percent ethanol if allowed under separate provisions of the
CAA (i.e., in the case where EPA grants a CAA sec. 211(f)(4) waiver
that allows for greater than 10 volume percent ethanol in gasoline). In
other words, the blended fuel is ``deemed to comply'' not because it is
E10, but because it is a gasoline-ethanol blended fuel that has
received a CAA sec. 211(f)(4) waiver. The Senate Report described the
``deemed to comply'' provision as an ``alternative enforcement
arrangement'' that had the benefit of simplifying compliance
demonstrations due to the inconsistency between the production of
gasoline batches, measured in millions of gallons, to ethanol blending
at the terminal in batches on the order of thousands of gallons. The
``deemed to comply'' provision further supports the interpretation that
the 1-psi waiver under CAA sec. 211(h)(4) can apply to gasoline with
ethanol content greater than 10 percent. The ``deemed to comply''
provision lays out the compliance mechanisms for regulated parties, but
also contemplates ethanol blends beyond E10, the only gasoline-ethanol
blended fuel with a CAA sec. 211(f)(4) waiver at the time of enactment,
because EPA's waiver authority under that provision is not limited to
gasoline containing any particular range of volume percent ethanol. CAA
sec. 211(h)(4)(B) provides that the ``deemed to comply provision'' will
apply upon a demonstration that, among other things, ``the ethanol
portion of the blend does not exceed its waiver condition under
subsection (f)(4).'' We read this phrase to apply to only the waiver
condition specifying the ethanol content of the fuel. Pursuant to the
E15 waivers issued in 2010 and 2011, a fuel that includes 15 percent
ethanol contains an ethanol portion that does not exceed the 211(f)(4)
waiver condition. As previously shown, if Congress had wanted to limit
the application of the (h)(4) waiver to E10, it could have done so, but
it did not. Instead, Congress contemplated that ethanol content may
increase in the future, that parties would likely apply for an
211(f)(4) waiver for those higher blends, that the 211(h)(4) waiver
would apply to these fuels, and that the 211(h)(4) ``deemed to comply''
provision would also apply.
Therefore, CAA sec. 211(h)(4) can be read as specifying the minimum
ethanol content for ethanol-gasoline blends for purposes of the 1-psi
waiver while the deemed to comply provision can be construed as a
defense against liability for any ethanol blend that has received a CAA
sec. 211(f)(4) waiver, which at present includes E15. As previously
explained, the ``deemed to comply'' provision that was enacted at the
inception of the RVP program to address industry practices at the time,
reflects the highest permissible ethanol content at that time because
of the waiver under CAA sec. 211(f)(4). CAA sec. 211(h)(4)(B) (``the
ethanol portion of the blend does not exceed its waiver condition under
subsection (f)(4) of this section.'') It is a statutorily mandated
defense that is in addition to other defenses codified at 40 CFR
80.28(g)(1) through (7). It is not and has never been the sole
enforcement mechanism for the 1-psi waiver. These other equally
effective provisions would be applicable to gasoline-ethanol blended
fuels containing 15 percent ethanol and our extending the 1-psi waiver
to such blends should have no effect on the enforcement of RVP
standards. Regulated parties could also continue to avail themselves of
this provision, if necessary. Moreover, considerations that animated
this provision, are now largely attenuated considering changes in the
refinery process. Today, ethanol blending is done almost completely
through in-line blending ethanol into CBOB specially made for blending
with ethanol as compared to the nascent days where it was splash
blended after completion of the refining process.
Our primary consideration has been to balance the goals of limiting
gasoline volatility and ensure that the addition of ethanol does not
cause the exceedance of the maximum RVP standard, while also promoting
the use of ethanol consistent with the purpose of CAA sec. 211(h)(4).
As previously explained, blending gasoline with at least 10 percent
ethanol results in an approximate 1.0 psi RVP increase. It does not
result in ``different volatility levels than already recognized by EPA
as adding less than 1.0 psi RVP to gasoline.'' \73\ Similarly, we also
expect that E15 produced from the same BOB as E10 would have a similar
(if not slightly lower) RVP than E10 and thus, would not exceed the
current 10.0 psi RVP limit.\74\ Therefore, we are fairly confident that
relative evaporative emissions effects for E15 would largely be similar
or slightly less than those for E10, as discussed in Section II.E.
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\73\ Clean Air Act Amendments: Hearings on H.R. 2521, H.R. 3054
and H.R. 3196 Before the Subcommittee on Health and the House
Committee on Environment and Committee On Energy and Commerce, 100th
Cong. 1st Sess. (1987) (statement of Eric Vaughn, President and CEO
of renewable Fuels Association).
\74\ ``Determination of the Potential Property Ranges of Mid-
Level Ethanol Blends.'' American Petroleum Institute, Washington,
DC. April 2010.
---------------------------------------------------------------------------
In sum, the primary consideration underlying the 1-psi waiver is to
limit gasoline volatility while promoting the use of ethanol due to its
importance to energy security and the agricultural sector. Today's
proposed interpretation, if finalized, will continue to further these
policy concerns given that agency action will now afford similar
treatment to all ethanol-gasoline blends.
2. Regulatory Amendments
This proposal includes technical amendments that would effectuate
our
[[Page 10593]]
proposed interpretation to allow the 1-psi waiver for E15 during the
summer under CAA sec. 211(h)(4). First, we are proposing to modify or
remove volatility controls associated with our prior interpretation of
CAA sec. 211(h)(4). These controls, found in 40 CFR 80.27, place
limitations on the RVP of gasoline-ethanol blends at specific
concentrations. Given that the primary effect of our proposed
interpretation of CAA sec. 211(h)(4) would expand the ``special
treatment for gasoline-ethanol blends'' to fuel blends containing 9-15
percent ethanol, we are proposing to modify the controls extending the
1-psi waiver from gasoline containing 9-10 percent ethanol to gasoline
containing 9-15 percent ethanol at 40 CFR 80.27 and related defense
provisions in 40 CFR 80.28.
Second, we are proposing to remove or modify provisions in the MMR
that were imposed to effectuate the prior 1-psi waiver interpretation
under CAA sec. 211(h)(4). Subsequent to the grant of the CAA sec.
211(f)(4) partial waivers for E15, we adopted regulations under CAA
sec. 211(c) to ensure that E15 would not be used in certain vehicles
and engines for which the waivers did not apply. To do so, in addition
to the conditions on the waivers that applied to fuel manufacturers, we
promulgated regulations to ensure that those same conditions were
enforceable on downstream parties. No changes were made to the RVP
regulations at 40 CFR 80.27 as a direct result of our interpretation
under CAA sec. 211(h)(4) that the 1-psi waiver did not extend to
gasoline-ethanol blends with an ethanol concentration greater than 10
percent. Additional regulations were put in place including regulations
currently found in 40 CFR 80.1504(f) and (g) (placing prohibitions on
the commingling of E10 and E15), and 40 CFR 80.1503 (placing PTD
requirements on E15). These regulations were put in place in order to
ensure that the RVP of E15 did not exceed 9.0 psi in accordance with
our interpretation of CAA sec. 211(h)(4) at the time. However, since
our proposed interpretation of CAA sec. 211(h)(4) increases the RVP
allowance to 10.0 psi, these provisions are no longer necessary.
Additionally, because the RVP of E15 will be approximately the same as
E10 if produced from the same blendstock, we do not anticipate
emissions impacts from this equal treatment. Given that we are
proposing to interpret CAA sec. 211(h)(4) to extend to gasoline-ethanol
blends of up to 15 percent ethanol, the prohibition on the commingling
of E15 and E10 is no longer necessary.
Finally, we are proposing to remove the PTD requirements related to
the 1-psi waiver at 40 CFR 80.1503. In 40 CFR part 80, subpart N, we
included PTD language designed to help ensure that E15 that did not
receive the 1-psi waiver would be segregated from E10 that did receive
the 1-psi waiver. Since we are proposing to allow the 1-psi waiver for
E15, we no longer need these PTD requirements. However, parties that
produce and distribute gasoline-ethanol blended fuels would still be
required to identify ethanol concentrations on PTDs as specified in 40
CFR 80.27 and 40 CFR 80.1503.
All other E15 misfueling mitigation provisions in 40 CFR part 80,
subpart N, would remain unchanged. In the MMR, we promulgated
regulations under CAA sec. 211(c)(1), which prohibit the use of E15 in
MY2000 and older motor vehicles, nonroad vehicles, engines, and
equipment (including motorcycles, and heavy-duty motor vehicles). CAA
sec. 211(c)(1) gives EPA authority to ``control or prohibit the
manufacture, introduction into commerce, offering for sale, or sale''
of any fuel or fuel additive (A) whose emission products, in the
judgment of the Administrator, cause or contribute to air pollution
``which may be reasonably anticipated to endanger public health or
welfare'' or (B) whose emission products ``will impair to a significant
degree the performance of any emission control device or system which
is in general use, or which the Administrator finds has been developed
to a point where in a reasonable time it would be in general use'' were
the fuel control or prohibition adopted. We promulgated the MMR based
on our assessment that E15 would significantly impair the emission
control systems used in MY2000 and older light-duty motor vehicles,
heavy-duty gasoline engines and vehicles, highway and off-highway
motorcycles, and all nonroad products. This led to our conclusion that
under CAA sec. 211(c)(1)(A), E15 use in these particular vehicles,
engines, and non-road products would likely result in increased VOC,
carbon monoxide (CO), and nitrogen oxide (NOX)
emissions.\75\ The proposed regulatory changes to 40 CFR part 80,
subparts B and N in this proposed rulemaking are solely related to our
proposed interpretation to allow the 1-psi waiver for E15 under CAA
sec. 211(h)(4). This proposed action would not change the basis of our
CAA sec. 211(c)(1)(A) and (B) finding in the MMR that prohibits E15
from use in MY2000 and older light-duty motor vehicles, heavy-duty
gasoline engines and vehicles, highway and off-highway motorcycles, and
all nonroad products. This action also does not propose to modify the
misfueling mitigation measures promulgated in the MMR, but, as
discussed in Section II.D.3, we seek comment on the need for additional
E15 misfueling measures.
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\75\ 76 FR 44422 (July 25, 2011).
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3. Effects on Regulated Parties
This section discusses distinctions between the obligations that
apply to certain parties in the fuel production, blending, and retail
chain, and how this proposed action would affect (or would not affect)
those parties. Specifically, we discuss how the proposed CAA sec.
211(h)(4) interpretation under which the 1-psi waiver would extend to
E15 would affect fuel manufacturers (e.g., refiners and importers of
gasoline), downstream oxygenate blenders, and retailers that make E15
at a blender pump.
a. E15 Made by Refiners, Importers, and Downstream Oxygenate Blenders
In this action, we are maintaining all of the CAA sec. 211(f)(4)
waiver conditions for E15 as they currently apply to fuel and fuel
additive manufacturers.\76\ CAA sec. 211(f)(1) operates as a
prohibition against the introduction into commerce of fuels and fuel
additives by manufacturers of fuels and fuel additives, and CAA sec.
211(f)(4) provides a mechanism to waive that prohibition if certain
criteria are met. Therefore, fuel and fuel additive manufacturers are
subject to any conditions that apply to a CAA sec. 211(f)(4) waiver.
Under this approach, fuel and fuel additive manufacturers would still
need to produce E15 that meets the 9.0 psi RVP requirement of the
waiver condition, while downstream parties are not similarly bound.
EPA's fuel and fuel additive registrations (FFARs) regulations at 40
CFR 79.2(d) define which parties are fuel manufacturers and makes clear
that parties that only blend oxygenates at allowable levels under CAA
sec. 211(f) are excluded from the definition of fuel manufacturers. We
are, however, neither reopening 40 CFR 79.2(d), nor soliciting comments
on this provision. We will therefore treat any comments we receive on
this topic as beyond the scope of this rulemaking.
---------------------------------------------------------------------------
\76\ We note, however, that under the new substantially similar
interpretive rulemaking proposed in Section II.C, such that it
includes E15, such waiver conditions would no longer apply to fuel
and fuel additive manufacturers.
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We are not changing our interpretation of the way the CAA controls
fuels and the way our regulations regulate fuels in any way other than
providing the 1-psi waiver to
[[Page 10594]]
gasoline containing greater than 10 volume percent ethanol as a
consequence of interpreting the 1-psi RVP waiver to apply to E15. The
1-psi waiver applies to all parties that blend and distribute gasoline-
ethanol blends containing at least 10 percent ethanol unless
specifically restricted under another portion of the CAA, in this case
CAA sec. 211(f) through the 9.0 psi RVP limit on E15 from May 1 through
September 15 as a condition of its CAA sec. 211(f)(4) partial waivers.
The 1-psi RVP waiver under CAA sec. 211(h)(4) is thus available to
downstream oxygenate blenders who produce E15 and to downstream parties
who distribute and sell E15, but the 1-psi waiver is not available to
fuel or fuel additive manufacturers since fuel and fuel additive
manufacturers must comply with the high ozone season 9.0 psi RVP E15
waiver condition.
This is in accordance with how the fuel marketplace currently
functions with regard to E10. Refiners and importers currently produce
or import gasoline (or conventional blendstock for oxygenate blending
(CBOB)), which can then be blended with ethanol downstream. It is not
until that ethanol is blended into the gasoline or CBOB that parties
are able to receive the benefits of the 1-psi waiver (i.e., an RVP
volatility limit of 10.0 psi). Therefore, a refiner's or importer's
gasoline or CBOB must always meet a 9.0 psi RVP limitation prior to the
addition of ethanol.\77\ However, because the CAA sec. 211(f)(4) waiver
for E10 was granted by operation of law, and thus did not contain a
waiver condition limiting the RVP to 10.0 psi, in contrast to E15,
refiners and importers can take advantage of the 1-psi waiver for E10.
It should be noted, however, that if another part of the CAA or EPA
regulation precludes the 1-psi waiver, for example, reformulated
gasoline (RFG) required under CAA sec. 211(k) or a low-RVP fuel program
established in a state implementation plan, parties cannot take
advantage of the 1-psi waiver for E10 or E15.\78\ In such
circumstances, however, the same CBOBs already supplied for E10
blending can already be used for E15 blending, so the 1-psi waiver is
not at issue.
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\77\ In fact, as discussed above, downstream parties can only be
deemed in compliance under CAA sec. 211(h)(4)(A) if the gasoline or
CBOB met the applicable RVP standard prior to the addition of the
ethanol.
\78\ During the pre-proposal development process, we received a
document related to whether allowing E15 the 1-psi waiver would
result in states being preempted under CAA sec. 211(c)(4). Please
see ``RVP Preemption Memorandum'' in the docket at EPA-HQ-OAR-2018-
0775 for this document.
---------------------------------------------------------------------------
The 1-psi waiver for E15 would function the same way, although if a
refiner or importer were to choose to blend E15, including but not
limited to blending at a co-located terminal or at a terminal
downstream of a refinery operated by the refiner or importer, they
would not be able to use the 1-psi waiver because the exclusion from
the definition of a ``fuel manufacturer'' only includes a party
``(other than a fuel refiner or importer).'' \79\ This means that
refiners and importers who blend E15 would still need to comply with
the waiver conditions under CAA sec. 211(f)(4).
---------------------------------------------------------------------------
\79\ If a separate party operated a terminal co-located with a
refinery and the party was excluded from the definition of fuel
manufacturers under 40 CFR 79.2(d)(2), the party that operated the
co-located terminal would be not be subject to the E15 waiver
conditions. As previously noted, we are neither reopening this
provision for comments nor soliciting comments on it and any
comments on it we receive will be treated as beyond the scope of
this rulemaking.
---------------------------------------------------------------------------
This interpretation of CAA sec. 211(f)(4) is consistent with our
past treatment of CAA sec. 211(f)(1) and (f)(4)'s applicability to only
fuel and fuel additive manufacturers, and is further supported by our
actions in the MMR, which imposed regulatory requirements that are
similar to the E15 CAA sec. 211(f)(4) waiver conditions on downstream
parties, to whom the waiver conditions do not reach.\80\ The MMR was
enacted ``to mitigate misfueling with E15 that lawfully has been
introduced into commerce under the terms of the waiver[s]. The waiver
conditions, and implementation of the waiver conditions, address a
closely related but different issue--when, how and by whom E15 can be
introduced into commerce under the partial waiver decisions. This rule
only addresses the issue of mitigating misfueling in the event E15 is
lawfully introduced into commerce under the partial waivers, and is
issued under EPA's authority under section 211(c).'' \81\
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\80\ See 76 FR 44421 (July 25, 2011) (enacting E15 MMR
provisions ``to ensure that E15 being sold at retail stations was in
compliance with the RVP condition of the E15 waiver and that an E10
fuel that used the 1.0 psi RVP waiver under CAA sec. 211(h) was not
commingled with E15, which must have a lower RVP in the
summertime'').
\81\ See 76 FR 44440 (July 25, 2011).
---------------------------------------------------------------------------
As discussed above, CAA sec. 211(f) imposes limitations on fuel and
fuel additive manufacturers. All fuel and fuel additive manufacturers
must meet the statutory requirements of CAA sec. 211(f)(1) or the
waiver conditions imposed under a CAA sec. 211(f)(4) waiver. As
previously explained fuel manufacturers are defined in our regulations
at 40 CFR 79.2. This definition explicitly excludes parties ``(other
than a fuel refiner or importer) who add[] an oxygenate compound to
fuel in any otherwise allowable amount.'' These excluded parties may
also be considered ``oxygenate blenders'' under our regulations in 40
CFR part 80.\82\ An ``oxygenate blender'' is defined as ``any person
who owns, leases, operates, controls, or supervises an oxygenate
blending facility, or who owns or controls the blendstock or gasoline
used or the gasoline produced at an oxygenate blending facility.'' \83\
An ``oxygenate blending facility'' is defined as ``any facility
(including a truck) at which oxygenate is added to gasoline or
blendstock, and at which the quality or quantity of gasoline is not
altered in any other manner except for the addition of deposit control
additives.'' \84\
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\82\ 40 CFR 80.2.
\83\ Id.
\84\ Id.
---------------------------------------------------------------------------
While our proposed interpretation of CAA sec. 211(h)(4) would allow
for gasoline-ethanol blends that contain at least 10 volume percent
ethanol to receive the 1-psi waiver, CAA sec. 211(f) and our 40 CFR
parts 79 and 80 fuels regulations continue to limit the amount of
ethanol allowed to be blended into gasoline, and also the gasoline
ethanol blends that can receive the 1-psi waiver. The definition of
``fuel manufacturer'' also places a limitation on the ethanol content
of the fuel. Only parties who ``add[] an oxygenate compound to fuel in
any otherwise allowable amount'' are excluded from the definition of
fuel manufacturer.\85\ This provision only allows the addition of
oxygenate compounds up to the amount of any CAA sec. 211(f)(4) waiver,
or any allowable oxygen content under our interpretation of the meaning
of ``substantially similar.'' A party who unlawfully adds an oxygenate
compound in a volume that exceeds the oxygen content limit in the
interpretative definition of ``substantially similar'' or the CAA sec.
211(f)(4) waiver condition, or who adds anything other than an
oxygenate compound allowed by the substantially similar interpretative
rule, is a fuel manufacturer, and does not receive the 1-psi waiver for
fuels containing at least 10 percent ethanol.
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\85\ 40 CFR 79.2(d).
---------------------------------------------------------------------------
The result is that any party who is not a refiner or importer that
produces E15 from only certified gasoline (including CBOB) and
denatured fuel ethanol would be entitled to the 1-psi waiver just as is
the case currently when such parties produce E10. This could occur at
[[Page 10595]]
a downstream terminal where ethanol is added along with gasoline to a
tank truck for delivery to a retail station. This could also occur at
retail stations that blend E15 onsite using blender pumps that utilize
either gasoline and denatured fuel ethanol as blendstocks onsite, or
that use gasoline (either E0 or E10) and E85 \86\ as blendstocks onsite
so long as that E85 had itself been produced solely from denatured fuel
ethanol and certified gasoline (or CBOB).
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\86\ For purposes of this preamble, E85 means a gasoline-ethanol
blended fuel that contains at least 50 volume percent ethanol but no
more than 83 volume percent ethanol. We use the term E85 as the
market has historically and commercially identified such fuels as
E85.
---------------------------------------------------------------------------
b. E15 Made at Blender Pumps
For the reasons described in this section, a retail station that
blends E15 using E85 that contains hydrocarbons not certified as
gasoline or blendstock for oxygenate blending (BOB) (e.g., the natural
gas liquids that are often used at ethanol plants to denature ethanol
and make E85) would not be entitled to the 1-psi waiver.
First, parties that produce E15 via a blender pump using E85 made
with ethanol and natural gas liquids (i.e., an uncertified gasoline
blendstock) are fuel manufacturers under our existing 40 CFR part 79
regulations (covering registration of fuels and additives), and as such
are subject to the 9.0 psi RVP condition under the existing E15 CAA
sec. 211(f)(4) waivers. Any party that blends an uncertified gasoline
blendstock into gasoline is a fuel manufacturer under our 40 CFR part
79 regulations because they are altering the chemical composition of a
fuel. Regardless of our proposed interpretation of CAA sec. 211(h)(4),
then, any such parties that produce E15 are still subject to the 9.0
psi RVP standard. E15 made at blender pumps may only receive the
proposed extension of the 1-psi waiver in instances where an oxygenate
blender blends certified gasoline (or CBOB) with E85 made from ethanol
and certified gasoline (or CBOB).
Second, such parties are also gasoline refiners under our existing
40 CFR part 80 regulations because they blend uncertified gasoline
blendstocks into gasoline.\87\ Under our regulations in 40 CFR part 80
(covering implementation of our fuels control programs), any party that
blends uncertified blendstocks into gasoline is a gasoline refiner and
must meet all requirements applicable to gasoline refiners under 40 CFR
part 80. These requirements include, but are not limited to, sampling
and testing each batch of gasoline for conformance to EPA's fuel
standards, demonstrating compliance with annual average sulfur and
benzene standards, registering as a gasoline refiner under 40 CFR part
80, submitting periodic and annual compliance reports, and arranging
for an annual audit by an independent auditor. These requirements were
put in place to help ensure that parties downstream of gasoline
refineries did not adversely affect fuel quality in ways that damaged
vehicle and engine emission controls and helped ensure that the air
quality benefits of our fuel quality regulations are met.
---------------------------------------------------------------------------
\87\ The regulations at 40 CFR part 80 allow for parties to
blend uncertified gasoline blendstock into previously certified
gasoline as long as the party complies with our sampling and testing
requirements at 40 CFR 80.65, 80.101, and 80.1640.
---------------------------------------------------------------------------
Third, under our FFARS regulations in 40 CFR part 79, parties that
blend uncertified blendstocks into gasoline are fuel manufacturers and
must register their fuels and fuel additives as required under the CAA.
In the case where a blender pump produces E15 by blending a certified
gasoline (typically E10) with E85 that contains uncertified blendstocks
(e.g., natural gas liquids), the operator of the blender pump meets the
definitions of both a gasoline refiner under 40 CFR part 80 and a fuel
manufacturer under 40 CFR part 79 and must comply with associated
requirements.
We proposed to address this situation in the Renewables Enhancement
and Growth Support (REGS) rule \88\ by proposing provisions that would
control the sulfur, benzene, and volatility of E85 used to make E15 via
a blender pump, which would allow gasoline made via blender pumps to
meet applicable EPA fuel quality standards and lawfully be made.\89\
The proposed REGS rule also proposed to remove the FFARS requirements
under 40 CFR part 79 for blender pump operators that make gasoline via
a blender pump. Since those proposed provisions have not been
finalized, the only way for a blender pump operator to lawfully make
E15 at a blender pump is to make E15 with certified gasoline and E85
made from ethanol and certified gasoline (or CBOB) or to comply with
all requirement applicable to refiners and fuel manufacturers.
---------------------------------------------------------------------------
\88\ See 81 FR 80841 (November 16, 2016).
\89\ In the proposed REGS rule, to specifically address the
issue of E10, E15, and other gasoline-ethanol blended gasolines
(i.e., gasoline containing between 16 and 50 volume percent ethanol
or ``E16-50'') produced at a blender pump, we proposed limitations
on the use of fuels that a blender pump operator could use to make
compliant gasoline. In general, under the proposed REGS rule,
blender pump operators would need to use certified gasoline and
certified E85 to assure compliance with EPA's gasoline fuel quality
standards under 40 CFR part 80. See 81 FR 80847-80848 (November 16,
2016).
---------------------------------------------------------------------------
Finally, and perhaps most importantly, even if we finalize the
proposed REGS rule and allow blender pumps to make gasoline at blender
pumps and exempt blender pump operators from complying with the
requirements for gasoline refiners and fuel manufacturers, based on
information received during the comment period of the proposed REGS
rule, it is likely that E15 made at blender pumps with E85 produced
from natural gas liquids would often violate the applicable RVP
standards even with the 1-psi waiver. Natural gas liquids often have
RVP levels well above 10.0 psi. Adding such potentially highly volatile
components to E15 (via E85) in significant concentrations would result
in a finished E15 with a volatility in excess of 10.0 psi RVP.
Therefore, in this proposal, only E15 produced using certified gasoline
(or CBOB) and denatured fuel ethanol would be eligible for the 1-psi
waiver.
c. Summary and Conclusion
Table II.B.4.c-1 summarizes how we believe the E15 partial waiver
conditions imposed via CAA sec. 211(f)(4) and the 1-psi waiver under
CAA sec. 211(h)(4) would apply to fuel manufacturers, downstream
oxygenate blenders, and retailers that make E15 via a blender pump as a
result of our proposed interpretation to allow E15 to receive the 1.0
psi waiver.
Table II.B.4.c-1--Summary of E15 1-psi Waiver Applicability by Party
----------------------------------------------------------------------------------------------------------------
Can take advantage of the Subject to E15 waiver Could lawfully make/sell
1-psi waiver? conditions? E15 at 10 psi in summer?
----------------------------------------------------------------------------------------------------------------
Fuel Manufacturers............ Yes....................... Yes...................... No.
Oxygenate Blenders............ Yes....................... No....................... Yes.
[[Page 10596]]
Retailers that make E15 with Yes....................... No....................... Yes.
E85 made with gasoline/BOB.
Retailers that make E15 with Yes....................... Yes...................... No.
E85 made with something other
than gasoline/BOB.
----------------------------------------------------------------------------------------------------------------
As mentioned above, under our proposed interpretation, all parties
can take advantage of the 1-psi waiver unless they are precluded from
doing so by some other requirement. We believe that the E15 waiver
condition limiting the RVP of E15 to 9.0 psi during the summer would
preclude fuel manufacturers (i.e., refiners and importers) from being
able to introduce E15 into commerce under CAA sec. 211(f), but would
not preclude downstream oxygenate blenders that were not otherwise fuel
manufacturers from blending E15. For retailers that blend E15 using E85
made from denatured fuel ethanol (``DFE'') and certified gasoline (or
CBOB) via a blender pump, those parties are acting analogous to
downstream oxygenate blenders and could lawfully make E15. For all of
the reasons described above, for retailers using E85 made with anything
other than DFE and certified gasoline (or CBOB), those parties are
acting analogous to fuel manufacturers and could not lawfully make E15.
We seek comment on our proposed interpretation of CAA sec.
211(h)(4) as specifying a minimum ethanol content for fuel blends
containing gasoline and ethanol as well as these implementing
requirements. Under this construct, only certain regulated parties that
produce and distribute E15 would be able to avail themselves of the 1-
psi waiver.
C. Proposed Interpretation of ``Substantially Similar'' for Gasoline
This action proposes a new interpretation of ``substantially
similar'' which defines which fuels are substantially similar to Tier 3
E10 certification fuel under CAA sec. 211(f)(1), as an alternative to
the approach described above which would apply the CAA sec. 211(f)(4)
waiver and its associated conditions.\90\ Specifically, we are
proposing that E15 with an RVP of 10.0 psi is sub sim to fuel used to
certify Tier 3 light-duty vehicles (i.e., E10 with an RVP of 9.0 psi).
Alternatively, we propse that E15 with an RVP of 9.0 psi is sub sim to
fuel used to certify Tier 3 light-duty vehicles. Either of these new
interpretations of sub sim would increase the allowable concentration
of ethanol blended into gasoline to up to 15-volume-percent because we
believe that E15 is sub sim to Tier 3 E10 certification fuel.
---------------------------------------------------------------------------
\90\ Tier 3 vehicles must be certified on fuels described at 40
CFR 1065.710(b). For purposes of this preamble, we refer to
certification test fuel used in certification testing for Tier 3
motor vehicles that contains 10-volume-percent ethanol as ``Tier 3
E10 certification fuel''.
---------------------------------------------------------------------------
E15 would have similar effects on emissions (exhaust and
evaporative), materials compatibility, and driveability for light-duty
motor vehicles certified using Tier 3 E10 certification fuel.\91\ This
proposed interpretative rule would, if finalized, make it lawful for
refiners and importers (e.g., fuel manufacturers as described in 40 CFR
79.2(d) discussed above) to make and introduce into commerce E15 at
10.0 psi RVP without the use of the E15 partial waivers since we would
now interpret E15 as sub sim to Tier 3 E10 certification fuel. We are
proposing two alternative interpretations of the sub sim provision for
E15. First, we are proposing that E15 at 10 psi RVP is substantially
similar to Tier 3 E10 certification fuel at 9 psi RVP. Alternatively,
we are proposing that E15 at 9 psi is substantially similar to Tier 3
E10 certification fuel at 9 psi RVP. In conjunction with our
interpretation of CAA sec. 211(h)(4) described above, this would allow
all fuel manufacturers, not only downstream oxygenate blenders, the
ability to lawfully introduce into commerce E15 at 10.0 psi RVP from
May 1 through September 15. Prohibitions on the use of E15 in 2000 and
older MY light-duty vehicles that currently apply as conditions of the
CAA sec. 211(f)(4) waiver and as regulations established under CAA sec.
211(c), as well as the use of E15 in other vehicles, engines, and
equipment not covered by the E15 partial waivers, would remain in
place, and parties that make and distribute E15 and ethanol for use in
producing E15 would still need to satisfy the MMR requirements under 40
CFR part 80, subpart N. This section outlines the background and
rationale for our proposed interpretative rulemaking.
---------------------------------------------------------------------------
\91\ Auto manufacturers certified some light-duty motor vehicles
using E10 certification fuel as early as MY2017 and almost all auto
manufacturers must certify their light-duty motor vehicles using E10
certification fuel by MY2020.
---------------------------------------------------------------------------
1. Statutory Framework
The Air Quality Act of 1967 and the CAA of 1970 established the
basic framework for EPA fuels regulation. CAA sec. 211(a) allows EPA to
designate fuels and fuel additives for registration. CAA sec. 211(b)
sets forth registration requirements for fuels and fuel additives and
authorizes EPA to require health and environmental effects testing for
the registration of fuels and fuel additives. CAA sec. 211(c)
authorizes EPA to regulate or prohibit fuels or additives for use in
motor (or nonroad) vehicles or engines if: (A) ``any fuel or fuel
additive or any emission product of such fuel or fuel additive causes,
or contributes, to air pollution . . . that may reasonably be
anticipated to endanger the public health or welfare, or (B) if
emission products of such fuel or fuel additive will impair to a
significant degree the performance of any emission control device or
system.''
In the CAA Amendments of 1977, Congress established CAA sec.
211(f)(1), which prohibits manufacturers from first introducing into
commerce any fuel or fuel additive for general use in light-duty
vehicles that is not ``substantially similar to any fuel or fuel
additive utilized in the certification of any model year 1975, or
subsequent model year, vehicle.'' If a fuel or fuel additive is not sub
sim, a fuel or fuel additive manufacturer may obtain a waiver under CAA
sec. 211(f)(4) if the manufacturer can demonstrate that the new fuel or
fuel additive ``will not cause or contribute to a failure of any
emission control device or system (over the useful life of the motor
vehicle, motor vehicle engine, nonroad engine, or nonroad vehicle in
which such device or system is used) to achieve compliance by the
vehicle or engine with the emission standards with respect to which it
has been certified.'' Together, these CAA sec. 211(f) provisions were
designed to prevent fuels and fuel additives from being introduced into
commerce that would degrade the emission performance of the existing
fleet and protect vehicle manufacturers from their
[[Page 10597]]
vehicles consequently failing emission standards in use.
As discussed above, in the CAA Amendments of 1990, Congress added
CAA sec. 211(h) to address the volatility of gasoline, which largely
codified EPA's then-new RVP regulations. Accordingly, entirely separate
from CAA sec. 211(f), CAA sec. 211(h)(1) prohibits the sale of gasoline
with an RVP in excess of 9.0 psi during the high ozone season (while
allowing EPA to promulgate more stringent RVP requirements for
nonattainment areas), and CAA sec. 211(h)(4) provides a 1.0 psi RVP
allowance for ``fuel blends containing gasoline and 10 percent''
ethanol.
2. Certification Fuels
Historically, two fuels are utilized in EPA's emissions standards
certification of gasoline-powered vehicles and engines: standardized
gasoline with controlled parameters to ensure consistency across
vehicle and engine certification used in emissions testing, and
commercially available mileage accumulation fuels used to ensure
durability in use of exhaust and evaporative emissions controls.\92\
Historically the fuel used in emissions testing (``certification test
fuel'') contained no oxygenates (e.g., ethanol) and was often referred
to by its brand name, ``indolene.''
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\92\ See 46 FR 38582 (July 28, 1981).
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In the 2014 Tier 3 rulemaking, we updated the certification test
fuel for Tier 3 certified motor vehicles and changed the certification
test fuel from E0 to E10 to reflect the widespread use of E10 in the
marketplace.\93\ The requirement to use Tier 3 E10 certification fuel
may have applied as early as MY2015 if a manufacturer elected to comply
early with the Tier 3 vehicle emissions standards, but the requirement
to use E10 in at least some vehicles began with MY2017. Almost all
MY2020 and newer vehicles must be certified for emissions testing with
Tier 3 E10 certification fuel with some exceptions for small volume
vehicle manufacturers, which must use Tier 3 E10 certification fuel by
MY2022.
---------------------------------------------------------------------------
\93\ See 79 FR 23414 (April 28, 2014).
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Service accumulation fuel for durability must be representative of
commercially-available gasoline \94\ and evaporative emissions
durability must ``employ gasoline fuel for the entire mileage
accumulation period that contains ethanol in, at least, the highest
concentration permissible in gasoline under federal law and that is
commercially available in any state in the United States.'' \95\ Since
MY2004, service accumulation fuel used for evaporative system aging
must contain the highest concentration of ethanol available in the
market. After EPA partially granted the waivers for E15 in 2010 and
2011, we notified manufacturers in early 2012 that new evaporative
emission families must be aged on E15 under 40 CFR 86.1824-08(f)(1). We
believe that auto manufacturers began evaporative system aging on E15
as early as MY2014.
---------------------------------------------------------------------------
\94\ See 40 CFR 86.113-15(a)(5).
\95\ See 40 CFR 86.1824-08(f)(1).
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3. History of Sub Sim Interpretations
EPA has issued four interpretative rules that defined the meaning
of ``substantially similar'' for gasoline. These interpretive rules
describe the types of unleaded gasoline that are considered
substantially similar to the unleaded gasoline utilized in our vehicle
and engine certification programs by placing limits on a gasoline's
chemical composition and physical properties, including the types and
amount of alcohols and ethers (oxygenates) that may be added to
gasoline. Fuels that are found to be substantially similar to our
certification fuels may be introduced into commerce. Each of our past
interpretative rules provided an allowance for oxygenates within the
gasoline. We last issued an interpretative rule in 2008 on the phrase
``substantially similar'' for gasoline.\96\ The current substantially
similar interpretative rule for unleaded gasoline allows oxygen content
up to 2.7 percent by weight for certain ethers and alcohols. Despite
having changed certification test fuel to include 10 volume percent
ethanol, prior to this proposed action, we have not addressed what
should be considered substantially similar to Tier 3 E10 certification
fuel utilized in Tier 3 light duty vehicle certification.
---------------------------------------------------------------------------
\96\ See 73 FR 22281 (April 25, 2008).
---------------------------------------------------------------------------
In defining what qualifies as sub sim to certification fuels, we
have listed general physical and chemical characteristics, such as
oxygen content, because fuels and fuel additives meeting these general
``sub sim'' characteristics will ``not adversely affect emissions.'' If
we were to later find that a fuel or fuel additive that satisfies the
physical and chemical sub sim characteristics ``may reasonably be
anticipated to endanger public health or welfare'' or ``impair to a
significant degree the performance of any emission control device or
system,'' either in general or in particular vehicles or circumstances,
we have authority to regulate that fuel or fuel additive under CAA sec.
211(c), which provides that we may by regulation place controls or
prohibitions on fuels and fuel additives to protect public health or
welfare or protect emission control devices or systems.\97\ In our past
interpretations defining what physical and chemical characteristics are
necessary to make a fuel or fuel additive ``sub sim'' to certification
test fuel, we have taken three primary factors into account: (1)
Emissions, (2) materials compatibility, and (3) drivability.\98\
---------------------------------------------------------------------------
\97\ See 45 FR 67443 (October 10, 1980).
\98\ See 56 FR 5352 (February 11, 1991).
---------------------------------------------------------------------------
We initially specified that fuel with oxygen content up to 2.0
weight percent is sub sim to certification test fuel.\99\ We later
revised the definition to allow oxygen content up to 2.7 weight percent
for gasoline containing aliphatic ethers and/or alcohols (excluding
methanol), finding, based on data and our experience with CAA sec.
211(f)(4) waiver applications, that such levels would not result in
emissions, materials compatibility, or drivability problems compared
with certification test fuel.\100\ Thus, we have a history of
establishing maximum oxygen content as a criterion, in addition to
other criteria, for determining whether a fuel or fuel additive is
substantially similar to a fuel utilized in certification.
---------------------------------------------------------------------------
\99\ See 45 FR 6743 (October 10, 1980). 2.0 wt% oxygen equates
to approximately 5.7 vol% ethanol.
\100\ See 56 FR 5352 (February 11, 1991). 2.7 wt% oxygen equates
to approximately 7.7 vol% ethanol.
---------------------------------------------------------------------------
With respect to fuel volatility, our sub sim interpretations have
specified that in order to qualify as sub sim to certification test
fuel, which has historically had an RVP of 9.0 psi, fuels need only
``meet ASTM standards in general, that is, not necessarily for every
geographic location and time of year.'' \101\ To qualify as sub sim,
gasoline (whether or not containing ethanol) ``must possess, at time of
manufacture, all the physical and chemical characteristics of an
unleaded gasoline as specified in ASTM D 4814-88 for at least one of
the Seasonal and Geographical Volatility Classes specified in the
standard.'' \102\
---------------------------------------------------------------------------
\101\ See 46 FR 38585 (July 28, 1981).
\102\ See 73 FR 22281 (April 25, 2008).
---------------------------------------------------------------------------
4. Criteria for Determining Whether a Fuel is ``Substantially Similar''
In order to be substantially similar, a fuel or fuel additive must
be sub sim to a fuel used in the certification of any vehicle or engine
under CAA sec. 206. To make this determination, we have generally
considered the effects of a fuel or fuel additive on emissions (exhaust
and evaporative), materials compatibility, and driveability for motor
[[Page 10598]]
vehicles and motor vehicle engines certified under CAA sec. 206.\103\
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\103\ See, e.g., 56 FR 5354 (February 11, 1991).
---------------------------------------------------------------------------
In this proposed CAA sec. 211(f)(1) interpretative rulemaking, we
consider whether E15 is substantially similar to Tier 3 E10
certification fuel when used in Tier 3 light-duty vehicles. The scope
of that comparison is relatively narrow for two reasons. First, CAA
sec. 211(f)(1) only requires a consideration of the potential impacts
on light-duty motor vehicles and motor vehicle engines. In this regard,
CAA sec. 211(f)(1) is different than what an applicant must demonstrate
in a waiver under CAA sec. 211(f)(4) from the restrictions of CAA sec.
211(f)(1). CAA sec. 211(f)(1) is focused on motor vehicles and motor
vehicle engines under CAA sec. 206 and applies to a broad class of
fuels. A CAA sec. 211(f)(4) waiver, on the other hand, requires that a
specific fuel not cause or contribute any vehicle or engine certified
under CAA sec. 206 and 213 to exceed emission standards over the useful
life of the vehicle or engine. Thus, the scope of vehicles and engines
considered to determine whether a fuel is substantially similar under
CAA sec. 211(f)(1) is significantly narrower than the scope of vehicles
and engines that must be considered by EPA for a waiver to be granted
under CAA sec. 211(f)(4).
Second, under CAA sec. 211(f)(1), the sub sim determination need
only demonstrate that E15 is sub sim to a fuel used in certification of
a 1975 or later MY vehicle or engine, not substantially similar to all
certification fuels required and used historically (e.g., E0 for light-
duty vehicles and trucks prior to Tier 3) to assess compatibility and
emission performance. In this case, the sub sim determination
demonstrates that E15 is sub sim to Tier 3 E10 certification fuel.
5. Technical Rationale and Discussion
As discussed above, we have considered whether a fuel has similar
effects on emissions, materials compatibility, and driveability when
determining whether a fuel is substantially similar to certification
fuel. Based on existing data and our engineering judgement, we have
concluded that E15, with its additional oxygen content relative to Tier
3 E10 certification fuel, would have effects on emissions, materials
compatibility, and drivability substantially similar to E10 in Tier 3
vehicles.
a. Exhaust Emissions
In the 2010 CAA sec. 211(f)(4) partial waiver for E15, we concluded
from available data that neither the immediate combustion effects nor
the long-term durability impacts of operating on E15 blends would
prevent MY2001 and newer light-duty vehicles from complying with their
full useful life emission standards.\104\ This decision was supported
by a large study conducted by DOE that tested 16 high-sales vehicles
spanning model years 1999-2007 using ethanol splash blends made from
Tier 2 certification gasoline (E0).\105\ Analysis of the resulting data
shows that the E15 blend produced approximately 5% higher
NOX, 4% higher NMOG, and 4% lower CO compared to E10, though
none of these differences was statistically significant. This work did
not measure PM emissions, but the expectation at the time was that PM
should react to ethanol in a similar way as NMOG emissions.
---------------------------------------------------------------------------
\104\ See 75 FR 68096 (November 4, 2010).
\105\ Knoll, K., West, B., Huff, S., Thomas, J. et al.,
``Effects of Mid-Level Ethanol Blends on Conventional Vehicle
Emissions,'' SAE Technical Paper 2009-01-2723, 2009.
---------------------------------------------------------------------------
Since the time of the 2010 waiver decision, additional data have
been published on the effects of ethanol blends on Tier 2 vehicles. The
EPAct/V2/E-89 study (referred to as ``EPAct study''), jointly conducted
by EPA, DOE/National Renewable Energy Laboratory (NREL), and the
Coordinating Research Council (CRC) in 2009-2010, looked at the effects
of five fuel properties, including ethanol concentration, on emissions
from 15 high-sales light-duty vehicles from MY2008. Measurements
included PM, a pollutant for which its relationship to fuel properties
had previously not been examined in much detail for gasoline vehicles.
The size and scope of this study allowed for statistical models to be
developed that could be used to correlate the impacts of the five fuel
properties, including ethanol concentration, on emissions, enabling
projections to be made of the emission impacts of a wide range of
fuels, not limited to those tested. Results generally confirmed the
NOX and CO emission impacts described above, while
indicating that ethanol's effects on NMOG and PM are more complex and
depend on other fuel parameters, such as the fuel's distillation
profile and aromatics content.\106 107\ For example, the EPAct study
statistical models estimate approximately 2% higher NOX, 4%
lower NMOG, 2% lower CO, and 2% higher PM for E15 compared to the E10
fuels used in the DOE study. If we instead assume an E15 splash blend
starting from a typical E10 market fuel, the EPAct study models project
2% higher NOX, 2% higher NMOG, 2% lower CO, and 4% higher
PM. Since these figures represent the output of models whose
coefficients survived a process of statistical testing, they are
meaningful despite being small. This type of analysis is different from
performing a test for significant differences directly on paired
emission measurements, as is presented for the other studies discussed
below, where measured differences may be statistically insignificant
due to the limited scope of the test program and/or the number of
variables left uncontrolled.
---------------------------------------------------------------------------
\106\ EPA Office of Transportation and Air Quality. ``EPAct/V2/
E-89: Assessing the Effect of Five Gasoline Properties on Exhaust
Emissions from Light-Duty Vehicles Certified to Tier 2 Standards:
Final Report on Program Design and Data Collection''. EPA-420-R-13-
004. April 2013.
\107\ Butler, A., Sobotowski, R., Hoffman, G., and Machiele, P.,
``Influence of Fuel PM Index and Ethanol Content on Particulate
Emissions from Light-Duty Gasoline Vehicles,'' SAE Technical Paper
2015-01-1072, 2015, doi:10.4271/2015-01-1072.
---------------------------------------------------------------------------
Two studies published in 2017 and 2018 by CRC, projects E-94-2 and
E-94-3, respectively, examined the effects of ethanol and PM Index on
PM and other emissions from MY2012-2015 Tier 2 vehicles, all with
gasoline direct injected (GDI) engines and several with
turbocharging.\108 109\ Results for the overall test fleet of 16
vehicles in E-94-2 showed no statistically significant effect of E10
match blends \110\ relative to E0 for total hydrocarbons (THC),
NOX, or CO, while PM increased by 19% for the regular-grade
(87 AKI) test fuels. The E-94-3 study tested a four-vehicle subset on
four E10 splash blends made from the E0 fuels in E-94-2, and found a PM
increase of 21% on average, consistent with the effect found in the
larger E94-2 study. Assuming this PM effect is linear over small fuel
changes, we would expect around 10% higher PM when moving from E10 to
E15. Comparing these results to the EPAct study and DOE study above
suggests that later-technology vehicles with direct injection have
equal or lower
[[Page 10599]]
sensitivity to ethanol blending for gaseous emissions, but may be more
sensitive for PM.
---------------------------------------------------------------------------
\108\ Morgan, Peter; Smith, Ian; Premnath, Vinay; Kroll,
Svitlana; Crawford, Robert. ``Evaluation and Investigation of Fuel
Effects on Gaseous and Particulate Emissions on SIDI In-Use
Vehicles''. SwRI 03.20955. Southwest Research Institute, San
Antonio, TX. CRC E-94-2. Coordinating Research Council, Alpharetta,
GA. March 2017.
\109\ Morgan, Peter; Lobato, Peter; Premnath, Vinay; Kroll,
Svitlana; Brunner, Kevin; Crawford, Robert. ``Impacts of Splash-
Blending on Particulate Emissions for SIDI Engines''. SwRI 03.20955-
1. Southwest Research Institute, San Antonio, TX. CRC E-94-3.
Coordinating Research Council, Alpharetta, GA. June 2018.
\110\ Matched blended fuels are fuels that have been crafted to
control fuel parameters (e.g., distillation parameters and RVP)
after the blending of ethanol typically for research and testing
purposes. This is contrasted with splash blended fuels, which are
not controlled to specifically account for the blending of ethanol.
---------------------------------------------------------------------------
Another study published in 2018 by the University of California,
Riverside Center for Environmental Research and Technology (``CE-
CERT'') looked at the effects of ethanol and aromatics on emissions
from five vehicles spanning model years 2016 to 2017, all with GDI
engines and certified to either Tier 3 or LEV III standards.\111\ The
test fuels included E0, E10, and E15 blends that were closely matched
on aromatic content (at two levels, 21% and 29% volume) but the mid-
point distillation temperature (T40-T50) was uncontrolled, and varied
significantly.\112\ Results of this study showed no statistically
significant difference in NOX, non-methane hydrocarbons
(NMHC), or PM when comparing E15 to E10 blends at either aromatics
level.
---------------------------------------------------------------------------
\111\ Karavalakis, G; Durbin, T; Yang, J; Roth, P., ``Impacts of
Aromatics and Ethanol Content on Exhaust Emissions from Gasoline
Direct Injection (GDI) Vehicles''. University of California, CE-
CERT, April 2018.
\112\ The EPAct study found T50 to have a meaningful and
statistically significant impact on NMOG, NMHC, NOX, and
PM emissions.
---------------------------------------------------------------------------
While there are limited data on Tier 3 vehicles, the results of the
Tier 2 and Tier 3 vehicle studies cited above are nevertheless largely
consistent with each other given that ethanol blending also affects
many other fuel properties, and given that ethanol is blended into
gasolines in different ways that affect the collateral property changes
differently. This makes it difficult to interpret trends across the
body of literature without detailed information on multiple fuel
properties. However, since the early 1990s, a number of programs have
studied the effects of ethanol on emissions from earlier vintage
vehicles, and based on these studies, emissions models have been
published, including the Complex Model,\113\ Predictive Model,\114\ and
MOVES simulator,\115\ and the results from the more recent studies are
also largely consistent with them. Namely, ethanol blending causes
slight increases in NOX emissions and slight decreases for
CO emissions. Earlier studies did not evaluate PM emissions from
ethanol blending.
---------------------------------------------------------------------------
\113\ See ``Complex Model Used to Analyze RFG and Anti-dumping
Emissions Performance Standards,'' available at https://www.epa.gov/fuels-registration-reporting-and-compliance-help/complex-model-used-analyze-rfg-and-anti-dumping.
\114\ See ``California Gasoline Predictive Models, and CARBOB
Model Development,'' available at https://www.arb.ca.gov/fuels/gasoline/premodel/pmdevelop.htm.
\115\ See ``Moves and Other Mobile Source Emissions Models,''
available at: https://www.epa.gov/moves.
---------------------------------------------------------------------------
While some criteria pollutants would have relative and real
increases (NOX and PM) and others have similar decreases
(VOC and CO) on E15 compared to E10, these changes are relatively
small. In the E15 partial waivers, we determined that effects of this
magnitude were too small to cause or contribute 2001 and newer light-
duty vehicles to exceed the vehicles' certified exhaust emissions
standards and we expect that this would also be the case for Tier 3
certified vehicles. While CAA sec. 211(f)(1) does not define specific
criteria for how to determine whether an ethanol blend is substantially
similar to certification test gasoline, we believe that the small
changes in exhaust emissions from E15 relative to Tier 3 E10
certification fuel used in Tier 3 certified vehicles are within the
scope of what we have determined to be sub sim in our prior sub sim
interpretive rulemakings. Therefore, we believe that E15 is sub sim to
Tier 3 E10 certification fuel from the perspective of exhaust
emissions. However, we seek comment and request any additional
information related to the potential effects on the exhaust emissions
of E15 compared to Tier 3 E10 certification fuel, particularly in Tier
3 certified vehicles given the limited data currently available.
b. Evaporative Emissions
EPA has set evaporative emission standards for motor vehicles since
1971. During the ensuing years, these evaporative standards have
continued to evolve, resulting in additional evaporative emissions
reductions. Consideration of whether E15 is substantially similar to
Tier 3 E10 certification fuel for evaporative emissions requires
consideration of the applicable evaporative emissions standards to
which the particular motor vehicles were certified, in this case Tier 3
motor vehicles. There are now six main components to motor vehicle
evaporative emissions that are important for our standards: (1) Diurnal
(evaporative emissions that come off the fuel system as a motor vehicle
heats up during the course of the day); (2) refueling emissions
(evaporative emissions that come off the fuel system as the vehicle is
refueled); (3) hot soak (evaporative emissions that come off a hot
motor vehicle as it cools down after the engine is shut off); (4)
running loss (evaporative emissions that come off the fuel system
during motor vehicle operation); (5) permeation (evaporative emissions
that come through the walls of elastomers in the fuel system and are
measured as part of the diurnal test); and (6) unintended leaks due to
deterioration/damage that is now largely monitored through onboard
diagnostic standards.
For hot soak, permeation, and unintended leak evaporative
emissions, we expect that E15 would have a similar effect as Tier 3 E10
certification fuel. In the E15 partial waivers, we stated that we did
not expect that E15 would have an effect on hot soak, permeation, and
unintended leak evaporative emissions based on a review of the data and
on the fact that auto manufacturers have been required to age vehicles
on E10 for evaporative emissions durability testing since MY 2004. We
are not aware of any information suggesting that Tier 3 vehicles would
behave differently since they are aged for evaporative emissions
durability on E15 and certified on Tier 3 E10 certification fuel.
Furthermore, in our review of the testing of permeation on pre-Tier 3
vehicles (i.e., prior to changes made to address permeation) in the E15
partial waiver decisions, while ethanol was shown to significantly
worsen permeation emissions, there was no discernable worsening of the
impacts at higher ethanol concentrations.\116\ Consequently, we do not
anticipate permeation emissions with E15 to be any higher than with
E10.
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\116\ See 75 FR 68115-68120 (November 4, 2010) and 76 FR 4675-
4681 (January 26, 2011).
---------------------------------------------------------------------------
We are proposing two alternative approaches to assessing the
evaporative emissions impacts of E15 with regard to the volatility of
the fuel. First, we compare E15 at 10.0 psi to Tier 3 E10 certification
fuel at 9.0 psi to evaluate differences in evaporative emissions from
refueling, diurnal, and running loss emissions sources. Alternatively,
we compare E15 at 9.0 psi, the fuel without a 1-psi waiver under CAA
sec. 211(h)(4), to Tier 3 E10 certification fuel at 9.0 psi.
Refueling, diurnal, and running loss evaporative emissions increase
as fuel volatility increases, with gasoline with an RVP of 10.0 psi
producing significantly more vapor for the evaporative emission control
system to capture and purge through the engine than gasoline with an
RVP of 9.0 psi.\117\ However, because we specifically addressed
gasoline volatility in our prior 1981, 1991, and 2008 sub sim
reinterpretations,\118\ we are not proposing to modify our long-
standing
[[Page 10600]]
approach to controlling volatility in this action, and because there
are not refueling, diurnal, or running loss evaporative emission
impacts of E15 relative to Tier 3 E10 certification fuel apart from
RVP, we do not believe these evaporative emission impacts are relevant
to our proposed interpretation of sub sim. Furthermore, our existing
regulations promulgated under CAA sec. 211(c) and 211(h) are a
sufficient mechanism to control the RVP of gasoline. Since this
interpretation primarily responds to the fact that we have now changed
Tier 3 certification fuel to include 10 percent ethanol, we do not
believe modification of our sub sim interpretation to set a specific
RVP level would be appropriate.
---------------------------------------------------------------------------
\117\ These effects are discussed more in Section II.E.
\118\ See 46 FR 38582 (July 28, 1981), 56 FR 5352 (February 11,
1991), and 73 FR 22277 (April 25, 2008), respectively. Historically,
we have defined sub sim with regards to volatility as being anything
within the general ASTM specifications for volatility for any
location and time of year.
---------------------------------------------------------------------------
Historically, the primary purpose of the requirement under the
definition of substantially similar that gasoline must meet a
volatility class under the ASTM specification for gasoline was to
ensure that the fuel was physically and chemically similar to gasoline
as to be used in a gasoline-fueled motor vehicle. For example, in the
1980 sub sim interpretative rulemaking, we allowed gasoline-ethanol
blends containing up to 2.0 weight percent oxygen (about 5.5 volume
percent ethanol); such fuel would experience a similar 1-psi increase
to E10 or E15 if produced using the same base gasoline. Even during
1980, certification fuel used for gasoline-fueled motor vehicles was
expected to have an RVP of 9.0 psi.\119\ Therefore, we have not
generally considered the expected increase in RVP resulting from the
addition of RVP when determining whether a fuel is sub sim to gasoline
certification fuel.
---------------------------------------------------------------------------
\119\ See 40 CFR 86.113-78 (1977).
---------------------------------------------------------------------------
We determined that such a change was unnecessary and declined to
impose such a limitation when we reinterpreted sub sim in 1991 and in
2008. In 1991, we maintained the view that sub sim fuels need only meet
general ASTM specifications (i.e., any volatility class in ASTM D 4814-
88) for volatility. This was after we promulgated the Phase I and Phase
II RVP standards for gasoline under CAA sec. 211(c) and Congress
enacted CAA sec. 211(h) in 1990, which, as discussed above, we have
interpreted as essentially codifying our regulatory approach to fuel
volatility as it existed prior to 1990. In 2008, when we provided
flexibility for testing gasoline used only in Alaska to meet sub sim
volatility requirements, we chose to maintain the existing volatility
language for gasoline for the rest of the U.S.
We are also proposing that E15 at 9.0 psi RVP is sub sim to Tier 3
E10 certification fuel at 9.0 psi RVP during the summer. This would
allow us, from a technical standpoint, to consider the impacts of RVP
on evaporative emissions, and in particular on refueling, diurnal, and
running loss evaporative emissions under CAA sec. 211(f)(1). Refueling,
diurnal, and running loss evaporative emissions are mostly a function
of volatility of the fuel. Therefore, if two fuels have the same RVP,
the expected evaporative emissions from the two fuels would be similar.
In this situation, since there is no difference in RVP, E15 at 9.0 psi
RVP would have nearly identical evaporative emissions to E10 at 9.0 psi
RVP from refueling, diurnal, and running loss emissions sources.
We believe that under CAA sec. 211(f)(1) we only need to determine
that E15 at 9.0 psi RVP is sub sim to Tier 3 E10 certification fuel at
9.0 psi RVP in order for fuel manufacturers and downstream parties to
take advantage of the CAA sec. 211(h)(4) waiver. Congress intended for
gasoline-ethanol blends to have a 1-psi waiver in order to promote
ethanol blending in gasoline. In other words, given the existence of
CAA sec. 211(h)(4), we believe it is appropriate when interpreting sub
sim for CAA sec. 211(f)(1) to compare E15 at 9.0 psi RVP to E10
certification test fuel at 9.0 psi RVP. CAA sec. 211(h)(4) then
provides the 1-psi waiver to E15. Therefore, under this alternative we
would propose to interpret sub sim to apply to gasoline with a maximum
of 9.0 psi RVP during the summer.
In summary, we expect that E15 would have similar evaporative
emissions effects as Tier 3 E10 certification fuel for Tier 3 light-
duty vehicles with regard to evaporative emissions from permeation, hot
soak, and other unintended evaporative emissions. For refueling,
diurnal and running loss evaporative emissions, we are not proposing to
alter the existing interpretation of substantially similar. As
explained above in our proposed interpretation of CAA sec. 211(h)(4),
we believe it was Congress' intent to allow for gasoline-ethanol
blended fuels containing at least 10 percent ethanol to receive the 1-
psi waiver and we have interpreted sub sim under 211(f)(1) to be
consistent with Congress' intent. Therefore, we are proposing that E15
at 10.0 psi RVP is sub sim to Tier 3 E10 certification test fuel at 9.0
psi RVP when used in Tier 3 vehicles. Alternatively, we propose that
E15 at 9.0 psi RVP is sub sim to Tier 3 E10 certification fuel at 9.0
psi RVP when used in Tier 3 vehicles.
c. Materials Compatibility
Materials compatibility is a key factor in considering what fuels
or fuel additives are sub sim to certification fuel, insofar as poor
materials compatibility can lead to serious exhaust and evaporative
emission compliance problems not only immediately upon use, but
especially over the full useful life of vehicles and engines. In the
E15 partial waivers, we determined that the use of E15 in MY2001 and
newer light-duty motor vehicles ``will not [result in] materials
compatibility issues that lead to exhaust or evaporative emissions
exceedances.'' \120\ We argued that ``[n]ewer motor vehicles, such as
Tier 2 and NLEV vehicles (MY2001 and newer), on the other hand, were
designed to encounter more regular ethanol exposure compared to earlier
model year motor vehicles'' since EPA's in-use verification program
would require auto manufacturers to place more ``emphasis on real world
motor vehicle testing'' prompting manufacturers to consider
commercially available fuels containing ethanol when developing and
testing their emissions systems.\121\ Based on this assessment plus
confirmatory data from DOE's extensive test program that aged MY2001
and newer vehicles up to 120,000 miles on E15, we concluded that MY2001
and newer vehicles would not have materials compatibility issues with
E15. We expect that Tier 3 certified vehicles would have similar, if
not better, materials compatibility with E15 compared to MY2001 and
newer vehicles since Tier 3 certified vehicles should be designed to
encounter E15 in-use and manufacturers are required to use E15 as an
aging fuel for evaporative durability testing.
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\120\ See 75 FR 68122-68123 (November 4, 2010); 76 FR 4681
(January 26, 2011).
\121\ See 75 FR 68122 (November 4, 2010).
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As required under the vehicle and certification regulations,\122\
since granting the E15 partial waivers, E15 is now used as an aging
fuel for service accumulation for evaporative durability testing. Auto
manufacturers have used E15 for service accumulation for evaporative
durability testing since at least MY2014. This means that many Tier 2
certified vehicles since MY2014 and all Tier 3 certified vehicles have
been aged on E15 and have been designed with materials capable of
handling E15 for extended periods of time.
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\122\ See 40 CFR 86.1824-08(f)(1).
---------------------------------------------------------------------------
Therefore, we would not expect any materials compatibility issues
from E15 in Tier 3 vehicles and we expect that
[[Page 10601]]
E15 would have substantially similar or identical materials
compatibility with Tier 3 E10 certification fuel.
d. Driveability
A change in the driveability of a motor vehicle that results in
significant deviation from normal operation (e.g., stalling,
hesitation, etc.) would result in increased emissions. These increases
may not be demonstrated in the emission certification test cycles but
instead are present during in-use operation. In addition to consumer
dissatisfaction, a motor vehicle stall and subsequent restart can
result in a significant increase in emissions because HC and CO
emission rates are typically highest during vehicle starts, especially
cold starts. Further, concerns exist if the consumer or operator
tampers with the motor vehicle in an attempt to correct the
driveability issue since consumers may attempt to modify a motor
vehicle from its original certified configuration. Thus, we have
considered whether fuels or fuel additives have an adverse effect on
driveability relative to certification fuel to define what is
substantially similar.
We concluded in the E15 partial waivers that we did not believe
that E15 would cause driveability concerns for MY2001 and newer light-
duty vehicles. We reviewed the data and information from the over 30
different test programs evaluated to grant the E15 partial waivers and
we found ``no specific reports of driveability, operability or on-board
diagnostics (OBD) issues across many different vehicles and duty cycles
including lab testing and in-use operation.'' \123\
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\123\ See 76 FR 4681-82 (January 26, 2011).
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After having granted the partial E15 waivers, we believe that Tier
2 and Tier 3 vehicles also have better capability of operating on E15,
since as mentioned above, auto manufacturers have been required to use
E15 as an aging fuel for evaporative durability aging since at least
MY2014.
We also believe that the producers and distributors of gasoline
adhere to ASTM specifications for gasoline (i.e., ASTM D 4814),\124\
which helps address the driveability of gasoline that contains up to 15
volume percent ethanol. As E15 has been in the market since at least
2012, industry, through ASTM International, has worked to develop
voluntary consensus-based standards to help ensure the quality of E15
made and used in the marketplace. For example, ASTM D4814-18c has
language to ensure that gasoline-ethanol blends have certain physical
and chemical characteristics, like the gasoline-ethanol blend having
distillation parameters falling within specified ranges, to ensure that
when the gasoline-ethanol blended fuel is used, driveability issues
will not arise.\125\
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\124\ ASTM Standard D4814, 2019, ``Standard Specification for
Automotive Spark-Ignition Engine Fuel,'' ASTM International, West
Conshohocken, PA, 2003, DOI: 10.1520/C0033-03, www.astm.org.
\125\ Id.
---------------------------------------------------------------------------
For these reasons, we believe that E15 would have similar
driveability characteristics to Tier 3 E10 certification fuel.
e. Conclusion
For reasons described above, we are proposing that E15 is
substantially similar to Tier 3 E10 certification fuel. As discussed
above, when interpreting which fuels and fuel additives are sub sum to
certification fuel under CAA sec. 211(f)(1), we consider those
potential effects of relevance under CAA sec. 211(f)(1) of fuels and
fuel additives on certified motor vehicles' emissions (exhaust and
evaporative), materials compatibility, and driveability. Regarding
emissions, while E15 compared with Tier 3 E10 certification test fuel
would have small emissions changes in Tier 3 vehicles, we expect that
E15 would exhibit similar exhaust and evaporative emissions for Tier 3
vehicles certified on Tier 3 E10 certification fuel. For materials
compatibility and driveability, we expect that due to E15 being used as
a service accumulation fuel for evaporative emissions aging, as well as
our conclusions for MY2001 and newer light-duty motor vehicles
regarding materials compatibility and driveability in the E15 partial
waivers, E15 would be sub sim to Tier 3 E10 certification fuel.
Our proposed interpretation is limited to gasoline that contains
only ethanol content up to 15 percent as this is the only oxygenate
that we have sufficient data and information to support at this
time.\126\ Other oxygenates (notably isobutanol) may have similar
emissions effects to Tier 3 E10 certification fuel, but we lack the
data and information on emissions, materials compatibility, and
driveability as established for ethanol as part of the E15 partial
waiver decisions and the Tier 3 rulemaking. Therefore, our proposed
interpretation of sub sim for gasoline would interpret gasoline-ethanol
blends containing up to 15 percent ethanol as sub sim, while keeping
the oxygen content limit of 2.7 weight percent for other oxygenates. We
seek comment on whether we should interpret sub sim to encompass other
oxygenates and request any supporting data on the potential effects of
other oxygenates on emissions, materials compatibility, and
driveability of Tier 3 vehicles.
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\126\ It should also be noted that we chose to express the
proposed increase in gasoline-ethanol content in terms of volume
percentage versus converting to weight percent oxygenate. We did
this for two reasons. First, as stated, we believe we only have data
and information to support an interpretation for gasoline containing
only ethanol up to 15 volume percent. Second, this avoids the issues
associated with the variability in the density of gasoline.
---------------------------------------------------------------------------
6. Other Aspects of the Proposed Interpretative Rulemaking
a. Effects of Proposed Interpretation of CAA sec. 211(h)(4)
The proposed new interpretation of ``substantially similar''
interpreting E15 to be sub sim to Tier 3 E10 certification fuel
discussed in this section would make it lawful for refiners and
importers to make and introduce into commerce E15 without the use of
the E15 partial waivers. This proposed interpretation of
``substantially similar'' in conjunction with the proposed
interpretation of CAA sec. 211(h)(4) would also extend the exemption
from the CAA sec. 211(h)(1) upper RVP limit from 9.0 psi to 10.0 psi
for fuels containing 9-15 percent ethanol.
As previously explained, the deemed to comply provision was
promulgated at the inception of the RVP program when industry had just
begun blending ethanol in gasoline and reflects the highest permissible
ethanol content under the waiver under CAA sec. 211(f)(4).
Specifically, the deemed to comply provision applies where ``the
ethanol portion of the blend does not exceed its waiver condition under
subsection (f)(4) of this section.'' \127\ A plain reading of this
provision therefore, would suggest that it could not apply where the
agency concludes that a fuel is substantially similar to certification
fuels, under CAA sec. 211(f)(1). However, we seek comment on the
continued use of the deemed to comply provision to ease the
demonstration burdens for fuels that do not have a CAA sec. 211(f)(4)
waiver, but nonetheless can be introduced into commerce because they
are substantially similar to Tier 3 E10 certification fuel.
---------------------------------------------------------------------------
\127\ CAA sec. 211(h)(4)(B).
---------------------------------------------------------------------------
If we finalize our interpretation of substantially similar proposed
in Section II.C, the 1-psi waiver would be available to fuel
manufacturers, refiners, and importers, in contrast to the approach
discussed in Section II.B, which would only allow downstream parties to
take advantage of the 1-psi waiver. However, retailers that produce E15
via a blender pump would still have
[[Page 10602]]
issues complying with EPA fuels regulations at 40 CFR parts 79 and 80
unless they made the E15 solely from DFE and certified gasoline (or
CBOB).
b. Regulatory Amendments
The technical amendments to our regulations discussed in Section
II.B.2, in the context of our first approach to allow the 1-psi waiver
for E15 during the summer, would also be necessary were EPA to finalize
a new interpretation of ``substantially similar'' that finds that E15
is sub sim to Tier 3 E10 certification fuel. The regulatory changes
would be identical to those discussed in Section II.B.2, as those
regulatory changes would be promulgated to effectuate our new
interpretation of CAA sec. 211(h)(4). In short, we would promulgate
regulatory amendments modifying the ethanol content at 40 CFR 80.27 to
blends of gasoline containing 9-15 percent ethanol. We would also
promulgate regulations removing requirements implemented in the MMR
relating to (1) comingling of E10 and E15; and (2) PTD requirements for
E15 that would no longer be necessary were E15 to receive the 1-psi
waiver. As discussed in Section II.B.2, all other regulations
promulgated as part of the MMR would remain in place.
c. Potential Conditions As Part of CAA sec. 211(f)(1) Interpretative
Rulemaking
CAA sec. 211(f)(1)(A) prohibits fuel or fuel additive manufacturers
from first introducing into commerce, or increasing the concentration
in use of, any fuel or fuel additive for general use in light-duty
motor vehicles which is not substantially similar to that utilized in
the certification of motor vehicles or engines under CAA sec. 206. As
explained above, we have interpreted the ``substantially similar''
provision several times to allow the introduction into commerce of
certain fuel blends. The language of CAA sec. 211(f)(1) does not
address whether and how EPA can restrict its determination that a
particular fuel is ``substantially similar'' to a certification fuel.
Given the fact that there have now been multiple certification fuels
since 1977, when CAA sec. 211(f)(1) was first enacted, we believe it is
reasonable to interpret this provision as allowing EPA to apply
restrictions on a sub sim determination, where the restrictions are
intended to avoid the kinds of problems that prompted the prohibition
against introduction into commerce. We solicit comment on this
approach, including comments on the specific conditions we should
impose.
One implication of a sub sim interpretation that includes E15 under
CAA sec. 211(f)(1) would be that a waiver under CAA sec. 211(f)(4) will
no longer be necessary for E15 to be introduced into commerce. This
would in effect remove the conditions of the E15 partial waivers
imposed on fuel and fuel additive manufacturers, in the absence of any
limitations on the sub sim interpretation. This would mean that the
conditions in the E15 partial waivers designed to limit the
introduction into commerce of E15 to only MY2001 and newer light-duty
motor vehicles would not apply. The need for the conditions on the E15
partial waivers may be partially mitigated because we have already put
in place parallel restrictions in our regulations in the E15 MMR
rulemaking at 40 CFR part 80, subpart N.\128\ However, some conditions
in the E15 partial waivers are not part of the MMR. One such condition
is the requirement that fuel and fuel additive manufacturers have an
EPA-approved misfueling mitigation plan (MMP) prior to introducing E15
into commerce. While MMPs generally commit fuel and fuel additive
manufacturers to adhere to regulatory requirements of the MMR, MMPs
also commit these manufacturers to participate in public outreach on
the appropriate use of E15 and allow for specific, additional
misfueling mitigation measures that may apply in a manufacturers
specific situation. Another condition in the E15 partial waivers is
that ethanol producers must manufacture denatured fuel ethanol that
meets industry established quality standards if used to make E15. This
requirement is not currently part of EPA's fuels regulations.
---------------------------------------------------------------------------
\128\ As noted above, these restrictions remain necessary, and
we are not proposing to lift the prohibition at 40 CFR 80.1504(a)(1)
on the sale, introduction, or use of E15 into MY2000 and older
light-duty motor vehicles, heavy-duty motor vehicles, or nonroad
engines, vehicles, and equipment, nor are we proposing to remove any
of the misfueling mitigation requirements in the E15 MMR.
Consequently, those marketplace protections will be unaffected by
this proposed action.
---------------------------------------------------------------------------
Furthermore, as discussed, the technical basis to deny the E15
waiver request for MY2000 and older motor vehicles and nonroad products
and promulgate the MMR is unchanged and removing the conditions in the
E15 partial waivers removes a layer of protection against the
misfueling of these vehicles, engines, and equipment.\129\ We denied
the E15 waiver request for MY2000 and older motor vehicles, nonroad
vehicles, engines, and equipment (including motorcycles, and heavy-duty
motor vehicles) due to our engineering assessment that these vehicles,
engines, and equipment may experience emissions failures over these
vehicles, engines, and equipments' full useful lives. Also, as
discussed above, in the MMR we concluded that under CAA sec.
211(c)(1)(A), the likely result would be increased VOC, CO, and
NOX emissions were these particular engines, vehicles and
equipment to use E15. The prohibitions and regulatory requirements were
designed to help mitigate the misfueling of E15 in these vehicles.
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\129\ See 75 FR 68127-68138 (November 4, 2010).
---------------------------------------------------------------------------
There are still millions of MY2000 and older motor vehicles on the
road (although they will over time make a smaller contribution to
vehicle miles travelled) and hundreds of millions of pieces of nonroad
equipment not designed for and prohibited from E15 use. The existing
conditions on the E15 partial waivers under CAA sec. 211(f)(4) help
ensure E15 fuel quality and mitigate the misfueling of vehicles,
engines, and equipment and we believe it is appropriate to continue to
impose the same conditions on parties that introduce E15 into commerce
under a CAA sec. 211(f)(1) sub sim interpretative rulemaking.
Therefore, we are proposing and seek comment on certain limitations,
including those contained in the current CAA sec. 211(f)(4) waiver, as
part of an interpretative rulemaking which defines E15 as substantially
similar to Tier 3 E10 certification fuel under CAA sec. 211(f)(1).
Additionally, we seek comment on whether this proposed sub sim
interpretation for E15 should be limited to the subset of the national
vehicle and engine fleet to which the current E15 waivers apply (MY2001
and newer light-duty motor vehicles) or on which our assessment in
Section II.C is based (i.e., only to vehicles and engines certified
using Tier 3 E10 certification fuel). While we have not previously
imposed conditions in substantially similar interpretative rulemakings
designed to limit the applicability to certain classes of vehicles,
engines, and equipment, for the reasons explained above, we are seeking
comment in this case. The record has not changed with respect to the
inability of older vehicles, nonroad equipment, motorcycles, or heavy-
duty trucks to use E15, which formed the basis of our denial of the E15
waiver request for such vehicles, engines, and equipment.
Furthermore, our assessment in Section II.C was limited to only
Tier 3 E10 certification fuel used to certify MY2020 (some earlier)
light-duty vehicles, not all in-use vehicles and
[[Page 10603]]
engines that run on gasoline. Such a condition would be in recognition
of the fact that, in contrast to the date when CAA sec. 211(f)(1) was
enacted, not all gasoline vehicles and equipment are certified on the
same gasoline. All other vehicles, engines, and equipment prior to Tier
3 used certification fuel without ethanol, and some nonroad vehicles,
engines, and equipment are still certified using E0. A condition
limiting the applicability of the sub sim interpretative rulemaking to
vehicles certified on Tier 3 certification fuel would recognize the
fact that most vehicles, engines, and equipment were not certified on
E10, and prevent emission exceedances by limiting which vehicles,
engines, and equipment could use E15 under the proposed sub sim
interpretative rulemaking.
Finally, we seek comment on whether we can impose the existing
waiver conditions in the E15 partial waivers, in their entirety, as
conditions in the proposed substantially similar interpretative
rulemaking. The conditions on the E15 partial waivers provide
additional misfueling mitigation and fuel quality protections, which as
mentioned above some stakeholders believe may need to be bolstered in
the future as E15 becomes more available to consumers.
D. E15 Misfueling Mitigation
Some stakeholders have raised concerns since the President's
announcement over whether the remaining E15 misfueling mitigation
measures would be sufficient in light of this proposed action.\130\
These stakeholders suggested that a possible consequence of this
proposed action would be an increase in the availability of E15 in the
market resulting in an increase in the potential misfueling of E15 in
nonroad vehicles, engines, and equipment and MY2000 and older light-
duty vehicles. These stakeholders suggested that, in light of their
concerns and advancements in technology since our MMR rule, we seek
comment on a wide range of additional misfueling mitigation measures to
help avoid the misfueling of E15.
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\130\ See ``Joint Comments on E15 Education and Outreach'' from
the Outdoor Power Equipment Institute and the National Marine
Manufacturers Association to EPA, January 29, 2019.
---------------------------------------------------------------------------
While we believe additional misfueling measures are unnecessary at
this time and outside the scope of this proposed action, we recognize
that as E15 and other higher-level ethanol blends become more prevalent
in the marketplace, the use of additional misfueling mitigation
measures may be appropriate. We also recognize that additional
misfueling mitigation measures would most likely place a significant
burden on retailers, many of whom are small businesses, to upgrade fuel
dispensers to implement physical barriers to E15 use or employ radio-
frequency identification (RFID) technology. Therefore, we seek comment
on whether additional misfueling mitigation measures would be
appropriate and we specifically seek comment on the costs and benefits
of such measures on affected parties.
E. E15 Criteria Pollutant and Air Toxics Emission Impacts
As discussed above, we expect the emissions of E15 to be
substantially similar to those of E10 Tier 3 certification fuel when
used in Tier 3 light-duty vehicles. This section describes expected
emissions effects of the proposed action on evaporative and exhaust
emissions of E15 relative to E10 typically available in the
marketplace.
Evaporative emissions from vehicles comprise approximately 60
percent of the VOC emissions during summertime conditions from the
current vehicle fleet based on results produced by MOVES2014b, and such
VOC emissions contribute to ambient levels of ozone, PM, and air
toxics, all of which endanger public health and welfare. Today's
vehicles are equipped with charcoal cannisters to capture vapors
generated during refueling as well as daily diurnal temperature
fluctuations. This stored vapor is then drawn into the engine and
combusted during vehicle operation.
Currently and historically, vehicle manufacturers have been
required to certify their vehicles on test gasoline with a volatility
of 9.0 psi RVP under severe operating conditions similar to what might
be expected on high ozone days. The evaporative emission standards have
been progressively made more stringent over time, such that under the
Tier 3 standards they require essentially zero vapor loss during normal
operation on 9.0-psi fuel. Increasing fuel RVP from 9.0 psi to 10.0 psi
increases fuel vapor generation significantly under summertime
conditions, which can overwhelm a vehicle's evaporative control system
and push it out of compliance. Consequently, controlling the volatility
of gasoline during the summer is important in order to control the
evaporative VOC emissions produced by vehicles and engines in-use.
This proposal changes the volatility standard that applies to E15
in-use from 9.0 psi to 10.0 psi RVP. Viewing this change in isolation,
one might expect a significant increase in evaporative emissions. To
accurately assess emission impacts in this case, however, we need to
examine current real-world circumstances. Namely, we expect any E15
introduced into the market to displace E10 that is already being sold
and that carries the 1-psi waiver in conventional gasoline areas (E10
has nearly 100 percent market share for gasoline sold in the U.S.). E15
has a slightly lower RVP than E10 when made from the same BOB, a
situation we believe will be the case unless E15 use becomes
widespread.\131\ Thus, to the extent that E15 displaces E10 in the
short term, E15 is expected to lower the volatility of in-use gasoline
by as much as 0.1 psi.\132\
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\131\ We believe it would be unlikely for refiners to produce an
E15 CBOB for such a small difference in RVP. However, refiners may
want to create a CBOB with a slightly lower octane level to account
for the increased octane from the additional ethanol in E15 versus
E10. We believe this would only occur if E15 comprised a large part
of a conventional gasoline area's market.
\132\ ``Determination of the Potential Property Ranges of Mid-
Level Ethanol Blends.'' American Petroleum Institute, Washington,
DC. April 2010.
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Use of E15 blends will have other criteria pollutant emission
impacts beyond those related to volatility described above. Assuming
E15 is made from the same BOB as E10, we expect the additional 5 volume
percent ethanol to further dilute hydrocarbon fuel components such as
aromatics, producing changes in several exhaust emissions such as
NOX, NMOG, and benzene.133 134 Ethanol also
causes changes in the volatility profile of the blended fuel, typically
lowering the mid-point distillation temperature (T50) significantly,
and the 90 percent temperature (T90) slightly.\135\ Table II.E-1 shows
predicted fuel property and exhaust emission changes for Tier 2
vehicles using both E10 certification gasoline and a typical market E10
as baselines for comparison. Results using the EPAct model developed
from the EPAct/V2/E-89 study described in Section II.C.5.a suggest E15
blends are expected to produce slightly lower CO, and slightly higher
NOX and PM
[[Page 10604]]
compared to their E10 blending base. Changes in NMOG (or VOC) vary in
direction depending on the T50 of the blending base.
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\133\ For the effects of sulfur on emissions see Table ES-3 in
``The Effects of Ultra-Low Sulfur Gasoline on Emissions from Tier 2
Vehicles in the In-Use Fleet.'' U.S. EPA Office of Transportation
and Air Quality, Ann Arbor MI. EPA-420-R-14-002, March 2014.
\134\ For the effects of ethanol and aromatics on emissions see
Tables ES-1 through ES-4 in ``Assessing the Effect of Five Gasoline
Properties on Exhaust Emissions from Light-Duty Vehicles Certified
to Tier 2 Standards: Analysis of Data from EPAct Phase 3 (EPAct/V2/
E-89): Final Report.'' U.S. EPA Office of Transportation and Air
Quality, Ann Arbor MI. EPA-420-R-13-002, March 2013.
\135\ ``Determination of the Potential Property Ranges of Mid-
Level Ethanol Blends.'' American Petroleum Institute, Washington,
DC. April 2010.
Table II.E-1--Example Emission Impacts of E15 Blends Based on EPAct Model
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fuel properties used in analysis E15 emissions impact relative to indicated
------------------------------------------------------- baseline
-------------------------------------------
Eth. vol Arom. vol RVP T50 T90 NOX (%)
(%) (%) (psi) ([deg]F) ([deg]F) CO (%) NMOG (%) PM (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline: E10 certification fuel at 9 psi............ 10.0 23.0 9.0 200 325 ......... ......... ......... .........
E15 at 9 psi (splash)................................ 15.0 21.9 9.0 163 321 -2.5 -5.6 1.8 2.7
E15 at 10 psi (splash)............................... 15.0 21.9 10.0 163 321 -1.3 -8.0 1.8 2.7
Baseline: E10 market fuel at 10 psi.................. 10.0 23.0 10.0 180 320 ......... ......... ......... .........
E15 at 10 psi (splash)............................... 15.0 21.9 10.0 160 316 -2.0 2.2 2.5 4.0
E15 at 10 psi (MOVES Fuel Wizard) *.................. 15.0 21.7 10.0 167 318 -2.6 1.4 2.7 4.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The MOVES Fuel Wizard attempts to estimate how properties would change in a widespread blending scenario.
If E15 use becomes widespread in the longer term, refiners may
adjust the base blendstock to accommodate the additional ethanol.
During the rapid expansion of E10 blending between 2007-2012, aromatics
levels were observed to decline by a few volume percent while pump
octane levels stayed constant, and octane match-blending is understood
to have been a contributing factor.136 137 For other fuel
properties, such as sulfur and benzene content, refiner control could
be relaxed slightly for E15 blendstocks with the finished market E15
blend still meeting with the regulatory limits. Moving from E15 splash
blends to match blends may then undo some small emission reductions
occurring when E15 is made from refinery blendstocks designed for E10.
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\136\ See Figure 3-4 of the Regulatory Impact Analysis for
``Control of Air Pollution from Motor Vehicles: Tier 3 Motor Vehicle
Emission and Fuel Standards.'' EPA-420-R-14-005, February 2014.
\137\ See Figure 65 of ``Fuel Trends Report: Gasoline 2006-
2016.'' EPA-420-R-17-005. October 2017.
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F. E15 Economic Impacts
1. Benefits for E15 RVP
We anticipate that providing the flexibility to use E15 at 10.0 psi
RVP in the summer could help incentivize retailers to introduce E15
into the marketplace. In situations where denatured fuel ethanol is
cheaper than gasoline, parties may elect to make E15 more widely
available, which may result in a modest decrease in fuel prices at the
pump. This could help to further the use of increased volumes of
renewable fuels under the RFS program, which in turn could provide
energy security benefits.
2. Costs for E15 RVP
Our proposal to allow E15 to take advantage of the 1-psi waiver in
the summer may help open new market opportunities for E15. However,
fuel manufacturers and distributors of E15 would not be compelled to
make or offer E15 and could choose to offer E15 as dictated by market
demands and individual business decisions.
Overall, we anticipate very little change in costs regarding the
proposed regulatory provisions to allow E15 to receive the 1-psi waiver
in the summer. This action places no new regulatory burdens on any
party in the gasoline or denatured fuel ethanol distribution system and
modifies, but does not remove, PTD requirements for E15. Hence, we
expect that these proposed provisions would not substantially alter the
cost of compliance for parties that produce and distribute E15.
III. RIN Market Reforms
A. Overview of RFS Compliance
The RFS program began in 2006, pursuant to the requirements in CAA
sec. 211(o) that were added through the Energy Policy Act of 2005
(EPAct). The statutory requirements for the RFS program were
subsequently modified through the Energy Independence and Security Act
of 2007 (EISA), leading to the publication of major revisions to the
regulatory requirements on March 26, 2010.\138\
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\138\ See 75 FR 14670 (March 26, 2010).
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Under CAA sec. 211(o), EPA is required to set renewable fuel
percentage standards every year.\139\ To comply, obligated parties
\140\ can purchase and blend the requisite volumes of renewable fuels
into the petroleum-derived transportation fuels they produce or import.
However, to allow the market to function more efficiently and avoid
market disruption, in implementing the statutorily-required credit
program, and to assist obligated parties in meeting their individual
RVOs, Congress directed EPA to establish, through a transparent public
rulemaking process, a system for the generation and use of renewable
fuel program credits.\141\ The credits created under this program are
known as RINs. RINs are credits that are generated upon production of
qualifying renewable fuel and ultimately used by obligated parties to
demonstrate compliance. Renewable fuel producers and importers generate
and assign RINs to the renewable fuel they produce or import. These
RINs are then transferred with the renewable fuel to the downstream
parties that blend the renewable fuel into transportation fuel. In lieu
of blending the renewable fuels themselves to demonstrate compliance,
obligated parties have the option to instead purchase RINs from other
parties that blend renewable fuels.
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\139\ See, e.g., final rule establishing the RFS standards for
2019 and biomass-based diesel volume for 2020 (83 FR 63704, December
11, 2018).
\140\ Obligated parties are refiners and importers of gasoline
and diesel fuel. See 40 CFR 80.1406.
\141\ See CAA sec. 211(o)(5).
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The assigned RINs that accompany the renewable fuel can primarily
be separated from the fuel if the fuel is purchased by an obligated
party or blended into transportation fuel. Once separated, RINs can be
traded as a separate commodity from the renewable fuel. Obligated
parties accumulate RINs over the course of the year, either by buying
renewable fuel with assigned RINs that they separate and retain for
compliance (and either blend the fuel themselves or rely on others to
do on their behalf), or by purchasing separated RINs on the open
market. All RIN
[[Page 10605]]
transactions, including the generation of RINs, RIN trades, and the
retirement of RINs to satisfy an obligated party's RVOs, are reported
to EPA using the EPA Moderated Transaction System (EMTS).\142\
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\142\ Public EMTS data can be found on EPA's website at https://www.epa.gov/fuels-registration-reporting-and-compliance-help/public-data-renewable-fuel-standard.
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The annual RVOs for a given obligated party are calculated by
multiplying the obligated party's total annual production and import of
gasoline and diesel fuel by four annual percent standards corresponding
to the four renewable fuel categories established by Congress.\143\
Each obligated party must obtain sufficient RINs of each category to
demonstrate compliance with its individual RVOs for the four annual
percentage standards. Obligated parties comply on an annual average
basis, through their annual compliance report to EPA that identifies
their obligation based on gasoline and diesel production/import and
identifies the RINs acquired and retired for that year's compliance.
Thus, compliance under the RFS program requires obligated parties to
understand how to calculate their individual obligations based on the
four percentage standards, and then to plan for their annual compliance
demonstration through RIN acquisition, either through blending or
through trading, over the course of the year. There are also associated
registration, reporting, and recordkeeping requirements.
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\143\ The 2019 percentage standards for cellulosic biofuel,
biomass-based diesel, advanced biofuel, and total renewable fuel are
0.230%, 1.73%, 2.71%, and 10.97%, respectively. The cellulosic and
biomass-based diesel standards are nested within the advanced
biofuel standard, which is itself nested in the total renewable fuel
standard. This implies a conventional renewable fuel percentage
standard of 8.26%. See 83 FR 63704 (December 11, 2018).
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B. RIN Market Assessment
Renewable fuel producers and importers generate RINs by entering
their renewable fuel production or import information into EMTS. When a
renewable fuel producer or importer transfers ownership of the fuel to
another party, the assigned RINs usually transfer as well. Both parties
must report information about the RIN transaction to EMTS within five
days of the transfer. Parties must also report in EMTS when they
separate RINs from fuel, when they trade separated RINs with another
party, and when they retire RINs for compliance or other reasons. EMTS
effectively acts as an electronic platform that records RIN
transactions, conducts RIN title transfers between parties, and
maintains a RIN account balance for each registered party.
RINs are transacted through contracts or on the spot market, in
bilateral trades directly between buyers and sellers, or facilitated by
third-party brokers. EPA designed the RIN system to operate as a
relatively ``open'' trading market in order to maximize liquidity and
ensure a robust marketplace for RINs. For example, in establishing the
original trading program, EPA attempted to provide as much compliance
flexibility as possible and did not place limits on the number of
allowable RIN trades, nor restrict the types of parties that could
acquire and trade RINs. Several stakeholders from across the fuels
industries supported the trading system we finalized in 2007.\144\ In
the RFS1 final rule preamble, we summarized the comments of several
parties as saying ``that unlimited trading among all interested parties
would increase liquidity and transparency in the RIN market,'' and
``that increasing the number of participants would facilitate the
acquisition of RINs by obligated parties and promote economic
efficiency.'' \145\
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\144\ See Chapter 5.4.3 of ``Regulation of Fuels and Fuel
Additives: Renewable Fuel Standard Program--Summary and Analysis of
Comments.'' EPA 420-R-07-006, April 2007, available at https://www.epa.gov/sites/production/files/2015-08/documents/420r07006.pdf.
\145\ See 72 FR 23944 (May 1, 2007).
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Individual transaction prices are generally not made public, but
some services, such as OPIS and Argus, offer daily price information on
commodities such as RINs from a subset of parties that trade in the RIN
market. The public can access this information for a fee paid to these
service providers. Recently, EPA began posting aggregated weekly RIN
price information reported to EPA through EMTS on our public website,
which is updated monthly.\146\ RIN prices are a function of multiple
factors, including but not limited to changes in petroleum prices,
agricultural feedstock (e.g., corn, soy) prices, and expectations of
future market shifts and standards. RIN prices may also fluctuate as
the market responds to RFS standards and expectations of future EPA
policy decisions.
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\146\ See https://www.epa.gov/fuels-registration-reporting-and-compliance-help/rin-trades-and-price-information. The RIN Price
dataset shows historical, weekly, volume-weighted average RIN price
data for separated RINs as reported to EPA through EMTS. Price
filters are applied to the data set to remove outliers and data is
aggregated to protect confidential business information.
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[[Page 10606]]
[GRAPHIC] [TIFF OMITTED] TP21MR19.000
While there are many different factors that impact RIN prices, a
review of the historical RIN price data demonstrates that RIN prices
generally follow expected market principles. For example, in the early
years of the RFS program (2010-2012) D6 RIN prices (for mostly corn
ethanol) were generally only a few cents. During this time, the implied
conventional biofuel volume (the difference between the total renewable
fuel volume and the advanced biofuel volume and the only volume to
which D6 RINs can be applied) could be met by blending ethanol as E10.
The blending of ethanol up to E10 was driven by economic factors rather
than financial incentives provided by the RFS program.\147\ First,
ethanol has a relatively high octane value, and thus is attractive as a
gasoline blendstock component. Second, ethanol was cheaper on a
volumetric (per gallon) basis than gasoline during this time period,
and it was therefore economic to blend at levels up to 10 percent.
Third, though ethanol contains about one-third less energy than
gasoline on a per-gallon basis, that fuel economy difference between
E10 and gasoline without ethanol (E0) is relatively small
(approximately 3 percent) and is largely unnoticed by consumers. In
light of these factors, the blending of ethanol up to E10 was
economically viable for blenders in these years. The D6 RIN price was
therefore very low, approximately equal to the transaction costs of
trading RINs between parties.
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\147\ Until 2013, the price for D6 (conventional biofuel) RINs,
the vast majority of which were generated for ethanol produced from
corn starch, was negligible (See Figure III.B-1). The Volumetric
Ethanol Excise Tax Credit was also available to ethanol blenders
through 2011.
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In 2013, however, the implied conventional biofuel volume
established by the RFS program exceeded the volume of ethanol that
could be blended into gasoline at a rate of up to 10 percent (the E10
blendwall). To meet the aggregate RVOs, obligated parties now needed to
acquire RINs beyond those that were available from blending ethanol as
E10. These additional RINs had to come from either blending ethanol
into higher-level ethanol blends (e.g., E85) or blending non-ethanol
biofuels (such as biodiesel or renewable diesel beyond what was needed
to satisfy the biomass-based diesel (BBD) and advanced biofuel volume
standards). Blending ethanol into higher level blends, unlike the
blending of ethanol into E10 blends, was not an economically viable
practice in 2013 (nor is it currently) absent the incentives provided
by the RFS program (i.e., the RIN price). Although ethanol has a higher
octane value than gasoline, the existing vehicle fleet in the United
States does not realize an additional benefit from the higher octane
level of high ethanol blends such as E85. Further, consumers notice the
decrease in fuel economy (between 15 and 27 percent) in such blends.
This is because ethanol contains about one-third less energy than
gasoline on a per-gallon basis. The sale of higher-level ethanol blends
is also limited to flexible fuel vehicles, and relatively few retail
stations offer these higher-level ethanol blends due to the combination
of the high cost of the infrastructure upgrades to enable most existing
stations to sell E85 and the low demand for E85, even among FFV
owners.\148\ The relatively low number of stations selling E85 has also
hindered the competitiveness of the pricing of the few retail stations
that do sell these blends. As a result, in most cases obligated parties
have turned to additional volumes of biodiesel and renewable diesel
instead of E85 or other higher level ethanol blends to meet their
implied conventional biofuel volume obligation and therefore their
total renewable fuel obligation.\149\ D4 (BBD) RINs, generated for
biodiesel and renewable diesel, have in effect served as a ceiling for
D6 RIN prices since excess D4 RINs can be used to satisfy an obligated
party's total renewable fuel obligation. As a result, the D6 RIN price
rose to just slightly below the D4 RIN price. With a few exceptions
(such as in the first half of 2017) when the total renewable fuel
obligation has been at or below the E10 blendwall, the D6 RIN price has
generally moved in
[[Page 10607]]
conjunction with the D4 RIN price since 2013.
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\148\ Pouliot, S., Liao, K.A., Babcock, B.A.; ``Estimating
Willingness to Pay for E85 in the United States Using an Intercept
Survey of Flex Motorists.'' Working Paper 16-WP 562, Center for
Agricultural and Rural Development, Iowa State University, June
2018.
\149\ While biodiesel and renewable diesel remain considerably
more expensive than diesel fuel, the recently expired tax subsidy
for them, coupled with a lesser infrastructure hurdle enabled them
to be a more economical option than higher level ethanol blends in
recent years.
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D5 RIN prices similarly followed distinct pricing patterns prior to
reaching the E10 blendwall in 2013 and in the years since 2013. Prior
to reaching the blendwall, a significant volume of the D5 RINs were
generated for imported sugarcane ethanol. Since sugarcane ethanol was
generally more expensive to produce than corn ethanol (driven by high
world sugar prices), the D5 RIN price generally reflected the price
difference between corn ethanol and sugarcane ethanol during this time
period. When the E10 blendwall was reached in 2013 it became much more
expensive to blend additional volumes of ethanol (both for corn ethanol
and sugarcane ethanol) since additional ethanol had to be sold in
higher-level ethanol blends. As a result, the primary fuels used to
satisfy the implied volume of ``other advanced'' biofuels (the
remaining advanced biofuel volume after subtracting the required
volumes of BBD and cellulosic biofuel) in 2013 and the following years
have been biodiesel and renewable diesel. The D5 RIN price in these
years has followed the D4 RIN price, with the few cents difference
between the two RIN prices reflecting the fact that, unlike D4 RINs, D5
RINs can only be used towards an obligated party's advanced biofuel and
total renewable fuel obligations (and not the BBD obligation).
As with D6 and D5 RIN prices, D4 RIN prices generally follow
expected market fundamentals. D4 RIN prices are generally equal to the
difference between the market prices of biodiesel and petroleum diesel,
after accounting for the biodiesel tax credit. For each year from 2010
through 2017, a $1 per gallon biodiesel blenders tax credit from the
Internal Revenue Service has also been available. In some years, such
as 2013 and 2016, this tax credit was available prospectively (i.e.,
the tax credit was in place throughout the year). In other cases, such
as in 2012 and 2017, the tax credit was only available retroactively
(i.e., the tax credit was not extended until near the end of the year
or after the year had ended but applied to all qualifying biodiesel and
renewable diesel blended in that year). The biodiesel blenders tax
credit has not yet been extended to 2018 or 2019 by Congress.\150\ For
years in which the biodiesel tax credit was not in place prospectively,
the D4 RIN prices generally reflected the market's confidence that the
tax credit would ultimately be applicable. A recent paper investigating
the price of D4 RINs and economic fundamentals further supports this
view of the D4 RIN market stating that ``movements in the D4 RIN price
at frequencies of a month or longer are well explained by two economic
fundamentals: the spread between the biodiesel and Ultra Low Sulfur
Diesel prices and whether the biodiesel tax credit is in effect.''
\151\
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\150\ As of February 28, 2019.
\151\ Irwin, S.H., K. McCormack, and J.H. Stock (2018). ``The
Price of Biodiesel RINs and Economic Fundamentals,'' NBER Working
Paper Series, Working Paper 25341.
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Finally, the D3 RIN price has generally followed the combined
prices of the cellulosic waiver credit (CWC) and the D4/D5 RIN price.
Each year since 2010, we have reduced the required volume of cellulosic
biofuel from the statutory volumes using the cellulosic waiver
authority set forth in CAA sec. 211(o)(7)(D). When EPA takes this
action, the statute requires that we make CWCs available for purchase
to obligated parties at a price determined using a formula given in the
statute. CWCs can be used to satisfy an obligated party's cellulosic
biofuel obligation, but unlike a D3 (or D7) RIN, a CWC cannot be used
towards satisfying an obligated party's advanced biofuel or total
renewable fuel obligations. Thus, a D3 RIN has the ``compliance
equivalency'' of a CWC plus a D5 (or D4) RIN. As expected, the D3 RIN
price has generally been slightly less than the sum of the CWC price
and the D4/D5 RIN price. This price point reflects the compliance
certainty that the CWC offers (CWCs cannot later be determined to be
invalid) as well as the fact that CWCs can simply be purchased directly
from EPA at the compliance deadline rather than purchased in relatively
small quantities from biofuel producers or blenders.
Obligated parties that purchased RINs on the market for compliance
in 2013 saw their D6 RIN prices substantially increase from the year
prior (see Figure III.B.1). Though this increase in D6 RIN prices was
the result of structural changes in the market, as described above,
increasing D6 RIN prices did raise concerns regarding whether market
manipulation played some role in elevated prices. Some RFS stakeholders
petitioned EPA to change the definition of obligated party, arguing in
part that the current point of obligation facilitates price
manipulation. In response to those petitions, EPA conducted an
extensive analysis of RIN prices and market dynamics. After studying
the data, we concluded that RIN prices generally reflected market
fundamentals and that obligated parties (including parties that
purchase separated RINs) recover the cost of RINs in the market price
of the gasoline and diesel fuel they sell.\152\
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\152\ See ``Denial of Petitions for Rulemaking to Change the RFS
Point of Obligation'' (2017), available at https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P100TBGV.pdf.
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C. President's Directive
Some RFS stakeholders have voiced concerns regarding whether
elevated RIN prices and excessive RIN price volatility are being caused
at least in part by some type of market manipulation. In comments to
proposed EPA rulemakings, litigation filings and arguments, and via
meetings with EPA staff, some stakeholders have described conditions
that they believe make the RIN market vulnerable to anti-competitive
behavior. For example, commenters have described a thin market volume,
opaque price signals, and inelastic demand and supply curves and have
provided specific examples of behavior they find manipulative, such as
phantom RIN offers that suddenly vanish and reappear at higher prices
after a party attempts to buy them at the purported asking price.\153\
These stakeholders also speculate that, as a result of market
conditions and price volatility, anti-competitive behavior is taking
place. For example, commenters have argued that a small number of
sophisticated market participants control a large number of ``surplus''
RINs that they hoard and use to squeeze the market.
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\153\ See, e.g., comments from Monroe Energy (Docket Item No.
EPA-HQ-OAR-2018-0167-0622).
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We take these claims of market manipulation seriously and have
taken formal action previously to investigate claims of manipulation.
In March 2016, EPA entered into a Memorandum of Understanding (MOU)
with the Commodity Futures Trading Commission (CFTC).\154\ Under the
MOU, we provided CFTC with certain RIN data for analysis in order to
facilitate an EPA investigation.
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\154\ See ``Memorandum of Understanding Between the
Environmental Protection Agency and the Commodity Futures Trading
Commission on the Sharing of Information Available to EPA Related to
the Functioning of Renewable Fuel and Related Markets'' (2016),
available at https://www.epa.gov/sites/production/files/2016-03/documents/epa-cftc-mou-2016-03-16.pdf.
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Although we have yet to see data-based evidence of RIN market
manipulation, the potential for such behavior is a concern, and we have
already formally solicited comment from stakeholders on potential
changes that might address such issues. In the 2018 RVO proposal, we
broadly sought input on potential regulatory changes related to RIN
trading as well as on ways to increase program
[[Page 10608]]
transparency.\155\ We received comments from stakeholders suggesting a
number of regulatory changes related to who may purchase RINs, the
duration for which RINs could be held, and other potential requirements
related to the buying, selling, or holding of RINs. We also received a
number of suggestions for increasing the amount of data related to the
RIN market that we make publicly available. We evaluated these ideas,
and in the 2019 RVO proposal, we listed those that were under
consideration for implementation at that time, including: Prohibiting
parties other than obligated parties from purchasing separated RINs;
requiring public disclosure if a party holds a certain percentage of
the RIN market; requiring obligated parties to retire RINs for
compliance purposes on a more frequent basis; and publicly posting
information on RIN prices, small refinery exemptions, and RIN holdings
by different categories of entities.\156\ We requested comment on the
expected impact that these specific changes could have on the RIN
market, either positively or negatively.
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\155\ See 82 FR 34206 (July 21, 2017).
\156\ See 83 FR 32024 (July 10, 2018).
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We received many comments in support of publicly posting more RFS
program data. In response, in September 2018, we began publishing
weekly aggregated RIN prices, as reported in EMTS by sellers and
buyers, as well as weekly aggregated transaction volumes. We believe
publishing as much data and information on the RIN market as possible,
while still protecting confidential business information, improves
market transparency and helps obligated parties and other market
participants make informed decisions. We also believe that these data
can reduce information asymmetry among market participants increasing
confidence in the market. In addition, we began publishing information
on small refinery exemption requests received and granted by EPA and
the volumes of gasoline and diesel fuel exempted. This helped all
obligated parties account for the potential volume exempted under these
provisions and make adjustments to their compliance strategies
accordingly.
We also received a wide variety of comments regarding the other
ideas we put forth for comment in the 2019 RVO: prohibiting parties
other than obligated parties from purchasing separated RINs, requiring
public disclosure if a party holds a certain percentage of the RIN
market, and requiring obligated parties to retire RINs for compliance
purposes on a more frequent basis. Some commenters expressed support
for these ideas and offered others for our consideration while some
commenters opposed both the specific reform proposals and the general
concept of interfering with the open RIN market in any way. Summaries
of, and responses to, those comments are included throughout this
action as we explain the rationale behind the proposals we are making
today.
On October 11, 2018, President Trump issued a White House statement
\157\ explaining that EPA was being directed to initiate a rulemaking
to address RIN price manipulation claims and increase transparency in
the RIN market. Specifically, the memorandum directs EPA to consider
potential reforms to the RIN regulations, including but not limited to
the following proposals:
---------------------------------------------------------------------------
\157\ See ``President Donald J. Trump is Expanding Waivers for
E15 and Increasing Transparency in the RIN Market'' Fact Sheet,
available at: https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-expanding-waivers-e15-increasing-transparency-rin-market.
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Prohibiting entities other than obligated parties from
purchasing separated RINs.
Requiring public disclosure when RIN holdings held by an
individual actor exceed specified limits.
Limiting the length of time a non-obligated party can hold
RINs.
Requiring the retirement of RINs for the purpose of
compliance be made in real time.
Pursuant to this directive, we are proposing these reforms.
D. Objectives
We are interested in ensuring that the RIN market works efficiently
and is free of anti-competitive behavior. We affirm that price
manipulation through anti-competitive behavior, similar to what is
referred to as cornering or squeezing the market, and false or
misleading representations in transactions, is antithetical to
effective market operation and should be discouraged.\158\ Were such
anti-competitive behaviors to occur, it could undermine the confidence
of market participants in the RIN market and undermine the RFS program
itself. Consequently, in this action, we are proposing regulatory
changes based upon the President's Directive that could help prevent
anti-competitive behavior. For each reform, we evaluated comments
already submitted to EPA describing its advantages and disadvantages.
We also evaluated how a reform could be designed and implemented,
whether a reform could be gamed or have unintended consequences, and
what potential burden and cost it could place on regulated parties and
on EPA. In Section III.E, we describe our evaluation in detail for each
reform, including sharing comments received from stakeholders on
similar market reform ideas solicited in prior rulemakings.
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\158\ Such behaviors may also violate the anti-fraud and anti-
manipulation provisions of the Commodity Exchange Act. See, e.g.,
Section 9(a)(2) of the CEA, 7 U.S.C. 13(a)(2) (2012), states that it
is a felony for ``Any person to manipulate or attempt to manipulate
the price of any commodity in interstate commerce . . . or to corner
or attempt to corner any such commodity or knowingly to deliver or
cause to be delivered for transmission through the mails or
interstate commerce by telegraph, telephone, wireless, or other
means of communication false or misleading or knowingly inaccurate
reports concerning crop or market information or conditions that
affect or tend to affect the price of any commodity in interstate
commerce.'' Section 6(c)(1) of the CEA, 7 U.S.C. 9(1) (2012), titled
Prohibition against manipulation, states that ``it shall be unlawful
for any person, directly or indirectly, to use or employ, or attempt
to use or employ, in connection with . . . a contract of sale of any
commodity in interstate commerce . . . any manipulative or deceptive
device or contrivance. . . .''
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EPA designed the RIN system and regulations to maximize compliance
flexibility and market liquidity. We realize that new market
restrictions could impact that flexibility and liquidity. For example,
we note the numerous comments received on the 2019 RVO rule stating
that changes to the RIN market structure could reduce liquidity,
increase volatility, and make the RIN market function less efficiently,
increasing costs to obligated parties and consumers.\159\ In addition,
a white paper on the President's Directive recently released by the
American Petroleum Institute (API) cautions that ``the proposed
regulatory changes are likely to create additional significant problems
of their own'' and that ``history suggests that regulatory agencies
should be extremely cautious in changing established rules in regulated
markets.'' \160\ Interested stakeholders have also suggested that some
reforms could impact the ability of small, less recognized, or new
renewable fuel producers and blenders to enter the market. Finally, we
understand that some reforms could inadvertently affect otherwise
legitimate market behavior. For example, parties that make a profit on
the RIN market are not necessarily conducting
[[Page 10609]]
manipulative or anti-competitive behavior and may very well be
increasing market efficiency and liquidity with their actions.
Therefore, we have taken into consideration the potential for reforms
to harm the RIN market in this proposed action.
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\159\ See, e.g., comments to the 2019 RVO rule from Steptoe &
Johnson LLP on behalf of the National Association of Convenience
Stores (NACS) and the Society of Independent Gasoline Marketers of
America (SIGMA), BP, and American Petroleum Institute (API) in
Docket No. EPA-HQ-OAR-2018-0167.
\160\ See ``An Analysis of the Renewable Fuel Standard's RIN
Market'', Covington & Burling LLP, February 15, 2019, available at
https://www.api.org/~/media/Files/Policy/Fuels-and-Renewables/2019/
RIN-market-paper.pdf.
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We are proposing regulatory changes in this action for all four
reforms identified in the President's Directive and request comments on
both the positive and negative consequences of each reform. We intend
to finalize the reforms that we conclude are beneficial for the RFS
program, the RIN market, and the RFS stakeholders, and do not impose
unnecessary burden. For all four reforms outlined in this action, we
focus on separated RINs only; we believe the physical storage
limitations faced by renewable fuel already reduce the opportunity for
price manipulation of assigned RINs and that the existing regulations
at 40 CFR 80.1428 already include anti-hoarding provisions for RINs
attached to renewable fuel. Furthermore, for each of the four reforms,
we evaluate whether we should limit the proposed regulatory provision
to D6 RINs only. Stakeholder concerns over market manipulation focused
mainly on D6 RINs because, as described in Section III.B, in 2013 the
overall demand for RINs increased due to the increased RVO set in the
statute while the supply of D6 RINs remained nearly flat due to the E10
blendwall.\161\ D6 RINs are also the predominant RIN type generated,
and therefore impacts on D6 RIN prices have much larger consequences
for obligated parties than impacts on the prices of other RIN
types.\162\ For each reform discussed in Section III.E, we explain
whether it is feasible to propose that the reform apply to D6 RINs only
and our rationale. We seek comment on narrowing the scope of the
proposals in this action to D6 RINs only.
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\161\ We acknowledge that the stock of D6 RINs has fluctuated
over time due to market shifts, EPA actions, and other factors, and
that a larger stock of RINs puts downward pressure on RIN prices.
\162\ According to data from EMTS approximately 78 percent of
all RINs generated in 2018 were D6 RINs.
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E. Proposed Approach to Individual Regulatory Reforms
For each potential reform, we discuss the basic concept, its
implications for the program and marketplace, the scope and design of
the specific regulatory modification in question, and other relevant
details. Broadly speaking, EPA is interested not only in comments on
specific individual reforms, but also on how the various reforms might
work in combination, and the degree to which the reforms provide, or
detract from, symmetry in the marketplace, so that one set of actors is
not advantaged at the expense of another set operating in the same
market.
1. Reform One: Public Disclosure if RIN Holdings Exceed Certain
Threshold
The first potential reform from the President's Directive that we
address in this action is a requirement for public disclosure when a
party's RIN holdings exceed a certain threshold. The fundamental
concept underpinning this reform is that increased transparency can
help deter market actors from amassing an excess of separated RINs,
which due to the concentration in ownership of available supplies could
result in undue influence or market power. This reform could also let
market participants know the underlying status of the market. A
concentration of separated RINs, if sufficiently large in scope, could
be used by a party to manipulate the market by artificially affecting
prices in any direction. The most extreme examples of market power are
monopolies, but concentration can be a concern even for markets with
many participants when only a few control the majority of available
supply at any given point in time.
In this action, we are proposing to set two thresholds that would
work in tandem to identify parties that have amassed RINs in excess of
normal business practices, which could indicate an intent to assert an
inappropriate influence on the market. These thresholds would apply to
holdings of separated D6 RINs only. The first threshold would be
triggered if a party's end-of-day separated D6 RIN holdings exceeded
three percent of the total implied conventional biofuel volume
requirement (e.g., 15 billion gallons for compliance year 2018) set for
that year by EPA in the RVO rule, which is the total renewable fuel
volume requirement minus the advanced fuel volume requirement. A party
without an RVO (a non-obligated party) that triggered the first
threshold would notify EPA of an exceedance at the end of the quarter.
An obligated party that triggered the first threshold would apply the
second threshold by comparing its end-of-day separated D6 RIN holdings
with 130 percent of its individual implied conventional RVO. Only
obligated parties that triggered both the first and second thresholds
would notify EPA of an exceedance at the end of the quarter. In this
action, we are proposing to publish on our website on a quarterly basis
the names of any parties that report exceeding the thresholds. We are
also proposing that the RIN holdings of corporate affiliates be
included in a party's calculations to determine if they trigger a
threshold. The definition of corporate affiliate, calculation of the
thresholds and specifics of the reporting requirements are discussed in
more detail below.
The purpose of putting into place a disclosure requirement is
twofold: first, to provide transparency in the market regarding how
often certain RIN position thresholds are reached and exceeded, and
second, to disincentivize such behavior by requiring public disclosure.
If the threshold were ever exceeded, public disclosure would alert
market participants and where appropriate prompt a closer review of the
circumstances by EPA. Were the threshold to be exceeded, we could then
consider further actions to investigate for anti-competitive behavior
and help prevent similar behavior in the future. We seek comment on
what those further actions might entail, including actions to address
concerns within the broader RIN market generally.
It is important to emphasize that we use the term ``threshold'' in
this proposed regulatory modification to mean a level that may be
exceeded, with only a disclosure consequence if exceeded. We use the
term ``limit'' in this action to mean a level that may not be exceeded,
with a potential enforcement consequence if exceeded. As an alternative
to the RIN holding thresholds we are proposing, we seek comment on
establishing a RIN holdings limit, whereby we would prohibit parties
from holding more than a certain level of RINs. Other marketplaces have
established such limits, and we discuss the distinction, as well as the
reasons for pursuing the threshold/disclosure approach, below. We seek
comment on this alternative proposal and on the issue generally.
Regulatory bodies supervising markets regularly take measures to
prevent excessive market power, and it is useful when considering new
regulations in the RIN market to assess the tools used in other
comparable areas. Tools used in other markets to accomplish similar
market power-limiting objectives include collecting market participant
data, conducting market surveillance, publicly disclosing market
information, and restricting the activity of certain market
participants. Physical commodity markets are not typically regulated
with holdings thresholds or limits, however, because the physical
restrictions to hoarding, like limited physical storage space, obviate
the need for regulatory restriction and oversight. Rather,
[[Page 10610]]
holding thresholds and limits are usually reserved for futures and
derivative markets where such physical constraints do not serve as a
check on market concentration. For example, the CFTC currently
maintains limits on the number of open positions \163\ that parties can
take at a given time in nine agricultural markets.\164\ Other entities
registered with the CFTC, called Exchanges, impose and enforce position
limits on a large number of remaining futures and options.
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\163\ An open position refers to a contract for the purchase or
sale of a commodity fur future delivery. See CFTC Regulation 150.2,
17 CFR 150.2 (2012), available at https://ecfr.io/Title-17/se17.2.150_12.
\164\ See CFTC Regulation 150.2, 17 CFR 150.2 (2012), available
at https://ecfr.io/Title-17/se17.2.150_12.
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RINs do not fall neatly into either category; they are neither
limited by physical storage space nor a derivative. In looking for
analogs in other regulated markets, it is therefore helpful to see how
other environmental allowance markets operate for purposes of
comparison. For this action, we looked at other environmental credit
programs and their markets to better understand options for the RIN
market and found that different markets operate with different
approaches. For example, the California Air Resources Board (CARB)
enforces an allowance holding limit in the California Cap-and-Trade
Program for greenhouse gas emissions; \165\ the Regional Greenhouse Gas
Initiative (RGGI) \166\ enforces a credit purchasing limit in the RGGI
cap-and-trade program credit auctions; and the Government of Canada
enforced a limit in its Federal Renewable Fuels Regulations on the
number of compliance credits a primary supplier can own at the end of
each month.\167\ On the other hand, neither EPA's Acid Rain
Program\168\ nor California's Low Carbon Fuel Standard (LCFS) \169\ has
limits or thresholds on allowance or credit holdings, and we are
unaware of any state Renewable Portfolio Standard (RPS) program \170\
that enforces a renewable energy credit holding threshold or limit.
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\165\ More information on California's Cap and Trade program can
be found at https://www.arb.ca.gov/cc/capandtrade/capandtrade.htm.
Information about the allowance holding limit can be found in
``Facts About Cap and Trade: Market Oversight and Enforcement''
(2011), available at https://www.arb.ca.gov/cc/capandtrade/market_oversight.pdf.
\166\ The Regional Greenhouse Gas Initiative (RGGI) is a
cooperative effort among the states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and
Vermont to cap and reduce CO2 emissions from the power
sector. More information on RGGI can be found at https://www.rggi.org. Information about the credit purchasing limit can be
found in ``CO2 Allowance Auctions Frequently Asked
Questions'' (2017), available at https://www.rggi.org/sites/default/files/Uploads/Auction-Materials/38/RGGI_CO2_Allowance_Auction_FAQs_Jan_10_2017.pdf.
\167\ More information on Canada's Federal Renewable Fuel
Regulations, including about the credit limit, can be found in
``Questions & Answers on the Federal Renewable Fuels Regulations''
(2012), available at https://www.canada.ca/en/environment-climate-change/services/canadian-environmental-protection-act-registry/publications/revised-questions-answers-renewable-fuels.html.
\168\ More information on EPA's Acid Rain Program can be found
at https://www.epa.gov/airmarkets/acid-rain-program.
\169\ More information on California's LCFS Program can be found
at https://www.arb.ca.gov/fuels/lcfs/lcfs.htm.
\170\ An RPS is a regulatory method mandating utility companies
operating within a certain jurisdiction to increase production of
energy from renewable resources. More information on RPS programs
can be found in ``Chapter 5. Renewable Portfolio Standards'' of
``EPA Energy and Environment Guide to Action'' (2015), available at
https://www.epa.gov/sites/production/files/2017-06/documents/guide_action_full.pdf.
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a. Implications and Discussion
We believe that requiring public disclosure by parties that exceed
a certain RIN holding threshold could prove beneficial for the market
as a whole. It could disincentivize parties from gaining market power,
signal potentially harmful behavior to competitors, regulators, and
policy makers, and be used to justify stronger preventative actions.
However, this reform could also have detrimental effects, especially if
not designed properly. Excess market power is very difficult to
quantify in any given market, even if regulators have perfect knowledge
of all market conditions. A real risk exists of setting a RIN holding
threshold in this rulemaking incorrectly. If a threshold is set too
low, it could unnecessarily compromise market efficiency and liquidity
and interfere with obligated parties' ability to comply with
regulations by disincentivizing them from holding the necessary
quantity of RINs to meet their RVO. We therefore believe that a
threshold with a consequence of public disclosure is appropriate rather
than a holding limit with an enforcement consequence. A threshold
serves as a deterrent and warning bell without the risk of
unnecessarily causing harm. We also believe that, in the face of
insufficient evidence of any identified parties currently exhibiting
what might be considered excessive market power, public disclosure is
an appropriate first action. EPA could follow up with more restrictive
measures later if warranted and seeks comment on what follow-up actions
might be appropriate.
The following sections outline the various considerations we made
in designing this proposed measure.
b. Scope
As discussed in Section III.D, for each of the four potential
reforms, we evaluated whether we could limit the scope of the measure
to D6 RINs. For this provision of publicly disclosing when a party
exceeds a RIN holding threshold, we concluded that we could limit its
scope to D6 RINs without compromising its intended effect. Also, we
believe that we can practically design and propose a maximum D6 RIN
holding threshold without setting one for D3, D4, or D5 RINs. Not only
have D6 RINs raised the most stakeholder concern, as discussed above,
but the nested nature of the RVOs and the unique characteristics of
other RIN markets (e.g., D3) would make covering all RIN categories
considerably more complicated. As also discussed in Section III.D, we
are further limiting our proposal of this measure to separated RINs
because we believe the physical storage limitations faced by renewable
fuel already reduce the opportunity for price manipulation of assigned
RINs and that the existing regulations at 40 CFR 80.1428 already
include anti-hoarding provisions for RINs attached to renewable fuel.
Finally, we are proposing that this threshold cover any vintage D6 RINs
that are available for compliance with the current year RVO. We seek
comment on these proposed aspects of this reform.
c. Methodology for the RIN Holding Threshold \171\
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\171\ We refer to the threshold in the singular in the title to
describe the overall policy, but as described in this section, we
are actually proposing a dual threshold approach.
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In this action, we are proposing to set two holding thresholds. As
stated above, it is extremely difficult to pinpoint a specific market
share that would equate to concerning market power. Therefore, we
approach this reform by instead estimating the holding level that we
believe would be consistent with legitimate market needs. We recognize
that legitimate holdings for obligated parties relate to the number of
RINs they need for compliance with their RVO, so we logically conclude
that an obligated party threshold should relate to its RVO. We also
recognize that non-obligated parties have no RVO and require a
different threshold methodology. Non-obligated parties have less need
to hold RINs than obligated parties because they have no compliance use
for them, so we believe their threshold should generally be set lower.
Thus, we believe one lower threshold that covers everybody and a second
higher threshold that adjusts to the compliance needs of obligated
[[Page 10611]]
parties together would adequately constrain a market with a very wide
range of participants. Both non-obligated parties and obligated parties
would be held to similar incentives.
We are proposing a primary D6 RIN holding threshold for all RIN-
holding parties relative to the implied conventional biofuel volume
requirement finalized by EPA each year. We determine the implied
conventional biofuel volume requirement by subtracting the advanced
fuel volume requirement from the total renewable fuel volume
requirement because D6 RINs can only be used to meet the implied
conventional biofuel portion of the total RVO. For example, if the
implied conventional biofuel volume requirement were 15 billion in a
given year, a certain percentage of 15 billion would be the primary
threshold for that year. A threshold relative to the volume requirement
adjusts over time to the size of the annual standard rather than to the
number of RINs in the market. The benefit of this approach is that the
volume requirement does not change, so parties know exactly what level
to avoid at all times. This approach is similar to the calculation of
the allowance holding limit used in the linked cap-and-trade programs
implemented by California and Quebec.\172\
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\172\ See ``Facts About Holding Limit for Linked Cap-and-Trade
Programs'' (September 14, 2018), available at https://www.arb.ca.gov/cc/capandtrade/holding_limit.pdf.
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In this action, we are proposing to set a secondary threshold for
obligated parties. We recognize that larger obligated parties with
large RVOs have valid reasons to accumulate and hold a volume of RINs
that might exceed the primary threshold, not only to meet their next
annual compliance obligation but also to bank additional RINs for
compliance with the following year's obligation. As explained in
Section III.D, many instances of RIN accumulation are legitimate and
are not related to price manipulation, making it that much harder for
regulators to pinpoint the instances of RIN accumulation that are not
based on legitimate commercial or compliance needs. For example,
parties that anticipate an increase in the price of RINs and/or the
quantity of RINs they will need for compliance purposes in future years
may choose to acquire RINs beyond their needs for the current year for
use in the following year. Therefore, we recognize that the threshold
would have to somehow account for and allow RINs held to meet
compliance obligations. For example, exemptions to position limits in
futures and options markets are granted by the CFTC or Exchanges on a
case-by-case basis to parties that demonstrate valid commercial stakes
in the underlying physical market.\173\ In addition, parties that are
covered by the cap and have an emissions compliance obligation under
the California Cap-and-Trade Program are allowed to hold more
allowances than parties not covered by the cap. While all parties
participating in the California Cap-and-Trade Program are subject to
the same fixed annual holding limit, parties with a compliance
obligation qualify for a limited exemption from the holding limit.
Allowances placed in a covered entity's compliance account (from which
the entity can no longer remove or trade allowances) up to the limited
exemption do not count against the holding limit. The limited exemption
is based on lagged values of the entity's reported emissions and is
large enough to cover the entity's cumulative emissions obligations.
This ensures that entities with compliance obligations greater than the
holding limit can still acquire and hold compliance instruments to
comply with their obligations.\174\ We seek comment on the general
concept of a secondary threshold for obligated parties in the RFS
program.
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\173\ A position limit refers to a limit on the number of
contracts for the purchase or sale of a commodity for future
delivery a party can hold. See CFTC Regulation 150.2, 17 CFR 150.2
(2012) at https://ecfr.io/Title-17/se17.2.150_12.
\174\ See ``Facts About Limited Exemption from the Holding
Limit'' (December 1, 2017), available at https://www.arb.ca.gov/cc/capandtrade/limited_exemption.pdf.
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d. Setting the Primary Threshold
We are proposing that all RIN-holding parties would be subject to a
primary threshold for disclosure. We are proposing one approach to
calculating the primary threshold that adjusts depending on how many
RVOs are in effect. For anytime between April 1 and December 31, when
only one set of annual RVOs is in effect, we are proposing that the
primary threshold would equal three percent of the annual implied
conventional biofuel volume requirement established by EPA in a rule
promulgated each year to set the annual renewable fuel standards. In
our hypothetical example, this would amount to three percent of 15
billion D6 RINs, or 450 million D6 RINs. For anytime between January 1
and March 31, when two sets of annual RVOS are in effect, we are
proposing that the primary threshold would be three percent of 125
percent of the annual implied conventional biofuel volume requirement.
We are proposing that the threshold in the first quarter of the year
should be 125 percent of the other months because parties may need to
hold RINs for two overlapping RVOs in that quarter rather than just
one. In our hypothetical example, this would amount to three percent of
18.75 billion D6 RINs, or 562.5 million D6 RINs. We propose that a
party's RIN balance at the end of each day in EMTS would be combined
with any RINs in pending trades at the end of the day. We seek comment
on this approach.
To determine the primary threshold of three percent, we considered
thresholds in other programs as well as an analysis of RFS RIN
holdings. We looked at the linked cap-and-trade programs implemented by
California and Quebec as examples. They use a formula that calculates a
holding limit of about three percent of their combined annual allowance
budgets every year.\175\ Based on our discussions with CARB concerning
the implementation and effectiveness of that threshold, we are
proposing a similar level. We therefore conclude that a holding limit
or threshold of three percent of an allowance or credit standard can
identify parties which have acquired RIN holdings larger than necessary
for normal business operations and which may indicate an effort to
assert inappropriate market power. To help inform our assessment of a
three-percent threshold, we conducted a screening analysis using
individual-level data to evaluate historical market shares.
Specifically, we looked at daily D6 RIN holdings aggregated by company
between April 1, 2017 and April 1, 2018, compared to the overall
market. For simplicity, we looked at D6 RINs of all vintages. Using our
proposed equations for the primary threshold, we found that in that
one-year period, 13 out of 126 obligated parties would have exceeded
the three percent primary threshold. None of the 280 non-obligated
parties that held separated D6 RINs in that time period exceeded the
three percent primary threshold.\176\
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\175\ See calculation in the memorandum, ``California and Quebec
Holding Limit Percentages,'' available in the docket for this
action.
\176\ See calculation in the memorandum, ``Threshold
Calculations for D6 RIN Holding Parties,'' available in the docket
for this action.
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We seek comment on the general approach of setting the primary D6
RIN holding threshold relative to the implied conventional biofuel
volume requirement and the specific application of a three-percent
threshold. We also seek comment on the actual thresholds that this
calculation generates, whether it is appropriate, and whether it could
harm any market participants and, if so,
[[Page 10612]]
how. We also considered setting two primary thresholds, one for
obligated parties set at three percent and a lower one for non-
obligated parties set at one percent (an obligated party would still
apply the secondary threshold if it exceeded its primary threshold). In
our hypothetical example, a one percent threshold would amount to 150
million RINs from April 1 to December 31 and 188 million RINs from
January 1 to March 31. We considered this approach because a one
percent primary threshold for non-obligated parties could potentially
meet the objectives outlined in Sections III.E.3 and III.E.4 in a
simplified and more streamlined way than the various reforms proposed
in those sections. In our screening analysis, we found that two non-
obligated parties would have exceeded the one percent threshold during
the time period analyzed, though we did not consider whether the
parties were affiliated with an obligated party, as described
below.\177\ We seek comment on this considered approach of limiting
non-obligated parties using just one reform, a lower primary threshold
of one percent.
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\177\ See calculation in the memorandum, ``Threshold
Calculations for D6 RIN Holding Parties,'' available in the docket
for this action.
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We considered but are not proposing setting a threshold relative to
total separated D6 RINs available in the market. The downside of this
approach is that the quantity of total available RINs changes
continuously, and it is not possible for market participants to know
what it is at every moment. This makes it difficult to calculate the
threshold at any given time. Another downside of this approach is that
it uses all unretired, separated D6 RINs as a proxy for available D6
RINs because that is the best information that either the market or EPA
has. If a party were to keep D6 RINs off the market, as is alleged by
some parties, then our proxy would become an overestimate of the actual
number of D6 RINs available. Thus, this approach would underestimate a
party's market share. In considering this approach, we also could not
find a universal standard for the level of market share that
constitutes an inappropriate or concerning level of market power. The
only example we could find of another environmental credit program that
implements a market share limit is the RGGI program, which applies a
25-percent limit to the number of credits a party can purchase at a
single credit auction.\178\ Though this is not a holding limit or
threshold per se, it is a limit that relates to preventing a party from
establishing undue market power. Therefore, if we were to choose this
approach to setting a threshold in the final rule, we would consider a
D6 RIN holding threshold at or around 25 percent of total available D6
RINs. In our screening analysis, we compared maximum individual end-of-
day D6 RIN holdings in every quarter between 2013 and 2018 to total
available D6 RINs in that quarter. We looked at all, non-expired D6
RINs regardless of the year in which they were generated.\179\ We found
that the maximum market share over that entire time period, by any
individual RIN holder, was 18 percent. In other words, on one day, one
party held 18 percent of the 9.9 billion D6 separated RINs available on
that day. In that particular case, an obligated party hit the 18-
percent level in the first quarter of 2017, at a time when other
obligated parties were retiring hundreds of millions of RINs in single
EMTS transactions for the upcoming compliance deadline. This activity
dropped the total available RINs in the market suddenly and
drastically. Setting aside those periods of time where significant and
sudden RIN retirements were occurring, the maximum level of D6 RINs
that any one party held at a time was between 10 and 14 percent of all
D6 RINs.\180\ These figures are commensurate with the gasoline and
diesel production market share of the largest refiners. We seek comment
on our proposal to set the primary threshold relative to the annual
implied conventional biofuel volume requirement and on the alternative
approach considered but not proposed.
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\178\ See ``CO2 Allowance Auctions Frequently Asked
Questions'' (January 10, 2017), available at https://www.rggi.org/sites/default/files/Uploads/Auction-Materials/38/RGGI_CO2_Allowance_Auction_FAQs_Jan_10_2017.pdf.
\179\ CAA sec. 211(o)(5) requires that EPA establish a credit
program as part of its RFS regulations, and that the credits be
valid to show compliance for 12 months as of the date of generation.
EPA implemented this requirement through the use of RINs, which can
be used to demonstrate compliance for the year in which they are
generated or the subsequent compliance year. Obligated parties can
obtain more RINs than they need in a given compliance year, allowing
them to ``carry over'' these excess RINs for use in the subsequent
compliance year, although use of these carryover RINs is limited to
20 percent of the obligated party's RVO.
\180\ The full analysis is detailed in the memorandum, ``Daily
Comparison of Individual RIN Holdings to Total Available RINs,''
available in the docket for this action.
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e. The Secondary Threshold
If a RIN-holding party exceeded the primary threshold, it would
indicate that its D6 RIN holdings were a sizeable share of the market.
For parties with no RVO, this would signal a position that could
potentially command market power with the potential to artificially
influence price. For obligated parties, however, a second test would be
needed to evaluate their holdings against their compliance obligation
because that could explain their sizeable holdings. For the secondary
threshold, we are proposing that an obligated party would compare its
implied conventional biofuel RVO to its D6 RIN holdings of all
vintages, on a daily basis. If the D6 RIN holdings are more than 130
percent of the implied conventional biofuel RVO on any day, the
obligated party would trigger the public disclosure requirement. We are
proposing one approach to calculating the secondary threshold that
adjusts depending on how many RVOs are in effect. We want to account
for the fact that, generally, an obligated party holds more D6 RINs in
the first three months of the year when it is preparing to retire for
the prior year's obligation while also accumulating RINs for the
current year's obligation.
For days between April 1 and December 31, an obligated party would
multiply its gasoline and diesel production and import volume from the
prior year by the difference between the renewable fuel percentage
standard from the prior year and the advanced fuel percentage standard
from the prior year. It would also account for any deficit volume it
carried over from the prior year. See the proposed equations at 40 CFR
80.1435 for more detail on this proposed approach.
For days between January 1 and March 31, an obligated party would
multiply its gasoline and diesel production and import volume from the
prior year by 125 percent of the difference between the renewable fuel
percentage standard from the prior year and the advanced fuel
percentage standard from the prior year. It would also account for any
deficit volume it carried over two years ago to the prior year. See the
proposed equations at 40 CFR 80.1435 for more detail on this proposed
approach. We are proposing that obligated parties who triggered the
primary threshold would conduct this secondary threshold calculation at
least quarterly using daily RIN holding levels and implied conventional
biofuel RVOs.
We also considered requiring the calculations at the end of the
compliance year when the actual annual RVO becomes known. For example,
on March 31, when a large obligated party reports to EPA its actual
gasoline and diesel production and import volume and its RVOs for the
prior year, it could also evaluate its daily D6 RIN holdings against
the implied conventional biofuel
[[Page 10613]]
RVO for the year. The downside to this approach is that the red flag
for potentially problematic market power could come long after the
excessive RIN holding level occurs, in some cases over a year later.
This delay between the RIN holding level and public disclosure of the
exceedance would decrease the effectiveness of the reform and hamper
its intended purpose of deterrence and market notification. Therefore,
we are not proposing such an option. We seek comment on the quarterly
interval proposed. We chose 130 percent because it allows for holdings
of 100 percent of their implied conventional biofuel RVO, 20 percent
for banking, and 10 percent for additional flexibility and uncertainty.
This flexibility would, for example, cover potentially invalid D6 RINs
that may not be sold or retired according to the existing part 80
regulations. With the secondary threshold in place, an obligated party
with end-of-day D6 RIN holdings in a given quarter below the primary
threshold would not trigger public disclosure, while an obligated party
with D6 RIN holdings above the primary threshold would conduct a second
test against 130 percent of their implied conventional biofuel RVO to
date to determine whether public disclosure would be triggered.
In our screening analysis, we found that in the 2017 compliance
year, thirteen obligated parties would have exceeded a three-percent
primary threshold and would have applied the secondary threshold. We
found that three would have also exceeded the 130-percent threshold at
least once.\181\ We note that we were unable to fully aggregate
holdings and RVOs by corporate affiliates, as described further below,
or account for RINs that an obligated party was holding for a small
refinery with an exemption approval from EPA.\182\ Nonetheless, this
analysis suggests that a few obligated parties might have to report
triggering the proposed D6 RIN holding threshold in the future. We seek
comment on proposing to set the secondary threshold at 130 percent of
the implied conventional biofuel RVO to date for obligated parties and
the 125 percent factor that would be applied in the first quarter of
the year.
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\181\ We aggregated all facilities by their company ID in EMTS
to get a company total for both RIN holdings and thresholds. See
calculations in the memorandum, ``Threshold Calculations for D6 RIN
Holding Parties,'' available in the docket for this action.
\182\ While our analysis could not account for this, our
proposed regulations do.
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f. Aggregating RIN Holdings
Market power can be applied in an anti-competitive way when a party
controls a sufficiently large share of available supply, in this case
separated D6 RINs. As already described, we are proposing in this
action to require a RIN holding reporting threshold on at least each
individual entity registered to transact RINs in EMTS. However, two
individual entities with independent registration profiles in EMTS may
be affiliated and may have control over each other's RIN holdings and
each other's actions. For example, two entities may be subsidiaries of
the same parent company or one entity may be the official financial
asset trading arm of the other. In each of these cases, each entity may
have control over a larger RIN holding than its individual EMTS account
would suggest.
In addition, we note that a RIN holding threshold applied to
individual parties, without regard to their affiliations, would create
a large gaming opportunity. One party that wanted to gain market power
but evade the RIN holding reporting threshold provision could spin-off
various subsidiaries that would each hold RINs below the reporting
threshold. It is our intent to design this reform to prevent such
gaming.
As a result, we are proposing in this action that a party would
aggregate its RIN holdings with the holdings of all other parties with
overlapping ownership or corporate control for evaluation against the
thresholds. This methodology is similarly applied by CARB for the
California cap-and-trade credit holding limit and by RGGI for the RGGI
program auction purchasing limit. We provide a few examples to
illustrate this proposed concept. If an obligated party were owned by a
non-obligated party, then the combined D6 RIN holdings would first be
applied against the primary threshold. If the primary threshold were
triggered, then the combined D6 RIN holdings would be applied against
the secondary threshold using the obligated party's implied
conventional biofuel RVO. If two non-obligated parties were affiliated
by corporate ownership, then their combined D6 RIN holdings would be
applied against the primary threshold only. If two obligated parties
were affiliated by corporate ownership, then their combined D6 RIN
holdings would be applied against the primary threshold first and then,
if necessary, against the secondary threshold using the obligated
parties' implied combined conventional biofuel RVO. Were we to finalize
any other approaches to establishing RIN holding thresholds for
reporting, we would intend to require that the RIN holdings of all
parties affiliated by corporate ownership would nevertheless still be
aggregated together.
In order to propose a definition for the term ``corporate
affiliate,'' we reviewed how other environmental credit programs define
and apply this concept. California's Cap-and-Trade Program applies a
shared, single allowance holding limit to entities and their direct
corporate associations, which they generally define as when one entity
has more than 50-percent ownership in another entity or when two
entities share a common parent (i.e., when there is a common entity of
which the two entities are subsidiaries). In addition, the California
Cap-and-Trade Program requires that entities report, when requested,
information related to indirect corporate associations, which they
define as ownership of more than 20 percent but less than or equal to
50 percent.\183\ For the RGGI program auction purchase limit, corporate
association occurs when one applicant has more than 20-percent
ownership in another applicant or when one party has 20-percent
ownership in two applicants (parent company).\184\
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\183\ See ``Chapter 3.1.A: Disclosure of Corporate Associations,
Consultants or Advisors, and Knowledgeable Employees'' of ``Cap-and-
Trade Regulation Instructional Guidance'' (February 2015), available
at https://www.arb.ca.gov/cc/capandtrade/guidance/guidance.htm.
\184\ See ``Auction Notice for CO2 Allowance Auction
42 on December 05, 2018'' (October 9, 2018), available at https://www.rggi.org/sites/default/files/Uploads/Auction-Materials/42/Auction_Notice_Oct_09_2018.pdf.
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In this action, we are proposing that two parties are corporate
affiliates if one has more than 20-percent ownership in the other or if
both parties are owned more than 20 percent by the same parent company.
We are proposing a ``more than 20'' percent ownership level because it
is consistent with the value that the other programs apply. For this
proposed provision on a D6 RIN holding threshold, we are proposing that
only corporate affiliates registered to own RINs in EMTS would be
included in the RIN holding aggregation. Corporate affiliates that are
not registered in EMTS to own RINs would not need to be included in the
threshold calculations as these affiliates cannot hold RINs.\185\
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\185\ For diagrams and examples of different types of
affiliates, see the memorandum, ``Affiliates and Groups Definitional
Relationship and Requirements,'' available in the docket for this
action.
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We considered but are not proposing to require aggregation of RIN
holdings for comparison to the threshold among parties with a
contractual relationship, for example if there is an implicit or
[[Page 10614]]
explicit agreement in place for one to purchase RINs for the other. As
such, an obligated party that has a contract in place with a trader or
a blender for delivery of D6 RINs would not add those D6 RINs to its
holdings for comparison to the threshold until delivery occurred. We
realize that this proposed approach would omit some RINs from the
threshold comparison that could be under a party's control. However, we
believe that a methodology for including such contractual relationships
in the aggregation would be too complex and could result in double-
counting RINs. We seek comment on our proposed approach to defining
corporate affiliate and on omitting contractual affiliates from the RIN
holding aggregation.
g. CBI Determination
We are proposing to require public disclosure of the name of a
party that reported exceeding the EPA-set RIN holding threshold. We are
not proposing to publicly disclose the actual RIN holding level, the
amount by which it exceeded the threshold, when it exceeded the
threshold, how many times it did so, or which threshold was applied. As
such, we are proposing to determine that a yes/no answer to this
threshold question does not qualify as CBI under the CAA. We find that
whether a party exceeded a RIN-holding threshold provides very little
insight into its actual RIN holding level, its gasoline or diesel
production or import volume, or any other information that competitors
could use to discern sensitive information.
In responding to a Freedom of Information Act (FOIA) request in
2013, we determined that certain data collected and stored by EMTS at
that time were CBI, including a party's RIN holdings at the end of the
quarter.\186\ We recognize that in our evaluation of disclosing whether
an entity exceeded a RIN holding threshold, we therefore need to
carefully consider whether the underlying RIN holding level is
sufficiently masked. In other words, we need to ensure that we do not
disclose underlying CBI data or allow the CBI to be computed, back-
calculated, or otherwise discerned using other publicly available data.
Since the actual RIN level cannot be discerned or back-calculated by
knowing whether the threshold was exceeded, we believe our proposed
public disclosure accomplishes this objective.
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\186\ See EPA's FOIA Request Confidentiality Determination
document (Docket Item No. EPA-HQ-OAR-2016-0041-0023).
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Under the approach proposed in this action, a large obligated party
that triggers the primary threshold would apply the secondary threshold
of 130 percent of its implied conventional fuel RVO to date, which in
turn is calculated by multiplying a publicly known percentage standard
with its annual gasoline and diesel production or import volume. We
recognize that fuel production volume and import volume are closely
protected by refiners and importers as sensitive information that could
potentially harm competitiveness if disclosed. Therefore, in our
evaluation of public disclosure, we also need to consider whether fuel
volume could be computed, back-calculated, or otherwise discerned by
publishing whether a party exceeded an RVO-relative threshold. We find
that it could not, since neither the threshold nor any numbers above it
relates to or requires a specific fuel volume. The threshold and the
figure of comparison are ratios and do not disclose or make discernable
information about the actual fuel production or import volume.
We also considered whether any information related to this proposed
disclosure could warrant CBI treatment, such as information that has
not yet gone through a formal CBI determination process by EPA. We do
not believe the information we propose to disclose constitutes CBI
because, as previously discussed, the underlying RIN holding level is
sufficiently masked. We believe it is in the interest of the market and
the program to publicly disclose exceedances of the proposed threshold.
We are proposing a threshold in this action that is sufficiently high
to only be exceeded by volume of RINs that is likely more than a party
would need for compliance or for any other legitimate business need. We
believe that our proposed threshold is consistent with the level of RIN
holdings that could cause excessive market power, and we want to
protect the integrity and functioning of the RIN market by deterring
potentially anti-competitive behavior through public disclosure. We
also note that the disclosure would come after the sale were completed
and would not be associated with a date or dates, so disclosing the
threshold-related information could not interfere with a sale
negotiated in the past. Finally, we note that a company can control
whether it exceeds the threshold and therefore whether its exceedance
will be publicly disclosed by ensuring that its RIN holdings never
exceed the threshold. In this way, a company has the power to control
whether this information is released.
We seek comment on whether publication of whether the parties in a
corporate affiliate group exceeded the RIN holding threshold would
disclose underlying CBI or otherwise would likely result in substantial
competitive harm to a particular company. Please identify the specific
data element and explain how the public release of that particular
value would or would not be likely to result in disclosure of
underlying CBI or otherwise cause substantial competitive harm. If the
concern is that the release of being above a threshold would allow
competitors to derive a CBI value for an individual facility or
company, specifically describe the mechanism by which this could occur.
Describe any unique process or aspect of a facility or company that
would be revealed if the data were made publicly available. If the
value would disclose underlying CBI only when used in combination with
other publicly available data, then identify the information that could
be revealed, describe how it would be calculated or otherwise
discerned, explain why the information is sensitive, describe the
competitive harm that its disclosure would be likely to cause, and
identify the source of the other data. If the data are physically
published, such as in a book, industry trade publication, or federal
agency publication, provide the title, volume number (if applicable),
author(s), publisher, publication date, frequency of publication, and
International Standard Book Number (ISBN), or other identifier. For
data published on a website, provide the address of the website, the
date the website was last visited, and identify the website publisher
and content author. Avoid conclusory and unsubstantiated statements or
general assertions regarding potential harm.
In summary, we have found that the information described in this
section for public disclosure is clearly not entitled to CBI treatment.
We are describing our finding and the rationale behind it in this
notice of proposed rulemaking because we expect this finding to be of
high interest to stakeholders. We encourage those with CBI concerns to
submit comments, which we will take into consideration in the
finalization of this rulemaking.
h. Reporting and Recordkeeping Requirements
In this action, we are proposing that parties would calculate the
threshold for each day, and parties that triggered the threshold for a
day would be required
[[Page 10615]]
to report the event to EPA by the quarterly reporting deadlines
specified in Table 1 to 40 CFR 80.1452. We seek comment on the proposed
quarterly frequency and whether quarterly notice allows for too much
lag between an exceedance and disclosure . For a corporate affiliate
group that triggered the threshold together, each registered party
would be required to separately notify EPA of the event. We are
proposing to add a yes/no question on triggering the threshold to the
RIN Activity Report that all RIN-holding parties are already required
to submit to EPA quarterly. The party would select ``no'' if the
threshold was never triggered during the given quarter or ``yes'' if it
was triggered at least once in the quarter. The submitting official
would be required to certify the completeness and accuracy of that
answer upon report submission. We are also proposing that independent
auditors would need to review all daily threshold calculations during
the attest engagement process and would need to include in their attest
engagement report to EPA confirmation that the party notified EPA as
required of all instances of the threshold being triggered. This would
include confirmation that the D6 RIN holdings and RVOs, if applicable,
of all corporate affiliates were fully and properly accounted for in
the calculations. We therefore are proposing that parties registered to
hold RINs be required to keep as records all threshold calculations,
including corporate affiliate values, and provide those records to the
auditor for review.
The proposed calculation would use gasoline and diesel production
and import volumes from the prior compliance year as a proxy for
volumes in the current year. We recognize that the calculations could
be an inaccurate representation of current year volumes in some cases,
such as mergers or big changes in import volumes from year to year.
However, in most situations we envision that these year-to-year changes
may not impact the necessity to report. We seek comment on ways to
fairly account for these limited situations.
In this action, we are proposing that EPA would be responsible for
publicly disclosing that a party notified us of exceeding the
threshold. We already maintain and regularly update a centralized
website for RFS data \187\ that has become the hub for up-to-date
program information and transparency. Stakeholders, as well as the
public at large, who want to know the identity of those that hold RINs
in excess of the amount that flags potential market power concerns
would only need to go to one place, EPA's website, to find all publicly
available information on the topic. We seek comment on our proposal to
publish the names of parties that exceed the RIN holding disclosure
threshold on the EPA website.
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\187\ Public EMTS data can be found on EPA's website at https://www.epa.gov/fuels-registration-reporting-and-compliance-help/public-data-renewable-fuel-standard.
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2. Reform Two: Increase RFS Compliance Frequency
The second potential reform we address in this action is
establishing a requirement for more frequent retirement of RINs for
purposes of program compliance. The fundamental concept underpinning
this reform is that, if it were finalized, obligated parties would be
required to retire RINs in their accounts gradually over the year
rather than all at once at the end of the year. We believe that
requiring RINs to be retired for compliance on a more frequent basis
could potentially help minimize opportunities for hoarding or other
behavior that could negatively impact the RIN market. Further, we
believe this regulatory modification would have the added benefit of
helping obligated parties reduce the risk of non-compliance at the end
of the year since they would be required to obtain RINs to meet a
portion of their individual RVO on a quarterly basis.
Under this reform, we are proposing to establish RIN retirement
requirements for the first three quarters of the compliance year,
calculated as the gasoline and diesel production and import volume
through the end of the quarter multiplied by 80 percent of the current
year renewable fuel standard. We are proposing to include the 80
percent factor for these interim RIN retirements to address the
inherent uncertainty of projecting an obligated party's obligation
without full information. Obligated parties would submit reports to EPA
60 days after the end of the quarter to demonstrate compliance with
these requirements and could use any D-code RINs to do so. This reform
would not impact the current annual RVO calculations or compliance,
including the two-year RIN life, the annual deficit carryover, or the
20 percent carryover provisions. Specifics on the calculations,
reporting requirements and schedules are discussed in more detail
below.
Some stakeholders have voiced concern about asymmetry in the market
if EPA were to establish a more frequent compliance period for
obligated parties without requiring RIN holders to make RINs available
more frequently, and vice versa. Taking this concern under
consideration, we have tried to balance this reform with our proposed
reform that would limit the duration that a non-obligated party could
hold separated RINs (discussed in Section III.E.4). Namely, this
proposal would establish that both program compliance and the
requirement for non-obligated parties to sell their separated RINs
apply at quarterly intervals. We believe this symmetry will help to
facilitate more frequent compliance and reduce the risk of one party
having an unfair advantage over the other since both sides would face
similar obligations to buy and sell RINs within the required
timeframes.
We believe that more frequent RIN retirement could help smooth
demand for RINs across the year. However, under this proposed reform,
RIN demand could still increase at certain times of the year due to
circumstances beyond EPA's control, which could make purchasers
particularly vulnerable to manipulative terms from sellers at those
times. Even though the magnitude of the obligation would be roughly
decreased by a factor of four, sellers with excess RINs beyond their
quarterly retirement requirements could still exercise power over the
RIN market--now several times throughout the year before each quarterly
deadline instead of just once annually. Market power is relative, and
we recognize that a smaller stockpile of RINs in a party's account
relative to a smaller pool of available RINs can still result in market
power. Therefore, the ultimate benefit of this reform on the RIN market
and on parties' behavior is unclear.
a. Implications on the Annual RVO
In this action, we are not proposing to change the timeframe of the
annual RVO or the annual RVO compliance obligation. Rather, we are
proposing to maintain the annual RVO and annual RVO compliance
obligation and to add requirements for periodic RIN retirement
throughout the year. This is similar to personal tax requirements
imposed by the IRS and states; money is generally withheld from an
individual's paycheck throughout the year based on an estimate of their
annual tax burden, but the actual annual tax burden is only calculated
and due for full payment once the tax year is over. By proposing a
requirement for obligated parties to retire RINs periodically through
the year, we are able to leave intact the many elements of the RFS
program that are based on an annual program (e.g., the annual deficit
provision, the annual 20 percent carryover provision, and the two-year
life of a RIN). We believe that these annual program components, as
[[Page 10616]]
described further below, are functioning effectively and that changing
these annual program components could create harmful unintended
consequences. We believe we can leave these annual elements of the
program unchanged while still accomplishing the objective of this
reform.
The current RFS program is designed around an annual RVO. As
specified in 40 CFR 80.1407(a), obligated parties wait until the
compliance year has passed to calculate their annual RVOs using their
actual annual gasoline and diesel production and import volume. The RVO
equations also account for deficits on an annual basis, such that a
deficit incurred in the prior year is carried over into the current
year. 40 CFR 80.1427(a) specifies how obligated parties demonstrate
compliance with this annual RVO. These equations were designed so that
an obligated party has an entire year to collect enough RINs to address
any deficit carried over from the prior year. We believe that this
annual approach to satisfying prior year deficits should continue
unchanged. Therefore, we are not proposing any edits to 40 CFR
80.1407(a) or 80.1427(a).
The deficit provision comes from direction in the CAA for EPA to
include provisions allowing any person to carry forward a renewable
fuel deficit from one calendar year to the next when certain conditions
are met. The conditions outlined in the CAA are ``that the person, in
the calendar year following the year in which the renewable fuel
deficit is created (i) achieve compliance with the renewable fuel
requirements under paragraph (2); and (ii) generates or purchases
additional renewable fuel credits to offset the renewable fuel deficit
of the previous year.'' \188\ Since the statute specifies that an
obligated party can create a deficit on an annual basis, we are
proposing in this action to maintain that annual flexibility.
Therefore, an obligated party would be allowed to fall short of its RIN
retirement requirements in any or all periods of one compliance year as
long as it retired RINs at some point in the following compliance year
to offset the following year's obligation, which includes the current
year deficit. See Section III.E.2.e for further discussion on such RIN
retirement shortfalls.
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\188\ See CAA sec. 211(o)(5)(D).
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Finally, 40 CFR 80.1427(a)(5) specifies that no more than 20
percent of an obligated party's current year RVO can be satisfied with
prior year RINs. In this action, we are not proposing any amendments to
this part of the regulation. We propose that this carryover provision
continue to only apply to the annual RVO. We are not proposing to apply
this provision to any interval other than annually. Therefore, an
obligated party that retired RINs periodically during the year,
pursuant to this action, could use any amount of prior year RINs to do
so, subject to the requirements that the final annual RVO compliance
demonstration is consistent with the 20-percent carryover provision.
b. Compliance Frequency
During the development of this proposed rule, we considered
establishing compliance frequencies other than quarterly. Ultimately,
however, we chose to propose a quarterly compliance frequency for
obligated parties; a quarterly requirement appears to balance the
objectives of a more frequent compliance requirement without being
overly burdensome or introducing excessive complexity. As such,
obligated parties would be required to use new equations proposed at 40
CFR 80.1427(d) for the first, second, and third quarters of a year.
Obligated parties would not have a separate RIN retirement requirement
for the fourth quarter and would instead continue to use the existing
RVO equations at 40 CFR 80.1427(a) to demonstrate compliance with the
annual RVO. We seek comment on a quarterly frequency and on whether
obligated parties that reporting gasoline and diesel production and
import volumes to the Energy Information Agency (EIA) weekly and
monthly would prefer a frequency greater than quarterly that aligns
with the EIA survey frequency.
We considered a provision that would require RIN retirement for
every batch of gasoline or diesel immediately or shortly after it is
produced or imported, but we do not believe a practical implementation
framework for this concept exists. It would be virtually impossible for
the market to instantaneously meet such tight demand for RINs by
obligated parties. The generation of RINs and the production and import
of transportation fuel are not time aligned over the course of the
year. We believe that a quarterly RIN retirement requirement is close
enough to ``real time'' compliance to meet the objectives of this
reform while still providing enough flexibility for obligated parties
to feasibly comply.
As part of our analysis, we reviewed the historic pace of RIN
generation throughout a calendar year. We observed that RIN generation
is not consistent throughout the year and varies depending on the month
or season. For example, in calendar year 2017, the monthly generation
of biomass-based diesel (D4) RINs is lowest in January because
biodiesel blending drops in the winter months when gelling of biodiesel
can occur in some regions. The monthly D4 generation rate increased
gradually until July when it began to decrease again. Finally,
generation spiked higher in December than in any other month as parties
worked to meet the RFS requirement that renewable fuel must be
generated and blended in the same calendar year (and in some years
rushed to take advantage of expiring tax credits). In fact, generation
of all four D-code RINs peaked in December. When we compared these
monthly generation rates to a potential monthly RIN retirement
requirement based on estimated monthly gasoline and diesel
volumes,\189\ we saw that in many months, the demand for RINs exceeded
the generation of new RINs. In addition, when we compared the monthly
generation of all D-code RINs with potential monthly RIN retirement
requirement, we found that cumulative RIN generation would not catch up
to the cumulative RIN retirement requirement until December. This lack
of alignment in time between RIN generation and gasoline/diesel fuel
demand renders ``real time'' RIN retirement infeasible. We concluded
from this analysis that it is important to provide some margin of time-
flexibility to allow obligated parties to acquire RINs for compliance
and that too-frequent retirement requirements would be too restrictive
and counterproductive.
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\189\ See calculation in the memorandum, ``Comparison of Monthly
RIN Generation Rates to a Potential Monthly RVO,'' available in the
docket for this action.
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We seek comment on the appropriateness of a quarterly frequency
requirement and on other potential frequencies, such as monthly or bi-
annually. Because of the need for flexibility, we also considered
several compliance deadlines, by which obligated parties would need to
achieve the quarterly compliance requirements. See Section III.E.2.f
for a discussion of deadline options considered and the deadlines we
are proposing in this action.
c. Scope
As discussed earlier in this preamble, for each reform we
considered whether we could limit its scope to reduce the risk of
unintended negative consequences while still meeting the objective of
the reform. In particular, we considered whether we could limit the
[[Page 10617]]
reforms to just D6 RINs since D6 RINs are the main source of market
manipulation concern.
For the compliance frequency reform outlined here in Section
III.E.2, we concluded that, because of the nested nature of the RIN
system, we could not require retirement of only D6 RINs. For example,
an obligated party could choose to retire only D3, D4, and D5 RINs,
which are nested in the renewable fuel obligation, to comply with its
renewable fuel RVO. Therefore, we are proposing a quarterly RIN
retirement requirement based on only the renewable fuel RVO in this
action and allowing obligated parties to retire any D-code of RINs to
meet it.
d. Incurring a Shortfall
In this action, we are proposing that an obligated party would be
allowed to fall short of a quarterly RIN retirement requirement if it
met certain conditions. This shortfall provision would mirror the
flexibility provided by the annual deficit provision described above.
Under one set of conditions, a party would be allowed to incur a
shortfall in a quarter of a given year as long as in the following year
it satisfied all three quarterly RIN retirement obligations. Under a
second set of conditions, a party would be allowed to incur a shortfall
in a quarter of a given year and in a quarter of the following year if
its annual RVO for the current year were equal to zero (e.g., as the
result of an approved small refinery exemption). Under this proposal, a
shortfall in one quarter would have the same effect as a shortfall in
all three quarters of the year on a party's ability to incur shortfalls
in the following year. We are proposing amendments to 40 CFR 80.1427(b)
to reflect this provision.
We considered an alternative approach under which a party's
shortfall in one or more quarters of a year would not affect a party's
ability to incur a shortfall in one or more quarters of the following
year. However, we believe this alternative would create a loophole to
this reform that could be exploited by obligated parties to circumvent
the proposed quarterly RIN retirement requirements. By way of example,
consider an obligated party that retired no RINs in the first three
quarters of a given year and then fully complied with its annual RVOs
at the end of the year by retiring all required RINs. Under the
alternative approach, the obligated party would be allowed to incur
shortfalls in all three quarters of the following year and could repeat
this compliance strategy again and again. This would amount to a
circumvention of the proposed quarterly compliance reform altogether.
Considering this example under the proposed approach instead, the
obligated party that retired no RINs in the first three quarters of a
given year would be required to meet the quarterly RIN retirement
requirements of the following year. We seek comment on allowing
shortfalls under certain conditions and on our approach to preventing
shortfalls over multiple years. We seek comment on the alternative we
considered as well as other alternative approaches commenters
recommend.
e. Calculating the RIN Retirement Requirement
We are proposing in this action that the RIN retirement
requirements for the first three quarters of a compliance year would be
calculated as 80 percent of an obligated party's cumulative gasoline
and diesel production and import volume multiplied by the renewable
fuel percentage standard for the current year. As explained above, the
quarterly RIN retirement equations would not include an input for any
prior year deficit carried over or a limitation on the year of the RINs
used. We believe that an 80-percent flexibility would address the
seasonal variability in RIN generation that could impede a party's
ability to acquire 100 percent of its required RINs. We also believe
that an 80-percent flexibility would provide some leeway for volume
errors identified at the end of the year through the attest engagement
process. We seek comment on this approach to providing obligated
parties with this flexibility and on the value of 80 percent that we
chose to propose and whether a different value would be more
appropriate.
We considered, but are not proposing, setting a RIN holding
requirement rather than a RIN retirement requirement. Under this
approach, obligated parties would need to demonstrate that they owned
at least 80 percent of their cumulative volumes multiplied by the
renewable fuel percentage standard. One reason for this approach is
that it could better align with the RIN holding threshold calculations
proposed in Section III.E.1, which would not adjust the threshold as
RINs were retired every quarter. As such, an obligated party that had
retired 60 percent of its annual renewable fuel obligation after three
quarters would only have a legitimate need to hold the 40 percent of
its annual obligation remaining plus 30-percent headroom, but it would
be allowed under our proposal to hold 130 percent. We proposed these
calculations in Section III.E.1 to keep them simple, but we realize
that some commenters may find it unbalanced and unfair. We seek comment
on adjusting this reform to a holding rather than retirement
requirement to address concerns with the threshold calculations.
f. Compliance Deadline
Under the existing regulations, the deadline by which obligated
parties must demonstrate compliance with their annual RVOs is March 31
of the year following the compliance year. As such, parties have three
months after the last day of the compliance period to compile their
gasoline and diesel production and import volumes, calculate their
RVOs, acquire the necessary number of RINs, and submit their annual
compliance reporting forms. This three-month administrative period is
necessary for obligated parties to complete all of the required
compliance steps properly.
In this action, we are proposing that an administrative period be
added to the end of the first, second, and third quarters for
demonstration of compliance with the periodic RIN retirement
requirements. We are proposing a two-month administrative period such
that the compliance demonstration deadlines would be June 1, September
1, and December 1 of the compliance year. This delayed schedule would
provide obligated parties with additional time to gather production and
import volumes, acquire RINs, and complete the reporting forms and
would align with existing quarterly reporting deadlines. RINs generated
during the administrative period could be used for compliance in the
previous quarter. We are proposing that a three-month administrative
period and the March 31 compliance demonstration deadline continue to
apply to the annual RVO. We seek comment on these proposed deadlines
and on whether a different administrative period or periods would be
more appropriate.
g. Reporting and Recordkeeping
In this action, we are proposing that compliance with the quarterly
RIN retirement requirements would be demonstrated to EPA through
reporting. The quarterly deadlines described above would be reporting
deadlines and would align with the existing deadlines for RIN
generation, transaction, and activity reports. We believe that aligning
our proposed quarterly deadlines with deadlines for existing reporting
requirements would be an easier adjustment for parties. To implement
this reporting requirement, we are proposing that obligated parties
would report cumulative gasoline and diesel production and import
volumes and demonstration of compliance with
[[Page 10618]]
requirements in the first three quarters. We are also proposing to
update recordkeeping requirements to include all applicable quarterly
values and calculations. We are not proposing to amend the attest
engagement due date, so it would continue to be required once at the
end of each compliance year. The RIN generation, transaction, and
activity reports would continue to be required quarterly.
We are proposing that any minor adjustments that an obligated party
would need to make to a prior quarter's reported volumes due to an EPA-
reported remedial action would be required to be accounted for in the
next RIN retirement calculation and demonstration. Since the obligated
party would be certifying that their reported values were accurate to
the best of their knowledge, we believe that the risk of gaming the
regulations by consistently under-calculating a quarterly RIN
retirement requirement is low. A continued pattern of under-calculating
by one party could potentially result in an enforcement action. We seek
comment to this approach to remedial action volume adjustments and on
alternatives to account for them in this action.
h. Small Refinery Exemptions
Under this reform, we are proposing that all obligated parties
would be required to meet RIN retirement requirements on a quarterly
basis. This means that small refineries that submit a petition for an
extension of the small refinery exemption would typically face
reporting and RIN retirement requirements before EPA issues a decision
on the petition. Even under the current annual reporting requirements,
many small refineries already choose to retire RINs before EPA acts on
their petitions, understanding that EPA will later ``unretire'' those
RINs should EPA ultimately decide exemption is warranted for that
refinery in that compliance year. However, we recognize that quarterly
RIN retirement obligations for small refineries that may receive an
exemption would not necessarily be efficient. As described below, small
refineries that expect to receive hardship relief can alternatively
defer quarterly reporting under the retirement shortfall provisions
proposed in this action provided they did not carry a deficit from the
previous compliance year (e.g., if they received hardship relief in the
previous year).
Under this proposal, all refineries including small refineries
would be able to incur a full RIN requirement shortfall in the first
three quarters as long as they had not incurred a deficit in the prior
year. When EPA grants an RFS exemption, the exempt refinery has no RFS
obligation during the compliance year for which an exemption has been
granted. For small refineries that received RFS hardship exemptions,
their annual RVO would be zeroed out. Since the small refineries
wouldn't trigger the annual deficit provision in that year, they could
repeat the same steps in the next year if they still faced hardship. We
note that an obligated party reporting at an aggregated level for
multiple refineries, including at least one small refinery, would not
zero out its total annual RVO. Rather, when EPA approved its small
refinery exemption(s), it would exclude the small refinery volumes from
its annual RVO calculations but still include volumes from the other
refineries. As such, we believe that a small refinery that would like
to take the compliance path outlined above would have to report on a
facility-by-facility basis, rather than on an aggregated basis. An
obligated party that wished to report at an aggregated level would have
to account for any small refinery volumes when calculating and
complying with its quarterly RIN retirement requirement.
If the small refinery chose to comply with the proposed quarterly
RIN retirement requirements and then received an RFS exemption from
EPA, then we would work with the small refinery to unretire its RINs as
we do now under the current annual reporting requirements. We are not
seeking comment on whether EPA can unretire RINs after granting a small
refinery exemption. If the small refinery chose to incur a RIN
retirement shortfall in the first three quarters but did not receive an
exemption from EPA, then it would be required to comply with the annual
RVO by March 31 as they also do under the current annual reporting
requirement by either obtaining the appropriate number of RINs or by
taking a deficit. In that case, whether they met the annual obligation
or carried a deficit into the following year, they would be prohibited
from incurring a shortfall in any quarter of the following year.
3. Reform Three: Limiting Who Can Purchase Separated RINs
The third potential reform from the President's Directive that we
address in this action is limiting the purchasing of separated RINs to
obligated parties only. Canada structured its Federal Renewable Fuels
Regulations this way by only permitting primary suppliers, the
regulated parties under those regulations, to acquire compliance units
from others.\190\ This is also how the credit provisions in our
gasoline sulfur and benzene programs are structured. In those EPA
programs, the obligated parties are both the generators of the credits
and the users of the credits and are the only parties that need to take
any action. Conversely, in the RFS program, obligated parties are
typically dependent on the action of other parties, such as renewable
fuel producers and blenders, to actually introduce the renewable fuel
and the RINs into the marketplace. Consequently, the RFS program was
set up differently.
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\190\ See ``Questions & Answers on the Federal Renewable Fuels
Regulations'' (2012), available at https://www.canada.ca/en/environment-climate-change/services/canadian-environmental-protection-act-registry/publications/revised-questions-answers-renewable-fuels.html.
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Supporters of this regulatory change argue that, since obligated
parties are the only parties who need to purchase RINs for the purpose
of compliance, obligated parties should be the only parties allowed to
purchase separated RINs. The goal of this reform is to minimize the
number of parties trading RINs so as to reduce the risk of hoarding or
other actions by non-obligated parties that could improperly impact the
prices of RINs and thus impact the cost of compliance for obligated
parties. In developing this proposed reform, EPA is taking into
consideration the concerns that limiting the parties that can trade in
the RIN market could have negative unintended consequences, as
discussed below.
Under this reform, we are proposing that only obligated parties,
exporters and certain non-obligated parties be allowed to purchase
separated D6 RINs. Non-obligated parties would be exempt from this
proposed provision if they were a corporate affiliate or a contractual
affiliate of an obligate party.
As explained in Section III.B of this action, RINs are generated
with the generation of renewable fuel and move downstream of the
producer attached to the renewable fuel. When a blender acquires the
renewable fuel and blends it with conventional fuel, the blender is
required to separate the RIN from the renewable fuel. The separated RIN
becomes its own commodity separate from the renewable fuel that can be
traded and used separately. By the very nature of the blender's role in
the fuel distribution system and the requirements of the RFS program,
blenders must become owners of separated RINs. Therefore, this reform
is limited to only the purchase of separated RINs.
[[Page 10619]]
a. Implications and Discussion
As described above, this reform would limit the purchasing of
separated D6 RINs to obligated parties and certain non-obligated
parties. Some stakeholders have commented that this reform would be
beneficial because it would specifically block market traders and
brokers whose only intention is to make a profit in the RIN market and
may have an incentive to engage in manipulative or anti-competitive
behavior to boost their profits.\191\ (We note, however, that simply
making a profit on the RIN market is not manipulative or anti-
competitive behavior.) Limiting non-obligated parties from purchasing
separated D6 RINs could help deter or prevent that potential behavior
from occurring in the future. Conversely, some have claimed that
limiting the number of parties participating could harm the RIN market
and have other unintended consequences. In fact, this specific reform
was explicitly raised for consideration in the 2019 RVO proposal, and
we received multiple comments in opposition, citing the harm this
reform would likely cause. For example, many parties commented that the
liquidity of the RIN market would decline if RIN market participation
were curtailed. These comments stated that some parties without a
compliance obligation alleviate the burden on the seller of finding a
counterpart willing to buy the exact amount of RINs for sale at that
exact time. They do so by aggregating small RIN bundles for large
buyers, disaggregating large RIN parcels for sale to multiple buyers,
and holding RINs until the parties are ready to buy. Some commenters
also stated that, especially in a market as sensitive to policy
announcements as the RIN market, higher participation can reduce
volatility and help the market adjust to a policy or other shock more
quickly than curtailed participation. As such, these comments warned
that restricting participation in the RIN market would reduce
liquidity, increase volatility, and ultimately increase RIN
prices.\192\
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\191\ See, e.g., comments from HollyFrontier (Docket Item No.
EPA-HQ-OAR-2018-0167-1198), Monroe Energy (Docket Item No. EPA-HQ-
OAR-2018-0167-0622), and Valero (Docket Item No. EPA-HQ-OAR-2018-
0167-1041).
\192\ See, e.g., comments from ACT Commodities (Docket Item No.
EPA-HQ-OAR-2018-0167-0615), Phillips 66 (Docket Item No. EPA-HQ-OAR-
2018-0167-1267), and Shell (Docket Item No. EPA-HQ-OAR-2018-0167-
0513).
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Some commenters explained that a RIN price reflecting higher
transaction costs would not be representative of the fundamentals of
the market and thus would weaken the market signal function of RIN
prices. For example, the RIN price is used by obligated parties to
estimate the compliance cost they need to recover through their fuel
pricing, by biofuel producers to gauge supply and demand of the biofuel
market, and by downstream parties to decide whether to build out more
blending infrastructure. Curtailed market liquidity could weaken
everyone's ability to react to the market effectively.
Some stakeholders have also provided comment to EPA outside of the
2019 RVO rulemaking about how this reform would harm them and their
business operations directly. Specifically, we heard from some non-
obligated parties who play a large role in the existing fuel market by
blending biofuel with petroleum-based fuel and moving the blended fuel
downstream to retailers. These blenders enter into term contracts with
obligated parties for delivery of a specific quantity of RINs at the
end of the contract period. Blenders base their commitment on expected
fuel blending volumes, which relate to expected fuel production and
fuel demand. However, if fuel production or demand fell shorter than
expected, RIN separation by the blender would also fall short. In order
to meet its contractual obligation in this situation, the blender would
have to buy separated RINs on the RIN market. A reform that prohibited
blenders from buying separated RINs would require blenders and their
obligated party counter-parties to restructure the RIN delivery
guarantees in the current contracts. Therefore, some of these blenders
have expressed concern with the harm to them and the operation of the
RFS program that this reform could cause. They've also highlighted the
asymmetry this would create in the fuels system between refineries and
blenders; blenders who fall short of their RIN supply contracts with
refineries would not be able to fill the gap while refineries who fall
short of their petroleum-based fuel contracts with blenders would be
able to fill the gap by purchasing gasoline, diesel, or blendstock on
the market as needed. Therefore, they characterize a reform that
prohibits them from purchasing separated RINs as creating an uneven
playing field in the fuels industry.
For all of the reasons listed above, we are not proposing to
prohibit all but obligated parties from purchasing separated D6 RINs
because we recognize that doing so could cause harm to parties, the D6
RIN market, and to the RFS program. Thus, our proposal to limit this
reform reflects a weighing of the beneficial aspects of deterring
potential market manipulation against the potential negative
consequences on the RFS program. We seek comment on these potential
consequences as well as comments on alternative approaches to implement
this reform.
b. Scope
We are proposing to limit the scope of this reform to D6 RINs only.
D6 RINs are the D-code about which we have heard concerns related to
hoarding and market manipulation. In order to limit any unintended
consequences of this action, we believe it is sensible to limit this
action to D6 RINs. For example, we believe that it would be very
challenging to restrict the purchasing of separated D3 RINs because D3
RINs generated from biogas to fuel natural gas vehicles are generated
at the same time as they are separated; it would not be possible to
distinguish parties who own a D3 RIN from parties who separated it. We
seek comment on our narrow application of this reform to D6 RINs only
and on concerns of anti-competitive behavior related to the purchasing
of other D-code RINs.
In this action, we are proposing that obligated parties as well as
a limited set of non-obligated parties would be allowed to purchase
separated D6 RINs freely. We considered a firm prohibition on all
transactions of all parties other than obligated parties from
purchasing D6 RINs, but we believe that certain limited situations
involving non-obligated parties should continue to be allowed for the
RFS to function properly. We outline those situations and allowances
below.
First, we are proposing that a party that is a corporate affiliate
or a contractual affiliate, as proposed at 40 CFR 80.1401, to an
obligated party would be allowed to execute a separated D6 RIN purchase
transaction. This would include a party that is owned more than 20
percent by an obligated party or that owns more than 20 percent of an
obligated party. This would also include a party that has an agreement
to deliver RINs to an obligated party. Based on discussions with some
obligated parties, we believe that they routinely contract with third-
parties, such as traders, to deliver separated D6 RINs. We have also
learned, as described in Section III.E.3.a, that some non-obligated
parties routinely commit under contract to deliver D6 RINs to obligated
parties based on their anticipated future blending volumes and must
purchase separated D6 RINs on the market to satisfy the contract if
their blending volumes fall short. We believe all of these contractual
transactions are helpful to obligated parties and that obligated
parties, the
[[Page 10620]]
very parties this reform is attempting to protect, would be harmed if
these types of contractual transactions were prohibited.
Second, we are proposing that non-obligated parties needing to
replace invalid RINs would also be allowed to purchase separated RINs
for that purpose. Parties that generate renewable fuel with RINs
attached sometimes make errors in their renewable fuel and RIN
calculations, and blenders that purchase RINs attached to renewable
fuel sometimes learn too late that the RINs they've acquired are
fraudulent or erroneous. We believe that the most straightforward and
practical way to allow these parties to stay compliant with the RFS
program is to continue to allow them to replace invalid RINs by
purchasing new separated RINs from the market.
Third, we are proposing that exporters of renewable fuel that
needed D6 RINs to satisfy their exporter RVOs according to 40 CFR
80.1430 would be allowed to purchase separated D6 RINs in these limited
situations. Parties that export conventional fuel blended with
renewable fuel must acquire and retire RINs to account for the portion
of their exported product that is renewable fuel. These exporters do
not necessarily receive, generate or separate RINs, so they need
another way to acquire RINs in order to comply with the program.
Ultimately, we believe that our proposal would successfully exclude
from the RIN market those parties that serve no function in the fuels
market and that may enter the RIN market for speculative or
manipulative reasons only. We seek comment on providing allowances in
this reform, including whether doing so would create any gaming
opportunities and, if so, how that could be avoided. For example, a
non-obligated party could create a contract with an obligated party at
a minimum level as a way to game this reform. We seek comment on how we
could tighten this reform but still allow enough compliance flexibility
for obligated parties with contractual relationships with non-obligated
parties. We also seek comment on the appropriateness of these
allowances and on any other limited situations, in which non-obligated
parties should be allowed to purchase separated D6 RINs.
We recognize that a reform prohibiting non-obligated parties from
certain activities could create strong incentives for non-obligated
parties to become obligated parties. This can be done relatively easily
by importing a small volume of fuel or blending small volumes of
blendstock to produce fuel. This type of gaming could circumvent the
entire purpose of this reform and create a sizable implementation
burden on EPA to no avail. We seek comment on ways this gaming could be
prevented should we finalize this reform, including limiting the number
of separated D6 RINs that importers, blender refiners, and non-
obligated parties exempted from this prohibition can purchase. This is
similar to the limitation we placed on the ability of certain obligated
parties to separate RINs under 40 CFR 80.1429(b)(9).
c. Reporting and Recordkeeping
As described in Section III.E.1.h, we are proposing to add a yes/no
field on the D6 RIN holding threshold to the RIN Activity Report that
all RIN holding parties already submit to EPA quarterly. Since all RIN
holding parties already submit these reports quarterly, we believe the
incremental reporting burden of filling out a new threshold field would
be minimal. In order to maintain compliance oversight of this RIN
purchasing restriction on non-obligated parties, we are proposing to
also add a field to the quarterly RIN Activity Report on whether a non-
obligated party purchased D6 RINs in the quarter. If the non-obligated
party reported purchasing any amount of separated D6 RINs, it would
then have to report whether a valid reason (e.g., invalid RINs,
exports, contract with obligated party) applied. As with the threshold
field, we believe it would be important for parties to certify that
they were in compliance with this proposed provision. We are also
proposing that non-obligated parties would be required to keep all
applicable records related to this restriction, such as actual
contracts with obligated parties or evidence of invalid RINs and make
those records available to their attest engagement auditor. The auditor
would review the records and confirm that the party made the proper
calculations and reported accurately to EPA on compliance with the
proposed provision. We seek comment on this proposed approach to
compliance oversight.
d. Alternative Approaches Considered
In addition to the specific reform we are proposing to restrict to
certain parties the ability to purchase separated D6 RINs, we seek
comment on alternatives that also meet the objective of this reform in
the President's Directive but in a more simple and direct way. We
recognize that prohibiting a class of parties from taking an action but
then carving out a list of exceptions to that prohibition has the
potential to be confusing and unwieldy. Instead of the reform that we
are proposing, an alternative approach to accomplishing the intended
goals of this reform objective could be to rely only on the first
reform discussed in Section III.E.1. Rather than restricting who could
purchase and who could sell to whom, we could address the concern that
non-obligated parties might hoard RINs only by imposing a limit on
their D6 RIN holding. The holding limit specifically on non-obligated
parties could be lower than the three percent of the annual
conventional biofuel volume requirement proposed. We seek comment on
these alternatives and on any other alternatives commenters recommend.
4. Reform Four: Limiting Duration of RIN Holdings by Non-Obligated
Parties
The fourth potential reform from the President's Directive that we
address in this action is limiting the duration a non-obligated party
can hold RINs. In Section III.E.3, we describe our proposal to restrict
certain non-obligated parties from purchasing separated RINs but still
allowing them to own separated RINs that they acquire by blending
renewable fuel into petroleum-based fuel. This fourth reform would
restrict non-obligated parties further by limiting how long they could
hold the separated RINs acquired at blending. The concept behind this
reform is to require non-obligated parties to inject their RINs into
the market soon after acquiring them to maximize liquidity for
obligated parties who need the RINs for compliance.
Under this reform, we are proposing a limit on the duration that a
non-obligated party can hold separated D6 RINs. Specifically, we are
proposing that a non-obligated party must sell or retire as many RINs
as it obtained in a quarter by the quarter's end. For example, both a
RIN separated on January 1 and a RIN separated on March 31 would each
need to be offset by a RIN sale in the first quarter. The proposed
provision would not apply to potentially invalid D6 RINs that are
required to be held and prohibited from being sold. This proposed
provision would not apply to obligated parties. Additional information
on calculations and reporting are discussed in more detail in Section
III.E.4.e.
The potential anti-competitive behavior related to non-obligated
parties holding RINs that would be avoided with this action is the
potential to accumulate enough RINs to gain market power and then use
that market power to manipulate the price of RINs. We note that such
market power is also addressed by the public disclosure reform outlined
in Section III.E.1. However, we are additionally proposing
[[Page 10621]]
to limit the duration that non-obligated parties can hold separated
RINs in this action as an alternative or additional method to address
this concern. We seek comment on the value of limiting the duration
that a non-obligated party can hold separated RINs, and specifically on
whether it adds any safeguards against manipulative behavior beyond the
public disclosure reform.
Some obligated parties have complained that blenders routinely
withhold separated RINs from the market until the price is high enough
to secure a large profit. We note that such actions are not necessarily
price manipulation or evidence of anti-competitive behavior.
a. Implications and Discussion
As described above, this reform would limit the duration that a
non-obligated party could hold a D6 RIN and would therefore interfere
with attempts at increasing its market power. This reform could also
increase the availability of D6 RINs on the market for obligated
parties who want or need to acquire RINs for quarterly retirement. A
final benefit of this reform is that it provides symmetry to the
quarterly RIN retirement requirement for obligated parties as discussed
in Section III.E.2; that reform would increase the frequency of D6 RIN
demand and this reform would increase the frequency of D6 RIN supply.
This reform could also have harmful consequences for some parties
in the market. At an even more basic level, a fuel blender with
separated RINs to sell may not be able to find a party willing to buy
those RINs at the time of blending. Therefore, a duration limit that is
set too short could take too much flexibility away from non-obligated
parties and make it difficult for them to participate in the RIN
system. As such, we have proposed a duration limit of a quarter that we
believe minimizes the risk of causing harm to parties in the RIN
system.
Finally, we note that non-obligated parties who want to evade the
duration limit for holding separated RINs could easily take the minimal
action necessary to become an obligated party. For example, a blender
could easily blend a small volume of blending stocks to produce
gasoline or diesel or import a small volume of petroleum-based fuel in
order to become an obligated party. As an obligated party, the blender
would no longer be subject to a restriction on how long it could hold
its RINs. While such gaming would not directly harm any party or the
RIN market, it could harm the integrity of the program if done widely
and could increase the implementation and oversight burden on EPA. We
seek comment on the implications of such gaming and on any ideas to
prevent it, including imposing the duration limit on RINs held by
importers and blender refiners that are in excess of their RVO
requirements. This is similar to the limitations we placed on the
ability of these obligated parties to separate RINs under 40 CFR
80.1429(b)(9).
b. Scope
We are proposing to limit the scope of this reform to D6 RINs only.
D6 RINs are the only D-code about which we have heard concerns related
to hoarding and market manipulation. In order to limit any unintended
consequences of this action, we believe it is sensible to limit the
type of RIN it applies to while still meeting the objective of the
reform. For example, since most D3 RINs are generated only once a
month, we believe parties might need more flexibility on the time
between RIN generation and RIN sale than other D-codes. Furthermore, D4
RINs attached to biodiesel produced by a small or unknown company may
not be well received on the market, so a non-obligated party that
blends such biodiesel into petroleum-based diesel and separates such D4
RINs might need time to find a willing buyer. A restriction on how long
they can hold such D4 RINs before selling could upset the balance in
purchase negotiations and force non-obligated parties to sell these D4
RINs at significantly discounted prices to stay in compliance with this
proposed regulation. We seek comment on our narrow application of this
reform to D6 RINs only and on concerns of anti-competitive behavior
related to the purchasing of other D-code RINs.
We are also proposing that separated D6 RINs that are potentially
invalid would not be accounted for by a non-obligated party in its
count of D6 RINs separated in a quarter. A party would leave those D6
RINs out of the count of D6 RINs it would have to sell or retire. The
non-obligated party would continue to be subject to the requirements at
40 CFR 80.1431.
c. Duration
Although we did not identify this reform concept in the list of
reforms under EPA consideration in the 2019 RVO proposal, several
parties proactively commented on this concept. Some commenters
suggested a 30-day duration, others suggested 60 days, and still others
suggested 90 days. We considered each of these potential durations and
decided to propose in this action a 90-day cycle, whereby the number of
separated D6 RINs that a non-obligated party would be required to sell
or retire in a quarter would be number of separated D6 RINs that the
party separated or purchased in that same quarter. Requiring non-
obligated parties to sell RINs by the end of the quarter would have the
significant benefit of matching the quarterly RIN retirement cycle that
would be required of obligated parties under this Section III.E.2 of
this action. Coordinating these two frequencies may help maintain
equilibrium in the RIN market and create equity among all RIN system
participants. We seek comment on the appropriateness of this duration
and of any other potential durations. We note that the reform proposed
under Section III.E.2 would require RIN retirement of only 80 percent
of the renewable fuel standard, so we seek comment on whether the RIN
holding duration should only apply to 80 percent of RINs separated or
purchased in order to better align the two reforms.
d. Implementation
In this action, we are proposing that a non-obligated party would
be required to count the total number of RINs it separated or purchased
each quarter and sell or retire that many total RINs by the end of the
same quarter. For example, a non-obligated party would count the total
number of RINs it separated or purchased between January 1 and March 31
of a given year and then would sell or retire that many RINs between
January 1 and March 31 of that year. This approach would meet the
intention of this reform to prevent RIN hoarding and increase liquidity
without getting stuck needlessly in the details of which specific RIN
is being sold. It would also allow non-obligated parties the
flexibility to hold onto some D6 RINs that may be more difficult to
sell for a longer period of time, provided they are selling an equal
number of D6 RINs by the established deadline. We are also proposing
that, for a non-obligated party, any D6 RINs acquired in one quarter
through a remedial action with an EPA-generated separation date in the
previous quarter would add the D6 separated RINs to its separated total
for the current quarter.
We also considered a slightly longer period between RIN separation
and sale in which a non-obligated party would be required to count the
number of RINs it separated each quarter and sell at least that many
RINs in that quarter and the following quarter. For example, a non-
obligated party that sold 100 RINs between January 1 and March 31 would
[[Page 10622]]
have to sell at least 100 RINs between January 1 and June 30. RINs
separated on January 1 would need to be sold within 180 days and RINs
separated on March 31 would need to be sold within 90 days. Such a
scheme would create overlapping periods, however, in which the same RIN
sale could be counted towards two different quarterly requirements. We
ultimately decided to propose a quarterly requirement, but we seek
comment on this alternative approach.
We also considered an approach that would initiate a 90-day
expiration timer for each separated RIN batch on the day it is
separated by a non-obligated party. Under this design, a blender would
need to sell each RIN or batch of RINs within 90 days of separating it
from the underlying renewable fuel. However, such an implementation
scheme would place a large burden on non-obligated parties to keep
track of multiple expiration timers, possibly dozens or hundreds at a
time. It would also be very costly, if not infeasible, for EPA to
update EMTS to track so many individual expiration deadlines, which
across the entire system could total in the thousands or millions at
any given time. A slightly more manageable version that we considered
but are not proposing would be to require that an individual RIN
separated in one quarter by a blender be sold by that blender by that
quarter's compliance deadline for obligated parties. This approach
would still tag each RIN or RIN batch with an expiration date, but the
same expiration date would be applied to all RINs generated in the
quarter. This approach would result in a total of four expiration dates
a year across the whole RIN system for EPA to keep track of rather than
thousands or millions. However, we believe that any approach that
requires EMTS to tag individual RINs or RIN batches with a specific
date would be technically infeasible. We seek comment on the proposed
approach and on any other alternative approaches that commenters
recommend.
The approach we are proposing, if finalized, as well as all of the
other approaches considered, would allow a non-obligated party to
maintain the RIN holdings it would have on the day before the effective
date of this reform. This aspect of the reform could incentivize non-
obligated parties to build up their RIN holdings in advance of the
final rule effective date, which would be counter to the goal of this
reform. We seek comment on an approach to addressing this concern.
We are proposing that all non-obligated parties would be subject to
this D6 RIN holding duration limit, with no exception. For the third
reform discussed in Section E.III.3, we are proposing situations that
should be excluded from its restriction, namely situations in which
exporters would need to satisfy export RVOs, non-obligated parties
would need to replace invalid RINs, and non-obligated parties would
need to satisfy contract terms with obligated parties. We believe those
exceptions are warranted because they either allow parties to meet the
RFS requirements or because they help the RFS program run smoothly for
obligated parties. For the reform discussed in this section, however,
we do not believe that any exceptions are necessary. For example, a
non-obligated party that needs D6 RINs to satisfy a contract with an
obligated party could still do so while meeting the holding duration
limit. We seek comment on whether any exceptions to this reform would
be warranted, and if so which exceptions and why.
e. Reporting and Recordkeeping
In order to maintain compliance oversight of this RIN holding
duration reform on non-obligated parties, we propose in this action to
add a field to the quarterly RIN Activity Report on whether the
proposed D6 RIN holding duration limit was exceeded in the quarter. We
are also proposing that the attest engagement auditor would review the
D6 RIN separation and sales numbers and confirm that the parties made
the proper calculations and reported accurately to EPA on compliance
with the proposed provision. This proposed approach to reporting,
recordkeeping, and compliance oversight is similar to our proposals for
the first and third reforms discussed in this action. We seek comment
on this proposed approach to compliance oversight.
5. Enhancing EPA's Market Monitoring Capabilities
In addition to the four reforms proposed in this action, we are
considering taking additional steps to enhance our market monitoring
capabilities in order to better detect potential market manipulation.
The items listed below represent options we are currently considering,
and we welcome public input on any aspects related to enhancing our
data collections, enhancing our data systems, and/or seeking third-
party RIN market surveillance assistance. We are also seeking comment
on how these options could work in conjunction with the four reforms
outlined in Sections III.E.1-4.
a. Enhance Data Collection
Monitoring a commodities market as large and complex as the RIN
market requires a substantial amount of market data. We currently
require parties to submit some data under the RFS related to RIN
trades. These data include trade prices, RIN volumes traded, and the
parties involved in the transaction. These current data collections can
be used to assess the RIN market for manipulative activities, but we
recognize that we have an opportunity in this action to diversify the
data we collect to enhance our ability to monitor the market. We also
recognize the importance of balancing the benefits of additional data
with the burden imposed both on the regulated industry and EPA of
reporting and handling the data. Considering these factors, we are
requesting comment on additional data collections that would enhance
our ability to monitor the RIN market for instances of manipulation.
As described in Section III.E.1, we are proposing that parties
would be required to report to EPA when their aggregate RIN holdings,
including holdings of corporate affiliates, exceed a specified
threshold. In order to provide meaning to this proposed reform and to
enhance our market monitoring capabilities, we are proposing in this
section that auditors would include in their annual attest engagements
submitted to EPA by June 1 following the compliance year the names of
the party's corporate and contractual affiliates in the compliance
year. Parties that meet both definitions would need to be identified in
both categories.\193\ Given the complexity of contracts and RIN
transactions, it is very challenging for EPA to confirm whether parties
have common ownership and whether any group of corporate affiliates
reached a level of aggregated D6 RIN holdings in a compliance year that
would trigger the thresholds established in Section III.E.1 of this
action. Therefore, we believe we need to collect information on
corporate affiliates to allow us to properly conduct oversight of the
RIN market. We are also proposing that this list would contain the
names of contractual affiliates so that we could maintain some insight
into any additional market share parties could have control over. We
note that this list would include parties that are not registered with
EMTS to hold RINs. While only registered affiliates are included in the
threshold equations in
[[Page 10623]]
Section III.E.1 for simplicity, we believe we need a wider picture of
affiliations to, for example, monitor for a non-registered party that
has established contracts with multiple parties to purchase and own a
large number of aggregated RINs on its behalf. We would treat these
lists as CBI and would not make them publicly available. We recognize
that there may be challenges that we may not be aware of for parties to
disclose this information to auditors and for auditors to pass it along
to EPA, and therefore we are seeking comment on any potential concerns
and how these concerns may outweigh the benefits of adding this data to
market oversight.
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\193\ For diagrams and examples of different types of
affiliates, see the memorandum, ``Affiliates and Groups Definitional
Relationship and Requirements,'' available in the docket for this
action.
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We are also proposing amendments to 40 CFR 80.1452(c)(12) to
specify how parties report prices of RIN transactions to EPA.
Currently, some RIN prices reported are illogical numbers, so we are
providing further instruction on how to report the true price
correctly. Specifically, we are proposing that a per gallon RIN price
would be required for a separated RIN transaction and that a price of
$0.00 would only be allowed for intracompany and tolling agreement
transactions. We are also seeking comment on any other legitimate
reasons for reporting a $0.00 RIN price besides the reasons identified
above.
We are also planning to update business rules in EMTS to require
that both parties in a RIN transaction enter the same RIN price. EMTS
already has a business rule that requires both parties in a RIN
transaction to enter the same RIN volume, and this business rule has
been very helpful in maintaining high quality volume data that we can
reliably publish and use for compliance oversight. These and other
business rules prevent data entry errors and prompt parties that
haven't properly followed the instructions in the regulations to
correct their numbers. By adding a similar business rule to EMTS on
prices, we believe we can prevent reporting errors and improve the
quality and reliability of our price data.
Finally, we are proposing to update the transaction type options at
40 CFR 80.1452(c)(6) to capture whether a RIN transaction is the result
of a spot trade or of delivery from a term contract. We believe that
collecting this additional information will improve our understanding
of the RIN price reported because we will know whether the price was
established on the transaction date or sometime prior. With this
information in hand, we could filter term contract prices out of the
RIN price dataset that we publish and analyze internally for compliance
oversight. Thus, the published price would be a better reflection of
market prices on a given day. We seek comment on this updated reporting
requirement.
b. Third-Party Market Monitoring
We are considering whether we should employ third-party monitoring
of the RIN market. We are aware of other environmental commodity
markets that employ third-party market monitoring services to conduct
analysis of the market, including screening for potential anti-
competitive behavior or market manipulation. For example, the Western
Climate Initiative, Inc. provides administrative services to the linked
cap and trade programs in Quebec and California, including managing a
contract with a company that provides independent marketing monitoring
for the jurisdictions.\194\ Quebec and California each maintain market
monitoring capabilities to oversee the joint market. In addition, RGGI
contracts with a third-party to monitor its CO2 allowance
trading market and produce and publish quarterly and annual reports
summarizing their findings.\195\ We believe additional RIN market
oversight and monitoring from an independent third-party could serve as
a deterrent to manipulative behavior and increase market transparency,
enabling the market to more easily function as designed. However, we
also recognize this added feature would come at a cost that may or may
not outweigh the benefits. For example, there would be additional
financial and staff time costs to manage the contracts and system with
the third party, including ensuring proper data security, transfer, and
training that would divert EPA's already limited resources away from
the many high priority areas under the RFS program. Therefore, we are
seeking comment on whether we should consider employing third-party
monitoring of the RIN market, including production of market analysis
reports and how to share findings in these reports and still protect
confidential business information.
---------------------------------------------------------------------------
\194\ See ``Annual Report 2017 Activities and Accomplishments''
(May 1, 2018), available at http://www.wci-inc.org/docs/Attachment%206a.%20WCI_Inc_2017_Annual_Report_Final.pdf.
\195\ See ``Annual Report on the Market for RGGI CO2
Allowances: 2017'' (May 2018), available at https://www.rggi.org/auctions/market-monitor-reports.
---------------------------------------------------------------------------
F. RIN Market Reform Economic Impacts
1. Benefits of RIN Market Reform
The goal of the proposed reforms is to discourage or help prevent
anti-competitive market practices that may introduce uncertainty or
volatility into the RIN market. If these anti-competitive behaviors
were to occur in the RIN market, then it comes at a cost to both
obligated parties and biofuel producers if the prices are artificially
inflated or deflated. Therefore, if the proposed reforms deliver on
their intended goal, we believe the net benefit of this should help
reduce undue costs and lower the risks for both obligated parties and
renewable fuel producers. These proposed reforms also provide the added
benefit of increasing transparency into the RIN market. In general,
true commodities markets function optimally when all participants have
access to as much information possible, without infringing on
confidential business information, and this information is disseminated
or shared with all parties at the same time. This helps create a level
playing field and minimize any potential advantage one party may have
over the another. The net benefit of greater transparency helps market
participants, such as obligated parties, plan short- and long-term
strategies to manage their compliance costs.
2. Costs of RIN Market Reform
As detailed in Sections III.E.1-4, we are proposing to require
additional reporting and recordkeeping for obligated parties under the
RFS program and non-obligated parties that participate in the RIN
market. As a result, we expect modest costs associated with these new
requirements.\196\ Specifically, we anticipate new costs associated
with reporting and recordkeeping requirements related to RIN holdings,
affiliated parties, increased compliance frequency, and any other data
elements EPA collects as informed by Section III.E.5.a. We also
anticipate some costs associated with prohibiting certain non-obligated
parties from purchasing separated D6 RINs. Many of these parties have
developed business models and enter into contracts that may require
them to leverage the ability to purchase separated D6 RINs on spot
markets. Prohibiting this practice would require that these parties
adjust their business models.
---------------------------------------------------------------------------
\196\ For a quantitative breakdown of new recordkeeping and
reporting burden imposed by this action, see ``ICR _Detailed Burden
Tables'' and ``E15 RVP RIN Market Reform Rule ICR _Supporting
Statement'' materials in the docket for this action.
---------------------------------------------------------------------------
G. Conclusion
On October 11, 2018, President Trump issued a White House statement
explaining that EPA was being directed to initiate a rulemaking.
Consequently, in this action, we are proposing
[[Page 10624]]
regulatory changes in line with the President's Directive that could
serve to prevent anti-competitive behavior from potentially taking root
in the future.
In Section III.E.1, we are proposing to set two thresholds that
would work in tandem to identify parties with separated D6 RIN holdings
significantly larger than needed for normal business functions and
which may indicate an attempt to assert inappropriate market power.
Although we are not proposing that exceeding the threshold would be a
prohibited act, we are proposing that we would publish on our website
the names of any parties that reported exceeding the thresholds. We are
also proposing that the RIN holdings of corporate affiliates be
included in a party's threshold calculations. In Section III.E.2, we
are proposing to establish RIN retirement requirements for the first
three quarters of the compliance year. Obligated parties could use any
D-code RINs to do so. This reform would not impact the current annual
RVO calculations or compliance. In Section III.E.3, we are proposing
that only obligated parties, exporter, and certain non-obligated
parties be allowed to purchase separated D6 RINs. Non-obligated parties
would be exempt from this proposed restriction if they were a corporate
or contractual affiliate to an obligated party. In Section III.E.4, we
are proposing a limit on the duration that a non-obligated party could
hold separated D6 RINs. Specifically, we are proposing that a non-
obligated party would be required to sell or retire as many RINs as it
obtained in a quarter by the end of that quarter. In Section III.E.5,
we outline our consideration of taking additional steps to enhance our
market monitoring capabilities. We discuss the possibility of employing
a third-party market monitor to conduct analysis of the RIN market,
including screening for potential anti-competitive behavior.
Overall, we are proposing to amend existing reports to collect
quarterly RIN retirement information and information on whether the
proposed D6 RIN holding thresholds were exceeded and whether the
proposed requirements on purchasing and holding separated D6 RINs were
met. We are proposing that parties would keep all records related to
these reporting requirements and would submit them to auditors for the
attest engagement process. In particular, we are proposing that each
party would submit a complete list of its corporate and contractual
affiliates to the auditor for review and that the auditor would submit
that list to EPA with its attest engagement report. Finally, we are
proposing enhancements to existing reporting fields in EMTS to improve
our RIN price data for analysis.
We are seeking comment on all of the reform details proposed in
this action, including the proposed reporting and recordkeeping
requirements. We also seek comment on means to reduce the burden of
implementation of these reforms, including on small entities. We are
not seeking comment on the many elements of the RFS program that are
not proposed for amendment in this action, and those program elements
and regulatory provisions are outside the scope of this action.
IV. Statutory and Executive Order Reviews
A. Executive Order 12866: Regulatory Planning and Review and Executive
Order 13563: Improving Regulation and Regulatory Review
This action is a significant regulatory action that was submitted
to the Office of Management and Budget (OMB) for review. Any changes
made in response to OMB recommendations have been documented in the
docket.
B. Executive Order 13771: Reducing Regulations and Controlling
Regulatory Costs
This action is not expected to be an Executive Order 13771
regulatory action. Details on the estimated costs of this proposed rule
can be found in EPA's analysis of the potential costs and benefits
associated with this action.
C. Paperwork Reduction Act (PRA)
With respect to the E15 1-psi waiver portion of this action, no new
information collection burden is imposed under the PRA. OMB has
previously approved the information collection activities contained in
the existing regulations and has assigned OMB control number 2060-0675.
The proposed changes to the regulations would remove a small segment of
language on PTDs required to be generated and kept as records by
parties that make and distribute gasoline under the regulations at 40
CFR part 80, subpart N. These proposed changes would not require any
additional information from regulated parties nor do we believe that
these proposed changes would substantively alter practices used by
regulated parties to satisfy the PTD regulatory requirements.
The information collection activities related to the RIN market
reform portion of this proposed rule have been submitted for approval
to OMB under the PRA. The Information Collection Request (ICR) document
that EPA prepared has been assigned EPA ICR number 2592.01. You can
find a copy of the ICR in the docket for this rule, and it is briefly
summarized here.
This ICR includes all additional RFS related information collection
activities resulting from the Modifications to Fuel Regulations to
Provide Flexibility for E15; Modifications to RFS RIN Market
Regulations proposed rulemaking. These information collection
activities include new recordkeeping and reporting requirements
proposed under 40 CFR part 80, subpart M.
Respondents/affected entities: The respondents to this information
collection fall into the following general industry categories:
Petroleum refineries, ethyl alcohol manufacturers, other basic organic
chemical manufacturing, chemical and allied products merchant
wholesalers, petroleum bulk stations and terminals, petroleum and
petroleum products merchant wholesalers, gasoline service stations, and
marine service stations.
Respondent's obligation to respond: Mandatory.
Estimated number of respondents: 22,119.
Frequency of response: Quarterly, annually.
Total estimated burden: 216,891 hours (per year). Burden is defined
at 5 CFR 1320.3(b).
Total estimated cost: $20,445,451 (per year).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number. The OMB control numbers for EPA's
regulations in 40 CFR are listed in 40 CFR part 9.
Submit your comments on the Agency's need for this information, the
accuracy of the provided burden estimates and any suggested methods for
minimizing respondent burden to EPA using the docket identified at the
beginning of this rule. You may also send your ICR-related comments to
OMB's Office of Information and Regulatory Affairs via email to
[email protected], Attention: Desk Officer for EPA. Since OMB
is required to make a decision concerning the ICR between 30 and 60
days after receipt, OMB must receive comments no later than April 22,
2019. EPA will respond to any ICR-related comments in the final rule.
D. Regulatory Flexibility Act (RFA)
I certify that this action will not have a significant economic
impact on a substantial number of small entities under the RFA. In
making this determination, the impact of concern is
[[Page 10625]]
any significant adverse economic impact on small entities. An agency
may certify that a rule will not have a significant economic impact on
a substantial number of small entities if the rule relieves regulatory
burden, has no net burden or otherwise has a positive economic effect
on the small entities subject to the rule.
With respect to the E15 1-psi waiver portion of this action, the
proposed regulatory changes do not substantively alter the regulatory
requirements on parties that make and distribute gasoline.
Additionally, the proposed interpretation to allow E15 to receive the
1-psi waiver would allow parties that make and distribute E15,
including small entities, more flexibility in the summer to satisfy
market demands.
With respect to the proposed RIN market reform provisions of this
action, we have conducted a screening analysis to assess whether we
should make a finding that this action will not have a significant
economic impact on a substantial number of small entities.\197\ As
detailed in that analysis, we believe that the existing flexibilities
for small entities provide sufficient compliance flexibility and no
additional flexibilities are necessary.
---------------------------------------------------------------------------
\197\ See ``Screening Analysis for the Proposed Modifications to
RFS RIN Market Regulations,'' available in the docket for this
action.
---------------------------------------------------------------------------
We have therefore concluded that this action will have no net
regulatory burden for all directly regulated small entities.
E. Unfunded Mandates Reform Act (UMRA)
This action does not contain an unfunded mandate of $100 million or
more as described in UMRA, 2 U.S.C. 1531-1538, and does not
significantly or uniquely affect small governments. This action
implements mandates specifically and explicitly set forth in CAA sec.
211 and we believe that this action represents the least costly, most
cost-effective approach to achieve the statutory requirements.
F. Executive Order 13132: Federalism
This action does not have federalism implications. It will not have
substantial direct effects on the states, on the relationship between
the national government and the states, or on the distribution of power
and responsibilities among the various levels of government.
G. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
This action does not have tribal implications as specified in
Executive Order 13175.
H. Executive Order 13045: Protection of Children From Environmental
Health Risks and Safety Risks
EPA interprets Executive Order 13045 as applying only to those
regulatory actions that concern environmental health or safety risks
that EPA has reason to believe may disproportionately affect children,
per the definition of ``covered regulatory action'' in section 2-202 of
the Executive Order. This action is not subject to Executive Order
13045 because it does not concern an environmental health risk or
safety risk.
I. Executive Order 13211: Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
This action is not a ``significant energy action'' because it is
not likely to have a significant adverse effect on the supply,
distribution or use of energy. The flexibility provided to E15 blends
by this action will enable additional supply of energy but are not
expected to have an immediate significant effect on supply,
distribution, or use of energy. The modifications to the RFS compliance
system are not expected to have a significant effect on supply,
distribution, or use of energy.
J. National Technology Transfer and Advancement Act (NTTAA)
This rulemaking does not involve technical standards.
K. Executive Order 12898: Federal Actions To Address Environmental
Justice in Minority Populations and Low-Income Populations
EPA believes that this action does not have disproportionately high
and adverse human health or environmental effects on minority
populations, low income populations, and/or indigenous peoples, as
specified in Executive Order 12898 (59 FR 7629, February 16, 1994).
This proposed rule does not affect the level of protection provided to
human health or the environment by applicable air quality standards.
This action does not substantially relax the control measures on
sources regulated by EPA fuels programs and therefore will not cause
emissions increases from these sources.
V. Statutory Authority
Statutory authority for this action comes from section 211 of the
Clean Air Act, 42 U.S.C. 7545. Additional support for the procedural
and compliance related aspects of this proposed rule comes from
sections 114, 208, and 301(a) of the Clean Air Act, 42 U.S.C. 7414,
7542, and 7601(a).
List of Subjects in 40 CFR Part 80
Environmental protection, Fuel additives, Gasoline, Labeling, Motor
vehicle pollution, Penalties, Reporting and recordkeeping requirements.
Dated: March 12, 2019.
Andrew Wheeler,
Administrator.
For the reasons set forth in the preamble, EPA proposes to amend 40
CFR part 80 as follows:
PART 80--REGULATION OF FUEL AND FUEL ADDITIVES
0
1. The authority citation for part 80 continues to read as follows:
Authority: 42 U.S.C. 7414, 7521, 7542, 7545, and 7601(a).
Subpart B--Controls and Prohibitions
0
2. Section 80.27 is amended by revising paragraph (d)(2) to read as
follows:
Sec. 80.27 Controls and prohibitions on gasoline volatility.
* * * * *
(d) * * *
(2) In order to qualify for the special regulatory treatment
specified in paragraph (d)(1) of this section, gasoline must contain
denatured, anhydrous ethanol. The concentration of the ethanol,
excluding the required denaturing agent, must be at least 9% and no
more than 15% (by volume) of the gasoline. The ethanol content of the
gasoline shall be determined by the use of one of the testing
methodologies specified in Sec. 80.47. The maximum ethanol content
shall not exceed any applicable waiver conditions under section 211(f)
of the Clean Air Act.
* * * * *
0
3. Section 80.28 is amended by revising paragraphs (g)(6)(iii), (g)(8)
introductory text, and (g)(8)(ii) as follows:
Sec. 80.28 Liability for violations of gasoline volatility controls
and prohibitions.
* * * * *
(g) * * *
(6) * * *
(iii) That the gasoline determined to be in violation contained no
more than 15% ethanol (by volume) when it was
[[Page 10626]]
delivered to the next party in the distribution system.
* * * * *
(8) In addition to the defenses provided in paragraphs (g)(1)
through (g)(6) of this section, in any case in which an ethanol
blender, distributor, reseller, carrier, retailer, or wholesale
purchaser-consumer would be in violation under paragraphs (b), (c),
(d), (e) or (f), of this section, as a result of gasoline which
contains between 9 and 15 percent ethanol (by volume) but exceeds the
applicable standard by more than one pound per square inch (1.0 psi),
the ethanol blender, distributor, reseller, carrier, retailer or
wholesale purchaser-consumer shall not be deemed in violation if such
person can demonstrate, by showing receipt of a certification from the
facility from which the gasoline was received or other evidence
acceptable to the Administrator, that:
* * * * *
(ii) The ethanol portion of the blend does not exceed 15 percent
(by volume); and
* * * * *
Subpart M--Renewable Fuel Standard
0
4. Section 80.1401 is amended by adding in alphabetical order
definitions for ``Contractual affiliate,'' ``Corporate affiliate,''
``Corporate affiliate group,'' ``DX RIN,'' and ``End of Day'' to read
as follows:
Sec. 80.1401 Definitions.
* * * * *
Contractual affiliate means one of the following:
(1) Two parties are contractual affiliates if they have an explicit
or implicit agreement in place for one to purchase or hold RINs on
behalf of the other or to deliver RINs to the other. This other party
may or may not be registered under the RFS program.
(2) Two parties are contractual affiliates if one RIN-owning party
purchases or holds RINs on behalf of the other. This other party may or
may not be registered under the RFS program.
* * * * *
Corporate affiliate means one of the following:
(1) Two parties are corporate affiliates if one owns or controls
ownership of more than 20 percent of the other.
(2) Two parties are corporate affiliates if one parent company owns
or controls ownership of more than 20 percent of both.
Corporate affiliate group means a group of parties in which each
party is a corporate affiliate to at least one other party in the
group.
* * * * *
DX RIN means a RIN with a D code of X, where X is the D code of the
renewable fuel as identified under Sec. 80.1425, generated under Sec.
80.1426, and submitted to EMTS under Sec. 80.1452. For example, a D6
RIN is a RIN with a D code of 6.
* * * * *
End of day means 7:00 a.m. Coordinated Universal Time (UTC).
* * * * *
0
5. Section 80.1427 is amended by:
0
a. Revising paragraph (b)(1) introductory text;
0
b. Redesignating paragraphs (b)(1)(ii) through (iv) as paragraphs
(b)(1)(iii) through (v);
0
c. Adding new paragraph (b)(1)(ii);
0
d. Revising newly redesignated paragraph b(1)(iii); and
0
e. Adding paragraph (d).
The revisions and additions read as follows:
Sec. 80.1427 How are RINs used to demonstrate compliance?
* * * * *
(b) * * *
(1) An obligated party that fails to meet the requirements of
paragraph (a)(1) or (a)(7) of this section for calendar year i or fails
to meet the requirements of paragraph (d)(1) of this section for any
quarter in calendar year i is permitted to carry a deficit into year i
+ 1 under the following conditions:
* * * * *
(ii) The party met the requirements of paragraph (d)(1) of this
section in each quarter in calendar year i-1 for the same RVO.
(iii) The party subsequently meets the requirements of paragraphs
(a)(1) and (d)(1) of this section for calendar year i + 1 and carries
no deficit into year i + 2 for the same RVO.
* * * * *
(d) Installment requirement. (1) In addition to the annual
demonstration pursuant to Sec. 80.1451(a)(1) that an obligated party
has met its Renewable Volume Obligations under Sec. Sec. 80.1407 and
80.1430, each obligated party must meet an installment requirement by
retiring a sufficient number of RINs for the first three quarters of
the compliance year by the reporting deadlines specified in Table 1 to
Sec. 80.1451, except as specified in paragraph (d)(3) of this section.
(2) Obligated parties must determine their installment requirements
as follows:
IRi,q = [RFStdRF,i * (GVi,q +
DVi,q) * 0.80] + SHORTi,q-OVERi,q
Where:
IRi,q = The installment requirement is the number of RINs
an obligated party needs to retire for quarter q in compliance
period i, in RINs.
RFStdRF,i = The Renewable Volume Obligation for renewable
fuel for compliance period i, determined by EPA pursuant to Sec.
80.1405, in percent.
GVi,q = The cumulative non-renewable gasoline volume,
determined in accordance with Sec. 80.1407(b), (c), and (f), which
is produced in or imported into the 48 contiguous states or Hawaii
by an obligated party in compliance period i through quarter q, in
gallons.
DVi,q = The cumulative non-renewable diesel volume,
determined in accordance with Sec. 80.1407(d), (e), and (f),
produced in or imported into the 48 contiguous states or Hawaii by
an obligated party in compliance period i through quarter q, in
gallons.
i = The compliance period, typically expressed as a calendar year.
q = The quarter, as defined in Table 1 to Sec. 80.1451, in
compliance period i.
SHORTi.q = Cumulative shortfall from prior quarters in
compliance period i through quarter q, which includes the amount of
additional RINs an obligated party needed to retire to meet the
installment requirement in the prior quarter(s), in RINs. For
quarter one, this term is zero.
OVERi,q = Cumulative overage from the prior quarter(s) in
compliance period i through quarter q, which includes the amount of
excess RINs retired more than the installment requirement in the
prior quarter(s), in RINs. For quarter one, this term is zero.
(3) An obligated party must satisfy the installment in compliance
period i as required by paragraph (d)(2) of this section unless the
obligated party satisfies all installments in compliance period i + 1
or has no RVO in compliance period i.
0
6. Section 80.1428 is amended by revising paragraph (b)(2) to read as
follows:
Sec. 80.1428 General Requirements for RIN distribution.
* * * * *
(b) * * *
(2) Separated RIN ownership. (i) Any person that has registered
pursuant to Sec. 80.1450 can own a separated RIN, except as specified
in paragraph (b)(2)(ii) of this section.
(ii) Only a person that has registered as an obligated party or
exporter of renewable fuel pursuant to Sec. 80.1450, and who must
satisfy an RVO, may purchase a separated D6 RIN, unless the person
meets one of the following conditions:
(A) The person meets the definition of contractual affiliate or
corporate affiliate in Sec. 80.1401.
(B) The person is replacing an invalid D6 RIN under this subpart.
[[Page 10627]]
(iii) Any person who owns a separated D6 RIN under paragraph
(b)(2)(i) of this section and is not an obligated party must either
sell or retire at least the total number of D6 RINs separated or
purchased in a quarter by the quarterly report deadline specified in
Table 1 in Sec. 80.1451.
(iv) Any person who owns a separated D6 RIN to replace an invalid
D6 RIN, as allowed under paragraph (b)(2)(ii)(B) of this section, may
not sell the separated or purchased D6 RIN and must retire the
separated or purchased D6 RIN within 60 days of the date of separating
or purchasing the RIN pursuant to the applicable provisions of
Sec. Sec. 80.1431 and 80.1474.
* * * * *
0
7. Section 80.1435 is added to read as follows:
Sec. 80.1435 How are RIN holdings and RIN holding thresholds
calculated?
(a) RIN holdings calculation. (1) Each party must calculate daily
end-of-day separated D6 RIN holdings by aggregating its end-of-day
separated D6 RIN holdings with the end-of-day separated D6 RIN holdings
of all corporate affiliates in a corporate affiliate group and use the
end-of-day separated D6 RIN holdings as specified in paragraph (b) of
this section.
(2) Each party must calculate, as applicable, the holdings-to-
market percentage under paragraph (b)(1) of the section and the
holdings-to-obligation percentage under paragraph (b)(2) of this
section quarterly in accordance with the schedule specified in Table 1
to Sec. 80.1451.
(3) Each obligated party that is part of a corporate affiliate
group that has a holdings-to-market percentage, as calculated under
paragraph (b)(1) of this section, greater than 3.00 percent for any
calendar day in a compliance period must calculate their holdings-to-
obligation percentage as specified in paragraph (b)(2) of this section.
(4) Each party must individually keep copies of all calculations
and supporting information for separated D6 RIN holding threshold
calculations required under this section as specified in Sec.
80.1454(u).
(b) RIN holding thresholds calculations.--(1) Primary test
calculations. For each day in a compliance period, each party that owns
RINs must calculate the holdings-to-market percentage for their
corporate affiliate group using the method specified in paragraph
(b)(1)(i) or (b)(1)(ii) of this section, as applicable.
(i) For each day beginning January 1 through March 31, calculate
the holdings-to-market percentage for a corporate affiliate group as
follows:
HTMPd = [([sum]D6RINd)a/
(CNV_VOLTOT,i * 1.25)] * 100
Where:
HTMPd = The holdings-to-market percentage is the
percentage of separated D6 RINs a corporate affiliate group holds on
calendar day d relative to the total expected number of separated D6
RINs in the market in compliance period i, in percent.
d = A given calendar day.
i = The compliance period, typically expressed as a calendar year.
a = Individual corporate affiliate in a corporate affiliate group.
([sum]D6RINd)a = Sum of the number of
separated D6 RINs each individual corporate affiliate a holds at the
end of calendar day d, in RIN-gallons.
CNV_VOLTOT,i = The total expected annual volume of
conventional renewable fuels for the compliance period i, in
gallons. Unless otherwise specified, this number is 15 billion
gallons.
(ii) For each day beginning April 1 through December 31, calculate
the holdings-to-market percentage for a corporate affiliate group as
follows:
HTMPd = [([sum]D6RINd)a/
(CNV_VOLTOT,i)] * 100
Where:
HTMPd = The holdings-to-market percentage is the
percentage of separated D6 RINs a corporate affiliate group holds on
calendar day d relative to the total expected number of separated D6
RINs in the market in compliance period i, in percent.
d = A given calendar day.
i = The compliance period, typically expressed as a calendar year.
a = Individual corporate affiliate in a corporate affiliate group.
([sum]D6RINd)a = Sum of the number of
separated D6 RINs each individual corporate affiliate a holds at the
end of calendar day d, in RIN-gallons.
CNV_VOLTOT,i = The total expected annual volume of
conventional renewable fuels for compliance period i, in gallons.
Unless otherwise specified, this number is 15 billion gallons.
(2) Secondary threshold calculations. For each day in a
compliance period where a corporate affiliate group is required to
calculate with the secondary threshold requirement under Sec.
80.1435(a)(4), each obligated party must calculate the holdings-to-
obligation percentage for their corporate affiliate group using the
methods at paragraph (b)(2)(i) or (b)(2)(ii) of this section, as
applicable.
(i) For each day beginning January 1 through March 31, calculate
the holdings-to-obligation percentage as follows:
HTOPd = [([sum]D6RINd)a/
{[([sum]CNV_RVOi-1)a +
([sum]CNV_DEFi-1)a +
([sum]CNV_DEFi-2)a] * 1.25{time} ] * 100
Where:
HTOPd = The holdings-to-obligation percentage is the
percentage of separated D6 RINs a corporate affiliate group holds on
calendar day d relative to their expected separated D6 RIN holdings
based on the corporate affiliate group's conventional RVO for
compliance period i-1, in percent.
d = A given calendar day.
i = The compliance period, typically expressed as a calendar year.
a = Individual corporate affiliate in a corporate affiliate group.
([sum]D6RINd)a = Sum of the number of
separated D6 RINs each individual corporate affiliate a holds on
calendar day d, in RIN-gallons.
([sum]CNV_RVOi-1)a = Sum of the conventional
RVOs for each individual corporate affiliate a for compliance period
i-1 as calculated in paragraph (b)(2)(iii) of this section, in RIN-
gallons.
([sum]CNV_DEFi-1)a = Sum of the conventional
deficits for each individual corporate affiliate a as calculated in
paragraph (b)(2)(iv) of this section for compliance period i-1, in
RIN-gallons.
([sum]CNV_DEFi-2)a = Sum of the conventional
deficits for each individual corporate affiliate a as calculated in
paragraph (b)(2)(iv) of this section for compliance period i-2, in
RIN-gallons.
(ii) For each day beginning April 1 through December 31, calculate
the holdings-to-obligation percentage as follows:
HTOPd = {([sum]D6RINd)a/
[([sum]CNV_RVOi-1)a +
([sum]CNV_DEFi-1)a]{time} * 100
Where:
HTOPd = The holdings-to-obligation percentage is the
percentage of separated D6 RINs a corporate affiliate group holds on
calendar day d relative to their expected separated D6 RIN holdings
based on the corporate affiliate group's conventional RVO for
compliance period i-1, in percent.
d = A given calendar day.
i = The compliance period, typically expressed as a calendar year.
a = Individual corporate affiliate in a corporate affiliate group.
([sum]D6RINd)a = Sum of the number of
separated D6 RINs each individual corporate affiliate a holds on
calendar day d, in RIN gallons.
([sum]CNV_RVOi-1)a = Sum of the conventional
RVOs for each individual corporate affiliate a for compliance period
i-1 as calculated in paragraph (b)(2)(iii) of this section, in RIN-
gallons.
([sum]CNV_DEFi-1)a = Sum of the conventional
deficits for each individual corporate affiliate a as calculated in
paragraph (b)(2)(iv) of this section for compliance period i-1, in
RIN-gallons.
(iii) As needed to calculate the holdings-to-obligation percentage
in paragraphs (b)(2)(i) and (b)(2)(ii) of this section, calculate the
conventional RVO for an individual corporate affiliate as follows:
[[Page 10628]]
CNV_RVOi = {[RFStdRF,i * (GVi +
DVi)]-[RFStdAB,i * (GVi +
DVi)]{time} + ERVORF,i
Where:
CNV_RVOi = The conventional RVO for an individual
corporate affiliate for compliance period i without deficits, in
RIN-gallons.
i = The compliance period, typically expressed as a calendar year.
RFStdRF,i = The standard for renewable fuel for
compliance period i determined by EPA pursuant to Sec. 80.1405, in
percent.
RFStdAB,i = The standard for advanced biofuel for
compliance period i determined by EPA pursuant to Sec. 80.1405, in
percent.
GVi = The non-renewable gasoline volume, determined in
accordance with Sec. 80.1407(b), (c), and (f), which is produced in
or imported into the 48 contiguous states or Hawaii by an obligated
party for compliance period i, in gallons.
DVi = The non-renewable diesel volume, determined in
accordance with Sec. 80.1407(b), (c), and (f), which is produced in
or imported into the 48 contiguous states or Hawaii by an obligated
party for compliance period i, in gallons.
ERVORF,i = The sum of all renewable volume obligations
from exporting renewable fuels, as calculated under Sec. 80.1430,
by an obligated party for compliance period i, in RIN-gallons.
(iv) As needed to calculate the holdings-to-obligation percentage
in paragraphs (b)(2)(i) and (b)(2)(ii) of this section, calculate the
conventional deficit for an individual corporate affiliate as follows:
CNV_DEFi = DRF,i-DAB,i
Where:
CNV_DEFi = The conventional deficit for an individual
corporate affiliate for compliance period i, in RIN-gallons. If a
conventional deficit is less than zero, use zero for conventional
deficits in paragraphs (b)(2)(i) and (b)(2)(ii) of this section.
i = The compliance period, typically expressed as a calendar year.
DRF,i = Deficit carryover from compliance period i for
renewable fuel, in RIN-gallons.
DAB,i = Deficit carryover from compliance period i for
advanced biofuel, in RIN-gallons.
(c) Exceeding the D6 RIN holding thresholds. (1) Primary threshold
test. If a party or corporate affiliate group has a holdings-to-market
percentage greater than three percent for any calendar day in a
compliance period, as determined under paragraph (b)(1) of this
section, and the corporate affiliate group does not contain an
obligated party, each party in the corporate affiliate group must
separately submit a report to EPA as specified in Sec. 80.1451(c).
(2) Secondary threshold test. If an obligated party or a corporate
affiliate group required to calculate a holdings-to-obligation
percentage under paragraph (a)(3) of this section has a holdings-to-
obligation percentage greater than 130.00 percent for any calendar day
in a compliance period, as determined under paragraph (b)(2) of this
section, each party in the corporate affiliate group must separately
report to EPA as specified in Sec. 80.1451(c).
(3) Reporting deadline. Parties required to report to EPA under
this section as specified under Sec. 80.1451(c), must report to EPA by
the deadlines specified in Table 1 to Sec. 80.1451.
0
8. Section 80.1451 is amended by revising paragraphs (a)(3) and (c)(2)
to read as follows:
Sec. 80.1451 What are the reporting requirements under the RFS
program?
(a) * * *
(3) The quarterly RIN activity reports required under paragraph
(c)(2) of this section to also include:
(i) For obligated parties, all of the following information:
(A) The installment requirement calculated using the procedures in
Sec. 80.1427(d) for the applicable quarterly reporting period.
(B) The cumulative shortfall from prior quarters as calculated in
Sec. 80.1427(d).
(C) The cumulative overage from the prior quarters as calculated in
Sec. 80.1427(d).
(D) The resulting balance after applying total RINs retired for
compliance as calculated in Sec. 80.1427(d).
(ii) Any additional information that the Administrator may require.
* * * * *
(c) * * *
(2) Reports related to a person's RIN activity must be submitted to
EPA according to the schedule specified in paragraph (f)(2) of this
section. Each report must summarize RIN activities for the reporting
period and must include all of the following information:
(i) The submitting party's name.
(ii) The submitting party's EPA-issued company identification
number.
(iii) Primary registration designation or compliance level for
compliance year (e.g., ``Aggregated Refiner,'' ``Exporter,''
``Renewable Fuel Producer,'' ``RIN Owner Only,'' etc.).
(iv) Number of prior-year and current-year separated D3, D4, D5,
D6, and D7 RINs owned at the end of the quarter.
(v) Indicate if the submitting party exceeded the separated D6 RIN
holding threshold in the quarter, as determined by the applicable
calculation specified in Sec. 80.1435. If the answer is yes, then EPA
may publish the name and EPA-issued company identification number of
the party.
(vi) For non-obligated parties who purchased separated D6 RINs
during the reporting period, the reason(s) for the purchase consistent
with Sec. 80.1428(b)(2)(ii).
(vii) Total number of assigned D6 RINs separated during the
reporting period.
(viii) Total number of separated D6 RINs purchased during the
reporting period.
(ix) Total number of separated D6 RINs sold during the reporting
period.
(x) Total number of separated D6 RINs retired during the reporting
period.
(xi) For non-obligated parties, total number of separated D6 RINs
subject to the requirement in Sec. 80.1428(b)(2)(iii) held past the
stated RIN distribution deadline.
(xii) The volume of renewable fuel (in gallons) owned at the end of
the quarter.
(xiii) The total number of assigned RINs owned at the end of the
quarter.
(xiv) Any additional information that the Administrator may
require.
* * * * *
0
9. Section 80.1452 is amended by:
0
a. Revising paragraph (c)(12); and
0
b. Adding paragraph (c)(15).
The revision and addition read as follows:
Sec. 80.1452 What are the requirements related to the EPA Moderated
Transaction System (EMTS)?
* * * * *
(c) * * *
(12)(i) For RIN buy or sell transaction types including assigned
RINs, the per-gallon RIN price or the per-gallon price of renewable
fuel with RINs included.
(ii) For RIN buy or sell transaction types including separated
RINs, the per-gallon RIN price.
* * * * *
(15) For buy or sell transactions of separated RINs, the mechanism
used to purchase the RINs (e.g., spot market or fulfilling a term
contract).
* * * * *
0
10. Section 80.1454 is amended by adding paragraphs (i)(1) and (2) and
paragraphs (u) through (y) to read as follows:
Sec. 80.1454 What are the recordkeeping requirements under the RFS
program?
* * * * *
(i) * * *
(1) For buy or sell transactions of separated RINs, parties must
retain records substantiating the price reported to EPA under Sec.
80.1452.
(2) For buy or sell transactions of separated RINs, parties must
retain
[[Page 10629]]
records demonstrating the transaction mechanism (e.g., spot market or
fulfilling a term contract).
* * * * *
(u) Requirements for recordkeeping of RIN holdings for all parties
transacting or owning RINs. (1) Parties must retain records related to
end-of-day separated D6 RIN holdings, conventional RVO calculations,
and any associated calculations recorded in order to meet the RIN
holdings requirements described in Sec. 80.1435. Such records must
include information related to any corporate affiliates and their RIN
holdings and calculations.
(2) Parties must retain records related to their reports to EPA
regarding threshold compliance under Sec. Sec. 80.1435 and 80.1451.
(v) Requirements for recordkeeping for installment requirement. (1)
Obligated parties must retain records related to gasoline and diesel
production levels used for RVO calculation in Sec. Sec. 80.1427 and
80.1451.
(2) Obligated parties must retain records related to the RVO
calculation inputs as listed in Sec. Sec. 80.1427 and 80.1451.
(3) Obligated parties must retain records related to any remedial
actions submitted after the quarterly compliance deadline.
(w) Recordkeeping requirements for parties prohibited from
purchasing separated D6 RINs. (1) Non-obligated parties must retain all
records pertaining to why they purchased separated D6 RINs. This may
include, but is not limited to, legal contracts with obligated parties
or documents indicating the need to replace invalid D6 RINs.
(2) [Reserved]
(x) Requirements for recordkeeping of D6 RIN holdings by non-
obligated parties. (1) Non-obligated parties must retain all records
related to the number of D6 RINs separated in a given quarter,
purchased in a given quarter, and sold in a given quarter to
demonstrate compliance with the requirements in Sec. 80.1428.
(2) [Reserved]
(y) Requirements for recordkeeping of contractual and corporate
affiliates. (1) Parties must retain records including, but not limited
to, the name, address, business location, contact information, and
description of relationship, for each corporate affiliate. For the
corporate affiliate group, a relational diagram.
(2) Parties must retain records including, but not limited to, the
name, address, business location, contact information, and contract or
other agreement for each contractual affiliate.
0
11. Section 80.1460 is amended by revising paragraphs (c)(1) and (d) to
read as follows:
Sec. 80.1460 What acts are prohibited under the RFS program?
* * * * *
(c) * * *
(1) Fail to acquire sufficient RINs, fail to retire sufficient
RINs, or use invalid RINs to meet the person's RVOs or quarterly
compliance requirements under Sec. 80.1427.
* * * * *
(d) RIN retention violation. No person may do any of the following:
(1) Retain RINs in violation of the requirements in Sec.
80.1428(a)(5).
(2) Purchase separated RINs in violation of the requirements in
Sec. 80.1428(b)(2).
* * * * *
0
12. Section 80.1464 is amended by:
0
a. Revising paragraph (a)(3)(ii);
0
b. Adding paragraphs (a)(4) through (5);
0
c. Revising paragraph (b)(3)(ii);
0
d. Adding paragraph (b)(5);
0
e. Revising paragraph (c)(2)(ii); and
0
f. Adding paragraph (c)(3).
The revisions and additions read as follows:
Sec. 80.1464 What are the attest engagement requirements under the
RFS program?
(a) * * *
(3) * * *
(ii) Obtain the database, spreadsheet, or other documentation used
to generate the information in the RIN activity reports; compare the
RIN transaction samples reviewed under paragraph (a)(2) of this section
with the corresponding entries in the database or spreadsheet and
report as a finding any discrepancies; compute the total number of
current-year and prior-year RINs owned at the start and end of each
quarter, purchased, separated, sold, retired and reinstated, and for
parties that reported RIN activity for RINs assigned to a volume of
renewable fuel, the volume and type of renewable fuel (as defined in
Sec. 80.1401) owned at the end of each quarter; as represented in
these documents; obtain a list of all corporate affiliates and a list
of all contractual affiliates and review the information regarding
their documented relationship to the submitter (e.g., contracts, or
other legal documents); and identify any contractual affiliates that
had a contract with the party that did not result in transfer of RINs
to the party during the calendar year; report a separate list for all
corporate affiliates and all contractual affiliates including
identification information for each corporate or contractual affiliate
(e.g., company ID, company name, corporate address, etc) and any
findings to EPA.
(4) Quarterly installment requirement for obligated parties. (i)
Compare the volumes of products listed in Sec. 80.1407(c) and (e)
reported to EPA in the report required under Sec. 80.1451(a)(3) with
the volumes, excluding any renewable fuel volumes, contained in the
inventory reconciliation analysis under Sec. 80.133 and the volume of
non-renewable diesel produced or imported. Verify that the volumes
reported to EPA agree with the volumes in the inventory reconciliation
analysis and the volumes of non-renewable diesel produced or imported,
and report as a finding any exception.
(ii) Compare the calculated installment requirement for each
quarter using the required steps found in 80.1427(d) with any RINs
retired for compliance. Verify that any cumulative shortfall or
cumulative overage is carried through as applicable into any subsequent
quarter.
(5) RIN holdings. (i) Obtain and read copies of the RIN holdings
calculations kept under Sec. 80.1454(u) for the obligated party and
any corporate affiliates.
(ii) Report as a finding any date where the aggregated calculation
exceeded the RIN holding threshold(s) specified in Sec. 80.1435. State
whether this information agrees with the party's reports (notification
of threshold exceedance) to EPA.
(b) * * *
(3) * * *
(ii) Obtain the database, spreadsheet, or other documentation used
to generate the information in the RIN activity reports; compare the
RIN transaction samples reviewed under paragraph (b)(2) of this section
with the corresponding entries in the database or spreadsheet and
report as a finding any discrepancies; report the total number of each
RIN generated during each quarter and compute and report the total
number of current-year and prior-year RINs owned at the start and end
of each quarter, purchased, separated, sold, retired and reinstated,
and for parties that reported RIN activity for RINs assigned to a
volume of renewable fuel, the volume of renewable fuel owned at the end
of each quarter, as represented in these documents; review the
information regarding contractual affiliates and corporate affiliates
(as defined in Sec. 80.1401) and their documented relationship to the
submitter; identify any contractual affiliates that had a contract with
the party that did not result in transfer of RINs to the party during
the calendar year; report a separate list for all corporate affiliates
and all contractual
[[Page 10630]]
affiliates including identification information for each corporate or
contractual affiliate (e.g., company ID, company name, corporate
address, etc) and any findings to EPA.
* * * * *
(5) RIN holdings. (i) Obtain and read copies of the RIN holdings
calculations for the renewable fuel producers and RIN-generating
importers and any corporate affiliates.
(ii) Report as a finding any date where the aggregated calculation
exceeded the RIN holding threshold(s) specified in Sec. 80.1435.
(c) * * *
(2) * * *
(ii) Obtain the database, spreadsheet, or other documentation used
to generate the information in the RIN activity reports; compare the
RIN transaction samples reviewed under paragraph (c)(1) of this section
with the corresponding entries in the database or spreadsheet and
report as a finding any discrepancies; compute the total number of
current-year and prior-year RINs owned at the start and end of each
quarter, purchased, sold, retired, separated, and reinstated and for
parties that reported RIN activity for RINs assigned to a volume of
renewable fuel, the volume of renewable fuel owned at the end of each
quarter, as represented in these documents; review the information
regarding corporate affiliates and contractual affiliates (as defined
in Sec. 80.1401) and their documented relationship to the submitter
(e.g., contract); identify any contractual affiliates that had a
contract with the party that did not result in transfer of RINs to the
party during the calendar year; report a separate list for all
corporate affiliates and all contractual affiliates including
identification information for each corporate or contractual affiliate
(e.g., company ID, company name, corporate address, etc) and any
findings to EPA.
(3) RIN holdings. (i) Obtain and read copies of the RIN holdings
calculations for the renewable fuel producers and RIN-generating
importers and any corporate affiliates.
(ii) Report as a finding any date where the aggregated calculation
exceeded the RIN holding threshold specified in Sec. 80.1435. State
whether this information agrees with the party's reports (notification
of threshold exceedance) to EPA.
* * * * *
Subpart N--Additional Requirements for Gasoline-Ethanol Blends
0
13. Section 80.1503 is amended by:
0
a. Revising paragraph (a)(1)(vi)(B);
0
b. Removing and reserving paragraph (a)(1)(vi)(C);
0
c. Revising paragraph (b)(1)(vi)(B); and
0
d. Removing and reserving paragraphs (b)(1)(vi)(C) through (E).
The revisions read as follows:
Sec. 80.1503 What are the product transfer document requirements for
gasoline-ethanol blends, gasolines, and conventional blendstocks for
oxygenate blending subject to this subpart?
(a) * * *
(1) * * *
(vi) * * *
(B) The conspicuous statement that the gasoline being shipped
contains ethanol and the percentage concentration of ethanol as
described in Sec. 80.27(d)(3).
* * * * *
(b) * * *
(1) * * *
(vi) * * *
(B)(1) For gasoline containing less than 9 volume percent ethanol,
the following statement: ``EX--Contains up to X% ethanol. The RVP does
not exceed [fill in appropriate value] psi.'' The term X refers to the
maximum volume percent ethanol present in the gasoline.
(2) The conspicuous statement that the gasoline being shipped
contains ethanol and the percentage concentration of ethanol as
described in Sec. 80.27(d)(3) may be used in lieu of the statement
required under paragraph (b)(1)(vi)(B)(1) of this section.
* * * * *
0
14. Section 80.1504 is amended by removing and reserving paragraphs (f)
and (g).
[FR Doc. 2019-05030 Filed 3-20-19; 8:45 am]
BILLING CODE 6560-50-P