Deep Dive Episode 262 – Analyzing the EPA’s Proposed Renewable Fuel Standard Rule

[Music]

 

Introduction: Welcome to The Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker. 

 

On April 26, 2023, The Federalist Society’s Regulatory Transparency Project hosted a virtual event titled “Analyzing the EPA’s Proposed Renewable Fuel Standard.” The following is the audio from the event. 

 

Sarah Bengtsson:  Good afternoon and welcome to this Regulatory Transparency Project webinar. My name is Sarah Bengtsson, and I’m Associate Director of RTP here at The Federalist Society. Today, April 26, 2023, we are pleased to host a discussion on the EPA’s proposed renewable fuel standard rule. Throughout the discussion, our panel will be taking audience questions, so please submit your question into the Q&A function at the bottom of your Zoom window. Please note that, as always, all expressions of opinion on today’s program are those of the speakers. 

 

Our moderator for today’s discussion is Daren Bakst. Daren is Deputy Director and Senior Fellow at the Competitive Enterprise Institute’s Center for Energy and Environment. You can read the full bios for Daren and our other speakers at regproject.org. Thank you all for joining and now I will hand it over to you, Daren. 

 

Daren Bakst:  Thank you so much, Sarah, and good afternoon, everybody. As Sarah said, my name is Daren Bakst, and I’m Deputy Director of the Center for Energy and Environment at the Competitive Enterprise Institute. I want to thank you for joining us today as we discuss the EPA’s latest proposed rule on the renewable fuel standard. And it covers the standard for 2023 to 2025. 

 

The rule was published in the federal register on December 31 of last year, and the comment period ended on February 10. So that was a really short comment period, especially for a rule that brings up so many new and complicated issues. A final rule is expected soon, and likely no later than June 14. And that’s the deadline that was agreed to in a consent decree. 

 

So let’s get right to it. I’m honored to be joined by two leading experts, Jonathan Brightbill, who’s a partner at Winston & Strawn, and Brendan Williams, who’s Vice President of Government Relations at PBF Energy. Jonathan will provide an overview of the RFS, and then Brendan will provide an overview of the proposed rule. We’ll then have a discussion to help flesh out the issues. And this will include taking your questions. So please do submit your questions, and I can incorporate them throughout the discussion. So Jonathan, let me turn the program over to you, and you can provide an overview of the RFS. 

 

Jonathan Brightbill:  Well, great. Thank you very much, Daren, and thank you to The Federalist Society and the Regulatory Transparency Project for inviting me to join on this panel and comment and talk a little bit about the new renewable fuel standards. This is a program that is at a pivotal kind of transformational moment, and it’s something that I spent a lot of time litigating during my time at the Department of Justice, the Environment and National Resource Division. It’s a program around which there has been a lot of contention over the years. And the recent proposal by EPA to change the RFS program in some really fundamental ways, I think, is going to result in that contentious nature continuing for some time. 

 

So what is the renewable fuel standard? It’s called the RFS program. It was created actually during the Bush administration, the George W. Bush administration. It initially kicked off through the Energy Policy Act of 2005, which then included some amendments to the Clean Air Act. And so this is a program that falls within the ambient of air emissions control. 

 

It was later amended, shortly thereafter, after initially launching for a couple of years in the Energy Independence and Security Act, EISA, of 2007—and that’s going to be important to keep in mind as the discussion continues—and really expanded in 2007 through the EISA into the program that we have today. So contrary to those who have said that Congress has refused to act or never acted or taken action as it relates to greenhouse gas emissions, this was in fact a bipartisan effort passed during the George W. Bush administration to reduce the amount of greenhouse gas emissions, lifecycle greenhouse gas emissions, that would result from the use of America’s transportation fuels and really targeted at the fossil fuels. Particularly once 2007 comes around, the EISA comes in. 

 

Another primary purpose of this program was to enhance U.S. energy independence and to reduce our dependence on international imports. So what the RFS program does, high level, is require that fossil fuel, petroleum be blended with a proportion in various portions — and there’s complicated formulas — but different percentages of essentially biomass derived alcohols that can be added and blended into petroleum-based transportation fuels to create on a whole lifecycle adjusted basis a transportation fuel that has less greenhouse gas emissions and impact. So the RFS program set up four categories. We don’t really need to get into that for purposes of today’s discussion, but there’s biomass-based diesel, cellulosic biofuels, advanced biofuels, and then renewable fuel total. 

 

So what is important for now understanding how the program is changing and shifting is that from 2007 to 2022 Congress by statute in a table that’s in the Clean Air Act—you can go there and read the numbers. Congress made these determinations itself—specified what the various volumes of each kind of renewable fuel was supposed to be its percentage of the U.S. total transportation fuels. Now, importantly in 2023 that congressional table ran out. And so from this point forward we no longer have a congressional mandate as to what those numbers are going to be. It has now been handed off to EPA to determine what the volumes for the various biofuels can and should be based on a series of factors that are articulated in the statute. 

 

So how the program works, high level, it was conceived as a market simulating regulation where individual entities can buy and sell credits for compliance. What are called the obligated parties, which are really kind of your oil companies, gas manufacturers, importers, etc., they were the obligated parties. And under this program they achieved compliance with the regulatory requirements, the percentages of renewable fuels in their transportation fuels by either blending the biomass based fuels and alcohols in with their petroleum based fuels or by buying credits from others who generated these credits in what were called renewable identification numbers, or RINs, to then meet these volume obligations. 

 

EPA through annual rulemakings would go through, and they would calculate what the RVOs, the renewable volume obligations, were supposed to be based on their projections of what the various kind of gasoline, diesel fuel productions were going to be needed in the future and then convert pursuant to this table, at least historically, into what these obligations were. So these RINs as they were called would then be generated by the producers or the blenders of the renewable fuels. And at the end of the compliance year, the obligated parties would then be required to demonstrate that they have sufficient RINs to meet their volume obligations. So all this is super complex. 

 

So let me just take a step back and just kind of give you a big picture policy view of what this is through the kind of prism of basic economics, which is that the RFS is or effectively historically was a tax primarily on gasoline that then flowed to and subsidized the manufacture of biobased renewable fuels and agricultural interests. But rather than Congress say here’s a 20 percent tax on gasoline; now we’ve got the money in the Treasury; now I’m going to pay out a subsidy and these folks get money in their pocket, essentially by forcing petroleum-based manufacturers to buy biofuels and blend them that effectively raised what would otherwise be the baseline price at least by some folks’ data. That’s contested by others, and some contest — many interests actually feel that in certain submarkets and areas biofuels actually make the cost of certain transportations less expensive. 

 

But on the whole essentially instead of the tax being paid to the Congress and redistributed by virtue of obligated parties having to buy the renewable fuels, essentially the money flows and the subsidy flows directly by regulation. And that’s important to understand as we get into the discussion and some of the arguments and questions that have been raised about EPA’s new proposal. 

 

One additional feature that is important for folks to understand is what is called the blend wall. And that is essentially a point where from a technological basis it is thought that there’s a maximum amount of biomass-based fuels and ethanols that can be essentially effectively and safely blended into the overall pool of gasoline without damaging engine parts, voiding warranties, and impacting performance. Again, some of this stuff is technically contested. I’m just kind of articulating where the meets and bounds are in some of the disputes. But this blend wall then creates compliance problems for obligated parties because of the inability to at a technical level continue to use certain kinds of renewable fuels in different areas. 

 

So high level, that’s how the program works today. Congress set some numbers. EPA set a percentage. People manufacture RINs and generate credits. And then those credits are then used to show compliance with an applicable percentage of biofuels in the transportation fuels, gasoline, diesel, whatever, jet fuel that then power transportation in the nation. 

 

Daren Bakst:  Thanks, Jonathan. That was great. Now, let’s turn to the proposal itself. And Brendan, can you give us an overview of the proposed rule?

 

Brendan Williams:  Sure. And thanks again for having me today. I really appreciate it. So building on what Jonathan said, we are at an inflection point with the RFS program because up through 2022, as Jonathan mentioned, the statute actually had specific volumes written into the law that EPA essentially had to use as a guidepost. They do have waiver authorities and ability to adjust it to a certain extent. But after 2022, as Jonathan mentioned, there are no volumes. 

 

So what does that mean? The statute essentially hands the program over to EPA in what is being referred to as the set period. So you’ll hear the most recent proposal called the set rule because it’s how they plan on setting this standard after the 2022 date, which is when the calendar and the statute actually expires. 

 

So what is EPA supposed to do with no volumes? The law actually is fairly vague on that front. The statute basically tells EPA you have to set the volumes based on seven criteria that have a lot of sub criteria. If you talk to EPA, it ends up being about 24 criteria really. Nothing tells EPA how to prioritize or weigh any of the criteria. None of the criteria are actually even defined. 

 

So they can be interpreted in a couple different ways. They include things like the impact of biofuels on engine and refueling infrastructure, the implications of the standards you set on climate change, agricultural economies, consumer prices, etc. So several very vague categories that EPA has to figure out how to interpret them, how to weigh each of them, prioritize each of them, and analyze all of them. And there’s not even really anything dictating the timeframe for which EPA can set the rule, so this is the first time ever we’ve seen a forward looking three year standard because in the set rule EPA felt like the best way to go about this was to kind of use the criteria to project volumes out through a series of years and then set them for that number of years. 

 

The only limiting element, the only very limiting element to the statute, the specific directions that’s given to EPA is, when advancing the set rule, the statute tells EPA that the percentage of the advanced biofuel requirement that they set has to be at least the same number as it was for the 2022 rule. So in 2022, the advanced biofuel requirement, which is essentially all made up through bio and renewable diesel, was about 27 percent of the overall requirement. So EPA’s got to make sure the advanced standard comes out to at least that percentage moving forward. 

 

The second more specific directions that are in the statute says that EPA has to set the cellulosic biofuel requirement, which is another subset of the mandate, assuming that they don’t have to issue this waiver credit that they were allowed to issue as a cost containment mechanism prior to 2023. So those are two of the changes that really emphasize why we’re at an inflection point and kind of in uncharted territory as it comes to the program. That actually — so what’s significant about this proposal is it’s the first proposal in the set period as it’s called, and it’s a multi-year proposal, which EPA hasn’t done before. And EPA has significantly more leeway than they did previously to set the different volumes. 

 

The other significant element of this rule is that EPA used the proposal to propose a system for creating what’s called eRINs. So Jonathan mentioned that the RFS is essentially an upside down cap in trade program, and a cap in trade program have an emissions limit. And you have to reduce emissions or get allowances from people who can to get under the cap. Biofuel mandate is EPA sets a specific volume, and you have to either blend or get credits to show you’ve hit your proportion of that number. So the tradable credits are called RINS. And so eRINs are RINS that are generated from electric vehicles. 

 

So how did the EPA go about doing this? The mandate I always call — it’s a series of nested mandates, which we don’t need to get into all the details. But think of it like a Russian doll within a doll. So the fuels that you can use for the innermost doll can be used for everything. But anything outside the innermost doll can’t be used in reversed order for the inside buckets. 

 

But one of the requirements is cellulosic biofuel. Cellulosic biofuel never actually materialized, so several years ago EPA said biogas that replaces geologic gas in natural gas vehicles qualifies as cellulosic ethanol or cellulosic biofuel. And so to this date that still represents the entirety of the cellulosic mandate. And since there’s a limited supply of natural gas vehicles, it’s been relatively small compared to the rest of the requirements. 

 

But with this proposal EPA is proposing to say that biogas that replaced geologic gas to power electricity that powers electric vehicles can now generate RINs. And they proposed having the auto manufacturers, which are referred to as the OEM — right, the original equipment manufacturers. They’re proposing to give these RINs to the auto manufacturers by having the auto manufacturers say, well, we made this many electric vehicles. Here are some contracts we have with electricity providers to show that why this biogas is getting onto the system and thus we should get these RINs. And they’re using the eRINs program to try and dramatically expand the cellulosic portion of the mandate and thus the overall mandate. 

 

To date, a little under somewhere in the neighborhood of 600 million ethanol equivalent gallons of biogas has been what the requirement has been. But EPA is basically proposing to double that each year for the next couple of years based on the premise of the eRINs program. There’s a lot of questions over the legality of the eRINs program. In the Energy Independence and Security Act of 2007 which Jonathan mentioned, Congress actually specifically addressed this issue, and they said, EPA, you need to do a study to see if we wanted to do this how it would look and give us some recommendations on what a pilot program could look at that we could consider. 

 

So it was pretty clear that Congress actually wanted to have the final say over it. EPA never did that study and is just advancing this eRINs proposal as it is, which is a very significant change in a program that to date has been focused on liquid fuels and has a lot of implications for the RIN market. The RIN market’s pretty significant for — so my company’s what’s called a merchant refiner. We don’t have any upstream oil production. 

 

You won’t see a PBF gas station. We literally buy the oil, manufacture it into gasoline, diesel, chemicals. And so we sell most of our product in the interstate pipeline system in bulk. You cannot blend ethanol into gasoline and put it into a pipeline. The mixture doesn’t hold. So all the blending occurs way downstream, further down the supply chain of where we are. So we’re already reliant on purchasing RINs to meet the brunt of our obligation. 

 

And they have added significant costs to the overall supply chain. In January of 2020 they were about 10 cents. They’re about $1.60 now. So that ends up equating to about a $30 billion tax on the whole system. And we have always argued that it’s disproportionately born among different classes of refineries, whether you’re between merchants and somebody who’s an integrated oil company that has businesses in every part of the supply chain. 

 

So the massive expansion with the eRINs has implications for the RIN market, cost to consumer. It has implication for biofuels, how much does this eat into the actual liquid biofuel portion of the mandate moving forward? And a lot of complications, a lot of issues associated with all this. But I will stop there, so, Daren, we can turn it over back to you and get to questions and answers. 

 

Daren Bakst:  Thanks, Brendan. All these complicated issues and there’s like maybe 40 days or something to submit comments on it. So that is a pretty short comment period. I want to start with some big picture questions, just connected to the RFS before I get to the proposed rule. And I guess the first question is what do RFS proponents point to to show that the RFS is successful, and how do they explain the need for the RFS? How do they explain the continued need for it? And Jonathan, let me start with you. I know that was a two part question, so sorry. Hopefully, you’ll remember. 

 

Jonathan Brightbill:  Well, sure. And thanks. So recall Congress’s primary two justifications for the RFS program. One is to reduce the total amount of lifecycle greenhouse gas emissions that are associated with our transportation fuels and second to enhance energy and domestic security. And so the proponents of the RFS point to both of those primary policy objectives of the RFS program as boxes checked. That by blending in biofuels — so essentially we have corn, soybeans, other crops that are as they are grown they’re consuming carbon and carbon dioxide and in the process in order to then create the various fuels and processes. 

 

And once those things are blended into a gallon of gasoline, you compare the gallon of gasoline that’s in the car today with those biofuels blended on a total lifecycle basis versus the gallon of gasoline that would just be pure petroleum, and you’re going to get a calculated difference. We didn’t get into this, but the EPA has a pretty rigorous what’s called pathways program whereby biofuel manufacturers are supposed to come in and document how these fuels are created and what the overall lifecycle greenhouse gas impacts would be. So the proponents of RFS, they point to that. 

 

They point to the fact that by taking crops that are grown here in the United States instead of — again, baseline 2005/2007. This is somewhat before the fracking revolution that came along late in the 00s. But as compared to the baseline of 2005 and 2007, you’re talking about reducing your dependence on resources extracted abroad. And you grow crops here in the United States. And you can use them in order to reduce the amount of imports of whatever resources that are necessary to power our economy. It generates jobs and income for rural communities. A lot of organizations are very supportive of the fact that this is an additional market for agricultural interests and farmers. 

 

And while the nature of the program is certainly such that there are impacts — and Brendan just described the impacts on his company and how their kind of place in the overall supply chain leaves them in a spot where they are very dependent on the fluctuations and the come and the go of the RINs market. There are some that say at certain times, places, and ways that ultimately this program reduces the price of gasoline for consumers at the pump or at least can and has at various points in time. 

 

Brendan Williams:  Yeah. Just building on what Jonathan said, again, when the law was passed, everybody was still talking about — it was before the shale boom. So everybody was talking about peak oil and hence the bill Energy Independence and Security Act. Greenhouse gases were obviously part of it in 2007. 

 

In 2005 you have to remember it actually replaced what used to be an oxygenate standard for gasoline. So all fuel used to have a certain amount of oxygen volume per gallon for clean air requirements. But the cars evolved; right? You had oxygen sensors on engines. The oxygenate standard became not only irrelevant, but there was an oxygenate called MTBE that used to be used. The two primary ones were MTBE and ethanol. MTBE started showing up in groundwater, created a lot of lawsuits. And so the ethanol standard actually replaced the oxygenate standard and was a way to maintain a mandated market essentially for a certain amount of biofuels. Obviously, it got greatly expanded in 2007. 

 

I think originally the thought was that you would have these second generation drop in biofuels come in that could help create innovation and lower emissions and lower costs. But in practice you haven’t seen a lot of that. Renewable diesel is something that’s pointed to as a success, and we actually just opened a renewable diesel plant for the advanced portion of the mandate. But for the conventional biofuel requirement, which is predominately ethanol as Jonathan mentioned, the blend wall’s been a significant limiting factor. 

 

So I think proponents of the RFS would say, well, you kind of need this upside down cap in trade program. You need to make petroleum more expensive so that when you add biofuel into it there’s more incentive to add biofuel and try to lower the relative cost. And then folks would say, well, Congress guaranteed us a certain amount of volume, etc., etc. We’ve noted that in practice. 

 

Ethanol’s cheaper than gasoline as it is 92 percent of the time plus over the last decade and a half. So we would argue the RINs would just add cost to the system and actually prevent ethanol from being able to lower the cost at the pump. But that’s something that’s kind of hotly debated. 

 

The issue often does get framed as kind of biofuel versus oil. But the way we look at it it’s more about the RIN system and the disparity between. Some folks have businesses and the whole part of the supply chain where your requirement is based under a finding capacity, not how much fuel you move downstream at the big wholesale terminals where all the fuel gets blended together before it’s delivered to a gas station. So if you’re in that downstream part of the business and you move a lot more fuel through your marketing arm than your refining arm, you’re always going to have more credits than you need compared to someone like us who isn’t even in that part of the supply chain and is reliant on purchasing them. 

 

So you have some folks say, well, you need this to push more biofuel into the market, particularly on the ethanol side. And then on the other side you have folks saying, well, this isn’t really working as it’s intended. Right now, we’re actually using because of the blend wall — and I can get into as much detail as people are interested. We’re actually using bio and renewable diesel. We’re kind of over-complying with that mandate because you can use those fuels to meet the conventional requirement, the ethanol requirement. It’s that Russian doll within a doll system I mentioned. 

 

And that’s growing domestically, but it is certainly reliant obviously the support of the program. And the mandate is still set at such a high level that we’re not making enough of those fuels domestically where we still have to import a couple hundred million gallons of bio renewable diesel a year not to meet the advanced portion of the requirement but to actually bridge the gap between the blend wall and the requirement that EPA sets for the de facto ethanol mandate. 

 

Daren Bakst:  So now, Brendan, I’m going to come right back to you. So you kind of touched on it some, but what are some of the criticisms of the RFS?

 

Brendan Williams:  Sure. So yeah, it was a good segue; right? So building on some of the things I’ve highlighted I think some of the criticisms are, A) that because of the blend wall, the program’s not working as intended. I think the intent of the program was crafted as you have drop in fuels that are ubiquitous in all infrastructure. And with time, more and more vehicles will be able to run on fuels higher than 15 percent ethanol. EPA’s approved anything after 2001, but most of those vehicles actually aren’t warranted to run on the fuel. So about a quarter of all the vehicles on the road now can run on blends higher than 10 percent ethanol. 

 

But the mandate requires more than that, which is one of the issues. That number will grow. But there are about 130,000 gas stations in the country, and only around 2,500 even offer E15 because a lot of the underground storage tanks, the pumps, that infrastructure, especially if it’s older, was not built to dispense these fuels. And there’s no requirement on the retailer or the blender. The requirement’s on the refiner. 

 

So the incentive isn’t there to build out the infrastructure. The incentive actually there is to ring those up. It’s a benefit if you have no obligation and you’re the one selling the fuel. So I think criticisms were this isn’t doing anything else for ethanol. Ethanol’s already cheaper than gasoline. And all the RIN is doing is driving us to over-comply with the advance standard to eat into ethanol’s pot. 

 

Another criticism would be the cost of the program. As I mentioned, RIN — the financial sector has extensively noted that RINs do add to the cost at the pump. They’re disproportionately born among refiners upstream of where all the fuel gets blended. But downstream where all the fuel gets blended, the brunt of it is getting passed through to the consumer. And the blenders basically pocket the difference in terms of profit. 

 

Some folks would contend that. Right? It’s a big argument. Some folks disagree with that perspective. But in terms of one criticism that’s another one that folks have said is that the whole structure of the RIN system is set up so that it’s the highest cost option for trying to get to your objective. It’s not really achieving the objective, and it’s adding anywhere from 20 to 30 cents a gallon at the pump while actually incentivizing refinery consolidation and putting certain classes of refineries at risk. 

 

And then I think advocates of the program outside of the ethanol space would say the program has been successful in incentivizing new types of biofuels. And there’s merit to that; right? A lot of people are in the renewable diesel business now that wouldn’t be if not for a combination of the tax credit and the RFS and then the LCFS credits, the California fuel standard. But there are still obviously significantly more costly than traditional fuels, so everybody’s paying a price for that too. And costs probably will come down a little as [inaudible 00:31:39] grow and have scale. 

 

But I think the core of the criticism lies into the structure of the RIN program, how it’s inequitable, what that is costing and the fact that when you look at those two together, the result is a program that’s costing folks without actually really advancing the objectives set forth in the standard, as it pertains to certain classes of biofuels too. eRINs as well I think a lot of folks are saying, well, you’ll probably get some unity from the biofuel and refining sectors that this was intended to be a liquid fuel program. Congress explicitly wanted to study this before moving forward, and it wasn’t supposed to be another subsidy for electrifications because that’s another kind of new criticism that you probably have some jointly shared amongst elements of the biofuel and refining sector. 

 

Daren Bakst:  Jonathan, is there anything else, any additional criticisms? In particular I’m wondering if you have some criticisms I know from food sectors about food prices, the environmental impact, anything else you could —

 

Jonathan Brightbill:  Yes. Yeah. I mean, one of the interesting things about this program — and I saw it at DOJ during my time there. A lot of the litigation is and has been biofuel sector versus traditional petroleum sector. And that was the perspective Brendan brought to the criticisms. But if you go to the Sierra Club NRDC environmental groups, their view is this program is not helping the environment. It’s actually negative ultimately for the environment. And they’ve been — in the time since launched the view of much of the environmental community is that the impacts — total lifecycle impacts on greenhouse gas emissions are marginal in their projections and in their telling. 

 

And then there are a lot of criticisms of what this program then means for as you were beginning to get to, Daren, food prices because this is now an additional competitive use of corn or soybeans. It’s not just to eat. It’s now also to be used as fuel, and so supply and demand, Econ 101, demand goes up. So does the potential price that those who produce can charge. 

 

Then there’s also the idea that, well, maybe we don’t want land converted from wetlands or prairies or forests or what have you into more agricultural use, use of pesticides, runoff, all kinds of what I’ll call indirect impacts, allegations that this can impact groundwater supplies and other things as the use of the various kind of modern agricultural techniques and technologies are used to actually grow the crops themselves. So this is a program that Congress created, Congress mandated but that the environmental community as a whole is generally opposed to. 

 

Daren Bakst:  So we’ve talked a lot about the RFS generally. The program is supposed to be on the proposed rule, so let’s get to the details of the rule. And let’s try to go through these relatively quickly because it’s a lot of questions on the proposed rule. And again, for the audience, please do submit questions if you have some. Jonathan, you had talked about the purpose of the RFS. And I wanted to know whether or not you thought the proposed rule is consistent with the purpose of the statute, at least as Congress envisioned it. 

 

Jonathan Brightbill:  Well, I can tell you that there are a lot of people who are going to make arguments, I think, that it is not. Certainly there are pieces of it that are consistent and that will continue to advance kind of the core existing program. But there will be those — and there were a lot of comments that were submitted by EPA of folks who are very critical of the EPA proposal to expand and actually utilize these eRINs. 

 

And one of the reasons for that is that — twofold. We talked about what the kind of two primary policy objectives are of the RFS or what it was. Number one was reduce the net total lifecycle greenhouse gas emissions of transportation fuels and that an eRINs program is not going to do that. And the fuels that go into liquid fuels that have been the historic objective of the program are not going to be improved or have their total net greenhouse gas emissions reduced or changed in any way by having eRINs generated and awarded. So say the opponents. 

 

But nevertheless, that same implied tax burden is still going to be borne by the gasoline, by the transportation fuel. So what you’re going to have ultimately as part of this tax leaking out effectively from Congress’s intended purpose and design in terms of where the subsidies were targeted and leak out because of the rewrite of EPA’s regulations or addition of this into subsidizing something else that is not the historic objective of the RFS program. 

 

Second thing is I think criticism that was common in a lot of the comments that were submitted is that this is a move backwards from the perspective of energy security because instead of encouraging the production of fuels and then fuel supplements that are generated, can be generated, and utilized within the United States, the eRINs proposal in fact will make us less secure in terms of our total, again, net energy capacity because electrification depends on batteries and batteries depend on heavy metals and other things which are coming primarily in this day and age from China and which there are not any serious efforts or proposals to ramp up and line and scale at this point in the United States or certainly not in the scales that would be necessary to meet the projected electrification needs if we move towards electric vehicles. So I think that that is a primary criticism, particularly of the eRINs part of this, the novel piece of this is that it is right angles with the actual intended congressional purpose for the renewable fuel standards. 

 

And obviously there are arguments to be made to the contrary, but one of the things I think this presents and to come into FedSoc interesting are of conversation land is this is an area where the Supreme Court’s major questions doctrine from West Virginia v. EPA — I think there are very good arguments that are going to be made that in the legal challenges that are almost very likely to come to all of this that this is what I’ll call a decent major questions case. I think personally, look, as the guy who argued the major questions doctrine for EPA and the United States in the D.C. Circuit and then before it got endorsed and adopted by the Supreme Court in West Virginia v. EPA, I helped to inject the major questions doctrine into modern administrative law. 

 

But as part of that I don’t think it is candidly — my assessment is it’s not going to have as much impact as I think a lot of laypeople think it can and will based on the kind of major questions mantra because ultimately it’s a clear statement of statutory construction. And so its implications of whether it even applies and where it applies and what its implications will be are a lot more subtle than a lot of commentators will state and I think even understand. 

 

That said, this is an instance where arguments are being made — pretty colorful arguments are being made that the EPA regulation is moving the program at right angles to congressional intent. And one of the things that Congress gets a fair amount of criticism for failure to, quote, get things done and then also its frequent delegations of authority to administrative agencies. But one thing that Congress has continued to pretty jealously try to keep their arms around and control of is the power of the purse, who pays and then where the money goes. And through appropriations — and they haven’t seen real fit to give much of that authority up. And this proposal is one that is argued to be taking essentially a congressional subsidy and redirecting it in another direction/place that Congress didn’t set it forth. And then as Brendan indicated, there’s some statutory indications in the broader EISA of 2007 that call this approach into question. 

 

Brendan Williams:  You know, it’s interesting, building on what Jonathan said. No matter what kind of refinery you are — you’re a merchant, integrated — nobody can blend anything into a liquid fuel supply and generate eRINs. So it literally is a pure tax on the fuel supply. In fact, in the last RVO EPA finalized, EPA actually expressed concern about how high they should set the cellulosic requirement, and this was even before eRINs, because of what the potential impact on the fuel supply were. The eRINs is being used to dramatically expand, double for each of the next couple of years the cellulosic requirement. 

 

So it is a direct tax, and it does raise the overall — I mean, these things are — our company spent somewhere in the neighborhood of a billion dollars last year in environmental credits, the brunt of which was RINs. That’s more than we spent to operate six refineries across the country. It’s our highest expense, more than payroll, more than electricity, more than anything other than purchasing crude oil. 

 

And you have seen some others point in part to the cost of this program for some of the refinery shutdowns and consolidations we’ve seen over the last three years. The U.S.’s 1.2 million barrels a day less refining capacity than it was just three years ago. COVID was part of that, but the cost of this combined with some of the other programs was also a significant factor that was pointed to. 

 

For the first time ever on the West Coast, they’re actually short refining capacity. Ironically, they’re importing somewhere in the neighborhood of 80,000 barrels a day of gasoline, so finished petroleum products, because they’re short refining capacity. And it’s actually coming from Asian refineries that are running Russian crude. So you do create a lot of — the more you drive the cost of this program through things like eRINs which will be a straight tax, you do risk some additional overall transportation and energy market dislocations. 

 

Daren Bakst:  Brendan, let me address this follow up question to you. Is this a subsidy for auto manufacturers? Who is benefiting from this —

 

Brendan Williams:  For eRINs, yeah. It’s a direct subsidy. The way the rule is written now the auto manufacturer is the one who gets the RINs. And that’s just basically they say, hey, we signed this contract that shows this amount of electricity will be produced by biogas, so give us the relevant RINs. And then they’re not an obligated party, so they turn around and sell them. And we refiners have to buy them. 

 

So it is another subsidy for auto manufacturers that — and electric vehicles are already obviously extensively subsidized. We have the $7,500 tax credit in the IRA. And when you go down a list of other subsidies and various statutes, various laws, not only federally but state. I would argue it’s also a very inequitable subsidy in addition to consumers eventually paying it. And the most low income households pay the largest share of their disposable income on energy costs. 

 

You’re also essentially asking a company like mine, which is a mid-cap size company — I think our market cap is somewhere in the neighborhood of $5 billion. So we basically have to subsidize a company like Tesla, which is the sixth wealthiest company in the world by market cap. So it’s not only a subsidy for electric vehicle manufacturing. We would argue it’s also an unnecessary one given the extensive amount of subsidies you already have and the fact that they’re already making obviously electric cars now without it. 

 

Daren Bakst:  I know we have several more questions, so I’ll try to move these along. Brendan, I want to just come right back to you actually. I think there’s an important point about the EPA really makes a big deal in the proposed rule about — at least I think it does in the preamble and throughout the proposed rule about the desire to change the vehicle fleet, that that’s kind of one of the goals of the eRINs. And I just want to get your take on that. 

 

Brendan Williams:  Yeah. I would echo some of Jonathan’s comments. I think this is something — this raises a lot bigger issues that I think Congress should spend a lot of time on. First of all, let’s say if you’re in the biofuel sector; right? So folks like us who are making renewable diesel, this program did drive investments in biofuels in those sectors. So you spent a lot of money investing in that, which is billions and billions of dollars. 

 

Now you’re saying, well, we kind of want liquid fuels to go away. So you’re actually putting additional investments at risk that, regardless of what you feel about the program, probably could achieve the program’s objectives in a much lower cost. But I think as Jonathan said, too, I think that people are starting to recognize the fact that there are issues of massively mandating electric vehicles or massively subsidizing them, trying to transform the vehicle fleet in a very compressed time period that people are just starting to wake up to. 

 

Jonathan mentioned the mineral, not only where the minerals are mined. 80 percent of the cobalt in the world is currently mined in the Congo. And that’s where half of the world’s reserves are. And there are significant issues about child labor and very abject conditions there. The 85 percent of the lithium in the world actually has to go to China to be refined. All these minerals actually also have to be refined before it can be sent back to a battery plant to be included in a battery. 

 

There’s been actually extensive analysis that shows coming off the manufacturing line a lot of the electric vehicle companies actually don’t look at the lifecycle emissions portfolio of their vehicles. They just look at the manufacture of it. They don’t look at the mineral supply chain, the mineral refining, anything upstream. 

 

But there’s been a lot of analysis that says if you — an electric vehicle has anywhere from — and if you treat it generously from an emission standpoint but it has anywhere from 40 to 50 percent more imbedded carbon. 45 to 50 percent more carbon emissions are required to make an EV than a traditional internal combustion engine. And then even if you assume the grid is 100 percent renewable, which it’s not, it takes 130,000 miles for it to break even. 

 

And so I think you’re going to find out that in this — and it takes a long time to permit mines. The global average timeframe is 13 to 15 years. And we’ve obviously seen some mines rejected here in the U.S. You could actually do things — half of an electric vehicle is actually made of petrochemicals. 

 

So there are actually things you can do to get more even manufacturing for electric vehicles based here domestically. But these are big issues that nobody’s really thought through and worked on solutions for as they race to try and massively subsidize and transform the vehicle fleet within a decade. If you look at the latest EPA GHG tailpipe standard, it essentially mandates that 67 percent of all new vehicle sales have to be electric by 2032. I haven’t talked to an auto manufacturer who’s told me that that’s feasible. 

 

Daren Bakst:  Yeah. I think one of the key takeaways I would hope that people get is that this rule is actually a key part of this major change to try to electrify the fleet. And while the tailpipe rules might get more attention, this one also deserves a lot of attention as well. And Jonathan, I want you to address an authority question to the eRINs part of it. And we had talked about — you had mentioned that study that was supposed to have been conducted. I just want to get your take. I mean, that study wasn’t ever completed. It never has been completed. I just want to see if you thought through a statutory authority for these eRINs. 

 

Jonathan Brightbill:  A lot of comments were submitted in opposition to the proposal raising a lot of significant questions about EPA statutory authority here. And there were a number of what I’ll call textual problems with this. First and foremost, the standards are expressed in changing the volume of renewable fuels in gallons of transportation fuel. 

 

And let’s just pause on the word “fuel.” What is a fuel? Fuel is not a battery. A battery is not a fuel. Fuel is something you essentially combust, you set on fire to create energy, heat. Wood is a fuel. Gasoline is a fuel. And batteries aren’t fuel. And you’re not changing the gallons or the volumes or anything at the final analysis of what’s in the vehicles. 

 

So there’s kind of what I’ll call an initial textual problem with trying to fit eRINs into the existing program which has been identified. But this is magnified by the fact that 202 was not passed in isolation; right? If you go to the Code and you pull out the Code and you read what the current renewable fuels program is, most people forget that codes — well, in some instances the codes are positive law. But in many instances the codes that you pull out, the U.S.C., they’re not positive law. They’re not the law. The statutes are the law. 

 

And so the code is just a convenient summary of all the statutes that have been put together in many of the various titles and in particular if we’re talking about the EPA titles, so title 42. Although, again, some have been codified officially into positive law by Congress. But the statutes are the law. 

 

And if you go to the statute that was passed here in 2007 and you keep reading it past 202, you get to 206. And 206 talks about essentially what EPA is now doing by regulation potentially being done in the future. 206 talks about a study being called for, EPA engaging a study into the possibility of incorporating essentially some sort of eRINs into it in order to supplement what the existing program is doing in the context of electric vehicles and battery powered vehicles. And then Congress directs that after this study is done it essentially implies that EPA can come back to the Congress, and Congress might at that point authorize EPA to do a pilot program on this. It uses that term, “pilot this.” 

 

And so one twist I heard — I can’t take credit for it, but I heard somebody express their opinion that EPA doesn’t even have the statutory authority to pilot what they’re now doing let alone to actually do it. So there are some inconsistencies then in terms of how it works. There’s also some questions about whether the overall paradigm here of having biogas not then lead directly to specifically traceable amounts of electrons getting to the battery — even if you’re going to entertain the notion of, well, instead of a certain percentage of the biofuels having generated — being actually in the transportation fuel, in the gasoline, we’ll take that same concept, and we’ll transfer it to it has to be a certain amount of biogas, a certain amount of the electrons that are flowing into the battery. That’s fine. That’ll be good enough. 

 

But the statute actually has some really stringent language around traceability I’ll call it and how that’s tracked. And EPA has proposed to address that by essentially — given the fact that electric vehicles in particular but most cars that you’re now buying are constantly talking to the manufacturer. And if they’re not talking to the manufacturer, you’re downloading lots of data to them about what you did and where you drove and where you’ve been and other things that they then have. And so part of the proposal is to use that data and information to then try to arguably match up to where through these contracts and other mechanisms that Brendan was talking about — where the electrons flowed from in order to charge the vehicle batteries. 

 

So there are a lot of issues here between the translation of the concept of what they’re trying to do here in terms of metaphorically transfer the concept of what’s happening with gasoline or diesel fuel, as an example, and then move that over and do that with batteries that critics have identified are not an entirely, shall we say, tight fit with the statutory language. And then you layer on top of that the major questions doctrine which calls for a clear statement of congressional intent and desire to have this happen when there are arguments that are being made that in fact 206 — [inaudible 00:57:06] is a clear statement to the contrary. Congress doesn’t want this happening. So there are questions that have been raised and I think folks can expect are likely to be seen asserted. 

 

Brendan Williams:  You know, it gets even more complicated when you look at how biogas got included into the cellulosic category specifically because that in and of itself was also kind of a bank shot. The statute does say that biogas can qualify as an advanced biofuel, and the discussion around cellulosic was you had a lot of venture capitals and some big investment firms, big investment banks saying, oh, if you mandate cellulosic ethanol, that will calm — everybody was talking about liquid cellulosic fuels. So when EPA — so when that didn’t materialize and EPA approved biogas, it basically said okay, well, the statute says biogas can qualify as an advanced biofuel. 

 

The statute also has this requirement for cellulosic biofuel. And it has to be 60 percent less carbon intensive than the 2005 gasoline baseline. So biogas is an advanced biofuel, but it also meets this threshold. So since it meets this threshold, not only are we going to say it’s an advanced biofuel, but we will qualify this as cellulosic biofuel as long as it’s replacing geologic gas in a natural gas vehicle. So there’s a couple little — you kind of got to stretch it a little just to get to there. 

 

And building on what Jonathan said about tracing electrons, the way biogas works now is that you don’t actually have to trace the gas. It’s still contractual going into a natural gas vehicle. So you clean the gas, and you just dump it into the interstate gas pipeline system. And somebody says, okay, this person put this volume out over here. I took this volume off over here. And they certified it. So you already kind of have an issue with tracing actually the gas through the system. Now, compounded with that, you can’t really trace electrons once they’re on the grid, too. So you kind of have that one step removed twice over now. 

 

Daren Bakst:  So we only have actually just a couple minutes left, and I hate to do this to you, Jonathan. But I do want to ask you a question about the set rule in that there’s so much discretion to the EPA now that we’re in this kind of — there’s no volume target set in the statute. And one of the issues that’s been brought up is that there’s so much discretion, whether or not this actually poses nondelegation concerns. I know that’s a tough question to answer quickly. But if you could, I want to get your thoughts on it. 

 

Jonathan Brightbill:  I’ve seen better nondelegation arguments than this one. I know that people are making that argument, and we’re going to see that argument. I think that it’s an interesting idea. But if you were going to ask me to call balls and strikes to try to predict I’d say it isn’t the place that I would expect to be the decision point on this one because there are a lot of factors there. And I think your median D.C. Circuit panel, we’ll call it, is going to have other arguments to deal with that are kind of a higher likelihood to be where the decision point is on something like this. But of course maybe you get past all those things, and you get to nondelegation. I think it’s an interesting argument in theory, but I really haven’t seen it written up yet in a way that completely convinces me that that has a high probability of success, although very interesting. 

 

Daren Bakst:  So, Brendan, I want to get to a final question here. It’s more of a cost-benefit question. So when I was looking at the proposed rule in the RIA, the EPA only monetized effects of two statutory list of factors that they have to kind of go through. And that was fuel costs and energy security benefits. So just looking at the 3 percent discount that they applied, they found cost of $29.5 billion — that’s the fuel cost. And then energy benefits they found were $634 million. So basically the costs are about 47 times greater than the identified benefits. I don’t know if I’m missing something or if you’ve got any take on that. 

 

Brendan Williams:  No, I think you’re right. That’s the raw numbers. They lay it out, too. So they lay that out in the RIA and then simultaneously say, well, yeah, the RIN market’s $30 billion that’s changing hands each year. But it’s all a wash; right? I mean, it’s a contradiction, and it doesn’t hold up. There are actually ways to structure the program where it’s a lot more cost effective. I would argue there’s actually ways to structure it where you could actually better get more ethanol in the fuel supply if that’s your objective. But that’s not how it’s currently structured. 

 

And I would — as I mentioned, just in the ethanol side, ethanol’s cheaper than gasoline right now. Where we’ve seen more consumption of fuels like E15 is where there’s been more direct investment in the infrastructure, which is costly. EPA said in their RIA the investment a retail station would have to — the dollars a retail station would have to invest just to be able to move from selling E10 to E15 break down to something in the neighborhood of $2.89 a gallon when the average retail margin is 3 cents on a gallon of gasoline because you’re making more money on a Twinkie and a coffee when people go into your store. That’s a big haul. But where we have seen people directly invest in infrastructure, you see some uptick in it. 

 

But we certainly haven’t seen the massive cost associated with what the overall cost of RINs is placing on the system really do anything to advance the objectives of the program. If you trace RIN price over the percentage of ethanol blended into the fuel supply, we’ve kind of hit the blend wall. And we are ticking up a little bit over very, very gradually. And that trajectory is the same no matter if RINs had been 15 cents or $1.50 like they are now over long periods of time. So we would certainly argue the current structure of the program. It’s probably the costliest way they can structure it with minimal benefits, to the extent there are different ways you can structure this program where you can lower the cost significantly and probably achieve the objectives if you want, but that certainly isn’t how it’s being administered right now. 

 

Daren Bakst:  Brendan and Jonathan, thank you so much for sharing your expertise today on this important proposed rule. Of course I want to thank all of you for participating in today’s program or watching a recording of the event. We look forward to seeing you again soon. 

 

Sarah Bengtsson:  Thank you. I just want to thank all of our speakers for sharing your time and your expertise with us today and our audience, as Daren said, thank you for tuning in. You can find more of our content on our website at regproject.org or follow us on any major social media platform @fedsocRTP to stay up to date. We are adjourned. 

 

Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at regproject.org. That’s R-E-G-project.org. 

 

View more