Giant Appeals Court Victory For Biofuels

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Jim Lane

As DuPont’s (DD) Jan Koninckx put it in his understated way, July 28th was “a good day for biofuels.”

But it was the biggest victory in the courts for biofuels, ever.

Specifically, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of Americans for Clean Energy and other renewable fuels advocates, agreeing with the petitioners that the Environmental Protection Agency erred in how it interpreted and used the “inadequate domestic supply” waiver in the Renewable Fuel Standard law in setting low renewable fuel volumes for 2014-2016.

In Americans for Clean Energy et al v. Environmental Protection Agency, the Court vacated EPA’s decision to reduce the total renewable fuel volume requirement in 2016 and remanded the rule to EPA for further consideration.

It’s here.

The background

In late May 2015, the EPA weighed in with staggeringly weak RFS volumetric proposals for 2014 through 2016, based on an arcane theory of “supply” vs. “demand” that the Court of Appeals found ridiculous. At the time, the industry was aghast, and responded with more than 200,000 comments. Among them, dire remarks like “POET expects to stop all future U.S. cellulosic investments if EPA’s proposed base renewable fuel requirements are not strengthened.”

And BIO’s Brent Erickson warned:

“EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure. This is a point that will have to be litigated. It goes against Congressional intent. EPA has proposed higher volumes for advanced biofuels, still below the statutory volumes, but maintained a methodology that discourages investment in the industry. That will likely undercut future production, requiring additional cuts to volumes in future.”

And so, industry sued. And now, as Judge Kavanaugh writes in his unanimous opinion:

EPA noted that the Renewable Fuel Program’s requirements were “readily achieved” in the few years after Congress created the program in 2005 and amended it in 2007. Id. That was due in large part to the fact that the industry had the capacity to produce – and the market had the capacity to consume – increasing quantities of ethanol. Id. But by 2014, ready compliance with the statutory volume requirements was no longer possible. That is because the industry hit the “E10 blendwall”: an “infrastructure and market-related constraint on ethanol demand” that “arises because most U.S. vehicle engines were not designed to handle gasoline consisting of more than 10 percent ethanol.” Put differently, a few years into the amended Renewable Fuel Program, the supply of ethanol was much greater than the demand in the market.

Now, you may ask yourself, why would the distribution industry (controlled by, ahem, you can guess who) ever embrace E15. E30, or E85 if they could, by refusing to put in infrastructure, they could get ethanol volumes waived down — volumes that would have to be replaced by more gasoline (made by, ahem, you can guess who).

Think of it this way. All a petroleum marketer would have to do to squash competition is to make sure that no pump in the United States could handle E10 ethanol, or any ethanol content whatsoever. Presto! The E0.00000001 blendwall, and we’re right back to the gasoline dependency we started with.

Congress debated this very problem in the 2007 EISA Act. As Judge Kavanaugh observed:

The drafting history of the “inadequate domestic supply” provision, to the extent it is relevant, counts as yet another strike against EPA’s interpretation. The version of the Energy Policy Act passed by the House would have allowed EPA to reduce the statutory volume requirements “based on a determination by the Administrator, after public notice and opportunity for comment, that there is an inadequate domestic supply or distribution capacity to meet the requirement.” The latter portion of the waiver provision – which would have allowed EPA to consider “distribution capacity” – was dropped in the version of the bill passed by the Senate.As relevant here, the House agreed to the Senate’s amendment to the bill. The “distribution capacity” language does not appear in the final version of the Act. Congress’s decision to drop the “distribution capacity” language counsels against EPA’s reading in this case, which in effect would add that kind of language back into the waiver.

Nevertheless, the EPA went ahead with its interpretation. Industry headed for the courts for justice. And justice they won.

Why is this so big?

If you’ve been asking where all the cellulosic biofuels are, the obvious answer is that very little has been made, but why? One primary reason — not the only one, but a completely major factor — has been the EPA’s insistence that the content standard for US gasoline can be limited in terms of ethanol should anyone in the oil or automobile industry decide not to build distribution capacity.

It struck us as absurd from the get-go. We noted that, by he same logic, that any obligated party could avoid mandates for safe drinking water by not building any distribution for anything but filthy water. Or a cruise ship could avoid rules for minimum lifeboat count by simply not installing the davits to hold them.

Everyone knows that this is not so. A mandate to provide something puts the responsibility on the obligated party to figure out how to distribute it. And in the case of the Renewable Fuel Standard, if parties feel they cannot afford the burden of blending and distributing fuels, or the exercise in innovation of figuring out how to lower the cost — they can simply purchase RIN credits in the open market and they are done.

The problem is that common sense evaded the EPA in this case. Not only did they release the 2014 Renewable Fuel Standard some 2 years late — in fact, after 2014 had expired — they got the math very, very wrong.

So decided Circuit judges Brett Kavanaugh, Janice Rogers Brown and Patricia Millett — the first two being Bush-era nominees — in a stinging decision penned by Kavanaugh.

Highlights from the decision

Importantly, whether a thing is “available” to someone has nothing to do with whether he or she decides to use it. (The fact that a person is on a diet does not mean that there is an inadequate supply of food in the refrigerator.) So too here: Whether there is an adequate amount of renewable fuel available to allow refiners, blenders, and importers to meet the statutory volume requirements has little to do with how much renewable fuel that refiners, blenders, and importers – much less consumers at the pump – ultimately decide to use.

The Renewable Fuel Program’s increasing requirements are designed to force the market to create ways to produce and use greater and greater volumes of renewable fuel each year. EPA’s interpretation of the “inadequate domestic supply” provision flouts that statutory design: Instead of the statute’s volume requirements forcing demand up, the lack of demand allows EPA to bring the volume requirements down. “No argument” that EPA has “offered here supports that goal- defying (much less that text-defying) statutory construction.”

We reject EPA’s attempt to bootstrap the definition of “renewable fuel” into a boundless general waiver authority. Contrary to EPA’s contention, the phrase “that is used” in the definition of “renewable fuel” does not mean that biofuel transforms into renewable fuel only when it is actually pumped into gas tanks.

Second, EPA contends that interpreting “supply” to refer to the amount of renewable fuel available to refiners, blenders, and importers in effect reads “supply” to mean “production.” That interpretation is not correct, according to EPA, because “other fuel related provisions of the Clean Air Act” distinguish between “capacity to produce” and “capacity to supply” fuel.

EPA has not explained why Congress would have established the severe-harm waiver standard “only to allow waiver under the inadequate-supply” provision based on “lesser degrees” of economic harm.

We are not convinced that EPA’s strained interpretation of “inadequate domestic supply” is necessary to avoid the parade of horribles that EPA identifies.

Taking a step back, moreover, we reject EPA’s purposive argument on its own terms. That is because EPA’s proposed interpretation of the “inadequate domestic supply” waiver provision – in which the demand for renewable fuel largely dictates the volume requirements – turns the Renewable Fuel Program’s “market forcing” provisions on their head. Final Rule, 80 Fed. Reg. at 77,423. To be sure, EPA and obligated parties have raised serious concerns that the Renewable Fuel Program is not actually functioning as intended and that, as a result, the statute’s requirements will only become more and more impractical to meet. But the fact that EPA thinks a statute would work better if tweaked does not give EPA the right to amend the statute. Cf. Utility Air Regulatory Group v. EPA, 134 S. Ct. 2427, 2445, slip op. at 21 (2014) (“An agency has no power to ‘tailor’ legislation to bureaucratic policy goals by rewriting unambiguous statutory terms. Agencies exercise discretion only in the interstices created by statutory silence or ambiguity; they must always give effect to the unambiguously expressed intent of Congress.”) (internal quotation marks omitted).

Reaction from the stakeholders

Jan Koninckx, DuPont:

“We look forward to working with EPA as the agency re-examines the renewable volume obligation rules on biofuels and translates the Court’s decision into regulatory action. Consistent and long-term biofuels policy is critical to continued growth and investment in renewable fuels.

National Corn Growers Association

“Today’s Court decision is a win for farmers, the biofuels industry, and consumers. We appreciate the Court honoring Congress’ intent. Congress created the Renewable Fuel Standard to help increase American energy independence and provide cleaner fuel choices for consumers by opening a closed fuel market and forcing the oil industry to allow competition in. Whether there is an adequate supply of renewable fuel to meet volume standards is not the same as how much fuel is used. Or, in the Court’s own words, ‘The fact that a person is on a diet does not mean there is an inadequate supply of food in the refrigerator.’

“Corn farmers have done our part to help expand the supply of renewable fuel, as well as help support use of renewable fuels with retailers and consumers. We look forward to working with the EPA to ensure that going forward, the Agency follows the law when implementing the RFS.”

POET CEO Jeff Broin

“Today’s decision is a victory for U.S. drivers and everyone who supports clean, American-made fuel. Congress clearly laid out its vision for increasing our nation’s use of American-made biofuels, and the biofuels industry has worked tirelessly to make that vision a reality. We must use every available gallon of clean, domestic biofuels in lieu of importing more oil. It’s environmentally responsible; it’s economically responsible; it’s common sense; and it’s the law. We hope this decision will help us move past the unjustified resistance to year-round use of E15 by those protecting oil markets and pave the way to the expansion of higher biofuel blends across the United States.

Donnell Rehagen, CEO, National Biodiesel Board

“Today’s decision from the D.C. Circuit is welcome reassurance that EPA has the authority to increase volumes of biomass-based diesel. We must do so to advance the goals of the law. And as co-petitioners to the general waiver authority argument, we were pleased to see the court agreeing with our arguments. Biofuels today replace toxic chemicals linked to cancer, developmental disorders and other health issues. Biofuels lower greenhouse gas emissions by at least 43 percent. Today’s decision will help to increase those benefits while lowering costs for consumers at the pump.”

BIO President & CEO Jim Greenwood

“BIO and its members are pleased that the Court agreed with us that EPA’s flawed methodology would have allowed the oil industry to control the volumes of renewable fuels offered to consumers. BIO has consistently said that the RFS statute does not allow EPA to rely on demand-side factors under the oil industry’s control as a basis for setting annual volumes.

“We are equally pleased that EPA abandoned its legally flawed reliance on general waiver authority in subsequent rules. We will continue to work with the agency as it reconsiders the 2015 and 2016 RFS volumes. EPA can send a strong signal that it will support the biofuels industry and grow advanced and cellulosic biofuel production.

“BIO’s members rely on the RFS to open the U.S. transportation fuel market to new, cleaner technologies. Stability in this program enables our member companies to secure investment for the development and commercialization of new advanced biofuel technologies.”

The Bottom Line

This issue looks settled for all time — there’s just nothing for the Supreme Court to look at here until President Trump gets five justices on the bench from Oklahoma, and there’s nothing for the Court of Appeals here to go for an en banc review of the three-member panel. There no controversy between warring circuit courts, and the decision is a model of judiciary knocking down zealous Obama-era bureaucrats.

If there are issues with the RFS, the Circuit Court is very clear:

If the regime is indeed flawed, it is up to Congress and the President to “reenter the field” and fix it.

ABFA president Mike McAdams recently penned this column on that topic and we anticipate and encourage a healthy and vigorous debate on the RFS’ legislative future. Now, let the noisy, fractious, democratic debate begin.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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