EPA proposes substantial expansion of Renewable Fuel Standard Program with eRIN proposal

In early December, the US Environmental Protection Agency (EPA) published its long-awaited proposed rulemaking establishing the biofuel mandates under the Renewable Fuel Standard (RFS) Program for 2023, 2024, and 2025 (available here).

The RFS Program requires refiners and importers either to blend volumes of renewable fuel such as ethanol or biodiesel into the transportation pool (gasoline and diesel fuel) or to purchase renewable fuel credits known as renewable identification numbers (RINs). Producers of qualifying renewable fuels are permitted to generate and sell RINs associated with their production.

EPA refers to the proposal as the Set Rule because it marks a new phase for the RFS Program – the Agency, not the US Congress, will establish future mandates for cellulosic biofuel, advanced biofuel, total renewable fuel, and biomass-based diesel. The proposed rule includes a number of important policies that will shape EPA’s implementation of the RFS Program going forward. However, none is more significant than EPA’s proposal to include renewable electricity derived from biogas and used to charge battery electric and plug-in hybrid electric vehicles (collectively, EVs) in the Program. Production of renewable electricity would, in most cases, qualify for the generation of a cellulosic biofuel RIN.

The component of the RFS Program involving renewable electricity for transportation purposes would operate, to some degree, differently than the rest of the Program. Beginning in 2024 and 2025, auto manufacturers (original equipment manufacturers or OEMs), not the producer of the renewable fuel, would be permitted to generate and sell compliance credits (known as electric-RINs or eRINs). Specifically, OEMs could generate 1 eRIN for every 6.5 kilowatt-hours (kWh) of renewable electricity used to charge their EV fleet. EPA selected OEMs as the regulated entity eligible to generate these marketable compliance credits because it believes they are best situated to calculate the renewable electricity demand attributable to charging their EV fleets.

However, consistent with the Agency’s experience with liquid biofuels under the RFS Program, it anticipates the value of the credit will be shared with other parties in the renewable electricity production and distribution chain, among them biogas producers, renewable electricity generators, EV charging station owners, and others associated with the EV industry.

The eRIN proposal would add a new layer to the RFS Program designed to incentivize growth of the EV market in the US. EPA believes that the new program is consistent with its statutory authority under the Clean Air Act, and it has proposed an expansive definition of qualifying biofuels based on the energy content of transportation fuels, not the mass of biofuel blended or physically present in a given fuel.

Nevertheless, interested parties should be aware that, if finalized, it is expected that the eRIN proposal – and other provisions of the Set Rule – will be challenged in the federal courts.

Background

As indicated, the RFS Program has traditionally dealt with biofuels and liquid petroleum-based fuels. However, in 2010, EPA first determined that electricity, natural gas, and propane derived from renewable biomass could meet the statutory definition of renewable fuel, and thus would be eligible to generate RINs so long as regulated parties could “identify the specific quantities of their product which are actually used as a transportation fuel."

EPA subsequently approved renewable fuel pathways for renewable electricity – a renewable fuel pathway is an approved combination of a feedstock, production process and fuel type that is eligible to generate RINs:

• Pathway Q allows for cellulosic biofuel (RIN Code D3) for renewable electricity produced from biogas from landfills, municipal wastewater treatment facility digesters, agricultural digesters, separated municipal solid waste digesters, and other cellulosic waste digesters.
• Pathway T allows for advanced biofuel (RIN Code D5) generation for renewable electricity using biogas from non-cellulosic waste digesters.

Prior to the eRIN proposal, EPA never authorized any party to generate eRINs associated with renewable electricity. Unlike liquid biofuels such as ethanol or biodiesel, EPA was concerned that once electricity is on the commercial electricity transmission grid, it is an indistinct commodity that cannot be traced to an EV charging facility or vehicle battery.

eRIN proposal

When formulating its eRIN proposal, EPA considered either a bottom-up or top-down approach to tracking renewable electricity from the biogas producer to EV batteries. Ultimately, it has proposed a top-down approach whereby OEMs would determine renewable electricity consumption based on the size of their EV fleet (both new and in-use vehicles) and information regarding the electricity consumption of those vehicles.

The proposed eRIN program would directly regulate three parties in the renewable electricity generation/distribution chain:

• OEMs
• renewable electricity generators (utilities) and
• biogas producers.

OEMs would determine electricity consumption of their EV fleet and contract with renewable electricity generators for the exclusive right to generate eRINs for the quantity of renewable electricity derived from biogas that matches their EV fleet’s electricity consumption. EPA refers to these contracts as RIN generation agreements. Renewable electricity generation facilities would only be permitted to enter into RIN generation agreements with a single OEM. In addition, biogas producers would also be required to register their biogas production facilities with EPA, submit periodic reports and keep internal records for the qualifying biogas they produce, generate records for biogas transfers, and undergo an annual attestation audit.

EPA anticipates that these entities will require months to a year or more to register with the Agency and produce qualifying biogas and renewable electricity. Therefore, it has proposed to commence the eRIN program starting January 1, 2024. EPA estimates that the main limiting factor affecting the quantity of renewable electricity available to produce eRINs in 2024 and 2025 will be the pace at which biogas producers and renewable electricity generators can successfully register their fuel with the Agency. Based predominantly on these estimates, EPA is proposing to mandate 600 million eRINs from renewable electricity in 2024 and 1.2 billion eRINs from renewable electricity in 2025.

Obligated parties under the RFS program (petroleum refiners and importers) would be required to purchase eRINs to meet their annual compliance obligations. In the preamble to the Set Rule, EPA estimates that the eRIN component of the Program will have a limited impact on the price of transportation fuels. It states that “eRINs alone are projected to increase the price of gasoline and diesel by $0.01 per gallon in 2024 and approximately $0.02 per gallon in 2025.”

Outlook

EPA has requested public comments on a number of components of the proposed Set Rule and the eRIN program, in particular. Although EPA first determined that electricity derived from biogas meets the statutory requirements for qualifying biofuel under the RFS Program, its eRIN proposal represents a substantial expansion of the cellulosic biofuel component of the Program. In the first two years that OEMs would be eligible to generate eRINs, qualifying renewable electricity would more than double the cellulosic biofuel mandate, with substantial additional increases likely in the future as additional biogas producers register with the EPA. The proposal, if finalized, will be a significant regulatory incentive for EVs and renewable electricity projects.

If you have questions regarding the RFS Program or the proposals contained in the Set Rule, please contact the author.