D.C. Circuit Concludes EPA Cannot Use RFS Authority to Drive Cellulosic Biofuels Industry

January 29, 2013

In an opinion released late last week (American Petroleum Instit. v. EPA, No. 12-1139 (D.C. Cir. Jan. 25, 2013)), the U.S. Court of Appeals for the D.C. Circuit vacated in part an EPA determination relating to the production and use of cellulosic biofuels. The court concluded the agency did not have the authority to use an unreasonably optimistic methodology to “project” the volume of cellulosic biofuels to be produced in 2012, thereby increasing the compliance obligation for regulated entities. The court did separately uphold, however, that the agency had sufficiently justified its reason for not reducing the amount of “advanced biofuel” volumes for 2012.

The January 2012 rule at issue was promulgated as part of the revised EPA renewable fuel standard (RFS) program, which was enacted by Congress in 2007 to mandate increasing quantities of renewable fuel production and usage through 2022. The RFS program requires EPA to determine “applicable volumes” of renewable fuel, including “advanced biofuels,” which produce fewer greenhouse gas (GHG) emissions compared to conventional renewable fuels such as ethanol. Fuel refiners, importers and blenders are obligated under the RFS to purchase renewable fuels or equivalent renewable identification numbers (RINs) in quantities determined pursuant to the agency’s annual estimation of a given renewable fuel’s annual production, or “applicable volume.”

It is that EPA volume determination that had been challenged by an industry trade association. The association had argued that EPA’s method of predicting the applicable volume of cellulosic biofuels (produced from switchgrass and agricultural wastes) was unlawful. In its 2012 volume determination, EPA projected the cellulosic biofuel production at 8.65 million gallons, an increase from the previous year’s prediction of 6.6 million gallons. The court viewed EPA’s forecast as unreasonably overly optimistic given that in both 2010 and 2011 the nascent cellulosic biofuel industry was unable to produce fuel in amounts anywhere close to that number. Given the divide between actual historical production and EPA forecasts for 2012, the court concluded it was unlawful for EPA to employ a fuel-production methodology that was tilted toward overestimating likely applicable volumes.

In drawing its conclusion, the court agreed with the rule’s challenger that the EPA methodology was being employed to promote growth in the cellulosic biofuel industry — because higher production estimates result in a larger compliance obligation and associated price signal to cellulosic biofuel developers. The three-judge panel further concurred that EPA’s use of a skewed methodology amounted to subjective policy bias that “has no basis in the relevant text of the Act.” The court stated that “EPA points to no instance in which the term ‘projected’ is used to allow the projector to let its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.”

The court did agree that the RFS program amounted to a congressional effort to promote the development of renewable fuels by mandating increased production and usage, summing up the approach as: “[d]o a good job, cellulosic fuel producers. If you fail, we’ll fine your customers.” Nonetheless, it found EPA did not have permission under the applicable statutory authority to accelerate such congressional promotion by tweaking market production estimates. The court stated that “[g]iven [the] asymmetry in [RFS program] incentives, EPA’s projection [for cellulosic biofuels] is not ‘technology-forcing’ in the same sense as other innovation-minded regulations that we have upheld.” It is this final point that should be highlighted. The court was largely interpreting the express and detailed statutory language establishing EPA’s responsibility to implement the RFS program. Therefore, this decision should not be viewed as immediately affecting other EPA efforts to implement “technology-forcing” rules under separate legislative authorities.

While the court vacated the rule’s projection of the “applicable volume” of cellulosic biofuel, it also determined that EPA adequately defended its decision not to reduce its projections for advanced biofuels from their previous levels. On this point, the challengers had argued that EPA’s decision not to reduce its projections was arbitrary and unreasoned because it was not supported by specific numerical projections. Rejecting this position, the court concluded that “rationality does not always imply a high degree of quantitative specificity.”