September 11, 2024
So, a bit of background.
Most of you are already familiar with the Renewable Fuel Standard (RFS) and Small Refinery Exemptions (SRE). If you are not, please be sure to read up on them in previous posts. Now that that’s done, let’s look at the issue at hand.
In 2022, EPA denied all SREs that had been petitioned. The Agency reasoned that only compliance costs with the RFS were relevant to showing disproportionate economic harm, and these costs could simply be passed along to their consumers. As such, EPA concluded that small refineries do not face any economic hardship via compliance with the RFS and all petitions were denied.
These denials came to be known as the Denial Actions and were eventually brought before the DC Court of Appeals for review. Why does any of this matter, you might ask? Good question. Because any decision regarding SREs is going to impact demand for renewable fuels under the RFS, and put downward pressure on RIN prices.
On July 26, 2024, the DC Court of Appeals concluded that EPA’s rationale for denying all exemption requests was, in fact, contrary to law as well as arbitrary and capricious. Therefore, they vacated the Denial Actions except for two refineries whose names have been kept confidential.
So how did we end up here? Let’s go through a brief history below to see what led to this.
In a 2020 case from the 10th circuit court, EPA’s decision to grant certain hardship exemptions for the 2016 and 2017 compliance years were reviewed. Upon review, the 10th circuit concluded that EPA erred in a few respects. Part of their review concluded that “disproportionate economic harm” under the RFS had to be tied to compliance costs. Their review also found that EPA had not accounted for EPA’s own theory that the costs of compliance with RFS could simply be passed along to the consumer, and as such, their analysis for the 2016- and 2017-years’ exemptions were flawed.
The Supreme Court then partially reversed the 10th circuit holding in HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association. They did not address their holding that economic hardship had to be caused by compliance with the RFS or the holding that the costs of compliance with RFS could simply be passed along to consumers.
After the HollyFrontier decision, EPA denied 36 exemption petitions for the year 2018 and later denied all remaining hardship petitions that were pending. These Denial Actions broke from EPA’s prior approach in many ways, influenced by the 10th circuit’s opinion. The Agency then took two major actions.
First, EPA reinterpreted the statutory language to require refineries to show they had experienced disproportionate economic hardship caused solely by compliance with the RFS program.
Second, and more importantly, EPA decided to apply the RIN cost passthrough theory and concluded that any RFS compliance costs could simply be passed along to consumers in the price of the fuel, and thus would not face disproportionate economic hardship. Because of this, EPA also concluded that no small refineries would face disproportionate economic hardship and as such, all SRE petitions were denied.
Many small refineries who were subject to the Denial Actions filed petitions for review, arguing that the Denial Actions are contrary to law because EPA’s review unlawfully narrows the hardship exemption. The DC court of appeals agreed with the petitioners on that front.
The DC court of appeals found that EPA’s definition of “disproportionate economic hardship” is not consistent with the meaning of the hardship exemption and is contradictory to other provisions in the Clean Air Act (CAA). The Denial Actions looked exclusively at compliance costs instead of the big picture, thus causing an overly strict requirement.
The DC court of appeals found that EPA’s interpretation of the small refinery hardship exemption imposes a limitation that goes beyond the plain meaning of the statute. While the necessary economic hardship must be caused by RFS compliance, the statute nowhere suggests that this must be the sole cause of the hardship.
The court reasoned that EPA’s interpretation cannot be squared with the CAA and accordingly, they find the Denial Actions as being contrary to law, as well as arbitrary and capricious because EPA failed to support its theory that costs could be passed along to consumers.
Now the criteria for how to evaluate SREs are once again in EPA’s hands, but with even more guidance from the court. In all likelihood, it will be the next Administration that will decide those criteria and ultimately, what SRE petitions will be approved. Whether more or less SREs are approved in the future remains to be seen. But what we do know is that EPA will need to re-evaluate how they are defining “disproportionate economic hardship” when it comes to SREs.