supply increases will likely require diverting potential biodiesel and
renewable diesel feedstocks from

existing uses, revising production facilities to handle larger volumes
of different feedstocks, potentially distributing the biodiesel to new
terminal or bulk plants, and/or using biodiesel in blends greater than
5%. Thus, it may require greater investment for growth rates of
biodiesel and renewable diesel in 2016 to equal the growth rate that
occurred in 2013. However, any such conclusion would need to be
tempered by the consideration of the extent to which legal and market
forces were in place to drive future growth. This is especially true
since the year with the historic maximum rate of growth was 2013--a
year in which both tax incentives and RFS incentives were in place to
incentivize growth. We believe the incentives provided by the standards
in this final rule will be sufficient to enable this growth to occur,
despite these challenges. However, to avoid volumes of biodiesel and
renewable diesel from plateauing in the longer term, developments such
as significant gains in oilseed productivity, the development of new
oilseed crops, the approval from engine manufacturers to use B20 blends
in all or nearly all diesel engines, and investments in renewable
diesel production capacity may be necessary.
    We received many comments on our NPRM that offered projections of
the available biodiesel and renewable diesel supply in 2016. It was not
always clear from reading the comments if the volume projections they
offered represent their projection of the total supply of biodiesel and
renewable diesel, as is relevant for determining the total renewable
fuel supply in 2016, or if they represent a sub-set of the total
biodiesel and renewable diesel availability (such as only BBD and not
conventional biodiesel, only biodiesel and not renewable diesel, or the
level at which they requested the BBD standard be set). Nevertheless,
we have reviewed these comments and considered the volume projections
offered and the supporting data provided in determining the supply of
biodiesel and renewable diesel in the United States in 2016.
    The National Biodiesel Board suggested that the volume of advanced
biodiesel supplied to help meet the advanced biofuel volume requirement
should be at least 2.7 billion gallons in 2016, based on the highest
rate of D4 RIN generation achieved in a single month. They effectively
assumed that the rate of RIN generation that occurred in December 2013
(220 million gallons) could be duplicated over a 12-month period, and
that all of this product could be distributed and used in the United
States in 2016. They stated that an additional 370-720 million gallons
of biodiesel (550-1,080 million RINs) could be supplied from imported
biodiesel. We disagree that these volumes can be supplied in 2016. We
believe that using the highest production in a single month from the
historical record is not a reasonable basis for projecting possible
future supply over the course of an entire year for a number of
reasons. Such an approach does not take into account the factors,
described below, that allowed for that maximum single month production,
including the expiring blenders tax credit and the inability to sustain
that production level year-round. In addition, production inventories
can be grown over a one-month time period in a manner that masks
constraints in the fuel delivery infrastructure. As evidence, we note
that the highest D4 RIN generation level in a single month (220 million
gallons in December 2013) occurred immediately before one of the lowest
monthly D4 RIN generation level that has occurred in the last several
years (88 million gallons in January 2014). The average of those two
months is the equivalent of about 1.85 billion gallons over the course
of a year.
    Moreover, the highest monthly D4 RIN generation level cited by the
National Biodiesel Board included imports which have been highly
variable and cannot be projected with reasonable certainty based on
historical supply. The fact that the month used by NBB to project that
2.7 billion gallons of BBD could be supplied already includes a
significant amount of imported volumes makes their estimate of
additional imports particularly uncertain. The portion of the 1.85
billion gallon annual average RIN generation rate derived from
annualizing December 2013 and January 2014 volumes that can be
attributed to domestic production is 1.43 billion gallons, and even
this number should be considered high because it does not account for
exports of biodiesel and RINs retired because they were invalid or were
otherwise not available for compliance. As a result of these factors,
the actual demonstrated domestic supply (domestic production plus
imports, less exports and corrections) of biodiesel and renewable
diesel does not support an available supply of 3.1-3.4 billion gallons
per year, as suggested by NBB.
    In addition to the comments from NBB, we also received a number of
other comments suggesting a higher supply of biodiesel may be available
in 2016 than in previous years. Many commenters, such as the American
Council on Renewable Energy, the American Soybean Association, the
National Renders Association, John Deere, several state soybean
associations, and others suggested that the BBD standard should require
the use of at least 2 billion gallons in 2016. Other commenters,
including Archer Daniels Midland, the California Biodiesel Alliance,
Imperium Renewables, and others suggested that the BBD standard should
require the use of 2.4 billion gallons in 2016. Since they were focused
on the BBD standard, these numbers do not necessarily represent the
commenters' views of the available supply of biodiesel and renewable
diesel in 2016, but we believe they give a good indication of their
views on the available supply. We also note that they are much more in
line with the available supply volumes that we estimate below based on
an extrapolation of growth rates from previous years.
    Given the widely divergent comments and available data on the
potential supply of biodiesel feedstocks, it is clear that there is a
great deal of uncertainty in the degree to which those feedstock
supplies can grow in 2016. A focus on potentially available feedstock
supplies is insufficient as this is not the only factor to consider in
assessing the potential volumes of biodiesel and renewable diesel in
2016. Neither biodiesel production capacity, nor the supply of oils,
fats, and greases around the world, has ever been the sole constraint
on biodiesel and renewable diesel supply to the U.S. Indeed, as
discussed above, there are a number of constraints, ranging from
competing demand for biodiesel and renewable diesel feedstocks to
biodiesel and renewable diesel distribution infrastructure and engine
compatibility, that we believe will constrain the supply of biodiesel
and renewable diesel supply in 2016.
    These constraints do not represent insurmountable barriers, but
they do take time to overcome. The market has been making efforts to
overcome these constraints in recent years as demonstrated by the fact
that biodiesel and renewable diesel consumption in the U.S. has been
steadily increasing. We agree with the biofuels industry that more
opportunity for ongoing growth still exists, but we do believe that the
constraints listed above will continue to be a factor in the rate of
growth for 2016, but we also believe that existing biodiesel and
renewable diesel production capacity should not be the basis for
projecting achievable volumes

in 2016. Instead, we believe that the ongoing constraints listed above
mean that the opportunity for growth 2016 is of a similar magnitude to
that which we have experienced in recent years. For 2016 we are
projecting the supply of biodiesel and renewable diesel for use in the
United States could reasonably be as much as 2.5 billion gallons. We
believe this value represents the maximum reasonably achievable volume
of biodiesel and renewable diesel that can be supplied to the United
States in 2016.
    This volume of biodiesel and renewable diesel is approximately
equal to the projected volume using the highest observed annual growth
rate (2.53 billion gallons), and far higher than the projected volume
using the average growth rate between 2011 and 2015 (2.06 billion
gallons). We believe this is appropriate considering both the
demonstrated ability of the market to respond to incentives for
increased production, import, and use of biodiesel and renewable
diesel, as demonstrated in 2013, and also the potential constraints to
the continued growth of biodiesel and renewable diesel discussed above.
These constraints, particularly the availability of qualifying
feedstocks to processing facilities that can utilize them in light of
competing demand for these feedstocks and the distribution
infrastructure needed to increase the use of biodiesel and renewable
diesel, may be more challenging to overcome in the future, but we
believe growth in 2016 can still approach the record growth experienced
in 2013. In 2013 increasing available supplies of feedstock, through
means such as greater corn oil production rates at ethanol plants and
increased recovery of waste fats and oils, and increasing biodiesel and
renewable diesel distribution by adding biodiesel blending capacity at
terminals and/or bulk plants in areas with large local demand for
diesel fuel, were both relatively simple. For 2016 the RFS standard
will necessitate similar and potentially even larger investments and
actions to grow biodiesel and renewable diesel supply.
    We recognize that the market may not necessarily respond to the
final total renewable standard by supplying exactly 2.5 billion gallons
of biodiesel and renewable diesel to the transportation fuels market in
the United States, but may instead supply a slightly lower or higher
volume of biodiesel and renewable diesel with corresponding changes in
the supply of other types of renewable fuel. As a result, we believe
there is less uncertainty with respect to achievability of the total
volume requirement than there is concerning the projected 2.5 billion
gallons of biodiesel and renewable diesel that we have used in deriving
the final total renewable fuel volume requirement.
4. Projecting the Supply of Other Renewable Fuels
    The RINs available for meeting the total renewable fuel standard
include not only ethanol, biodiesel, and renewable diesel, but also
RINs generated for a number of other renewable fuels. While the
potential for each of these fuels is small relative to those covered
above, the volumes must still be considered in assessing the total
supply of renewable fuel in 2016. One such fuel is CNG/LNG derived from
biogas when used as a transportation fuel. The potential for this fuel
in 2016 is approximately 210 million gallons. This projection is
discussed in more detail in Section IV, as this fuel generally
qualifies as a cellulosic biofuel.
    There also are some opportunities for moderate growth through the
end of 2016 in a variety of other fuel types. Currently, the RFS
regulations provide a RIN generating pathway for heating oil, naphtha,
jet fuel, LPG, liquefied natural gas, renewable gasoline, butanol, and
electricity. To date only heating oil, naphtha, and butanol have been
produced to generate RINs, reaching a projected annual high of 23 mill
gal based on data through September, 2015. Since these sources have not
grown significantly over the last several years, we believe that the
supply of other non-ethanol renewable fuels can reach about 25 million
gallons in 2016.
5. Total Renewable Fuel Supply in 2016
    The total volume of renewable fuel that can be supplied in 2016 is
the combination of the estimated supply of each of the biofuel types
described above: ethanol, biodiesel and renewable diesel, and other
biofuels such as biogas, naphtha, and heating oil. Most of these
biofuel types can be produced as either advanced biofuel or as
conventional (D6) renewable fuel, depending on the feedstock and
production process used. Our estimate of the supply of total renewable
fuel shown in the table below includes contributions from both advanced
biofuels and conventional renewable fuels.

Table II.E.5-1--Volumes Used To Determine Total Renewable Fuel Supply in
                                  2016
------------------------------------------------------------------------
                                Volume  (million
                                    gallons)            Million RINs
------------------------------------------------------------------------
Ethanol.....................                14,128                14,128
Biodiesel and renewable                      2,500                 3,750
 diesel.....................
Biogas......................                   210                   210
Other non-ethanol renewable                     25                    25
 fuels......................
                             -------------------------------------------
    Total...................                16,861                18,113
------------------------------------------------------------------------

    Based on this analysis, we are establishing a total renewable fuel
volume requirement of 18.11 billion gallons for 2016. However, we note
that the contributions from individual sources that are shown in Table
II.E.5-1 were developed only for the purpose of determining a final
volume requirement for 2016; they do not represent EPA's projection of
precisely how the market will respond to the standards we set. We
continue to believe, as we noted in the NPRM, that any estimate we make
regarding particular fuel types is uncertain, but that overall the
final volume requirement is attainable. The contributions from
individual sources that we have used are illustrative of one way in
which the volume requirement for total renewable fuel could be met.
Actual market responses could vary widely, as described more fully in
Section II.G.
    The volumes of total renewable fuel that we are establishing for
2016 reflect our assessment of the maximum volumes that can reasonably
be achieved, taking into account both the constraints on supply
discussed previously and our judgment regarding the ability of the
standards we set to result in marketplace changes in 2016.

As shown in Figure II.E.5-1, the volume requirements for 2016 would
follow an upward trend consistent with that from previous years.
[GRAPHIC] [TIFF OMITTED] TR14DE15.010

F. Advanced Biofuel Volume Requirement for 2016

    As described in Section II.B above, we are reducing volumes of
total renewable fuel under both the cellulosic and the general waiver
authority, and we are reducing volumes of advanced biofuel under the
cellulosic waiver authority only. As noted in Section II.B, EPA has
broad discretion in utilizing the cellulosic waiver authority, since
Congress did not specify the circumstances under which it may or should
be utilized nor the factors to consider in determining appropriate
volume reductions. We are cognizant of the fact that increases in the
statutory volume targets after 2015 are only in advanced biofuel, and
that advanced biofuel provides relatively large GHG reductions in
comparison to conventional renewable fuel. In light of these facts, our
intention in utilizing the cellulosic waiver authority for 2016 is to
place an emphasis on setting the 2016 advanced biofuel volume
requirement at a level that is reasonably attainable taking into
account uncertainties related to such factors as production, import,
distribution and consumption constraints associated with these
fuels.\129\
---------------------------------------------------------------------------

    \129\ Our approach in identifying ``reasonably attainable''
volumes of advanced biofuels using the cellulosic waiver authority
is different than our approach under the general waiver authority of
identifying the ``maximum reasonably achievable supply''. In
exercising the cellulosic waiver authority in this rulemaking, we
are not required, and do not intend, to necessarily identify the
most likely ``maximum'' volumes of advanced biofuels that can be
used in 2016. Although we generally seek in establishing the
advanced biofuel volume requirement to require that available
advanced biofuels backfill for shortfalls in cellulosic biofuels in
2016, our inquiry is not intended to be as exacting.
---------------------------------------------------------------------------

    As described earlier, we are establishing a total renewable fuel
volume requirement of 18.11 billion gallons for 2016. Our assessment of
total renewable fuel is based on an estimate of 14.13 billion gallons
of ethanol and 2.50 billion gallons of biodiesel and renewable diesel,
in addition to smaller volumes of biogas and other types of renewable
fuel.\130\ Given that advanced biofuels are a subset of total renewable
fuel, the 2016 volume requirement for advanced biofuels reflects our
assessment of the portion of total ethanol and biodiesel, as well as
other renewable fuels, that should be required as an advanced biofuel.
---------------------------------------------------------------------------

    \130\ This includes both advanced and conventional biodiesel and
renewable diesel.
---------------------------------------------------------------------------

    With regard to ethanol, the primary source of advanced biofuel is
imported sugarcane ethanol.\131\ As described in the NPRM, the supply
of imported sugarcane ethanol continues to be highly uncertain and
there is little indication that this uncertainty will change in 2016.
For instance, both total ethanol imports and imports of Brazilian
sugarcane ethanol have varied significantly since 2004, as shown in
Figure II.F-1.
---------------------------------------------------------------------------

    \131\ In certain situations, advanced ethanol can also be
produced from sorghum and food wastes.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TR14DE15.011

    The Brazilian Sugarcane Industry Association (UNICA) provided
comments suggesting that 2 billion gallons of sugarcane ethanol could
be supplied to the U.S. in 2016. After further investigation, we do not
believe that this level of import is reasonably achievable in 2016. To
begin with, exports of 2 billion gallons from Brazil to the U.S. would
be significantly higher than total exports to all countries in all
previous years, as shown below.
[GRAPHIC] [TIFF OMITTED] TR14DE15.012

    In recent years, ethanol exports from Brazil to countries other
than the U.S. averaged more than 300 million gallons each year. Brazil
has recently increased ethanol exports to China and has also increased
its own ethanol use requirements.132 133 If this were to
continue in 2016, total exports from Brazil would need to reach 2.4
billion gallons in order to supply 2 billion gallons to the U.S. We do
not believe that the information that UNICA provided supports this
extremely high level of exports.
---------------------------------------------------------------------------

    \132\ ``Ethanol acts as lone bright spot amid China commodity
gloom--Reuters,'' docket EPA-HQ-OAR-2015-0111.
    \133\ ``Brazil Hikes Ethanol Blend in Gasoline to 27%,''
DownstreamBusiness.com, March 12, 2015.
---------------------------------------------------------------------------

    Although UNICA cites a variety of factors that can affect ethanol
exports and which are beyond the control of Brazilian mills and the
EPA, it nevertheless based its estimate of potential exports to the
U.S. solely on a combination of Brazilian ethanol production capacity
and opportunities created by the RFS program itself. We believe that
UNICA has underestimated the uncertainty associated with other market
factors, including the E10 blendwall in the U.S., changes in domestic
demand for ethanol in Brazil, and competing world demand for sugar.
With regard to sugar, it is true that Brazilian production has been
declining for the last several years. However, between 2005 and 2015,
Brazilian production of sugar has increased just as often as it has
decreased, demonstrating that there is uncertainty with regard to
worldwide demand for sugar. We

believe it would be imprudent to assume that the downward trend in
sugar production in recent years will continue in 2016.
    More importantly, while production of sugarcane has increased
moderately in Brazil over the last several years, total gasoline
consumption in Brazil also continues to climb.\134\ This reduces the
potential for substantial increases in exports of ethanol in 2016, as
ethanol serves as a critical source of fuel supply in Brazil to offset
shortages in petroleum. In fact, total consumption of petroleum in
Brazil has increased at a rate of about 4.9% over the last several
years, while the rate of sugarcane production has only grown at a rate
of about 2.2%.\135\
---------------------------------------------------------------------------

    \134\ ``Gasoline Demand in Brazil: an empirical analysis,''
Tha[iacute]s Machada de Matos Vilela, Pontifical Catholic University
of Rio de Janeiro, Figure 2.
    \135\ ``Brazilian sugarcane production and petroleum
consumption,'' docket EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    Several stakeholders also pointed to the potential for so-called
``circle trade'' between the U.S. and Brazil as a reason to either
reduce the applicable volume requirement for advanced biofuel in such a
way as to limit imports of sugarcane ethanol, and/or to increase the
required volume of BBD. In this circle trade, corn-based ethanol is
exported from the U.S. to Brazil at the same time that sugarcane
ethanol is exported from Brazil to the U.S. This has undoubtedly
occurred in the past, though the circle trade volumes have represented
only 21% of all ethanol imports and exports between the two countries
that occurred between 2010 and 2014.\136\ However, there has been a
high degree of variability in sugarcane ethanol imports into the U.S.,
and also a high degree of variability in the export of corn ethanol to
Brazil. In some years the U.S. exported more ethanol to Brazil than
Brazil exported to the U.S., while in other years the opposite
occurred. This indicates that there are a wide variety of factors
driving imports and exports of ethanol, and ``circle trade'' does not
appear to have been the major one in the past. Nevertheless, to the
degree that circle trade increased in response to higher RFS volume
requirements for advanced biofuel, the GHG benefits associated with the
advanced biofuel volume requirement would be reduced.
---------------------------------------------------------------------------

    \136\ Between 2010 and 2014, circle trade represented about 21%
of all ethanol imports and exports between the U.S. and Brazil. See
``Analysis of circle trade between the US and Brazil,'' docket EPA-
HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    As stated in the NPRM, the highest volume of Brazilian sugarcane
ethanol that has ever been imported was 680 million gallons in 2006; in
2013 imports reached 435 million gallons.\137\ However, in 2014 imports
were only 64 million gallons, and the projected annual level of imports
for 2015 is about 55 million gallons.138 139 Some sugarcane
ethanol will likely be imported in 2016 in order to meet the
requirements of California's Low Carbon Fuel Standard (LCFS), and all
such imported sugarcane ethanol will qualify to meet the RFS standards.
However, sugarcane ethanol volumes have also fallen off in recent years
under California's program.\140\ Given our assessment of UNICA's
estimate of volumes it can export to the U.S. in 2016 as described
previously, and our assessment of uncertainty in import volumes as
evidenced by the highly variable historical supply, there is no
indication (apart from UNICA's comments, discussed above) that imports
of sugarcane ethanol in 2016 will be markedly different from historic
levels. While the historical average level of ethanol imports over the
last ten years is about 300 million gallons, the low levels of imports
seen in 2014 and 2015 suggest that such volumes may not be available in
2016. Accordingly, for the purposes of determining the reasonably
attainable volume of advanced biofuels, we believe it is reasonable to
assume that a somewhat lower level of imports will occur than the
historic average over the last ten years. Thus we estimate that about
200 million gallons of sugarcane ethanol will be available in 2016 for
the purposes of determining the advanced biofuel volume requirement for
2016. However, actual imports of sugarcane ethanol could be higher or
lower than this level as shown in the scenarios for how the market
could respond in Section II.G.
---------------------------------------------------------------------------

    \137\ Ethanol import data from EIA, representing imports
directly from Brazil and indirectly through the Caribbean Basin
Initiative (CBI) and the Central America Free Trade Agreement
(CAFTA). http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epooxe_im0_mbbl_m.htm.
    \138\ Based on import data from EMTS.
    \139\ Notably, in response to the February 7, 2013 NPRM, UNICA
projected that Brazil could supply 800 mill gal of sugarcane to the
U.S. in 2014.
    \140\ ``Status Review of California's Low Carbon Fuel
Standard,'' Institute of Transportation Studies, University of
California Davis, April 2015.
---------------------------------------------------------------------------

    With regard to advanced biodiesel and renewable diesel, past
experience suggests that a high percentage of the supply of biodiesel
and renewable diesel to the United States qualifies as advanced
biofuel. In previous years biodiesel and renewable diesel produced in
the United States has been almost exclusively advanced biofuel. It is
also likely that some advanced biodiesel will be imported in 2016, as
discussed in Section II.E.3.iii, however we believe that the volume of
biodiesel imported from Argentina in 2016 is likely to be less than the
several hundred million gallons suggested by some commenters (see
Section II.E.3.iii for more detail on biodiesel and renewable diesel
imports). Imports of conventional (D6) biodiesel and renewable diesel,
however, have also increased in recent years, and are likely to
continue to contribute to the supply of renewable fuel in the United
States in 2016. By including a high percentage of the 2.5 billion
gallon projected total supply of biodiesel and renewable diesel in the
advanced biofuel category, consistent with past experience, we are
incentivizing increased production and import of biodiesel and
renewable diesel that is produced from feedstocks that qualify for
advanced biofuel RINs in 2016, rather than conventional renewable fuel
RINs, enhancing the GHG benefits of the RFS program.
    The discussion of the many constraints on total biodiesel supply in
Section II.E.3 above is also relevant in the determination of
reasonably attainable volumes of advanced biodiesel. In this context,
we believe that out of the total of 2.5 billion gallons of biodiesel
and renewable diesel that we have determined can reasonably be assumed
for purposes of establishing the total renewable fuel volume
requirement, that 2.1 billion gallons could be advanced biofuel. While
we expect domestically produced biodiesel and renewable diesel to
remain the primary source of biodiesel and renewable diesel supplied to
the United States in 2016, the potential constraints related to the
distribution and use of biodiesel, discussed in Section II.E.3 above,
may lead to an increasing demand for renewable diesel, which faces
fewer potential constraints related to distribution and use than
biodiesel. Much of the renewable diesel produced globally would qualify
as conventional, rather than advanced biofuel, and we therefore expect
that conventional renewable diesel will continue to be an important
source of renewable fuel used in the United States in 2016. The volume
of advanced biodiesel and renewable diesel which we are assuming for
purposes of deriving the advanced biofuel standard for 2016 (2.1
billion gallons) would represent an increase of about 370 million
gallons from that supplied in 2015, which is greater than the annual
increase that occurred in the previous two years (91 million gallons
from 2013 to 2014 and 104 million gallons from 2014 to 2015)

but less than the highest annual increase that occurred in 2013 (about
560 million gallons from 2012 to 2013). This projected increase in the
available volume of advanced biodiesel and renewable diesel accounts
for the expected increased availability of feedstocks, such as soy oil,
distillers corn oil, and waste oils, fats, and greases, that we expect
will be available to biodiesel and renewable producers in 2016 (see
Section II.E.3.i for a further discussion of feedstock availability).
It also represents a significant increase from the highest levels of
advanced biodiesel and renewable diesel supplied to date. We find this
volume to be reasonably attainable for the reasons discussed in Section
II.E.3.
    Due to the nested nature of the standards, all cellulosic biofuel
qualifies to help meet the advanced biofuel volume requirement. As
described in Section II.E.4, we have also estimated that about 25
million gallons of advanced biofuel other than ethanol, biodiesel, and
renewable diesel can be supplied in 2016. We estimate that the
combination of all these sources results in a reasonably attainable
volume of advanced biofuel for 2016 of 3.61 billion gallons. This is
the volume requirement that we are establishing for advanced biofuel
for 2016. We note that the volumes actually used to satisfy this
requirement may be different than those listed in Table II.F-1 below.

 Table II.F-1--Volumes Used To Determine Advanced Biofuel Supply in 2016
------------------------------------------------------------------------
                                                      Volume
                                                     (million   Million
                                                     gallons)     RINs
------------------------------------------------------------------------
Cellulosic biofuel................................        230        230
Biodiesel and renewable diesel....................      2,100      3,150
Imported sugarcane ethanol........................        200        200
Other non-ethanol.................................         25         25
                                                   ---------------------
  Total...........................................      2,555      3,605
------------------------------------------------------------------------

    The volume of advanced biofuel that we are establishing for 2016
will require increases from current levels that are substantial yet
attainable, taking into account the constraints on supply discussed
previously, our judgment regarding the ability of the standards we set
to result in marketplace changes, and the various uncertainties we have
described. Figure II.F-3 shows that the advanced biofuel volume
requirement for 2016 will be significantly higher than the actual
supply of advanced biofuel in previous years.
[GRAPHIC] [TIFF OMITTED] TR14DE15.013

G. Market Responses to the 2016 Advanced Biofuel and Total Renewable
Fuel Volume Requirements

    The transportation fuel market is dynamic and complex, and the RFS
program is only one of many factors that determine the relative types
and amounts of renewable fuel that will be used. Thus, while we set the
applicable volume requirements for advanced biofuel and total renewable
fuel, we cannot precisely predict how the market will choose to meet
those requirements, as the RFS standards we set generally allow use of
multiple fuel types for compliance. We can, however, delineate a range
of possibilities, and doing so provides a means of demonstrating that
the final volume requirements are attainable through multiple possible
paths.
    For our final 2016 total renewable fuel volume requirement of 18.11
billion gallons, there would be 1.05 billion ethanol-equivalent gallons
needed beyond that supplied by E10, the BBD volume requirement of 1.9
billion physical gallons (equivalent to 2.85 billion D4 RINs as
described in Section III.D.4), and that portion of the cellulosic
biofuel volume which we would expect to be derived from non-ethanol
biofuel (see Section IV.F).

  Table II.G-1--Breakdown of Renewable Fuel Use in 2016 Based on Final
                                 Volumes
                  [Billion ethanol-equivalent gallons]
------------------------------------------------------------------------

------------------------------------------------------------------------
Total renewable fuel.........................................      18.11
Ethanol consumed as E10 \a\..................................     -14.00
Non-ethanol cellulosic biofuel...............................      -0.21
Biomass-based diesel \b\.....................................      -2.85
Additional renewable fuel that must be used..................       1.05
------------------------------------------------------------------------
\a\ Includes all sources of ethanol (cellulosic, advanced, and
  conventional).
\b\ Represents the 1.90 billion physical gallons that is the minimum
  required under the BBD standard.

All of the constraints discussed in Section II.E.1 could play a role in
determining how the market chooses to supply the additional 1.05
billion gallons needed. The options available to the market to fulfill
the need for 1.05 billion gallons of renewable fuel include the
following: \141\

    \141\ Although obligated parties could draw down the bank of
carryover RINs as an alternative means of compliance, as discussed
elsewhere we believe that the incentives for obligated parties to
retain their carryover RINs is sufficiently large that they will
preferentially acquire and retire current-year RINs for compliance.
---------------------------------------------------------------------------

 Increase the production and use of BBD above the final
standard of 1.90 billion gallons \142\
---------------------------------------------------------------------------

    \142\ We have determined in the context of deriving the advanced
biofuel standard that 2.2 billion gallons are reasonably attainable.
However, the market could operate such that larger volumes are made
available.
---------------------------------------------------------------------------

 Increase import and use of sugarcane ethanol and/or domestic
production and use of corn-ethanol, which would require a corresponding
increase in E15 and/or E85
 Increase production and/or imports of conventional (D6)
biodiesel and renewable diesel
 Increase the production of other non-ethanol biofuels, such as
renewable heating oil, jet fuel, naphtha, butanol, and renewable fuels
coprocessed with petroleum

In determining the amounts of each type of renewable fuel used to meet
the total renewable fuel volume requirement, the market would also need
to satisfy the final advanced biofuel standard of 3.61 billion gallons.
    To illustrate the possible outcomes, we evaluated a number of
scenarios with varying levels of E85/E15, E0, imported sugarcane
ethanol, advanced biodiesel and renewable diesel, and conventional
biodiesel and renewable diesel (likely to be made from palm oil). In
doing so we sought to capture the range of possibilities for each
individual source, based both on levels achieved in the past and how
the market might respond to the final standards in 2016. Each of the
rows in Table II.G-2 represent a scenario in which the final total
renewable fuel and advanced biofuel volume requirements would be
satisfied. While we cannot predict precisely how the market will
respond to the standards we are setting, we believe that the market
will respond, and will likely do so within the range of options shown
in the table below. The flexibility afforded the market through the RFS
program helps to make the standards we are finalizing today reasonably
achievable.

  Table II.G-2--Volume Scenarios Illustrating Possible Compliance with 3.61 Bill gal Advanced Biofuel and 18.11
                                          Bill gal Total Renewable Fuel
                                              [Million gallons] a b
----------------------------------------------------------------------------------------------------------------
                                                                                Minimum
                                                   Total ethanol     Sugarcane         Total         volume of
             E85 \c\                    E0              \d\           ethanol      biodiesel \e\     advanced
                                                                                biodiesel \e\
----------------------------------------------------------------------------------------------------------------
200.............................             100          14,122             100           2,502           2,170
200.............................             100          14,122             300           2,502           2,037
200.............................             300          14,102               0           2,516           2,237
200.............................             300          14,102             100           2,516           2,170
200.............................             300          14,102             300           2,516           2,037
200.............................             300          14,102             495           2,516           1,907
400.............................             100          14,255               0           2,414           2,237
400.............................             100          14,255             100           2,414           2,170
400.............................             100          14,255             300           2,414           2,037
400.............................             100          14,255             495           2,414           1,907
400.............................             300          14,234             100           2,427           2,170
400.............................             300          14,234             300           2,427           2,037
----------------------------------------------------------------------------------------------------------------
\a\ Assumes for the purposes of these scenarios that supply of other non-ethanol advanced biofuel (heating oil,
  naphtha, etc.) is 25 mill gal, and that the cellulosic biofuel final standard for 2016 is 230 mill gal, of
  which 20 mill gal is ethanol and the remainder is primarily biogas.
\b\ Biomass-based diesel, conventional biodiesel, and total biodiesel are given as biodiesel-equivalent volumes,
  though some portion may be renewable diesel. Other categories are given as ethanol-equivalent volumes.
  Biodiesel-equivalent volumes can be converted to ethanol-equivalent volumes by multiplying by 1.5.
\c\ Some higher ethanol blend volume here represented as E85 may alternatively be E15 (1 gal of E85 could be
  replaced with 12.8 gallons of E15)
\d\ For the range of total ethanol shown in this table, the nationwide pool-wide average ethanol content would
  range from 10.07% to 10.18%. The majority of gasoline will contain 10% ethanol, and some gasoline will contain
  higher levels of ethanol such as E15 or E85. In comparison, the pool-wide average ethanol content in 2014 and
  2015 (projected) was 9.97% and 10.01%, respectively. When the increase in ethanol use is combined with
  substantial increases in non-ethanol renewable fuels, the 2016 volume requirements are significantly higher
  than both 2014 and 2015.
\e\ Includes supply from both domestic producers as well as imports.

    The scenarios in the table above are not the only ways that the
market could choose to meet the total renewable fuel and advanced
biofuel volume requirements that we are finalizing today. Indeed, other
combinations are possible, with volumes higher than the highest levels
we have shown above or, in some cases, lower than the lowest levels we
have shown. The scenarios above (and similar scenarios presented in the
NPRM) cannot be treated as EPA's views on the only, or even most
likely, ways that the market may respond to the final volume
requirements for 2016, contrary to the views of some stakeholders who
commented on the NPRM. Instead, the scenarios are merely

illustrative of the various ways that it could play out. Our purpose in
generating the list of scenarios above is only to illustrate a range of
possibilities which demonstrate that the standards we are finalizing
today are achievable despite the considerable increases relative to
2015.
    Stakeholders who believed that the volume requirements we proposed
in the NPRM were too high often described them as unprecedented or
overly aggressive, implicitly treating the various legal and practical
constraints to increased renewable fuel use as a barrier that cannot or
should not be crossed. Some stakeholders said that any scenario in
which a particular category of renewable fuel exceeded historical
maximums or previously demonstrated production levels cannot be
considered to be achievable. Based on this premise, such stakeholders
dismissed all scenarios in the NPRM as being unachievable.
    As described earlier, while we acknowledge that constraints on
growth in renewable fuel supply are real, we do not believe that they
create absolute barriers to growth in renewable fuel supply. Instead,
the current constraints on growth in supply mean that each additional
supply increment is likely to be more difficult to achieve than
previous increments, and likely require more time to overcome than past
constraints. The market most certainly can and will respond to the
standards that we set by increasing supply, as has been demonstrated on
other occasions. Growth in the biofuels market is also the primary
objective of the statute, as we acknowledge throughout this action.
However, the market is not unlimited in its ability to respond, and for
this reason we have found it necessary to reduce the required volumes
below the statutory targets.
    The scenarios that we provided in the NPRM, and somewhat different
scenarios presented above that reflect the final volume requirements,
demonstrate that the market has various ways in which it could respond.
The market can be expected to choose the lowest cost path to compliance
for 2016, but some parties may choose paths that are intended to result
in lower costs in the long term despite generating higher costs in the
near term. For instance, regulated parties may respond to the standards
we set with investments in production, distribution, and consumption
infrastructure that is focused on longer term growth.
    All of the volume levels in the scenarios shown above are within
reach of a responsive market, though they may not all be equally
likely. Below we discuss several of them to demonstrate that the final
volume requirements for 2016 are achievable.
    With regard to E85, according to EIA there will be about 16 million
FFVs in the in-use fleet in 2016 with a total consumption capacity of
about 14 billion gallons of E85.\143\ However, since only about 2% of
retail stations nationwide currently offer E85, only a minority of FFVs
have easy access to E85. Under more favorable E85 pricing that could
result from higher RIN prices, E85 sales volumes higher than those
achieved in 2014 (about 150 million gallons) are certainly achievable.
As described in Section II.E.2.iii we believe that 200 million gallons
is the most likely maximum achievable volume of E85 in 2016. Even with
some growth in the number of retail stations offering E85, however, E85
sales are unlikely to grow dramatically in 2016 due to the weak
observed consumer response to E85 combined with the limited ability of
the RIN mechanism under current conditions to reduce the retail price
of E85 relative to E10 as described in Section II.E.2.ii. USDA's
Biofuels Infrastructure Partnership grant program, an important program
to expand ethanol retail infrastructure, could increase the number of
E85 retail stations by perhaps as much as 400 in 2016 as discussed
above, but such growth would still have a relatively small impact on
total ethanol use.\144\ As described in Section II.E.2.iii, under
highly favorable though much less likely conditions related to growth
in the number of E85 retail stations, retail pricing, and consumer
response to that pricing, it is possible that E85 volumes as high as
400 million gallons could be reached in 2016.\145\ Thus we have
included scenarios in Table II.G-2 that include E85 volumes as high as
400 million gallons. Higher volumes of E85 sales in 2016 are very
unlikely, but are possible if the market can overcome constraints
associated with E85 pricing at retail and consumer responses to those
prices.
---------------------------------------------------------------------------

    \143\ According to AEO2015, Table 42, total vehicle miles
travelled by FFVs in 2016 will be about 7.95% of all light-duty
gasoline-powered vehicles, equivalent to about 10.9 bill gal of E10
or 13.9 bill gal of E85.
    \144\ We acknowledge that the USDA program will increase the
number of retail stations offering E15, potentially significantly.
However, as described in Section II.E.2.iv, the impact on total
ethanol supply in 2016 from increased use of E15 is likely to be
considerably smaller than the impact on total ethanol supply from
the use of E85. Thus some portion of the volumes of E85 shown in
Table II.G-2 may instead be ethanol-equivalent volumes of E15.
    \145\ ``Correlating E85 consumption volumes with E85 price,''
memorandum from David Korotney to EPA Docket EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    As Table II.G-2 illustrates, the final standards could result in
the consumption of as much as 2.5 billion gallons of biodiesel and
renewable diesel, representing an increase of more than 600 million
gallons over the projected 2015 supply of all D4 and D6 biodiesel and
renewable diesel. While this would be a substantial increase, we
believe that it is possible for the market to reach this level as
discussed as in Section II.E.3. 2.5 billion gallons of biodiesel would
represent about 4% of the nationwide pool of diesel fuel in 2016. Most
diesel fuel could contain 5% biodiesel while still allowing some diesel
fuel to contain no biodiesel to accommodate areas of the country where
the distribution infrastructure is not yet established, as well as that
used in northern states during the coldest months of the year. Also,
B20 could be used in a number of centrally-fueled fleets composed of
newer engines without violating manufacturer warranties, and additional
volumes of biodiesel could be used in heating oil. In light of these
additional volumes, it is possible that 2.5 billion gallons could be
supplied in 2016.
    We note that it would be inappropriate to construct a new scenario
based on the highest volumes in each category that are shown in Table
II.G-2 in order to argue for higher volume requirements than we are
establishing today. Doing so would result in summing of values that we
have determined are higher than the most likely maximum achievable
volumes of the different fuel categories, resulting in a total volume
that we believe would be extremely unlikely to be achievable. We have
more confidence in the ability of the market to achieve 18.11 billion
gallons of total renewable fuel through some combination of different
types of renewable fuel than we have in the ability of the market to
achieve a specific level of, say, biodiesel. Thus, for instance, while
the highest biodiesel volume shown in Table II.G-2 is about 2.5 billion
gallons, the market could choose a different level of total biodiesel
and renewable diesel, offsetting the volumes with other fuels. The same
is true for the highest level of E85 shown in Table II.G-2 of 400
million gallons, or the highest level of sugarcane ethanol of about 500
million gallons. In addition, the consumption of each fuel in Table
II.G-2 is not independent of the consumption of the other fuels in the
table. For example, greater domestic biodiesel production reduces the
likelihood of large imports of biodiesel

because these two fuels compete against one another for access to
feedstocks that can be used to make biodiesel in 2016 and for available
distribution infrastructure and market share. The probability that the
upper limits of all sources shown in Table II.G-2 could be achieved
simultaneously is extremely unlikely.
    As noted in the NPRM, the volume requirements that we are
establishing today will likely result in RIN prices that are higher
than historical levels. RIN price increases are an expected market
response to a renewable fuel volume requirement that is higher than
that in previous years and which is expected to require effort on the
part of producers, distributors, blenders, and retailers to overcome
constraints. While the RIN market mechanism provides incentives for the
market to increase supply both in the near and long term, as stated
earlier the RIN market mechanism is not without limitation, and the
renewable fuel supply cannot be expected to increase proportionally at
any RIN price. Particularly in the near term (specifically 2016), we do
not believe that significantly higher RIN prices would likely compel
the market to supply substantially higher volumes than we are
finalizing today.

H. Treatment of Carryover RINs

    We explained in the NPRM that we cannot precisely assess the volume
of carryover RINs available for use in complying with the 2014, 2015,
and 2016 standards, but that we estimated that approximately 1.8
billion would remain after compliance with the 2013 RFS standards. We
proposed that the current bank of carryover RINs should be preserved as
a compliance ``buffer'' and not intentionally drawn down by setting
volume requirements at a level that is higher than can be satisfied
through the production and use of physical gallons of fuel.\146\ Many
stakeholders provided comment on the topic of how EPA should consider
carryover RINs as part of the standard-setting process. After
considering these comments, we have decided for this rulemaking to
treat carryover RINs in the manner proposed and not establish volume
requirements that would be expected to require obligated parties to
draw down the current bank of carryover RINs so as to achieve
compliance.
---------------------------------------------------------------------------

    \146\ For the bank of carryover RINs to be preserved from one
year to the next, individual carryover RINs are used for compliance
before they expire and are essentially replaced with a newer vintage
RIN that is then held for use in the next year. For example, if the
volume of the RIN bank is unchanged from 2013 to 2014, then all of
the approximately 1.74 billion vintage 2013 carryover RINs must be
used for compliance in 2014, or they will expire. However, the same
volume of 2014 RINs can then be ``banked'' for use in the next year.
---------------------------------------------------------------------------

1. Summary of Public Comments
    Comments on this issue generally expressed two opposing points of
view. Many commenters, including many obligated parties, contended that
EPA should not assume a draw-down in the bank of carryover RINs in
determining the appropriate level of volume requirements. On the other
hand, other commenters including many renewable fuel providers urged
EPA to rely on carryover RINs to push the standards higher than the
levels of projected physical volumes and so minimize the extent to
which statutory applicable volumes are reduced.
    Representatives of obligated parties were nearly uniform in
supporting EPA's proposal to not assume a draw-down in the current bank
of carryover RINs in setting the 2014, 2015, and 2016 advanced biofuel
and total renewable fuel standards. Virtually all of these commenters
agreed that maintaining the bank of carryover RIN would provide them
with needed compliance flexibility to address unforeseen events such as
operational problems, market dislocations, supply limitations, or
fraudulent RINs. Several commenters noted that if EPA were to rely on
the use of carryover RINs to push for higher standards than reflected
by actual renewable fuel supply, it would remove a flexibility that
Congress had intended for obligated parties. Several commenters also
noted that obligated parties vary in their ability to acquire RINs,
with the result being that some obligated parties have a substantial
number of carryover RINs, while others have few or none. They argued
that setting the volume requirements with the expectation that all or a
substantial number of carryover RINs would be used would make
compliance even more difficult than it would otherwise be for those who
must rely largely or totally on RIN purchases rather than on acquiring
RINs through blending activities. Several commenters also argued that
maintaining the bank of carryover RINs allows for better market trading
liquidity and a cushion against future program uncertainty. They noted
the importance of a relatively stable, liquid RIN market for achieving
compliance with volume requirements, particularly where new and
expanded avenues of supply are still being developed and built. In
their view, carryover RINs have been important to maintaining a
functioning market, and they cautioned EPA against reducing that pool
at all or too much and thereby risking severe market disruption in the
event of a drought or other unforeseen difficulties.
    Commenters from the renewable fuel industry, on the other hand,
urged EPA to assume a draw-down in the bank of carryover RINs in
determining whether and to what extent to waive statutory volumes. They
noted that EPA considered the availability of carryover RINs in
previous decisions not to waive statutory volumes, and argued that
EPA's proposed approach was inconsistent with this past practice. They
pointed out that in order to comply with the statute's purpose to
encourage growth in the use of renewable fuel in the transportation
fuel supply, carryover RINs should be considered available for
minimizing the extent to which statutory volume requirements are
reduced. Some of these commenters further argued that the carryover
RINs clearly are part of the renewable fuel ``supply'' available for
compliance purposes, and therefore EPA must count them in determining
whether there is an ``inadequate domestic supply'' for purposes of
justifying use of the general waiver authority.
2. Updated Projection of Carryover RIN Volume
    In the NPRM, EPA assessed the size of the RIN bank at approximately
1.8 billion carryover RINs. However, we have updated our assessment,
and now believe that 1.74 billion is the maximum that might be
available for possible use in complying with the standards for 2014,
2015 and 2016.\147\ There is considerable uncertainty surrounding this
number since there has not been a compliance demonstration since 2013
(for the 2012 RFS standards). As described in a memorandum to the
docket, the 1.74 billion carryover RIN maximum value will effectively
be reduced to an uncertain degree to satisfy deficit carry-forwards
from 2012.\148\ In addition, there have been enforcement actions in
past years that have resulted in the retirement of RINs that were
fraudulently generated and were therefore invalid, and parties who
relied

on those invalid RINs for compliance were required to acquire valid
substitutes to true up their past compliance demonstrations. Future
enforcement actions could have similar results, and require that
obligated parties settle past enforcement-related obligations in
addition to the 2014-2016 standards, thereby creating greater demand
for RINs than what EPA has determined represents the maximum reasonably
achievable in this time period. The result of such enforcement actions,
therefore, could be an effective reduction in the size of the
collective bank of carryover RINs to a level further below 1.74 billion
RINs.
---------------------------------------------------------------------------

    \147\ As noted elsewhere, we do not believe that the collective
bank of carryover RINs will be drawn down to achieve compliance with
2014, 2015, and 2016 standards, since carryover RINs from one year
will likely be rolled over into new carryover RINs for the next; we
are describing here the size of the collective RIN bank, RINs that
could theoretically be used for compliance purposes with 2014, 2015
and 2016 standards, though we do not believe that they will be.
    \148\ ``Estimating Carryover RINs Available for Use in 2014,''
Dallas Burkholder, Office of Transportation and Air Quality, U.S.
EPA. November 2015. EPA Air Docket EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

3. EPA's Decision and Response to Comments
    EPA has decided to maintain the proposed approach, and not set the
volume requirements in the final rule with the intention or expectation
of drawing down the current bank of carryover RINs. While we have not
assumed an intentional drawdown in the overall bank of carryover RINs
owned by obligated parties collectively in establishing the volume
standards for 2014, 2015, and 2016, we understand that some obligated
parties may choose to sell or use all or part of their individual banks
of carryover RINs during this time period. To the extent that they do
so, other obligated parties would be in a position to bank carryover
RINs by using available renewable fuel or purchasing RINs representing
such fuel, with the expected net result being no effective change in
the size of the overall bank of carryover RINs that is owned
collectively by obligated parties.
    In finalizing this approach, we carefully considered the many
comments received, including on the role of carryover RINs under our
waiver authorities and the policy implications of our decision. Our
responses to major comments are summarized here, with additional
detailed responses in the Response to Comments document in the docket.
i. Importance of Carryover RINs
    We agree with the many commenters who noted the importance of
carryover RINs to individual compliance flexibility and operability of
the program as whole. We believe that carryover RINs are extremely
important in providing obligated parties compliance flexibility in the
face of substantial uncertainties in the transportation fuel
marketplace, and in providing a liquid and well-functioning RIN market
upon which success of the entire program depends. As described in the
2007 rulemaking establishing the RFS regulatory program,\149\ carryover
RINs are intended to provide flexibility in the face of a variety of
circumstances that could limit the availability of RINs, including
weather-related damage to renewable fuel feedstocks and other
circumstances affecting the supply of renewable fuel that is needed to
meet the standards. Commenters have drawn our attention to operational
problems, market dislocations, and fraudulent RINs as other types of
unforeseen circumstances for which the availability of carryover RINs
is important. Obligated parties make individual decisions about whether
and how many RINs to acquire for their compliance management purposes,
and a decision by EPA to effectively require the ``draw down'' of all
or a substantial volume of individual carryover RIN banks by setting
higher future volume requirements than can be satisfied with actual
renewable fuel use would decrease their compliance options and increase
their risk of noncompliance. An intentional drawdown of the carryover
RIN bank under current circumstances would likely have long-term
effects on the RFS program, as increasing standards are expected to
make compliance more challenging and reduce the ability to generate new
carryover RINs.
---------------------------------------------------------------------------

    \149\ 72 FR 23900, May 1, 2007.
---------------------------------------------------------------------------

    An adequate RIN bank also serves to make the RIN market liquid and
to avoid the possible need for frequent standards adjustments. Just as
the economy as a whole functions best when individuals and businesses
prudently plan for unforeseen events by maintaining inventories and
reserve money accounts, we believe that the RFS program will not
function properly unless sufficient carryover RINs are held in reserve
for potential use by the RIN holders themselves, or for possible sale
to others that may not have established their own carryover RIN
reserves. Were there to be no RINs in reserve, then even minor
disruptions causing shortfalls in renewable fuel production or
distribution, or higher than expected transportation fuel demand
(requiring greater volumes of renewable fuel to comply with the
percentage standards that apply to all volumes of transportation fuel,
including the unexpected volumes) could lead to the need for a new
waiver of the standards, undermining the market certainty so critical
to the long term success of the RFS program. Furthermore, many
obligated parties lack the ability to generate certain types of RINs.
With a functioning liquid RIN market this is not a problem because we
expect that these obligated parties will be able to comply by securing
these RINs on the open market. However, a significant drawdown of the
carryover RIN bank leading to a scarcity of RINs may stop the market
from functioning in an efficient manner, even where the market overall
could satisfy the standards. For all of these reasons, the collective
carryover RIN bank provides a needed programmatic buffer that both
facilitates individual compliance and provides for smooth overall
functioning of the program. (Here and elsewhere we use the term
``buffer'' as shorthand reference to all of the benefits that are
provided by a sufficient bank of carryover RINs.)
    The importance of carryover RINs to the RFS program and to
obligated parties can be illustrated by comparing them to either
currency or inventory, as they can be seen as functioning in both roles
in the RFS program. First, carryover RINs, like all RINs, are a form of
``currency'' that can be traded and that ultimately are used to settle
compliance accounts at the close of each RFS compliance year.
Individual banks of carryover RINs can be analogized to a typical
individual bank account in which money is deposited and withdrawn. It
is commonly understood that in managing both personal and business
finances, that a reserve fund should be maintained to cover unforeseen
circumstances. Thus, it is generally considered unwise to budget
spending every dollar that is earned in a paycheck, since unforeseen
events such as illness, injury, or a downturn in business could impact
future earnings, and it is prudent to assume that such an event will
occur in the future and to plan for them. This type of planning is
particularly important in situations where credit is either unavailable
or restricted, since in such circumstances there may be very limited
alternatives to a reserve account. The RFS compliance system is
structured to provide only limited ``credit'' for compliance
obligations. Parties may defer compliance for one calendar year, but
are required to pay back the deficit in the next compliance year while
also meeting the next year's requirements.\150\ Parties may also seek
forgiveness of their RFS debt by petitioning EPA pursuant to CAA
section 211(o)(7)(A) for a waiver to account for ``inadequate domestic
supply'' or severe economic or environmental harm, but there is no
guarantee that such waivers will be provided, or that they will be
granted in time to provide the relief needed, and since such waivers
are only available to address widespread concerns. They are

not likely to be available to address individual circumstances. Thus,
we believe that there are very good reasons for the program to allow
for the market as a whole to have a reasonable number of carryover RINs
available, and there are incentives for individual parties to seek to
establish and retain a reserve bank of carryover RINs that can be used
to address expected market downturns as well as unforeseen
circumstances that may hinder or prevent compliance. Furthermore, just
as the economy as a whole is stronger and more resilient when many
individuals have significant monetary savings, we believe the RFS
program, too, is stronger and more resilient to market swings and
unforeseen events when obligated parties, collectively, have a
sufficient bank of carryover RINs. Excessive savings are generally not
positive for an economy, since they suggest that investments in future
growth are not being made; however, insufficient savings run the risk
of a market collapse in the face of economic downturns. An appropriate
amount of savings is the desired goal. In our judgement, maintaining
the current volume of carryover RINs will provide an appropriate
collective savings account for the RFS program to provide benefits
similar to desired collective savings in the economy.
---------------------------------------------------------------------------

    \150\ See CAA section 211(o)(5)(D).
---------------------------------------------------------------------------

    We also believe the carryover RIN bank for the RFS program can be
analogized to the working inventory that any business needs to operate.
In the case of businesses, these are the raw materials, parts, or cash
on hand needed to keep production going for the next day, the next
week, or the next several months until new supplies can be delivered
during normal operations and to allow for potential disruptions in
supply of necessary materials. Failure to maintain an adequate working
inventory of supplies could shut down operations, cause contracts to go
unfulfilled, and create a lack of confidence in the business by would-
be purchasers of their products that could ultimately lead to business
failure. This is why successful businesses maintain inventories of
supplies that they will need to maintain continuous production, and to
account for unexpected disruptions in supply.\151\ This phenomenon,
known as convenience yield, is also why they typically maintain
multiple sources of supply, rather than relying on just one.
Maintaining an inventory and alternative sources is particularly
important in situations where product supply is limited, unreliable, or
uncertain, since the inventory allows continued operations despite
these circumstances. While in theory the working inventories can be
drawn down, and might need to be when circumstances dictate, these
working inventories are not drawn down in the course of normal business
operations and instead are maintained year after year to serve their
intended purpose. We believe we are in this same situation for the
existing bank of carryover RINs. Although the RFS program is structured
such that compliance with the percentage standards is determined on an
annual average (rather than a per-gallon) basis, it is nevertheless
logical and prudent for obligated parties to view RINs as an essential
ingredient of their product, and to attempt to match their RIN holdings
to production volumes on an ongoing basis. The availability of
carryover RINs can help provide needed assurance to obligated parties
during the compliance year that they will eventually be able to comply
with the RFS standards, while still planning to do so through the
acquisition of current-year RINs. While individual obligated parties
may not have a bank of carryover RINs at present, the access to
carryover RINs in the marketplace from other sources can serve the same
function.
---------------------------------------------------------------------------

    \151\ For example, the marketwide carryover inventory of corn
from one crop year to the next is roughly 9-10% of annual harvest.
EIA. ``Weekly U.S. Ending Stocks of Fuel Ethanol.'' October 21, 2015
(available at http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPOOXE_SAE_NUS_MBBL&f=W); EIA. ``Weekly
U.S. Oxygenate Plant Production of Fuel Ethanol.'' October 21, 2015
(available at http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPOOXE_YOP_NUS_MBBLD&f=W). Similarly, the
average amount of ethanol in inventory at any given time is
approximately 5-6% of annual production. USDA. ``Grain Stocks.''
September 30, 2015 (available at http://usda.mannlib.cornell.edu/usda/current/GraiStoc/GraiStoc-09-30-2015.pdf); USDA. ``Crop
Production Annual Summary.'' January 12, 2015 (available at http://usda.mannlib.cornell.edu/usda/current/CropProdSu/CropProdSu-01-12-2015_revision.pdf).
---------------------------------------------------------------------------

ii. Role of Carryover RINs Under the Waiver Authorities
    Some commenters disagreed with the proposed approach, suggesting
that carryover RINs must be considered as part of ``supply'' in
determining if there is an ``inadequate domestic supply'' justifying a
waiver pursuant to CAA section 211(o)(7)(A). We disagree with these
comments. As noted in Section II.B., the term ``inadequate domestic
supply'' is not defined in the statute. Similarly, CAA section
211(o)(5), which provides the statutory basis for the carryover RIN
regulatory provisions, requires that EPA establish a credit program as
part of its RFS regulations, and that the credits be valid to show
compliance for 12 months as of the date of generation, but is silent on
the relationship of these credits to the ``inadequate domestic supply''
reference in section 211(o)(7)(A). Therefore, EPA finds no guidance in
the text of these key statutory provisions on whether or not carryover
RINs should be deemed part of the ``supply'' referenced in CAA section
211(o)(7)(A). In light of the statute's silence on this matter, it is
appropriate for EPA to interpret the term so as to best fulfill the
statute's objectives, including the general objective that the program
runs efficiently.
    We believe that the word ``supply'' in the phrase ``inadequate
domestic supply'' can logically be read to refer only to actual
renewable fuel (and not carryover RINs), since the focus of the entire
RFS program is on increasing the amount of renewable fuel used in the
transportation sector. Commenters suggested that the word ``supply''
could perhaps be interpreted to include both renewable fuel and
carryover RINs on the grounds that all such RINs can be used for
compliance purposes. However, it is clear that the result of this
latter interpretation would be a complete drawdown in the collective
bank of carryover RINs in a relatively short time period. In any year
where actual renewable fuel supply was below the statutory levels and
there was a balance of carryover RINs, reducing if not eliminating that
balance would be a condition of exercising the general waiver
authority. Because we firmly believe that maintaining a significant
bank of carryover RINs provides a substantial benefit to the RFS
program, as described above, in our judgment it best serves the
interests of the program to interpret the term ``supply'' in the term
``inadequate domestic supply'' to include only actual renewable fuel,
and not carryover RINs.
    Although we do not believe that carryover RINs should be considered
as part of the ``supply'' of renewable fuel in the context of a finding
of ``inadequate domestic supply'' under the general waiver authority,
we do believe that the availability of carryover RINs is an important
factor for EPA to consider in determining whether or not to use the
general waiver authority, just as it is when EPA considers using its
cellulosic waiver authority (as upheld in the Monroe case). Thus, while
we do not take carryover RINs into consideration in determining whether
we can exercise the general waiver authority, we do take them into
consideration in determining whether we should exercise either the
general waiver authority or the

cellulosic waiver authority. The exercise of these waiver authorities
is discretionary and with an overabundance of carryover RINs, EPA could
decide not to waive the statutory volume targets, even where the supply
of actual renewable fuel may be inadequate to allow compliance, since
the carryover RINs would allow compliance and a drawdown in the
carryover RIN bank would not result in a loss of the important
``buffer'' function provided by a sufficient bank of carryover RINs.
However, when the size of the bank of carryover RINs is limited, EPA
could reasonably decide to exercise its waiver authorities to match the
RFS requirements to the volume of the renewable fuel supply in the year
in question, with the intention of preserving the limited bank of
carryover RINs for the overall benefit of the program.\152\ That is the
present situation; in light of the projected limited size of the
current bank of carryover RINs, we have determined that the volume
requirements for total renewable fuel should be set at the level of
projected supply of renewable fuels, and not at higher levels that
would be expected to require a drawdown in the overall bank of
carryover RINs. Similarly, in exercising the cellulosic waiver
authority, we are not setting the volume requirements for advanced
biofuel with the intention or expectation of requiring a draw-down in
the bank of carryover RINs. We believe that preserving the current
collective bank of carryover RINs is appropriate to provide a program
buffer that facilitates the effective operation of the RFS program, and
that a draw-down of this collective bank of carryover RINs should be
avoided in setting the volume requirements for 2014-2016.
---------------------------------------------------------------------------

    \152\ In some years, the situation could fall between these
extremes, where EPA may exercise its discretion in a manner that
assumes a somewhat enlarged bank of carryover RINs would be drawn
down to a limited degree.
---------------------------------------------------------------------------

    We do not agree with those commenters who asserted that carryover
RINs may never be a consideration in determining whether and by how
much to reduce statutory volume requirements. In evaluating EPA's
decision not to use the cellulosic waiver authority in 2013 to reduce
advanced and total renewable fuel volumes, the D.C. Circuit in Monroe
ruled that EPA reasonably concluded that the availability of carryover
RINs was ``certainly relevant'' to its decision.\153\ We also
considered the availability of carryover RINs in our decision not to
exercise the general waiver authority in responding to petitions
seeking a waiver of RFS requirements based on the 2012 drought.\154\
---------------------------------------------------------------------------

    \153\ Monroe at 12. The court also quoted with approval EPA's
explanation that ``carryover RINs are a valid compliance mechanism''
and a means for obligated parties to ``protect [] against any
potential supply shortfalls that could limit the availability of
RINs.'' Id. (emphasis added by the court).
    \154\ At the same time, as discussed elsewhere in this section,
we do not agree with commenters who view our past actions as
requiring that we always rely on the availability of carryover RINs
as justification for avoiding waivers.
---------------------------------------------------------------------------

    Similarly, were EPA to receive a request to waive already-
established standards during the compliance year, we believe that it
would be appropriate for EPA to take into consideration the
substantially different context involved. Although the situation is not
presently before us, we believe that there could be a strong case for
avoiding granting a waiver during the course of a compliance year if a
waiver can be avoided through the use of carryover RINs. We would need
to consider in that context whether it would be appropriate to revise
an established standard in the midst of the compliance year if there is
a compliance mechanism available to avert that result. Indeed, EPA
believes that one benefit of preserving carryover RINs when setting
standards in the first instance, is precisely so that they may be
available to address unforeseen circumstances such as a downturn in wet
gallon supply during the compliance year. EPA will evaluate all such
actions on a case-by-case basis.
iii. Extent to Which the Current Bank of Carryover RINs Could Be Drawn
Down Without Compromising the Beneficial Buffer They Provide
    As discussed above, we believe that an appropriate bank of
carryover RINs serves an important program function, but we also
believe that in circumstances where there is an overabundance of
carryover RINs, that EPA can and should consider their availability as
a possible approach to avoid or minimize waivers of the statutory
volume targets. In establishing the RFS regulatory program, we
considered both the beneficial program impacts of carryover RINs (e.g.,
compliance flexibility, liquidity in the RIN trading market, etc.) and
the potential that a substantial volume of carryover RINs could
undermine the legitimate need of biofuel producers for assurance that
the products they produce will actually be sold and used during a given
compliance year, which could occur if obligated parties preferentially
satisfy their obligations with carryover RINs. Balancing these
considerations, and taking into account the statutory provision that
credits should only be valid to show compliance for 12 months after the
date of generation, EPA specified by regulation that obligated parties
may only satisfy 20 percent of their RVO in a given year with carryover
RINs. This 20 percent value therefore sets a cap on the possible use of
carryover RINs that increases in absolute terms over time as the volume
of renewable fuel required through the RFS program grows. In the
initial years of the RFS program, obligated parties were able to
steadily build up an inventory of carryover RINs, as market demand for
ethanol exceeded the RFS standards. However the absolute size of the
carryover RIN bank has been decreasing in recent years, as compliance
requirements have become more challenging, and the ability to over-
comply and create carryover RINs has become increasingly difficult.
    For example, we estimated that 3.5 billion excess RINs were
generated in 2011--almost 500 million more than the 3.02 billion
carryover RINs that could be used in 2012 as a result of the 20 percent
cap.\155\ For 2013, we estimated that 2.67 billion 2012 carryover RINs
were available for compliance.\156\ This represented 16 percent of that
year's 16.55 billion gallon total renewable fuel applicable volume.
After compliance with the 2013 standards, we estimate that the
carryover RIN bank will include at most 1.74 billion RINs and probably
something less than that as discussed above. If we use the availability
of carryover RINs as a basis for setting the standards for 2014 and
2015 to the statutory volumes as some commenters suggest, instead of
setting them at actual renewable fuel supply, then, assuming we entered
the 2014 compliance year with 1.74 billion carryover RINs, the amount
of carryover RINs available for 2016 would only be on the order of 0.1
billion RINs, insufficient to maintain the statutory volumes for 2016
and insufficient to provide the benefits of a program buffer as
described in this section. If instead we do not require a drawdown in
2014 and 2015, then potentially 1.74 billion carryover RINs would still
be available for 2016, representing just 8 percent of the statutory
volume of 22.25 billion gallons and 10 percent of the 18.1 billion
gallon total renewable volume requirement finalized today.\157\ We
believe that we

should not intentionally set the RFS standards for 2014-2016 so as to
intentionally draw down this bank of carryover RINs.\158\ This is not
inconsistent with prior decisions, as some commenters have argued,
since the bank of carryover RINs is substantially less, both in
absolute numbers and as a percentage of the applicable standards, than
was the case in prior actions when we noted the availability of
carryover RINs as a factor in deciding not to waive statutory volume
targets. We recognize that the volume of carryover RINs that should be
preserved for programmatic purposes is not given to a precise
determination, and is largely a matter of judgement. At this time,
given the information presently available to us, we believe it best not
to set the RFS standards for 2014-2016 so as to intentionally draw down
the current carryover RIN bank in whole or in part. We expect to
evaluate this issue each year in our annual standards rulemakings, and
to learn from experience in implementing the program, particularly once
compliance for 2013, 2014, 2015, and 2016 has been established.
---------------------------------------------------------------------------

    \155\ See 77 FR 70752, 70759 (November 27, 2012).
    \156\ See 78 FR 49821 (August 15, 2013).
    \157\ As noted earlier, stocks of ethanol have averaged
approximately 5-6 percent of annual production, and corn stocks,
which vary by season, have rarely fallen below 9-10 percent of the
annual harvest.
    \158\ Although EPA has set the volume requirements for total
renewable fuel in today's rule based on a determination of volumes
we believe represent the maximum levels that are reasonably
achievable, we acknowledge that this determination is difficult, and
that it involves a considerable amount of judgement. If EPA has
erred in assuming too much is possible, the collective bank of
carryover RINs would be available to obligated parties to facilitate
compliance. This can be seen as an additional potential benefit of
retaining an adequate bank of carryover RINs.
---------------------------------------------------------------------------

iv. Whether Carryover RINs Will Be Used To Avoid Needed Investments
    Some commenters felt that the availability of carryover RINs could
result in obligated parties complying through retirement of carryover
RINs rather than investing in infrastructure or other long-term efforts
to increase biofuel supply. As noted above, we recognize the potential
that too large a volume of carryover RINs could undermine the
legitimate need of biofuel producers for assurance that the products
they produce will actually be sold and used during a given compliance
year, but we believe the current size of the carryover RIN bank is not
sufficiently large to result in such problems. While we recognize that
individual obligated parties may choose to comply in part through
retiring carryover RINs (up to the 20 percent cap), we believe that,
considering the importance of carryover RINs in providing compliance
flexibility, obligated parties as a whole are unlikely to deplete the
collective bank of carryover RINs simply to delay making investments in
new infrastructure to increase the production and distribution of
renewable fuel. Our thesis is supported by empirical evidence from
2013.
    EPA acknowledged in setting the 2013 standards that 14.5 billion
gallons of ethanol would be needed to meet the total statutory
renewable fuel volume of 16.55 billion gallons, assuming that no
biomass-based diesel was produced above the 1.28 billion gallons
required by the biomass-based diesel standard. We also determined that
that the total amount of ethanol the market could absorb as E10 in 2013
was 13.1 billion gallons, leaving a potential gap of 1.4 billion
gallons. We then described how biomass-based diesel production in
excess of the biomass-based diesel standard, increased production of
other non-ethanol renewable fuels, and use of E85 could contribute to
the needed gallons. We also pointed out that about 2.6 billion
carryover RINs would be available in 2013, which was more than enough
to cover the potential gap of 1.4 billion gallons if other approaches
to compliance were not realized. We decided, therefore, that a waiver
of the statutory applicable volume of total renewable fuel was not
needed in 2013, since there were multiple approaches to compliance
available in the marketplace. Following signature of the final rule,
there was a dramatic increase in RIN prices, as parties bid them up in
an attempt to acquire sufficient RINs for compliance.\159\ We believe
in general that high RIN prices provide an incentive to the renewable
fuels market to increase renewable fuel production and import, as well
as an incentive to invest in the infrastructure necessary to enable
higher volumes of renewable fuels to be consumed.\160\ This appears to
have occurred in 2013, notwithstanding the availability of carryover
RINs. For example, E85 sales volumes increased significantly relative
to previous years, although due to infrastructure limitations the
increase in E85 consumption was still relatively small in absolute
terms. Instead, the market turned to biodiesel and renewable diesel;
these fuels were used at record levels, far exceeding the biomass-based
diesel standard, and even exceeding the volumes required to satisfy the
advanced biofuel standard.\161\ Excess biodiesel was used to fulfill a
substantial portion of the shortfall in conventional biofuel necessary
to meet the total renewable fuel standard. Not only did RIN prices
spike, but they also all converged to the RIN prices for D4 BBD,
indicating that obligated parties were willing to pay advanced biofuel
and BBD prices for as many RINs as could be supplied rather than rely
on carryover D6 RINs. Had obligated parties collectively acted in 2013
so as to delay the investments necessary to expand the infrastructure
to produce and consume additional volumes of biofuel they would have
blended ethanol as E10, blended the minimum biodiesel volume required
to meet the BBD and advanced biofuel standards, and used carryover RINs
to satisfy the balance of their obligations. Although we estimate that
800 million carryover RINs will ultimately be used for 2013 compliance,
this is far short of the 1.4 billion RINs that could have been used had
obligated parties placed little value on their retention and
collectively drawn them down as an alternative to investing in the
biofuel supply.\162\ We believe the experience in 2013 supports our
assessment that obligated parties as a whole are unlikely to draw down
the current bank of carryover RINs (which is substantially smaller than
it was in 2013) as an alternative to buying RINs representing current-
year production.
---------------------------------------------------------------------------

    \159\ See Figure III.D.1-1.
    \160\ See ``A Preliminary Assessment of RIN Market Dynamics, RIN
Prices, and Their Effects,'' Dallas Burkholder, Office of
Transportation and Air Quality, U.S. EPA. May 14, 2015, EPA Air
Docket EPA-HQ-OAR-2015-0111.
    \161\ See Section III.B of this preamble.
    \162\ We recognize that carryover RINs are held unevenly and
that discussion of the collective behavior of obligated parties in
the face of the 2013 RFS mandates greatly oversimplifies the
dynamics likely at work. Nevertheless, we believe the experience
provides useful information regarding market response as a whole to
a situation with both ambitious RFS requirements and significant
availability of carryover RINs.
---------------------------------------------------------------------------

v. Response to Other Comments
    Some parties argued that we should not assume a draw-down in the
bank of carryover RINs in setting the total renewable fuel volume
requirements because obligated parties vary in their ability to acquire
RINs, with the result being that some obligated parties have a
substantial number of carryover RINs, while others have few or none.
They argued that setting the volume requirements with the expectation
that all or a substantial number of carryover RINs would be used would
make compliance even more difficult than it would otherwise be for
those who must rely largely or totally on RIN purchases rather than on
acquiring RINs through blending activities. We acknowledge this
argument and believe that our approach will make the RIN market more
fluid and facilitate compliance by parties that choose to comply with
RFS

requirements by purchasing separated RINs.
    Some parties argued that setting the annual standards so as to
intentionally draw down the carryover RIN bank would likely raise RIN
prices to a higher degree than the proposed approach and provide
increased incentive for expansion of production and delivery
infrastructure of renewable fuels. While we acknowledge that higher RIN
prices would likely occur from the suggested approach, we do not
believe, for the reasons set forth in section II.E of this preamble,
that there is an unlimited ability for higher RIN prices to result in
increased biofuel supply. We believe we have set the total renewable
fuel volume requirements today at the maximum reasonably achievable
levels, taking into account the ability of the market to respond to
higher standards. Furthermore, even if the commenter were correct, any
benefits associated with increased biofuel supply in the short term
would need to be balanced against the harmful effects of depletion of
the bank of carryover RINs and instability of the RIN market it would
cause. Given the importance we place on an adequate RIN bank to provide
a needed compliance buffer, as discussed above, we do not choose to
exercise our discretion under the general waiver authority to set
volumes that require depletion of the bank of carryover RINs.
    Some parties argued that our approach to carryover RINs in this
rule is inconsistent with past practice, and therefore arbitrary. We
disagree. While it is true that a consideration of the availability of
carryover RINs factored into our decisions not to exercise statutory
waiver authorities in the rule establishing 2013 RFS standards (where
the issue arose in the context of deciding whether to use the
cellulosic waiver authority), and in our decision to deny waiver
requests based on the 2012 drought (where we considered whether to
exercise the general waiver authority on the basis of claims of severe
harm to the economy), the factual backgrounds for those decisions were
vastly different than the situation today. In those cases there was an
overabundance of carryover RINs. As noted above, the size of the
carryover RIN bank is currently substantially lower, both in absolute
terms and as a percentage of the 2016 total renewable fuel volume
requirement finalized today. Furthermore, the program is currently
facing very considerable challenges that will require new and
relatively costly approaches to increasing renewable fuel supplies; we
believe, therefore, that the need for a programmatic buffer is even
more critical under current circumstances than in the past.
4. Summary
    For all of these reasons, we have determined that under current
circumstances, carryover RINs should not be counted on to avoid or
minimize the need to reduce the 2014, 2015, and 2016 statutory volume
targets. However, we note that we may or may not take a similar
approach in future years; we will assess the situation on a case-by-
case basis going forward, and take into account any lessons learned
from implementing the rules applicable to 2014, 2015 and 2016.

I. Impacts of Final Standards on Costs

    In this section we provide illustrative cost estimates for the
final standards. By ``illustrative costs,'' EPA means that the cost
estimates provided are not meant to be precise measures, nor do they
attempt to capture the full impacts of the rule. These estimates are
provided solely for the purpose of showing how the cost to produce a
gallon of a ``representative'' renewable fuel compares to the cost of
petroleum fuel. There are a significant number of caveats that must be
considered when interpreting these cost estimates. First, as discussed
by commenters, there are a number of different feedstocks that could be
used to produce advanced fuels, and there is a significant amount of
heterogeneity in the costs associated with these different feedstocks
and fuels. Some fuels may be cost competitive with the petroleum fuel
they replace; however we do not have cost data on every type of
feedstock and every type of fuel. Therefore, we do not attempt to
capture this range of potential costs in our illustrative estimates.
    Second, given time constraints associated with providing estimates
for several annual standards in this rule, EPA did not quantitatively
assess other direct and indirect costs or benefits of increased biofuel
volumes such as infrastructure costs, investment, GHG reduction
benefits, air quality impacts, or energy security benefits, which all
are to some degree affected by the rule. While some of these impacts
were analyzed in the 2010 final rulemaking which established the
current RFS program, we have not fully analyzed these impacts for the
2014, 2015, and 2016 volume requirements being established today. We
have framed the analyses we have performed for this final rule as
``illustrative'' so as not to give the impression of comprehensive
estimates.
    Third, a number of different scenarios could be considered the
``baseline'' for the assessment of the costs of this rule. One scenario
would be the statutory volumes in which case this final rule would be
reducing volumes, and reducing costs. For the purposes of showing
illustrative overall costs of this rulemaking, we use the preceding
year's standard as the baseline (e.g., the baseline for the 2016
advanced standard is the final 2015 advanced standard, etc.), an
approach consistent with past practices.
    Fourth, the 2014 standards were not finalized prior to 2014 so it
is difficult to estimate what their costs may have been. Market
participants may have anticipated a higher final 2014 standard than the
market would provide in the absence of the standard, which would
contribute to the positive RIN prices witnessed in 2014. In contrast,
the final 2014 standards represent reductions in both the advanced and
conventional volumes compared to the 2013 standards, suggesting a
reduction in costs for this final 2014 rule compared to the 2013
standards. Finally, the final 2014 standards are based on actual
production levels in 2014, possibly suggesting that the 2014 standards
we are finalizing are what would have happened in the marketplace
absent a rulemaking. Viewed in this way, the standards would impose no
cost. Given the complexity of this issue, we have not attempted to
estimate the costs of the 2014 standards. This issue associated with
estimating costs for the 2014 standards also arises with the 2015
standards to a degree. The final standards for 2015 are being set late
in the 2015 calendar year, so it is not clear how much extra renewable
fuels (and thus costs) the standards are requiring above what the
marketplace would have supplied absent them.\163\ In any case, we
provide illustrative costs for the 2015 advanced biofuel standards and
total renewable fuel standards in addition to those for 2016.
---------------------------------------------------------------------------

    \163\ Because the 2015 proposal was out part way through the
year, it is possible that market participants anticipated standards
at least as high as those proposed.
---------------------------------------------------------------------------

    EPA is providing cost estimates for three illustrative scenarios--
one, if the entire change in the advanced standards is met with soybean
oil BBD; two, if the entire change in the advanced standards is met
with sugarcane ethanol from Brazil; and three, if the entire change in
the total renewable fuel volumes that can be satisfied with
conventional biofuels (i.e., non-advanced) is met with corn ethanol.
While a variety of biofuels could help fulfill the advanced standard

beyond soybean oil BBD and sugarcane ethanol from Brazil, these two
biofuels have been most widely used in the past. The same is true for
corn ethanol vis-a-vis the non-advanced component of the total
renewable fuel standard. We believe these scenarios provide
illustrative costs of meeting the final standards. For this analysis,
we estimate the per gallon costs of producing biodiesel, sugarcane
ethanol, and corn ethanol relative to the petroleum fuel they replace
at the wholesale level, then multiply these per gallon costs by the
applicable volumes established in this rule for the advanced (for
biodiesel and sugarcane ethanol) and non-advanced component of the
total renewable fuel (for corn ethanol) categories. More background
information on this section, including details of the data sources used
and assumptions made for each of the scenarios, can be found in a
memorandum submitted to the docket.\164\
---------------------------------------------------------------------------

    \164\ ``Illustrative Costs Impact of the Final Annual RFS2
Standards, 2014-2017,'' Memorandum from Michael Shell and Michael
Shelby to EPA Air Docket EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    Because we are focusing on the wholesale level in each of the three
scenarios, these comparisons do not consider taxes, retail margins, and
any other costs or transfers that occur at or after the point of
blending (i.e., transfers are payments within society and are not
additional costs). Further, as mentioned above we do not attempt to
estimate potential costs related to infrastructure expansion with
increased biofuel volumes. In addition, because more ethanol gallons
must be consumed to go the same distance as gasoline and more biomass-
based diesel must be consumed to go the same distance as petroleum
diesel due to each of the biofuels' lesser energy content, we consider
the costs of ethanol and biomass-based diesel on an energy equivalent
basis to their petroleum replacements (i.e., per energy equivalent
gallon (EEG)).
    For our first illustrative cost scenario, we consider the costs of
soybean-based biodiesel to meet the entire change in the advanced
standards. The final 2014 standard is being set at the actual level of
advanced biofuels produced in 2014, 2.67 billion gallons. The advanced
biofuel volumes are being finalized for 2015 at 2.88 billion gallons
and for 2016 at 3.61 billion gallons. Comparing the difference in costs
between biomass-based diesel and petroleum-based diesel, we estimate a
cost difference that ranges from $1.45 to $1.71/EEG in 2015 and from
$1.00 to $2.46/EEG in 2016. Multiplying the per gallon cost estimates
by the volume of fuel displaced by the advanced standard, on an energy
equivalent basis, results in an overall annual cost of $203 to $240
million in 2015 and $480 to $1,182 million in 2016.
    For our second illustrative cost scenario, we provide estimates of
what the potential costs might be if all additional volumes used to
meet the 2015 and 2016 advanced biofuel standards above the previous
year's advanced biofuel standard are met with imported Brazilian
sugarcane ethanol. Comparing the difference in costs between sugarcane
ethanol and the wholesale gasoline price on a per gallon basis, we
estimate cost differences that range from $0.89 to $2.05/EEG in 2015
and from $0.91 to $2.07/EEG in 2016. Taking the difference in per
gallon costs for sugarcane ethanol and the wholesale gasoline price and
multiplying that by the volume of petroleum displaced on an energy
equivalent basis from the advanced standard results in an overall
estimated annual cost of $186 to $431 million for 2015 and $656 to
$1,493 million for 2016.
    For the third illustrative cost scenario, we assess the difference
in cost associated with a change in the implied volumes available for
conventional (i.e., non-advanced) biofuels for 2015 and 2016. We
provide estimates of what the potential costs might be if corn ethanol
is used to meet the entire conventional renewable fuel volumes. The
implied 2014 volume allowance for conventional renewable fuel is 13.61
billion gallons, 14.05 billion gallons in 2015, and 14.50 billion
gallons in 2016. If corn ethanol is used to meet the difference between
the implied 2014 to 2015 and 2015 to 2016 conventional renewable fuel
volume increases, an increase of 440 million gallons of corn ethanol
would be required in 2015 and 450 million gallons in 2016. Comparing
the difference in costs between corn ethanol and the wholesale gasoline
price, we estimate a cost difference of $0.96 in 2015 and cost
differences that range from $1.01 to $1.33/EEG in 2016. Taking the
difference in per gallon costs between the corn ethanol and the
wholesale gasoline price estimates and multiplying that by the volume
of petroleum displaced on an energy equivalent basis by the
conventional standard results in an overall estimated annual cost of
$424 million for 2015 and $453 to $597 million for 2016.
    An alternative way of looking at the illustrative costs in 2016,
given the fact that this is a three year rule, is to consider a volume
change relative to the 2014 proposed standard. The cost estimate for
meeting the 2016 standard would range from $620 to $1,526 million if
the entire advanced standard were to be met with soybean-based diesel.
The cost estimates would range from $847 to $1,929 million if the
entire advanced standard were met with sugarcane ethanol. The cost
estimate for meeting the entire conventional standard in 2016 with corn
ethanol would range from $895 to $1,181 million.
    While it would be instructive to show not only the costs but also
the potential benefits of the standards being finalized and
understanding both would be an important consideration in any future
reassessment of the RFS program, the short timeframe provided for the
annual renewable fuel rule process does not allow sufficient time for
EPA to conduct a comprehensive analysis of the benefits of the 2015 and
2016 standards and the statute does not require it. Moreover, as
discussed in the final rule establishing the 1.28 billion gallon
requirement for BBD in 2013, the costs and benefits of the RFS program
as a whole are best assessed when the program is fully mature in 2022
and beyond.\165\ We continue to believe that this is the case, as the
annual standard-setting process encourages consideration of the program
on a piecemeal (i.e., year-to-year) basis, which may not reflect the
long-term economic effects of the program. Therefore, for the purpose
of this annual rulemaking, we have not quantified benefits for the 2015
and 2016 final standards. As noted, this approach pertains to this and
other annual rulemakings, not to potential future assessments of the
program. We do not have a quantified estimate of the GHG impacts for
the single year (e.g., 2015, 2016). When the RFS program is fully
phased in, the program will result in considerable volumes of renewable
fuels that will reduce GHG emissions in comparison to the fossil fuels
which they replace. EPA estimated GHG, energy security, and air quality
impacts and benefits for the 2010 RFS2 final rule for 2022.
---------------------------------------------------------------------------

    \165\ 77 FR 59477, September 27, 2012.
---------------------------------------------------------------------------

    EPA received numerous comments related to the costs of the proposed
2014, 2015, and 2016 renewable fuel volumes. One commenter believes
that EPA overestimated the cost of additional biodiesel volumes. They
claimed that ``the program has resulted in providing the public with an
alternative fuel source at a lower cost,'' and provided documentation
of a testimony in which a diesel fuel provider claims to use biodiesel
because it's cheaper than diesel. The commenter further states that the
price of the RIN offers discounts to the biofuel producer.

    Per gallon, wholesale biodiesel prices have been and continue to be
more expensive than petroleum diesel. For example, on October 22, 2015,
the front month futures price for B100 Soy Methyl Ester (SME) Chicago
is $2.32/gallon, while the front month futures price for New York
Harbor (NYH) Ultra-Low Sulfur Diesel (ULSD) is $1.47/gallon.\166\
---------------------------------------------------------------------------

    \166\ PFL Market Daily, Progressive Fuels Limited. http://www.progressivefuelslimited.com/Web_Data/pfldaily.pdf.
---------------------------------------------------------------------------

    Regarding the RIN discount, EPA acknowledges that biofuel producers
may receive discounts due to RIN values. However, the discount a
producer may receive due to RIN payment is not a cost, or a benefit; it
is a transfer. In our cost methodology, we attempt to calculate the
real resource costs associated with using biofuels in comparison to the
fossil fuels that they replace. We did not attempt to capture transfers
as a result of RIN prices and tax credits, which we acknowledge have
distributional impacts. We simply evaluated the cost to consumers by
considering per energy equivalent gallon difference in wholesale costs
of biofuels against their petroleum alternative given projected market
prices.
    Multiple commenters expressed concern over the fact that EPA did
not perform a full incremental cost-benefit analysis for the annual
renewable fuel volumes. API commented that EPA should provide a
``complete assessment of the rule's costs on obligated parties,
consumers, and other affected parties, along with a comparison of those
costs with the rule's benefits.'' As EPA has previously stated, the
annual rulemaking schedule for setting renewable fuel volumes does not
allow sufficient time to conduct a comprehensive benefit-cost analysis.
For the 2010 RFS2 final rule, EPA performed a full benefit-cost
analysis for 2022, when the program fully matures. For this rulemaking,
EPA performed the illustrative cost analysis described above in an
attempt to capture some of the impacts of the rule qualitatively.
Another commenter acknowledged EPA's 2010 benefit-cost analysis and the
time constraint facing the agency in propagating annual standards, but
called on EPA to complete an incremental analysis of the full impacts
of this rule.
    We agree that performing an incremental cost-benefit analysis would
be helpful to an extent, but we continue to believe that assessing the
program as a whole, over its maturity, is most appropriate.

III. Final Biomass-Based Diesel Volumes for 2014-2017

    In this section we discuss the final biomass-based diesel (BBD)
applicable volumes for 2014 through 2017. It is important to note that
the BBD volume requirement is nested within both the advanced biofuel
and the total renewable fuel volume requirements; so that any
``excess'' BBD produced beyond the mandated BBD volume can be used to
satisfy both these other applicable volume requirements. Therefore, in
finalizing the applicable BBD volume for 2014-2017, we considered not
only the volume for the BBD standard, which effectively guarantees a
minimum amount, but also the advanced biofuel and total renewable fuel
volume requirements, which historically have played a significant role
in determining demand for BBD as well.
    In finalizing an applicable BBD volume requirement for 2017, we are
establishing the volume requirement but not the percent standard.

A. Statutory Requirements

    The statute establishes applicable volume targets for years through
2022 for cellulosic biofuel, advanced biofuel, and total renewable
fuel. For BBD, applicable volume targets are specified in the statute
only through 2012. For years after those for which volumes are
specified in the statute, EPA is required under CAA section
211(o)(2)(B)(ii) to determine the applicable volume of BBD, in
coordination with the Secretary of Energy and the Secretary of
Agriculture, based on a review of the implementation of the program
during calendar years for which the statute specifies the volumes and
an analysis of the following factors:
    1. The impact of the production and use of renewable fuels on the
environment, including on air quality, climate change, conversion of
wetlands, ecosystems, wildlife habitat, water quality, and water
supply;
    2. The impact of renewable fuels on the energy security of the
United States;
    3. The expected annual rate of future commercial production of
renewable fuels, including advanced biofuels in each category
(cellulosic biofuel and BBD);
    4. The impact of renewable fuels on the infrastructure of the
United States, including deliverability of materials, goods, and
products other than renewable fuel, and the sufficiency of
infrastructure to deliver and use renewable fuel;
    5. The impact of the use of renewable fuels on the cost to
consumers of transportation fuel and on the cost to transport goods;
and
    6. The impact of the use of renewable fuels on other factors,
including job creation, the price and supply of agricultural
commodities, rural economic development, and food prices.

The statute also specifies that the volume requirement for BBD cannot
be less than the applicable volume for calendar year 2012, which is 1.0
billion gallons. The statute does not, however, establish any other
numeric criteria, or provide any guidance on how the EPA should weigh
the importance of the often competing factors, and the overarching
goals of the statute when the EPA sets the applicable volumes of BBD in
years after those for which the statute specifies such volumes. In the
period 2013-2022, the statute specifies increasing applicable volumes
of cellulosic biofuel, advanced biofuel, and total renewable fuel, but
provides no guidance, beyond the 1.0 billion gallon minimum, on the
level at which BBD volumes should be set.

B. BBD Production and Compliance Through 2013

    Due to the delayed issuance of the major regulatory revisions
necessary to implement changes to the RFS program enacted through the
Energy Independence and Security Act of 2007, EPA established a 2010
BBD standard that reflected volume requirements for both 2009 and 2010,
and allowed RINs generated as early as 2008 to be used for compliance
with that standard. Given the complexity associated with the 2010 BBD
standard, we begin our review of implementation of the program with the
2011 compliance year. This review is required by the CAA, and also
provides insight into the capabilities of the industry to produce,
import, export, and distribute BBD. It also helps us to understand what
factors, beyond the BBD standard, may incentivize the production and
import of BBD. The number of BBD RINs generated, along with the number
of RINs retired for reasons other than compliance with the annual BBD
standards, are shown in Table III.B-1 below.

                                         Table III.B-1--Biomass-Based RIN Generation and Standards in 2011-2013
                                                                 [Million gallons] \167\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                BBD RINs
                                                             BBD RINs      Exported BBD    retired, non-   Available BBD   BBD standard    BBD standard
                                                             generated        (RINs)        compliance         RINs          (gallons)     (RINs) \168\
                                                                                reasons
--------------------------------------------------------------------------------------------------------------------------------------------------------
2011....................................................           1,692             110              97           1,484             800           1,200
2012....................................................           1,737             193              80           1,465           1,000           1,500
2013....................................................           2,739             295              94           2,350           1,280           1,920
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In reviewing historical BBD RIN generation and use, we see that the
number of RINs available for compliance purposes exceeded the volume
required to meet the BBD standard in 2011 and 2013. Additional
production and use of biodiesel was likely driven by a number of
factors, including demand to satisfy the advanced biofuel and total
renewable fuels standards, the biodiesel tax credit, and favorable
blending economics. In 2012 the available BBD RINs were slightly less
than the BBD standard. There are many reasons this may have been the
case, including the temporary lapse of the biodiesel tax credit at the
end of 2011.\169\
---------------------------------------------------------------------------

    \167\ Net BBD RINs Generated and BBD RINs Retired for Non-
Compliance Reasons information from EMTS. Biodiesel Export
information from EIA (http://www.eia.gov/dnav/pet/pet_move_expc_a_EPOORDB_EEX_mbbl_a.htm.)
    \168\ Each gallon of biodiesel generates 1.5 RINs due to its
higher energy content per gallon than ethanol. Renewable diesel
generates between 1.5 and 1.7 RINs per gallon.
    \169\ The biodiesel tax credit was reauthorized in January 2013.
It applied retroactively for 2012 and for the remainder of 2013. It
was once again extended in December 2014 and applied retroactively
to all of 2014 as well as to the remaining weeks of 2014.
---------------------------------------------------------------------------

    While the total number of BBD RINs generated in 2013 was 2.74
billion (representing 1.79 billion gallons of BBD), it is also
instructive to review the data on volumes that were produced
domestically, imported, exported, and retired for reasons other than
compliance. Total domestic production of BBD was 1.45 billion gallons
(2.19 billion RINs), while imports resulted in an additional 0.34
billion gallons (0.55 billion RINs).\170\ However, this volume was not
entirely available for compliance purposes, since some of the BBD
produced domestically was exported and some RINs had to be retired for
purposes other than compliance. Based on EIA export data, we estimate
that 0.196 billion gallons (0.295 billion RINs) of BBD were exported in
2013.\171\ A corresponding number of BBD RINs will eventually be
retired by exporters, as required by the RFS regulations, and therefore
are not available for use by refiners and importers in satisfying their
2013 obligations.\172\ Additionally, 0.094 billion BBD RINs were
retired for reasons other than compliance, such as volume error
corrections, contaminated or spoiled fuel, or fuel used for purposes
other than transportation fuel, heating oil, or jet fuel. Based on this
information, the actual amount of BBD available for compliance in 2013
totaled 2.36 billion RINs, representing approximately 1.55 billion
gallons of BBD. This is 430 million more BBD RINs than were required
for compliance with the BBD standard in 2013.
---------------------------------------------------------------------------

    \170\ ``2013 RIN Supply'', EPA Docket EPA-HQ-OAR-2015-0111.
    Note that not all of the imported volumes generated BBD (D4)
RINs. Some of this volume may have generated Renewable Fuel (D6)
RINs or no RINs at all.
    \171\ U.S. Energy Information Administration (EIA). Annual
export data for Biodiesel (2013). See http://www.eia.gov/dnav/pet/pet_move_expc_a_EPOORDB_EEX_mbbl_a.htm (last accessed October 27,
2015).
    \172\ EMTS includes data on RINs retired for export, but the
values are incomplete as of this writing since the 2013 compliance
deadline has not yet passed.
---------------------------------------------------------------------------

C. BBD Volumes for 2014

    As we did for advanced and total renewable fuel in 2014 and 2015,
we believe that it is appropriate to establish the 2014 and 2015 volume
requirements of BBD to reflect actual supply (including a projection
for the latter part of 2015 that is primarily based on supply in the
earlier part of the year for which data is available). Therefore, we
are finalizing a BBD applicable volume requirement of 1.63 billion
gallons for 2014, which represents our estimate of actual BBD supply in
2014. We define supply for 2014 as the number of BBD RINs generated in
2014 that were available for compliance.\173\ Supply would thus include
RINs that were generated for renewable fuel produced or imported in
2014 as recorded in the EMTS, minus any RINs that have already been
retired or would be expected to be retired to cover exports of
renewable fuels or for any purpose other than compliance with the RFS
percentage standards. RINs that have already been retired for such
circumstances as RINs being invalid, spills, corrected and replaced
RINs, etc. are recorded in EMTS on an ongoing basis. However, complete
information on RINs that are retired to cover exports of renewable fuel
and foreign generated renewable fuel that is exported to another
country is not available through EMTS until after the 2014 compliance
demonstration deadline. Since compliance cannot occur until the
standards are set, we are using biodiesel export information from EIA
for 2014 to estimate the number of 2014 BBD RINs that will be retired
to satisfy obligations associated with exported BBD.
---------------------------------------------------------------------------

    \173\ Our focus on RINs generated in 2014 is consistent with our
general approach to carryover RINs for this rulemaking, as described
in Section II.H.
---------------------------------------------------------------------------

    Actual supply of BBD in 2014 and the projected actual supply for
2015 is shown in Table III.C-1 below. Further details are provided in a
memorandum to the docket.\174\ Since EIA does not distinguish exports
by D code, we assumed that all biodiesel exports represent D4 BBD. We
expect that any errors introduced by this assumption will be very
small.\175\
---------------------------------------------------------------------------

    \174\ ``2014 RIN Supply,'' EPA docket EPA-HQ-OAR-2015-0111.
    \175\ From 2011 through 2015 only 12 million gallons of
conventional (D6) biodiesel and renewable diesel was produced in the
United States. We believe it is unlikely that foreign-produced
conventional (D6) biodiesel and renewable diesel was imported into
the United States and consequently exported, especially as the
biodiesel blenders tax credit has not applied to fuel produced
outside the U.S. for use as a fuel outside the U.S. since 2008.

                         Table III.C-1--Supply of Biomass-Based Diesel in 2014 and 2015
----------------------------------------------------------------------------------------------------------------
                                                      2014
-----------------------------------------------------------------------------------------------------------------
                                                                                BBD RINs
                                                     Domestic                      retired, non-
                                                  production and      Exports       compliance      Net supply
                                                      imports                         reasons
----------------------------------------------------------------------------------------------------------------
Million RINs....................................           2,709             124              82           2,490
Million gallons.................................           1,763              83              48     \176\ 1,630
----------------------------------------------------------------------------------------------------------------
                                              Projected Actual 2015
----------------------------------------------------------------------------------------------------------------
Million RINs....................................           2,888             145              92           2,650
Million gallons.................................           1,880              97              54           1,730
----------------------------------------------------------------------------------------------------------------

    Some \\commenters suggested the EPA was prohibited from increasing
the biomass-based diesel standard above 1.28 billion for the 2014
through 2016 time period because obligated parties did not have notice
of EPA's intention to increase the biomass-based diesel standard above
this amount at the times EPA missed the statutory deadlines for
establishing applicable BBD volume requirements for these years. We do
not agree with these commenters and believe that obligated parties were
on notice that the BBD volume requirements for these years could be
higher than 1.28 billion gallons. First, while in the November 2013
NPRM we proposed 2014 and 2015 BBD volume requirements of 1.28 million
gallons, we also requested comment on alternative approaches and higher
volumes.\177\ We noted in the NPRM that total biodiesel production by
the end of 2013 could be as high as 1.7 billion gallons and that the
facilities contributing to this production collectively had a capacity
of well over 2 billion gallons.\178\ Thus, stakeholders were certainly
on notice by November 2013 that a final BBD volume requirement greater
than 1.28 billion gallons was possible and could be used in deriving
the final 2014 and 2015 BBD standards. Furthermore, they were provided
with notice of the precise (for 2014) or approximate (for 2015) volume
requirements being finalized today through the June 10, 2015 NPRM.
Thus, we believe that parties had adequate notice that 2014 and 2015
BBD volume requirements as high as those in today's rule could be
finalized. And, although our proposal for 2016 was also issued late,
obligated parties will have had approximately six months from the date
of the June 2015 NPRM before the start of the compliance year, plus 12
months during the compliance year, plus three months after the close of
the compliance year to plan for compliance and acquire necessary RINs.
Finally, to provide those parties who may need additional time to
engage in RIN trading to obtain the right number and balance of RINs
for 2014 and 2015 compliance, EPA is providing very extensive
extensions of the normal compliance demonstration deadlines. For 2014,
the deadline in today's rule is August 1, 2016, two months later than
proposed and a full 8 months after signature of this rule. For 2015 the
compliance demonstration deadline is December 1, 2016, or 12 months
from signature of this rule. Since compliance can be achieved through
acquisition of RINs in the marketplace, and does not require capital
investments or actual renewable fuel blending, we believe that this
amount of lead time for parties to come into compliance is adequate and
reasonable.
---------------------------------------------------------------------------

    \176\ While the actual physical volume of D4 BBD supplied in
2014 was 1.63 billion gallons, we have used a physical volume of
1.67 billion gallons in calculating the percentage standard for 2014
because the formula for calculating the BBD percentage standard in
40 CFR 80.1405(c) includes a factor of 1.5, presuming that all BBD
is biodiesel. In reality, a significant portion of BBD in 2014 was
renewable diesel (328 million gallons), which generally has an
equivalence value of 1.7 rather than 1.5. The use of a physical
volume of 1.67 billion gallons ensures that the applicable
percentage standard for BBD accounts for the higher equivalence
value of the volume of renewable diesel produced and imported in
2014 and results in a requirement for 2.49 billion RINs, consistent
with supply.
    \177\ 78 FR 71732, 71734.
    \178\ 78 FR 71732, 71752.
---------------------------------------------------------------------------

    These same industry commenters suggested that because EPA was late
in issuing its final BBD applicable volume rules, some obligated
parties might have relied on the proposed 1.28 billion gallon
applicable volume requirement for 2014 and 2015, and would now face
difficulty in meeting higher volume obligations. Although they did not
identify any parties in this situation, there was one obligated party
who asserted in separate comments that they had in fact relied on the
November 2013 NPRM in planning 2014 compliance for all four of the
renewable fuel standards, and requesting that in fairness EPA not now
impose a higher obligation for that year. In reply we reiterate that
parties were on notice through the November 2013 NPRM that EPA could
finalize higher volume requirements than proposed. Indeed, it is the
nature of proposed rules that EPA review comments and consider changes,
so our doing so should not come as a surprise to anyone. In addition,
the tables of applicable volumes in the statute have long provided
notice with respect to advanced biofuel, total renewable fuel and
cellulosic biofuel that volume requirements could be as high for those
fuels as are specified there. We believe that once this commenter