Table 11 (U.S. Renewable Energy Use by Sector: Base Case) of the STEO.
    CAA section 211(o) exempts small refineries \31\ from the RFS
requirements until the 2011 compliance period. In RFS1, we extended
this exemption to the few remaining small refiners not already
exempted.\32\ Since EPA proposes that small refineries and small
refiners continue to be exempt from the program until 2011 under the
new RFS2 regulations, EPA will exclude their gasoline and diesel
volumes from the overall non-renewable gasoline and diesel volumes used
to determine the applicable percentages until 2011. EPA believes this
is appropriate because the percentage standards need to be based on the
gasoline and diesel subject to the renewable volume obligations, to
achieve the overall required volumes of renewable fuel. Because the
total small refinery and small refiner gasoline production volume is
expected to be fairly constant compared to total U.S. transportation
fuel production, we are proposing to estimate small refinery and small
refiner gasoline and diesel volumes using a constant percentage of
national consumption, as we did in RFS1. Using information from
gasoline batch reports submitted to EPA for 2006, EIA data, and input
from the California Air Resources Board regarding California small
refiners, we estimate that small refinery volumes constitute 11.9% of
the gasoline pool, and 15.2% of the diesel pool.
---------------------------------------------------------------------------

    \31\ Under section 211(o) of the Clean Air Act, small refineries
are those with 75,000 bbl/day or less average aggregate daily crude
oil throughput.
    \32\ See Section IV.B.2.
---------------------------------------------------------------------------

    CAA section 211(o) requires that the small refinery adjustment also
account for renewable fuels used during the prior year by small
refineries that are exempt and do not participate in the RFS2 program.
Accounting for this volume of renewable fuel would reduce the total
volume of renewable fuel use required of others, and thus directionally
would reduce the percentage standard. However, as we discussed in RFS1,
the amount of renewable fuel that would qualify, i.e., that was used by
exempt small refineries and small refiners but not used as part of the
RFS program, is expected to be very small. In fact, these volumes would
not significantly change the resulting percentage standards. Whatever
renewable fuels small refineries and small refiners blend will be
reflected as RINs available in the market; thus there is no need for a
separate accounting of their renewable fuel use in the equations used
to determine the standards. We thus are proposing, as for RFS1, that
this value be zero.
    Just as with their corresponding gasoline and diesel volumes,
renewable fuels used in Alaska or U.S. territories are not included in
the renewable fuel volumes that are subtracted from the total gasoline
and diesel volume estimates. Section 211(o) of the Clean Air Act
requires that the renewable fuel be consumed in the contiguous 48
states, and any other state or territory that opts in to the program
(Hawaii has subsequently opted in). However, because renewable fuel
produced in Alaska or a U.S. territory is unlikely to be transported to
the contiguous 48 states or to Hawaii, including their renewable fuel
volumes in the calculation of the standard would not serve the purpose
intended by section 211(o) of the Clean Air Act of ensuring that the
statutorily required renewable fuel volumes are consumed in the 48
contiguous states and any state or territory that opts in.
    In summary, we are proposing that the total projected non-renewable
gasoline and diesel volumes from which the annual standards are
calculated be based on EIA projections of gasoline and diesel
consumption in the contiguous 48 states and Hawaii, adjusted by
constant percentages of 11.9% and 15.2% in 2010 to account for small
refinery/refiner gasoline and diesel volumes, respectively, and with
built-in correction factors to be used when and if Alaska or a
territory opt-in to the program. If actual gasoline and diesel
consumption were to exceed the EIA projections, the result would be
that renewable fuel volumes would exceed the statutory volumes.
Conversely, if actual gasoline and diesel consumption was less than the
EIA projection for a given year, actual renewable fuel volumes could be
lower than the statutory volumes depending on market conditions.
Additional special considerations in establishing the annual cellulosic
biofuel standard are discussed below in Section III.E.1.c.
    The following formulas will be used to calculate the percentage
standards:
[GRAPHIC] [TIFF OMITTED] TN26MY09.000

[GRAPHIC] [TIFF OMITTED] TN26MY09.001

[GRAPHIC] [TIFF OMITTED] TN26MY09.002

[GRAPHIC] [TIFF OMITTED] TN26MY09.003

Where

StdCB,i = The cellulosic biofuel standard for year i, in
percent
StdBBD,i = The biomass-based diesel standard for year i,
in percent
StdAB,i = The advanced biofuel standard for year i, in
percent
StdRF,i = The renewable fuel standard for year i, in
percent
RFVCB,i = Annual volume of cellulosic biofuel required by
section 211(o)(2)(B) of the Clean Air Act for year i, in gallons
RFVBBD,i = Annual volume of biomass-based diesel required
by section 211(o)(2)(B) of the Clean Air Act for year i, in gallons
RFVAB,i = Annual volume of advanced biofuel required by
section 211(o)(2)(B) of the Clean Air Act for year i, in gallons
RFVRF,i = Annual volume of renewable fuel required by
section 211(o)(2)(B) of the Clean Air Act for year i, in gallons
Gi = Amount of gasoline projected to be used in the 48
contiguous states and Hawaii, in year i, in gallons*
Di = Amount of diesel projected to be used in the 48
contiguous states and Hawaii, in year i, in gallons
RGi = Amount of renewable fuel blended into gasoline that
is projected to be consumed in the 48 contiguous states and Hawaii,
in year i, in gallons
RDi = Amount of renewable fuel blended into diesel that
is projected to be consumed in the 48 contiguous states and Hawaii,
in year i, in gallons
GSi = Amount of gasoline projected to be used in Alaska
or a U.S. territory in year i if the state or territory opts in, in
gallons*
RGSi = Amount of renewable fuel blended into gasoline
that is projected to be consumed in Alaska or a U.S. territory in
year i if the state or territory opts in, in gallons
DSi = Amount of diesel projected to be used in Alaska or
a U.S. territory in year i if the state or territory opts in, in
gallons*
RDSi = Amount of renewable fuel blended into diesel that
is projected to be consumed in Alaska or a U.S. territory in year i
if the state or territory opts in, in gallons
GEi = The amount of gasoline projected to be produced by
exempt small refineries and small refiners in year i, in gallons, in
any year they are exempt per Sec. Sec.  80.1441 and 80.1442,
respectively. Equivalent to 0.119 * (Gi -
RGi).
DEi = The amount of diesel projected to be produced by
exempt small refineries and small refiners in year i, in gallons, in
any year they are exempt per Sec. Sec.  80.1441 and 80.1442,
respectively. Equivalent to 0.152 * (Di -
RDi).
    * Note that these terms for projected volumes of gasoline and
diesel use include gasoline and diesel that has been blended with
renewable fuel.

b. Proposed Standards for 2010
    In today's NPRM we are proposing the specific standards that would
apply to all obligated parties in calendar year 2010. We will consider
comments received on these standards as part of the comment period
associated with today's NPRM, and we intend to issue a Federal Register
notice by November 30, 2009 setting the applicable standards for 2010.
While we are not proposing standards for 2011 and beyond, we present
our current projections of these standards in the next section.
    Under CAA section 211(o)(7)(D)(i), EPA is required to make a
determination each year regarding whether the required volumes of
cellulosic biofuel for the following year can be produced. For any
calendar year for which the projected volume of cellulosic biofuel
production is less than the minimum required volume, the projected
volume becomes the basis for the cellulosic biofuel standard. In such a
case, the statute also indicates that EPA may also lower the required
volumes for advanced biofuel and total renewable fuel.
    Based on information available to date, we believe that there are
sufficient plans underway to build plants capable of producing 0.1
billion gallons of cellulosic biofuel in 2010, the minimum volume of
cellulosic biofuel required by EISA for 2010. Our April 2009 industry
assessment concludes that there could be seven small commercial-scale
plants online in 2010 (as well as a series of pilot and demonstration
plants) capable of producing just over 100 million gallons of
cellulosic biofuel. And since the majority of this production (73%) is
projected to be cellulosic diesel, the ethanol-equivalent complaince
volume could be closer to 145 million gallons. While it is possible
that some of these plants could be delayed or a portion of the
projected production may not meet the definition of ``cellulosic
biofuel'' (due to mixed feedstocks), it is also possible that other
plans could proceed ahead of their current schedules. For more on the
2010 cellulosic biofuel production assessment, refer to Section <IP_ADDRESS>
of the DRIA
    On the basis of this information, we are not proposing that any
portion of the cellulosic biofuel requirement for 2010 be waived.
Therefore, we are proposing that the volumes shown in Table II.A.1-1 be
used as the basis for the applicable standards for 2010. As described
more fully in Section III.E.2 below, we are also proposing that the
2010 standard for biomass-based diesel be based on the combined
required volumes for 2009 and 2010, or a total of 1.15 billion gallons.
The proposed standards for 2010 are shown in Table III.E.1.b-1.

             Table III.E.1.b-1--Proposed Standards for 2010
                                [Percent]
------------------------------------------------------------------------

------------------------------------------------------------------------
Cellulosic biofuel.............................................     0.06
Biomass-based diesel...........................................     0.71
Advanced biofuel...............................................     0.59
Renewable fuel.................................................     8.01
------------------------------------------------------------------------

    As described more fully in Section III.E.1.d below, we are
proposing that the RFS2 program take effect on January 1, 2010, but we
are also taking comment on an effective date later than January 1,
2010, including January 1, 2011 and a mid-2010 effective date. If the
RFS2 program became effective mid-2010, the RFS1 program would apply
during the first part of 2010 and the RFS2 program would apply for the
remainder of the year. We request comment on whether the four proposed
standards shown in Table III.E.1.b-1 would apply only to gasoline and
diesel produced or imported after the RFS2 effective date or should
apply to all gasoline and diesel produced in 2010. We also request
comment on whether a single standard for total renewable fuel should
apply under RFS1 regulations for the first part of 2010.
c. Projected Standards for Other Years
    As discussed above, we intend to set the percentage standards for
each upcoming year based on the most recent EIA projections, and using
the other sources of information as noted above. We would publish the
standard in the Federal Register by November 30 of the preceding year.
The standards would be used to determine the renewable volume
obligations based on an obligated party's total gasoline and diesel
production or import volume in a calendar year, January 1 through
December 31. An obligated party will calculate its Renewable Volume
Obligations (discussed in Section III.G.1) using the annual standards.
    For illustrative purposes, we have estimated the standards for 2011
and later based on current information using the formulas discussed
above, and assuming no modifications to the annual volumes
required.\33\ These values are listed below in Table III.E.1.c-1. The
required renewable fuel volumes specified in EISA are shown in Table
II.A.1-1. The projected gasoline, diesel and renewable fuels volumes
were determined from EIA's energy projections. Variables related to
Alaska or territory opt-ins were set to zero since we do not have any
information related

to their participation at this time. No adjustment was made for small
refiner or small refinery volumes since their exemption is assumed to
end at the end of the 2010 compliance period.
---------------------------------------------------------------------------

    \33\ ``Calculation of the Renewable Fuel Standard for Gasoline
and Diesel,'' memo to the docket from Christine Brunner, ASD, OTAQ,
EPA, April 2009.

                                Table III.E.1.c-1--Projected Standards Under RFS2
                                                    [percent]
----------------------------------------------------------------------------------------------------------------
                                                                             Biomass-
                                                               Cellulosic     based       Advanced    Renewable
                                                                biofuel       diesel      biofuel        fuel
----------------------------------------------------------------------------------------------------------------
2011........................................................         0.15         0.49         0.83         8.60
2012........................................................         0.31         0.61         1.22         9.31
2013........................................................         0.61        0.61a         1.68        10.09
2014........................................................         1.07        0.61a         2.28        11.05
2015........................................................         1.83        0.61a         3.35        12.48
2016........................................................         2.58        0.61a         4.40        13.49
2017........................................................         3.34        0.61a         5.46        14.56
2018........................................................         4.25        0.61a         6.68        15.80
2019........................................................         5.19        0.61a         7.95        17.11
2020........................................................         6.47        0.62a         9.25        18.50
2021........................................................         8.40        0.62a        11.21        20.54
2022........................................................        10.07        0.63a        13.21        22.65
----------------------------------------------------------------------------------------------------------------
\a\ These projected standards represent the minimum volume of 1.0 billion gallons required by EISA. The actual
  volume used to set the standard would be determined by EPA through a future rulemaking.

d. Alternative Effective Date
    Although we are proposing that the RFS2 regulatory program begin on
January 1, 2010 which, depending on timing for the final rule, would
allow approximately two months from the anticipated issuance of the
rule to its implementation, we seek comment on whether an effective
date later than January 1, 2010 would be necessary. If the RFS2 program
was not made effective on January 1, 2010, the most straightforward
alternative start date would be January 1, 2011. Delaying to 2011 would
provide regulated parties additional lead time and would allow all the
new requirements and standards to go into effect at the beginning of an
annual compliance period. However, delaying to 2011 would also mean
that demonstrating compliance with the separate requirements for
biomass-based diesel, cellulosic biofuel, and advanced biofuel mandates
would not go into effect until 2011. The total renewable fuel mandate
in EISA may be able to be implemented with the RFS1 regulations until
such time as the RFS2 regulations become effective. However, under the
RFS1 regulations, this entire standard would be for conventional
biofuels and would be applied to gasoline producers and importers only.
There would be no obligation with respect to diesel fuel producers and
importers, resulting in a numerically larger standard that would apply
to gasoline producers only and which could compel them to market a
larger proportion of ethanol as E85 to acquire sufficient RINs for
compliance. One possible way to address this issue would be to reduce
the 2010 total renewable fuel standard proportionately to reflect the
application of the standard only to gasoline producers. However, it
does not appear that EPA has statutory authority, or discretion under
the RFS1 regulations, to modify the total renewable fuel mandate in
this manner. As discussed below in Section III.E.2, any delay beyond
January 1, 2010 also has implications for our proposed treatment of the
biomass-based diesel volumes required for 2009. EPA invites comment on
whether RFS2 implementation should be delayed to January 1, 2011 and,
if so, the manner in which the EISA-mandated RFS program should be
implemented prior to that date.
    Another alternative would be to delay the effective date of the
RFS2 program to some time after January 1, 2010 but before January 1,
2011. This alternative would raise the same issues described above
(regarding the option of a delay until January 1, 2011) for that
portion of 2010 during which RFS2 was not effective. It would also
raise additional transition and implementation issues. For instance, we
would need to determine whether diesel fuel producers and importers
carry a total renewable fuel obligation calculated on the basis of
their production for all of 2010 or just the production period in 2010
during which the RFS2 regulations are effective. We would also need to
determine whether the 2010 cellulosic biofuel, biomass-based diesel,
and advanced biofuel standards applicable under RFS2 should apply to
production of gasoline and diesel for all of 2010 or just the
production that occurred after the RFS2 regulations were effective If
the latter, EPA would need to determine the extent to which RFS1 RINs
generated in the first part of 2010 could be used to satisfy RFS2
obligations, given that some 2010 RINs would be generated under the
RFS1 requirements while other 2010 RINs would be generated under RFS2
requirements. To accomplish this, RINs generated under the RFS2
requirements would need to be distinguished from RINs generated under
RFS1 requirements through the RINs' D codes. Section III.A provides a
more detailed description of this alternative approach to the
assignment of D codes under the RFS2 program. For additional discussion
of how RFS1 RINs would be treated in the transition to the RFS2
program, see our proposed transition approach described in Section
III.G.3.
    We are requesting comment on all issues related to the option of an
RFS2 start date sometime after January 1, 2010, including the need for
such a delayed start, the level of the standards, treatment of diesel
producers and importers, whether the standards for advanced biofuel,
cellulosic biofuel and biomass-based diesel should apply to the entire
2010 production or just the production that would occur after the RFS2
effective date, treatment of the 2009 and/or 2010 biomass-based diesel
standard, and the extent to which RFS1 RINs should be valid to show
compliance with RFS2 standards.
2. Treatment of Biomass-Based Diesel in 2009 and 2010
    We are proposing to make the RFS2 program required through EISA
effective on January 1, 2010. The RFS2 program would include an
expansion to four

separate standards, changes to the RIN system, changes to renewable
fuel definitions, the introduction of lifecycle GHG reduction
thresholds, and the expansion of obligated parties to include producers
and importers of diesel and nonroad fuel. However, EISA requires
promulgation of the final RFS2 regulations within one year of enactment
and presumes full implementation by January 1, 2009. Moreover, EISA
specifies new volume requirements for biomass-based diesel, advanced
biofuel, and total renewable fuel for 2009. As described in Section
II.A.5, it is not possible to have the full RFS2 program implemented by
January 1, 2009. As a result, we must consider how to treat these
separate volume requirements for 2009.
a. Proposed Shift in Biomass-Based Diesel Requirement From 2009 to 2010
    The statutory language in EISA does not indicate that the existing
RFS1 regulations cease to apply on January 1, 2009. Rather, it directs
us to ``revise the regulations'' to ensure that the required volumes of
renewable fuel are contained in transportation fuel. As a result, until
the RFS1 regulations are changed through a notice and comment
rulemaking process, they will remain in effect. If the full RFS2
program goes into effect on January 1, 2010, then the existing RFS1
regulations will continue to apply in 2009.
    Under RFS1, we set the applicable standard each November for the
following compliance period using the required volume of renewable fuel
specified in the Clean Air Act, gasoline volume projections from EIA,
and the formula provided in the regulations at Sec.  80.1105(d). Since
final RFS2 regulations will not be promulgated by the end of 2008, this
RFS1 standard-setting process will apply to the 2009 compliance period
as well. However, EISA modifies the Clean Air Act to increase the
required volume of total renewable fuel for 2009 from 6.1 to 11.1
billion gallons, and thus the applicable standard for 2009, published
in November of 2008,\34\ reflects this higher volume. This will ensure
that the total renewable fuel requirement under EISA for 2009 is
implemented.
---------------------------------------------------------------------------

    \34\ See 73 FR 70643.
---------------------------------------------------------------------------

    While the total renewable fuel volume of 11.1 billion gallons will
be required in 2009, the existing RFS1 regulations do not provide a
mechanism for requiring the 0.5 billion gallons of biomass-based diesel
or the 0.6 billion gallons of advanced biofuel required by EISA for
2009. Below we describe our proposed approach for biomass-based diesel.
With regard to advanced biofuel, we believe that it is not necessary to
implement a separate requirement for the 0.6 billion gallons. Due to
the nested nature of the volume requirements, the 0.5 billion gallon
requirement for biomass-based diesel would count towards meeting the
advanced biofuel requirement, leaving just 0.1 billion gallons that we
believe will be supplied through imports of sugar-based ethanol even
without a specific mandate for advanced biofuel.
    We believe that the deficit carryover provision provides a
conceptual mechanism for ensuring that the volume of biomass-based
diesel that is required by EISA for 2009 is actually consumed. As
described in the RFS1 final rule, the statute permits obligated parties
to carry a deficit of any size from one compliance period to the next,
so long as a deficit is not carried over two years in a row.\35\ In
theory this would allow any and all obligated parties to defer
compliance with any or all of the 2009 standards until 2010. Based on
the precedent set by this statutory provision, we propose that the
compliance demonstration for the 2009 biomass-based diesel requirement
be extended to 2010. We believe this approach would provide a
reasonable transition for biomass-based diesel, given our inability to
issue regulations before the beginning of the 2009 calendar year. Our
proposed approach would implement the 2009 and 2010 biomass-based
diesel volume requirements in a way that ensures that these two years
worth of biomass-based diesel would be used, while providing reasonable
lead time for obligated parties. It would avoid a transition that fails
to have any requirements related to the 2009 biomass-based diesel
volume, and instead would require the use of the 2009 volume but would
achieve this by extending the compliance period by one year. We believe
this is a reasonable exercise of our authority under section 211(o)(2)
to issue regulations that ensure that the volumes for 2009 are
ultimately used, even though we are unable to issue final regulations
prior to the 2009 compliance year. In addition, it is a practical
approach that provides obligated parties with appropriate lead time.
---------------------------------------------------------------------------

    \35\ See 72 FR 23935.
---------------------------------------------------------------------------

    To implement our proposed approach, the 2009 requirement of 0.5
billion gallons of biomass-based diesel would be combined with the 2010
requirement of 0.65 billion gallons for a total adjusted 2010
requirement of 1.15 billion gallons of biomass-based diesel. The net
effect is that obligated parties can demonstrate compliance with both
the 2009 and 2010 biomass-based diesel requirements in 2010, consistent
with what the deficit carryover provision would have allowed had we
been able to implement the full RFS2 program by January 1, 2009.
    Furthermore, we propose to allow all 2009 biodiesel and renewable
diesel RINs, identifiable through an RR code of 15 or 17 respectively,
to be valid for showing compliance with the adjusted 2010 biomass-based
diesel standard of 1.15 billion gallons. This use of previous year RINs
for current year compliance would be consistent with our approach to
any other standard for any other year and consistent with the
flexibility available to any obligated party that carried a deficit
from one year to the next. Moreover, it allows an obligated party to
acquire sufficient biodiesel and renewable diesel RINs during 2009 to
comply with the 0.5 billion gallons requirement, even though their
compliance demonstration would not occur until the 2010 compliance
period.
    While we recognize that RINs generated in 2009 under RFS1
regulations will differ from those generated in 2010 under RFS2
regulations in terms of the purpose of the D code and the other
criteria for establishing the eligibility of renewable fuel, we believe
that the use of 2009 RINs for compliance with the 2010 adjusted
standard is appropriate. It is also consistent with CAA section
211(o)(5), which provides that validly generated credits may be used to
show compliance for 12 months. The program transition issue of RINs
generated under RFS1 but used to meet standards under RFS2 is discussed
in more detail in Section III.G.3 below.
    Rather than reducing the 2009 volume requirement for total
renewable fuel by 0.5 billion gallons of biomass-based diesel and
increasing the 2010 volume requirements for advanced biofuel and total
renewable fuel by the same amount, we are proposing that the only
standard that would be adjusted would be that for biomass-based diesel
in 2010. This approach would minimize the changes to the annual RFS
volume requirements and thus would more directly implement the
requirements of the statute. However, this approach would also require
that we allow 2009 biodiesel and renewable diesel RINs to be used for
compliance purposes for both the 2009 total renewable fuel standard as
well as the 2010 adjusted biomass-based diesel standard, but not for
the 2010 advanced biofuel or total renewable fuel standards. We have

identified two possible options for accomplishing this.
i. First Option for Treatment of 2009 Biodiesel and Renewable Diesel
RINs
    In the first option, an obligated party would add up the 2009
biodiesel and renewable diesel RINs that he used for 2009 compliance
with the RFS1 standard for renewable fuel, and reduce his 2010 biomass-
based diesel obligation by this amount. Any remaining 2010 biomass-
based diesel obligation would need to be covered with either 2009
biodiesel and renewable diesel RINs that were not used for compliance
with the renewable fuel standard in 2009, or 2010 biomass-based diesel
RINs. This is the option we are proposing in today's notice.
    The primary drawback of our proposed option is that 2009 biodiesel
and renewable diesel RINs used to demonstrate compliance with the 2009
renewable fuel standard could not be traded to any other party for use
in complying with the 2010 biomass-based diesel standard. Thus, for
instance, if a refiner acquired many 2009 biodiesel and renewable
diesel RINs and used them for compliance with the 2009 renewable fuel
standard, and if the number of these 2009 RINs was more than he needed
to comply with his 2010 biomass-based diesel obligation, he could not
trade the excess to another party. These excess RINs could never be
applied to the adjusted 2010 biomass-based diesel standard by any
party, and as a result the actual demand for biomass-based diesel could
exceed 1.15 bill gal. We believe that obligated parties could avoid
this outcome by planning ahead to use no more 2009 biodiesel and
renewable diesel RINs for 2009 compliance with the renewable fuel
standard than they would need for 2010 compliance with the adjusted
biomass-based diesel standard. Moreover, this option could provide
obligated parties with sufficient incentive to collect 0.5 billion
gallons worth of biodiesel and renewable diesel RINs in 2009 without
significant changes to the program's requirements.
ii. Second Option for Treatment of 2009 Biodiesel and Renewable Diesel
RINs
    Under the second option, biodiesel and renewable diesel RINs
generated in 2009 would be allowed to be used for compliance purposes
in both 2009 and 2010. To enable this option, for the specific and
limited case of biodiesel and renewable diesel RINs generated in 2009,
we would modify the regulatory prohibition at Sec.  80.1127(a)(3)
limiting the use of RINs for compliance demonstrations to a single
compliance year to allow 2009 biodiesel and renewable diesel RINs to be
used for compliance purposes in two different years. This change would
allow all 2009 biodiesel and renewable diesel RINs to be used to meet
the adjusted biomass-based diesel standard in 2010 regardless of
whether they were also used to meet the total renewable fuel standard
in 2009. We would also need to lift the 20% rollover cap that would
otherwise limit the use of 2009 RINs in 2010, and instead allow any
number of 2009 biodiesel and renewable diesel RINs to be used to meet
the 2010 biomass-based diesel standard.
    This option would also require that we implement additional RIN
tracking procedures. Under the current RFS1 regulations, RINs used for
compliance demonstrations are removed from the RIN market, while under
this alternative approach biodiesel and renewable diesel RINs could
continue to be valid for compliance purposes vis a vis the adjusted
2010 biomass-based diesel standard even if they were already used for
compliance with the renewable fuel standard in 2009. The regulations
would need to be changed to allow this, and both EPA's and industry's
IT systems would need to be modified to allow for this temporary
change.
    Due to the additional complexities associated with this option, we
are not proposing it. Nevertheless, we request comment on it, as it
would more explicitly reflect two separate obligations for calendar
year 2009: An RFS1 obligation for total renewable fuel, and an
obligation for biomass-based diesel that starts during 2009 with
compliance required by the end of 2010 for a volume that covers both
2009 and 2010. We also request comment on whether under this option we
should allow 2009 biodiesel and renewable diesel RINs to continue to be
bought and sold after 2009 if they are used to demonstrate compliance
with the 2009 total renewable fuel standard.
b. Proposed Treatment of Deficit Carryovers and Valid RIN Life For
Adjusted 2010 Biomass-Based Diesel Requirement
    Although our proposed transition approach is conceptually similar
to the statutory deficit carryover provision, the regulatory
requirements would not explicitly treat the movement of the 0.5 billion
gallons biomass-based diesel requirement from 2009 to 2010 as a deficit
carryover. In the absence of any modifications to the deficit carryover
provisions, then, an obligated party that did not fully comply with the
2010 biomass-based diesel requirement of 1.15 billion gallons could
carry a deficit of any amount into 2011.
    If we had been able to implement the 2009 biomass-based diesel
volume requirement of 0.5 billion gallons in calendar year 2009, the
2010 biomass-based diesel standard would have been based on 0.65
billion gallons. In this case, the maximum volume of biomass-based
diesel that could have been carried into 2011 as a deficit would have
been 0.65 billion gallons. In the context of our proposed approach to
the treatment of biomass-based diesel in 2009 and 2010, we believe that
it would be inappropriate to allow the full 1.15 billion gallons to be
carried into 2011 as a deficit. Therefore, we are proposing that
obligated parties be prohibited from carrying over a deficit into 2011
larger than 0.65 bill gal. In practice, this would mean that deficit
carryovers from 2010 into 2011 for biomass-based diesel could not
exceed 57% of an obligated party's 2010 RVO.
    Similarly, the combination of the 0.5 billion gallons biomass-based
diesel requirement from 2009 with the 2010 volume raises the question
of whether 2008 biodiesel or renewable diesel RINs could be used for
compliance in 2010 with the adjusted biomass-based diesel standard.
Without a change to the regulations, this practice would not be allowed
because RINs are only valid for compliances purposes for the year
generated or the year after. However, if we had been able to implement
the full RFS2 program for the 2009 compliance year, 2008 biodiesel and
renewable diesel RINs would be valid for compliance with the 0.5
billion gallons biomass-based diesel requirement. Therefore, we are
proposing to modify the regulations to allow excess 2008 biodiesel and
renewable diesel RINs to be used for compliance purposes in 2009 or
2010. We request comment on this proposal.
    We also propose that the 20% rollover cap would continue to apply
in all years as described in more detail in Section IV.D. However, we
are proposing an additional constraint in the application of this cap
to the biomass-based diesel obligation in the 2010 compliance year. If
the 2009 biomass-based diesel volume requirement of 0.5 billion gallons
could have been required in 2009, the use of excess 2008 biodiesel and
renewable diesel RINs would have been limited to 20% of the 2009
requirement, or a maximum of 0.1 billion gallons. Since we are
proposing to require that the 2009 and 2010 biomass-based diesel
requirements be combined for a total of 1.15 billion gallons, we
propose that the maximum allowable portion that could be derived from
2008 biomass-based

diesel RINs would be 0.1 billion gallons. This would represent 8.7% of
the 2010 obligation (\0.1/1.15\). In addition to this limit on the use
of 2008 RINs for 2010 compliance that is unique to this option, the 20%
rollover cap would continue to apply to the use of all previous-year
RINs used for compliance purposes in 2010. Thus, the total number of
all 2008 and 2009 RINs that could be used to meet the 2010 biomass-
based diesel obligation would continue to be capped at 20%. We request
comment on this approach.
    Finally, we are proposing to allow 2009 RINs that are retired
because they are ultimately used for nonroad or home heating oil
purposes to be valid for compliance with the 2010 RFS standard.
Currently, under RFS1, RINs associated with renewable fuel that is not
ultimately used as motor vehicle fuel must be retired. In contrast,
under EISA, renewable fuel used for nonroad purposes, except for use in
industrial boilers or ocean-going vessels, is considered transportation
fuel, and is eligible for the RFS program. We are proposing that 2009
RINs generated for renewable fuel that is ultimately used for nonroad
or home heating oil purposes continue to be retired by the appropriate
party pursuant to 80.1129(e). However, we are proposing that those
retired 2009 nonroad or home heating oil RINs be eligible for
reinstatement by the retiring party in 2010. These reinstated RINs may
be used by that party to demonstrate compliance with a 2010 RVO, or for
sale to other parties who would then use the RINs for compliance
purposes. While we anticipate that this proposed provision would be
utilized largely for biodiesel RINs that were retired by parties that
sold them for use as nonroad fuel or home heating oil, we propose that
the provision apply to all RINs. We request comment on this proposed
approach.
c. Alternative Approach to Treatment of Biomass-Based Diesel in 2009
and 2010
    Under our proposed approach, the 0.5 billion gallon requirement for
biomass-based diesel in 2009 would be added to the 0.65 billion gallon
requirement for 2010, and the total volume of 1.15 billion gallons
would be used as the basis of a single adjusted standard applicable to
obligated parties in 2010. The compliance demonstration for this single
standard would need to be made by February 28, 2011. As an alternative,
we could establish two separate biomass-based diesel standards for
which compliance must be demonstrated by February 28, 2011. One of
these standards would be based on 0.65 billion gallons and would
represent the applicable biomass-based diesel standard for 2010. The
other standard would be based on 0.5 billion gallons and would
represent the applicable biomass-based diesel standard for 2009. In
essence, the standard based on 0.5 billion gallons would be for the
2009 calendar year even though we would extend its compliance
demonstration until February 28, 2011.
    In this alternative, only excess 2008 or 2009 biodiesel and
renewable diesel RINs could be used to comply with the standard based
on 0.5 billion gallons. Excess 2009 biodiesel or renewable diesel RINs
and 2010 biomass-based diesel RINs could be used to comply with the
standard based on 0.65 billion gallons. The 20% rollover cap would
apply to both standards. As a result, this alternative approach would
effectively implement the 2009 biomass-based diesel standard in
calendar year 2009, and thus it may come closer to the statute's
requirements than our proposed approach. Moreover, the existing
provisions for the valid life of RINs and deficit carryover would not
need modification as they would under our proposed approach.
    However, this alternative would arguably provide less than
appropriate lead time for meeting the 0.5 billion gallon obligation, as
it would require obligated parties to begin acquiring sufficient 2008
and 2009 biodiesel and renewable diesel RINs starting in January of
2009 even though our final rulemaking is not expected to be issued
until the fall of 2009. There are two reasons that this lead time might
nevertheless be considered appropriate. First, obligated parties could
wait until the final rule is published to begin acquiring 2008 and 2009
biodiesel and renewable diesel RINs. Moreover, they would not need to
demonstrate compliance with the 0.5 billion gallons standard until
February 28, 2011, providing ample time to locate and acquire
sufficient RINs. Second, the deficit carryover provisions would allow
obligated parties to treat the separate 0.5 and 0.65 billion gallon
requirements as a single requirement that must be met in total by
February 28, 2011. In this sense, this alternative is similar to our
proposed approach. We request comment on this alternative approach.
d. Treatment of Biomass-Based Diesel Under an RFS2 Effective Date Other
Than January 1, 2010
    The above discussion assumes that the RFS2 program is effective on
January 1, 2010. If the program effective date is delayed, similar
issues arise regarding whether EISA volume mandates for fuel categories
with no mandates under RFS1 are lost, or should be recaptured through a
delayed compliance demonstration in the first year of the RFS2 program.
For a delay beyond January 1, 2010, the issues relate to cellulosic
biofuel and advanced biofuel in addition to biomass-based diesel.
    For instance, our proposed approach to biomass-based diesel
effectively makes the one-year deficit carryover a necessary element of
compliance for 2010, and maintains the two-year valid life of RINs.
However, if the effective date of RFS2 were delayed to January 1, 2011,
we could not take the same approach. By requiring compliance
demonstrations to be made in 2011 for the required biomass-based diesel
volumes mandated for 2009, 2010, and 2011, we would be effectively
requiring a 2-year deficit carryover and a three-year valid life of
RINs, contrary to the statutory limitations. As an alternative, one
possible approach would be to only sum the required biomass-based
diesel volumes for 2010 and 2011 and require compliance demonstrations
at the end of 2011.
    If the RFS2 program became effective in mid-2010, we would also
need to determine the appropriate level of the biomass-based diesel
standard, and whether it would apply to gasoline and diesel volumes
produced only after the RFS2 effective date, or all gasoline and diesel
volumes produced in 2010.
    EPA invites comment on whether and how it should recapture these
volume mandates under different start-date scenarios.

F. Fuels That Are Subject to the Standards

    Under RFS1, producers and importers of gasoline are obligated
parties subject to the standards. Any party that produces or imports
only diesel fuel is not subject to the standards. EISA changes this
provision by expanding the RFS program in general to include
transportation fuel. As discussed above, however, section 211(o)(3)
continues to require EPA to determine which refiners, blenders, and
importers are treated as subject to the standard. As described further
in Section III.G below, we are proposing that the sum of all highway
and nonroad gasoline and diesel fuel produced or imported within a
calendar year be the basis on which the RVOs are calculated. This
section provides our proposed definition of gasoline and diesel for the
purposes of the RFS program.

1. Gasoline
    As with the RFS1 program, the volume of gasoline used in
calculating the RVO under RFS2 would continue to include all finished
gasoline (reformulated gasoline (RFG) and conventional gasoline (CG))
produced or imported for use in the contiguous United States or Hawaii,
as well as all unfinished gasoline that becomes finished gasoline upon
the addition of oxygenate blended downstream from the refinery or
importer. This would include both unfinished reformulated gasoline,
called ``reformulated gasoline blendstock for oxygenate blending,'' or
``RBOB,'' and unfinished conventional gasoline designed for downstream
oxygenate blending (e.g., sub-octane conventional gasoline), called
``CBOB.'' The volume of any other unfinished gasoline or blendstock,
such as butane or naphtha produced in a refinery, would not be included
in the obligated volume, except where the blendstock is combined with
other blendstock or gasoline to produce finished gasoline, RBOB, or
CBOB. Where a blendstock is blended with other blendstock to produce
finished gasoline, RBOB, or CBOB, the total volume of the gasoline
blend would be included in the volume used to determine the blender's
renewable fuels obligation. Where a blendstock is added to finished
gasoline, only the volume of the blendstock would be included, since
the finished gasoline would have been included in the compliance
determinations of the refiner or importer of the gasoline. For purposes
of this preamble, the various gasoline products described above that we
are proposing to include in a party's obligated volume would
collectively be called ``gasoline.''
    Also consistent with the RFS1 program, we propose to continue to
exclude any volume of renewable fuel contained in gasoline from the
volume of gasoline used to determine the renewable fuels obligations.
This exclusion would apply to any renewable fuels that are blended into
gasoline at a refinery, contained in imported gasoline, or added at a
downstream location. Thus, for example, any ethanol added to RBOB or
CBOB at a refinery's rack or terminal downstream from the refinery or
importer would be excluded from the volume of gasoline used by the
refiner or importer to determine the obligation. This is consistent
with how the standard itself is calculated--EPA determines the
applicable percentage by comparing the overall projected volume of
gasoline used to the overall renewable fuel volume that is specified in
EPAct, and EPA excludes ethanol and other renewable fuels that blended
into the gasoline in determining the overall projected volume of
gasoline. When an obligated party determines their RVO by applying the
applicable percentage to the amount of gasoline they produce or import,
it is consistent to also exclude ethanol and other renewable fuel
blends from the calculation of the volume of gasoline produced.
    As with the RFS1 program, we are proposing that Gasoline Treated as
Blendstock (GTAB) would continue to be treated as a blendstock under
the RFS2 program, and thus would not count towards a party's renewable
fuel obligation. Where the GTAB is blended with other blendstock (other
than renewable fuel) to produce gasoline, the total volume of the
gasoline blend, including the GTAB, would be included in the volume of
gasoline used to determine the renewable fuel obligation. Where GTAB is
blended with renewable fuel to produce gasoline, only the GTAB volume
would be included in the volume of gasoline used to determine the
renewable fuel obligation. Where the GTAB is blended with finished
gasoline, only the GTAB volume would be included in the volume of
gasoline used to determine the renewable fuel obligation.
2. Diesel
    As discussed above in Section II.A.4, EISA expanded the RFS program
to include transportation fuels other than gasoline, and we are
proposing that both highway and nonroad diesel be used in calculating a
party's RVO. We are proposing that any party that produces or imports
petroleum-based diesel fuel that is designated as motor vehicle,
nonroad, locomotive, and marine diesel fuel (MVNRLM) (or any
subcategory of MVNRLM) would be required to include the volume of that
diesel fuel in the determination of its RVO under the RFS2 rule. We are
proposing that diesel fuel would include any distillate fuel that meets
the definition of MVNRLM diesel fuel as it has already been defined in
the regulations at Sec.  80.2(qqq), including any subcategories such as
MV (motor vehicle diesel produced for use in highway diesel engines and
vehicles), NRLM (diesel produced for use in nonroad, locomotive, and
marine diesel engines and equipment/vessels), NR (diesel produced for
use in nonroad engines and equipment), and LM (diesel produced for use
in locomotives and marine diesel engines and vessels).\36\ We are
proposing that transportation fuels meeting the definition of MVNRLM
would be used to calculate the RVOs, and refiners, blenders, or
importers of MVNRLM would be treated as obligated parties. As such,
diesel fuel that is designated as heating oil, jet fuel, or any
designation other than MVNRLM or a subcategory of MVNRLM, would not be
subject to the applicable percentage standard and would not be used to
calculate the RVOs.\37\
---------------------------------------------------------------------------

    \36\ EPA's diesel fuel regulations use the term ``nonroad'' to
designate one large category of land-based off-highway engines and
vehicles, recognizing that locomotive and marine engines and vessels
are also nonroad engines and vehicles under EPAct's definition of
nonroad. Except where noted, the discussion of nonroad in reference
to transportation fuel includes the entire category covered by
EPAct's definition of nonroad.
    \37\ See 40 CFR 80.598(a) for the kinds of fuel types used by
refiners or importers in designating their diesel fuel.
---------------------------------------------------------------------------

    We are also requesting comment on the idea that any diesel fuel not
meeting these requirements, such as distillate or residual fuel
intended solely for use in ocean-going vessels, would not be used to
calculate the RVOs. As discussed above in Section II.A.4, EISA
specifies that ``transportation fuels'' do not include fuels for use in
ocean-going vessels. We are interpreting the term ``ocean-going
vessel'' to mean those vessels that are powered by Category 3 (C3)
marine engines and that use residual fuel or operate internationally;
we request comment on this interpretation. As such, we are requesting
comment on the concept that fuel intended solely for use in ocean-going
vessels, or that an obligated party can verify as having been used in
an ocean-going vessel, would be excluded from the renewable fuel
standards. Further, we are also requesting comment on whether fuel used
on such vessels with C2 engines should also be excluded from the
renewable fuel standards, and how such an exemption should be phrased.
3. Other Transportation Fuels
    As discussed further in Section III.J.3, below, we propose that
transportation fuels other than gasoline or MVNRLM diesel fuel (natural
gas, propane, and electricity) would not be used to calculate the RVOs
of any obligated party. We believe this is a reasonable way to
implement the obligations of 211(o)(3) because the volumes are small
and the producers cannot readily differentiate the small transport
portion from the large non-transport portion (in fact, the producer may
have no knowledge of its use in transport); we will reconsider this
approach if and when these volumes grow. At the same time, it is clear
that other fuels can meet the definition of ``transportation fuel,''
and we are proposing that under certain

circumstances, producers or generators of such other transportation
fuels may generate RINs as a producer or importer of a renewable fuel.
See Section III.B.1.a for further discussion of other RIN-generating
fuels.

G. Renewable Volume Obligations (RVOs)

    Under the current RFS program, each obligated party must determine
its RVO based on the applicable percentage standard and its annual
gasoline volume. The RVO represents the volume of renewable fuel that
the obligated party must ensure is used in the U.S. in a given calendar
year. Obligated parties must meet their RVO through the accumulation of
RINs which represent the amount of renewable fuel used as motor vehicle
fuel that is sold or introduced into commerce within the U.S. Each
gallon-RIN would count as one gallon of renewable fuel for compliance
purposes.
    We propose to maintain this approach to compliance under the RFS2
program. One primary difference between the current and new RFS
programs in terms of demonstrating compliance would be that each
obligated party would now have four RVOs instead of one (through 2012)
or two (starting in 2013) under the RFS1 program. Also, as discussed
above, RVOs would be calculated based on production or importation of
both gasoline and diesel fuels, rather than gasoline alone.
    By acquiring RINs and applying them to their RVOs, obligated
parties are effectively causing the renewable fuel represented by the
RINs to be consumed as transportation fuel in highway or nonroad
vehicles or engines. Obligated parties would not be required to
physically blend the renewable fuel into gasoline or diesel fuel
themselves. The accumulation of RINs would continue to be the means
through which each obligated party shows compliance with its RVOs and
thus with the renewable fuel standards.
    If an obligated party acquires more RINs than it needs to meet its
RVOs, then in general it could retain the excess RINs for use in
complying with its RVOs in the following year or transfer the excess
RINs to another party. If, alternatively, an obligated party has not
acquired sufficient RINs to meet its RVOs, then under certain
conditions it could carry a deficit into the next year.
    This section describes our proposed approach to the calculation of
RVOs under RFS2 and the RINs that would be valid for demonstrating
compliance with those RVOs. This includes a description of the special
treatment that must be applied to 2009 RINs used for compliance
purposes in 2010, since RINs generated in 2009 under RFS1 would not be
exactly the same as those generated in 2010 under RFS2. We also
describe an alternative approach to the identification of obligated
parties that would place the obligations under RFS2 on only finished
gasoline and diesel rather than on certain blendstocks and unfinished
fuels as well. The implication of this would be that the final blender
of the gasoline or diesel would be the obligated parties rather than
producers of blendstocks and unfinished fuels.
1. Determination of RVOs Corresponding to the Four Standards
    In order for an obligated party to demonstrate compliance, the
percentage standards described in Section III.E.1 which are applicable
to all obligated parties must be converted into the volumes of
renewable fuel each obligated party is required to satisfy. These
volumes of renewable fuel are the volumes for which the obligated party
is responsible under the RFS program, and are referred to here as its
RVO. Under RFS2, each obligated party would need to acquire sufficient
RINs each year to meet each of the four RVOs corresponding to the four
renewable fuel standards.
    The calculation of the RVOs under RFS2 would follow the same format
as the existing formulas in the regulations at Sec.  80.1107(a), with
one modification. The standards for a particular compliance year would
be multiplied by the sum of the gasoline and diesel volume produced or
imported by an obligated party in that year rather than only the
gasoline volume as under the current program.\38\ To the degree that an
obligated party did not demonstrate full compliance with its RVOs for
the previous year, the shortfall would be included as a deficit
carryover in the calculation. CAA section 211(o)(5) only permits a
deficit carryover from one year to the next if the obligated party
achieves full compliance with its RVO including the deficit carryover
in the second year. Thus deficit carryovers could not occur two years
in succession for any of the four standards. They could, however, occur
as frequently as every other year for a given obligated party.
---------------------------------------------------------------------------

    \38\ As discussed above, the diesel fuel that is used to
calculate the RVO is any diesel designated as MVNRLM or a
subcategory of MVNRLM.
---------------------------------------------------------------------------

    Note that a party that produces only diesel fuel would have an
obligation for all four standards even though he would not have the
opportunity to blend ethanol into his own gasoline. Likewise, a party
that produces only gasoline will have an obligation for all four
standards even though he would not have an opportunity to blend
biomass-based diesel into his own diesel fuel. Although these
circumstances might imply that the four standards should be further
subdivided into gasoline-specific and diesel-specific standards, we do
not believe that this would be appropriate as described in Section
III.E.1. Instead, since the obligations are met through the use of
RINs, compliance with the standards does not require an obligated party
to blend renewable fuel into their own or anyone else's gasoline or
diesel fuel.
2. RINs Eligible To Meet Each RVO
    Under RFS1, all RINs had the same compliance value and thus it did
not matter what the RR or D code was for a given RIN when using that
RIN to meet the total renewable fuel standard. In contrast, under RFS2
only RINs with specified D codes could be used to meet each of the four
standards.
    As described in Section II.A.1, the volume requirements in EISA are
generally nested within one another, so that the advanced biofuel
requirement includes fuel that meets either the cellulosic biofuel or
the biomass-based diesel requirements, and the total renewable fuel
requirement includes fuel that meets the advanced biofuel requirement.
As a result, the RINs that can be used to meet the four standards are
likewise nested. Using the proposed D codes defined in Table III.A-1,
the RINs that could be used to meet each of the four standards are
shown in Table III.G.2-1.

                          Table III.G.2-1--RINs That Can Be Used To Meet Each Standard
----------------------------------------------------------------------------------------------------------------
               Standard                              Obligation                       Allowable D codes
----------------------------------------------------------------------------------------------------------------
Cellulosic biofuel....................  RVOCB..............................  1.

Biomass-based diesel..................  RVOBBD.............................  2.
Advanced biofuel......................  RVOAB..............................  1, 2, and 3.
Renewable fuel........................  RVORF..............................  1, 2, 3, and 4.
----------------------------------------------------------------------------------------------------------------

    The nested nature of the four standards also means that we must
allow the same RIN to be used to meet more than one standard in the
same year. Thus, for instance, a RIN with a D code of 1 could be used
to meet three of the four standards, while a RIN with a D code of 3
could be used to meet both the advanced biofuel and total renewable
fuel standards. However, we propose continuing to prohibit the use of a
single RIN for compliance purposes in more than one year or by more
than one party.\39\
---------------------------------------------------------------------------

    \39\ Note that we are proposing an exception to this general
prohibition for the specific and limited case of excess 2008 and
2009 biodiesel and renewable diesel RINs used to demonstrate
compliance with both the 2009 total renewable fuel standard and the
2010 biomass-based diesel standard. See Section III.E.2.a.
---------------------------------------------------------------------------

3. Treatment of RFS1 RINs Under RFS2
    As described in Section II.A, we are proposing a number of changes
to the RFS program as a result of the requirements in EISA. These
changes would go into effect on January 1, 2010 and, among other
things, would affect the conditions under which RINs are generated and
their applicability to each of the four standards. As a result, RINs
generated in 2010 under RFS2 will not be exactly the same as RINs
generated in 2009 under RFS1. Given the valid RIN life that allows a
RIN to be used in the year generated or the year after, we must address
circumstances in which excess 2009 RINs are used for compliance
purposes in 2010. We must also address deficit carryovers from 2009 to
2010, since the total renewable fuel standards in these two years will
be defined differently.
a. Use of 2009 RINs in 2010
    In 2009, the RFS1 regulations will continue to apply and thus
producers will not be required to demonstrate that their renewable fuel
is made from renewable biomass as defined by EISA, nor that their
combination of fuel type, feedstock, and process meets the GHG
thresholds specified in EISA. Moreover, there is no practical way to
determine after the fact if RINs generated in 2009 meet any of these
criteria. However, we believe that the vast majority of RINs generated
in 2009 would in fact meet the RFS2 requirements. First, while ethanol
made from corn must meet a 20% GHG threshold under RFS2 if produced by
a facility that commenced construction after December 19, 2007,
facilities that were already built or had commenced construction as of
December 19, 2007 are exempt from this requirement. Essentially all
ethanol produced in 2009 will meet the prerequisites for this
exemption. Second, it is unlikely that renewable fuels produced in 2009
will have been made from feedstocks grown on agricultural land that had
not been cleared or cultivated prior to December 19, 2007. In the
intervening time period, it is much more likely that the additional
feedstocks needed for renewable fuel production would come from
existing cropland or cropland that has lain fallow for some time.
Finally, the text of section 211(o)(5) states that a ``credit generated
under this paragraph shall be valid to show compliance for the 12
months as of the date of generation,'' and EISA did not change this
provision and did not specify any particular transition protocol to
follow. A straightforward interpretation of this provision is to allow
2009 RINs to be valid to show compliance for 2010 obligations.
    Since there will be separate standards for cellulosic biofuel and
biomass-based diesel in 2010, RINs generated in 2009 that could be used
to meet either of these two 2010 standards should meet the GHG
thresholds of 60% and 50%, respectively. While we will not have a
mechanism in place to determine if these thresholds have been met for
RINs generated in 2009, and there are indications from our assessment
of lifecycle GHG performance that at least some renewable fuels
produced in 2009 would not meet these thresholds, nevertheless any
shortfall in GHG performance for this one transition year is unlikely
to have a significant impact on long-term GHG benefits of the program.
Based on our belief that it is critical to the smooth operation of the
program that excess 2009 RINs be allowed to be used for compliance
purposes in 2010, we are proposing that RINs generated in 2009 to
represent cellulosic biomass ethanol whose GHG performance has not been
verified would still be valid for use for 2010 compliance purposes for
the cellulosic biofuel standard. Likewise, we are proposing that RINs
generated in 2009 to represent biodiesel and renewable diesel whose GHG
performance has not been verified would still be valid for use for 2010
compliance purposes for the biomass-based diesel standard. We request
comment on this approach.
    We propose to use information contained in the RR and D codes of
RFS1 RINs to determine how those RINs should be treated under RFS2. The
RR code is used to identify the Equivalence Value of each renewable
fuel, and under RFS1 these Equivalence Values are unique to specific
types of renewable fuel. For instance, biodiesel (mono alkyl ester) has
an Equivalence Value of 1.5, and non-ester renewable diesel has an
Equivalence Value of 1.7, and both of these fuels may be valid for
meeting the biomass-based diesel standard under RFS2. Likewise, RINs
generated for cellulosic biomass ethanol in 2009 must be identified
with a D code of 1, and these fuels may be valid for meeting the
cellulosic biofuel standard under RFS2. Our proposed treatment of 2009
RINs in 2010 is shown in Table III.G.3.a-1.

    Table III.G.3.a-1--Proposed Treatment of Excess 2009 RINs in 2010
------------------------------------------------------------------------
             Excess 2009 RINs                     Treatment in 2010
------------------------------------------------------------------------
RFS1 RINs with RR code of 15 or 17........  Equivalent to RFS2 RINs with
                                             D code of 2.
RFS1 RINs with D code of 1................  Equivalent to RFS2 RINs with
                                             D code of 1.
All other RFS1 RINs.......................  Equivalent to RFS2 RINs with
                                             D code of 4.
------------------------------------------------------------------------

    Although we have discussed the issue of RFS1 RINs being used for
RFS2 purposes in the context of our proposal that the RFS2 program be
effective on January 1, 2010, we would expect a similar treatment of
RFS1 RINs for RFS2 compliance purposes if the RFS2 effective date is
delayed. In that case RFS1 RINs generated in 2010 would be available to
show compliance for both the 2010 and 2011 compliance years, in a
manner similar to that described above.

b. Deficit Carryovers From the RFS1 Program to RFS2
    If the RFS2 program goes into effect on January 1, 2010, the
calculation of RVOs in 2009 under the existing regulations will be
somewhat different than the calculation of RVOs in 2010 under RFS2. In
particular, 2009 RVOs will be based upon gasoline production only,
while 2010 RVOs would be based on volumes of gasoline and diesel. As a
result, 2010 compliance demonstrations that include a deficit carried
over from 2009 will combine obligations calculated on two different
bases.
    We do not believe that deficits carried over from 2009 to 2010
would undermine the goals of the program in requiring specific volumes
of renewable fuel to be used each year. Although RVOs in 2009 and 2010
would be calculated differently, obligated parties must acquire
sufficient RINs in 2010 to cover any deficit carried over from 2009 in
addition to that portion of their 2010 obligation which is based on
their 2010 gasoline and diesel production. As a result, the 2009
nationwide volume requirement of 11.1 billion gallons of renewable fuel
will be consumed over the two year period concluding at the end of
2010. Thus, we are not proposing special treatment for deficits carried
over from 2009 to 2010.
    We propose that a deficit carried over from 2009 to 2010 would only
affect a party's total renewable fuel obligation in 2010
(RVORF,i as discussed in Section III.G.1), as the 2009
obligation is for total renewable fuel use, not a subcategory. The RVOs
for cellulosic biofuel, biomass-based diesel, or advanced biofuel would
not be affected, as they do not have parallel obligations in 2009 under
RFS1.
    If the RFS2 start date is delayed to be later than January 1, 2010,
we expect that the same principles described above would apply for any
deficit calculated under the RFS1 program and carried forward to RFS2.
4. Alternative Approach to Designation of Obligated Parties
    Under RFS1, obligated parties who are subject to the standard are
those that produce or import finished gasoline (RFG and conventional)
or unfinished gasoline that becomes finished gasoline upon the addition
of an oxygenate blended downstream from the refinery or importer.
Unfinished gasoline includes reformulated gasoline blendstock for
oxygenate blending (RBOB), and conventional gasoline blendstock
designed for downstream oxygenate blending (CBOB) which is generally
sub-octane conventional gasoline. The volume of any other unfinished
gasoline or blendstock, such as butane, is not included in the volume
used to determine the RVO, except where the blendstock is combined with
other blendstock or finished gasoline to produce finished gasoline,
RBOB, or CBOB. Thus, parties downstream of a refinery or importer are
only obligated parties to the degree that they use non-renewable
blendstocks to make finished gasoline, RBOB, or CBOB.
    The approach we took for RFS1 was based on our expectation at that
time that there would be an excess of RINs at low cost, and our belief
that the ability of RINs to be traded freely between any parties once
separated from renewable fuel would provide ample opportunity for
parties who were in need of RINs to acquire them from parties who had
excess. We also pointed out that the designation of ethanol blenders as
obligated parties would have greatly expanded the number of regulated
parties and increased the complexity of the RFS program beyond that
which was necessary to carry out the renewable fuels mandate under CAA
section 211(o).
    Following the new requirements under EISA, the required volumes of
renewable fuel will be increasing significantly above the levels
required under RFS1. These higher volumes are already resulting in
changes in the demand for RINs and operation of the RIN market. First,
obligated parties who have excess RINs are increasingly opting to
retain rather than sell them to ensure they have a sufficient number
for the next year's compliance. Second, since all gasoline is expected
to contain ethanol by 2013, few blenders would be able to avoid taking
ownership of RINs by that time under the existing definition of
obligated party. As a result, by 2013 essentially every blender would
be a regulated party who is subject to recordkeeping and reporting
requirements, and thus the additional burden of demonstrating
compliance with the standard could be small. Third, major integrated
refiners who operate gasoline marketing operations have direct access
to RINs for ethanol blended into their gasoline, while refiners whose
operations are focused primarily on producing refined products do not
have such direct access to RINs. The result is that in some cases there
are significant disparities between obligated parties in terms of
opportunities to acquire RINs. If those that have excess RINs are
reluctant to sell them, those who are seeking RINs may be forced to
market a disproportionate share of E85 in order to gain access to the
RINs they need for compliance. If obligated parties seeking RINs cannot
acquire a sufficient number, they can only carry a deficit into the
following year, after which they would be in noncompliance if they
could not acquire sufficient RINs. The result might be a much higher
price for RINs (and fuel) in the marketplace than would be expected
under a more liquid market.
    Given the change in circumstances brought about through EISA, it
may be appropriate to consider a change in the way that obligated
parties are defined to more evenly align a party's access to RINs with
that party's obligations under the RFS2 program. The most
straightforward approach would be to eliminate RBOB and CBOB from the
list of fuels that are subject to the standard, such that a party's RVO
would be based only on the non-renewable volume of finished gasoline or
diesel that he produces or imports. Parties that blend ethanol into
RBOB and CBOB to make finished gasoline would thus be obligated
parties, and their RVOs would be based upon the volume of RBOB and CBOB
prior to ethanol blending. Traditional refiners that convert crude oil
into transportation fuels would only have an RVO to the degree that
they produced finished gasoline or diesel, with all RBOB and CBOB sold
to another party being excluded from the calculation of their RVO.
    Since essentially all gasoline is expected to be E10 within the
next few years (see discussion in Section V.D.2 below), this approach
would effectively shift the obligation for all gasoline from refiners
and importers to ethanol blenders (who in many cases are still the
refiners). However, this approach by itself would maintain the
obligation for diesel on refiners and importers. Thus, a variation of
this approach would be to move the obligations for all gasoline and
diesel downstream to parties who supply finished transportation fuels
to retail outlets or to wholesale purchaser-consumer facilities. This
variation would have the additional effect of more closely aligning
obligations and access to RINs for parties that blend biodiesel and
renewable diesel into petroleum-based diesel.
    We are not proposing to eliminate RBOB and CBOB from the list of
fuels that are subject to the standard in today's notice since it would
result in a significant change in the number of obligated parties and
the movement of RINs. Many parties that are not obligated under the
current RFS program would become obligated, and would be forced to
implement new systems for determining and reporting compliance.
Nevertheless, it would have certain advantages. Currently, blenders

that are not obligated parties are profiting from the sale of RINs they
acquire through splash blending of ethanol. By eliminating RBOB and
CBOB from the list of obligated fuels, these blenders would become
directly responsible for ensuring that the volume requirements of the
RFS program are met, and the cost of meeting the standard would be more
evenly distributed among parties that blend renewable fuel into
gasoline. With obligations placed more closely to the points in the
distribution system where RINs are made available, the overall market
prices for RINs may be lowered and consequently the cost of the program
to consumers may be reduced.
    While eliminating the categories of RBOB and CBOB from the list of
obligated fuels would result in a significant change in the
distribution of obligations among transportation fuel producers, it
could help to ensure that the RIN market functions as we originally
intended. As a result, RINs would more directly be made available to
the parties that need them for compliance. This is similar to the goal
of the direct transfer approach to RIN distribution as described in the
proposed rulemaking for the RFS1 program and presented again in Section
III.H.4 below. We request comment on the degree to which access to RINs
is a concern among current obligated parties. Since either the
elimination of RBOB and CBOB from the list of obligated fuels or the
direct transfer approach to RIN distribution could both accomplish the
same goal, we request comment on which one would be more appropriate,
if any.
    We have also considered a number of alternative approaches that
could be used to help ensure that obligated parties can demonstrate
compliance. For instance, one alternative approach would leave our
proposed definitions for obligated parties in place, but would add a
regulatory requirement that any party who blends ethanol into RBOB or
CBOB must transfer the RINs associated with the ethanol to the original
producer of the RBOB or CBOB. However, we believe that such an approach
would be both inappropriate and difficult to implement. RBOB and CBOB
is often transferred between multiple parties prior to ethanol
blending. As a result, a regulatory requirement for RIN transfers back
to the original producer would necessitate an additional tracking
requirement for RBOB and CBOB so that the blender would know the
identity of the original producer. It would also be difficult to ensure
that RINs representing the specific category of renewable fuel blended
were transferred to the producer of the RBOB or CBOB, given the
fungible nature of RINs assigned to batches of renewable fuel. For
these reasons, we do not believe that this alternative approach would
be appropriate.
    In another alternative approach, some RINs that expire without
being used for compliance by an obligated party could be used to reduce
the nationwide volume of renewable fuel required in the following year.
We would only reduce the required volume of renewable fuel to the
degree that sufficient RINs had been generated to permit all obligated
parties to demonstrate compliance, but some obligated parties
nevertheless could not acquire a sufficient number of RINs. Moreover,
only RINs that were expiring would be used to reduce the nationwide
volume for the next year. This alternative approach would ensure that
the volumes required in the statute would actually be produced and
would prevent the hoarding of RINs from driving up demand for renewable
fuel. However, it would also reduce the impact of the valid life limit
for RINs.
    We could lower the 20% rollover cap applicable to the use of
previous-year RINs to a lower value, such as 10%. This approach would
provide a greater incentive for obligated parties with excess RINs to
sell them but would further restrict a potentially useful means of
managing an obligated party's risk. As described in Section IV.D, we
are not proposing any changes in the 20% rollover cap in today's
notice. However, we request comment on it.
    Finally, another change to the program that would not change the
definition of obligated parties, but could help address the disparity
of access to RINs among obligated parties, would be to remove the
requirement developed under RFS1 that RINs be transferred with
renewable fuel volume by the renewable fuel producers and importers.
This alternative is discussed further in Section III.H.4 below.

H. Separation of RINs

    We propose that most of the RFS1 provisions regarding the
separation of RINs from volumes of renewable fuel be retained for RFS2.
However, the modifications in EISA will require a number of changes,
primarily to the treatment of RINs associated with nonroad renewable
fuel and renewable fuels used in heating oil and jet fuel. Our approach
to the separation of RINs by exporters must also be modified to account
for the fact that there would be four categories of renewable fuel
under RFS2.
1. Nonroad
    Under RFS1, RINs associated with renewable fuels used in nonroad
vehicles and engines downstream of the renewable fuel producer are
required to be retired by the party who owns the renewable fuel at the
time of blending. This provision derived from the EPAct definition of
renewable fuel which was limited to fuel used to replace fossil fuel
used in a motor vehicle. EISA however expands the definition of
renewable fuel, and ties it to the definition of transportation fuel,
which is defined as any ``fuel for use in motor vehicles, motor vehicle
engines, nonroad vehicles, or nonroad engines (except for ocean-going
vessels). To implement these changes, the proposed RFS2 program
eliminates the RFS1 RIN retirement requirement for renewable fuels used
in nonroad applications, with the exception of RINs associated with
renewable fuels used in ocean-going vessels.
2. Heating Oil and Jet Fuel
    EISA defined `additional renewable fuel' as ``fuel that is produced
from renewable biomass and that is used to replace or reduce the
quantity of fossil fuel present in home heating oil or jet fuel.'' \40\
While we are proposing that fossil-based heating oil and jet fuel would
not be included in the fuel used by a refiner or importer to calculate
their RVO, we are proposing that renewable fuels used as or in heating
oil and jet fuel may generate RINs for credit purposes. Thus, the RINs
of a renewable fuel, such as biodiesel, that is blended into heating
oil continue to be valid. See also discussion in Section III.B.1.e.
---------------------------------------------------------------------------

    \40\ EISA, Title II, Subtitle A-Renewable Fuel Standard, Section
201.
---------------------------------------------------------------------------

3. Exporters
    Under RFS1, exporters are assigned an RVO representing the volume
of renewable fuel that has been exported, and they are required to
separate all RINs that have been assigned to fuel that is exported.
Since there is only one standard, there is only one possible RVO
applicable to exporters.
    Under RFS2, there are four possible RVOs corresponding to the four
categories of renewable fuel (cellulosic biofuel, biomass-based diesel,
advanced biofuel, total renewable fuel). However, given the fungible
nature of the RIN system and the fact that an assigned RIN transferred
with a volume of renewable fuel may not be the same RIN that was
originally generated to represent that volume, there is no way for an
exporter to determine from an assigned RIN which of the four categories
applies to

an exported volume. In order to determine its RVOs, the only
information available to the exporter is the type of renewable fuel
that he is exporting.
    For RFS2, we are proposing that exporters use the fuel type and its
associated volume to determine his applicable RVO. To accomplish this,
an exporter must know which of the four renewable fuel categories
applies to a given type of renewable fuel. We are proposing that all
biodiesel (mono alkyl esters) and renewable diesel would be categorized
as biomass-based diesel (D code of 4), and that exported volumes of
these two fuels would be used to determine the exporter's RVO for
biomass-based diesel. For all other types of renewable fuel, the most
likely category for most of the phase-in period of the RFS2 program is
general renewable fuel, and as a result we propose that all other types
of renewable fuel be used to determine the exporter's RVO for total
renewable fuel. Our proposed approach is provided at Sec.  80.1430. We
recognize that by 2022 the required volume of cellulosic biofuel will
exceed the required volume of general renewable fuel that is in excess
of the advanced biofuel requirements. Thus we request comment on
requiring all or some portion of renewable fuels other than biodiesel
and renewable diesel to be categorized as cellulosic biofuel in 2022
and beyond.
    An alternative approach could be required that would more closely
estimate the amount of exported renewable fuels that fall into the four
categories defined by EISA. In this alternative, the total nationwide
volumes required in each year (see Table II.A.1-1) would be used to
apportion specific types of renewable fuel into each of the four
categories. For example, exported ethanol may have originally been
produced from cellulose to meet the cellulosic biofuel requirement,
from corn to meet the total renewable fuel requirement, or may have
been imported as advanced biofuel. If ethanol were exported, we could
divide the exported volume into three RVOs for cellulosic biofuel,
advanced biofuel, and total renewable fuel using the same proportions
represented by the national volume requirements for that year. However,
we believe that this alternative approach would add considerable
complexity to the compliance determinations for exporters without
necessarily adding more precision. Given the expected small volumes of
exported renewable fuel, this added complexity does not seem warranted
at this time. Nevertheless, we request comment on it.
4. Alternative Approaches to RIN Transfers
    In the NPRM for the RFS1 rulemaking, we presented a variety of
approaches to the transfer of RINs, ultimately requiring that RINs
generated by renewable fuel producers and importers must be assigned to
batches of renewable fuel and transfered along with those batches.
However, given the higher volumes required under RFS2 and the resulting
expansion in the number of regulated parties, we believe that two of
the alternative approaches to RIN transfers should be considered for
RFS2. Our proposal for an EPA-moderated RIN trading system (EMTS) may
also support the implementation of one of these approaches.
    In one of the alternative approaches, we would entirely remove the
restriction established under the RFS1 rule requiring that RINs be
assigned to batches of renewable fuel and transferred with those
batches. Instead, renewable fuel producers could sell RINs (with a K
code of 2 rather than 1) separately from volumes of renewable fuel to
any party. This approach could significantly streamline the tracking
and trading of RINs. For instance, there would no longer be a need for
K-codes and restrictions on separation of RINs, there would only be a
single RIN market rather than two (one for RINs assigned to volume and
another for separated RINs), there would be no need for volume/RIN
balance calculations at the end of each quarter, and there would be no
need for restrictions on the number of RINs that can be transfered with
each gallon of renewable fuel. As described more fully in Section
III.B.4.b.ii, this approach could also provide a greater incentive for
producers to demonstrate that the renewable biomass definition has been
met for their feedstocks. As discussed in Section III.G.4, this approch
could help level the playing field among obligated parties for access
to RINs regardless of whether they market a substantial volume of
gasoline or not. However, as discussed in the RFS1 rulemaking, this
approach could also place obligated parties at greater risk of market
manipulation by renewable fuel producers.
    In order to address some of the concerns raised about allowing
producers and importers to separate RINs from their volume, in the NPRM
for the RFS1 rulemaking we also presented an alternative concept for
RIN distribution in which producers and importers of renewable fuels
would be required to transfer the RIN, but only to an obligated party
(see 71 FR 55591). This ''direct transfer'' approach would require
renewable fuel producers to transfer RINs with renewable fuel for all
transactions with obligated parties, and sell all other RINs directly
to obligated parties on a quarterly basis for any renewable fuel
volumes that were not sold directly to obligated parties. Only
renewable fuel producers, importers, and obligated parties would be
allowed to own RINs, and only obligated parties could take ownership of
RINs from producers and importers. This approach would spare marketers
and distributors of renewable fuel from the burdens associated with
transferring RINs with batches, and thus would eliminate the tracking,
recordkeeping and reporting requirements that would continue to be
applicable to them if RINs are transferred through the distribution
system as required under the RFS1 program.
    Under the direct transfer alternative, the renewable fuel producer
or importer would be required to transfer the RINs associated with his
renewable fuel to an obligated party who purchases the renewable fuel.
The RINs associated with any renewable fuel that is not directly
transferred to an obligated party would not be transferred with the
fuel as required under the RFS1 program. Instead, the renewable fuel
producer or importer would be required to sell the RINs directly to an
obligated party. Any RINs not sold in this way would be required to be
offered for sale to all obligated parties through a public auction.
This could be through an EPA moderated trading system, an existing
internet auction web site, or through another auction mechanism
implemented by a renewable fuel producer.
    Although we believe that the direct transfer approach has merit,
many of the concerns laid out in the RFS1 NPRM remain valid today. In
particular, the auctions would need to be regulated in some way to
ensure that RIN generators could not withhold RINs from the market by
such means as failing to adequately advertise the time and location of
an auction, by setting the selling price too high, by specifying a
minimum number of bids before selling, by conducting auctions
infrequently, by having unduly short bidding windows, etc. We seek
comment on how we could regulate such auctions to ensure that obligated
parties could acquire sufficient RINs for compliance purposes in a
timely manner.
    Our proposed EPA-moderated RIN trading system (see Section IV.E)
could help to make the direct transfer approach feasible. By creating
accounts

in a centralized system within which all RIN transfers between parties
would be made, it may be more straightforward for obligated parties to
identify available RINs owned by producers and importers, and to bid on
those RINs. Therefore, while we are not proposing the direct transfer
approach in today's action, we nevertheless request comment on it.
5. Neat Renewable Fuel and Renewable Fuel Blends Designated as
Transportation Fuel, Home Heating Oil, or Jet Fuel
    Under RFS1, RINs must, with limited exceptions, be separated by an
obligated party taking ownership of the renewable fuel, or by a party
that blends renewable fuel with gasoline or diesel. In addition, a
party that designates neat renewable fuel as motor vehicle fuel may
separate RINs associated with that fuel if the fuel is in fact used in
that manner without further blending. For purposes of the RFS program,
``neat renewable fuel'' is defined in 80.1101(p) as ``a renewable fuel
to which only de minimis amounts of conventional gasoline or diesel
have been added.'' One exception to these provisions is that biodiesel
blends in which diesel constitutes less than 20 volume percent are
ineligible for RIN separation by a blender. As noted in the preamble to
the final RFS1 regulations, EPA understands that in the vast majority
of cases, biodiesel is blended with diesel in concentrations of 80
volume percent or less.
    However, in order to account for situations in which biodiesel
blends of 81 percent or greater may be used as motor vehicle fuel
without ever having been owned by an obligated party, EPA is proposing
to change the applicability of the RIN separation provisions for RFS2.
EPA is proposing that 80.1429(b)(4) allow for separation of RINs for
neat renewable fuel or blends of renewable fuel and or diesel fuel that
the party designates as transportation fuel, home heating oil, or jet
fuel, provided the neat renewable fuel or blend is used in the
designated form, without further blending, as transportation fuel, home
heating oil, or jet fuel. As in RFS1, those parties that blend
renewable fuel with gasoline or diesel fuel (in a blend containing less
than 80 percent biodiesel would in all cases be required to separate
RINs pursuant 80.1429(b)(2).
    Thus, for example, under these proposed regulations, if a party
intends to separate RINs from a volume of B85, the party must designate
the blend for use as transportation fuel, home heating oil, or jet fuel
and the blend must be used in its designated form without further
blending. The party would also be required maintain records of this
designation pursuant to 80.1451(b)(5). Finally, the party would be
required to comply with the proposed PTD requirements in
80.1453(a)(5)(iv), which serve to notify downstream parties that the
volume of fuel has been designated for use as transportation fuel, home
heating oil, or jet fuel, and must be used in that designated form
without further blending. Parties could separate RINs at the time they
complied with the designation and PTD requirements, and would not need
to physically track ultimate fuel use.
    EPA requests comment on this proposed approach to RIN separation.
Additionally, EPA requests comment on an alternative approach to
modifying the current program for separation of RINs. Under this second
approach, 80.1429(b)(2) and (b)(5)would be eliminated as redundant, and
80.1429(b)(4) would be broadened to require separation of RINs for all
neat renewable fuels and all blends of renewable fuels with either
gasoline or diesel, when a party designates such fuel as transportation
fuel, home heating oil or jet fuel, and the fuel is in fact used in
accordance with that designation without further blending. The party
would be required to maintain records that verify the ultimate use of
the fuel as transportation, home heating, or jet fuel. Additionally,
there would be a PTD requirement to inform downstream parties that the
fuel has been designated as transportation, home heating, or jet fuel
and may not be further blended. This proposed approach would eliminate
the need for parties to distinguish for purposes of separating RINs
between fuels that are neat or blended or, for biodiesel, between
blends of E80 and below or E81 and above.

I. Treatment of Cellulosic Biofuel

1. Cellulosic Biofuel Standard
    EISA requires in section 202(e) that the Administrator set the
cellulosic biofuel standard each November for the next year based on
the lesser of the volume specified in the Act or the projected volume
of cellulosic biofuel production for that year. In the event that the
projected volume is less than the amount required in the Act, EPA may
also reduce the applicable volume of the advanced biofuels requirement
by the same or a lesser volume. We intend to examine EIA's projected
volumes and other available data including the production outlook
reports proposed in Section III.K to be submitted to the EPA to decide
the appropriate standard for the following year. The outlook reports
from all renewable fuel producers would assist EPA in determining what
the cellulosic biofuel standard should be and if the advanced biofuel
standard should be adjusted. For years where EPA determines that the
projected volume of cellulosic biofuels is not sufficient to meet the
levels in EISA we will consider the availability of other advanced
biofuels in deciding whether to lower the advanced biofuel standard as
well.
2. EPA Cellulosic Allowances for Cellulosic Biofuel
    Whenever EPA sets the cellulosic biofuel standard at a level lower
than that required in EISA, EPA is required to provide a number of
cellulosic credits for sale that is no more than the volume used to set
the standard. Congress also specified the price for such credits:
adjusted for inflation, they must be offered at the price of the higher
of 25 cents per gallon or the amount by which $3.00 per gallon exceeds
the average wholesale price of a gallon of gasoline in the United
States. The inflation adjustment will be for years after 2008. We
propose that the inflation adjustment would be based on the Consumer
Price Index for All Urban Consumers (CPI-U) for All Items expenditure
category as provided by the Bureau of Labor Statistics.\41\
---------------------------------------------------------------------------

    \41\ See U.S. Department of Labor, Bureau of Labor Statistics
(BLS), Consumer Price Index Web site at: http://www.bls.gov/cpi/.
---------------------------------------------------------------------------

    Congress afforded the Agency considerable flexibility in
implementing the system of cellulosic biofuel credits. EISA states EPA;
``shall include such provisions, including limiting the credits' uses
and useful life, as the Administrator deems appropriate to assist
market liquidity and transparency, to provide appropriate certainty for
regulated entities and renewable fuel producers, and to limit any
potential misuse of cellulosic biofuel credits to reduce the use of
other renewable fuels, and for such other purposes as the Administrator
determines will help achieve the goals of this subsection.''
    Though EISA gives EPA broad flexibility, we believe the best way to
accomplish the goals of providing certainty to both the cellulosic
biofuel industry and the obligated parties is to propose credits with
few degrees of freedom. We believe this would prevent speculation in
the market and provide certainty for investments in real cellulosic
biofuels.
    Specifically, we propose that the credits would be called
allowances so

that there is no confusion with RINs, such allowances would only be
available for the current compliance year for which we have waived some
portion of the cellulosic biofuel standard, they would only be
available to obligated parties, and they would be nontransferable and
nonrefundable. Further, we propose that obligated parties would only be
able to purchase allowances up to the level of their cellulosic biofuel
RVO less the number of cellulosic biofuel RINs that they own. This
would help ensure that every party that needs to meet the cellulosic
biofuel standard will have equal access to the allowances. A company
would also then only use an allowance to meet its total renewable and
advanced biofuel standards if it used the allowance for the cellulosic
biofuel standard. We believe that if a company can only purchase as
many allowances as it needs to meet its cellulosic biofuel obligation,
it can not hinder another obligated party from meeting the standard and
therefore every company that needs to meet the standard will have equal
access to the allowances in the event that they do not acquire
sufficient cellulosic biofuel RINs. If we were to allow a company to
purchase more allowances than they needed, another company may not be
able to meet the standard which we believe was not the intent of
Congress.
    We also propose that these allowances would be offered in a generic
format rather than a serialized format, like RINs. Allowances would be
purchased from the EPA at the time that an obligated party submits its
annual compliance demonstration to the EPA and establishes that it owns
insufficient cellulosic biofuel RINs to meet its cellulosic biofuel
RVO. A company owning cellulosic biofuel RINs and cellulosic allowances
may use both types of credits if desired to meet their RVOs, but unlike
RINs they would not be able to carry allowances over to the next
calendar year.
    Congress refers to allowances as ``cellulosic biofuel credits,''
with no indication that the ``credits'' should be given any less role
in meeting a party's obligations under the CAA section 211(o) than
would the purchase and use of a cellulosic biofuel RIN that reflects
actual production and use of cellulosic biofuel. Because cellulosic
biofuel RINs can be used to meet the advanced biofuel and total
renewable fuel standards in addition to the cellulosic biofuel
standard, we propose that cellulosic biofuel allowances also be
available for use in meeting those three standards.
    We propose that the wholesale price of gasoline will be based on
the average monthly bulk (refinery gate) price of gasoline using data
from the most recent twelve months of data from EIA's annual cellulosic
ethanol forecast each October.\42\ Thus we will set the allowance price
for the following year each November along with the cellulosic biofuel
standard for the following year. We seek comment on using the average
monthly rack (terminal) price for the same period and changing the
allowance price as often as quarterly. Though EISA allows EPA to change
the price as often as quarterly we believe this will lead to
speculation which may introduce more uncertainty for the obligated
parties and the cellulosic biofuel industry.
---------------------------------------------------------------------------

    \42\ More information on wholesale gasoline prices can be found
on the Department of Energy's (DOE), Energy Information
Administration's (EIA) Web site at: http://tonto.eia.doe.gov/dnav/pet/pet_pri_allmg_d_nus_PBS_cpgal_m.htm.
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3. Potential Adverse Impacts of Allowances
    While the credit provisions of section 202(e) of EISA ensure that
there is a predictable upper limit to the price that cellulosic biofuel
producers can charge for a gallon of cellulosic biofuel and its
assigned RIN, there may be circumstances in which this provision has
other unintended impacts. For instance, if we made all cellulosic
allowances available to any obligated party, one obligated party could
purchase more allowances than he needs to meet his cellulosic biofuel
RVO and then sell the remaining allowances at an inflated price to
other obligated parties. Thus, we are proposing that each obligated
party could only purchase allowances from the EPA up to the level of
their cellulosic biofuel RVO. However, even with this restriction an
obligated party could still purchase both cellulosic biofuel volume
with its assigned RINs sufficient to meet its cellulosic biofuel RVO,
and also purchase allowances from the EPA. In this case, the obligated
party would effectively be using allowances as a replacement for corn
ethanol rather than cellulosic biofuel. To prevent this, we are
proposing an additional restriction: an obligated party could only
purchase allowances from the EPA to the degree that it establishes it
owns insufficient cellulosic biofuel RINs to meet its cellulosic
biofuel RVO. This approach forces obligated parties to apply all their
cellulosic biofuel RINs to their cellulosic biofuel RVO before appying
any allowances to their cellulosic biofuel RVO.
    However, even with these proposed restrictions on the purchase and
application of allowances, the statutory provision may not operate as
intended. For instance, if the combination of cellulosic biofuel volume
price and RIN price is low compared to that for corn-ethanol, a small
number of obligated parties could purchase more cellulosic biofuel than
they need to meet their cellulosic biofuel RVOs and could use the
additional cellulosic biofuel RINs to meet their advanced biofuel and
total renewable fuel RVOs. Other obligated parties would then have no
access to cellulosic biofuel volume nor cellulosic biofuel RINs, and
would be forced to purchase allowances from the EPA. This situation
would have the net effect of allowances replacing imported sugarcane
ethanol and/or corn-ethanol rather than cellulosic biofuel.
    Moreover, under certain conditions it may be possible for the
market price of corn-ethanol RINs to be significantly higher than the
market price of cellulosic biofuel RINs, as the latter is limited in
the market by the price of EPA-generated allowances according to the
statutory formula described in Section III.I.2 above. Under some
conditions, this could result in a competitive disadvantage for
cellulosic biofuel in comparison to corn ethanol. For instance, if
gasoline prices at the pump are significantly higher than ethanol
production costs, while at the same time corn-ethanol production costs
are lower than cellulosic ethanol production costs, profit margins for
corn-ethanol producers would be larger than for cellulosic ethanol
producers. Under these conditions, while obligated parties may still
purchase cellulosic ethanol volume and its associated RIN rather than
allowances, cellulosic ethanol producers would realize lower profits
than corn-ethanol producers due to the upper limit placed on the price
of cellulosic biofuel RINs through the pricing formula for allowances.
For a newly forming and growing cellulosic biofuel industry, this
competitive disadvantage could make it more difficult for investors to
secure funding for new projects, threatening the ability of the
industry to reach the statutorily mandated volumes.
    We have not established the likelihood that these circumstances
would arise in practice, and we request comment on the specific market
conditions that could lead to them. Nevertheless, we have explored a
variety of ways that we could modify the RFS program structure to
mitigate these potential negative outcomes. For instance, as mentioned
in Section III.I.2 above, we are proposing that each

cellulosic allowance could be used to meet an obligated party's RVOs
for cellulosic biofuel, advanced biofuel, and total renewable fuel.
However, we could restrict the applicability of allowances to only the
cellulosic biofuel RVO. This approach could help ensure that demand for
imported sugarcane ethanol and corn ethanol does not fall in the event
that a small number of obligated parties purchase all available
cellulosic biofuel volume, compelling the remaining obligated parties
to purchase allowances. However, this approach could also have the
effect of making the advanced biofuel and total renewable fuel
standards more stringent. This could occur as obligated parties are
forced to buy additional imported sugarcane ethanol and corn ethanol to
make up for the fact that the allowances they purchase from the EPA
would not apply to the advanced biofuel and total renewable fuel
standards.
    As a variation to this approach, while still restricting the
applicability of allowances to only the cellulosic biofuel RVO, we
could similarly make cellulosic biofuel RINs applicable to only the
cellulosic biofuel RVO. This approach would ensure that the compliance
value of both cellulosic biofuel RINs and allowances is the same, but
would necessarily result in an increase in the effective stringency of
the advanced biofuel and total renewable fuel standards.
    Finally, we could institute a ``dual RIN'' approach to cellulosic
biofuel that has the potential to address some of the shortcomings of
the previous approaches. In this approach, both cellulosic biofuel RINs
(with a D code of 1) and allowances could only be applied to an
obligated party's cellulosic biofuel RVO, but producers of cellulosic
biofuel would also generate an additional RIN representing advanced
biofuel (with a D code of 3). The producer would only be required to
transfer the advanced biofuel RIN with a batch of cellulosic biofuel,
and could retain the cellulosic biofuel RIN for separate sale to any
party.\43\ The cellulosic biofuel and its attached advanced biofuel RIN
would then compete directly with other advanced biofuel and its
attached advanced biofuel RIN, while the separate cellulosic biofuel
RIN would have an independent market value that would be effectively
limited by the pricing formula for allowances as described in Section
III.I.2. However, this approach would be a more significant deviation
from the RIN generation and transfer program structure that was
developed cooperatively with stakeholders during RFS1. It would provide
cellulosic biofuel producers with significantly more control over the
sale and price of cellulosic biofuel RINs, which was one of the primary
concerns of obligated parties during the development of RFS1.
---------------------------------------------------------------------------

    \43\ The cellulosic biofuel RIN would be a separated RIN with a
K code of 2 immediately upon generation.
---------------------------------------------------------------------------

    Due to the drawbacks of each of these potential changes to the RFS
program structure, we are not proposing any of them in today's NPRM.
However, we request comment on whether any of them, or alternatives,
could address the adverse situations described above. We also request
comment on the degree to which the adverse situations are likely to
occur, and the degree of severity of the negative impacts that could
result.

J. Changes to Recordkeeping and Reporting Requirements

1. Recordkeeping
    As with the existing renewable fuel standard program, recordkeeping
under this proposed program will support the enforcement of the use of
RINs for compliance purposes. As with the existing renewable fuels
program, we are proposing that parties be afforded significant freedom
with regard to the form that product transfer documents (PTDs) take. We
propose to permit the use of product codes as long as they are
understood by all parties. We propose that product codes may not be
used for transfers to truck carriers or to retailers or wholesale
purchaser-consumers. We propose that parties must keep copies of all
PTDs they generate and receive, as well as copies of all reports
submitted to EPA and all records related to the sale, purchase,
brokering or transfer or RINs, for five (5) years. We also propose that
parties must also keep copies of records that relate to flexibilities,
as described in Section IV.A. through C. of this preamble. Such
flexibilities are related to attest engagements, the upward delegation
of RIN-separating responsibilities, and various small business oriented
provisions. Upon request, parties would be responsible for providing
their records to the Administrator or the Administrator's authorized
representative. We would reserve the right to request to receive
documents in a format that we can read and use.
    In Section IV.E. of this preamble, we propose an EPA-Moderated
Trading System for RINs. If adopted, the new system would allow for
real-time reporting of RIN generation (i.e., batch reports by producers
and importers) and RIN transactions.
2. Reporting
    Under the existing renewable fuels program, obligated parties,
exporters of renewable fuel, producers and importers of renewable
fuels, and any party who owns RINs must report appropriate information
to EPA on a quarterly and/or annual basis. We are proposing a change in
the schedule for submission of producers' and importers' batch reports,
and for the submission of RIN transaction reports. This proposed change
in schedule, which is discussed in great detail in Section IV.E. of
this preamble, is effective for 2010 only. We are proposing that, for
2010, these reports (which were submitted quarterly under RFS1) be
submitted monthly rather than quarterly. The reason for proposing
monthly reporting for 2010 is to minimize difficulties associated with
invalid RINs, while the EPA-Moderated Trading System is still under
development. As described in detail in IV.E. we intend to have an EPA-
Moderated Trading System fully operational by 2011. At the time that
system becomes fully operational, all batch and RIN transactional
reporting would be submitted in real time. The following deadlines
would apply to ``real time,' monthly, quarterly, and annual reports.
    ``Real time'' reports within the EPA-Moderating Trading System
would be submitted within three (3) business days of a reportable event
(e.g. generation of a RIN, a transaction occurring involving a RIN).
Real time reporting would apply to batch reports submitted by producers
and importers who generate RINs and to to RIN transaction reports
submitted in 2011 and future years.
    Monthly reports would be submitted according to the following
schedule:

               Table III.J.2-1--Monthly Reporting Schedule
------------------------------------------------------------------------
         Month covered by  report                Due date for report
------------------------------------------------------------------------
January...................................  February 28.
February..................................  March 31.
March.....................................  April 30.
April.....................................  May 31.
May.......................................  June 30.
June......................................  July 31.
July......................................  August 31.
August....................................  September 30.
September.................................  October 31.
October...................................  November 30.
November..................................  December 31.
December..................................  January 31.
------------------------------------------------------------------------

    The monthly reporting schedule would apply to batch reports
submitted by producers and importers who generate RINs and to RIN
transaction reports submitted for 2010 only.

    Quarterly reports would be submitted on the following schedule:

              Table III.J.-2--Quarterly Reporting Schedule
------------------------------------------------------------------------
        Quarter covered by  report              Due date for  report
------------------------------------------------------------------------
January-March.............................  May 31.
April-June................................  August 31.
July-September............................  November 30.
October-December..........................  February 28.
------------------------------------------------------------------------

    Quarterly reports include summary reports related to RIN
activities.
    Annual reports (covering January through December) would continue
to be due on February 28. Annual reports include compliance
demonstrations by obligated parties.
    Under this proposed rule, the universe of reporting parties would
grow, but we propose similar reporting to existing reporting. We
believe that the proposed EPA-Moderating Trading System will make
reporting easier for most parties. Existing reporting forms and
instructions are posted at http://www.epa.gov/otaq/regs/fuels/rfsforms.htm. You may wish to refer to these existing forms in
preparing your comments on this proposal.
    Simplified, secure reporting is currently available through our
Central Data Exchange (CDX). CDX permits us to accept reports that are
electronically signed and certified by the submitter in a secure and
robustly encrypted fashion. Using CDX eliminates the need for wet ink
signatures and reduces the reporting burden on regulated parties. It is
our intention to continue to encourage the use of CDX for reporting
under this proposed program as well.
    Due to the criteria that renewable fuel producers and importers
must meet in order to generate RINs under RFS2, and due to the fact
that renewable fuel producers and importers must have documentation
about whether their feedstock(s) meets the definition of ``renewable
biomass,'' we propose several changes to the RFS1 RIN generation
report. We propose to make the report a more general report on
renewable fuel production in order to capture information on all
batches of renewable fuel, whether or not RINs are generated for them.
All renewable fuel producers and importers above 10,000 gallons per
year would report to EPA on each batch of their fuel and indicate
whether or not RINs are generated for the batch. If RINs are generated,
the producer or importer would be required to certify that his
feedstock meets the definition of ``renewable biomass.'' If RINs are
not generated, the producer or importer would be required to state the
reason for not generating RINs, such as they have documentation that
states that their feedstock did not meet the definition of ``renewable
biomass,'' or the fuel pathway used to produce the fuel was such that
the fuel did not qualify for any D code (see Section III.B.4.b for a
discussion about demonstrating whether or not feedstock meets the
definition of ``renewable biomass''). For each batch of renewable fuel
produced, we also propose to require information about the types and
volumes of feedstock used and the types and volumes of co-products
produced, as well as information about the process or processes used.
This information is necessary to confirm that the producer or importer
assigned the appropriate D code to their fuel and that the D code was
consistent with their registration information.
    Two minor additions are being incorporated into the RIN transaction
report. First, for reports of RINs assigned to a volume of renewable
fuel, we are asking that the volume of renewable fuel be reported.
Additionally, we propose that RIN price information be submitted for
transactions involving both separated RINs and RINs assigned to a
renewable volume. This information is not collected under RFS1, but we
believe this information has great programmatic value to EPA because it
may help us to anticipate and appropriately react to market disruptions
and other compliance challenges, will be beneficial when setting future
renewable standards, and will provide additional insight into the
market when assessing potential waivers. We anticipate that having
current market information such as total number of RINs produced and
RINs available in the separated market is incomplete. Missing is our
ability to assess the general health and direction of the market and
overall liquidity of RINs. Tracking price trend information will allow
us to identify market inefficiencies and perceptions of RIN supply.
When price information is combined with information from the production
outlook reports, we will be better able to judge realistic expectations
of renewable production and be in a better position when setting and
justifying future renewable standards or pursuing relief through waiver
provisions. Also, we believe the addition of price information will be
highly beneficial to regulated parties. With price information being
noted on transaction reports, buyers and sellers will have an
additional and immediate reference when confirming transactions.
Additionally, we believe that highly summarized price information
(e.g., the average price of RINs traded) should be available to
regulated parties, as well, and may help them to anticipate and avoid
market disruptions.
    We also propose to make minor changes to compliance reports related
to the identification of types of RINs. Please refer to Section III.B.
of this preamble for a discussion of types of renewable fuels. Also,
please refer to Section III.A. for a discussion of proposed changes to
RINs.
    Under our proposed EPA-Moderated Trading System described in
Section IV.E. of this preamble, then there would be a change in
reporting burden on regulated parties that affects the frequency of
reporting and the number of reports. Instead of quarterly and/or annual
contact with EPA, there would be real time contact--i.e., as batches of
renewable fuel are generated or as RINs are transacted. However, we
believe that any burden is offset by the advantage of having a
simplified system for RIN management that will promote the integrity of
RINs and will remove ``guesswork'' now associated with RIN management.
As things are now, a regulated party may experience frustration and
incur expense in trying to track down and correct errors. Once an error
is made, it propagates throughout the distribution system with each
transfer from party to party. By having EPA moderate RIN management, we
believe that errors would be minimized and regulated parties would be
freed of the greater burden to attempt to track down and correct errors
they may have made. Implementation of the EPA-Moderated Trading System
would correspond to real-time reporting of the type of information
contained in the following two quarterly reports: The Renewable Fuel
Production Report, known as the RIN Generation Report or ``batch
report'' under RFS1 (Report Form Template RFS0400), and the RIN
Transaction Report (Report Form Template RFS0200), starting in 2011.
For 2010, we are proposing that the type of information contained in
these two forms be submitted monthly. These and other reports and
instructions related to the existing renewable fuel standard program
(RFS1) are posted at http://www.epa.gov/otaq/regs/fuels/rfsforms.htm.
3. Additional Requirements for Producers of Renewable Natural Gas,
Electricity, and Propane
    In addition to the general reporting requirement listed above, we
are proposing an additional item of reporting for producers of
renewable

natural gas, electricity, and propane who choose to generate and assign
RINs. While producers of renewable natural gas, electricity, and
propane who generate and assign RINs would be responsible for filing
the same reports as other producers of RIN-generating renewable fuels,
we propose that additional reporting for these producers be required to
support the actual use of their products in the transportation sector.
We believe that one simple way to achieve this may be to add a
requirement that producers of renewable natural gas, electricity, and
propane add the name of the purchaser (e.g., the name of the wholesale
purchaser-consumer (WPC) or fleet) to their quarterly RIN generation
reports and then maintain appropriate records that further identify the
purchaser and the details of the transaction. We are not proposing that
a purchaser who is either a WPC or an end user would have to register
under this scenario, unless that party engages in other activities
requiring registration under this program.

K. Production Outlook Reports

    We are also proposing additional reporting--annual production
outlook reports that would be required of all domestic renewable fuel
producers, foreign renewable fuel producers who register to generate
RINs, and importers of covered renewable fuels starting in 2010. These
production outlook reports would be similar to the pre-compliance
reports required under the Highway and Nonroad Diesel programs. These
reports would contain information about existing and planned production
capacity, long-range plans, and feedstocks and production processes to
be used at each production facility. For expanded production capacity
that is planned or underway at each existing facility, or new
production facilities that are planned or underway, the progress
reports would require information on: (1) Strategic planning; (2)
Planning and front-end engineering; (3) Detailed engineering and
permitting; (4) Procurement and Construction; and (5) Commissioning and
startup. These five project phases are described in EPA's June 2002
Highway Diesel Progress Review report (EPA document number EPA420-R-02-
016, located at: www.epa.gov/otaq/regs/hd2007/420r02016.pdf).
    The full list of requirements for the proposed production outlook
reports is provided in the proposed regulations at Sec.  80.1449. The
information submitted in the reports would be used to evaluate the
progress that the industry is making towards the renewable fuels volume
goals mandated by EISA and to set the annual cellulosic biofuel,
advanced biofuel, biomass-based diesel, and total renewable fuel
standards (see Section II.A.7 of this preamble). We are proposing that
the annual production outlook reports be due annually by February 28,
beginning in 2010 and continuing through 2022, and we are proposing
that each annual report must provide projected information through
calendar year 2022.
    EPA currently receives data on projected flexible-fuel vehicle
(FFV) sales and conversions from vehicle manufacturers; however, we do
not have information on renewable fuels in the distribution system.
Thus, EPA is also considering whether to require the annual submission
of data to facilitate our evaluation of the ability of the distribution
system to deliver the projected volumes of biofuels to petroleum
terminals that are needed to meet the RFS2 standards. We request
comment on the extent to which such information is already publicly
available or can be purchased from a proprietary source. We further
request comment on the extent to which such publicly available or
purchasable data would be sufficient for EPA to make its determination.
To the extent that additional data might be needed, we request comment
on the parties that should be required to report to EPA and what data
should be required. For example, would it be appropriate to require
terminal operators to report to EPA annually on their ability to
receive, store, and blend biofuels into petroleum-based fuels? We
believe that publicly available information on E85 refueling facilities
is sufficient for us to make a determination about the adequacy of such
facilities to support the projected volumes of E85 that would be used
to satisfy the RFS2 standards.
    We request comment on the proposed requirement of annual production
outlook reports, and all other aspects mentioned above (e.g., reporting
requirements, reporting dates, etc.).

L. What Acts Are Prohibited and Who Is Liable for Violations?

    The prohibition and liability provisions applicable to the proposed
RFS2 program would be similar to those of the RFS1 program and other
gasoline programs. The proposed rule identifies certain prohibited
acts, such as a failure to acquire sufficient RINs to meet a party's
RVOs, producing or importing a renewable fuel that is not assigned a
proper RIN category (or D Code), improperly assigning RINs to renewable
fuel that was not produced with renewable biomass, failing to assign
RINs to qualifying fuel, or creating or transferring invalid RINs. Any
person subject to a prohibition would be held liable for violating that
prohibition. Thus, for example, an obligated party would be liable if
the party failed to acquire sufficient RINs to meet its RVO. A party
who produces or imports renewable fuels would be liable for a failure
to assign proper RINs to qualifying batches of renewable fuel produced
or imported. Any party, including an obligated party, would be liable
for transferring a RIN that was not properly identified.
    In addition, any person who is subject to an affirmative
requirement under this program would be liable for a failure to comply
with the requirement. For example, an obligated party would be liable
for a failure to comply with the annual compliance reporting
requirements. A renewable fuel producer or importer would be liable for
a failure to comply with the applicable batch reporting requirements.
Any party subject to recordkeeping or product transfer document (PTD)
requirements would be liable for a failure to comply with these
requirements. Like other EPA fuels programs, the proposed rule provides
that a party who causes another party to violate a prohibition or fail
to comply with a requirement may be found liable for the violation.
    EPAct amended the penalty and injunction provisions in section
211(d) of the Clean Air Act to apply to violations of the renewable
fuels requirements in section 211(o). Accordingly, under the proposed
rule, any person who violates any prohibition or requirement of the
RFS2 program may be subject to civil penalties of $32,500 for every day
of each such violation and the amount of economic benefit or savings
resulting from the violation. Under the proposed rule, a failure to
acquire sufficient RINs to meet a party's renewable fuels obligation
would constitute a separate day of violation for each day the violation
occurred during the annual averaging period.
    As discussed above, the regulations would prohibit any party from
creating or transferring invalid RINs. These invalid RIN provisions
apply regardless of the good faith belief of a party that the RINs are
valid. These enforcement provisions are necessary to ensure the RFS2
program goals are not compromised by illegal conduct in the creation
and transfer of RINs.
    As in other motor vehicle fuel credit programs, the regulations
would address the consequences if an obligated party was found to have
used invalid RINs to demonstrate compliance with its RVO.

In this situation, the obligated party that used the invalid RINs would
be required to deduct any invalid RINs from its compliance
calculations. Obligated parties would be liable for violating the
standard if the remaining number of valid RINs was insufficient to meet
its RVO, and the obligated party might be subject to monetary penalties
if it used invalid RINs in its compliance demonstration. In determining
what penalty is appropriate, if any, we would consider a number of
factors, including whether the obligated party did in fact procure
sufficient valid RINs to cover the deficit created by the invalid RINs,
and whether the purchaser was indeed a good faith purchaser based on an