RINs can be generated in cases where the Equivalence Value is greater
than 1.0. If the RVO assigned to the exporter were based strictly on
the actual volume of the exported product, it would not capture the
extra-value RINs which generally are not assigned to batches. Thus we
propose that the RVO assigned to an exporter be based not on the actual
volume of renewable fuel exported, but rather on a volume adjusted by
the Equivalence Value assigned to each batch. The Equivalence Value is
represented by the RR code within the RIN as described in Section
III.D.2.a. Thus the exporter would multiply the actual volume of a
batch by that batch's Equivalence Value to obtain the volume used to
calculate the RVO.
    In cases wherein an exporter obtains a batch of renewable fuel
whose RIN has already been separated by an obligated party or blender,
the exporter may not know the Equivalence Value. We propose that for
such cases the exporter simply use the actual volume of the batch to
calculate its RVO. This will introduce some small error into the
calculation of the RVO for cases in which the renewable fuel had in
fact been assigned an Equivalence Value greater than 1.0. However, we
believe that the potential impact of this error would be exceedingly
small. We request comment on our proposed approach to exporters of
renewable fuel and any alternative approaches that could ensure that
production volumes of renewable fuel can be used as an accurate
surrogate for consumed volumes.
5. How Would the Agency Verify Compliance?
    The primary means through which the Agency would verify an
obligated party's compliance with its RVO would be the annual reports.
These reports would include a variety of information required for
compliance and enforcement, including the demonstration of compliance
with the previous calendar year's RVO, a list all transactions
involving RINs, and the tabulation of the total number of RINs owned,
used for compliance, transferred, retired and expired. Reporting
requirements for obligated and non-obligated parties are covered in
detail in Section IV.
    In its annual reports, an obligated party would be required to
include a list of all RINs held as of the reporting date, divided into
a number of categories. For instance, a distinction would be made
between current-year RINs and previous-year RINs as follows:
    Current-year RINs: RINs that came into existence during the
calendar year for which the report is demonstrating compliance.
    Previous-year RINs: RINs that came into existence in the calendar
year preceding the year for which the report is demonstrating
compliance.
    The report would also indicate which RINs were used for compliance
with the RVO including any potential deficit, which current-year RINs
were not used for compliance and would therefore be valid for
compliance the next year, and which previous-year RINs were not used
for compliance and therefore expired. The report would also include a
demonstration that the 20 percent cap to address RIN rollover had been
met, as described in Section III.D.3.c.
    In order to verify compliance for each obligated party, the primary
Agency activity would involve the validation of RINs. There are four
basic elements of RIN validation:
    (1) RINs used by an obligated party to comply with its RVO would be
checked to ensure that they are within their two-year valid life. The
RIN itself will contain the year of generation, so this check involves
only an examination of the listed RINs.
    (2) All RINs owned by an obligated party would be cross-checked
with annual reports from renewable fuel producers to verify that each
RIN had in fact been generated.
    (3) All RINs used by an obligated party for compliance purposes
would be cross-checked with annual reports from other obligated parties
to ensure that no two parties used the same RIN to comply.
    (4) Previous-year RINs used for compliance purposes would be
checked to ensure that they do not exceed 20 percent of the obligated
party's RVO.
    In cases where a RIN was highlighted under suspicion of being
invalid, the Agency would then need to take additional steps to resolve
the issue. In

general this would involve a review of RIN transfer records submitted
to the Agency by all parties in the distribution system that held the
RINs. RIN transfers would be recorded through EPA's Central Data
Exchange as described in Section IV. These RIN transfer records would
permit the Agency to identify all transaction(s) involving the RINs in
question. Liable parties could then be contacted and appropriate steps
taken to formally invalidate a RIN improperly claimed by a particular
party. Additional details of the liabilities and prohibitions
attributed to parties in the distribution system are discussed in
Section V.

E. How Are RINs Distributed and Traded?

    Under our proposed program structure, a Renewable Identification
Number (RIN) would be generated for every gallon of renewable fuel
produced or imported into the U.S., and would be acquired by obligated
parties for use in demonstrating compliance with the RFS requirements.
However, there are a variety of ways in which RINs could be transferred
from the point of generation by renewable fuel producers to the
obligated parties that need them.
    EPA's proposal was developed in light of the somewhat unique
aspects of the RFS program. As discussed earlier, under this program
the refiners and importers are the parties obligated to comply with the
renewable fuel requirements. At the same time, refiners and importers
do not generally produce or blend renewable fuels at their facilities,
and so are dependent on the actions of others for compliance. Unlike
EPA's other fuel programs, the actions needed for compliance largely
center on the production, distribution, and use of a product by parties
other than refiners and importers. In this context, EPA believes the
RIN transfer mechanism should focus first on facilitating compliance by
refiners and importers, and doing that in a way that imposes minimum
burden on other parties and minimum disruption of current mechanisms
for distribution of renewable fuels.
    Our proposal does this by relying on the current market structure
for ethanol distribution and use, and avoiding the need for creation of
new mechanisms for RIN distribution that are separate and apart from
this current structure. EPA's proposal would basically have the RIN
follow with the ethanol until the point the ethanol is purchased by the
obligated party, or is blended into gasoline by a blender. This
approach would allow the RIN to be incorporated into the current market
structure for sale and distribution of ethanol, and would avoid
requiring refiners to develop and use wholly new market mechanisms.
While the development of new market mechanisms to distribute RINs is
not precluded under our proposed program, it is also not required.
    The Agency has also evaluated several other options for
distributing RINs. We are not proposing these alternatives because they
tend to require the development of new market mechanisms, as compared
to relying on the current market structure for distribution of ethanol,
and they are less focused on facilitating compliance for the obligated
parties. At the same time, we recognize that all of the alternatives
described below, as well as our proposal, have differing positive and
negative aspects, and we invite comment on them, especially comments
comparing and contrasting them with our proposed program. Our proposal
is described in subsections 1 through 3 below, and alternative
approaches in subsection 4.
1. Distribution of RINs With Batches of Renewable Fuel
    We are proposing that standard-value RINs be transferred with
actual batches of renewable fuel as they move through the distribution
system, until ownership of the batch is assumed by an obligated party
or by a party that converts the renewable fuel into motor vehicle fuel.
After such time, the RINs could be separated from the batch and freely
traded. This approach would place certain requirements on anyone who
takes ownership of renewable fuels, including renewable fuel producers,
importers, marketers, distributors, blenders, and terminal operators.
    a. Responsibilities of Renewable Fuel Producers and Importers. The
initial generation of RINs and their assignment to specific batches of
renewable fuel would be the sole responsibility of renewable fuel
producers and renewable fuel importers. As described in Section
III.D.1, volumes of renewable fuel can be measured most accurately and
be more readily verified at these originating locations. They would
construct each batch-RIN based on the particular circumstances
associated with each batch, including the creation of a unique serial
number for the batch and specifying its Equivalence Value. The batch-
RIN would also identify the specific number of gallons in the batch,
thereby summarizing the gallon-RINs assigned to every gallon in the
batch. See Section III.D.2.a for details on our proposed format for
RINs.
    Only standard-value RINs would have to be assigned to batches.
Extra-value RINs could be generated by the renewable fuel producer in
cases where the renewable fuel in question has an Equivalence Value
greater than 1.0 (see Section III.D.2.c for further discussion).
However, the extra-value RINs would not need to be assigned to the
batch. Instead, they could be transferred to another party independent
of the batch. This requirement would in general result in a one-to-one
correspondence between gallons in a batch and the volume block numbers
in the batch-RIN assigned to that batch. As a result, the process of
dividing and combining RINs during batch splits and mergers would be
simplified, and the fungibility of RINs in the distribution system
would be maintained. For example, a marketer who took custody of
ethanol batches from several different producers, including a producer
of cellulosic biomass ethanol, and combined them all in a single tank
could then withdraw batches of any size from the tank, and assign a
number of gallon-RINs to each batch that is equivalent to the number of
actual gallons in that batch. This approach would also provide an
incentive for producers to produce renewable fuels with higher
Equivalence Values, since they could transfer the extra-value RINs to
any party.
    However, we are also proposing that producers have the option of
assigning even extra-value RINs to batches if they chose to do so.
Under these circumstances, the extra-value RINs would be treated just
like standard-value RINs, and thus would be subject to the same
limitations on who can separate the RIN from the batch. The assignment
of extra-value RINs to batches would also mean that the number of
gallon-RINs assigned to the batch would be greater than the number of
gallons in the batch. As a result, care would have to be taken during
batch splits and batch mergers to appropriately pass RINs assigned to a
parent batch on to the daughter batches. We request comment on allowing
extra-value RINs to be assigned to batches.
    There are two other cases in which the gallon-RINs assigned to a
batch would not exactly correspond to the number of gallons in that
batch. First, if a renewable fuel has an Equivalence Value less than
1.0, then RINs could only be assigned to a portion of the batch. Such
potential circumstances are described in Section III.D.2.d. RINs may
also not correspond exactly to gallons if the density of the batch
changes due to changes in temperature. For instance, under extreme
changes in temperature, the volume of a batch of ethanol can change by
5 percent or more. For this

reason we are proposing that all batch volumes be corrected to
represent a standard condition of 60 [deg]F prior to the assignment of
a RIN. For ethanol,\32\ we propose that the correction be done as
follows:\33\

    \32\ An appropriate temperature correction for other renewable
fuels should likewise be used.
    \33\ Derived from ``Fuel Ethanol Technical Information,'' Archer
Daniels Midland Company, v1.2, 2003.
---------------------------------------------------------------------------

    Vs,e = Va,e x (-0.0006301 x T + 1.0378)

Where:

Vs,e = Standard volume of ethanol at 60 [deg]F, in
gallons.
Va,e = Actual volume of ethanol, in gallons.
T = Actual temperature of the batch, in [deg]F.

    Since batches of ethanol are generally sold using standard volumes
rather than actual volumes, this approach to assigning RINs to batches
would be consistent with current practices and would maintain the one-
to-one correspondence between the volume block in the batch-RIN and the
standardized volume of the batch. We propose a similar approach to
biodiesel, where the volume correction can be calculated using the
following equation:\34\
---------------------------------------------------------------------------

    \34\ Derived from R.E. Tate et al, ``The densities of three
biodiesel fuels at temperatures up to 300 [deg]C'', Fuel 85 (2006)
1004-1009, Table 1 for soy methyl ester.

---------------------------------------------------------------------------
    Vs,b = Va,b x (-0.0008008 x T + 1.0480)

Where:

Vs,b = Standard volume of biodiesel at 60 [deg]F, in
gallons.
Va,b = Actual volume of biodiesel, in gallons.
T = Actual temperature of the batch, in [deg]F.

    The RIN would have to be assigned to a batch no later than the
point in time when the batch physically leaves the production or
importing facility. Although ownership of the batch may be retained by
the producer or importer, the RIN would nevertheless be required to be
transferred along with the batch as it leaves the originating facility.
This requirement would ensure that RINs could be verified against
production or importing facility records and against mandated reports
to the Energy Information Administration (EIA). It would also
centralize the process of assigning RINs to batches.
    The means through which RINs would be transferred with batches
would in some respects be left to the discretion of the renewable fuel
producer or importer. The primary requirement would be that the RIN be
included on a product transfer document (PTD). The PTD can be included
in any form of standard documentation that is already associated with
or used to identify title to the batch. The batch documentation must be
of the sort that uniquely identifies the batch and is generally
transferred from one party to another, in electronic or paper form,
when ownership of the batch is transferred. In many cases a bill-of-
lading could serve this purpose. The RIN must be displayed prominently
on the document when the batch leaves the originating facility, so that
parties taking ownership of the batch could make a record of this fact
with specific reference to the RIN. The RIN must be included on a PTD
whenever ownership or custody of the batch is transferred, until such
time as the RIN may be separated from the batch as described in Section
III.E.2. As in other fuels programs, we believe the PTD requirement can
be met by including the required information generated and transferred
in the normal course of business.
    RINs would be transferable in the context of the RFS program, and
except as discussed above, must be transferred along with ownership or
custody of the batch. The approach that a producer or importer takes to
the transfer or sale of RINs and batches would be at their discretion,
under the condition that the two be transferred or sold simultaneously
and to the same party.
    b. Responsibilities of Parties That Buy, Sell, or Handle Renewable
Fuels. Batches of renewable fuel can be transferred between many
different types of parties as they make their way from the production
or import facilities where they originated to the places where they are
blended into conventional gasoline or diesel. Some of these parties
take custody but not ownership of these batches, storing and
transmitting them on behalf of those who retain ownership. Other
parties take ownership but not custody, such as a refiner who purchases
ethanol and has it delivered directly to a blending facility. Thus
prior to blending, each batch of renewable fuel can be owned or held by
any number of parties including marketers, distributors, terminal
operators, and refiners. Under our proposed program, when any party
takes ownership of a batch of renewable fuel prior to ownership of the
batch of fuel by an obligated party or blender, the RINs associated
with that batch must be transferred as well. The RINs would be included
on PTDs that the party procures when taking ownership of a batch.
    We propose that in general all parties that assume ownership of any
batch of renewable fuel be required to transfer all RINs assigned to
that batch to another party to whom ownership of the batch is being
transferred. Batch splits and batch mergers represent special cases of
RIN transfers, and are described in more detail below. As described in
Section III.E.2, the only exception to the requirement that RINs be
transferred with batches would be parties who are obligated to meet the
renewable fuel standard, and parties who convert the renewable fuel
into motor vehicle fuel. Since our proposed program is designed to
allow RIN transfer and documentation to occur as part of normal
business practices in the context of renewable fuel distribution, the
incremental costs of transferring RINs with batches should be minimal.
Marketers and distributors would simply be adding the batch-RIN to
transfer documents such as bills-of-lading, and recording the batch-
RINs in their records of batch purchases and sales.
    Under most other credit trading programs, parties obligated to meet
a standard are also the parties that generate credits for trade. Under
these systems, non-obligated parties can participate only to the degree
that obligated parties explicitly include them. In the case of the RFS
program, however, the production of renewable fuels and their
conversion into motor vehicle fuel through blending is largely done by
persons other than obligated parties. To the degree that our proposed
program allowed the disparity between RFS obligations and the means of
compliance to continue, stakeholders have expressed concerns about a
variety of problems that could arise, such as market power by RIN
sellers in the market where RINs are exchanged. Market power on the
part of non-obligated parties could result in higher prices for RINs
than prices that would arise in a competitive, well-functioning market
setting. For instance, if a renewable fuel producer or marketer could
separate the batch-RIN from the batch, he could in theory withhold the
RIN from the marketplace temporarily. By the end of an annual
compliance period, a scarcity of RINs could increase their price, at
which point the renewable fuel producers or marketers could begin to
sell the RINs at an inflated price. In the extreme such parties could
potentially withhold a large number of RINs from the market, creating a
scarcity of RINs that could compel obligated parties to purchase
additional volumes of renewable fuel with associated RINs. These
scenarios are of particular concern given that we expect there will be
a relatively small number of renewable fuel producers and marketers
selling RINs in the

marketplace. For instance, although there currently exist about 100
ethanol production facilities in the U.S., nearly half of the
production volumes come from only seven companies. Likewise, only five
companies manage the majority of ethanol marketing.
    We believe that the general prohibition against the separation of
RINs from batches in the distribution system will place only a small
additional burden on marketers and distributors of renewable fuel.
According to several stakeholders, a large amount of ethanol is already
purchased from renewable fuel producers directly by refiners. In these
cases, the RIN would be transferred directly from the renewable fuel
producer to an obligated party. For the remaining batches of ethanol
that do experience multiple transfers before being blended into
gasoline, the RIN itself would represent a small incremental item of
information that must be recorded and transferred along with batches
and could be included in normal business records.
    In addition to the recordkeeping responsibilities described in more
detail in Section IV, parties that would be required to transfer RINs
with batches under our proposed program would also have the primary
responsibility of maintaining the integrity of RIN-batch pairing when
batches are split or merged. Our proposed approach to these situations
is described below.
i. Batch splits
    As described in Section III.D.2, batch-RINs assigned to batches of
renewable fuel would be formatted such that the volume block codes
(SSSSSS and EEEEEE) would identify every gallon in a batch, and thus
every gallon-RIN. Thus in most cases there will be a one-to-one
correspondence between gallons in a batch and the volume block codes
for the batch-RIN assigned to that batch. If a batch of renewable fuel
is split into two or more new batches, the gallon-RINs assigned to the
original batch can be split coincidentally with batch volumes. The
following example shows how this would be done (volume blocks separated
for clarity):
    Parent batch:

1000 gallons,
batch-RIN:<PHONE_NUMBER>345000011021-000001-001000.

    Daughter batch #1:

600 gallons,
batch-RIN:<PHONE_NUMBER>345000011021-000001-000600.

    Daughter batch #2:
100 gallons,
batch-RIN:<PHONE_NUMBER>345000011021-000601-000700.

    Daughter batch #3:
300 gallons,
batch-RIN:<PHONE_NUMBER>345000011021-000701-001000.

    In this example, the gallon-RINs remain both unique and paired on a
one-to-one basis with actual gallons even after the parent batch is
divided into smaller daughter batches.
    However, there will be some cases in which there is not a one-to-
one correspondence between a RIN assigned to a batch and the actual
gallons in that batch, and such cases could complicate the process of
splitting batches. For instance, changes in temperature could cause
batch volumes to swell or shrink. Renewable fuels with Equivalence
Values less than 1.0, although currently unlikely to arise in
appreciable volumes, will have more actual gallons in the original
batch than RINs assigned to that batch. And some producers may choose
to assign extra-value RINs to batches in cases wherein the Equivalence
Value is greater than 1.0.
    To address such cases, we propose to allow parties in the
distribution system the discretion to split batches and their assigned
RINs following any protocol they choose, as long as that protocol
preserves the requirement that gallon-RINs that have been assigned to a
batch by the producer are subsequently assigned to a batch after
splitting has occurred. Thus regardless of the splitting protocol used,
no gallon-RINs assigned to a batch could be retained by a party after
every gallon in that batch has been transferred to another party.
    There are a variety of batch splitting protocols that a party could
choose from for situations where there is not a one-to-one
correspondence between the number of gallon-RINs assigned to a batch
and the number of standardized gallons in that batch. However, we have
identified two acceptable protocols that we expect most parties to use.
These are described in Table III.E.1.b.i-1 below. Examples of batch
splits using both types of splitting protocols are given in Tables
III.E.1.b.i-2 and III.E.1.b.i-3. We propose that the Proportional
Protocol be required for cases in which the Equivalence Value of a
renewable fuel is less than 1.0. For cases in which the Equivalence
Value is equal to or greater than 1.0, we propose to allow parties the
flexibility to follow a batch splitting protocol of their own choosing
so long as there is at least one gallon-RIN for every physical gallon
in each of the daughter batches. We request comment on these batch
splitting protocols, any alternative protocols, and the need to codify
a protocol in the regulations for specific situations.

           Table III.E.1.b.i-1.--Two Batch Splitting Protocols
------------------------------------------------------------------------
                                  Proportional      One-to-one alignment
------------------------------------------------------------------------
Description.................  The gallon-RINs       The gallon-RINs
                               assigned to a         assigned to a
                               parent batch are      parent batch are
                               split                 split to ensure
                               proportionally with   that some daughter
                               the volumes in the    batches have a one-
                               daughter batches.     to-one
                                                     correspondence
                                                     between physical
                                                     gallons and gallon-
                                                     RINs. Remaining
                                                     gallon-RINs are
                                                     assigned to
                                                     remaining gallons.
Impacts for EV \a\ <  1.0....  Ratio of actual       Some daughter
                               gallons to gallon-    batches may have no
                               RINs in the parent    assigned RIN.
                               batch is preserved
                               in all daughter
                               batches.
Impacts for EV > 1.0........  Ratio of actual       Ratio of actual
                               gallons to gallon-    gallons to gallon-
                               RINs in the parent    RINs in some
                               batch is preserved    daughter batches
                               in all daughter       will be different
                               batches.              than the ratio for
                                                     the parent batch.
------------------------------------------------------------------------
a Equivalence Value.

      Table III.E.1.b.i-2.--Example of Proportional Batch Splitting
------------------------------------------------------------------------
                                                     EV < 1.0   EV > 1.0
------------------------------------------------------------------------
Parent batch:
    Actual volume (gal)...........................   \1\ 1000   \1\ 1000
    Batch-RIN SSSSSS code.........................     000001     000001
    Batch-RIN EEEEEE code.........................     000800     002500
    Number of gallon-RINs.........................        800       2500
Daughter batch 1:
    Actual volume (gal)...........................    \1\ 600    \1\ 600
    Batch-RIN SSSSSS code.........................     000001     000001
    Batch-RIN EEEEEE code.........................     000480     001500
    Number of gallon-RINs.........................        480       1500
Daughter batch 2:
    Actual volume (gal)...........................    \1\ 400    \1\ 400
    RIN volume block start (SSSSSS)...............     000481     001501
    RIN volume block end (EEEEEE).................     000800     002500
    Number of gallon-RINs.........................        320       1000
------------------------------------------------------------------------
\1\gal.

     Table III.E.1.b.i-3--Example of Batch Splitting With One-to-One
                                Alignment
------------------------------------------------------------------------
                                                     EV < 1.0   EV > 1.0
------------------------------------------------------------------------
Parent batch:
    Actual volume (gal)...........................   \1\ 1000   \1\ 1000
    Batch-RIN SSSSSS code.........................     000001     000001
    Batch-RIN EEEEEE code.........................     000800     002500
    Number of gallon-RINs.........................        800       2500
Daughter batch 1:
    Actual volume (gal)...........................    \1\ 600    \1\ 600
    Batch-RIN SSSSSS code.........................     000001     000001
    Batch-RIN EEEEEE code.........................     000600     000600
    Number of gallon-RINs.........................        600        600
Daughter batch 2:
    Actual volume (gal)...........................    \1\ 400    \1\ 400
    Batch-RIN SSSSSS code.........................     000601     000601
    Batch-RIN EEEEEE code.........................     000800     002500
    Number of gallon-RINs.........................        200       1900
------------------------------------------------------------------------
\1\gal.

ii. Batch mergers.
    In general batch mergers will begin with at least two parent
batches having different RINs. After the merger of the two parent
batches, the RINs from the two parents would simply need to be listed
separately on any product transfer documents such as bills-of-lading,
since they differ not just in the volume block codes but also in other
aspects of the RIN. We are not proposing any mechanism for simplifying
the RIN in the case of a batch merger, such as combining two different
RINs into a single RIN or replacing a collection of different RINs with
a new single RIN. We believe that such approaches would be likely to
create significant difficulties in tracking RINs and verifying their
validity.
    Parties that have two or more batches of renewable fuel that have
been merged into a single batch will be free to determine how the RINs
will be subsequently split and assigned to new daughter batches during
a batch split. We are not proposing a specific protocol for such cases,
beyond the general requirement that RINs that have been assigned to
parent batches remain assigned to a daughter batch after splitting has
occurred. However, it may be helpful for RINs to be ordered on PTDs in
the order in which the batches were combined, and then assigned to
daughter batches on a first-in, first-out basis. Thus as individual
parent batches are added to, for instance, a tank already containing
renewable fuel, the RINs associated with the newly added batch could be
added below the existing RINs on the documentation. As product was
drawn back out of the tank, the RINs assigned to the removed product
would be those at the top of the list of RINs on the tank
documentation. This FIFO approach would ensure that RINs assigned to
parent batches continue to move through the distribution system, and
batch splits could occur straightforwardly even in cases that begin
with merged batches. We request comment on whether this FIFO approach
should remain guidance or whether instead it should be a regulatory
requirement.
2. Separation of RINs From Batches
    Separation of a RIN from a batch means that the RIN would no longer
be included on the PTD, and could be traded independently from the
batch to which it had originally been assigned.
    We believe that the regulatory program should be structured around
facilitating compliance by obligated parties with their renewable fuel
obligation. This means that obligated parties should have the right to
market the renewable fuel separately from the RIN originally assigned
to it. We are therefore proposing that a refiner or importer would have
the right to separate the RIN from the batch as soon as he assumes
ownership of that batch. In the case of ethanol blended into gasoline
at low concentrations (< = 10 volume percent), stakeholders have
informed us that a large volume of the ethanol is purchased by refiners
directly from ethanol producers, and is then passed to blenders who
carry out the

blending with gasoline. Therefore, in many cases RINs assigned to
batches will pass directly from the producers who generated them to the
obligated parties who need them.
    However, significant volumes of ethanol are also blended into
gasoline without first being purchased by a refiner. In some cases, the
blender itself purchases the ethanol. In other cases, a downstream
customer purchases the ethanol and contracts with the blender to carry
out the blending. Regardless, the ethanol may never be held or owned by
an obligated party before it is blended into gasoline. Thus we believe
that a blender should also have the right to separate the RIN from the
batch if he actually blends the ethanol into gasoline. This would only
apply to batches where the RIN had not already been separated by an
obligated party. Since blenders would in general not be obligated
parties under our proposed program, blenders who separate RINs from
batches would have no need to hold onto those RINs and thus could
transfer them to an obligated party for compliance purposes, or to any
other party.
    There may be occasions in which a downstream customer actually owns
the batch of ethanol when it is blended into gasoline. In such cases
the blender will have custody but not ownership of the batch. We
propose that the RIN can be separated from the batch of ethanol when
the batch is blended into gasoline, but the RIN could only be separated
by the party that owns that batch of renewable fuel at the time of
blending.
    Once a RIN is separated from a batch of renewable fuel, the PTDs
associated with that batch could no longer list the RIN. Parties who
subsequently take ownership of the batch may not know if the RIN had
been separated, or if a RIN had never been assigned to the batch in the
first place, contrary to regulatory requirements. To avoid concerns
about whether RINs assigned to batches have not been appropriately
transferred with the batch, we request comment on whether PTDs should
include some notation indicating that the assigned RIN has been
removed.
    As described in Section III.B, many different types of renewable
fuel can be used to meet the RFS volume obligations placed upon
refineries and importers. Currently, ethanol is the most prominent
renewable fuel, and is most commonly used as a low level blend in
gasoline at concentrations of 10 volume percent or less. However, some
renewable fuels can be used in neat form (i.e. not blended with
conventional gasoline or diesel). The two RIN separation situations
described above would capture any renewable fuel for which ownership is
assumed by an obligated party or a party that blends the renewable fuel
into gasoline or diesel. However, renewable fuels which are used in
their neat (unblended) form as motor vehicle fuel may not be captured.
This would include such renewable fuels as neat biodiesel (B100),
methanol for use in a dedicated methanol vehicle, biogas for use in a
CNG vehicle, or renewable diesel used in its neat form.
    As for ethanol and biodiesel, neat renewable fuels would be
assigned a RIN by the producer. However, in cases where the neat
renewable fuel is never owned by an obligated party or blended into
gasoline or diesel before being used as a motor vehicle fuel, no party
would have the right to separate the RIN from the batch. The RIN would
therefore never become available to an obligated party for RFS
compliance purposes. Although the current use of these neat renewable
fuels is minor in comparison to the volumes of ethanol and lower blend
levels of biodiesel, we nevertheless believe that they should be
allowed to help meet the volume requirements of the RFS program.
    To address this issue, we propose to more broadly define the right
to separate a RIN from a batch. In addition to obligated parties and
blenders, we believe that any party holding a batch of renewable fuel
for which the RIN has not been separated could separate the RIN from
the batch if the party designates it for use only as a motor vehicle
fuel in its neat form and it is in fact only used as such. Given the
lack of any significant use of ethanol in its neat (but denatured) form
as a motor vehicle fuel, RINs for neat ethanol could only be separated
by an obligated party or a party that blends it with gasoline. This
would include a party that blended ethanol with a small amount of
gasoline to form E85, since there are millions of vehicles in the fleet
that can operate on E85. In this case, E85 would be treated like any
other ethanol/gasoline blend.
    Under our proposed approach, therefore, any party that holds a
batch of renewable fuel that is typically used in its neat form and was
designated by the producer for use in its neat form as a motor vehicle
fuel would be given the right to separate the RIN from the batch. This
approach would recognize that the neat form of the renewable fuel is
valid for compliance purposes under the RFS program, as described in
Section III.B.
    Biodiesel (mono alkyl esters) is one type of renewable fuel that
can under certain conditions be used in its neat form. However, in the
vast majority of cases it is blended with conventional diesel fuel
before use, typically in concentrations of 20 volume percent or less.
This approach is taken for a variety of reasons, including the
following:
     To reduce impacts on fuel economy.
     To mitigate cold temperature operability issues.
     To market biodiesel as an additive rather than an
alternative fuel.
     To address concerns of some engine owners or manufacturers
regarding the impacts of biodiesel on engine durability or drivability.
     To reduce the cost of the resulting fuel.
    Biodiesel is also used in low concentrations as a lubricity
additive and as a means for complying with the ultra-low sulfur
requirements for highway diesel fuel. Biodiesel is occasionally used in
its neat form. However, this approach is the exception rather than the
rule. Consequently, we propose that the RIN assigned to a batch of
biodiesel could only be separated from that batch if and when the
biodiesel is blended with conventional diesel. To avoid claims that
very high concentrations of biodiesel count as a blended product, we
also propose that biodiesel must be blended into conventional diesel at
a concentration of 80 volume percent or less before the RIN can be
separated from the batch.
    Our proposed approach to biodiesel would mean that biodiesel used
in its neat form would not be valid for compliance purposes under the
RFS program. To address this issue, we request comment on additionally
allowing a biodiesel producer to separate the RIN from the batch if it
could establish that it produced the batch of biodiesel specifically
for use as motor vehicle fuel in its neat form, and that the biodiesel
was in fact used in its neat form.
3. Distribution of Separated RINs
    Once a RIN is separated from a batch of renewable fuel, it would
become freely transferable. Each RIN could be held by any party, and
transferred between parties any number of times. This approach would
apply to extra-value RINs (RINs generated based on Equivalence Values
greater than 1.0) as well as standard-value RINs.
    We are not proposing to limit the number of times that a RIN could
be transferred, nor the types of parties that could receive or transfer
RINs. However, this approach would be unique among EPA's fuel
regulations. For all previous motor vehicle fuel credit trading
programs we have allowed only refiners and importers to transfer
credits, and have limited the number of times credits could be
transferred to one or two

transfers. This includes, for example, the credit trading programs for
reformulated gasoline and gasoline sulfur. These limitations were
included to make the credit trading programs enforceable by making the
transfer of credits, from the credit generator to the credit user,
shorter, and populated only by the refiners and importers who were
obligated to meet those standards. These approaches also helped to
ensure the validity of credits by limiting the sources of credits to
companies that the obligated parties know to be reliable business
partners. A recent report provided to the Agency by the American
Petroleum institute also provides support for limiting RIN trading to
obligated parties.\35\ Therefore, we are seeking comment on limiting
the number of trades and limiting the trades to only occur between
obligated parties even though we are not proposing to do so here.
---------------------------------------------------------------------------

    \35\ Montgomery, David W., ``Recommendations for a Trading
Program Which Will Comply with the Renewable Fuel Standard,'' CRA
International, Inc. May 25, 2006.
---------------------------------------------------------------------------

    For the RFS program, we believe that there is a need to provide for
this more open trading, and that it can occur without unduly
sacrificing the enforceability of the program or increasing its
oversight burden. As described earlier, the RFS program is unique in
that obligated parties are typically not the ones producing the
renewable fuels and generating the RINs, so there is a need for trades
to occur between obligated parties and non-obligated parties. By
prohibiting anyone except obligated parties from holding RINs after
they have been separated from a batch, we might be making it more
difficult for those RINs to eventually be transferred to the obligated
parties that need them. This is especially important in the case of the
RFS program, because the program must work efficiently not only for a
limited number of obligated parties, but a number of non-obligated
parties as well. A potentially large number of oxygenate blenders, many
of which will be small businesses, will be looking for ways to market
their RINs. Furthermore, in some cases renewable fuel producers will
also have RINs (in particular, extra-value RINs) that can be marketed.
Allowing other parties, including brokers, to receive and transfer RINs
may create a more fluid and free market that would increase the venues
for RINs to be acquired by the obligated parties that need them.
    We believe we can ensure the enforceability of the program despite
opening up trading to non-obligated parties and allowing multiple
trades. The RIN number, along with the associated electronic reporting
mechanism, should allow us the ability to verify the validity of RINs
and the source of any invalid RINs. Since all RINs generated, traded,
and used for compliance would be recorded electronically in an Agency
database, these types of investigations would be straightforward. The
number of RIN trades, and the parties between whom the RINs are being
traded, would only have the effect of increasing the size of the
database.
    As with other credit-trading programs, the business details of RIN
transactions, such as the conditions of a sale or any other transfer,
RIN price, role of mediators, etc. would be at the discretion of the
parties involved. The Agency would be concerned only with information
such as who holds a given RIN at any given moment, when transfers of
RINs occur, who the party to the transfers are, and ultimately which
obligated party relies on a given RIN for compliance purposes. This
type of information would therefore be the subject of various
recordkeeping and reporting requirements as described in Section IV,
and these requirements would generally apply regardless of whether RIN
has been separated from a batch.
    The means through which RIN trades would occur would also be at the
discretion of the parties involved. For instance, parties with RINs
could create open auctions, contract directly with those obligated
parties who seek RINs, use brokers to identify potential transferees
and negotiate terms, or just transfer the RINs to any other willing
party. Brokers involved in RIN transfer could either operate in the
role of arbitrator without holding the RINs, or alternatively could
receive the RINs from one party and transfer them to another. If they
are the transferee of any RINs, they would also be subject to the
registration, recordkeeping, and reporting requirements. We do not
believe that it would be appropriate or useful for the EPA to become
directly involved in RIN transfers, other than in the role of providing
a database within which transfers can be recorded. Thus EPA would not
plan on establishing a clearinghouse or centralized brokerage for the
management of RIN transfers, nor contract with a private firm through
whom all RIN buyers and sellers would arrange transfers. Our experience
with other credit trading programs suggests that, left to themselves,
natural free-market mechanisms will arise to handle RIN transfers, and
that these mechanisms will maximize the efficiency of the market while
minimizing the transaction costs for transfers of RINs.
4. Alternative Approaches to RIN Distribution
    During the development of our proposed RFS trading and compliance
program, stakeholders offered a variety of alternative program design
approaches. Most of these alternatives recognize the value of a RIN-
based system of compliance, but they differ in terms of which parties
would be allowed to separate a RIN from a batch and the means through
which the RINs should be transferred to obligated parties. We invite
comment on all of these options.
    Our primary concern with the alternative approaches is that we
believe they would be less effective than our proposed program at
ensuring that RINs would get to the obligated parties who need them in
a timely fashion. As described above, stakeholders have expressed
serious concerns about any program structure that could allow non-
obligated parties to exercise market power in the RIN market, and the
program we are proposing today is designed to minimize these concerns.
The alternative approaches described below, in contrast, could
potentially allow some non-obligated parties who acquire RINs to either
refuse to transfer them, make them difficult for obligated parties to
obtain, or drive their price up by exercising market power. We believe
that these stakeholder concerns about alternative program options are
legitimate, given that nearly half of the production volumes of ethanol
come from only seven companies and only five companies manage the
majority of ethanol marketing. Our proposal also best addresses other
related issues, such as limiting the number of obligated parties,
providing for the most open RIN market, and providing an effective
means at ensuring RIN certainty.
    a. Producer With Direct Transfer of RINs. One alternative to our
proposed program would allow producers and importers of renewable fuels
to transfer RINs separately from the renewable fuel that they
represent. The producer or importer would still generate the RIN, but
would not necessarily need to assign it to a specific batch of
renewable fuel. The producer or importer would be required to transfer
the RIN, but only to an obligated party.
    Under this approach non-obligated parties other than producers and
importers would have no RIN ownership opportunities and would therefore
not bear any burden associated with transferring RINs with batches.

This would eliminate most of the recordkeeping and reporting
requirements applicable to them under our proposed program. There would
also be no need for any regulatory requirements to ensure proper
accounting of RINs as they move through the distribution system, such
as requirements necessary to address volume changes due to temperature,
batch splits and mergers, use of renewable fuels in their neat form,
and the recordkeeping and reporting associated with these requirements.
    The challenges associated with this approach, however, pertain to
the disconnect between RINs and batches of renewable fuel. For
instance, the disconnect would produce the possibility for the creation
of market power with the renewable fuel producer that generates the
RINs. As discussed above, there is the possibility that renewable
producers might not place all RINs on the market for procurement by the
obligated parties, thereby driving up their price and/or increasing
further the demand for renewables. It is very unlikely that they would
withhold renewable fuel itself from the market in order to drive up the
price for it. Not only is storage capacity limited, but there is no
evidence that ethanol producers or marketers have ever exercised this
type of market control. This is also true under our proposed program.
    In addition, although a refiner could purchase renewable fuel
directly from a producer and acquire RINs at the same time, there would
be many other cases in which a refiner would purchase renewable fuel
without RINs (such as from a marketer). Although the market would
likely develop in such a way that renewable fuel without RINs would be
priced differently than renewable fuels with RINs, the purchase of the
renewable fuel would still have no bearing on the refiner's RFS
compliance demonstration, contrary to the intent of the Act. The
refiner would have to procure RINs separately. If the refiner purchased
more renewable fuel than it needed for compliance purposes in this way,
it would not have any excess RINs to transfer to another party. The Act
stipulates that allowances must be made for credits to be generated for
excess renewable fuel.
    To address the concern regarding producers withholding RINs from
the market, under this alternative the renewable producer would be
required to make the RINs available for transfer to an obligated party.
As under the proposed option, this RIN transfer could be done in one of
several ways, such as through direct contract or a restricted
clearinghouse. Any RINs not provided directly to an obligated party
would then need to be made available through a regularly scheduled
public auction to the highest bidder. This could be through an existing
internet auction Web site, or through another auction mechanism
implemented by a generator so long as the mechanism is equally open and
available to all obligated parties. Only obligated parties would be
permitted to bid on the RINs in such an auction.
    To ensure the effectiveness of such an approach, however, there are
a number of additional aspects of the program that would need to be
specified. Since a renewable producer could essentially withhold RINs
from the market by setting the selling price too high, such an approach
would hinge upon any such auctions occurring without any minimum price
for the RINs. Producers would be required to transfer RINs to the
highest bidder regardless of the bid price, even if there was only a
single bidder. The renewable producer would be required to send the
successful bidder a written confirmation of the RIN transfer, including
the RIN identification numbers. If there were no bids, the renewable
producer would be required to roll them over to subsequent auction
cycles until such time as the RINs were no longer valid for compliance
purposes and they would simply be retired. Finally, in order to ensure
that RINs were actually being made available, such sales, trades, or
auctions would be required to occur at least quarterly, but we seek
comment on whether a shorter cycle would be more appropriate.
    Various other aspects of the RIN auctions or transactions would
also have to be specified. For example, the location, time, and other
details of any auction would have to be made widely known to obligated
parties in sufficient time for them to participate. To this end, the
rule could specify that there must be advance public notice of the
intent to conduct an auction and the auction procedures, and that this
notice must be advertised through nationwide media or a public Internet
posting. The minimum amount of advance notice could be, for example,
one week or four weeks. The regulations could require that the RINs be
transferred in large enough blocks, such as 5,000 RINs, in order to
prevent undue transaction costs. The regulations could also specify the
time period during which any public auction must remain open; seven
days could be specified, for example. Other criteria for how the
auction is conducted could be included in order to ensure its
legitimacy. Interested commenters should include details for RIN
auctions or transactions that they believe should be addressed in
implementing regulations.
    Our proposed program is designed to ensure that the existing market
mechanisms for the distribution of renewable fuel can be used for the
distribution of RINs as well. The need for independent RIN markets is
minimized, and likewise the regulatory oversight of such markets is
minimized. Under the direct transfer alternative described above,
however, not only does an independent RIN market become a central
feature of the RFS program, but the regulations might need to specify
the many various aspects of RIN transfers as described above, and doing
so would represent an intervention into the market that the Agency has
not exercised before. It may be necessary to design the regulatory
provisions in this way in order to have an enforceable program under
this alternative, but we would have to be convinced that such an
approach could be properly structured and that it was superior to other
alternatives.
    Under this option, non-obligated parties such as marketers or
brokers would not be allowed to own RINs. It could be possible to add
in this flexibility, but in effect this option would then operate
similarly to our proposed approach, but with additional complications
and transaction costs due to the fact RINs would not follow batches
through the distribution system. Therefore, we do not believe it is
appropriate to provide this flexibility as part of the direct-transfer
option.
    b. Producer With Open RIN Market. Another approach would allow
producers and importers of renewable fuels to transfer RINs separately
from the renewable fuel to any party. If a renewable fuel producer did
choose to transfer the RIN with the batch, any downstream party would
have the right to separate that RIN from the batch.
    Although we believe that the recordkeeping burden placed upon
marketers and distributors under our proposed program would be minimal,
this alternative approach would essentially eliminate that burden
altogether. Marketers and distributors would not have to ensure that
RINs were transferred with batches and keep a record of those
transfers, and would not be responsible for ensuring that RINs remain
assigned to batches during batch splits and mergers. Any marketer or
distributor that did receive a batch with an assigned RIN could
separate the RIN from the batch and transfer it, maximizing the choices
available to them.

    However, this alternative approach would increase the burdens for
obligated parties to comply with their renewable fuel obligation since
all RINs would be controlled by producers and marketers at the point of
generation. The concerns described above regarding the exercising of
market power in the RIN market by a small number of non-obligated
parties would apply to this alternative. Although these concerns may be
less significant under EIA's current projections that renewable fuel
production volumes will exceed the RFS program requirements, we believe
that we should design the RFS program to function smoothly under any
future market scenario. Since it is possible that the market conditions
leading to EIA's projections could change, we believe that the concern
about producers and marketers exercising market power in the RIN market
is important. As a result, we do not believe that this alternative
approach is most appropriate.
    c. First Purchaser. As under our proposed approach, in this
alternative the renewable fuel producer would be required to assign a
RIN to every batch of renewable fuel and to transfer that RIN with the
batch. However, the first party in the distribution system to take
ownership of the batch would have the right to separate the RIN from
the batch. This means that any non-obligated party that purchased the
renewable fuel from its producer would be able to separate the RIN and
to transfer it independently from the batch.
    The advantage of this alternative approach, as compared to our
proposal, is that it would remove control of the sale of RINs from the
producers. However, the concern raised by refiners about the exercise
of market power in the RIN market remains because only five companies
today manage the majority of ethanol marketing in the U.S. With such a
small number of companies, any one could exert a controlling influence
on the RIN market. In addition, many large producers operate as
marketers for other smaller producers, allowing some producers to be
the first purchaser. As discussed for the previous alternative, we
believe that we should design the RFS program to function smoothly
under any future market scenario, including ones different from those
forming the basis of the current EIA projections. Thus we believe that
the concern about marketers exercising market power in the RIN market
is still important, and as a result we do not believe that the first
purchaser approach offers significant advantages over our proposed
program.
    d. Owner at Time of Blending. An alternative approach to our
proposed option of allowing obligated parties to separate RINs as soon
as they gain ownership would prohibit all parties from separating a RIN
from a batch of renewable fuel until the batch had actually been
blended into gasoline or diesel. The obligated party could retain the
RIN as soon as it gained ownership of the batch, but could not transfer
the RIN or use it for compliance purposes until the renewable fuel that
it represented was actually blended into gasoline or diesel. Thus, a
RIN could be separated from the batch of renewable fuel to which it has
been assigned only at the time of blending, and whomever owns the batch
at the time of blending would also have the right to separate the RIN
and use or transfer it.
    Although we based our proposed program design on the expectation
that all renewable fuels will eventually be consumed as fuel, primarily
through blending with conventional gasoline or diesel, this alternative
approach would provide direct verification of blending. However, we do
not believe that this is necessary in order to provide an enforceable
program, and in fact it would create an additional and unnecessary
burden for blenders.
    As discussed in Section III.D, it is not necessary to track
renewable fuels all the way to the point of blending because we can
confidently treat production volumes as an accurate surrogate for
consumption. This fact provides the basis for our proposed program, and
could also be used in support of the alternatives described previously.
If verification of blending were required before a RIN could be
separated from a batch, both obligated parties and blenders would be
subject to additional recordkeeping and paperwork burdens. The Agency
would be compelled to enforce activities at the blender level, adding
about 1200 parties to the list of those subject to enforcement under
our proposed program.
    By requiring refiners to wait until renewable fuel is blended
before they can separate the RIN, this alternative approach could limit
the potential for one refiner to purchase large volumes of renewable
fuel with the intent of separating the RINs and exercising market power
in the RIN market. However, we do not believe that this represents an
advantage to this alternative since it could not occur under our
proposed program either. There are no geographic limitations to RIN
transfers within the 48 contiguous states, so obligated parties that
need RINs can purchase them from any refiner who has an excess. In
addition, RINs that have been separated from their assigned batches by
oxygenate blenders represent an additional safety valve in the RIN
market, providing additional assurances that no one refiner could
exercise market power in the RIN market, thereby demanding an
unreasonably high price for them.
    For these reasons, we do not believe that requiring renewable fuel
to be blended into gasoline or diesel before a RIN could be separated
from the batch would provide any significant advantages over our
proposed program. However, we request comment on this alternative
approach.
    e. Blender at Time of Blending. Although we have concluded that
production volumes are an accurate surrogate for consumption, thus
eliminating the need to measure renewable fuel volumes at the point of
blending into gasoline or diesel, an alternative approach would do just
that.
    In this alternative program approach, RINs would not be generated
by the producer of the renewable fuel and assigned to batches. Instead,
blenders would keep detailed records of the volumes of renewable fuel
that they blended into gasoline or diesel, and would generate credits
for those volumes. Blenders would be considered obligated parties, but
their obligation would be considered as zero percent to avoid redundant
obligations (i.e., to avoid the blender being responsible for blending
renewable fuel into gasoline for which a refiner or importer also has
an RFS program responsibility). Thus they would generate credits which
could then be sold to a refiner or importer who needs it for compliance
purposes.
    The blender approach would differ from our proposed program and all
the other alternative approaches in that it would be based on actual
blending activity, as compared to ownership of the renewable fuel.
Under this alternative approach, the blender would not use records of
batch ownership to establish generation of credits, but rather would be
required to demonstrate that it had actually blended the renewable fuel
into gasoline or diesel. Since the blender was responsible for
blending, the blender would generate the credits from that blending and
would have the right to transfer them to another party.
    Although blenders could use IRS fuel credit forms to verify the
volumes of ethanol blended into gasoline under this alternative, the
IRS forms would not provide useful information related to biodiesel or
other renewable fuels that are blended into conventional gasoline

or diesel.\36\ Alternative approaches to verifying that these other
renewable fuels were actually blended would therefore need to be
designed under this alternative, and these verifications would
necessarily involve additional recordkeeping and reporting
requirements.
---------------------------------------------------------------------------

    \36\ There is some evidence that biodiesel producers are
operating as blenders in order to claim the right to the Federal
excise tax credit for biodiesel. However, in these cases they often
blend only very small amounts of conventional diesel into biodiesel,
such as 0.1 volume percent. The mixture, identified as B99.9, is
then transported to another blender who often adds significant
additional quantities of conventional diesel to make blends such as
B2 or B20.
---------------------------------------------------------------------------

    This approach would also tend to increase the burdens on refiners
to gain access to credits and thus demonstrate compliance. A refiner
who took ownership of a batch of renewable fuel could not use that
batch to meet its RVO unless he blended it into gasoline or diesel
himself. Such circumstances would create additional complexity for the
obligated parties that are avoided by the more streamlined approach we
are proposing.
    A blender approach would also be difficult to implement. To begin
with, many blenders are small businesses, and none have been
substantially regulated in an EPA fuel program before. We would be
imposing upon these parties the primary enforcement burden associated
with the RFS program even though they are not obligated for meeting the
renewable fuel standard. Also, this approach would not be able to
distinguish between cellulosic biomass ethanol and ethanol made from
other feedstocks, which creates significant difficulties in meeting
program requirements.
    Under a blender approach, even accurate records of blending would
be difficult to verify. There are more than 1200 blenders in the U.S.
who blend ethanol into gasoline, in addition to those that blend
biodiesel into conventional diesel fuel. Thus the blender approach
would maximize the number of parties involved, overly complicating the
compliance system. The enforcement burden on the Agency would be
significant, and ultimately it would be likely that many claims of
blending would go unchecked.
    Some of the concerns raised above could be addressed by re-
introducing the RIN concept into a blender approach. For instance, the
existence of RINs could help identify cellulosic biomass ethanol as
such. However, if a RIN-based system were implemented, this alternative
approach would become very similar to our proposed program, but with
additional enforcement burdens placed upon blenders. As a result the
advantages of this alternative approach over our proposed program would
disappear.
    Due to the additional and unnecessary recordkeeping and reporting
burdens that would be placed upon blenders under this alternative, the
dissociation of credits from renewable fuels acquired by obligated
partiers, and the likelihood that many blending events may go
unchecked, we do not believe that the alternative blender approach
should be adopted.

IV. Registration, Recordkeeping, and Reporting Requirements

A. Introduction

    Registration, recordkeeping and reporting are necessary to track
compliance with the renewable fuels standard and transactions involving
RINs. We are proposing to utilize the same basic forms for registration
that we use under the reformulated gasoline (RFG) and anti-dumping
program.\37\ These forms are well known in the regulated community and
are simple to fill out. Information requested includes company and
facility names and addresses and the identification of a contact person
with phone number and e-mail address. Registrations do not expire and
upon receipt of a completed registration form, EPA will issue unique
company and facility identification numbers that will appear in
compliance reports and, in the case of renewable fuels producers, will
be incorporated in the unique RINs they generate for each batch of
renewable fuel. We intend to use the same simplified registration
method we use for existing fuels programs under 40 CFR part 80, and
parties who have already registered with EPA under an existing fuels
program will not be required to re-register and will be able to use
their existing EPA-issued company and facility registration numbers.
---------------------------------------------------------------------------

    \37\ Please refer to http://www.epa.gov/otaq/regs/fuels/rfgforms.htm.
 The relevant registration forms for our existing fuels

programs are 3520-20A, 3520-20B, and 3520-20B1. Interested parties
may wish to view these forms, as they may be useful in preparing
comments on this proposed rule.
---------------------------------------------------------------------------

    We plan to use a simplified method of reporting via the Agency's
Central Data Exchange (CDX). CDX will permit us to accept reports that
are electronically signed and certified by the submitter in a secure
and robustly encrypted fashion. Guidance for reporting will be issued
prior to implementation and will contain specific instructions and
formats consistent with provisions in the final rule. We intend to
accept electronic reports generated in virtually all commercially
available spreadsheet programs and to permit parties to submit reports
in comma delimited text, which can be generated with a variety of basic
software packages. In order to permit maximum flexibility in meeting
the RFS program requirements, we must track activities involving the
creation and use of RINs, as well as any transactions such as purchase
or sale of RINs. Reports will be included in a compliance database
managed by EPA's Office of Transportation and Air Quality and will be
reviewed for completeness and for potential violations. Potential
violations will be referred to enforcement personnel.
    Records related to RIN transactions may be kept in any format and
the period of record retention by reporting parties is five (5) years,
which is the time frame for retention under similar 40 CFR part 80
fuels compliance reporting programs. Records retained would include
copies of all compliance reports submitted to EPA and copies of product
transfer documents (PTDs). Records would have to be provided to the
Administrator or the Administrator's representative upon request and
they may have to be converted to a readable, usable format.

B. Requirements for Obligated Parties and Exporters of Renewable Fuels

1. Registration
    We are proposing that ``obligated parties'' including refiners,
importers, and blenders of gasoline, as well as exporters of renewable
fuel, must register with EPA by [90 DAYS AFTER FINAL PUBLICATION OF THE
FINAL RULE]. Most refiners and importers are already registered with us
under various regulations related to reformulated (RFG) and
conventional gasoline or diesel fuel. We propose that these existing
registrations be applicable under the renewable fuel standard as well.
Exporters of renewable fuels may not have registered with EPA and we
anticipate perhaps 25 new registrations and 25 updated registrations
because of this program. If a party becomes subject to this proposed
regulation after the effective date, then we propose that they must
register with us and receive their EPA-issued company and facility
registration numbers prior to engaging in any transaction involving
RINs.
    Any party who is not currently registered with us would have to
submit a simple registration form. We will issue a 4-digit company
identification number and, for each facility registered, a 5-digit
facility identification number. Currently registered parties will only
be

responsible for updating company and facility records as the need to
update routine information arises, for example, if corporate points of
contact or addresses change. Currently registered refiners and
importers would continue to use their existing 4-digit company and 5-
digit facility identification numbers.
2. Reporting
    There are three types of reports that would be required of
obligated parties and exporters of renewable fuel. Reports would be
required to be submitted on an annual basis by the February 28
following a given January through December annual compliance period.
    The first type of report would provide the compliance
demonstration. It would require obligated parties to provide
information about their annual volume of gasoline produced or imported,
and would require exporters to provide information about their annual
volume of renewable fuel exported. The report would also describe the
calculation of their corresponding renewable volume obligation (RVO), a
listing of the RINs applied towards the RVO, any deficit carried over
from the previous year, and any deficit carried into the next year.
    The second type of report would provide detailed transactional
information regarding RINs. It would be akin to credit trading reports
submitted by refiners and importers under other fuels programs in 40
CFR part 80, such as the gasoline sulfur program. The purpose of this
report would be to document the ownership, transfer and use of RINs and
to track expired RINs. As such, and noted below, these reports would be
required of any party that owns RINs during the compliance period
covered by the report. The transactional report is necessary because
compliance with the RVO is primarily demonstrated through self-
reporting of RIN trades and therefore it is necessary for Agency
personnel to be able to link transactions involving each unique RIN in
order to verify compliance. We will be able to import reports into our
compliance database and match RINs to transactions across their entire
journey from generation to use. As with our other 40 CFR part 80
compliance-on-average and credit trading programs, many potential
violations are expected to be self-reported. Because the use of RINs
permits great flexibility in meeting the RVO, we believe that obligated
parties and others who create and handle RINs (including brokers) will
benefit from self-reporting.
    The third type of report will summarize RIN activities for the
previous year and will include the total number of RINs owned, used for
compliance, transferred and expired. This report would not include
details of every RIN owned or used, since this information would be
included in the compliance and transactional reports. Instead, this
third report would simply summarize the total number of RINs falling
into different categories.
    All reports submitted to us would have to be signed and certified
as true and correct by a responsible corporate officer. This can be
done electronically. As discussed above, we plan to utilize a highly
simplified electronic method of reporting via the Agency's Central Data
Exchange that is secure, provides encryption and reliable electronic
signatures, and that permits us to accept reports in the submitter's
choice of simple comma delimited text or commercially available
spreadsheet packages.
    We are proposing annual reporting only. However, we encourage
comments related to the frequency of reporting. We are particularly
interested in comments related to the frequency of transactional
reports related to RINs and whether these reports should be submitted
quarterly rather than annually. We also request comment on our proposed
requirement that three distinct types of reports be submitted for each
calendar year, specifically whether these reports could be simplified
or whether a smaller number of reports could provide the same
information.
3. Recordkeeping
    The proposed recordkeeping requirements for obligated parties and
exporters of renewable fuel support the enforcement of the use of RINs
for compliance purposes. Product transfer documents (PTDs) are central
to tracking individual RINs through the fungible distribution system
when those RINs are assigned to batches of renewable fuel. PTDs are
customarily issued in the course of business (i.e., issuing them is a
``customary business practice'') and are familiar to parties who
transfer or receive fuel. As with other fuels programs, PTDs may take
many forms, including bills of lading, as long as they travel with the
volume of renewable fuel being transferred. Specifically, we propose
that on each occasion any person transfers ownership of renewable fuels
subject to this proposed regulation that they provide the transferee
documents identifying the renewable fuel and containing identifying
information including the name and address of the transferor and
transferee, the EPA-issued company and facility IDs of the transferor
and transferee, the volume of renewable fuel that is being transferred,
the location of the renewable fuel at the time of transfer, and the
unique RIN associated with the volume of fuel being transferred, if
any. PTDs are used by all parties in the distribution chain down to the
retail outlet or wholesale purchaser-consumer facility that dispenses
it into motor vehicles.
    Except for transfers to truck carriers, retailers or wholesale
purchaser-consumers, product codes describing various attributes of the
fuel may be used to convey the information required for PTDs, as long
as the codes are clearly understood by each transferee. Therefore,
refiners and importers and exporters of renewable fuel may use codes.
The RIN would always have to appear on each PTD in its entirety before
it is separated from a batch, since it is a unique identification
number and cannot be summarized by a shorter code.
    Obligated parties and exporters of renewable fuel would have to
keep copies of PTDs and of all compliance reports submitted to EPA for
a period of not less than five (5) years. The five year period is
common to all our 40 CFR part 80 programs and is a reasonable period to
retain records in the event a potential violation is reported and must
be investigated and pursued by enforcement personnel. They would also
have to keep information related to the sale, purchase, brokering and
trading of RINs that support the information they report to EPA.
Refiners and importers would be responsible for providing records to
the Administrator or the Administrator's authorized representative in a
usable format upon request.

C. Requirements for Producers and Importers of Renewable Fuel

1. Registration
    We propose that any producer or importer of renewable fuel must
register by [90 DAYS AFTER THE DATE OF FINAL PUBLICATION OF THE FINAL
RULE]. The registration requirements are the same as those for refiners
and importers of gasoline, as described above. Renewable fuel producers
were not previously required to register with EPA and we anticipate
around 280 new registrants as a result of this proposed registration
requirement. Although renewable fuels producers are not ``obligated
parties,'' they are the parties who generate RINs. As mentioned above
in IV.B.1, the EPA-issued registration numbers will be part of the
unique RIN generated by the producer or importer of renewable fuel. In
order to support effective recordkeeping and reporting

for compliance purposes, we believe it is necessary for them and any
party who generates or owns RINs to register with the Agency.
    Registration is a simple process and there is no expiration date
associated with a registration. However, registration information may
be updated by the registrant as needed, for example, if a mailing
address changes. The information collected includes company name and
address; facility name(s) and address(es); and a contact person's name,
phone number and e-mail address. Any party who is not currently
registered with us would have to submit registration forms. We will
issue a 4-digit company identification number and, for each facility
registered, a 5-digit facility identification number. If a party
becomes subject to this proposed regulation after the effective date,
then we propose that they must register with us and receive their EPA-
issued company and facility identification numbers prior to generating
or holding any RINs.
    We also propose that small volume domestic producers of renewable
fuels, those who produce less than 10,000 gallons per year, be allowed
to remain unregistered. This proposed provision would free them from
recordkeeping and reporting requirements, but it would also preclude
them from generating RINs.
2. Reporting
    Renewable fuel producers and importers would be required to submit
three different annual reports by February 28, reflecting activity
during the previous calendar year. The first report would be an annual
report that reflects the generation of RINs. This report would identify
each batch of renewable fuel produced or imported during the previous
year and the RINs generated for each batch. This annual report would
provide information about the production date, renewable fuel type and
volume of renewable fuel produced or imported. For specific information
about how RINs are actually generated, please refer to the discussion
in Section III.D.2 of this preamble.
    Like any of the parties who can own RINs, a renewable fuel producer
would also have to submit a second type of report detailing
transactional information regarding RINs. This report would list the
RINs which they own at the end of the reporting period as well as any
RINs they have acquired from other parties or have transferred to other
parties, identifying which parties took part in the transfer. This
report would be similar to the transaction report described below
required of RIN owners who are not obligated parties, exporters, or
producers of renewable fuels.
    Finally, each producer or importer of renewable fuel would be
required to submit a third annual report summarizing RIN activities for
the previous year. This report would include the total number of RINs
generated, owned, transferred, and expired.
    All reports would have to be signed and certified as true and
correct by a responsible corporate officer. This can be done
electronically. As discussed above, we plan to utilize a highly
simplified electronic method of reporting via the Agency's Central Data
Exchange that is secure, provides encryption and reliable electronic
signatures, and that permits generation of reports in the submitter's
choice of simple comma delimited text or commercially available
spreadsheet packages.
    We request comment on our proposed requirement that three distinct
types of reports be submitted for each calendar year, specifically
whether these reports could be simplified or whether a smaller number
of reports could provide the same information.
3. Recordkeeping
    The proposed recordkeeping requirements for renewable fuels
producers support the enforcement of the use of RINs for compliance
purposes. Product transfer documents (PTDs) are central to tracking
individual RINs through the fungible distribution system when those
RINs are assigned to batches of renewable fuel. PTDs are customarily
generated and issued in the course of business (i.e. issuing them is a
``customary business practice'') and are familiar to parties who
transfer or receive fuel. As with other fuels programs, PTDs may take
many forms, including bills of lading, as long as they travel with the
volume of renewable fuel being transferred. Specifically, we propose
that on each occasion any person transfers ownership of renewable fuels
subject to this proposed regulation that they provide the transferee
documents identifying the renewable fuel and containing identifying
information including the name and address of the transferor and
transferee, the EPA-issued company and facility IDs of the transferor
and transferee, the volume of renewable fuel that is being transferred,
the location of the renewable fuel at the time of transfer, and the
unique RIN associated with the volume of fuel being transferred, if
any. PTDs are used by all parties in the distribution chain down to the
retail outlet or wholesale purchaser-consumer facility that dispenses
it into motor vehicles.
    Except for transfers to truck carriers, retailers or wholesale
purchaser-consumers, product codes may be used to convey the
information required for PTDs, as long as the codes are clearly
understood by each transferee. Therefore, renewable fuels producers may
use codes. The RIN would always have to appear on each PTD in its
entirety before it was separated from the batch, since it is a unique
identification number and cannot be summarized by a shorter code.
    Renewable fuels producers would have to keep copies of PTDs and of
all compliance reports submitted to EPA for a period of not less than
five (5) years. They would also have to keep information related to the
sale, purchase, brokering and trading of RINs. Upon request, renewable
fuels producers or importers would be responsible for providing
documentation of PTDs to the Administrator or the Administrator's
authorized representative in a usable format.

D. Requirements for Other Parties Who Own RINs

1. Registration
    We propose that other parties who intend to own RINs, and who are
not obligated parties, exporters of renewable fuels, or renewable fuels
producers or importers, must also register before ownership of any RINs
is assumed. The registration requirements are the same as those for
other parties discussed previously in Sections IV.B.1 and IV.C.1 above,
and require the registrant to provide very basic information about the
company, its facility or facilities, and a contact person. The
registration is on very simple forms provided by EPA. A variety of
parties may own RINs including (but certainly not limited to)
marketers, blenders, terminal operators, and jobbers. (As is mentioned
in the previous two sections, obligated parties and renewable producers
may also own RINs but have other reporting responsibilities, as well.)
    It is possible to own RINs separately from batches of renewable
fuel. For example, a broker might be expected to own RINs in this
fashion. Any party who is not currently registered with us and who
intends to own RINs would have to submit a simple registration form, as
described above. We anticipate about 1,500 new registrants as a result
of this proposed registration requirement, although an exact estimation
of the number of parties that will constitute this group is difficult
to

make. As with the other parties described in this Section, we will
issue a 4-digit company identification number and, for each facility
registered, a 5-digit facility identification number. If a party
becomes subject to this proposed regulation after the effective date,
then we propose that they must register with us and receive their EPA-
issued company and facility identification numbers prior to owning any
RINs.
2. Reporting
    Parties who own RINs would be required to submit two types of
annual reports by February 28, representing activity in the previous
calendar year. The first report would document RIN transactions. This
report is akin to the credit trading reports submitted by refiners and
importers under other fuels programs in 40 CFR part 80 and is the same
as the second report described for obligated parties in some detail in
Section IV.B.2 above.
    The second type of report would summarize RIN activities for the
previous year, including the total number of RINs owned, transferred,
and expired. This report would not include details of every RIN owned
or used, since this information would be included in the transactional
report. Instead, this report would simply summarize the total number of
RINs falling into different categories.
    All reports would have to be signed and certified as true and
correct by a responsible corporate officer. This can be done
electronically. As discussed above, we plan to utilize a highly
simplified electronic method of reporting via the Agency's Central
Data.
    As discussed above, we are seeking comments on the frequency of
reporting, especially with regard to RIN transactions. We are proposing
annual reporting, but are seeking comments on whether reporting should
be quarterly.
    We also request comment on our proposed requirement that two
distinct types of reports be submitted for each calendar year,
specifically whether these reports could be simplified or whether a
smaller number of reports could provide the same information.
3. Recordkeeping
    The proposed recordkeeping requirements for parties who own RINs
support the enforcement of the use of RINs for compliance purposes.
Product transfer documents (PTDs) are central to tracking individual
RINs through the fungible distribution system when those RINs are
assigned to batches of renewable fuel. PTDs are customarily generated
and issued in the course of business (i.e., issuing them is a
``customary business practice'') and are familiar to parties who
transfer or receive fuel. As with other fuels programs, PTDs may take
many forms, including bills of lading, as long as they travel with the
volume of renewable fuel being transferred. Specifically, we propose
that on each occasion any person transfers ownership of RINs (whether
assigned to batches of renewable fuel or not) that they provide the
transferee documents identifying the RIN and containing identifying
information including the name and address of the transferor and
transferee, the EPA-issued company and facility IDs of the transferor
and transferee, and the unique RINs that are being transferred.
Typically, parties who own RINs connected with batches of fuel would
handle PTDs; however, parties who own RINs separate from batches may
not. A party who owns RINs in connection with fuel and who received a
PTD would be responsible for meeting requirements related to PTDs.
    Parties who own RINs but who are not obligated parties, exporters
of renewable fuel, or renewable fuel producers or importers would have
to keep copies of PTDs associated with RIN transfers and of all
compliance reports submitted to EPA for a period of not less than five
(5) years. They would also have to keep information related to the
sale, purchase, brokering and trading of RINs. Upon request, owners of
RINs would be responsible for providing records to the Administrator or
the Administrator's authorized representative in a usable format.

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

    The prohibition and liability provisions applicable to this
proposed RFS program would be similar to those of other gasoline
programs. The proposed rule identifies certain prohibited acts, such as
a failure to acquire sufficient RINs to meet a party's renewable fuel
obligation (RVO), producing or importing a renewable fuel that is not
assigned a proper RIN, creating or transferring invalid RINs, or
transferring RINs that are not identified by proper RIN numbers. 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 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 the RFS 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
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.
    The Energy Act 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).\38\ Accordingly, under
the proposed rule, any person who violates any prohibition or
requirement of the RFS program may be subject to civil penalties 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.
---------------------------------------------------------------------------

    \38\ Sec. 1501(b) of the Energy Policy Act of 2005.
---------------------------------------------------------------------------

    As discussed above and in Section III.D, the regulations would
prohibit any party from creating or transferring invalid RINs. These
invalid RIN provisions would apply regardless of the good faith belief
of a party that the RINs were valid. These enforcement provisions are
necessary to ensure the RFS 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 refiner or importer that used the invalid RINs would be
required to deduct any invalid RINs from its compliance calculations.
The refiner or importer 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 investigation
of the RIN transfer. A penalty might include both the economic benefit
of using invalid RINs and/or a gravity component.
    Although an obligated party would be liable under our proposed
program for a violation if it used invalid RINs for compliance
purposes, we would normally look first to the generator or seller of
the invalid RINs both for payment of penalty and to procure sufficient
valid RINs to offset the invalid RINs. However, if, for example, that
party was out of business, then attention would turn to the obligated
party who would have to obtain sufficient valid RINs to offset the
invalid RINs.
    Because there are no standards under the RFS rule that may be
measured downstream, we believe that a presumptive liability scheme,
i.e., a scheme in which parties upstream from the facility where the
violation is found are presumed liable for the violation, would not be
applicable under the RFS program. We request comment on whether a
presumptive liability scheme may have application under the RFS rule.
We also request comment on the need for additional prohibition and
liability provisions specific to the proposed RFS program.

VI. Current and Projected Renewable Fuel Production and Use

    While the definition of renewable fuel does not limit compliance
with the standard to any one particular type of renewable fuel, ethanol
is currently the most prevalent renewable fuel blended into gasoline
today. Biodiesel represents another renewable fuel, which while not as
widespread as ethanol use (in terms of volume), has been increasing in
production capacity and use over the last several years. This section
provides a brief overview of the ethanol and biodiesel industries today
and how they are projected to grow into the future.

A. Overview of U.S. Ethanol Industry and Future Production/Consumption

1. Current Ethanol Production
    As of June 2006, there were 102 ethanol production facilities
operating in the United States with a combined production capacity of
approximately 4.9 billion gallons per year.\39\ All of the ethanol
currently produced comes from grain or starch-based feedstocks that can
easily be broken down into ethanol via traditional fermentation
processes. The majority of ethanol (almost 93 percent by volume) is
produced exclusively from corn. Another 7 percent comes from a blend of
corn and/or similarly processed grains (milo, wheat, or barley) and
less than 1 percent is produced from waste beverages, cheese whey, and
sugars/starches combined. A summary of ethanol production by feedstock
is presented in Table VI.A.1-1.
---------------------------------------------------------------------------

    \39\ The June 2006 ethanol production baseline was generated
from a variety of data sources including Renewable Fuels Association
(RFA), Ethanol Biorefinery Locations (Updated June 19, 2006);
Ethanol Producer Magazine (EPM), U.S. & Canada Fuel Ethanol Plant
Map (Spring 2006); and International Fuel Quality Center (IFQC),
Special Biofuels Report 75 (April 11, 2006) as well as
ethanol producer websites. The production baseline includes small-
scale ethanol production facilities as well as former food-grade
ethanol plants that have since transitioned into the fuel-grade
ethanol market. Where applicable, current ethanol plant production
levels were used to represent plant capacity, as nameplate
capacities are often underestimated.

                           Table VI.A.1-1.--2006 U.S. Ethanol Production by Feedstock
----------------------------------------------------------------------------------------------------------------
                                                                Capacity    Percent of   Number of    Percent of
                       Plant feedstock                          MMGal/yr     capacity      plants       plants
----------------------------------------------------------------------------------------------------------------
Corn a......................................................        4,516         92.7           85         83.3
Corn/Milo...................................................          162          3.3            5          4.9
Corn/Wheat..................................................           90          1.8            2          2.0
Corn/Barley.................................................           40          0.8            1          1.0
Milo/Wheat..................................................           40          0.8            1          1.0
Waste Beverage b............................................           16          0.3            5          4.9
Cheese Whey.................................................            8          0.2            2          2.0
Sugars & Starches...........................................            2          0.0            1          1.0
                                                             ---------------------------------------------------
    Total...................................................        4,872        100.0          102        100.0
----------------------------------------------------------------------------------------------------------------
a Includes seed corn.
b Includes brewery waste.

    There are a total of 94 plants processing corn and/or other
similarly processed grains. Of these facilities, 84 utilize dry milling
technologies and the remaining 10 plants rely on wet-milling processes.
Dry mill ethanol plants grind the entire kernel and produce only one
primary co-product: distillers' grains with solubles (DGS). The co-
product is sold wet (WDGS) or dried (DDGS) to the agricultural market
as animal feed. Carbon dioxide is also produced in the process and may
be recovered as a saleable product. In contrast to dry mill plants, wet
mill facilities separate the kernel prior to processing and in turn
produce other co-products (usually gluten feed, gluten meal, and oil)
in addition to DGS. Wet mill plants are generally more costly to build
but are larger in size on average. As such, approximately 23 percent of
the current ethanol production comes from the 10 previously-mentioned
wet mill facilities.
    The remaining 8 plants which process waste beverages, cheese whey,
or sugars/starches, operate differently than their grain-based
counterparts. These facilities do not require milling and instead
operate a more simplistic enzymatic fermentation process.
    In addition to grain and starch-to-ethanol production, another
method exists for producing ethanol from a more diverse feedstock base.
This process involves converting cellulosic feedstocks such as bagasse,
wood, straw, switchgrass, and other biomass into ethanol. Cellulose
consists of tightly-linked polymers of starch, and production of
ethanol from it requires additional steps to convert these polymers
into fermentable sugars. Scientists are actively pursuing acid and
enzyme hydrolysis to achieve this goal, but the technologies are still
not fully developed for large-scale commercial production. As of June
2006, there were no U.S ethanol plants processing cellulosic
feedstocks. Currently, the only known cellulose-to-ethanol plant in
North America is Iogen in Canada, which produces approximately one

million gallons of ethanol per year from wood chips. For a more
detailed discussion on cellulosic ethanol production/technologies,
refer to Section 7.1.2 of the Draft Regulatory Impact Analysis (DRIA).
    The ethanol production process is relatively resource-intensive and
requires the use of water, electricity and steam. Steam needed to heat
the process is generally produced onsite or by other dedicated boilers.
Of today's 102 ethanol production facilities, 98 burn natural gas, 2
burn coal, 1 burns coal and biomass, and 1 burns syrup from the process
to produce steam. A summary of ethanol production by plant energy
source is found below in Table VI.A.1-2.

                         Table VI.A.1-2.--2006 U.S. Ethanol Production by Energy Source
----------------------------------------------------------------------------------------------------------------
                                                                Capacity    Percent of   Number of    Percent of
                        Energy source                           MMGal/yr     capacity      plants       plants
----------------------------------------------------------------------------------------------------------------
Natural Gas \a\.............................................        4,671         95.9           98         96.1
Coal........................................................          102          2.1            2          2.0
Coal & Biomass..............................................           50          1.0            1          1.0
Syrup.......................................................           49          1.0            1          1.0
                                                             ---------------------------------------------------
    Total...................................................        4,872        100.0          102        100.0
----------------------------------------------------------------------------------------------------------------
\a\ Includes a natural gas facility which is considering transitioning to coal.

    Currently, 7 of the 102 ethanol plants utilize co-generation or
combined heat and power (CHP) technology. CHP is a mechanism for
improving overall plant efficiency. CHP facilities produce their own
electricity (or coordinate with the local municipality) and use
otherwise-wasted exhaust gases to help heat their process, reducing the
overall demand for boiler fuel.
    The majority of ethanol is produced in the Midwest within PADD 2--
not surprisingly, where most of the corn is grown. Of the 102 U.S.
ethanol production facilities, 93 are located in Midwest. The PADD 2
facilities account for about 97 percent (or 4.7 billion gallons per
year) of the total domestic ethanol production, as shown in Table
VI.A.1-3.

                              Table VI.A.1-3.--2006 U.S. Ethanol Production by PADD
----------------------------------------------------------------------------------------------------------------
                                                                Capacity    Percent of   Number of    Percent of
                            PADD                                MMgal/yr     capacity      plants       plants
----------------------------------------------------------------------------------------------------------------
PADD 1......................................................          0.4          0.0            1          1.0
PADD 2......................................................        4,710         96.7           93         91.2
PADD 3......................................................           30          0.6            1          1.0
PADD 4......................................................           98          2.0            4          3.0
PADD 5......................................................           34          0.7            3          2.9
                                                             ---------------------------------------------------
    Total...................................................        4,872        100.0          102        100.0
----------------------------------------------------------------------------------------------------------------

    Leading the Midwest in ethanol production are Iowa, Illinois,
Nebraska, Minnesota, and South Dakota with a combined capacity of 3.9
billion gallons per year. Together, these five states' 69 ethanol
plants account for 80 percent of the total domestic product. Although
the majority of ethanol production comes from the Midwest, there is a
sprinkling of plants situated outside the corn belt ranging from
California to Tennessee all the way down to Georgia.
    The U.S. ethanol industry is currently comprised of a mixture of
corporations and farmer-owned cooperatives (co-ops). More than half
(55) of today's plants are owned by corporations and, on average, these
plants are larger in size than farmer-owned co-ops. Accordingly,
company-owned plants account for nearly 65 percent of the total U.S.
ethanol production capacity. Additionally, 45 percent of the total
capacity comes from 22 plants owned by just 8 different companies.
2. Expected Growth in Ethanol Production
    Over the past 25 years, domestic fuel ethanol production has
steadily increased due to technological advances, environmental
regulation (e.g., oxygenate requirements in ozone and carbon monoxide
non-attainment areas), and the rising cost of crude oil. More recently,
ethanol production has soared due to state MTBE bans, steep increases
in crude oil prices, and producer tax incentives. As shown below in
Figure VI.A.2-1, over the past three years, domestic ethanol production
has nearly doubled from 2.1 billion gallons in 2002 to 4.0 billion
gallons in 2005.

[GRAPHIC] [TIFF OMITTED] TP22SE06.002

    EPA forecasts ethanol production to continue to grow into the
future. In addition to the past impacts of Federal and state tax
incentives, as well as the more recent impacts of state ethanol
mandates and the removal of MTBE from all U.S. gasoline, record-high
crude oil prices are expected to continue to drive up demand for
ethanol. As a result, the nation is on track to exceed the renewable
fuel volume requirements contained in the Act. Today's ethanol
production capacity (4.9 billion gallons) is already exceeding the 2006
renewable fuel requirement (4.0 billion gallons). In addition, there is
another 2.5 billion gallons of ethanol production capacity currently
under construction.\40\ A summary of the new construction and expansion
projects currently underway (as of June 2006) is found in Table VI.A.2-
1.
---------------------------------------------------------------------------

    \40\ Under construction plant locations, capacities, feedstocks,
and energy sources as well as planned/proposed plant locations and
capacities were derived from a variety of data sources including
Renewable Fuels Association (RFA), Ethanol Biorefinery Locations
(Updated June 19, 2006); Ethanol Producer Magazine (EPM), U.S. &
Canada Fuel Ethanol Plant Map (Spring 2006); and International Fuel
Quality Center (IFQC), Special Biofuels Report 75 (April
11, 2006) as well as ethanol producer Web sites.

                                             Table VI.A.2-1.--Under Construction U.S. Ethanol Plant Capacity
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   2006 ETOH baseline     New construction      Plant expansions     2006 baseline + UC
                                                                 ------------------------------------------------------------------          \a\
                                                                                ---------------------
                                                                   MMGal/yr    Plants    MMGal/yr    Plants    MMGal/yr    Plants    MMGal/yr    Plants
--------------------------------------------------------------------------------------------------------------------------------------------------------
PADD 1..........................................................        0.4          1          0          0          0          0        0.4          1
PADD 2..........................................................      4,710         93      2,048         35        252          8      7,010        128
PADD 3..........................................................         30          1         30          1          0          0         60          2
PADD 4..........................................................         98          4         50          1          7          1        155          5
PADD 5..........................................................         34          3         90          2          0          0        124          5
                                                                 ---------------------------------------------------------------------------------------

[[Continued on page 55601]]

]

[[pp. 55601-55651]] Regulation of Fuels and Fuel Additives: Renewable Fuel Standard
Program

[[Continued from page 55600]]

    Total.......................................................      4,872        102      2,218         39        259          9      7,349        141
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Under Construction.

    A select group of builders, technology providers, and construction
contractors are completing the majority of the construction projects
described in Table VI.A.2-1. As such, the completion dates of these
projects are staggered over approximately 18 months, resulting in the
gradual phase-in of ethanol production shown in Figure VI.A.2-2.
[GRAPHIC] [TIFF OMITTED] TP22SE06.003

    As shown in Table VI.A.2-1 and Figure VI.A.2-2, once all the
construction projects currently underway are complete (estimated by
December 2007), the resulting U.S. ethanol production capacity would be
over 7.3 billion gallons. Together with estimated biodiesel production
(300 million gallons by 2012), this would be more than enough renewable
fuel to satisfy the 2012 renewable fuel requirement (7.5 billion
gallons) contained in the Act. However, ethanol production is not
expected to stop here. There are more and more ethanol projects being
announced each day. Many of these potential projects are at various
stages of planning, such as conducting feasibility studies, gaining
city/county approval, applying for permits, applying for financing/
fundraising, or obtaining contractor agreements. Other projects have
been proposed or announced, but have not entered the formal planning
process. If all these plants were to come to fruition, the combined
domestic ethanol production could exceed 20 billion gallons as shown in
Table VI.A.2-2.

                                               Table VI.A.2-2.--Potential U.S. Ethanol Production Projects
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   2006 baseline + UC          Planned              Proposed        Total ETOH potential
                                                                          \a\          -----------------------------------------------------------------
                                                                -----------------------
                                                                  MMGal/yr     Plants    MMGal/yr    Plants    MMGal/yr    Plants    MMGal/yr    Plants
--------------------------------------------------------------------------------------------------------------------------------------------------------
PADD 1.........................................................         0.4          1        250          3      1,005         21      1,255         25
PADD 2.........................................................     7,010          128      1,940         15      7,508         90     16,458        233
PADD 3.........................................................        60            2        108          1        599          9        767         12
PADD 4.........................................................       155            5          0          0        815         14        970         19
PADD 5.........................................................       124            5        128          2        676         18        928         25
                                                                ----------------------------------------------------------------------------------------
    Total......................................................     7,349          141      2,426         21     10,603        152     20,378        314
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Under Construction.

    However, although there is clearly a great potential for growth in
ethanol production, it is unlikely that all the announced projects
would actually reach completion in a reasonable amount of time. There
is no precise way to know exactly which plants would come to fruition
in the future; however, we've chosen to focus our further discussions
on only those plants which are under construction or in the final
planning stages (denoted as ``planned'' above in Table VI.A.2-2). The
distinction between ``planned'' versus ``proposed'' is that as of June
2006 planned projects had completed permitting, fundraising/financing,
and had builders assigned with definitive construction timelines
whereas proposed projects did not.
    As shown in Table VI.A.2-2, once all the under construction and
planned projects are complete (by 2012 or sooner), the resulting U.S.
ethanol production capacity would be 9.8 billion gallons, exceeding the
2012 EIA demand estimate (9.6 billion gallons). This forecasted growth
would double today's production capacity and greatly exceed the 2012
renewable fuel requirement (7.5 billion gallons). In addition, domestic
ethanol production would be supplemented by imports, which are also
expected to increase in the future (as discussed in DRIA Section 1.5).
    Of the 60 forecasted new ethanol plants (39 under construction and
21 planned), all would (at least initially) rely on grain-based
feedstocks. Of the plants, 56 would rely exclusively on corn as a
feedstock. As for the remaining plants: Two would rely on both corn and
milo, one would process molasses and sweet sorghum, and the last would
start off processing corn and then transition into processing bagasse,
rice hulls, and wood.
    Under the Energy Act, the RFS program requires that 250 million
gallons of the renewable fuel consumed in 2013 and beyond meet the
definition of cellulosic biomass ethanol. As discussed in Section
III.B.1, the Act defines cellulosic biomass ethanol as ethanol derived
from any lignocellulosic or hemicellulosic matter that is available on
a renewable or recurring basis including dedicated energy crops and
trees, wood and wood residues, plants, grasses, agricultural residues,
fibers, animal wastes and other waste materials, and municipal solid
waste. The term also includes any ethanol produced in facilities where
animal or other waste materials are digested or otherwise used to
displace 90 percent of more of the fossil fuel normally used in the
production of ethanol.
    Of the 60 forecasted plants, only one is expected to meet the
definition of ``cellulosic biomass ethanol'' based on feedstocks. The
planned 108 MMgal/yr facility would start off processing corn and then
transition into processing bagasse, rice hulls, and wood (cellulosic
feedstocks). It is unclear as to whether this facility would be
processing cellulosic material by 2013, however there are several other
facilities that could potentially meet the Act's definition of
cellulosic ethanol based on plant energy sources. In total, there are
seven ethanol plants that burn or plan to burn renewable feedstocks to
generate steam for their processes. As shown in Table VI.A.1-2, two
existing plants burn renewable feedstocks. One plant burns a
combination of coal and biomass and the other burns syrup from the
production process. Together these existing plants have a combined
ethanol production capacity of 99 MMgal/yr. Additionally, there are
four under construction ethanol plants which plan to burn renewable
fuels. One plant plans to burn a combination of coal and biomass, two
plants plan to rely on manure/syngas, and the other plans to start up
burning natural gas and then transition to biomass. Together these
under construction facilities have a combined ethanol production
capacity of 87 MMgal/yr. Finally, a planned 275 MMgal/yr ethanol
production facility plans to burn a combination of coal, tires, and
biomass. Depending on how much fossil fuel is displaced by these
renewable feedstocks (on a plant-by-plant basis), a portion or all of
the aforementioned ethanol production (up to 461 MMgal/yr) could
potentially qualify as ``cellulosic biomass ethanol'' under the Act.
Combined with the 108 MMgal/yr plant planning to process renewable
feedstocks, the total cellulosic potential could be as high as 569
MMgal/yr in 2013. Even if only half of this ethanol were to end up
qualifying as cellulosic biomass ethanol, it would still be more than
enough to satisfy the Act's cellulosic requirement (250 million
gallons).\41\
---------------------------------------------------------------------------

    \41\ We anticipate a ramp-up in cellulosic ethanol production in
the years to come so that capacity exists to satisfy the 2013 Act's
requirement (250 million gallons of cellulosic biomass ethanol).
Therefore, for subsequent analysis purposes, we have assumed that
250 million gallons of ethanol would come from cellulosic biomass
sources by 2012.
---------------------------------------------------------------------------

3. Current Ethanol and MTBE Consumption
    To understand the impact of the increased ethanol production/use on
gasoline properties and in turn overall air quality, we first need to
gain a better understanding of where ethanol is used today and how the
picture is going to change in the future. As such, in addition to the
production analysis presented above, we have completed a parallel
consumption analysis comparing current ethanol consumption to future
predictions.
    In the 2004 base case, 3.5 billion gallons of ethanol \42\ and 1.9
billion gallons of MTBE \43\ were blended into gasoline to supply the
transportation sector with a total of 136 billion gallons of
gasoline.\44\ A breakdown of the 2004 gasoline and oxygenate
consumption by PADD is found below in Table VI. A.3-1.
---------------------------------------------------------------------------

    \42\ EIA Monthly Energy Review, June 2006 (Table 10.1: Renewable
Energy Consumption by Source, Appendix A: Thermal Conversion
Factors).
    \43\ File containing historical RFG MTBE usage obtained from EIA
representative on March 9, 2006.
    \44\ EIA 2004 Petroleum Marketing Annually (Table 48: Prime
Supplier Sales Volumes of Motor Gasoline by Grade, Formulation, PAD
District, and State).

                       Table VI.A.3-1.--2004 U.S. Gasoline & Oxygenate Consumption by PADD
----------------------------------------------------------------------------------------------------------------
                                                                       Ethanol                  MTBE \a\
                      PADD                         Gasoline  ---------------------------------------------------
                                                    MMgal        MMgal       Percent       MMgal       Percent
----------------------------------------------------------------------------------------------------------------
PADD 1.........................................       49,193          660         1.34        1,360         2.76
PADD 2.........................................       38,789        1,616         4.17            1         0.00
PADD 3.........................................       20,615           79         0.38          498         2.42
PADD 4.........................................        4,542           83         1.83            0         0.00
PADD 5 \b\.....................................        7,918          209         2.63           19         0.23
California.....................................       14,836          853         5.75            0         0.00
                                                ----------------------------------------------------------------
    Total......................................      135,893        3,500         2.58        1,878         1.38
----------------------------------------------------------------------------------------------------------------
\a\ MTBE blended into RFG.
\b\ PADD 5 excluding California.

    As shown above, nearly half (or about 45 percent) of the ethanol
was consumed in PADD 2 gasoline, not surprisingly, where the majority
of ethanol was produced. The next highest region of use was the State
of California which accounted for about 25 percent of domestic ethanol
consumption. This is reasonable because California alone accounts for
over 10 percent of the nation's total gasoline consumption and all the
fuel (both Federal RFG and California Phase 3 RFG) has been assumed to
contain ethanol (following their recent MTBE ban) at 5.7 volume
percent.\45\ The bulk of the remaining ethanol was used in reformulated
gasoline (RFG) and winter oxy-fuel areas requiring oxygenated gasoline.
Overall, 62 percent of ethanol was used in RFG, 33 percent was used in
CG, and 5 percent was used in winter oxy-fuel.\46\
---------------------------------------------------------------------------

    \45\ Based on conversation with Dean Simeroth at California Air
Resources Board (CARB).
    \46\ For the purpose of this analysis, except where noted, the
term pertains to Federal RFG plus California Phase 3 RFG (CaRFG3)
and Arizona Clean Burning Gasoline (CBG).
---------------------------------------------------------------------------

    As shown above in Table VI.A.3-1, 99 percent of MTBE use occurred
in PADDs 1 and 3. This reflects the high concentration of RFG areas in
the northeast (PADD 1) and the local production of MTBE in the gulf
coast (PADD 3). PADD 1 receives a large portion of its gasoline from
PADD 3 refineries who either produce the fossil-fuel based oxygenate or
are closely affiliated with MTBE-producing petrochemical facilities in
the area. Overall, 100 percent of MTBE in 2004 was assumed to be used
in reformulated gasoline.\47\
---------------------------------------------------------------------------

    \47\ 2004 MTBE consumption was obtained from EIA. The data
received was limited to states with RFG programs, thus MTBE use was
assumed to be limited to RFG areas for the purpose of this analysis.
---------------------------------------------------------------------------

    In 2004, total ethanol use exceeded MTBE use. Ethanol's lead
oxygenate role is relatively new, however the trend has been a work in
progress over the past few years. From 2001 to 2004, ethanol
consumption more than doubled (from 1.7 to 3.5 billion gallons), while
MTBE use (in RFG) was virtually cut in half (from 3.7 to 1.9 billion
gallons). A plot of oxygenate use over the past decade is provided
below in Figure VI.A.3-1.
    The nation's transition to ethanol is linked to states'' responses
to recent environmental concerns surrounding MTBE groundwater
contamination. Resulting concerns over drinking water quality have
prompted several states to significantly restrict or completely ban
MTBE use in gasoline. At the time of this analysis, 19 states had
adopted MTBE bans. A list of the states with MTBE bans is provided in
DRIA Table 2.1-4.

[GRAPHIC] [TIFF OMITTED] TP22SE06.004

4. Expected Growth in Ethanol Consumption
---------------------------------------------------------------------------

    \48\ Total ethanol use based on EIA Monthly Energy Review, June
2006 (Table 10.1: Renewable Energy Consumption by Source, Appendix
A: Thermal Conversion Factors). MTBE use in RFG also provided by EIA
(file received from EIA representative on March 9, 2006). Reported
2004 MTBE use has been adjusted from 2.0 to 1.9 Bgal based on
assumption of timely implementation of CA, CT, and NY MTBE bans on
1/1/04 (EIA reported a slight delay and thus showed small amounts of
MTBE use in these states in 2004).
---------------------------------------------------------------------------

    As mentioned above, ethanol demand is expected to increase well
beyond the levels contained in the renewable fuels standard (RFS) under
the Act. With the removal of the oxygenate mandate for reformulated
gasoline (RFG),\49\ all U.S. refiners are expected to eliminate the use
of MTBE in gasoline as soon as possible. In order to accomplish this
transition quickly (by 2006 or 2007 at the latest) while maintaining
gasoline volume, octane, and mobile source air toxics emission
performance standards, refiners are electing to blend ethanol into
virtually all of their RFG.\50\ This has caused a dramatic increase in
demand for ethanol which, in 2006 is being met by temporarily shifting
large volumes of ethanol out of conventional gasoline and into RFG
areas. By 2012, however, ethanol production will have grown to
accommodate the removal of MTBE without the need for such a shift from
conventional gasoline. More important than the removal of MTBE over the
long term, however, is the impact that the dramatic rise in the price
of crude oil is having on demand for renewable fuels, both ethanol and
biodiesel. This has dramatically improved the economics for renewable
fuel use, leading to a surge in demand that is expected to continue. In
the Annual Energy Outlook (AEO) 2006, EIA forecasted that by 2012,
total ethanol use (corn, cellulosic, and imports) would be about 9.6
billion gallons \51\ and biodiesel use would be about 0.3 billion