[Federal Register: May 1, 2007 (Volume 72, Number 83)]
[Rules and Regulations]
[Page 23899-24014]
[DOCID:fr01my07-8]

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Part II

Environmental Protection Agency

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40 CFR Part 80

Regulation of Fuels and Fuel Additives: Renewable Fuel Standard
Program; Final Rule

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2005-0161; FRL-8299-9]
RIN 2060-AN76

Regulation of Fuels and Fuel Additives: Renewable Fuel Standard
Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: Under the Clean Air Act, as amended by Section 1501 of the
Energy Policy Act of 2005, the Environmental Protection Agency is
required to promulgate regulations implementing a renewable fuel
program. The statute specifies the total volume of renewable fuel that
the regulations must ensure is used in gasoline sold in the U.S. each
year, with the total volume increasing over time. In this context, this
program is expected to reduce dependence on foreign sources of
petroleum, increase domestic sources of energy, and help transition to
alternatives to petroleum in the transportation sector. The increased
use of renewable fuels such as ethanol and biodiesel is also expected
to have the added effect of providing an expanded market for
agricultural products such as corn and soybeans. Based on our analysis,
we believe that the expanded use of renewable fuels will provide
reductions in carbon dioxide emissions that have been implicated in
climate change. Also, there will be some reductions in air toxics
emissions such as benzene from the transportation sector, while some
other emissions such as oxides of nitrogen are expected to increase.
    This action finalizes regulations designed to ensure that refiners,
blenders, and importers of gasoline will use enough renewable fuel each
year so that the total volume requirements of the Energy Policy Act are
met. Our rule describes the standard that will apply to these parties
and the renewable fuels that qualify for compliance. The regulations
also establish a trading program that will be an integral aspect of the
overall program, allowing renewable fuels to be used where they are
most economical while providing a flexible means for obligated parties
to comply with the standard.

DATES: This final rule is effective on September 1, 2007. The
incorporation by reference of certain publications listed in the rule
is approved by the Director of the Federal Register as of September 1,
2007.

ADDRESSES: EPA has established a docket for this action under Docket ID
No. EPA-HQ-OAR-2005-0161. All documents in the docket are listed in the
http://www.regulations.gov Web site. Although listed in the index, some

information is not publicly available, e.g., confidential business
information (CBI) or other information whose disclosure is restricted
by statute. Certain other material, such as copyrighted material, is
not placed on the Internet and will be publicly available only in hard
copy form. Publicly available docket materials are available either
electronically through http://www.regulations.gov or in hard copy at the EPA

Docket Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave.,
NW., Washington, DC. This Docket Facility is open from 8:30 a.m. to
4:30 p.m., Monday through Friday, excluding legal holidays. The
telephone number for the Public Reading Room is<PHONE_NUMBER> and the
telephone number for the EPA Docket Center is<PHONE_NUMBER>.

FOR FURTHER INFORMATION CONTACT: Julia MacAllister, U.S. Environmental
Protection Agency, National Vehicle and Fuel Emissions Laboratory, 2000
Traverwood, Ann Arbor MI, 48105; telephone number<PHONE_NUMBER>; fax
number<PHONE_NUMBER>; e-mail address<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

I. General Information

    Entities potentially affected by this action include those involved
with the production, distribution and sale of gasoline motor fuel or
renewable fuels such as ethanol and biodiesel. Regulated categories and
entities could include:

------------------------------------------------------------------------
                                                         Examples of
          Category            NAICS \1\   SIC \2\        potentially
                                codes      codes     regulated entities
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Industry....................     324110       2911  Petroleum
                                                     Refineries.
 Industry...................     325193       2869  Ethyl alcohol
                                                     manufacturing.
Industry....................     325199       2869  Other basic organic
                                                     chemical
                                                     manufacturing.
Industry....................     424690       5169  Chemical and allied
                                                     products merchant
                                                     wholesalers.
Industry....................     424710       5171  Petroleum bulk
                                                     stations and
                                                     terminals.
Industry....................     424720       5172  Petroleum and
                                                     petroleum products
                                                     merchant
                                                     wholesalers.
Industry....................     454319       5989  Other fuel dealers.
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\1\ North American Industry Classification System (NAICS).
\2\ Standard Industrial Classification (SIC) system code.

    This table is not intended to be exhaustive, but provides a guide
for readers regarding entities likely to be regulated by this action.
This table lists the types of entities that EPA is now aware could
potentially be affected by this action. Other types of entities not
listed in the table could also be affected. To decide whether your
organization might be affected by this action, you should carefully
examine today's notice and the existing regulations in 40 CFR part 80.
If you have any questions regarding the applicability of this action to
a particular entity, consult the persons listed in the preceding FOR
FURTHER INFORMATION CONTACT section.

Table of Contents

I. Introduction
    A. The Role of Renewable Fuels in the Transportation Sector
    B. Requirements in the Energy Policy Act
    C. Development of the RFS Program
II. Overview of the Program
    A. Impacts of Increased Reliance on Renewable Fuels
    1. Renewable Fuel Volume Scenarios Analyzed
    2. Emissions
    3. Economic Impacts
    4. Greenhouse Gases and Fossil Fuel Consumption
    5. Post 2012 RFS Standards
    B. Program Structure
    1. What Is the RFS Program Standard?
    2. Who Must Meet the Standard?
    3. What Qualifies as a Renewable Fuel?
    4. Equivalence Values of Different Renewables Fuels
    5. How Will Compliance Be Determined?
    6. How Will the Trading Program Work?
    7. How Will the Program Be Enforced?
    C. Voluntary Green Labeling Program
III. Complying With the Renewable Fuel Standard
    A. What Is the Standard That Must Be Met?
    1. How Is the Percentage Standard Calculated?
    2. What Are the Applicable Standards?
    3. Compliance in 2007

    4. Renewable Volume Obligations
    B. What Counts as a Renewable Fuel in the RFS Program?
    1. What Is a Renewable Fuel That Can Be Used for Compliance?
    a. Ethanol Made From a Cellulosic Feedstock
    b. Ethanol Made From any Feedstock in Facilities Using Waste
Material To Displace 90 Percent of Normal Fossil Fuel Use
    c. Ethanol That Is Made From the Non-Cellulosic Portions of
Animal, Other Waste, and Municipal Waste
    d. Foreign Producers of Cellulosic and Waste-Derived Ethanol
    2. What Is Biodiesel?
    a. Biodiesel (Mono-Alkyl Esters)
    b. Non-Ester Renewable Diesel
    3. Does Renewable Fuel Include Motor Fuel That Is Made From
Coprocessing a Renewable Feedstock With Fossil Fuels?
    a. Definition of ``Renewable Crudes'' and ``Renewable Crude-
Based Fuels''
    b. How Are Renewable Crude-Based Fuel Volumes Measured?
    4. What Are ``Equivalence Values'' for Renewable Fuel?
    a. Authority Under the Act To Establish Equivalence Values
    b. Energy Content and Renewable Content as the Basis for
Equivalence Values
    c. Lifecycle Analyses as the Basis for Equivalence Values
    C. What Gasoline Is Used To Calculate the Renewable Fuel
Obligation and Who Is Required To Meet the Obligation?
    1. What Gasoline Is Used To Calculate the Volume of Renewable
Fuel Required To Meet a Party's Obligation?
    2. Who Is Required To Meet the Renewable Fuels Obligation?
    3. What Exemptions Are Available Under the RFS Program?
    a. Small Refinery and Small Refiner Exemption
    b. General Hardship Exemption
    c. Temporary Hardship Exemption Based on Unforeseen
Circumstances
    4. What Are the Opt-in and State Waiver Provisions Under the RFS
Program?
    a. Opt-in Provisions for Noncontiguous States and Territories
    b. State Waiver Provisions
    D. How Do Obligated Parties Comply With the Standard?
    1. Why Use Renewable Identification Numbers?
    a. RINs Serve the Purpose of a Credit Trading Program
    b. Alternative Approach To Tracking Batches
    2. Generating RINs and Assigning Them to Batches
    a. Form of Renewable Identification Numbers
    b. Generating RINs
    c. Cases in Which RINS Are Not Generated
    3. Calculating and Reporting Compliance
    a. Using RINs To Meet the Standard
    b. Valid Life of RINs
    c. Cap on RIN Use To Address Rollover
    d. Deficit Carryovers
    4. Provisions for Exporters of Renewable Fuel
    5. How Will the Agency Verify Compliance?
    E. How Are RINs Distributed and Traded?
    1. Distribution of RINs With Volumes of Renewable Fuel
    a. Responsibilities of Renewable Fuel Producers and Importers
    b. Responsibilities of Parties That Buy, Sell, or Handle
Renewable Fuels
    c. Batch Splits and Batch Mergers
    2. Separation of RINs From Volumes of Renewable Fuel
    3. Distribution of Separated RINs
    4. Alternative Approaches to RIN Distribution
IV. Registration, Recordkeeping, and Reporting Requirements
    A. Introduction
    B. Registration
    1. Who Must Register Under the RFS Program?
    2. How Do I Register?
    3. How Do I Know I am Properly Registered With EPA?
    4. How are Small Volume Domestic Producers of Renewable Fuels
Treated for Registration Purposes?
    C. Reporting
    1. Who Must Report Under the RFS Program?
    2. What Reports Are Required Under the RFS Program?
    3. What Are the Specific Reporting Items for the Various Types
of Parties Required To Report?
    4. What are the Reporting Deadlines?
    5. How May I Submit Reports to EPA?
    6. What Does EPA Do With the Reports it Receives?
    7. May I Claim Information in Reports as CBI and How Will EPA
Protect it?
    8. How are Spilled Volumes With Associated Lost RINs To Be
Handled in Reports?
    D. Recordkeeping
    1. What Types of Records Must Be Kept?
    2. What Recordkeeping Requirements are Specific to Producers of
Cellulosic or Waste-Derived Ethanol?
    E. Attest Engagements
    1. What Are the Attest Engagement Requirements Under the RFS
Program?
    2. Who Is Subject to the Attest Engagement Requirements for the
RFS Program?
    3. How Are the Attest Engagement Requirements in this Final Rule
Different From Those Proposed?
V. What Acts Are Prohibited and Who Is Liable for Violations?
VI. Current and Projected Renewable Fuel Production and Use
    A. Overview of U.S. Ethanol Industry and Future Production/
Consumption
    1. Current Ethanol Production
    2. Expected Growth in Ethanol Production
    3. Current Ethanol and MTBE Consumption
    4. Expected Growth in Ethanol Consumption
    B. Overview of Biodiesel Industry and Future Production/
Consumption
    1. Characterization of U.S. Biodiesel Production/Consumption
    2. Expected Growth in U.S. Biodiesel Production/Consumption
    C. Feasibility of the RFS Program Volume Obligations
    1. Production Capacity of Ethanol and Biodiesel
    2. Technology Available To Produce Cellulosic Ethanol
    a. Sugar Platform
    i. Pretreatment
    ii. Dilute acid hydrolysis
    iii. Concentrated acid hydrolysis
    iv. Enzymatic hydrolysis
    b. Syngas Platform
    c. Plasma Technology
    d. Feedstock Optimization
    3. Renewable Fuel Distribution System Capability
VII. Impacts on Cost of Renewable Fuels and Gasoline
    A. Renewable Fuel Production and Blending Costs
    1. Ethanol Production Costs
    a. Corn Ethanol
    b. Cellulosic Ethanol
    2. Biodiesel Production Costs
    3. Diesel Fuel Costs
    B. Distribution Costs
    1. Ethanol Distribution Costs
    a. Capital Costs To Upgrade Distribution System for Increased
Ethanol Volume
    b. Ethanol Freight Costs
    2. Biodiesel Distribution Costs
    C. Estimated Costs to Gasoline
    1. Description of Cases Modeled
    a. Base Case (2004)
    b. Reference Case (2012)
    c. Control Cases (2012)
    2. Overview of Cost Analysis Provided by the Contractor Refinery
Model
    3. Overall Impact on Fuel Cost
    a. Cost Without Ethanol Subsidies
    b. Gasoline Costs Including Ethanol Consumption Tax Subsidies
VIII. What Are the Impacts of Increased Ethanol Use on Emissions and
Air Quality?
    A. Effect of Renewable Fuel Use on Emissions
    1. Emissions From Gasoline Fueled Motor Vehicles and Equipment
    a. Gasoline Fuel Quality
    b. Emissions From Motor Vehicles
    c. Nonroad Equipment
    2. Diesel Fuel Quality: Biodiesel
    3. Renewable Fuel Production and Distribution
    B. Impact on Emission Inventories
    1. Primary Analysis
    2. Sensitivity Analysis
    3. Local and Regional VOC and NOX Emission Impacts in
July
    C. Impact on Air Quality
    1. Impact of Increased Ethanol Use on Ozone
    2. Particulate Matter
IX. Impacts on Fossil Fuel Consumption and Related Implications
    A. Impacts on Lifecycle GHG Emissions and Fossil Energy Use
    1. Time Frame and Volumes Considered
    2. GREET Model
    a. Renewable Fuel Pathways Considered
    b. Modifications to GREET
    c. Sensitivity Analysis
    3. Displacement Indexes (DI)
    4. Impacts of Increased Renewable Fuel Use
    a. Greenhouse Gases and Carbon Dioxide
    b. Fossil Fuel and Petroleum
    B. Implications of Reduced Imports of Petroleum Products

    C. Energy Security Implications of Increases in Renewable Fuels
    1. Effect of Oil Use on Long-Run Oil Price, U.S. Import Costs,
and Economic Output
    2. Short-Run Disruption Premium From Expected Costs of Sudden
Supply Disruptions
    3. Costs of Existing U.S. Energy Security Policies
X. Agricultural Sector Economic Impacts
XI. Public Participation
XII. Administrative Requirements
    A. Executive Order 12866: Regulatory Planning and Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    1. Overview
    2. Background
    4. Summary of Potentially Affected Small Entities
    5. Impact of the Regulations on Small Entities
    6. Small Refiner Outreach
    7. Reporting, Recordkeeping, and Compliance Requirements
    8. Related Federal Rules
    9. Conclusions
    D. Unfunded Mandates Reform Act
    E. Executive Order 13132: Federalism
    F. Executive Order 13175: Consultation and Coordination With
Indian Tribal Governments
    G. Executive Order 13045: Protection of Children From
Environmental Health and Safety Risks
    H. Executive Order 13211: Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
    I. National Technology Transfer Advancement Act
    J. Executive Order 12898: Federal Actions to Address
Environmental Justice in Minority Populations and Low-Income
Populations.
    K. Congressional Review Act
    L. Clean Air Act Section 307(d)
XIII. Statutory A

I. Introduction

    Through today's final rule, we are putting in place a compliance
and enforcement program that implements the renewable fuel program,
also known as the Renewable Fuel Standard (RFS) program. This program
accomplishes the statutory goal of increasing the volume of renewable
fuels that are required to be used in vehicles in the U.S. as required
in Section 211(o) of the Clean Air Act (CAA) enacted as part of the
Energy Policy Act of 2005 (the Energy Act or the Act). This final rule
resulted from a collaborative effort with stakeholders, including
refiners, renewable fuel producers, and distributors, who together
helped to design a program that is simple, flexible, and enforceable.
    As a result of the favorable economics of renewable fuels in
comparison to conventional gasoline and diesel, renewable fuel volumes
are expected to exceed the requirements of the RFS program. We have
evaluated the impacts of a range of renewable fuel volumes as high as
10 billion gallons in 2012. This represents a significant increase over
the volume of renewable fuel used in 2004 which was approximately 3.5
billion gallons, and this increase is estimated to produce a number of
significant effects. For instance, we estimate that the transition to
renewable fuels will reduce petroleum consumption by 2.0 to 3.9 billion
gallons or approximately 0.8 to 1.6 percent of the petroleum that would
otherwise be used by the transportation sector.
    The increased use of renewable fuels is also expected to produce
reductions in some regulated pollutants. Carbon monoxide emissions from
gasoline powered vehicles and equipment will be reduced by 0.9 to 2.5
percent and emissions of benzene (a mobile source air toxic) will be
reduced by 1.8 to 4.0 percent.\1\ At the same time, other emissions may
increase. Nationwide, we estimate between a 41,000 and 83,000 ton
increase in VOC + NOX emissions. However, the effects will
vary significantly by region with some major metropolitan areas
experiencing small emission benefits, while other areas may see an
increase in VOC emissions from 4 to 5 percent and an increase in
NOX emissions from 6 to 7 percent from gasoline powered
vehicles and equipment.
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    \1\ These reductions are relative to the Mobile Source Air
Toxics (MSAT) standards in effect. Additional benzene emission
reductions will occur as a result of the recently finalized MSAT2
standards (72 FR 8428, February 26, 2007).
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    The use of renewable fuel will likewise reduce greenhouse gas
emissions such as carbon dioxide by 8.0 to 13.1 million metric tons,
about 0.4 to 0.6 percent of the anticipated greenhouse gas emissions
from the transportation sector in the United States in 2012. Greenhouse
gas emissions contribute to climate change, and thus, increased
renewable use is an important step in addressing this issue.
    Finally, we estimate that increases in the use of renewable fuels
will increase net farm income and the nation's energy security. Net
U.S. farm income is estimated to increase by between $2.6 and $5.4
billion through transfers from users of gasoline and consumers of
agricultural products used to produce ethanol. However, as feedstocks
used in the production of renewable fuels expand beyond the corn and
soybeans that are most common today, the renewable fuels industry is
expected to continue to diversify and grow in its ability to benefit
the nation's environment and economy.

A. The Role of Renewable Fuels in the Transportation Sector

    Renewable fuels have been an important part of our nation's
transportation fuel supply for many years. Following the CAA amendments
of 1990, the use of renewable fuels, particularly ethanol, increased
dramatically. Several key clean fuel programs required by the CAA
established new market opportunities for ethanol. A very successful
mobile source control strategy, the reformulated gasoline (RFG)
program, was implemented in 1995. This program set stringent new
controls on the emissions performance of gasoline, which were designed
to significantly reduce summertime ozone precursors and year round air
toxics emissions. The RFG program also required that RFG meet an oxygen
content standard. Several areas of the country began blending ethanol
into gasoline to help meet this new standard, such as Chicago and St.
Louis. Another successful clean fuel strategy required certain areas
exceeding the national ambient air quality standard for carbon monoxide
to also meet an oxygen content standard during the winter time to
reduce harmful carbon monoxide emissions. Many of these areas, such as
Denver and Phoenix, also blended ethanol during the winter months to
help meet this new standard.
    Today, the role and importance of renewable fuels in the
transportation sector continue to expand. In the past several years as
crude oil prices have soared above the lower levels of the 1990's, the
relative economics of renewable fuel use have improved dramatically. In
addition, since the vast majority of crude oil produced in or imported
into the U.S. is consumed as gasoline or diesel fuel in the U.S.,
concerns about our dependence on foreign sources of crude oil have
renewed interest in renewable transportation fuels. The emergence of
more in-depth understanding of the impacts of human activities on
climate change has also focused attention on the various ways that
renewable fuels can reduce the consumption of fossil fuels. The passage
of the Energy Policy Act of 2005 demonstrated a strong commitment on
the part of U.S. policymakers to consider additional means of
supporting renewable fuels as a supplement to petroleum-based fuels in
the transportation sector. The RFS program is one such means.
    The RFS program was debated by the U.S. Congress over several years
before finally being enacted through passage of the Energy Policy Act
of 2005. The RFS program is first and foremost designed

to increase the use of renewable fuels in motor vehicle fuel consumed
in the U.S. In this context, it is expected to simultaneously reduce
dependence on foreign sources of petroleum, increase domestic sources
of energy, and diversify our energy portfolio to help transition to
alternatives to petroleum in the transportation sector. Based on our
analysis, we also believe that the expanded use of renewable fuels will
provide reductions in carbon dioxide emissions that contribute to
climate change and in air toxics emissions such as benzene from the
transportation sector, while other emissions such as hydrocarbons and
oxides of nitrogen are projected to increase. The increased use of
renewable fuels such as ethanol and biodiesel is also expected to have
the added effect of providing an expanded market for agricultural
products such as corn and soybeans. The expected increase in cellulosic
ethanol production will also expand the market opportunities to a wider
array of feedstocks.
    The requirement for use of a specified volume of renewable fuels
complements other provisions of the Energy Act. In particular, the
required volume of renewable fuel use will offset any possible loss in
demand for renewable fuels occasioned by the Act's repeal of the oxygen
content mandate in the RFG program while allowing greater flexibility
in how renewable fuels are blended into the nation's fuel supply. The
RFS program also creates a specific annual level for minimum renewable
fuel use which increases over time, ensuring overall growth in the
demand and opportunity for renewable fuels.
    Because renewable fuels such as ethanol and biodiesel are not new
to the U.S. transportation sector, the expansion of their use is
expected to follow distribution and blending practices already in
place. For instance, the market already has the necessary production
and distribution mechanisms in place in many areas and the ability to
expand these mechanisms into new markets. Recent spikes in ethanol use
resulting first from the state MTBE bans, and now the virtual
elimination of MTBE from the marketplace, have tested the limits of the
ethanol distribution system. However, future growth is expected to move
in a more orderly fashion since the use of renewable fuels will not be
geographically constrained and, given EIA volume projections,
investment decisions can follow market forces rather than regulatory
mandates. In addition, the increased production volumes of ethanol and
the expanded penetration of ethanol in new markets may create new
opportunities for blending of E85, a blend of 85 percent ethanol and 15
percent gasoline, in the long run. The increased availability of E85
will mean that more flexible fueled vehicles (FFV) can use this fuel.
Of the approximately 5 million FFVs currently in use in the U.S, most
are currently fueled with conventional gasoline rather than E85, in
part due to the limited availability of E85.
    Given the ever-increasing demand for petroleum-based products in
the transportation sector, the RFS program also moves the nation in the
direction of replacing part of this demand with renewable energy. The
RFS program provides the certainty that at least a minimum amount of
renewable fuel will be used in the U.S., which in turn provides some
certainty for investment in production capacity of renewable fuels.
However, it should be understood that the RFS program is not the only
factor currently impacting demand for ethanol and other renewable
fuels. As Congress was developing the RFS program in the Energy Act,
several large states were adopting and implementing bans on the use of
MTBE in gasoline. As a result, refiners supplying reformulated gasoline
(RFG) in those states switched to ethanol to satisfy the oxygen content
mandate for their RFG, causing a large, sudden increase in demand for
ethanol. Even more importantly, with the removal of the oxygen content
mandate for RFG, refiners elected to remove essentially all MTBE from
the gasoline supply in the U.S. during the spring of 2006. In order to
accomplish this transition quickly, while still maintaining gasoline
volume, octane, and gasoline air toxics performance standards, refiners
elected to blend ethanol into virtually all reformulated gasoline
nationwide. This caused a second dramatic increase in demand for
ethanol, which in the near term was met by temporarily shifting large
volumes of ethanol out of conventional gasoline and into the RFG areas.
    Perhaps the largest impact on renewable fuel demand, however, has
been the increase in the cost of crude oil. In the last few years, both
crude oil prices and crude oil price forecasts have increased
dramatically. This has resulted in a large economic incentive for the
use of ethanol and biodiesel. The Energy Information Administration
(EIA) and others are currently projecting renewable fuel demand to
exceed the minimum volumes required under the RFS program by a
substantial margin. In this context, the effect of the RFS program is
to provide a minimum level of demand to support ongoing investment in
renewable fuel production. However, market demand for renewable fuels
is expected to exceed the statutory minimums. We believe that the
program we are finalizing today will operate effectively regardless of
the level of renewable fuel use or market conditions in the energy
sector.

B. Requirements in the Energy Policy Act

    Section 1501 of the Energy Policy Act amended the Clean Air Act and
provides the statutory basis for the RFS program in Section 211(o). It
requires EPA to establish a program to ensure that the pool of gasoline
sold in the contiguous 48 states contains specific volumes of renewable
fuel for each calendar year starting with 2006. The required overall
volumes for 2006 through 2012 are shown in Table I.B-1 below.

    Table I.B-1.-- Applicable Volumes of Renewable Fuel Under the RFS
                                 Program
------------------------------------------------------------------------
                                                                Billion
                        Calendar year                           gallons
                                                                  2006
------------------------------------------------------------------------
2006.........................................................        4.0
2007.........................................................        4.7
2008.........................................................        5.4
2009.........................................................        6.1
2010.........................................................        6.8
2011.........................................................        7.4
2012.........................................................        7.5
------------------------------------------------------------------------

    In order to ensure the use of the total renewable fuel volume
specified for each year, the Agency must set a standard for each year
representing the amount of renewable fuel that each refiner, blender,
or importer must use, expressed as a percentage of gasoline sold or
introduced into commerce. This yearly percentage standard is to be set
at a level that will ensure that the total renewable fuel volumes shown
in Table I.B-1 will be used based on gasoline volume projections
provided by the Energy Information Administration (EIA). The standard
for each year must be published in the Federal Register by November 30
of the previous year. Starting with 2013, EPA is required to establish
the applicable national volume, based on the criteria contained in the
statute, which must require at least the same overall percentage of
renewable fuel use as was required in 2012.
    The Act defines renewable fuels primarily on the basis of the
feedstock. In general, renewable fuel must be a motor vehicle fuel that
is produced from plant or animal products or wastes, as opposed to
fossil fuel sources. The Act

specifically identifies several types of motor vehicle fuels as
renewable fuels, including cellulosic biomass ethanol, waste-derived
ethanol, biogas, biodiesel, and blending components derived from
renewable fuel.
    The standard set annually by EPA is to be a single percentage
applicable to refiners, blenders, and importers, as appropriate. The
percentage standard is used by obligated parties to determine a volume
of renewable fuel that they are responsible for introducing into the
domestic gasoline pool for the given year. The percentage standard must
be adjusted such that it does not apply to multiple parties for the
same volume of gasoline. The standard must also take into account the
use of renewable fuel by small refineries that are exempt from the
program until 2011.
    Under the Act, the required volumes in Table I.B-1 apply to the
contiguous 48 states. However, Alaska and Hawaii can opt into the
program, in which case the pool of gasoline used to calculate the
standard, and the number of regulated parties, would change. In
addition, other states can request a waiver of the RFS program under
certain conditions, which would affect the national quantity of
renewable fuel required under the program.
    The Act requires the Agency to promulgate a credit trading program
for the RFS program whereby an obligated party may generate credits for
over-complying with their annual obligation. The obligated party can
then use these credits to meet their requirements in the following year
or trade them for use by another obligated party. Thus the credit
trading program allows obligated parties to comply in the most cost-
effective manner by permitting them to generate, transfer, and use
credits. The trading program also permits renewable fuels that are not
blended into gasoline, such as biodiesel, to participate in the RFS
program.
    The Agency must determine who can generate credits, under what
conditions credits may be traded, how credits may be transferred from
one party to another, and the appropriate value of credits for
different types of renewable fuel. If a party is not able to generate
or purchase sufficient credits to meet their annual obligation, they
are allowed to carry over the deficit to the next annual compliance
period, but must achieve full compliance in that following year.

C. Development of the RFS Program

    Section 1501 of the Energy Act prescribed the RFS program,
including the required total volumes, the timing of the obligation, the
parties who are obligated to comply, the definition of renewable fuel,
and the general framework for a credit trading program. Various aspects
of the program require additional development by the Agency beyond the
specifications in the Act. The Agency must develop regulations to
ensure the successful implementation of the RFS program, based on the
framework spelled out in the statute.
    Under the RFS program the trading provisions comprise an integral
element of compliance. Many obligated parties do not have access to
renewable fuels or the ability to blend them, and so must use credits
to comply. The RFS trading program is also unique in that the parties
liable for meeting the standard (refiners, importers, and blenders of
gasoline) are not generally the parties who make the renewable fuels or
blend them into gasoline. This creates the need for trading mechanisms
that ensure that the means to demonstrate compliance will be readily
available for use by obligated parties.
    The first step we took in developing the proposed program was to
seek input and recommendations from the affected stakeholders. There
were initially a wide range of thoughts and views on how to design the
program. However, there was broad consensus that the program should
satisfy a number of guiding principles, including, for example, that
the compliance and trading program should provide certainty to the
marketplace and minimize cost to the consumers; that the program should
preserve existing business practices for the production, distribution,
and use of both conventional and renewable fuels; that the program
should be designed to accommodate all qualifying renewable fuels; that
all renewable volumes produced are made available to obligated parties
for compliance; and that the Agency should have the ability to easily
verify compliance to ensure that the volume obligations are in fact
met. These guiding principles and the comments we received on our
Notice of Proposed Rulemaking (NPRM) helped to move us toward the
program in today's final rule.
    We published a Notice of Proposed Rulemaking on September 22, 2006
(71 FR 55552) which described our proposed approach to compliance and
the trading program, as well as preliminary analyses of the
environmental and economic impacts of increased use of renewable fuels.
The program finalized today largely mirrors the proposed program, with
some revisions reflecting continued input from stakeholders during the
formal comment period.

II. Overview of the Program

    Today's action establishes the final requirements for the RFS
program, as well as our assessment of the environmental and economic
impacts of the nation's transition to greater use of renewable fuels.
This section provides an overview of our program and renewable fuel
impacts assessment. Sections III through V provide the details of the
structure of the program, while Sections VI through X describe our
assessment of the impacts on emissions of regulated pollutants and
greenhouse gases, air quality, fossil fuel use, energy security,
economic impacts in the agricultural sector, and cost from the expanded
use of renewable fuels.

A. Impacts of Increased Reliance on Renewable Fuels

    In a typical major rulemaking, EPA would conduct a full assessment
of the economic and environmental impacts of the specific rule that it
is promulgating. However, as discussed in Section I.A., the replacement
of MTBE with ethanol and the extremely favorable economics for
renewable fuels brought on by the rise in crude oil prices are causing
renewable fuel use to far exceed the RFS requirements. Given these
circumstances, it is important to assess the impacts of this larger
increase in renewable use and the related changes occurring to
gasoline. For this reason we have carried out an assessment of the
economic and environmental impacts of the broader changes in fuel
quality resulting from our nation's transition to greater utilization
of renewable fuels, as opposed to an assessment that is limited to the
RFS program itself.
    To carry out our analyses, we elected to use 2004 as the baseline
from which to compare the impacts of expanded renewable use. We chose
2004 as a baseline primarily due to the fact that all the necessary
refinery production data, renewable fuel production data, and fuel
quality data were already in hand at the time we needed to begin the
analysis. We did not use 2005 as a baseline year because 2005 may not
be an appropriate year for comparison due to the extraordinary impacts
of hurricanes Katrina and Rita on gasoline production and use. To
assess the impacts of anticipated increases in renewable fuels, we
elected to look at what they would be in 2012, the year the
statutorily-mandated renewable fuel volumes will be fully phased in. By
conducting the analysis in this manner, the impacts include not just
the impact of expanded renewable fuel use by itself, but also the
corresponding decrease in the use of MTBE, and the

potential for oxygenates to be removed from RFG due to the absence of
the RFG oxygenate mandate. Since these three changes are all
inextricably linked and are occurring simultaneously in the
marketplace, evaluating the impacts in this manner is both necessary
and appropriate.
    We evaluated the impacts of expanded renewable fuel use and the
corresponding changes to the fuel supply on fuel costs, consumption of
fossil fuels, and some of the economic impacts on the agricultural
sector and energy security. We also evaluated the impacts on emissions,
including greenhouse gas emissions that contribute to climate change,
and the corresponding impacts on nationwide and regional air quality.
Our analyses are summarized in this section.
1. Renewable Fuel Volume Scenarios Analyzed
    As shown in Table I.B-1, the Act stipulates that the nationwide
volumes of renewable fuel required under the RFS program must be at
least 4.0 billion gallons in 2006 and increase to 7.5 billion gallons
in 2012. However, we expect that the volume of renewable fuel will
actually exceed the required volumes by a significant margin. Based on
economic modeling in 2006, EIA projected renewable fuel demand in 2012
of 9.6 billion gallons for ethanol, and approximately 300 million
gallons for biodiesel using crude oil prices forecast at $48 per
barrel.\2\ Therefore, in assessing the impacts of expanded use of
renewable fuels, we evaluated two comparative scenarios, one
representing the statutorily required minimum, and another reflecting
the higher levels projected by EIA. Although the actual renewable fuel
volumes produced in 2012 may differ from both the required and
projected volumes, we believe that these two volume scenarios together
represent a reasonable range for analysis purposes.\3\
---------------------------------------------------------------------------

    \2\ $48/barrel from Annual Energy Outlook 2006, Energy
Information Administration, Department of Energy.
    \3\ Subsequent to the analysis for this final rule, EIA has
released its 2007 AEO forecasts for ethanol use, which increase the
projection to 11.2 billion gallons by 2012.
---------------------------------------------------------------------------

    The Act also stipulates that at least 250 million gallons out of
the total volume required in 2013 and beyond must meet the definition
specified for cellulosic biomass ethanol. As described in Section VI,
there are a number of companies already making plans to produce ethanol
from cellulosic feedstocks and/or waste-derived energy sources that
could potentially meet the definition of cellulosic biomass ethanol.
Accordingly, we anticipate a ramp-up in production of cellulosic
biomass ethanol production in the coming years, and for analysis
purposes we have assumed that 250 million gallons of cellulosic biomass
ethanol will be used in 2012.
    As discussed in Section VI, we chose 2004 to represent current
baseline conditions. However, a direct comparison of the fuel quality
impacts on emissions and air quality that are expected to occur once
the RFS program is fully phased in required that changes in overall
fuel volume, fleet characterization, and other factors be constant.
Therefore, we created a 2012 reference case from the 2004 base case for
use in the emissions and air quality analysis that maintained current
fuel quality parameters while incorporating forecasted increases in
vehicle miles traveled and changes in fleet demographics. The 2012 fuel
reference case was developed by growing out the 2004 renewable fuel
baseline according to EIA's forecasted energy growth rates between 2004
and 2012.
    For the analyses, we created two 2012 scenarios representing
expanded renewable fuel production. The ``RFS Case'' represents volume
levels designed to exactly meet the requirements of the RFS program,
and includes the effects of higher credit values for cellulosic ethanol
and biodiesel. Since higher credit values mean that one gallon of
renewable fuel counts as more than one gallon for compliance purposes,
less than 7.5 billion gallons of renewable fuel is needed to meet the
7.5 billion gallon statutory requirement, but credits equivalent to 7.5
billion gallons of renewable fuel would still be available for
compliance purposes. The ``EIA Case'' represents volume levels based on
EIA projections. A summary of the assumed renewable fuel volumes for
the scenarios we evaluated is shown in Table II.A.1-1. Details of the
calculations used to determine these volumes are given in Chapter 2 of
the Regulatory Impact Analysis (RIA) in the docket for this rulemaking.

                       Table II.A.1-1.--Renewable Fuel Volume Scenarios (Billion Gallons)
----------------------------------------------------------------------------------------------------------------
                                                                                2012
                                                                  2004  base -----------------------------------
                                                                     case      Reference
                                                                                case      RFS case    EIA case
----------------------------------------------------------------------------------------------------------------
Corn-ethanol....................................................       3.548       3.947       6.421       9.388
Cellulosic ethanol..............................................       0           0           0.25        0.25
Biodiesel.......................................................       0.025       0.030       0.303       0.303
                                                                 -----------------------------------------------
    Total volume................................................       3.573       3.977       6.974       9.941
----------------------------------------------------------------------------------------------------------------

2. Emissions
    We evaluated the impacts of increased use of ethanol and biodiesel
on emissions and air quality in the U.S. relative to the reference
case. We estimated that nationwide VOC emissions in 2012 from gasoline
vehicles and equipment will increase by about 0.3% in the RFS Case and
about 0.7% in the EIA Case. For NOX, we estimated that
nationwide annual emissions in 2012 will increase about 0.9% for the
RFS Case and 1.6% for the EIA Case. These increases are equivalent to
an additional 18,000 to 43,000 tons of VOC per year, and an additional
23,000 to 40,000 tons of NOX per year.
    We also estimated the change in emissions in those areas which are
projected to experience a significant change in ethanol use; i.e.,
where the market share of ethanol blends was projected to change by 50
percent or more. We focused on July emissions since these are most
relevant to ozone formation and modeled 2015 because our ozone model is
based upon a 2015 emissions inventory (though we would expect similar
results in 2012). Finally, we developed separate estimates for RFG
areas, low RVP areas (i.e., RVP standards less than 9.0 RVP), and
conventional gasoline areas with a summer 9.0 RVP standard. For areas
with a significant change in ethanol use,

compared to the reference case, VOC emissions in RFG areas increased by
up to 2.3%, while NOX emissions increased by up to 1.6%. In
low RVP areas, VOC emissions increased by up to 4.6%, while
NOX emissions increased by up to 6.2%. In 9.0 RVP areas, VOC
emissions increased by up to 4.6%, while NOX emissions
increased by up to 7.3%.
    Unlike VOC and NOX, emissions of CO and benzene from
gasoline vehicles and equipment were estimated to decrease in 2012 when
the use of renewable fuels increased. Reductions in emissions of CO
varied from 0.9% percent to as high as 2.5% percent for the nation as a
whole, depending on the renewable fuel volume scenario. Similarly,
benzene emissions from gasoline vehicles and equipment were estimated
to be reduced from 1.8% to 4.0% percent.
    We do not have sufficient data to predict the effect of ethanol use
on levels of either directly emitted particulate matter (PM) or
secondarily formed PM. The increased NOX emissions are
expected to lead to increases in secondary nitrate PM, but at the same
time reduced aromatics resulting from ethanol blending are likely to
lead to a decrease in secondary organic PM, as discussed in Section
VIII.C. In addition, biodiesel use is expected to result in some
reduction in direct PM emissions, though small in magnitude due to the
relatively small volumes.
    The emission impact estimates described above are based on the best
available data and models. However, it must be highlighted that most of
the fuel effect estimates are based on very limited or old data which
may no longer be reliable in estimating the emission impacts on
vehicles in the 2012 fleet with advanced emission controls.\4\ As such,
these emission estimates should be viewed as preliminary. EPA hopes to
conduct significant new testing in order to better estimate the impact
of fuel changes on emissions from both highway vehicles and nonroad
equipment, including those fuel changes brought about by the use of
renewable fuels. We hope to be able to incorporate the data from such
additional testing into the analyses for other studies required by the
Energy Act, and into a subsequent rule to set the RFS program standard
for 2013 and later.
---------------------------------------------------------------------------

    \4\ Advanced emission controls include close-coupled, high-
density catalysts and their associated electronic control systems
for light-duty vehicles, and NOX adsorbers and PM traps
for heavy-duty engines.
---------------------------------------------------------------------------

    We used the Ozone Response Surface Model (RSM) to estimate the
impacts of the increased use of ethanol on ozone levels for both the
RFS Case and the EIA Case. The ozone RSM approximates the effect of VOC
and NOX emissions in a 37-state eastern area of the U.S.
Using this model, we projected that the changes in VOC and
NOX emissions could produce a very small increase in ambient
ozone levels. On average, population-weighted ozone design value
concentrations increased by about 0.05 ppb, which represents 0.06
percent of the standard. Even for areas expected to experience a
significant increase in ethanol use, population-weighted ozone design
value concentrations increased by only 0.15 to 0.18 ppb, about 0.2
percent of the standard. These ozone impacts do not consider the
reductions in CO emissions mentioned above, or the change in the types
of compounds comprising VOC emissions. Directionally, both of these
factors may mitigate these ozone increases.
    We investigated several other issues related to emissions and air
quality that could affect our estimates of the impacts of increased use
of renewable fuels. These are discussed in Section VIII and in greater
detail in the RIA. For instance, our current models assume that recent
model year vehicles are insensitive to many fuel changes. However, a
limited amount of new test data suggest that newer vehicles may be just
as sensitive as older model year vehicles. Our sensitivity analysis
suggests that if this is the case, VOC emissions could decrease by as
much as 0.3%, instead of increasing by up to 0.7%. NOX
emissions could increase by up to 4.2%, up from a 1.6% increase. We
also evaluated the emissions from the production of both ethanol and
biodiesel fuel and determined that they will also increase with
increased use of these fuels. Nationwide, emissions related to the
production and distribution of ethanol and biodiesel fuel are projected
to be of the same order of magnitude as the emission impacts related to
the use of these fuels in vehicles.
    Finally, a lack of emission data and atmospheric modeling tools
prevented us from making specific projections of the impact of
renewable fuels on ambient PM levels. As mentioned, however, ethanol
use may affect ambient PM levels due to the increase in NOX
emissions and the reduction in the aromatic content of gasoline, which
should reduce aromatic VOC emissions. All of these issues will be the
subject of further study and analysis in the future.
3. Economic Impacts
    In Section VII of this preamble, we estimate the cost of producing
the extra volumes of renewable fuel anticipated through 2012. For corn
ethanol, we estimate the per gallon cost of ethanol to range from $1.26
per gallon in 2012 (2004 dollars) in the RFS Case to $1.32 per gallon
in the EIA Case. These costs take into account the cost of the
feedstock (corn), plant equipment and operation and the value of any
co-products (distiller's dried grain and solubles, for example). For
biodiesel, we estimate the per gallon cost to be between $1.89 and
$2.06 per gallon if produced using soy bean oil, and less if using
yellow grease ($1.11 to $1.56 per gallon) or other relatively low cost
or no-cost feedstocks. The price paid for ethanol, however, is reduced
by the $0.51 per gallon federal tax subsidy as well as any state
subsidies that might apply. Similarly the price paid for biodiesel is
reduced due to the $1.00 per gallon federal tax subsidy biodiesel
produced from soy bean oil and $0.50 per gallon tax subsidy for
biodiesel produced from yellow grease. We also note that these costs
represent the production cost of the fuel and not the market price. In
recent years, the prices of ethanol and biodiesel have tended to track
the prices of gasoline and diesel fuel, in some cases even exceeding
those prices.
    These renewable fuels are then blended in gasoline and diesel fuel.
While biodiesel is typically just blended with typical petroleum
diesel, additional efforts are sometimes necessary and/or economically
advantageous at the refiner level when adding ethanol to gasoline. For
example, ethanol's high octane reduces the need for other octane
enhancements by the refiner, whereas offsetting the volatility increase
caused by ethanol may require removal of other highly volatile
components. Section VII examines these fuel cost impacts and concludes
that the net cost to society in 2012 in comparison to the reference
case will range from an estimate of 0.5 cent to 1.0 cent per gallon of
gasoline due to the increased use of renewable fuels and their
displacement of MTBE. The resulting total nationwide costs in 2012 are
$823 million per year for the RFS case and $1,739 million per year for
the EIA case. This total excludes the effects of the 51 cent/gal
federal excise tax credit as well as state tax subsidies.
    Our estimates of fuel impacts do not consider other societal
benefits. For example, the displacement of petroleum-based fuel
(largely imported) by renewable fuel (largely produced in the United
States), should reduce our use of imported oil and fuel. We estimate
that 95 percent of the lifecycle petroleum reductions resulting from
the use of renewable fuel will be met

through reductions in net petroleum imports. In Section IX of this
preamble we estimate the value of the decrease in imported petroleum at
about $2.6 billion in 2012 for the RFS Case and $5.1 billion for the
EIA Case, in comparison to our 2012 reference case. Total petroleum
import expenditures in 2012 are projected to be about $698 billion.
    Furthermore, the above estimate on reduced petroleum import
expenditures only partly assess the economic impacts. One of the
effects of increased use of renewable fuel is that it diversifies the
energy sources used in making transportation fuel. To the extent that
diverse sources of fuel energy reduce the dependence on any one source,
the risks, both financial as well as strategic, of a potential
disruption in supply reflected in the price volatility of a particular
energy source are reduced. As indicated in the proposal, EPA has worked
with researchers at Oakridge National Laboratory to update a study they
previously published and which has been used or cited in several
government actions impacting oil consumption. A draft report is being
made available in the docket at this time for further consideration.
This analysis only looks at the impact of reduced petroleum imports on
energy security. Other energy security issues could arise with the
wider use of biofuels. For example, ethanol's production and costs are
determined by the availability of corn as a feedstock. Corn production,
in turn, is weather-dependent. Also, the use of biofuels may increase
the use of natural gas. A full integrated analysis of the energy
security implications of the wider use of biofuels has yet to be
undertaken.
    While increased use of renewable fuel will reduce expenditures on
imported oil, it will also increase expenditures on renewable fuels and
in-turn, on the sources of those renewable fuels. The RFS program
attempts to spur the increased use of renewable transportation fuels
made principally from agricultural crops produced in the U.S. As a
result, it is important to analyze the consequences of the transition
to greater renewable fuel use in the U.S. agricultural sector. To
perform this analysis, EPA selected the Forest and Agricultural Sector
Optimization Model (FASOM) developed by Professor Bruce McCarl of Texas
A&M University and others over the past thirty years. FASOM is a
dynamic, nonlinear programming model of the agriculture and forestry
sectors of the U.S. (For this analysis, we focused on the agriculture
portion of the model.)
    Due to the greater demand for corn as a feedstock for ethanol
production, corn prices are estimated to increase in 2012 by 18 cents
per bushel for the RFS Case and 39 cents per bushel of corn for the EIA
Case from $2.32 (in 2004 dollars) in the Reference Case. Although
soybean prices are expected to rise slightly, the increased cost is
likely due to higher input costs, such as land prices. We estimate a
price increase of 18 cents (RFS Case) to 21 cents (EIA Case) per bushel
of soybeans from a Reference Case price of $5.26 per bushel. These
higher commodity prices are predicted to also result in higher U.S.
farm income. Our analysis predicts that farm income will increase by
$2.6 billion annually by 2012 for the RFS Case and $5.4 billion for the
EIA Case, roughly a 5 to 10 percent increase.
    Due to higher corn prices, U.S. exports of corn are estimated to
decrease by $573 million in the RFS Case and by $1.29 billion in the
EIA Case in 2012. With higher commodity prices, we would expect some
upward pressure on food costs as the higher cost of corn and soybeans
is passed along to consumers. We estimate a relatively modest increase
in annual household food costs associated with the higher price
commanded by corn and soybeans. For the RFS Case, annual per capita
wholesale food cost are estimated to increase by approximately $7,
while the higher renewable fuel volumes anticipated by the EIA Case
will result in a $12 annual increase in the per capita wholesale food
cost. This equates to roughly a $2.1 to $3.6 billion increase in
nationwide food costs in 2012.
4. Greenhouse Gases and Fossil Fuel Consumption
    There has been considerable interest in the impacts of fuel
programs on greenhouse gases implicated in climate change and on fossil
fuel consumption due largely to concerns about dependence on foreign
sources of petroleum. Therefore, in this rulemaking we have undertaken
an analysis of the greenhouse gas and fossil fuel consumption impacts
of a transition to greater renewable fuel use. This is the first
analysis of its kind in a high profile rule, and as such it may guide
future work in this area.
    As a result of the transition to greater renewable fuel use, some
petroleum-based gasoline and diesel will be directly replaced by
renewable fuels. Therefore, consumption of petroleum-based fuels will
be lower than it would be if no renewable fuels were used in
transportation vehicles. However, a true measure of the impact of
greater use of renewable fuels on petroleum use, and indeed on the use
of all fossil fuels, accounts not only for the direct use and
combustion of the finished fuel in a vehicle or engine, but also
includes the petroleum use associated with production and
transportation of that fuel. For instance, fossil fuels are used in
producing and transporting renewable feedstocks such as plants or
animal byproducts, in converting the renewable feedstocks into
renewable fuel, and in transporting and blending the renewable fuels
for consumption as motor vehicle fuel. Likewise, fossil fuels are used
in the production and transportation of petroleum and its finished
products. In order to estimate the true impacts of increases in
renewable fuel use on fossil fuel use, we must take these steps into
account. Such analyses are termed lifecycle analyses.
    There is also no consensus on the most appropriate approach for
conducting such lifecycle analyses. We have chosen to base our
lifecycle analysis on Argonne National Laboratory's GREET model for the
reasons described in Section IX. However, there are other lifecycle
models in use. The choice of model inputs and assumptions all have a
bearing on the results of lifecycle analyses, and many of these
assumptions remain the subject of debate among researchers.
    With these caveats, we compared the lifecycle impacts of renewable
fuels to the petroleum-based gasoline and diesel fuels that they
replace. This analysis allowed us to estimate not only the overall
impacts of renewable fuel use on petroleum use, but also on emissions
of greenhouse gases such as carbon dioxide from all fossil fuels. In
comparison to the reference case, we estimate that the increased use of
renewable fuels in the RFS and EIA cases will reduce transportation
sector petroleum consumption by about 0.8 and 1.6 percent,
respectively, in the transportation sector in 2012. This is equivalent
to 2.0-3.9 billion gallons of petroleum in 2012. We also estimated that
greenhouse gases from the transportation sector will be reduced by
about 0.4 and 0.6 percent for the RFS and EIA cases, respectively,
equivalent to about 8-13 million metric tons. These reductions are
projected to continue to increase beyond 2012 since crude oil prices
have been projected by EIA to continue to be high relative to the
prices of the 1990's, and as a result there is expected to be an
economic advantage to using renewable fuels beyond 2012. These
greenhouse gas emission reductions are also highly dependent on the
expectation that the majority of the future ethanol use will be
produced

from corn. If advances in the technology for converting cellulosic
feedstocks into ethanol allow cellulosic ethanol use to exceed the
levels assumed in our analysis, then even greater greenhouse gas
reductions may result.\5\
---------------------------------------------------------------------------

    \5\ Cellulosic ethanol is estimated to provide a comparable
petroleum displacement as corn derived ethanol on a per gallon
basis, though the impacts on total energy and greenhouse gas
emissions differ.
---------------------------------------------------------------------------

5. Post 2012 RFS Standards
    The Energy Policy Act of 2005, in addition to setting the standards
to be adopted through 2012, requires EPA, in coordination with the
Departments of Agriculture and Energy, to determine the applicable
volume for the renewable fuel standard for the year 2013 and subsequent
calendar years. This determination is to be based on a review of the
program's implementation in 2006 through 2012 as well as review of the
impact of renewable fuels on the environment, air quality, energy
security, job creation, rural economic development and the expected
annual rate of renewable fuel production, including production of
cellulosic ethanol.
    In today's final rulemaking, we do not suggest any specific
renewable fuel volumes for 2013 and beyond that may be appropriate
under the statutory criteria. However, we would note that the
President, in his State of the Union address this January, set specific
goals reducing the amount of gasoline usage in the United States by 20
percent in the next 10 years. This would be accomplished by reforming
and modernizing fuel economy standards for cars and setting mandatory
fuels standard equivalent to requiring use of 35 billion gallons of
renewable and alternative \6\ fuels in 2017. Therefore, given the
necessity to address the post-2013 period under the Energy Act and the
prospect of continued attention by the Administration and Congress to
this issue, EPA will continue to devote attention to the issue of
renewable and alternative fuel volumes in the post-2013 period.
---------------------------------------------------------------------------

    \6\ While the RFS program is specific to renewable fuels, the
president's goal of 35 billion gallons by 2017 would include not
only renewable fuels, but also other types of alternatives fuels.
---------------------------------------------------------------------------

    From a program structure perspective, we believe that what we are
putting in place today will remain useful as part of a 2013 and later
program. For example, EPA considers that the identification of
renewable fuel via a Renewable Identification Number (RIN), the
determination of liable parties, the averaging, banking and trading
system and the recordkeeping and reporting system would all be elements
of a post-2013 program. Depending on the structure of any final
legislation approved by Congress and signed into law, such elements
could also be incorporated into an expanded renewable and alternative
fuels program.

B. Program Structure

    The RFS program being finalized today requires refiners, importers,
and blenders (other than oxygenate blenders) to show that a required
volume of renewable fuel is used in gasoline. The required volume is
determined by multiplying their annual gasoline production by a
percentage standard specified by EPA. Compliance is demonstrated
through the acquisition of unique Renewable Identification Numbers
(RINs) assigned by the producer or importer to every batch of renewable
fuel produced or imported. The RIN shows that a certain volume of
renewable fuel was produced or imported. Each year, the refiners,
blenders and importers obligated to meet the renewable volume
requirement (referred to as ``obligated parties'') must acquire
sufficient RINs to demonstrate compliance with their volume obligation.
RINs can be traded, thereby functioning as the credits envisioned in
the Act. A system of recordkeeping and electronic reporting for all
parties that have RINs ensures the integrity of the RIN pool. This RIN-
based system will both meet the requirements of the Act and provide
several other important advantages:
     Renewable fuel production volumes can be easily verified.
     RIN trading can occur in real time as soon as the
renewable fuel is produced rather than waiting to the end of the year
when an obligated party would determine if it had exceeded the
standard.
     Renewable fuel can continue to be produced, distributed,
and blended in those markets where it is most economical to do so.
     Instances of double-counting of renewable fuel claimed for
compliance purposes can be identified based on electronically reported
data.
    Our RIN-based trading program is an essential component of the RFS
program, ensuring that every obligated party can comply with the
standard while providing the flexibility for each obligated party to
use renewable fuel in the most economical ways possible.
1. What Is the RFS Program Standard?
    EPA is required to convert the aggregate national volumes of
renewable fuel specified in the Act into corresponding renewable fuel
standards expressed as a percent of gasoline production or importation.
The renewable volume obligation that will apply to an individual
obligated party will then be determined based on this percentage and
the total gasoline production or import volume in a calendar year,
January 1 through December 31. EPA will publish the percentage standard
in the Federal Register each November for the following year based on
the most recent EIA gasoline demand projections. However, for
compliance in 2007 we are publishing the percentage standard in today's
action. The standard for 2007 is 4.02 percent. Section III.A describes
the calculation of the standard.
2. Who Must Meet the Standard?
    Under our program, any party that produces or imports gasoline for
consumption in the U.S., including refiners, importers, and blenders
(other than oxygenate blenders), will be subject to a renewable volume
obligation that is based on the renewable fuel standard. These
obligated parties will determine the level of their obligation by
multiplying the percentage standard by their annual volume of gasoline
production or importation. The result will be the renewable fuel volume
which each party must ensure is blended into gasoline consumed in the
U.S., with credit for certain other renewable fuels that are not
blended into gasoline.
    For 2007, we are requiring that the renewable fuel volume
obligation be determined by multiplying the percentage standard by the
volume of gasoline produced or imported prospectively from September 1,
2007 until December 31, 2007. While the standard will not apply to all
of 2007 gasoline production, we are nevertheless confident that the
total volume of renewable fuel used in all of 2007 will still exceed
the volume specified in the Act due to expectations that the demand for
renewable fuel will exceed the RFS requirements.
    In determining their annual gasoline production volume, obligated
parties must include all of the finished gasoline which they produced
or imported for use in the contiguous 48 states, and must also include
reformulated blendstock for oxygenate blending (RBOB), and conventional
blendstock for oxygenate blending (CBOB). For refiners and importers
this includes unfinished gasoline produced or imported that will become
gasoline upon addition of an oxygenate downstream of the refiner. Other
producers of gasoline, such as blenders,

will count as their gasoline production only the volumes of blendstocks
which become gasoline upon their addition to finished gasoline,
unfinished gasoline, or other blendstocks. Renewable fuels blended into
gasoline by any party will not be counted as gasoline for the purposes
of calculating the annual gasoline production volume.
    Small refiners and small refineries are exempt from meeting the
renewable fuel requirements through 2010. All gasoline producers
located in Alaska, Hawaii, and noncontiguous U.S. territories and
parties who import gasoline into these areas will be exempt
indefinitely. However, if Alaska, Hawaii or a noncontiguous territory
opts into the RFS program, all of the refiners (except for exempt small
refiners and refineries), importers, and blenders located in the state
or territory will be subject to the renewable fuel standard.
    Section III.A provides more details on the standard that must be
met, while Section III.C describes the parties that are obligated to
meet the standard.
3. What Qualifies as a Renewable Fuel?
    We have designed the program to cover the range of renewable fuels
produced today as well as any that might be produced in the future, so
long as they meet the Act's definition of renewable fuel and have been
registered and approved for use in motor vehicles. In this manner, we
believe that the program provides the greatest possible encouragement
for the development, production, and use of renewable fuels to reduce
our dependence on petroleum as well as to reduce the carbon dioxide
emissions that contribute to climate change. In general, renewable
fuels must be produced from plant or animal products or wastes, as
opposed to fossil fuel sources. Valid renewable fuels include ethanol
made from starch seeds, sugar, or cellulosic materials, biodiesel
(mono-alkyl esters), non-ester renewable diesel, and a variety of other
products. Both renewable fuels blended into conventional gasoline or
diesel and those used in their neat (unblended) form as motor vehicle
fuel will qualify. Section III.B provides more details on the renewable
fuels that will be allowed to be used for compliance with the standard
under our program.
4. Equivalence Values of Different Renewables Fuels
    One question that we faced in developing the program was what value
to place on different renewable fuels and on what basis should that
value be determined. The Act specifies that each gallon of cellulosic
biomass ethanol and waste-derived ethanol be treated as if it were 2.5
gallons of renewable fuel for compliance purposes, but does not specify
the values for other renewable fuels. Although in the NPRM we
considered a range of options including straight volume, energy
content, and requested comment on the merit and basis for setting
``Equivalence Values'' on several metrics including lifecycle energy or
greenhouse gas emissions, for this final rule we are requiring that the
``Equivalence Values'' for the different renewable fuels be based on
their energy content in comparison to the energy content of ethanol,
and adjusted as necessary for their renewable content. The result is an
Equivalence Value for corn ethanol of 1.0, for biobutanol of 1.3, for
biodiesel (mono alkyl ester) of 1.5, for non-ester renewable diesel of
1.7, and for cellulosic ethanol and waste-derived ethanol of 2.5. The
proposed methodology can be used to determine the appropriate
Equivalence Value for any other potential renewable fuel as well.
Section III.B.4 provides details of the determination of Equivalence
Values.
5. How Will Compliance Be Determined?
    Under our program, every gallon of renewable fuel produced or
imported into the U.S. must be assigned a unique RIN. A block of RINs
would be assigned to any batch of renewable fuel that is valid for
compliance purposes under the RFS program. These RINs must be
transferred with renewable fuel as ownership of a volume of renewable
fuel is initially transferred through the distribution system. Once the
renewable fuel is obtained by an obligated party or actually blended
into a motor vehicle fuel, the RIN can be separated from the batch of
renewable fuel and then either used for compliance purposes, held, or
traded.
    RINs represent proof of production which is then taken as proof of
consumption as well, since all but a trivial quantity of renewable fuel
produced or imported will be either consumed as fuel or exported. For
instance, ethanol produced for use as motor vehicle fuel is denatured
specifically so that it can only be used as fuel. Similarly, biodiesel
is produced only for use as fuel and has no other significant uses. An
obligated party demonstrates compliance with the renewable fuel
standard by accumulating sufficient RINs to cover their individual
renewable volume obligation. It will not matter whether the obligated
party used the renewable fuel themselves. An obligated party's
obligation will be to ensure that a certain amount of renewable fuel
was used, either by themselves or by someone else, and the RIN is
evidence that this occurred for a certain volume of renewable fuel.
Exporters of renewable fuel will also be required to acquire RINs in
sufficient quantities to cover the volume of renewable fuel exported.
RINs claimed for compliance purposes by obligated parties will thus
represent renewable fuel actually consumed as motor vehicle fuel in the
U.S.
    RINs are valid for compliance purposes for the calendar year in
which they are generated, or the following calendar year. This approach
to RIN life is consistent with the Act's prescription that credits be
valid for compliance purposes for 12 months as of the date of
generation, where credits are generated at the end of a year when
compliance is determined. An obligated party can either use RINs to
demonstrate compliance, or can transfer RINs to any other party. If an
obligated party is not able to accumulate sufficient RINs for
compliance in a given year, it can carry a deficit over to the next
year so long as the full deficit and obligation is covered in the next
year.
    In order to ensure that previous year RINs are not used
preferentially for compliance purposes in a manner that would
effectively circumvent the limitation that RINs be valid for only 12
months after the year generated, we are setting a cap on the use of
RINs generated the previous year when demonstrating compliance with the
renewable volume obligation for the current year. The cap will mean
that no more than 20 percent of a current year obligation can be
satisfied using RINs from the previous year. In this manner there is no
ability for excess renewable fuel use in successive years to cause an
accumulation of RINs to significantly depress renewable fuel demand in
any future year. In keeping with the Act, excess RINs not used in the
year they are generated or in the subsequent year will expire.
    Section III.D provides more details on how obligated parties must
use RINs for compliance purposes.
6. How Will the Trading Program Work?
    Renewable fuel producers and importers will be required to generate
RINs when they produce or import a batch of renewable fuel (unless, for
importers, the RINs have been assigned by a foreign producer registered
with EPA). They will then be required to transfer those RINs along with
the renewable fuel batches that they represent whenever they transfer
ownership of the batch to another party. Likewise any other non-
obligated party

that takes ownership of a volume of renewable fuel with RINs will be
required to transfer those RINs with a volume of renewable fuel. The
RIN can be separated from renewable fuel only by obligated parties (at
the point when they take ownership of the batch) or a party that
converts the renewable fuel into motor vehicle fuel (such as upon
blending with gasoline or diesel).
    Once a RIN is separated from a volume of renewable fuel, it can be
used for compliance purposes, banked, or traded to another party.
Separated RINs can be transferred to any party any number of times.
Recordkeeping and reporting requirements will apply to any party that
takes ownership of RINs, whether through the ownership of a batch of
renewable fuel or through the transfer of separated RINs.
    Thus obligated parties can acquire RINs directly through the
purchase of renewable fuel with assigned RINs or through the open
market for RINs that is allowed under this proposal. Section III.E
provides more details on how our RIN trading program will work.
7. How Will the Program Be Enforced?
    As in all EPA fuel regulations, there is a system of registration,
recordkeeping, and reporting requirements for obligated parties,
renewable producers and importers (RIN generators), and any parties
that procure or trade RINs either as part of their renewable purchases
or separately. In most cases, the recordkeeping requirements are not
significantly different from what these parties might be doing already
as a part of normal business practices. The lynch pin to the compliance
program, however, is the unique RIN number itself coupled with an
electronic reporting system where RIN generation, RIN use, and RIN
transactions will be reported and verified. Thus, EPA, as well as
industry can have confidence that invalid RINs are not generated and
that there is no double counting.

C. Voluntary Green Labeling Program

    In the proposal EPA asked for comments on the idea of creating a
voluntary labeling program to encourage the adoption and use of
practices that minimize the environmental concerns associated with
renewable fuel production. The proposal suggested adding a ``G'' (for
green) to the end of the RIN of a fuel to indicate that a gallon of
renewable fuel was produced with the combination of best farming
practices and environmentally friendly production methods and
facilities. EPA received a number of comments on this idea.
    The majority of respondents were very supportive of voluntary
labeling and encouraged EPA to establish this program through this
final rulemaking. Two commenters opposed the labeling concept, telling
EPA that the number and complexity of issues associated with fuel
production, and particularly with farming practices, would make such a
program impractical and difficult to implement. EPA also was told that
it would be hard to audit such a program. Most commenters agreed that
using the RIN to host the label makes sense, however the use of ``G''
for green fuel is insufficient to capture the full range of
environmental impacts of renewable fuel production and that it would be
difficult for EPA to establish an appropriate cut-off point for
determining which fuel qualified for a ``G'' designation. Several
respondents suggested that EPA instead use a more continuous scale
based on energy or lifecycle greenhouse gas emissions.
    A well designed voluntary labeling program could permit producers
and blenders to distinguish their fuels in the marketplace and allow
consumers to express preferences for ``green'' products through their
fuel purchases. While such a program could be valuable to producers,
blenders, and consumers, given the range of comments received on the
topic, we believe it is important first to continue the dialogue with
the various stakeholders to ensure that the program adequately
addresses the issues raised prior to putting any such program in place.
Thus we are not finalizing a voluntary labeling program. We will
continue to investigate the issues surrounding a voluntary labeling
program and the various ways in which it could be designed. In
particular we are interested in further exploring methods to
incorporate lifecycle impacts into a voluntary labeling program and
consumer expectations for such ``green'' labeling.

III. Complying With the Renewable Fuel Standard

    According to the Energy Act, the RFS program places obligations on
individual parties such that the renewable fuel volumes shown in Table
I.B-1 are used as motor vehicle fuel in the U.S. each year. To
accomplish this, the Agency must calculate and publish a standard by
November 30 of each year which is applicable to every obligated party.
On the basis of this standard each obligated party determines the
volume of renewable fuel that it must ensure is consumed as motor
vehicle fuel. In addition to setting the standard, we must clarify who
the obligated parties are and what volumes of gasoline are subject to
the standard. Obligated parties must also know which renewable fuels
are valid for RFS compliance purposes, and the relative values of each
type of renewable fuel in terms of compliance. This section discusses
how the annual standard is determined and which parties and volumes of
gasoline will be subject to the requirements.
    Because renewable fuels are not produced or distributed evenly
around the country, some obligated parties will have easier access to
renewable fuels than others. As a result, the RFS program depends on a
robust trading program. This section also describes all the elements of
our trading program.

A. What Is the Standard That Must Be Met?

1. How Is the Percentage Standard Calculated?
    Table I.B-1 shows the required total volume of renewable fuel
specified in the Act for 2007 through 2012. The renewable fuel standard
is based primarily on (1) the 48-state gasoline consumption volumes
projected by EIA (as the Act exempts Hawaii and Alaska, subject to
their right to opt-in, as discussed in Section III.C.4), and (2) the
volume of renewable fuels required by the Act for the coming year. The
renewable fuel standard will be expressed as a volume percentage of
gasoline sold or introduced into commerce in the U.S., and will be used
by each refiner, blender or importer to determine their renewable
volume obligation. The applicable percentage is set so that if each
regulated party meets the percentage and total gasoline consumption
does not fall short of EIA projections then the total amount of
renewable fuel used will meet the total renewable fuel volume specified
in Table I.B-1.
    In determining the applicable percentage for a calendar year, the
Act requires EPA to adjust the standard to prevent the imposition of
redundant obligations on any person and to account for the use of
renewable fuel during the previous calendar year by exempt small
refineries, defined as refineries that process less than 75,000 bpd of
crude oil. As a result, in order to be assured that the percentage
standard will in fact result in the volumes shown in Table I.B-1, we
must make several adjustments to what is otherwise a simple
calculation.
    As stated, the renewable fuel standard for a given year is
basically the ratio of the amount of renewable fuel specified in the
Act for that year to the projected 48-state non-renewable gasoline
volume

for that year. While the required amount of total renewable fuel for a
given year is provided by the Act, the Act requires EPA to use an EIA
estimate of the amount of gasoline that will be sold or introduced into
commerce for that year. The level of the percentage standard is reduced
if Alaska, Hawaii, or a U.S. territory choose to participate in the RFS
program, as gasoline produced in or imported into those states or
territories would then be subject to the standard. Should any of these
states or territories opt into the RFS program, the projected gasoline
volume would increase above that consumed in the 48 contiguous states.
    In the proposal, we stated that EIA had indicated that the best
estimation of the coming year's gasoline consumption is found in Table
5a (U.S. Petroleum Supply and Demand: Base Case) of the October issue
of the monthly EIA publication Short-Term Energy Outlook which
publishes quarterly energy projections. Commenters on this issue
supported the use of the October issue of EIA's Short-Term Energy
Outlook (STEO), Table 5a, for the purpose of estimating the next year's
gasoline consumption, and we have used the October 2006 STEO values for
estimating 2007 gasoline consumption for this final rule.
    The gasoline volumes in the STEO include renewable fuel use. As
discussed below in Section III.C.1, the renewable fuel obligation does
not apply to renewable blenders. Thus, the gasoline volume used to
determine the standard must be the non-renewable portion of the
gasoline pool, in order to achieve the volumes of renewables specified
in the Act. In order to get a total non-renewable gasoline volume, we
must subtract the renewable fuel volume from the total gasoline volume.
EIA has indicated that the best estimation of the coming year's
renewable fuel consumption is found in Table 11 (U.S. Renewable Energy
Use by Sector: Base Case) of the October issue of the STEO. As with the
gasoline projections discussed above, we have used the October 2006
STEO values for estimating 2007 renewable fuel values for this final
rule.
    The Act exempts small refineries \7\ from the RFS requirements
until the 2011 compliance period. As discussed in Section III.C.3.a, as
proposed, EPA is also exempting small refiners \8\ from the RFS
requirements until 2011, and is treating small refiner gasoline volumes
the same as small refinery gasoline volumes. Since small refineries and
small refiners are exempt from the program until 2011, EPA is excluding
their gasoline volumes from the overall non-renewable gasoline volume
used to determine the applicable percentage. EPA believes this is
appropriate because the percentage standard should be based only on the
gasoline subject to the renewable volume obligation. Because small
refineries and small refiners are exempt (unless they waive exemption)
only through the 2010 compliance period when the exemption ends,
calculation of the standard for calendar year 2011 and beyond will
include small refinery and small refiner volumes.\9\ Using information
from gasoline batch reports submitted to EPA, EIA data, and input from
the California Air Resources Board regarding California small refiners,
we are finalizing a small refiner exemption adjustment to the standard
of a constant 13.5%,\10\ consistent with the proposal.
---------------------------------------------------------------------------

    \7\ Under the Act, small refineries are those with 75,000 bbl/
day or less average aggregate daily crude oil throughput.
    \8\ Small refiners are those entities who produced gasoline from
crude oil in 2004, and who meet the crude processing capability (no
more than 155,000 barrels per calendar day, bpcd) and employee (no
more than 1500 people) criteria as specified in previous EPA fuel
regulations.
    \9\ As discussed in section III.C.3.a of this preamble, the
small refinery exemption may be extended under 211(o)(9)(A)(ii) or
(B) of the Clean Air Act as amended by the Energy Policy Act.
    \10\ ``Calculation of the Small Refiner/Small Refinery Fraction
for the Renewable Fuel Program,'' memo to the docket from Christine
Brunner, ASD, OTAQ, EPA September 2006.
---------------------------------------------------------------------------

    The Act requires that the small refinery adjustment also account
for renewable fuels used during the prior year by small refineries that
are exempt and do not participate in the RFS program. Accounting for
this volume of renewable fuel would reduce the total volume of
renewable fuel use required of others, and thus directionally would
reduce the percentage standard. However, as discussed in the proposal,
there are no such data available, the amount of renewable fuel that
would qualify (i.e., that was used by exempt small refineries and small
refiners but not used as part of the RFS program) is expected to be
very small and would not significantly change the resulting percentage
standard. Because whatever renewables small refiners and small
refineries blend will be reflected as RINs available in the market,
there is no need for a separate accounting of their renewable fuel use
in the equation used to determine the standard. We thus proposed that
this value be zero, and we are finalizing the equation as such.
    We also proposed not to include renewable fuel used in Alaska,
Hawaii, or U.S. territories when subtracting renewable fuel volumes
from the anticipated total gasoline volumes in EIA projections. The Act
requires that the renewable fuel be consumed in the contiguous 48
states unless Alaska, Hawaii, or a U.S. territory opt-in. However,
because renewable fuel produced in Alaska, Hawaii, and U.S. territories
is unlikely to be transported to the contiguous 48 states, including
their renewable fuel volumes in the calculation of the standard would
not serve the purpose intended by the Act of ensuring that the
statutorily required renewable fuel volumes are consumed in the 48
contiguous States. We are finalizing the exclusion of these areas'
renewable fuel use as proposed.
    We stated that any deficit carryover from 2006 would increase the
2007 standard. Since renewable fuel use in 2006 exceeded the 2.78
percent default standard, there is no deficit to carry over to 2007.
Beginning with the 2007 compliance period, when annual individual party
compliance replaces collective compliance, any deficit is calculated
for an individual party and is included in the party's Renewable Volume
Obligation (RVO) determination, as discussed in Section III.A.4.
    In summary, the total projected non-renewable gasoline volumes from
which the annual standard is calculated is based on EIA projections of
gasoline consumption in the contiguous 48 states, adjusted by a
constant percentage of 13.5% to account for small refinery/refiner
volume, with built-in correction factors to be used when and if non-
contiguous states and territories opt-in to the program. If actual
gasoline consumption were to exceed the EIA projection, the result
would be that renewable fuel volumes will exceed the statutory
requirements. Conversely, if actual gasoline consumption was less than
the EIA projection for a given year, theoretically a renewable fuel
shortfall could occur. However, our projections of renewable fuel use
due to market demand would make a shortfall extremely unlikely
regardless of the error in gasoline consumption projections.
    The following formula will be used to calculate the percentage
standard:

[GRAPHIC] [TIFF OMITTED] TR01MY07.056

Where:

RFStdi = Renewable Fuel standard in year i, in percent.
RFVi = Annual volume of renewable fuels required by
section 211(o)(2)(B) of the Act for year i, in gallons.
Gi = Amount of gasoline projected to be used in the 48
contiguous states, in year i, in gallons.
Ri = Amount of renewable fuel blended into gasoline that
is projected to be consumed in the 48 contiguous states, in year i,
in gallons.
GSi = Amount of gasoline projected to be used in Alaska,
Hawaii, or a U.S. territory in year i if the state or territory
opts-in, in gallons.
RSi = Amount of renewable fuel blended into gasoline that
is projected to be consumed in Alaska, Hawaii, or a U.S. territory
in year i if the state or territory opts-in, in gallons.
GEi = Amount of gasoline projected to be produced by
exempt small refineries and small refiners in year i, in gallons
(through 2010 only unless exemption extended under Sec. Sec.
211(o)(9)(A)(ii) or (B)). Equivalent to 0.135*(Gi-
Ri).
Celli = Beginning in 2013, the amount of renewable fuel
that is required to come from cellulosic sources, in year i, in
gallons (250,000,000 gallons minimum).

    After 2012 the Act requires that the applicable volume of required
renewable fuel specified in Table I.B-1 include a minimum of 250
million gallons that are derived from cellulosic biomass. As shown in
Table III.A.2-1 below, we have estimated this value (250 million
gallons) as a percent of an obligated party's production for 2013.
Thus, an obligated party will be subject to two standards in 2013 and
beyond, a non-cellulosic standard and a cellulosic standard. We are
therefore also finalizing the following formula for calculating the
cellulosic standard that is required beginning in 2013:
[GRAPHIC] [TIFF OMITTED] TR01MY07.057

Where, except for RFCelli, the variable descriptions are
as discussed above. The definition of RFCelli is:

RFCelli = Renewable Fuel Cellulosic Standard in year i,
in percent

    Note that after 2012 cellulosic RINs cannot be used to satisfy the
non-cellulosic RFS standard (RFStdi). The amount of
renewable fuel that is required to come from cellulosic sources
(Celli) is a fixed amount.
    We are not finalizing regulations that would specify the criteria
under which a state could petition the EPA for a waiver of the RFS
requirements, nor the ramifications of Agency approval of such a waiver
in terms of the level or applicability of the standard. As discussed in
the proposal, there was no clear way to include such a provision in the
context of the program being finalized. As a result, the formula for
the standard shown above does not include any components to account for
Agency approval of a state petition for a waiver of the RFS
requirements. Should EPA grant such a waiver in the future, it will
determine at that time what adjustments to make to the standard.
2. What Are the Applicable Standards?
    As discussed in the proposal, EPA will set the percentage standard
for each upcoming year based on the most recent EIA STEO projections,
and using the other sources of information as noted above. EPA will
publish the standard in the Federal Register by November 30 of the
preceding year. The standards are used to determine the renewable
volume obligation based on an obligated party's total gasoline
production or import volume in a calendar year, January 1 through
December 31. The percentage standards do not apply on a per gallon
basis. An obligated party will calculate its Renewable Volume
Obligation (discussed in Section III.A.4) using the annual standard.
    In the NPRM, we estimated the standards for 2007 and later using
data available at the time and the formulas discussed above.\11\ We
have revised these values based on more recent data, and using EIA's
October 2006 STEO gasoline and renewable fuel consumption
projections.\12\ In the proposal, we had used the lower heating value
of ethanol for converting from Btu to gallons of ethanol for the
purpose of calculating the standard. However, for this final rule, we
have used the higher heating value of ethanol as recommended by
commenters, to be consistent with EIA practices.\13\ \14\ Variables
related to state or territory opt-ins were set to zero since we do not
have any information related to their participation at this time. As
mentioned earlier, we estimate the small refinery and small refiner
fraction to be 13.5%. The exemption for small refineries and small
refiners ends at the end of the 2010 compliance period, unless extended
as discussed in Section III.C.3.a. Based on all of these factors, the
standard for 2007 is 4.02%. Projected values of the standard for 2008
and beyond are shown in Table III.A.2-1.
---------------------------------------------------------------------------

    \11\ ``Calculation of the Renewable Fuel Standard'' memo to the
docket from Christine Brunner, ASD, OTAQ, EPA, September 2006.
    \12\ ``Calculation of the Renewable Fuel Standard--Revised''
memo to the docket from Christine Brunner, ASD, OTAQ, EPA, April
2007.
    \13\ The higher (or gross or upper) heating value is used in all
Btu calculations for EIA's Annual Energy Review and in related EIA
publications (see discussion in EIA's Annual Energy Review, Appendix
A, Thermal Conversion Factors).
    \14\ The lower heating value (LHV) is used to represent energy
content in the context of setting Equivalence Values as described in
Section III.B.4 because it more accurately reflects the energy
available in the fuel to produce work.

                  Table III.A.2-1.--Projected Standards
------------------------------------------------------------------------
                                                          Cellulosic
              Year                Projected standard       standard
------------------------------------------------------------------------
2008............................  4.63%.............  Not applicable.
2009............................  5.21%.............  Not applicable.
2010............................  5.80%.............  Not applicable.
2011............................  5.38%.............  Not applicable.
2012............................  5.42%.............  Not applicable.
2013+...........................  5.24% min. (non-    0.18% min.
                                   cellulosic).
------------------------------------------------------------------------

    As discussed in Section II.A.5, for calendar year 2013 and
thereafter, the applicable volumes will be determined in accordance
with separate statutory provisions that include EPA coordination with
the Departments of Agriculture and Energy, and a review of the program
during calendar years 2006 through 2012. The Act specifies that this
review consider the impact of the use of renewable fuels on the
environment, air quality, energy security, job creation, and rural
economic development, and the expected annual rate of future production
of renewable fuels, including cellulosic ethanol. We intend to conduct
another rulemaking as we approach the 2013 timeframe that would include
our review of these factors. That rulemaking will present our
conclusions regarding the appropriate applicable volume of renewable
fuel for use in calculating the renewable fuel standard for 2013 and
beyond. The program finalized by today's rule will continue to apply
after 2012, though some elements may be modified in the rulemaking
setting the standards for 2013 and beyond. Today's rule does not
contain a mechanism for establishing a post-2012 standard.
3. Compliance in 2007
    The Energy Act requires that EPA promulgate regulations to
implement the RFS program, and if EPA did not issue such regulations
then a default standard for renewable fuel use would apply in 2006. On
December 30, 2005 we promulgated a direct final rule to interpret and
implement the application of the statutory default standard of 2.78
percent in calendar year 2006 (70 FR 77325). However, the Act provides
no default standard for any other year.
    In the NPRM we stated our expectation that, due to the limited time
available for this rulemaking, we would be unable to publish the final
rule and have it become effective by January 1, 2007. We discussed
several ways that we could specify how, and for what time periods, the
applicable standard and other program requirements would apply to
regulated parties for gasoline produced during 2007. We discussed a
collective compliance approach similar to that applied in 2006, as well
as a ``full year'' approach that would have based the renewable volume
obligation for each obligated party on all gasoline produced starting
on January 1, 2007 regardless of the effective date of the rule.
However, due to a number of issues with these approaches, we proposed a
``prospective'' approach in which the renewable fuel standard would be
applied to only those volumes of gasoline produced after the effective
date of the final rule. Essentially the renewable volume obligation for
2007 would be based on only those volumes of gasoline produced or
imported by an obligated party prospectively from the effective date of
the rulemaking forward, and renewable producers would not have to begin
generating RINs and maintaining the necessary records until this same
date.
    We received no comments supporting the alternative ``full year''
approach to 2007 compliance. However, several parties expressed a
preference for either a collective compliance approach for 2007, or if
not that then delaying implementation of the comprehensive program to
January 1, 2008. They argued that regulated parties needed additional
time to put into place the sophisticated RIN tracking systems that
would be required. The additional time would also allow regulated
parties to debug the systems, train personnel, and put support programs
into place. The American Coalition for Ethanol also argued that the
prospective approach did not guarantee that the total renewable fuel
volumes required by the Act for 2007 would actually be used in 2007,
whereas a collective compliance approach would. Parties in favor of a
collective compliance approach argued that EPA has the authority to
implement such an approach despite the fact that the Act does not
explicitly give EPA this authority, and also argued that there was no
need to include any form of credit carryover under a collective
compliance approach.
    However, a number of refiners and their associations opposed a
collective compliance approach to 2007 and expressed strong support for
the proposed prospective approach. They argued that a start date at
least 60 days from the date of publication of the final rule would
provide sufficient time to obligated parties for making the necessary
adjustments for compliance. They also argued that they should be
afforded the opportunity to participate as soon as possible in the
trading program, which the collective compliance approach used for 2006
would preclude for 2007.
    We continue to believe that a collective compliance approach is not
appropriate for 2007. The Energy Act requires us to promulgate
regulations that provide for the generation of credits by any person
who over complies with their obligation. It also stipulates that a
person who generates credits must be permitted to use them for
compliance purposes, or to transfer them to another party. These credit
provisions have meaning only in the context of an individual obligation
to meet the applicable standard. Delaying a credit program until 2008
would mean the credit provisions have no meaning at all for 2007, since
under a collective compliance approach no individual facility or
company would be liable for meeting the applicable standard. Including
a ``collective'' credit or deficit carryforward as part of a collective
compliance program would also not fully implement the credit provisions
of the Act. The prospective compliance approach, in contrast, not only
provides obligated parties with the opportunity to generate credits,
but also provides the industry with the certainty they need to comply
and is relatively straightforward to implement.
    Rather than requiring the program to begin on the effective date of
the rule as proposed (60 days following publication in the Federal
Register), we are finalizing a start date of September 1, 2007. From
this date forward, the renewable fuel standard will be applicable to
all gasoline produced or imported, and all renewable fuels produced or
imported will have to be assigned a RIN. All regulated parties must be
registered by this date, and the recordkeeping responsibilities will
also begin. By setting such a date, industry will be able to plan with
confidence to start complying upon signature of the rule, rather than
having the start date depend upon the timing of publication of this
final rule in the Federal Register. We recognize the concerns expressed
in comments that time is needed to prepare Information Technology (IT)
systems to comply with the program. However, we believe that a
September 1, 2007 start date will provide sufficient time. The final
rule is in most respects consistent with the NPRM, and based on
discussions with industry, plans for implementation are already
underway. Furthermore, a September 1, 2007 start date will likely
provide regulated parties some additional time to prepare in comparison
to simply setting the start date as 60 days following publication of
the rule.
    As stated in the NPRM, we recognize that the prospective approach
to 2007 compliance will not guarantee by regulation that the total
renewable fuel volumes required by the Act for 2007 would actually be
used in 2007. However, current projections from the Energy Information
Administration (EIA) on the volume of renewable fuel expected to be
produced in 2007 indicate that the Act's required volumes will be
exceeded by a substantial margin due to the relative economic value of
renewable fuels in comparison to gasoline. We are confident that the
combined effect of the regulatory

requirements for 2007 and the expected market demand for renewable
fuels will lead to greater renewable fuel use in 2007 than is called
for under the Act. Current renewable production already exceeds the
rate required for all of 2007, and as discussed in Section VI, capacity
is expected to continue to grow. Furthermore, refiners and importers
are not required to meet any requirements under the Act until EPA
adopts the regulations, and EPA is authorized to consider appropriate
lead time in establishing the regulatory requirements.\15\ Under this
option we believe there will be reasonable lead-time for regulated
parties to meet their 2007 compliance obligations. While no option
before us is perhaps totally consistent with all of the provisions of
the Act, we believe the rule as adopted does the best job possible
given the circumstances of implementing all of the provisions of the
Act for 2007.
---------------------------------------------------------------------------

    \15\ The statutory default standard for 2006 is the one
exception to this, since it directly establishes a renewable fuel
obligation applicable to refiners and importers in the event that
EPA does not promulgate regulations.
---------------------------------------------------------------------------

4. Renewable Volume Obligations
    In order for an obligated party to demonstrate compliance, the
percentage standards described in Section III.A.2 which are applicable
to all obligated parties must be converted into the volume of renewable
fuel each obligated party is required to satisfy. This volume of
renewable fuel is the volume for which the obligated party is
responsible under the RFS program, and is referred to here as its
Renewable Volume Obligation (RVO).
    The calculation of the RVO requires that the standard shown in
Table III.A.2-1 for a particular compliance year be multiplied by the
gasoline volume produced by an obligated party in that year. To the
degree that an obligated party did not demonstrate full compliance with
its RVO for the previous year, the shortfall is included as a deficit
carryover in the calculation. The equation used to calculate the RVO
for a particular year is shown below:

RVOi = Stdi x GVi + Di-1

Where:

RVOi = The Renewable Volume Obligation for the obligated
party for year i, in gallons.
Stdi = The RFS program standard for year i, in percent.
GVi = The non-renewable gasoline volume produced by an
obligated party in year i, in gallons.

Di-1 = Renewable fuel deficit carryover from the previous
year, in gallons.

    The Energy Act only permits a deficit carryover from one year to
the next if the obligated party achieves full compliance with its RVO
including the deficit carryover in the second year. Thus deficit
carryovers could not occur two years in succession. They could,
however, occur as frequently as every other year for a given obligated
party.
    The calculation of an obligated party's RVO is necessarily
retrospective, since the total gasoline volume that it produces in a
calendar year will not be known until the year has ended. However, the
obligated party will have an incentive to project gasoline volumes, and
thus the RVO, throughout the year so that it can spread its efforts to
comply across the entire year. Most refiners and importers will be able
to project their annual gasoline production volumes with a minimum of
uncertainty based on their historical operations, capacity, plans for
facility downtimes, knowledge of gasoline markets, etc. Even if
unforeseen circumstances (e.g., hurricane, unit failure, etc.)
significantly reduced the production volumes in comparison to their
projections, their RVO will likewise be reduced proportionally and
their ability to comply with the RFS requirements will be only
minimally affected. Each obligated party's projected RVO for a given
year becomes more accurate as that year progresses, but the obligated
party should nevertheless have a sufficiently accurate estimate of its
RVO at the beginning of the year to allow it to begin its efforts to
comply.

B. What Counts as a Renewable Fuel in the RFS Program?

    Section 211(o) of the Clean Air Act defines ``renewable fuel'' and
specifies many of the details of the renewable fuel program. The
following section provides EPA's views and interpretations on issues
related to what fuels may be counted towards compliance with the RVO,
and how they are counted.
1. What Is a Renewable Fuel That Can Be Used for Compliance?
    The statutory definition of renewable fuel includes cellulosic
ethanol and waste derived ethanol. It includes biodiesel, as defined in
the Energy Act.\16\ It also includes all motor vehicle fuels that are
produced from biomass material such as grain, starch, oilseeds, animal,
or fish materials including fats, greases and oils, sugarcane, sugar
beets, tobacco, potatoes or other biomass (such as bagasse from sugar
cane, corn stover, and algae and seaweed). In addition, it includes
motor vehicle fuels made using a feedstock of natural gas if produced
from a biogas source such as a landfill, sewage waste treatment plant,
feedlot, or other place where decaying organic material is found.
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    \16\ As discussed below, for purposes of this rulemaking, the
regulations separate ``biodiesel'' as defined in the Energy Act,
into biodiesel (diesels that meet the Energy Act's definition and
are a mono-alkyl ester) and renewable diesel (other diesels that
meet the Energy Act's definition but are not mono-alkyl esters).
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    According to the Act, the motor vehicle fuels must be used ``to
replace or reduce the quantity of fossil fuel present in a fuel mixture
used to operate a motor vehicle.'' Some motor vehicle fuels can be used
in both motor vehicles or nonroad engines or equipment. For example,
highway gasoline and diesel fuel are often used in both highway and
off-highway applications. Compressed natural gas can likewise be used
in either highway or nonroad applications. For purposes of the
renewable fuel program, EPA considers a fuel to be a ``motor vehicle
fuel'' and to be ``a fuel mixture used to operate a motor vehicle,''
based on its potential for use in highway and nonroad vehicles, without
regard to whether it, in fact, is used in a highway vehicle
application. EPA does not believe that the much more complex and costly
regulatory scheme that would be needed to track motor vehicle fuel use
versus off-road fuel use would be justified. (As discussed further
below, heaters and boilers are not considered highway or nonroad engine
applications and renewable fuel produced or imported specifically for
use in such equipment is not valid for compliance purposes under the
RFS program.) If it is a fuel that could be used in highway vehicles,
it will satisfy these parts of the definition of renewable fuel,
whether it is later used in highway or nonroad applications. This will
allow a motor vehicle fuel that otherwise meets the definition to be
counted towards a party's RVO without the need to track it to determine
its actual application in a highway vehicle, and provided only that the
producer does not know that the fuel will be used for a purpose other
than highway and nonroad engine applications. This is also consistent
with the requirement that EPA base the renewable fuel obligation on
estimates of the entire volume of gasoline consumed, without regard to
whether it is used in highway or nonroad applications.
    Renewable fuel as defined, may be made from a number of different
types of feedstocks. For example, the Fisher-Tropsch process can use
methane gas from landfills as a feedstock, to produce diesel or
gasoline. Vegetable oil made

from oilseeds such as rapeseed or soybeans can be used to make
biodiesel or renewable diesel. Methane, made from landfill gas (biogas)
can be used to make methanol, or can be used directly as a fuel in
vehicles with engines designed to run on compressed natural gas. Also,
some vegetable oils or animal fats can be processed in distillation
columns in refineries to make gasoline; as such, the renewable
feedstock serves as a ``renewable crude,'' and the resulting gasoline
or diesel product would be a renewable fuel. This last example is
discussed in further detail in Section III.B.3 below.
    As this discussion shows, the definition of renewable fuel in the
Act is broad in scope, and covers a wide range of fuels. While ethanol
is used primarily in combination with gasoline, the definition of
renewable fuel in the Act is not limited to fuels that can be blended
with gasoline. Various fuels that meet the definition of renewable fuel
can be used in their neat form, such as ethanol, biodiesel, methanol or
natural gas. Others, including ethanol may be used to produce a
gasoline blending component (such as ETBE). At the same time, the RFS
regulatory program is to ``ensure that gasoline sold or introduced into
commerce * * * contains the applicable volume of renewable fuel.'' This
applicable volume is specified as a total volume of renewable fuel on
an aggregate basis. Congress also clearly specified that one renewable
fuel, biodiesel, could be counted towards compliance even though it is
not a gasoline component, and does not directly displace or replace
gasoline. The Act is unclear on whether other fuels that meet the
definition of renewable fuel, but are not used in gasoline, could also
be used to demonstrate compliance towards the aggregate national use of
renewable fuels.
    EPA interprets the Act as allowing regulated parties to demonstrate
compliance based on any fuel that meets the statutory definition for
renewable fuel, whether it is directly blended with gasoline or not.
This would include neat alternative fuels such as ethanol, methanol,
and natural gas that meet the definition of renewable fuel. This is
appropriate for several reasons. First, it promotes the use of all
renewable fuels, which will further the achievement of the purposes
behind this provision. Congress did not intend to limit the program to
only gasoline components, as evidenced by the provision for biodiesel,
and the broad definition of renewable fuel evidences an intention to
address more renewable fuels than those used with gasoline. Second, in
practice EPA expects that the overwhelming volume of renewable fuel
used to demonstrate compliance with the renewable fuel obligation would
still be ethanol blended with gasoline. Finally, as discussed later,
EPA's compliance program is based on assigning volumes at the point of
production, and not at the point of blending into motor vehicle fuel.
This interpretation avoids the need to track renewable fuels downstream
to ensure they are blended with gasoline and not used in their neat
form; the gasoline that is used in motor vehicles is reduced by the
presence of renewable fuels in the gasoline pool whether they are
blended with gasoline or not. Comments received on this interpretation
were favorable towards it. EPA continues to believe, therefore, that
this approach is consistent with the intent of Congress and is a
reasonable interpretation of the Act. One commenter indicated that a
logical extension of this reasoning would provide that renewable fuel
that could be used in motor vehicles is still a renewable fuel under
the Act when used by renewable fuel producers in a boiler or heater.
EPA disagrees. The term ``renewable fuel'' means ``motor vehicle fuel
that * * * is used to replace or reduce the quantity of fossil fuel
present in a fuel mixture used to operate a motor vehicle.'' We believe
that all but a trivial quantity of renewable fuels that can be used in
motor vehicles will ultimately be used as motor vehicle fuel. Producers
of ethanol biodiesel and other products that can be used as motor
vehicle fuel can generally assume, therefore, that their products will
be used in that way, and can assign RINs to their product without
tracking its ultimate use. However, renewable fuel used onsite in a
boiler or heater by a renewable fuel producer clearly is not a motor
vehicle fuel used to replace or reduce the quantity of fossil fuel
present in a fuel mixture used to operate a motor vehicle.
    Under the Act, renewable fuel includes ``cellulosic biomass
ethanol'' and ``waste derived ethanol'', each of which is defined
separately. Ethanol can be cellulosic biomass ethanol in one of two
ways, as described below.
a. Ethanol Made From a Cellulosic Feedstock
    The simplest process of producing ethanol is by fermenting sugar in
sugar cane or beets, but ethanol can also be produced from starch in
corn and other feedstocks by first converting the starch to sugar.
Ethanol can also be produced from complex carbohydrates, such as the
cellulosic portion of plants or plant products. The cellulose is first
converted to sugars (by hydrolysis); then the same fermentation process
is used as for sugar to make ethanol. Cellulosic feedstocks (composed
of cellulose and hemicellulose) are currently more difficult and costly
to convert to sugar than are starches. While the cost and difficulty
are a disadvantage, the cellulosic process offers the advantage that a
wider variety of feedstocks can be used. Ultimately with more
feedstocks available from which to make ethanol more volume of ethanol
can be produced.
    The Act provides the definition of cellulosic biomass ethanol,
which states:

    ``The term `cellulosic biomass ethanol' means ethanol derived
from any lignocellulosic or hemicellulosic matter that is available
on a renewable or recurring basis, including:
    (i) Dedicated energy crops and trees;
    (ii) Wood and wood residues;
    (iii) Plants;
    (iv) Grasses;
    (v) Agricultural residues;
    (vi) Animal wastes and other waste materials, and
    (viii) Municipal solid waste.''

    Examples of cellulosic biomass source material include rice straw,
switch grass, and wood chips. Ethanol made from these materials would
qualify under the definition as cellulosic ethanol. In addition to the
above sources of feedstocks for cellulosic biomass ethanol, the Act's
definition also includes animal waste, municipal solid wastes, and
other waste materials. ``Other waste materials'' generally includes
waste material such as sewage sludge, waste candy, and waste starches
from food production, but for purposes of the definition of cellulosic
ethanol discussed in III.B.1.b below, it can also mean waste heat
obtained from an off-site combustion process.
    Although the definitions of ``cellulosic biomass ethanol'' and
``waste derived ethanol'' both include animal wastes and municipal
solid waste in their respective lists of covered feedstocks, there
remains a distinction between these types of ethanol. If the animal
wastes or municipal solid wastes contain cellulose or hemicellulose,
the resulting ethanol can be termed ``cellulosic biomass ethanol.'' If
the animal wastes or municipal solid wastes do not contain cellulose or
hemicellulose, then the resulting ethanol is labeled ``waste derived
ethanol.'' This is discussed further in Section III.B.1.c below.

b. Ethanol Made From Any Feedstock in Facilities Using Waste Material
To Displace 90 Percent of Normal Fossil Fuel Use
    The definition of cellulosic biomass ethanol in the Act also
provides that ethanol made at any facility--regardless of whether
cellulosic feedstock is used or not--may be defined as cellulosic if at
such facility ``animal wastes or other waste materials are digested or
otherwise used to displace 90 percent or more of the fossil fuel
normally used in the production of ethanol.'' The statutory language
suggests that there are two methods through which ``animal and other
waste materials'' may be considered for displacing fossil fuel. The
first method is the digestion of animal wastes or other waste
materials. EPA has interpreted the term ``digestion'' to mean the
conversion of animal or other wastes into methane, which can then be
combusted as fuel. We base our interpretation on the practice in
industry of using anaerobic digesters to break down waste products such
as manure into methane. Anaerobic digestion refers to the breakdown of
organic matter by bacteria in the absence of oxygen, and is used to
treat waste to produce renewable fuels. We note also that the digestion
of animal wastes or other waste materials to produce the fuel used at
the ethanol plant does not have to occur at the plant itself. Methane
made from animal or other wastes offsite and then purchased and used at
the ethanol plant would also qualify.
    The second method is suggested by the term ``otherwise used'' which
we interpret to mean (1) the direct combustion of the waste materials
as fuel at an ethanol plant, or (2) the use of thermal energy that
itself is a waste product; e.g., waste heat that is obtained from an
off-site combustion process such as a neighboring plant that has a
furnace or boiler from which the waste heat is captured. With respect
to the first meaning, ``other waste materials'' includes but is not
limited to waste materials from tree farms (tops, branches, limbs,
etc.), or waste materials from saw mills (sawdust, shavings and bark)
as well as other vegetative waste materials such as corn stover, or
sugar cane bagasse, that could be used as fuel for gasifier/boiler
units at ethanol plants. Since these materials are not also used as a
feedstock to starch-based ethanol plants, they are truly waste
materials. Although these waste materials conceivably could be
feedstocks to a cellulosic ethanol plant, their use in that manner is
sufficiently challenging at the current time that EPA believes that
such use does not subvert the intent of the definition.\17\ Since corn
kernels can readily be used as a feedstock in a typical ethanol
production facility, their use as a fuel for gasified/boiler units at a
corn ethanol plant would not be considered use of ``other waste
material'' for purposes of the definition of cellulosic biomass
ethanol.
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    \17\ On the other hand, wood from plants or trees that are grown
as an energy crop may not qualify as a waste-derived fuel in an
ethanol facility because such wood would not qualify as waste
materials under this portion of the definition. Under the definition
of renewable fuels and cellulosic biomass ethanol, however, such
wood material could serve as a feedstock in a cellulosic ethanol
plant, since these definitions do not restrict such feedstock to
waste materials only.
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    Regarding the use of waste heat as a source of thermal energy, we
note that there may be situations in which an off-site furnace, boiler
or heater creates excess or waste heat that is not used in the process
for which the thermal energy is employed. For example, a glass furnace
generates a significant amount of waste heat that often goes unused. We
have therefore included in the regulatory definition of cellulosic
biomass ethanol waste heat generated from off-site sources in the
definition of ``other waste materials'' that can be used to displace
90% of the fossil fuel otherwise used at an ethanol production
facility.
    Several commenters argued that because the source of the waste heat
is ultimately a fossil fuel in most cases that it should not be
considered an ``other waste material''. The Agency recognizes that
fossil fuel is ultimately the source of most waste heat, but it is also
the case that waste heat that is uncaptured represents a loss of energy
that could otherwise displace fossil fuel use elsewhere. Specifically,
waste heat used at an ethanol plant would result in displacement of
fossil fuel use at the plant. In writing the proposed rule, we were
aware of the concern raised by the commenters and therefore proposed to
restrict waste heat to off-site sources only. We believe that this
approach minimizes the concern. We disagree with another commenter that
such restriction would create a perverse incentive for facilities near
ethanol plants to oversize its combustion units to sell waste heat to
the neighboring ethanol facilities where it would be used to displace
fossil fuel. It is highly unlikely that businesses would incur the
additional expense of building an oversized combustion unit for the
sale of waste heat. Also, the 2.5 gallon value given for one gallon of
cellulosic ethanol as provided by the Act extends only through 2012.
Any additional market value for waste heat used to qualify ethanol as
cellulosic would therefore be of relatively short duration and not
likely to warrant investment in oversized combustion units.\18\
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    \18\ The term ``other waste materials'' is also included in the
portions of the definitions of ``cellulosic biomass ethanol'' and
``waste-derived ethanol'' that identify feedstocks. The inclusion of
off-site generated waste heat in the definition of ``other waste
materials'', however, applies only to the portion of the definition
of cellulosic biomass ethanol that relates to displacement of fossil
fuels, and does not apply to the term ``other waste materials'' as
otherwise used in these definitions.
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    The term ``fossil fuel normally used in the production of ethanol''
means fossil fuel used at the facility in the ethanol production
process itself, rather than other phases such as trucks transporting
product, and fossil fuel used to grow and harvest the feedstock.
Therefore the diesel fuel that trucks consume in hauling wood waste
from sawmills to the ethanol facility would not be counted in