component of the definition of cellulosic ethanol to foreign
facilities, we intend for the final rule to develop compliance and
enforcement related safeguards similar to those set forth in proposed
80.1165(f), (g), (h) and (j), and with additional inspection, audit,
recordkeeping and reporting safeguards to verify compliance with the
requirements on fuel use at foreign facilities. We seek comment on the
most effective means of doing this. Because of the difficulty of
implementing these safeguards, however, we also solicit comment on a
provision that would limit the application of this definition of
cellulosic ethanol only to ethanol plants in the U.S.
    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
are proposing to include waste heat in the definition of ``other waste
materials'', and also that waste heat captured and used as a source of
thermal energy in an ethanol plant would satisfy the requirement of
other waste materials being ``otherwise used'' to make ethanol.
Although the source of the waste heat is ultimately a fossil fuel in
most cases, we recognize that without the capture of the heat and
subsequent use in the ethanol plant, that energy would be unused, and
the ethanol plant would consume the equivalent amount of fossil fuel.
Thus, for the same amount of fossil fuel consumption at the off-site
plant, heat energy capture would result in displacement of fossil fuel
use at the ethanol plant. Because of potential confusion identifying
thermal energy that is waste heat from fossil fuel combustion sources
on site (i.e., at the ethanol plant itself), we are limiting this
proposal to waste heat captured at off-site plants. The Agency solicits
comment on our proposal to consider waste heat in the definition of
``other waste materials''.
    We propose to interpret the term ``fossil fuel normally used in the
production of ethanol'' to mean 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 determining whether the 90% displacement criteria has been met. We
are interpreting it in this way because we believe the accounting of
fuel use associated with transportation and other life cycle activities
would be extremely difficult and in many cases impossible.\15\ The
Agency solicits comments on this aspect of our approach in accounting
for fossil fuel displacement.
---------------------------------------------------------------------------

    \15\ In Section IX of today's preamble we discuss our analysis
of the lifecycle fuel impacts of the RFS rule, with respect to
greenhouse gas (GHG) emissions. While we do account for fuel used in
hauling materials to ethanol plant in our analysis, we are using
average nationwide values, rather than data collected for individual
plants.
---------------------------------------------------------------------------

    Based on the operation of ethanol plants, we are viewing this
definition to apply to waste materials used to produce thermal energy
rather than electrical energy. Electrical usage at ethanol plants is
used for lights and equipment not related to the production of ethanol.
Also, the calculation of fossil fuel used to generate such electrical
usage would be difficult because it is not always possible to track the
source of electricity that is purchased off-site. We are therefore
proposing that the displacement of 90 percent of fossil fuels at the
ethanol plant means those fuels consumed on-site and that are used to
generate thermal energy used to produce ethanol. The term ``fossil fuel
normally used in the production of ethanol'' in today's proposal means
fossil fuel that is combusted at the facility itself to produce thermal
energy. Owners are required to keep records of fuel (waste-derived and
fossil fuel) used for thermal energy for verification of their claims.
They will also be required to track the fossil fuel equivalent of the
waste heat captured and used in the ethanol process. Since such waste
heat would typically be purchased through agreement with the off-site
owner, we do not feel it burdensome for owners to track such
information. Owners would therefore calculate the amount of energy in
Btu's associated with waste-derived fuels (including the fossil fuel
equivalent waste heat), and divided by the total energy in Btus used to
produce ethanol in a given year. Holders of RINs associated with the
sale or trade of such cellulosic ethanol would get the benefit of the
2.5 credit (through 2012 when such credit is valid).
    In the event that the requirements of 90 percent displacement of
fossil fuel are not met, the owner of a facility producing such ethanol
would be required to obtain additional RINs to make up whatever deficit
exists for those RINs sold or traded with a value of 2.5. Assuming this
is made up, then holders of the RINs associated with the ethanol the
plant produced in the previous year would not be affected. We solicit
comment on this proposed approach.
    c. Ethanol that is made from the non-cellulosic portions of animal,
other waste, and municipal waste. ``Waste derived ethanol'' is defined
in the Act as ethanol derived from ``animal wastes, including poultry
fats and poultry wastes, and other waste materials; * * * or municipal
solid waste.'' Both animal wastes and municipal solid waste are also
listed as allowable feedstocks for the production of ``cellulosic
biomass ethanol.'' The determination of the appropriate category of
ethanol is based on whether the feedstocks on question contain
cellulose or hemicellulose that is used to make the ethanol. Thus, if
the ethanol is made from the non-cellulosic portions of animal, other
waste, or municipal waste, it is labeled ``waste derived ethanol.''
2. What Is Biodiesel?
    The definition of renewable fuel in the Act includes corn-based and
cellulosic biomass ethanol, waste derived ethanol, and the renewable
fuel portion of blending components derived from renewable fuel.
Biodiesel is also specifically named as being included in the Act's
definition of renewable fuel. The Act states that ``The term `renewable
fuel' includes * * * biodiesel (as defined in section 312(f) of the
Energy Policy Act of 1992.'' This definition, as modified by Section
1515 of the Energy Act states:
    The term ``biodiesel'' means a diesel fuel substitute produced from
nonpetroleum renewable resources that meets the registration
requirements for fuels and fuel additives established by the
Environmental Protection Agency under section 7545 of this title, and
includes biodiesel derived from animal wastes, including poultry fats
and poultry wastes, and other waste materials, or municipal solid waste
and sludges and oils derived from wastewater and the treatment of
wastewater.
    This definition of biodiesel would include both mono-alkyl esters
which meet ASTM specification D-6751 \16\ (the most common meaning of
the term

``biodiesel'') that have been registered with EPA, and any non-esters
that are intended for use in engines that are designed to run on
conventional, petroleum-derived diesel fuel, have been registered with
the EPA, and are made from any of the feedstocks listed above.
---------------------------------------------------------------------------

    \16\ In the event that the ASTM specification D-6751 is
succeeded with a different number in the future, EPA may revise the
regulations accordingly at such time.
---------------------------------------------------------------------------

    To implement the above definition of biodiesel in the context of
the RFS rulemaking while still recognizing the unique history and role
of mono-alkyl esters meeting ASTM D-6751, we propose to divide the
Act's definition of biodiesel into two separate parts: biodiesel (mono-
alkyl esters) and non-ester renewable diesel. The combination of
``biodiesel (mono-alkyl esters)'' and ``non-ester renewable diesel'' in
the regulations would fulfill the Act's definition of biodiesel. The
Agency solicits comment on this approach and specifically asks whether
the ``non-ester renewable diesel'' definition be referenced explicitly
to ASTM D-975.
    a. Biodiesel (Mono-Alkyl Esters). Under this part, the term
``biodiesel (mono-alkyl esters)'' means a motor vehicle fuel which: (1)
Meets the registration requirements for fuels and fuel additives
established by the Environmental Protection Agency under section 7545
of this title (Clean Air Act Section 211); (2) is a mono-alkyl ester;
(3) meets ASTM specification D-6751-02a; (4) is intended for use in
engines that are designed to run on conventional, petroleum-derived
diesel fuel, and (5) is derived from nonpetroleum renewable resources
including, but not limited to, animal wastes, including poultry fats
and poultry wastes, and other waste materials, or municipal solid waste
and sludges and oils derived from wastewater and the treatment of
wastewater.
    b. Non-Ester Renewable Diesel. The term ``non-ester renewable
diesel'' means a motor vehicle fuel which: (1) Meets the registration
requirements for fuels and fuel additives established by the
Environmental Protection Agency under section 7545 of this title (Clean
Air Act Section 211); (2) is not a mono-alkyl ester; (3) is intended
for use in engines that are designed to run on conventional, petroleum-
derived diesel fuel, and (4) is derived from nonpetroleum renewable
resources including, but not limited to, animal wastes, including
poultry fats and poultry wastes, and other waste materials, or
municipal solid waste and sludges and oils derived from wastewater and
the treatment of wastewater. Current examples of a non-ester renewable
diesel include: ``renewable diesel'' produced by the Neste process, or
diesel fuel produced by processing fats and oils through a refinery
hydrotreating process.
3. Is Motor Fuel That Is Made From a Renewable Feedstock a Renewable
Fuel?
    We interpret the statutory definition of renewable fuels to include
all gasoline or diesel that is made from a class of feedstocks called
``biocrudes'', which are defined as biologically derived feedstocks
(such as fats and greases). We are providing a definition of
``biocrude-based renewable fuels'' to mean gasoline or diesel products
resulting from the processing of biocrudes in production units within
refineries that process crude oil and other petroleum based feedstocks
and which make gasoline and diesel fuel.\17\ A particular batch of
biocrude used as feedstock to a production unit would replace crude oil
or other petroleum based feedstocks which ordinarily would be the
feedstock in that process unit. The non-ester renewable diesel defined
in Section III.B.2.b above could be one such type.
---------------------------------------------------------------------------

    \17\ Biocrude-based renewable fuels will need to be registered
under the provisions contained in 40 CFR 79 Part 4 before they can
be sold commercially.
---------------------------------------------------------------------------

    We are assuming that all of the biocrude used as a feedstock in a
refinery unit will end up as a biocrude-based renewable fuel. Rather
than requiring the refiner to document what portion of the biocrude-
based renewable fuel is other than diesel or gasoline (e.g., jet fuel),
we are proposing to have the volume of the biocrude itself count as the
volume of renewable fuel produced for the purposes of determining the
volume block codes that are in the RIN (discussed in further detail in
Section III.D). While this approach may result in some products such as
jet fuel being counted as renewable fuel, we believe the majority of
the products produced will be motor vehicle fuel because we assume
refiners who elect to use biocrudes would do so to help meet the
requirements of this rule. Furthermore, both diesel and gasoline
presently make up about 85 percent of the product slate of refineries
on average. This amount that has been steadily increasing for over
time, and we expect that the percentage will continue to increase as
demand for gasoline and diesel increases.
    We are also proposing that the Equivalence Value assigned to
biocrude-based renewable fuels be designated as 1.0, despite the fact
that they might warrant a higher value based on their energy content as
described in the next section.\18\ This approach should balance out the
likelihood that some of the biocrude-based renewable fuel is not a
motor vehicle fuel.
---------------------------------------------------------------------------

    \18\ With respect to biodiesel, however, since such fuel is
typically not made in a traditional petroleum-based refinery, it
would not be a biocrude-based renewable fuel and would thus not be
limited to the 1.0 Equivalence Value.
---------------------------------------------------------------------------

4. What Are ``Equivalence Values'' for Renewable Fuel?
    One question that EPA must address is how to count volumes of
renewable fuel in determining compliance with the renewable volume
obligation. For instance, the Act stipulates that every gallon of
cellulosic ethanol should count as if it were 2.5 gallons for RFS
compliance purposes. The Act does not stipulate similar values for
other renewable fuels, but as described below we believe it is
appropriate to do so.
    We are proposing that the ``Equivalence Values'' for 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,
and for cellulosic ethanol of 2.5. However, the methodology can be used
to determine the appropriate equivalence value for any other potential
renewable fuel as well.
    This section describes why we believe that the use of relative
energy content is appropriate under the Act, and our investigation of
the alternative use of lifecycle analyses as the basis of Equivalence
Values.
    a. Authority Under The Act To Establish Equivalence Values. We are
proposing that Equivalence Values be assigned to every renewable fuel
to provide an indication of the number of gallons that can be claimed
for compliance purposes for every physical gallon of renewable fuel. An
Equivalence Value of 1.0 would mean that every physical gallon of
renewable fuel would count as one gallon for RFS compliance purposes.
An Equivalence Value greater than 1.0 would mean that every physical
gallon of renewable fuel would count as more than one gallon for RFS
compliance purposes, while a value less than 1.0 would count as less
than one gallon.
    We are interpreting the Act as allowing EPA to develop Equivalence
Values according to the methodology discussed below. We believe that
the use of Equivalence Values is consistent with the intent of Congress
to treat different renewable fuels differently in different
circumstances, and to provide

incentives for use of renewable fuels in certain circumstances, as
evidenced by those specific circumstances addressed by Congress. The
Act has several provisions that provide for mechanisms other than
straight volume measurement to determine the value of a renewable fuel
in terms of RFS compliance. For example, 1 gallon of cellulosic biomass
or waste derived ethanol is to be treated as 2.5 gallons of renewable
fuel. EPA is also required to establish an ``appropriate amount of
credits'' for biodiesel, and to provide for ``an appropriate amount of
credit'' for using more renewable fuels than are required to meet your
obligation. EPA is also to determine the ``renewable fuel portion'' of
a blending component derived from a renewable fuel. All of these
statutory provisions provide evidence that Congress did not limit this
program solely to a straight volume measurement of gallons in the
context of the RFS program for certain specified circumstances.
    The Act is unclear as to whether a straight gallon measurement is
required in circumstances other than those specified by Congress. We
believe the Act can and should be interpreted to allow the use of
Equivalence Values in those circumstances. First, this is consistent
with the way Congress treated the various specific circumstances noted
above, and thus is basically a continuation of that process. Second,
EPA does not believe that providing such an Equivalence Value for this
small volume of renewable fuel will interfere in any way with meeting
the total national volume goals for usage of renewable fuel. We are
proposing to use an Equivalence Value of 1.0 for ethanol other than
cellulosic biomass or waste derived ethanol, and we expect that there
will only be very limited additional situations where an Equivalence
Value other than 1.0 is used. As a result, this approach is a
reasonable way for the RFS program to ensure that the total volume of
renewable fuels will be used as required under the Act.
    b. Energy Content and Renewable Content as the Basis for
Equivalence Values. We believe it is appropriate to base the
Equivalence Value assigned to a particular renewable fuel on the degree
to which the renewable fuel supplants the petroleum content of fuel
used in a motor vehicle. This is consistent with the Act's definition
of renewable fuel, which refers to the degree to which it is directly
used to replace or reduce the quantity of fossil fuel present in a fuel
mixture used to operate a motor vehicle. The degree to which the fossil
fuel is replaced is best represented by its relative energy content. To
appropriately account for the different energy contents of different
renewable fuels as well as the fact that some renewable fuels actually
contain some non-renewable content, we propose to calculate Equivalence
Values using both the renewable content of a renewable fuel and its
energy content. This section describes our proposal for calculating the
Equivalence Values.
    In order to take the energy content of a renewable fuel into
account when calculating the Equivalence Values, we must identify an
appropriate point of reference. Ethanol would be a reasonable point of
reference as it is currently the most prominent renewable fuel in the
transportation sector, and it is likely that the authors of the Act saw
ethanol as the primary means through which the required volumes would
be met in at least the first years of the RFS program. By comparing
every renewable fuel to ethanol on an equivalent energy content basis,
each renewable fuel could be assigned an Equivalence Value that
precisely accounts for the amount of petroleum in motor vehicle fuel
that is reduced or replaced by that renewable fuel in comparison to
ethanol. To the degree that corn-based ethanol continues to dominate
the pool of renewable fuel, this approach would allow actual volumes of
renewable fuel to be consistent with the volumes required by the Act
while still allowing some renewable fuels to be attributed a higher
value in terms of RFS compliance to the extent that they have a higher
energy content than ethanol.
    Equivalence Values should also account for the renewable content of
renewable fuels, since the presence of any non-renewable content
impairs the ability of the renewable fuel to replace or reduce the
quantity of fossil fuel present in a fuel mixture used to operate a
motor vehicle. The Act specifically states that only the renewable fuel
portion of a blending component should be considered part of the
applicable volume under the RFS program. We have interpreted this to
mean that every renewable fuel should be evaluated at the molecular
level to distinguish between those components that were derived from a
renewable feedstock, versus those components that were derived from a
fossil fuel feedstock. Along with energy content in comparison to
ethanol, the relative amount of renewable versus non-renewable content
can then be used directly as the basis for the Equivalence Value.
    We propose that the calculation of Equivalence Values should
simultaneously take into account both the renewable content of a
renewable fuel and its energy content in comparison to ethanol. To
accomplish this, we propose the following formula:

EV = (RRF / REth) x (ECRF /
ECEth)

Where:

EV = Equivalence Value for the renewable fuel.
RRF = Renewable content of the renewable fuel, in
percent.
REth = Renewable content of ethanol, in percent.
ECRF = Energy content of the renewable fuel, in Btu per
gallon (LHV).
ECEth = Energy content of ethanol, in Btu per gallon
(LHV).

    R is a measure of that portion of a single renewable fuel molecule
which can be considered to have come from a renewable source. Since R
is being combined with relative energy content in the formula above,
the value of R cannot be based on the weight fraction of the renewable
atoms in the molecule, but rather must be based on the energy content
of those atoms. As a result the calculation of R for any particular
renewable fuel requires an analysis of the chemical process through
which it was produced. A detailed explanation of calculations for R and
several examples are given in a technical memorandum in the docket
\19\.
---------------------------------------------------------------------------

    \19\ ``Calculation of equivalence values for renewable fuels
under the RFS program'', memo from David Korotney to EPA Air Docket
OAR-2005-0161.
---------------------------------------------------------------------------

    In the case of ethanol, denaturants are added to preclude its use
as food. Denaturants are generally a fossil-fuel based, gasoline-like
hydrocarbon in concentrations of 2-5 volume percent, with 5 percent
being the most common historical level. In general this would mean that
the Equivalence Value of ethanol would be 0.95. However, we believe
that the Equivalence Value for ethanol should be specified as 1.0
despite the presence of a denaturant. First, as stated above, ethanol
is expected to dominate the renewable fuel pool for at least the next
several years, and it is likely that the authors of the Act recognized
this fact. Thus it seems likely that it was the intent of the authors
of the Act that each physical gallon of denatured ethanol be counted as
one gallon for RFS compliance purposes. Second, the accounting of
ethanol has historically ignored the presence of the denaturant. For
instance, under Internal Revenue Service (IRS) regulations the
denaturant can be counted as ethanol by parties filing claims to the
IRS for the Federal excise tax credit. Also, EIA reporting requirements
for ethanol producers

allow them to include the denaturant in their reported volumes.
    Since we are proposing that denatured ethanol be assigned an
Equivalence Value of 1.0, this must be reflected in the values of
REth and ECEth. We have calculated these values
to be 93.1 percent and 77,550 Btu/gal, respectively. Details of these
calculations can be found in the aforementioned technical memorandum to
the docket.
    The calculation of the Equivalence Value for a particular renewable
fuel can lead to values that deviate only slightly from 1.0, and/or can
have varying degrees of precision depending on the uncertainty in the
value of R or ECRF. We are therefore proposing three
simplifications to streamline the application of Equivalence Values in
the context of the RFS program. First, consistent with our approach to
the R value for ethanol, we are proposing that all Equivalence Values
calculated to be in the range of 0.9-1.2 be treated as if they were
exactly 1.0. This approach would eliminate many of the complexities
described in Section III.D.2 that are associated with using renewable
fuels for RFS compliance purposes that have an Equivalence Value other
than 1.0. Second, we propose that several bins be created for renewable
fuels with Equivalence Values above 1.0. These bins would replace the
calculated Equivalence Values with standardized ones to account for
uncertainty in the calculations as well as to simplify their
application. We propose that the bins be 1.0, 1.3, 1.5, and 1.7. Each
renewable fuel would be assigned to the bin that is closest to its
calculated Equivalence Value. Finally, we propose that all Equivalence
Values, if any, which are calculated to be less than 0.9 be rounded to
the first decimal place.
    Using the methodology described above, we calculated the
Equivalence Values for a number of different renewable fuels expected
to be in use over the next few years, and modified them according to
our proposed rounding protocols. These are shown in the table below.

 Table III.B.4-1.--Proposed Equivalence Values for Some Renewable Fuels
------------------------------------------------------------------------
                                                            Equivalence
                                                            Value (EV)
------------------------------------------------------------------------
Cellulosic biomass ethanol or waste-derived ethanol.....             2.5
Ethanol from corn, starches, or sugar...................             1.0
Biodiesel (mono alkyl ester)............................             1.5
Non-ester renewable diesel..............................             1.7
Butanol.................................................             1.3
ETBE from corn ethanol..................................             0.4
------------------------------------------------------------------------

    Since there are a wide variety of possible renewable fuels that
could qualify under the RFS program, there may be cases in which a
party produces a renewable fuel not shown in Table III.B.4-1. In such
cases we propose to allow the producer to submit a petition to the
Agency describing the renewable fuel, its feedstock and production
process, and the calculation of its Equivalence Value. The Agency would
review the petition and assign an appropriate Equivalence Value to the
renewable fuel based on the proposed rounding protocols described
above. Regarding publication of the newly assigned Equivalence Value,
we could publish it in the Federal Register at the same time as the
annual standard is published each November. We request comment on
whether publishing new Equivalence Values in this manner is
appropriate.
    Regarding biodiesel (mono alkyl esters), we also considered an
additional approach in setting the Equivalence Value. Since ethanol
derived from waste products such as animal wastes and municipal solid
waste will be assigned an Equivalence Value of 2.5 based on a
requirement in the Act, it might be appropriate to create a parallel
provision for biodiesel made from wastes. Under this approach,
biodiesel made from waste products would be assigned an Equivalence
Value of 2.5 through 2012. Currently, waste products (for example,
poultry fats and poultry wastes, municipal solid waste, or wastewater
sludge) make up less than 10 percent of biodiesel feedstocks. This
approach would have the effect of incentivizing the use of waste
products and recycled biomass to make biodiesel. Beyond the RFS
program, it could also set a precedent to promote recycling and waste
conservation. While we are not proposing to set the Equivalence Value
for waste-derived biodiesel at 2.5 in today's action, we nevertheless
believe that this approach has merit and request comment on it.
    c. Lifecycle Analyses as The Basis for Equivalence Values. Although
we are proposing that Equivalence Values be based on energy content
relative to ethanol and renewable content, some stakeholders have
suggested that Equivalence Values should be based on lifecycle
analyses. Such an approach may have merit, but it would also raise a
number of challenges. Consequently, we are inviting comment here not
only on the merit and basis for setting equivalence values on a
lifecycle basis, but also the appropriate means of doing so.
    Lifecycle analyses involve an examination of fossil fuel used, and
emissions generated, at all stages of a renewable fuel's life. A
typical lifecycle analysis examines production of the feedstock, its
transport to a conversion facility, the conversion of the feedstock
into renewable motor vehicle fuel, and the transport of the renewable
fuel to the consumer. At each stage, every activity that consumes
fossil fuels or results in emissions is quantified, and these energy
consumption and emission estimates are then summed over all stages. By
accounting for every activity associated with renewable fuels over
their entire life, we can assess renewable fuels in terms of not just
their impact within the transportation sector, but across all sectors,
and thus for the nation as a whole. In this way they provide a more
complete picture of the potential impacts of different fuels or
different fuel sources.
    Advocates for using lifecycle analyses for setting the Equivalence
Values for different renewable fuels indicate that there could be
several advantages to this approach. First, doing so could create an
incentive for obligated parties to choose renewable fuels having a
greater ability to reduce fossil fuel use or resulting emissions, since
such renewable fuels would have higher Equivalence Values and thus
greater value in terms of compliance with the RFS requirements. The
preferential demand for renewable fuels having higher Equivalence
Values could in turn spur additional growth in production of these
renewable fuels. Second, using lifecycle analyses as the basis for
Equivalence Values could orient the RFS program more explicitly towards
reducing fossil fuel use or emissions.
    At the same time, the use of lifecycle analyses to establish the
Equivalence Values for different renewable fuels also raises a number
of issues. For instance, lifecycle analyses can be conducted using
several different metrics, including total fossil fuel consumed,
petroleum energy consumed, criteria pollutant emissions (e.g., VOC,
NOX, PM) carbon dioxide emissions, or greenhouse gas
emissions. Each metric would result in a different Equivalence Value
for the same renewable fuel. At the present time there is no consensus
on which metric would be most appropriate for this purpose.

    There is also no consensus on the approach to lifecycle analyses
themselves. Although we have chosen to base our lifecycle analyses on
Argonne National Laboratory's GREET model for the reasons described in
Section IX, there are a variety of other lifecycle models and analyses
available. 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. Lifecycle
analyses must also contend with the fact that the inputs and
assumptions generally represent industry-wide averages even though
energy consumed and emissions generated can vary widely from one
facility or process to another. There currently exists no single body,
governmental or otherwise, that has organized a comprehensive dialogue
among stakeholders about the appropriate tools and assumptions behind
any lifecycle analyses with the goal of coming to agreement.
    Another issue to using lifecycle analyses as the basis for
Equivalence Values pertains to the ultimate impact that the RFS program
would have on petroleum use, fossil fuel use, criteria pollutant
emissions, and/or emissions of GHGs. With a fixed volume of renewable
fuel required under the RFS program, any renewable fuel with an
Equivalence Value greater than 1.0 would necessarily mean that fewer
actual gallons would be needed to meet the RFS standard. Thus, the
advantage per gallon may be offset with fewer overall gallons,
resulting in no overall additional benefit unless the RFS standard was
simultaneously adjusted.
    Finally, lifecycle analyses of different renewable fuels are likely
to change over time as farming practices and process technologies
evolve. Significant changes would necessitate corresponding changes in
the RFS program to adjust the Equivalence Values on an ongoing basis
which would add uncertainty into the long-term RIN market.
    We request comment on all issues associated with the use of
lifecycle analyses in establishing the Equivalence Values for different
renewable fuels for the RFS program.

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?
    The Act requires EPA to promulgate regulations designed to ensure
that ``gasoline sold or introduced into commerce in the United States
(except in noncontiguous states or territories)'' contains on an annual
average basis, the applicable aggregate volumes of renewable fuels as
prescribed in the Act.\20\ To implement this provision, we are
proposing that the volume of gasoline used to determined the renewable
fuel obligation include all finished gasoline, RFG and conventional,
produced or imported for use in the contiguous United States during the
annual averaging period. We are also proposing to include in the volume
of gasoline used to determine the renewable fuel obligation all
unfinished gasoline that becomes finished gasoline upon the addition of
oxygenate blended downstream from the refinery or importer. This would
include both unfinished reformulated gasoline, called ``reformulated
gasoline blendstock for oxygenate blending,'' or ``RBOB,'' and
unfinished conventional gasoline (e.g. sub-octane conventional
gasoline), called ``CBOB.''
---------------------------------------------------------------------------

    \20\ CAA Section 211(o)(2)(A)(i), as added by Section 1501(a) of
the Energy Policy Act of 2005.
---------------------------------------------------------------------------

    Under the proposed rule, the volume of any other unfinished
gasoline or blendstock, such as butane, would not be included in the
volume used to determine the renewable fuel obligation, except where
the blendstock is combined with other blendstock or finished gasoline
to produce finished gasoline. Where a blendstock is blended with other
blendstock to produce finished gasoline, RBOB, or CBOB, the total
volume of the gasoline blend would be included in the volume used to
determine the renewable fuels obligation for the blender. Where a
blendstock is added to finished gasoline, only the volume of the
blendstock would be included, since the finished gasoline would have
been included in the compliance determinations of the refiner or
importer of the gasoline.\21\ Gasoline produced or imported for use in
a noncontiguous state or U.S. territory \22\ would not be included in
the volume used to determine the renewable fuels obligation (unless the
noncontiguous state or territory has opted-in to the RFS program), nor
would gasoline, RBOB or CBOB exported for use outside the United
States.
---------------------------------------------------------------------------

    \21\ ``Gasoline treated as blendstock,'' or ``GTAB,'' would be
treated as any other blendstock with regard to the RFS rule; i.e.,
where the GTAB is blended with other blendstock to produce gasoline,
the total volume of the gasoline blend, including the GTAB, would be
included in the volume gasoline used to determine the renewable fuel
obligation for the blender. Where the GTAB is blended with finished
gasoline, only the GTAB volume would be included.
    \22\ The noncontiguous states are Alaska and Hawaii. The
territories are the Commonwealth of Puerto Rico, the U.S. Virgin
Islands, Guam, American Samoa, and the Commonwealth of the Northern
Marianas.
---------------------------------------------------------------------------

    For purposes of this preamble, the various gasoline products (as
described above) that we are proposing to include in the volume of
gasoline used to determine the renewable fuel obligation are
collectively called ``gasoline.''
    Generally, ethanol and other renewable fuels would typically be
used in gasoline, increasing the volume of the entire gasoline blend.
We are proposing to exclude the volume of renewable fuels contained in
gasoline from the volume of gasoline used to determine the renewable
fuels obligation. In implementing the Act's renewable fuels
requirement, our primary goal is to design a program that is simple,
flexible and enforceable. If the program were to include renewable
fuels in the volume of gasoline used to determine the renewable fuel
obligation, then every blender that blends ethanol downstream from the
refinery or importer would be subject to the renewable fuel obligation
for the volume of ethanol that they blend. There are currently
approximately 1,200 such ethanol blenders. Of these blenders, only
those who blend ethanol into RBOB are regulated parties under current
fuels regulations. Designating all of these ethanol blenders as
obligated parties under the RFS program would greatly expand the number
of regulated parties and increase the complexity of the RFS program
beyond that which is necessary to carry out the renewable fuels mandate
under the Act.
    The Act provides that the renewable fuel obligation shall be
``applicable to refiners, blenders, and importers, as appropriate.''
\23\ For the reasons discussed above, we believe it is appropriate to
exclude downstream renewable fuel blenders from the group of parties
subject to the renewable fuel obligation, and to exclude renewable
fuels from the volume of gasoline used to determine the renewable fuel
obligation. This exclusion would apply to any renewable fuels that are
blended into gasoline at a refinery, contained in imported gasoline, or
added at a downstream blending facility. Thus, for example, any ethanol
added to RBOB or CBOB downstream from the refinery or importer would be
excluded from the volume of gasoline used to determine the obligation.
Any non-renewable fuel added downstream, however, would be included in
the volume of gasoline used to determine the obligation. This approach
has no impact on the total

volume of renewable fuels required, merely on the number of obligated
parties. We invite comment on the proposal to exclude renewable fuels
in the volume of gasoline subject to the renewable fuels obligation. As
discussed earlier, in a similar manner this volume of renewable fuel
would also be excluded from the calculation performed each year by EPA
to determine the applicable percentage.
---------------------------------------------------------------------------

    \23\ CAA Section 211(o)(3)(B), as added by Section 1501(a) of
the Energy Policy Act of 2005.
---------------------------------------------------------------------------

2. Who Is Required To Meet the Renewable Fuels Obligation?
    Under the proposed rule, persons who meet the definition of
refiner, which includes blenders who produce gasoline by combining
blendstocks or blending blendstocks into finished gasoline, and persons
who meet the definition of importer under the fuels regulations would
be subject to the renewable fuel obligation. As noted above, blenders
who only blend renewable fuels downstream from the refinery or importer
would not be subject to the renewable fuel obligation. Any person that
is required to meet the renewable fuels obligation is called an
``obligated party.'' We generally refer to all of the obligated parties
as refiners and importers, as the covered blenders are all refiners
under the regulations.
    A refiner or importer located in a noncontiguous state or U.S.
territory would not be subject to the renewable fuel obligation and
thus would not be an obligated party (unless the noncontiguous state or
territory opts-in to the RFS program). A party located within the
contiguous 48 states that ``imports'' into the 48 states gasoline
produced or imported by a refiner or importer located in a
noncontiguous state or territory would be an obligated party and must
meet the renewable fuel obligation for such gasoline.
3. What Exemptions Are Available Under The RFS Program?
    a. Small Refinery and Small Refiner Exemption. The Act provides an
exemption from the RFS standard for small refineries during the first
five years of the program. The Act defines small refinery as ``a
refinery for which the average aggregate daily crude oil throughput for
a calendar year (as determined by dividing the aggregate throughput for
the calendar year by the number of days in the calendar year) does not
exceed 75,000 barrels.'' \24\ Under the proposed rule, any gasoline
produced at a refinery that qualifies as a small refinery under this
definition is not counted in determining the renewable fuel obligation
of a refiner until January 1, 2011. Where a refiner complies with the
renewable fuel obligation on an aggregate basis for multiple
refineries, the refiner may exclude from its compliance calculations
gasoline produced at any refinery that qualifies as a small refinery
under the RFS program. Beginning in 2011, small refineries would be
required to meet the same renewable fuel obligation as all other
refineries. This exemption would apply to any refinery that meets the
definition of small refinery stated above regardless of the size of the
refining company that owns the refinery. Based on information currently
available to us we expect 42 small refineries to qualify for this
exemption.
---------------------------------------------------------------------------

    \24\ CAA Section 211(o)(a)(9), as added by Section 1501(a) of
the Energy Policy Act of 2005.
---------------------------------------------------------------------------

    In addition to small refineries as defined in the Act, we are
proposing to extend this relief to refiners who meet the proposed
criteria for small refiner status. Under the proposal, a small refiner
is defined as any refiner who, during 2004: (1) Produces gasoline at a
refinery by processing crude oil through refinery processing units; (2)
employs an average of no more than 1,500 people, including all
employees of the small refiner, any parent company and its subsidiary
companies; and (3) has a total crude oil processing capability for all
of the small refiner's refineries of 155,000 barrels per calendar year
(bpcd). These size requirements were established in prior rulemakings
and were the result of our analysis of small refiner impacts. We do not
believe that there are more than three gasoline refineries owned by
small refiners that meet these criteria and that currently exceed the
75,000 bpcd crude oil processing capability defined by the Act. We
request comment on whether a refiner who has a refinery which exceeds
the 75,000 bpcd criteria should be eligible to apply for a small
refiner exemption under the RFS program. EPA believes it has this
discretion in determining an appropriate lead-time for the start-up of
this program, as well as discretion to determine the regulated
refiners, blenders and importers, ``as appropriate.''
    We are also proposing to allow foreign refiners to apply for a
small refinery or small refiner exemption under the RFS program. This
would apply to foreign refiners that apply for refineries under the
75,000 bpcd criteria or foreign refiners that apply for small refiner
status. Under the anti-dumping, MSAT and gasoline sulfur rules, foreign
refiners are allowed to comply with certain regulations separately from
any importer. Additional requirements applicable to such foreign
refiners are included in these rules to ensure that enforcement of the
regulations at the foreign refinery would not be compromised. We are
proposing similar enforcement-related requirements that would apply to
foreign refiners that apply for a small refinery or small refiner
exemption. Under the existing fuels regulations, few foreign refiners
have chosen to undertake these additional requirements, and almost all
gasoline produced at foreign refineries is included in the importers'
compliance determinations. We invite comment on the value of extending
the small refinery and small refiner exemptions to foreign refiners
under the RFS program.
    Under the proposed rule, applications for a small refinery
exemption must be received by EPA by September 1, 2007 for the
exemption to be effective in 2007 and subsequent calendar years. The
application must include documentation that the small refinery's
average aggregate daily crude oil throughput for calendar year 2004 did
not exceed 75,000 barrels. As long as the refinery met the criteria in
2004, it would have the exemption through 2010 regardless of changes in
crude throughput or ownership. A small refinery exemption would be
effective 60 days after receipt of the application by EPA unless EPA
notifies the applicant that the application was not approved or that
additional documentation is required. We are proposing to base
eligibility on 2004 data rather than on 2005 data, since it was the
first full year prior to passage of the Energy Act. In addition, some
refineries' production may have been affected by Hurricane Katrina in
2005. We request comment on whether multiple-year average should be the
basis for eligibility.
    As discussed above, refiners that do not qualify for a small
refinery exemption under the 75,000 bpcd criteria, but nevertheless
meet the criteria of a small refiner may apply for small refiner status
under the RFS rule. The application must be received by EPA by
September 1, 2007 for the exemption to be effective in 2007 and
subsequent calendar years. Like the exemption for small refineries,
small refiner status would be determined based on documentation
submitted in the application which demonstrates that the refiner met
the criteria for small refiner status during the calendar year 2004.
EPA will notify the refiner of approval or disapproval of small refiner
status by letter. Unlike the case for small refineries, refiners that
receive approved small refiner status and subsequently do not meet all
of the criteria for small

refiner status (i.e., cease producing gasoline from processing crude
oil, employ more than 1,500 people or exceed the 155,000 bpcd crude oil
capacity limit) as a result of a merger with or acquisition of or by
another entity, are disqualified as small refiners, except in the case
of a merger between two previously approved small refiners. As in other
EPA programs, where such disqualification occurs, the refiner must
notify EPA in writing no later than 20 days following the disqualifying
event.
    The Act provides that the Secretary of Energy must conduct a study
for EPA to determine whether compliance with the renewable fuels
requirement would impose a disproportionate economic hardship on small
refineries. If the study finds that compliance with the renewable fuels
requirements would impose a disproportionate economic hardship on a
particular small refinery, EPA is required to extend the small
refinery's exemption for a period of not less than two additional
years. The Act also provides that a refiner with a small refinery may
at any time petition EPA for an extension of the exemption for the
reason of disproportionate economic hardship. In accordance with these
provisions of the Act, the proposed rule includes a process by which
refiners with small refineries may petition EPA for an extension of the
small refinery exemption. As provided in the Act, the proposed rule
would require EPA to act on the petition not later than 90 days after
the date of receipt of the petition.
    During the initial exemption period and any extended exemption
periods, the gasoline produced by small refineries and refineries owned
by approved small refiners would be subject to the renewable fuel
standard.
    Under the proposed rule, the automatic five year exemption for
small refineries, and any extended exemptions, may be waived upon
notification to EPA. In waiving its exemption, gasoline produced at a
small refinery would be included in the RFS program and would be
included in the gasoline used to determine a refiner's renewable fuel
obligation. If a refiner waives the exemption for their small refinery
or their exemption as a small refiner, the refiner would be able to
separate and transfer RINs like any other obligated party. If a refiner
does not waive the exemption, the refiner could still separate and
transfer RINs, but only for the renewable fuel that the refiner itself
blends into gasoline (i.e. the refiner operates as an oxygenate
blender).
    b. General Hardship Exemption. In recent rulemakings, we have
included a general hardship exemption for parties that could
demonstrate severe economic hardship in complying with the standard. We
are proposing not to include in the RFS program provisions for a
general hardship exemption. Unlike most other fuels programs, the RFS
program includes inherent flexibility since compliance with the
renewable fuels standard is based on a nationwide trading program,
without any per gallon requirements, and without any requirement that
the refiner or importer produce the renewable fuel. By purchasing RINs,
obligated parties would be able to fulfill their renewable fuel
obligation without having to make capital investments that may
otherwise be necessary in order to blend renewable fuels into gasoline.
We believe that sufficient RINs would be available and at reasonable
prices, given that EIA projects that far greater renewable fuels will
be used than required. Given the flexibility provided in the RIN
trading program, including the provisions for deficit carry-over, and
the fact that the standard is proportional to the volume of gasoline
actually produced, we believe that there likely would be no need for a
general hardship exemption. We request comment on whether there is a
need to include a general hardship exemption in the RFS program.
    c. Temporary Exemption Based On Unforeseen Circumstances. In recent
rulemakings, we have also included a temporary exemption based on
unforeseen circumstances. We are proposing not to include such an
exemption in the RFS program. The need for such an exemption would
primarily be based on the inability to comply with the renewable fuels
standard due to a natural disaster, such as a hurricane. However, in
the event of a natural disaster, we believe that the volume of gasoline
produced by an obligated party would also drop, which would result in a
reduction in the renewable fuel requirement. We believe, therefore,
that unforeseen circumstances, such as a hurricane or other natural
disaster, would not result in a party's inability to obtain sufficient
RINs to comply with the applicable renewable fuels standard. We request
comment on whether there would be a need to include a temporary
exemption based on unforeseen circumstances, and, in particular,
circumstances that may affect ethanol producers.
4. What Are the Opt-In and State Waiver Provisions Under the RFS
Program?
    a. Opt-in Provisions for Noncontiguous States and Territories. The
Act provides that, upon the petition of a noncontiguous state or U.S.
territory, EPA may apply the renewable fuels requirements to gasoline
produced in or imported into that noncontiguous state or U.S. territory
at the same time as, or any time after the effective date of the RFS
program.\25\ In granting such a petition, EPA may issue or revise the
RFS regulations, establish applicable volume percentages, provide for
generation of credits, and take other actions as necessary to allow for
the application of the RFS program in a noncontiguous state or
territory.
---------------------------------------------------------------------------

    \25\ CAA Section 211(o)(2)(A)(ii), as added by Section 1501(a)
of the Energy Policy Act of 2005.
---------------------------------------------------------------------------

    Today's proposed rule would implement this provision of the Act by
providing a process wherein the governor of a noncontiguous state or
territory may petition EPA to have the state or territory included in
the RFS program. However, we believe that approval of the petition
would not require a showing other than a request to be included in the
program. The petition must be received by EPA on or before October 31
for the noncontiguous state or territory to be included in the RFS
program in the next calendar year. A noncontiguous state or territory
for which a petition is received after October 31 would not be included
in the RFS program in the next calendar year, but would be included in
the RFS program in the following year. For example, if EPA receives a
petition on September 1, 2007, the noncontiguous state or territory
would be included in the RFS program beginning on January 1, 2008. If
EPA receives a petition on December 1, 2007, the noncontiguous state or
territory would be included in the RFS program beginning January 1,
2009. We believe that requiring petitions to be received by October 31
would be necessary to allow EPA time to make any adjustments in
applicable standard. The method for recalculating the renewable fuels
standard to reflect the addition of a state or territory that has opted
into the RFS program is discussed in Section III.A.
    Where a noncontiguous state or territory opts-in to the RFS
program, producers and importers of gasoline for that state or
territory would be obligated parties subject to the renewable fuel
requirements. All refiners, blenders and importers who produce or
import gasoline for use in a state or territory that has opted-in to
the RFS program would be required to count this volume of gasoline in
determining their renewable fuel obligation, and would be able to
separate RINs from batches of renewable fuels used in gasoline that is
sold or introduced into commerce in the

state or territory that has opted-in to the RFS program.
    Once a petition to opt-in to the RFS program is approved by EPA,
the state or territory would remain in the RFS program and be treated
as any of the 48 contiguous states. We request comment on the opt-in
provisions.
    b. State Waiver Provisions. The Energy Act provides that EPA, in
consultation with the U.S. Department of Agriculture (USDA) and the
Department of Energy (DOE), may waive the renewable fuels requirements
in whole or in part upon a petition by one or more states by reducing
the national quantity of renewable fuel required under the Act.\26\ The
Act also outlines the basic requirements for such a waiver, such as a
demonstration that implementation of the renewable fuels requirements
would severely harm the economy or environment of a state, a region, or
the United States, or that there is an inadequate domestic supply of
renewable fuel.
---------------------------------------------------------------------------

    \26\ CAA Section 211(o)(7), as added by Section 1501 of the
Energy Policy Act of 2005.
---------------------------------------------------------------------------

    If EPA approves a state's petition for a waiver of the RFS program,
the Act stipulates that the national quantity of renewable fuel
required (Table I.B-1) may be reduced in whole or in part. This
reduction could reduce the standard applicable to all obligated
parties. However, there is no provision in the Act that would permit
EPA to reduce or eliminate any obligations under the RFS program
specifically for parties located within the state that petitioned for
the waiver. Thus all refiners, importers, and blenders located in the
state would still be obligated parties if they produce gasoline. In
addition, an approval of a state's petition for a waiver may not have
any impact on renewable fuel use in that state, since it would not be a
prohibition on the sale or consumption of renewable fuels in that
state. In fact the Act prohibits the regulations from restricting the
geographic areas in which renewable fuels may be used. Renewable fuel
use in the state in question would thus continue to be driven by
natural market forces.
    Given that state petitions for a waiver of the RFS program are
unlikely to affect renewable fuel use in that state, we are not
proposing regulations providing more specificity regarding the criteria
for a waiver, or the ramifications of Agency approval of such a waiver
in terms of the level or applicability of the standard. However, states
can still submit petitions to the Agency for a waiver of the RFS
requirements under the provision in the Energy Act. We request comment
on this approach.

D. How Do Obligated Parties Comply With the Standard?

    Under the Act, EPA is to establish a renewable fuel standard
annually, expressed as a percentage of gasoline sold or introduced into
commerce, that will ensure that overall a specified total national
volume of renewable fuels will be used in gasoline in the U.S. The Act
does not require each obligated party to necessarily do the blending
themselves in order to comply with this obligation. The Act envisions a
regulatory program that would ensure the national volume is met as long
as a refiner or importer ensured that someone used a certain volume of
renewable fuel, whether it was themselves or another party. Under the
credit trading program required by the Act, each obligated party is
allowed to satisfy its obligations either through its own actions or
through the transfer of credits from others who have more than
satisfied their individual requirements.
    This section describes our proposed compliance program. It is based
on the use of unique renewable identification numbers (RINs) assigned
to batches of renewable fuel by renewable fuel producers. These numbers
could then be sold or traded, and ultimately used by any obligated
party to demonstrate compliance with the applicable standard. Excess
RINs would be identical to the credits envisioned by the Act. As
described below, we believe that our approach is consistent with the
language and intent of the Act and preserves the natural market forces
and blending practices that keep renewable fuel costs to a minimum.
1. Why Use Renewable Identification Numbers?
    Once renewable fuels are produced or imported, there is very high
confidence they will in fact be blended into gasoline or otherwise used
as motor vehicle fuels, except for exports. Renewable fuels are not
used for food, chemicals, or as feedstocks to other production
processes. In fact the denaturant that must be added to ethanol is
designed specifically to ensure that the ethanol can be used only as
motor vehicle fuel. In discussions with stakeholders, it has become
clear that other renewable fuels, including biodiesel and renewable
fuels used in their neat (unblended) form, likewise are not used for
anything other than fuel. Therefore if a refiner ensures that a certain
volume of renewable fuel has been produced, in effect they have also
ensured that this volume will be blended into gasoline or otherwise
used as a motor vehicle fuel. It is therefore appropriate for EPA to
establish the obligation for refiners and importers as an obligation to
ensure that a certain volume of renewable fuel has been produced. This
will ensure that the total required volume of renewable fuels will be
used in the U.S., and as discussed below has many benefits as far as
streamlining the program and minimizing disruptions to the current
marketplace for production, distribution, and use of renewable fuels.
    Implementing a program that is based on ensuring production of a
certain volume of renewable fuels requires a system of volume
accounting and tracking of renewable fuels. We propose that this system
be based on the assignment of unique numbers to each batch of renewable
fuel. These numbers would be called Renewable Identification Numbers or
RINs, and would be assigned to each batch by the renewable fuel
producer or importer.
    The use of RINs would allow the Agency to measure and track
renewable fuel volumes starting at the point of their production rather
than at the point when they are blended into conventional fuels.
Although an alternative approach would be to measure renewable fuel
volumes as they are blended into conventional gasoline or diesel,
measuring renewable fuel volumes at the point of production provides
more accurate measurements that can be easily verified as described in
Section III.D.1.b below. For instance, ethanol producers are already
required to report their production volumes to EIA through Monthly
Oxygenate Reports. This data would provide an independent source for
verifying volumes. The total number of batches and parties involved is
also minimized in this approach. The total number of batches is
smallest at the point of production, since batches are commonly split
into smaller ones as they proceed through the distribution system to
the place where they are blended into conventional fuel. The number of
renewable fuel producers is also far smaller than the number of
blenders. Currently there are approximately 100 ethanol plants and 40
biodiesel plants in the U.S., compared with approximately 1200
blenders.\27\
---------------------------------------------------------------------------

    \27\ Those blenders who add ethanol to RBOB are already
regulated under our reformulated gasoline regulations.
---------------------------------------------------------------------------

    The assignment of RINs to batches of renewable fuel at the point of
their production also allows those batches to be identified according
to various categories important for compliance

purposes. For instance, the RIN will contain a component that specifies
whether a batch of ethanol was made from cellulosic feedstocks. This
RIN component will be of particular importance for 2013 and beyond when
the Act specifies a national volume requirement for cellulosic biomass
ethanol. The RIN can also identify the Equivalence Value of the
renewable fuel which will often only be known at the point of its
production. Finally, the RIN can identify the year in which the batch
was produced, a critical element of determining the applicable time
period within which RINs are valid for compliance purposes.
    Production volumes of renewable fuels intended for blending into
gasoline are an accurate surrogate for volumes actually blended into
gasoline. In addition, production volumes of renewable fuels capture
those renewable fuels used as motor vehicle fuel in their neat
(unblended) form. Thus we believe that this approach would allow us to
account for all renewable fuels consumed in the U.S. because renewable
fuels always end up being used as fuel in the U.S. or exported.
    There are also changes that can occur at various times throughout
the year in the volumes of renewable fuel that are in storage. These
stock changes involve the temporary storage of renewable fuel during
times of excess. However, these stock changes always have a net change
of zero over the long term since there is no economic benefit to
stockpiling renewable fuels.
    Exports of renewable fuel represent the only distribution pathway
that could impair the use of production as a surrogate for renewable
fuel blending into gasoline or other use as a motor vehicle fuel.
However, we believe that our proposed approach can account for exports
through an explicit requirement placed upon exporters (discussed in
Section III.D.4 below). As a result, we are confident that our proposed
approach satisfies the statutory obligation that our regulations impose
obligations on refiners and importers that will ensure that gasoline
sold or introduced into commerce in the U.S. each year will contain the
volumes of renewable fuel specified in the Act. By tracking the amount
of renewable fuel produced or imported, and subtracting the amount
exported, we will have an accurate accounting of the renewable fuel
actually consumed as motor vehicle fuel in the U.S. Exports of
renewable fuel are discussed in more detail in Section III.D.4.
    a. RINs Serve the Purpose of a Credit Trading Program. According to
the Act, we must promulgate regulations that include provisions for a
credit trading program. A credit trading program would allow a refiner
that overcomplied with its annual RVO to generate credits representing
the excess renewable fuel. The Act stipulates that those credits could
then be used within the ensuing 12 month period, or transferred to
another refiner that had not blended sufficient renewable fuel into its
gasoline to satisfy its RVO. In this way the credit trading program
would permit current blending practices to continue wherein some
refiners purchase a significant amount of renewable fuel for blending
into their gasoline while others do little or none, thus providing a
means for all refiners to comply with the standard.
    Our proposed RIN-based program would fulfill all the functions of a
credit trading program, and thus would meet the Act's requirements. If
at the end of a compliance period, a party had more RINs than it needed
to show compliance with its renewable volume obligation, these excess
RINs would serve the function of credits, and could be used, banked, or
traded in the next compliance period. RINs could be transferred to
another party in an identical fashion to a credit. However, our
proposed program provides additional flexibility in that it would
permit all RINs to be transferred between parties before they were
deemed to be in excess of a party's annual RVO at the end of the year.
This is because a RIN serves two functions: it is direct evidence of
compliance, and after a compliance year is over excess RINs serve the
function of credits for overcompliance. Thus the RIN approach has the
advantage of allowing real-time trading without having to wait until
the end of the year to determine excess.
    As in other motor vehicle fuels credit programs, we are also
proposing that any renewable producer that generates RINs must use an
independent auditor to conduct annual reviews of the party's renewable
production, RIN generation, and RIN transactions. These reviews are
called ``attest engagements,'' because the auditor is asked to attest
to the validity of the regulated party's credit transactions. For
example, the reformulated gasoline program requires attest engagements
for refiners and importers, and downstream oxygenate blenders to verify
the underlying documentation forming the basis of the required reports
(40 CFR part 80, subpart F). In the case of RIN generation, the auditor
would be required to verify that the number of RINs generated matched
the volume renewables produced, that any extra value RINs were
appropriately generated, and that RINs numbers were properly assigned
and documented on the renewable fuel PTDs as required by the
regulations.
    b. Alternative Approach To Tracking Batches. If we did not
implement a RIN-based system for uniquely identifying, measuring, and
tracking batches of renewable fuel, the RFS program would necessarily
require that we measure renewable fuel volumes at the point in the
distribution system where they are actually blended into conventional
gasoline or diesel or used in their neat form as motor vehicle fuel.
However, this alternative approach would create a number of significant
problems.
    First, the parties obligated to meet the standard (refiners,
importers, and blenders of gasoline) are often not the parties who
produce renewable fuel or blend renewable fuels such as ethanol into
gasoline. This separation would require a mechanism for obligated
parties to obtain credit for renewable fuels blended by non-obligated
parties. Generally, this would be done through contract management.
Unfortunately, there might be an incentive to exaggerate the volumes of
renewable fuel blended and thus exaggerate the number of credits
generated. This alternative approach might also create opportunities
for double-counting batches of renewable fuel, either intentionally or
unintentionally.
    Second, as described in Section I, one of our guiding principles in
designing the RFS compliance and trading program was to ensure that
existing business practices could continue to the degree possible. With
the alternative approach described above, some refiners might have to
significantly change their business or production practices to take
greater control of ethanol blending and, therefore, the mechanism for
compliance with the RFS program. For instance, a refiner could
establish a contract with an oxygenate blender, securing the rights to
the credits that oxygenate blender creates. A refiner might also decide
to take on more blending responsibilities itself. However, these
approaches would run counter to the normal business practices that keep
fuel costs to a minimum, and would thus have a tendency to increase
fuel costs.
    Third, tracking renewable fuel volumes to identify the date, place,
and volume of blending into gasoline would maximize the number of
parties involved, overly complicating the compliance system. There are
approximately 1200 blenders in the U.S. who blend ethanol into
gasoline, in addition to those that blend biodiesel into conventional
diesel fuel. Many of

these parties are small businesses that have not been regulated in an
EPA fuel program before. Enforcement efforts would necessarily be
placed on them, imposing upon them the primary burden of accurately
documenting the volumes of renewable fuel that are blended into
gasoline even though they are not obligated for meeting the standard.
In contrast, under our proposed program blenders would only need to
keep records of RINs acquired with batches. It is our expectation that
in most cases obligated parties will separate the RINs from batches
before those batches are transferred to blenders. Therefore, blenders
will only have to keep records of RINs for a fraction of the renewable
fuel produced.
    Fourth, a focus on the point of blending would not address
renewable fuels that need not be blended into gasoline or diesel. For
example, although biodiesel \28\ is generally blended into conventional
diesel before being used as fuel, it can be used in its neat form
(B100). If volumes of renewable fuel were counted only when blending
into conventional fuel occurred, then B100 could never be claimed by an
obligated party for RFS compliance purposes. The same would be true of
other renewable fuels which, although not produced in significant
quantities today, could play a more substantial role in the renewable
fuels market in the future. Examples of these other unblended renewable
fuels could include renewable diesel made by hydrotreating plant oils
instead of transesterifying them, or a renewable gasoline made from a
Fischer-Tropsch process applied to biogas.
---------------------------------------------------------------------------

    \28\ Mono-alkyl esters made from plant or animal oils or fats,
and which have been registered with the EPA for use in highway motor
vehicles.
---------------------------------------------------------------------------

    Finally, a focus on the point of blending would not permit
cellulose biomass ethanol to be distinguished from other forms of
ethanol. Since the Act requires that 250 million gallons of cellulosic
biomass ethanol be produced starting in 2013, this alternative approach
would require tracking of batches of renewable fuel at the producer
level.
    In a blender-based approach, then, special exceptions would need to
be developed in order for these neat fuels to be available for RFS
program compliance purposes. For instance, a system of measuring and
tracking neat renewable fuel volumes at the point of production would
likely be necessary. This would be no different from a RIN-based
program for such fuels.
    Our proposed RIN-based program would address all these concerns
automatically by shifting the focus of accounting to the point of
production rather than blending. As a result we believe that a blender-
based alternative approach described above is inferior to our proposed
program. We request comment on a RIN-based system for uniquely
identifying, measuring, and tracking batches of renewable fuel for
compliance purposes.
2. Generating RINs and Assigning Them to Batches
    a. Form of Renewable Identification Numbers. Each RIN would be
generated by the producer or importer of the renewable fuel and would
uniquely identify not only a specific batch, but also every gallon in
that batch. The RIN would consist of a 34-character code having the
following form:

RIN: YYYYCCCCFFFFFBBBBB RRDKSSSSSSEEEEEE

Where:

YYYY = Calendar year of production or import
CCCC = Company ID
FFFFF = Facility ID
BBBBB = Serial batch number
RR = Code identifying the Equivalence Value
D = Code identifying cellulosic biomass ethanol or waste-derived
ethanol
K = Code identifying extra-value RINs
SSSSSS = Start of volume block.
EEEEEE = End of volume block.

    Some examples of RINs are given in Section III.E.1.b.
    The company and facility IDs would be assigned by the EPA as part
of the registration process as described in Section IV.B. The serial
batch number would be chosen by the producer and would generally be a
sequential value starting with 000001 at the beginning of each year. We
have chosen five digits for the serial batch number to allow for
facilities that produce up to a hundred thousand batches per year.
However, we request comment on whether four digits would be sufficient.
    The RR, D, and K codes would together describe the nature of the
renewable fuel and the RINs that were generated to represent it. The RR
code would simply represent the Equivalence Value for the renewable
fuel, multiplied by 10 to eliminate the decimal place inherent in
Equivalence Values. Equivalence Values form the basis for the total
number of RINs that can be generated for a given volume of renewable
fuel, and are described in Section III.B.4.
    The D code would identify cellulosic biomass ethanol batches as
such. Since the Act requires that a minimum of 250 million gallons of
cellulosic biomass ethanol be consumed starting in 2013, obligated
parties will need to be able to distinguish RINs representing
cellulosic biomass ethanol from RINs representing other types of
renewable fuel. This requirement is discussed in more detail in Section
III.A.
    The K code would be used to specify whether the RIN represents
actual gallons of renewable fuel, or instead represents extra-value
RINs. Extra-value RINs arise only in cases where the Equivalence Value
is greater than 1.0. Extra-value RINs are discussed in more detail in
Section III.D.2.b below.
    The RIN also contains two values that together identify the total
number of gallons in a batch as well as uniquely identifying each
gallon in that batch.\29\ When RINs are first assigned to a batch of
renewable fuel by its producer or importer, the volume start block for
that batch will in general be 1 (i.e. SSSSSS will have a value of
000001). The volume block end is the total volume number of gallons in
the batch (i.e. for a 10,000 gallon batch, EEEEEE would have a value of
010000). Thus the single RIN assigned to the batch is in effect
shorthand for all the unique RINs assigned to every individual gallon
in the batch. We propose that the number of gallons in a batch be
standardized to 60 [deg]F to avoid RIN assignment problems associated
with volume swell due to temperature changes. We have assigned six
digits to the volume block codes to allow batches up to a million
gallons in size. We request comment on whether a fewer number of digits
for the SSSSSS and EEEEEE codes would be sufficient.
---------------------------------------------------------------------------

    \29\ RINs represent actual gallons in a batch when the RIN is a
standard-value RIN. Extra-value RINs represent additional gallons in
cases where the Equivalence Value is greater than Equivalence Value
is greater than 1.0. See further discussion in Section III.D.2.b.
---------------------------------------------------------------------------

    Since ``RIN'' can refer to either the number assigned to the batch
or the number representing each gallon in that batch, we propose
distinguishing between a batch-RIN and a gallon-RIN. A batch-RIN would
be the multi-character code written on a product transfer document
associated with a batch of renewable fuel. The batch-RIN would include
SSSSSS and EEEEEE values identifying every (volume-standardized) gallon
in the batch, each of which would be assigned its own gallon-RIN. A
gallon-RIN would have identical SSSSSS and EEEEEE values identifying
one gallon in a batch.
    Our approach to RINs permits the batch to be divided into smaller
batches at any point in the distribution system while maintaining the
assignment of unique RINs. For instance, if a 1000 gallon batch of
renewable fuel is divided into two 500 gallon batches, the volume block
start and block end values

in the original batch-RIN would change to reflect the batch split. The
batch-RIN for the first 500 gallon batch would have an SSSSSS value of
000001 and an EEEEEE value of 000500, while the second 500 gallon batch
would have an SSSSSS value of 000501 and an EEEEEE value of 001000.
Additional batch splits would be handled similarly. More discussion of
batch splits is provided in Section III.E.1.b.i.
    b. Generating Extra-Value RINs. In general, there is a one-to-one
correspondence between gallon-RINs and physical gallons of renewable
fuel in a batch. For instance, a 10,000 gallon batch of renewable fuel
would be assigned 10,000 gallon-RINs, and the batch-RIN would contain
volume block start and volume block end values summarizing the 10,000
gallon-RINs. However, under certain circumstances RINs may be generated
in addition to those that represent the volume of renewable fuel
actually produced. This would occur in cases where the Equivalence
Value of the renewable fuel in question is greater than 1.0. Renewable
fuel Equivalence Values are discussed in Section III.B.4.
    If a renewable fuel has an Equivalence Value greater than 1.0, the
incremental value above 1.0 can be used to generate ``extra-value''
RINs. For instance, the Equivalence Value for biodiesel shown in Table
III.B.4-1 is 1.5. If a biodiesel producer made a 1000 gallon batch of
biodiesel, 1000 standard-value gallon-RINs would be assigned to the
batch and an additional 500 extra-value gallon-RINs could also be
generated.
    All the RINs generated to represent a batch of renewable fuel would
contain the same RR code representing the Equivalence Value of the
renewable fuel. However, extra-value RINs would be treated differently
from standard-value RINs in two ways. First, the extra-value RINs would
include a K code that identifies them as extra-value RINs,
distinguishing them from standard-value RINs that represent actual
gallons of renewable fuel. Second, extra-value RINs would not be
required to be transferred along with the batch of renewable fuel as it
moves through the distribution system.\30\ Rather, an extra-value RINs
could be transferred as an independent commodity by the producer. This
approach would provide an incentive for producers to make renewable
fuels that have a comparatively greater value in terms of meeting the
volume requirements of the RFS program. Also, by not requiring extra-
value RINs to be assigned to the batches of renewable fuel that they
represent, batches of renewable fuel can continue to have a one-to-one
correspondence between gallon-RINs assigned to the batch and the number
of physical gallons in that batch. This approach can greatly simplify
the transfer of RINs with batches particularly when batch splits occur.
---------------------------------------------------------------------------

    \30\ As described in Section III.E below, we are proposing that
standard-value RINs would be assigned to the batch of renewable fuel
they represent and would be required to be transferred with the
batch.
---------------------------------------------------------------------------

    c. Cases in Which RINs Are Not Generated. Although in general every
(temperature-standardized) gallon of renewable fuel produced or
imported would be assigned a gallon-RIN, there are several cases in
which a RIN may not be assigned. For instance, if a renewable fuel
producer also operated as an exporter, any renewable fuel that it
produced and exported would not need to be assigned a RIN. Since the
gasoline that is blended with renewable fuels under the RFS program
must be ``sold or introduced into commerce'' within the U.S., renewable
fuels that are exported cannot be claimed by an obligated party for
compliance purposes, and therefore would not need to be assigned a RIN.
Exports of renewable fuel are discussed further in Section III.D.4.
    Another case in which a RIN may not be assigned to a batch of
renewable fuel would be if the renewable fuel was consumed within the
confines of the production facility where it was made. RINs under
today's proposal would be assigned to renewable fuel when it leaves the
production facility. So long as renewable fuel remained at the
production facility, it would not need to be assigned a RIN.
    A third case in which some renewable fuel would not be assigned a
RIN would occur for small volume producers. We are proposing that
renewable fuel producers who produce less than 10,000 gallons in a year
would not be required to generate RINs or assign them to batches. If
they chose to register as a renewable fuel producer under the RFS
program, however, they would be subject to all the regulatory
provisions that apply to all producers, including the requirement to
assign RINs to batches. We request comment on the 10,000 gallon
threshold.
    A fourth case in which some renewable fuel would not be assigned a
RIN could occur when a gasoline or diesel blending component is only
partially derived from a renewable source. In such cases the
Equivalence Value associated with the renewable fuel would be less than
1.0, indicating that it is produced by combining a renewable fuel with
a non-renewable fossil fuel. For instance, ethyl tertiary butyl ether
(ETBE) is made from combining ethanol with isobutylene. The ethanol is
generally from corn, and the isobutylene is generally from petroleum.
Equivalence Values are discussed in Section III.B.4. In this situation
only a fraction of the gallons of renewable fuel produced would be
assigned a RIN in proportion to its Equivalence Value, with the
remaining gallons not being assigned a RIN.
    Finally, a renewable fuel whose energy content is less than that of
ethanol might also be assigned an Equivalence Value less than 1.0, and
as a result fewer gallon-RINs would be assigned to a batch than
physical gallons in that batch. For example, methanol made from
biogenic methane (biogas) for use in a methanol vehicle would have an
energy content less than that for ethanol. Although methanol is
currently used as a fuel in only very small quantities, if it was
produced from renewable feedstocks it would have an Equivalence Value
less than 1.0.
    If a renewable fuel has a Equivalence Value less than 1.0, then
gallon-RINs could only be assigned to a portion of the batch. The
number of gallons within a batch that could be assigned a RIN would be
calculated from the following formula:

Va = EV x Vs
Where:

Va = Volume of the batch that is assigned a RIN, in
gallons (rounded to the nearest whole gallon).
EV = Equivalence Value for the renewable fuel in question (< 1.0).
Vs = Total volume of the batch standardized to 60 [deg]F,
in gallons.

    In such cases, the volume block start and volume block end values
in the batch-RIN (i.e. SSSSSS and EEEEEE codes described in Section
III.D.2.b) would not exactly correspond to the volume of the batch.
Instead, they would cover the first portion of the batch. The remaining
portion of the batch would not be assigned a RIN. For clarity in
regards to batch splits, a party could assign the gallon-RINs to the
first-out gallons of the batch. Thus if a batch split occurred, every
gallon drawn out of the original batch to form a new, smaller batch
would be assigned a gallon-RIN, up to the point when all the available
gallon-RINs were assigned to the new batch. Any additional gallons
drawn out of the original batch, or left with the original batch, would
have no associated RINs. However, we are not requiring this approach
but only offer it as one possibility. We propose that parties that have
ownership or custody of batches of renewable fuel have the discretion
to split batches and their associated RINs in any way, subject to

certain restrictions. Batch splits are discussed in more detail in
Section III.E.1.b.i.
3. Calculating and Reporting Compliance
    Under our proposed program, RINs would form the basis of the volume
accounting and tracking system that would allow each obligated party to
demonstrate that they had discharged their renewable fuel obligation.
This section describes how the compliance process using RINs would
work. Our proposed approach to the distribution and trading of RINs is
covered separately in Section III.E below.
    a. Using RINs to Meet the Standard. Under our proposed program,
each obligated party would determine its Renewable Volume Obligation
(RVO) based on the applicable percentage standard and its annual
gasoline volume as described in Section III.A.4. The RVO represents the
volume of renewable fuel that the obligated party must ensure is
produced for use in the U.S. in a given calendar year. Since the
nationwide renewable fuel volumes shown in Table I.B-1 are required by
the Act to be consumed in whole calendar years, the RVO for each
obligated party is likewise an obligation that is calculated on an
annual basis.
    Since our proposed program uses RINs as a measure of the amount of
renewable fuel used as motor vehicle fuel that is sold or introduced
into commerce within the U.S., obligated parties would meet their RVO
through the accumulation of RINs. In so doing, they would effectively
be causing the renewable fuel represented by the RINs to be consumed as
motor vehicle fuel. Obligated parties would not be required to
physically blend the renewable fuel into gasoline or diesel fuel
themselves. The accumulation of RINs would be the means through which
each obligated party would show compliance with its RVO, and thus with
the renewable fuel standard.
    For each calendar year, each obligated party would be required to
submit a report to the Agency documenting the RINs it acquired, and
showing that the sum of all gallon-RINs acquired were equal to or
greater than its RVO. This reporting is discussed in more detail in
Section IV. In the context of demonstrating compliance, all gallon-RINs
would have the same compliance value, i.e. there would be no
distinction between standard-value RINs and extra-value RINs for
compliance purposes. The Agency could then verify that the RINs used
for compliance purposes were valid by simply comparing RINs reported by
producers to RINs claimed by obligated parties. We could also verify
simply that any given gallon-RIN was not double-counted, i.e., used by
more than one obligated party for compliance purposes. In order to be
able to identify the cause of any double-counting, however, additional
information would be needed on RIN transactions as discussed in Section
IV.
    If an obligated party has acquired more RINs than it needs to meet
its RVO, then in general it could retain the excess RINs for use in
complying with its RVO in the following year, or transfer the excess
RINs to another party. The conditions under which this would be allowed
are determined by the valid life of a RIN, described in more detail in
Sections III.D.3.b below. If alternatively an obligated party has not
acquired sufficient RINs to meet its RVO, then under certain conditions
it could carryover a deficit into the next year. Deficit carryovers are
discussed in more detail in Section III.D.3.d.
    The regulations would prohibit any party from creating or
transferring invalid RINs. Invalid RIN could not be used in
demonstrating compliance regardless of the good faith belief of a party
that the RINs were valid. These enforcement provisions are necessary to
ensure the RFS program goals are not compromised by illegal conduct in
the creation and transfer of RINs.
    As in other motor vehicle fuel credit programs, the regulations
would address the consequences if an obligated party was found to have
used invalid RINs to demonstrate compliance with its RVO. In this
situation, the refiner or importer that used the invalid RINs would be
required to deduct any invalid RINs from its compliance calculations.
The refiner or importer would be liable for violating the standard if
the remaining number of valid RINs was insufficient to meet its RVO,
and the obligated party might be subject to monetary penalties if it
used invalid RINs in its compliance demonstration. In determining what
penalty was appropriate, if any, we would consider a number of factors,
including whether the obligated party did in fact procure sufficient
valid RINs to cover the deficit created by the invalid RINs, and
whether the purchaser was indeed a good faith purchaser based on an
investigation of the RIN transfer. A penalty might include both the
economic benefit of using invalid RINs and/or a punitive component.
    Although an obligated party would be liable under our proposed
program for a violation if it used invalid RINs for compliance
purposes, we would normally look first to the generator/seller of the
invalid RINs both for payment of penalty and to procure sufficient
valid RINs to offset the invalid RINs. However, if that party was found
to be out of business, then attention would turn to the obligated party
who would have to obtain sufficient valid RINs to offset the invalid
RINs.
    As for RIN generators, we are proposing that obligated parties be
required to conduct attest engagements for the volume of gasoline they
produce and the number of RINs procured to ensure compliance with their
RVO. In most cases, this should amount to little more than is already
required under existing EPA gasoline regulations. In the case of
renewable fuel exporters, the attest engagement would verify the volume
of renewable fuel exported and therefore the magnitude of their RVO.
Attest engagement reports would be submitted to the party that
commissioned the engagement, and to EPA.
    b. Valid Life of RINs. The Act requires that renewable fuel credits
be valid to show compliance for 12 months as of the date of generation.
This section describes our proposed interpretation of this provision in
the context of a RIN-based program. We also discuss some possible
alternative interpretations that we have considered.
    As described in Section III.D.1.a, credits represent renewable fuel
volumes in excess of what an obligated party needs to meet their annual
compliance obligation. Given that the renewable fuel standard is an
annual standard, compliance would be determined shortly after the end
of the year, and credits would be identified at that time. Compliance
is typically demonstrated by submitting a compliance demonstration to
EPA. Given the 12-month life of a credit as stated in the Act, we
interpret this provision as meaning that credits would only be valid
for compliance purposes for the following compliance year. Hence if a
refiner or importer overcomplied with their 2007 obligation they would
generate credits that could be used to show compliance with the 2008
compliance obligation, but the credits could not be used to show
compliance for later years.
    The Act's limit on credit life helps balance the risks between the
needs of renewable fuel producers and obligated parties. Producers are
currently making investments in expanded production capacity on the
expectation of a statutorily guaranteed minimum market. Under the
market conditions we are experiencing today that make ethanol use more
economically attractive, the annual volume requirements in the RFS
program will not drive consumption of renewable fuels. However, if the
price of

crude oil dropped significantly and the use of ethanol in gasoline
became less economically attractive, obligated parties could use
stockpiled credits to comply with the program requirements. As a
result, demand for renewable fuel could fall well below the RFS program
requirements, and many producers could find themselves with a stranded
investment. The 12 month valid life limit for credits minimizes the
potential for this type of result.
    For obligated parties, the 12 month valid life for credits provides
a window within which parties who do not meet their renewable fuel
obligation through their own physical use of renewable fuel can obtain
credits from other parties who have excess. This critical aspect of the
credit trading system allows the renewable fuels market to continue
operating according to natural market forces, avoiding the possibility
that every single refiner would need to purchase renewable fuel for
blending into its own gasoline. But the 12 month life also provides a
window within which banking and trading can be used to offset the
negative effects of fluctuations in either supply of or demand for
renewable fuels. For instance, if crude oil prices were to drop
significantly and thus natural market demand for ethanol likewise fell,
the RFS program would normally bring demand back up to the minimum
required volumes shown in Table I.B-1. But in this circumstance, the
use of ethanol in gasoline would be less economically attractive, since
demand for ethanol would not be following price but rather the
statutorily required minimum volumes. As a result, the price of RINs,
and thus ethanol blends, could spike above the levels that would exist
if no minimum required volumes existed. The 12 month valid life creates
some flexibility in the market to help mitigate these potential price
spikes. The renewable fuels market could also experience a significant
drop in supply if, for instance, a drought were to limit the production
of the feedstocks needed to produce renewable fuel. Obligated parties
could use banked credits to comply rather than carry a deficit into the
next year.
    In the context of our proposed RIN-based program, we are able to
accomplish the same objective as the Act's 12 month life of credits by
allowing RINs to be used to show compliance for the year in which the
renewable fuel was produced and its associated RIN first generated, or
the following year. RINs not used for compliance purposes in the year
in which they were generated would by definition be in excess of the
RINs an obligated party needed in that year, making excess RINs
equivalent to credits. Excess RINs would be valid for compliance
purposes in the year following the one in which they initially came
into existence.\31\ RINs not used within their valid life would expire.
This would satisfy the Act's 12 month duration for credits.
---------------------------------------------------------------------------

    \31\ The use of previous-year RINs for current year compliance
purposes would also be limited by the 20 percent RIN rollover cap
under today's proposal. However, as discussed in the next section,
we believe that this proposed cap will still provide a significant
amount of flexibility to obligated parties.
---------------------------------------------------------------------------

    Thus we propose that every RIN be valid for the calendar-year
compliance period in which it was generated, or the following year. If
a RIN was created in one year but was not used by an obligated party to
meet its RVO for that year, the RIN could be used for compliance
purposes in the next year (subject to certain provisions to address RIN
rollover as discussed below). If, however, a RIN was created in one
year and was not used for compliance purposes in that year or in the
next year, it would expire.
    There are alternative approaches that could be taken to
establishing the valid life of a RIN. For instance, excess RINs could
be deemed to be generated not at the end of an annual compliance
period, but rather on the date that an obligated party must submit its
annual report to the Agency (February 28 as described in Section
IV.A.2). In this case the 12-month valid life could extend into the
following calendar year. As described above, the fact that compliance
is determined on an annual basis means that RINs that are valid for any
portion of a calendar year should be available for demonstrating
compliance with that year's compliance obligation. Under this
alternative approach, RINs would be valid for three full compliance
periods: the calendar year in which the original RIN came into
existence, the following year during which it was deemed to be in
excess of an obligated party's RVO, and a third year within which the
12 month valid life expired. We do not believe that this interpretation
is most consistent with the Act's purposes. This could allow a given
year's exceptional overcompliance to effectively reduce required
renewable fuel volumes for two years in the future. We do not believe
that this would promote the best balance between allowing flexibility
for obligated parties while also increasing the use of renewable fuels
annually.
    Another possible approach to RIN life would be to interpret the
Energy Act's 12-month credit life provision as applying
retrospectively, not prospectively. Under this approach, the 12-month
timeframe in the Act would be interpreted to refer to the calendar year
within which a credit was generated. If excess RINs were deemed to be
such on December 31, then under this alternative approach no RINs could
be used for compliance purposes beyond the year in which they
originally came into existence.
    However, the Act explicitly indicates that obligated parties may
either use the credits they have generated or transfer them. For a
party to be able to use credits generated, such credit use must
necessarily occur in a compliance year other than the one in which the
credit was generated. Thus we believe that it is appropriate for all
RINs to be valid for the year in which they were generated and the
following calendar year. In comparison to a single-year valid life for
RINs, our proposed approach provides some additional compliance
flexibility to obligated parties as they make efforts to acquire
sufficient RINs to meet their RVOs each year. This flexibility will
have the effect of keeping fuel costs to a minimum.
    We recognize that the language of the Act regarding credit valid
life is not unequivocal. However, we believe that an interpretation
leading to a valid life of one year after the year in which the RIN was
generated is most consistent with the program as a whole. The record of
the development of this legislation does not provide a clear indication
to the contrary. In fact, while some stakeholders have argued that the
Energy Act could have been written to explicitly allow a valid life of
multiple years if that had been Congress' intent, we believe it could
likewise have been written to explicitly limit the valid life to the
year in which the renewable fuel was produced if that had been its
clear intent. Therefore, the interpretation of the valid life language
in the Act must be established in the context of the statutory
requirements for the full RFS program and the practical implications of
its implementation.
    One possible objection to our proposed approach is that the use of
RINs generated in one compliance period to satisfy obligations in a
subsequent compliance period could result in less renewable fuel used
in a given year than is set forth in the statute. However, the language
in the Act shows that Congress clearly intended a credit program that
provided a degree of implementation flexibility. For instance, the
deficit carryover provision allows any obligated party to fail to meet
its RVO in one year if it meets the deficit and its RVO in the next
year. If many obligated parties took advantage of this provision, it
could

result in the nationwide total volume obligation for a particular
calendar year not being met. In a similar fashion, the statutory
requirement that every gallon of cellulosic biomass ethanol be treated
as 2.5 gallons for the purposes of compliance means that the annually
required volumes of renewable fuel could be met in part by virtual,
rather than actual, volumes. Finally, the calculation of the renewable
fuel standard is based on projected nationwide gasoline volumes
provided by EIA (see Section III.A). If the projected gasoline volume
falls short of the actual gasoline volume in a given year, the standard
will fail to create the demand for the full renewable fuel volume
required by the Act for that year. The Act contains no provision for
correcting for underestimated gasoline volumes.
    We request comment on the valid life of RINs, including our
proposed approach in which RINs would be valid for the year generated
or the following year, and the alternative approaches in which RINs
would be valid for more or less time than under our proposal.
    c. Cap on RIN Use to Address Rollover. As described in Section
III.D.3.b above, we are proposing that RINs be valid for compliance
purposes for the calendar year in which they were generated or the
following year. We believe that this approach is most consistent with
the Act's prescription that credits be valid for compliance purposes
for 12 months as of the date of generation. Our proposed approach is
intended to address both the risk taken by producers expecting a
guaranteed demand to cover their expanded production capacity
investments and the risk taken by obligated parties who need a
guaranteed supply in order to meet their regulatory obligations under
this program.
    However, the use of previous year RINs to meet current year
compliance obligations does create an opportunity for effectively
circumventing the valid life limit for RINs. This can occur in
situations wherein the total number of RINs generated each year for a
number of years in a row exceeds the number of RINs required under the
RFS program for those years. The example below illustrates the issue.

                                Table III.D.3.c-1.--Example of RIN Rollover Issue
                                                 [Billion RINs]
----------------------------------------------------------------------------------------------------------------
                                                Available RINs                    Compliance Determination
                                   -----------------------------------------------------------------------------
                                                                                New excess
                                      Required       RINs        Excess      Previous    Additional      RINs
                                    under RFS a  generated b                year RINs   RINs needed   generated
----------------------------------------------------------------------------------------------------------------
2007..............................          4.7          5.2          0.5          0.0          4.7          0.5
2008..............................          5.4          6.0          0.6          0.5          4.9          1.1
2009..............................          6.1          6.9          0.8          1.1          5.0          1.9
----------------------------------------------------------------------------------------------------------------
a Equivalent to the required volumes shown in Table I.B-1.
b One possible production volume scenario based on EIA projections in their Annual Energy Outlook 2006.

    In this example, there are 0.5 billion more RINs available for
compliance year 2007 than are needed to comply with the RFS program
requirements. Since these RINs are not used in the year in which they
are generated (2007), they can be used for compliance purposes in the
following year (2008). If they are not used in 2008, they will expire.
    In 2008, 0.6 billion more RINs come into existence than are needed
to meet the 2008 requirements. This should mean that there are 0.6
billion more RINs available than are needed to comply with the RFS
program requirements for 2008, and thus 0.6 billion RINs should be
carried into 2009. However, since there are also 0.5 billion RINs
available from the previous year which can be used for compliance
purposes in 2008, this permits the generation of 0.5 new excess RINs in
2008 if all the 2007 RINs are used to demonstrate compliance in 2008.
Thus there are in fact 1.1 billion excess RINs generated in 2008 rather
than only 0.6 billion, and they can all be used for compliance purposes
in 2009. In summary, the excess RINs from 2007 were used to generate
new excess RINs in 2008, and in effect (though not by record) the
excess RINs from 2007 can be used for compliance purposes in 2009, a
year after they should have expired. Thus excess RINs have ``rolled
over'' multiple years.
    The rollover issue essentially could make the applicable valid life
for RINs virtually meaningless in practice. Even though individual RINs
technically could only be used for compliance purposes for the year
generated and the following year, in practice obligated parties could
use previous-year RINs to generate new excess current-year RINs which
could then be carried into the following year. This could continue for
every year in which the volume of renewable fuel produced in a given
year exceeds the RFS requirements for that year, up to limit of 100
percent of the standard for that year. The net result is that the RFS
program could operate as if there was virtually no valid life limit for
RINs at all.
    RIN rollover also undermines the ability of a limit on credit life
to guarantee a market for renewable fuels. As described in Section
III.D.3.b, if the natural market demand for ethanol was higher than the
volumes required under the RFS program for several years in a row, as
may occur in practice, obligated parties could amass RINs that, in the
extreme, could be used entirely in lieu of actually demanding ethanol
in some subsequent year.
    Some stakeholders do not perceive a problem with the RIN rollover
issue. They point to the need for maximum flexibility in responding to
fluctuations in the market, and they are primarily concerned about
potential supply problems. For instance, if a drought were to reduce
the availability of corn for ethanol production, there may simply not
be sufficient RINs available for compliance purposes. A drought
situation actually occurred in 1996, and as a result 1996 ethanol
production was 21% less than it had been in 1995. In 1997, production
had not even returned to the 1995 levels. Although the Agency has the
authority to waive the required renewable fuel volumes in whole or in
part in the event of inadequate domestic supply, this can occur only on
petition by one or more states, and then only after consultation with
both the Department of Agriculture and the Department of Energy.
Obligated parties have expressed concern that such a waiver would not
occur in a timely fashion. The availability of excess previous-year
RINs would thus provide compliance certainty in the event that the
supply of current-year RINs falls below the RFS program requirements

and the Agency does not waive any portion of the program requirements.
    We believe that the rollover issue can and should be addressed. The
Act's provision regarding the valid life of credits is clearly intended
to obtain the benefits associated with a limited credit life. Any
program structure in which some RINs have a de facto infinite life,
regardless of the technical life of individual RINs, does not
appropriately achieve the benefits expected from the Act's provision
regarding the 12-month life of credits. The authority to establish a
credit program and to implement a limited life for credits includes the
authority to limit actions that have the practical effect of
circumventing this limited credit life.
    To be consistent with the Act, we believe that the rollover issue
should be addressed in our regulations. However, we also believe that
the limits to preclude such unhindered rollovers should not preclude
all previous-year RINs from being used for current-year compliance. To
accomplish this, we must restrict the number of previous-year RINs that
can be used for current year compliance. We considered a number of
possible approaches for accomplishing this, some of which are discussed
below. After consultation with stakeholders, we decided that the best
approach would be to place a percentage cap on the amount of an
obligated party's Renewable Volume Obligation (RVO) that can be met
using previous-year RINs. We are proposing that this cap be set at 20
percent. Thus each obligated party would be required to use current-
year RINs to meet at least 80 percent of its RVO, with a maximum of 20
percent being derived from previous-year RINs. The cap would not be
effective until compliance year 2009, since no rollover is possible in
years 2007 or 2008.
    Any previous-year RINs that an obligated party may have that are in
excess of the 20 percent cap could be traded to other obligated parties
that need them. If the previous-year RINs in excess of the 20 percent
cap were not used by any obligated party for compliance, they would
expire. The net result would be that, for the market as a whole, no
more than 20 percent of a given year's renewable fuel standard could be
met with RINs from the previous year.
    Furthermore, we believe that the 20 percent cap provides the
appropriate balance between, on the one hand, allowing legitimate RIN
carryovers and protecting against potential supply shortfalls that
could limit the availability of RINs, and on the other hand ensuring an
annual demand for renewable fuels as envisioned by the Act. We believe
this approach also provides the certainty all parties desire in
implementing the program. The same cap would apply equally to all
obligated parties, and the cap would be the same for all years,
providing certainty on exactly how obligated parties must comply with
their RVO going out into the future. A 20 percent cap would be readily
enforceable with minimal additional program complexity, as each
obligated party's annual report would simply provide separate listings
of previous-year and current-year RINs to establish that the cap had
not been exceeded. A 20 percent cap would have no impact on who would
own RINs, their valid life, or any other regulatory provision regarding
compliance.
    Rather than employing a fixed 20 percent cap, we also considered an
approach whereby we would set the cap annually based on the actual
excess renewable fuel production. Table III.D.3.c-2 provides an example
of how the caps would be calculated if the EIA projections for ethanol
production prove accurate.

                        Table III.D.3.c-2.--Required and Projected Renewable Fuel Volumes
                                                [Billion gallons]
----------------------------------------------------------------------------------------------------------------
                                                                                Previous
                                                                                Year excess
                                                                                ethanol as
                                                                Required     Ethanol                  a fraction
                                                              under RFS a   produced b    Excess d    of current
                                                                                year
                                                                                compliance
                                                                                (percent)
----------------------------------------------------------------------------------------------------------------
2008........................................................          5.4          6.0          0.6  ...........
2009........................................................          6.1          6.9          0.8          9.8
2010........................................................          6.8          7.9          1.1         11.8
2011........................................................          7.4          8.8          1.4         14.9
2012........................................................          7.5          9.6          2.1         18.7
2013........................................................        c 7.6         10.1          2.5         27.6
2014........................................................        c 7.8         10.3          2.5         32.1
2015........................................................        c 7.9         10.5          2.6         31.6
----------------------------------------------------------------------------------------------------------------
a Equivalent to the required volumes shown in Table I.B-1
b Projected ethanol production volumes from EIA, Annual Energy Outlook 2006.
c Example of possible increases in the required volumes. The Energy Act requires at minimum a constant
  percentage of renewable fuel in gasoline after 2012.
d Does not include other renewable fuels such as biodiesel which would increase the excess even further.

    In 2009, for instance, the cap would be 9.8 percent, and by 2012 it
would be 18.7 percent. Under such an approach, the value of the cap
might more precisely reflect the actual excess RINs and preclude their
rollover. However, the annual calculation of the cap would require that
the total renewable fuel volumes from the previous year be known. For
compliance year 2009, information on 2008 renewable fuels production
would not generally be known until spring of 2009. Therefore, obligated
parties would not know until mid-year at the earliest what the exact
cap would be for that year. The Agency could publish an estimate of the
cap by the end of the previous year, but it would not provide obligated
parties with the certainty they may need for establishing contracts and
business relationships for RIN trading. In addition, such a variable
cap may not ensure a smoothly functioning RIN market under all possible
market conditions. Market flexibility is needed most when the RIN
market is the tightest (i.e. when renewable fuel production volumes are
closest to the volumes required under the RFS program). Yet under this
alternative approach, the cap would be the smallest when supply was
closest to demand for

RINs. The cap would approach zero as supply approached the volumes
required under the RFS program, and thus an obligated party that had
even a small number of excess RINs from the prior year could not use
them, but rather would be forced to trade them to someone else.
Conversely, when supply significantly exceeds demand and market
flexibility is needed least, the cap would be the highest. Fixing the
cap at 20 percent both provides certainty to the RIN market, and
ensures that some minimum level of flexibility exists for individual
obligated parties even in a market without excess RINs.
    The level of 20 percent is also consistent with both past ethanol
market fluctuations and future projections of excess ethanol. As
described above, the largest single-year drop in ethanol supply
occurred in 1996 and resulted in 21% less ethanol being produced than
in 1995. While future supply shortfalls may be larger or smaller, the
circumstances of 1996 provide one example of their potential magnitude.
Furthermore, as illustrated in Table III.D.3.c-2, EIA projections
indicate that previous year volumes will exceed current-year
requirements by roughly 10 to 30 percent between 2009 and 2015. Our
proposed 20 percent cap lies in the midrange of these values.
    As a result, we believe that a cap of 20 percent appears to be a
reasonable way to limit RIN rollover and provide some assurances to
renewable fuel producers regarding demand for renewable fuel. A cap of
20 percent would also ensure that many previous-year RINs can still be
used for current year compliance, providing some flexibility in the
event of market disruptions.
    Despite the flexibility it would provide, a cap of 20 percent would
not be guaranteed to be sufficient to address every potential future
supply shortfall or fluctuation in the renewable fuels market. Thus we
request comment on whether a higher cap, such as 30 percent, would be
more appropriate. On the other hand, since EIA is projecting that a cap
of 20 percent will be more than what is necessary in the first few
years of the program to address rollover, we also request comment on
whether a smaller cap, such as 10 percent, would be appropriate.
    We also request comment on whether the Agency should adopt a
provision allowing the cap to be raised in the event that supply
shortfalls overwhelmed the 20 percent cap. Under this conditional
provision, the Agency would monitor standard indicators of agricultural
production and renewable fuel supply to determine if sufficient volumes
of renewable can be produced to meet the RFS program requirements in a
given year. Prior to the end of a compliance period, if the Agency
determined that a supply shortfall was imminent, it could raise the cap
to permit a greater number of previous-year RINs to be used for
current-year compliance. Although this approach would not change the
required volumes, it could create some additional temporary
flexibility.
    In addition to our proposed 20 percent cap, we also evaluated an
alternative approach for addressing the RIN rollover issue. Under this
alternative, we would not employ a uniform cap at all, but rather would
require current-year RINs to be applied towards an obligated party's
RVO before any previous-year RINs were considered. This ``last-in,
first-out'' (LIFO) approach would eliminate the possibility that
previous-year RINs could be used to generate new excess current-year
RINs, forcing them to expire. Although it would focus the RIN rollover
correction on obligated parties and would tailor it to the specific
circumstances of each party, this alternative approach would also
create the need for an additional regulatory prohibition. Under this
approach, RINs held by non-obligated parties would not automatically
expire. As a result, non-obligated parties could in essence serve as a
bank of previous-year RINs, thus permitting the rollover to continue
despite the imposition of a LIFO protocol. To prevent this, the LIFO
approach would have to include a requirement that non-obligated parties
be prohibited from owning previous-year RINs. If a non-obligated party
were to own a current-year RIN on December 31 and hold it until January
1, that RIN would automatically expire. In order to enforce this
provision, the Agency would also need to keep track of and receive
reports on all RIN transactions for non-obligated parties by their
transaction date.
    Given the additional uncertainty and complexity caused by this
alternative approach, we believe that our proposed 20 percent cap
provides the greatest degree of simplicity and flexibility while still
addressing the RIN rollover issue. However, we request comment on any
alternative approaches to addressing the RIN rollover issue.
    d. Deficit Carryovers. The Energy Act also contains a provision
allowing an obligated party to carry a deficit forward from one year
into the next if it cannot generate or purchase sufficient credits to
meet its RVO. However, deficits cannot be carried over two years in a
row.
    Deficit carryovers are measured in gallons of renewable fuel, just
as for RINs and RVOs. If an obligated party has not acquired sufficient
RINs to meet its RVO in a given year, the deficit is calculated by
subtracting the total number of RINs an obligated party has acquired
from its RVO. There are no volume penalties, discounts, or other
factors included when calculating a deficit carryover. As described in
Section III.D.1, the deficit is then added to the RVO for the next
year. The calculation of the RVO as described in Section III.A.4 shows
how a deficit would be carried over into the next year:

    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.

    If an obligated party does acquire sufficient RINs to meet its RVO
in year i-1, the obligated party must procure sufficient RINs to cover
the full RVO for year i including the deficit. There are no provisions
allowing for another year of carryover. If the obligated party does not
acquire sufficient RINs to meet its RVO for that year plus the deficit
carryover from the previous year, it would be in noncompliance.
    The Act indicates that deficit carryovers are to occur due to
``inability'' to generate or purchase sufficient credits. We believe
that obligated parties will make a determined effort to satisfy their
RVO on an annual basis, and that a deficit will demonstrate that they
were unable to do so. Thus, we are not proposing that any particular
demonstration of ``inability'' be a prerequisite to the ability of
obligated parties to carry deficits forward. However, we request
comment on this issue.
4. Provisions for Exporters of Renewable Fuel
    As described in Section III.D.2.a, we believe that U.S. consumption
of renewable fuel as motor vehicle fuel can be measured with
considerable accuracy through the tracking of renewable fuel production
and importing records. This is the basis for our proposed RIN-based
system of compliance. However, exports of renewable fuel must be
accounted for under this approach. For instance, if a gallon of ethanol
is produced in the U.S. but consumed outside of the U.S., the RIN
associated with that gallon should

not be valid for RFS compliance purposes since the RFS program is
intended to require a specific volume of renewable fuel to be consumed
in the U.S. Exports of renewable fuel currently represent about 5
percent of U.S. production.
    To ensure that renewable fuels exported from the U.S. cannot be
used by an obligated party for RFS compliance purposes, the RINs
associated with that exported renewable fuel must be removed from
circulation. Ideally the producer of the exported renewable fuel would
simply not create RINs for those batches. However, in the fungible
distribution system it is common for exportation of fuel to occur
without the knowledge of the producer. As a result, we cannot rely on
the producers to know which batches will be exported and to not
generate RINs for those batches. Another approach would be to increase
the obligation placed on refiners, importers, and blenders of gasoline
based on the volume of renewable fuel exported. Obligated parties would
thus acquire RINs to meet the standard described in Section III.A, and
would also be required to acquire RINs to cover the volume of renewable
fuel exported. However, this approach would not only require an
estimate of the volume of renewable fuel exported in the next year, but
would also mean that every obligated party would share in accumulating
RINs to cover the exports.
    Given these drawbacks, we believe that these two approaches would
be unworkable. As a result, we believe that it should be the exporter's
responsibility to account for exported renewable fuel. The most
straightforward mechanism to accomplish this would be to assign an RVO
to each exporter that is equal to the annual volume of renewable fuel
it exported. Just as for obligated parties, then, the exporter would be
required to acquire sufficient gallon-RINs to meet its RVO. If the
exporter purchased renewable fuel directly from a producer, that
renewable fuel would come with associated gallon-RINs which could then
be applied to its RVO under our proposed program. In this circumstance,
the exporter would not need to acquire RINs from any other source. If,
however, the exporter received renewable fuel without the associated
RINs, it would need to acquire RINs from some other source in order to
meet its RVO.
    As discussed in Section III.D.2.c, it may be possible to eliminate
the need for RINs altogether in specific circumstances involving
exports of renewable fuels. For instance, if the exporter was wholly
owned by a renewable fuel producer, there would be no need to generate
RINs for the exported product. Likewise if a renewable fuel producer
specifically and explicitly earmarked a batch of renewable fuel for
export, there would be no need for a RIN to be generated. However, in
both of these cases the producer would need to report the volumes that
were not assigned a RIN to the EPA in its annual RFS report, along with
the connection to exports, in order to demonstrate that RINs were
legitimately not assigned to these batches. We request comment on these
special-case approaches to exported renewable fuels.
    As described in Section III.D.2, there are cases in which there is
not a one-to-one correspondence between gallons in a batch of renewable
fuel and the RINs generated for that batch. For instance, extra-value