parties, citing the additional burden of demonstrating compliance with
the standard especially for small businesses. They also pointed to the
need to implement new systems for determining and reporting compliance,
the short leadtime for doing so, and the fewer resources that smaller
downstream companies have to manage such work in comparison to the much
larger refiners. Finally, they pointed to the additional complexity
that would be added to the RFS program beyond that which is necessary
to carry out the renewable fuels mandate under CAA section 211(o).
    When the RFS1 regulations were drafted, the obligations were placed
on the relatively small number of refiners and importers rather than on
the relatively large number of downstream blenders and terminals in
order to minimize the number of regulated parties and keep the program
simple. However, with the expanded RFS2 mandates, essentially all
downstream blenders and terminals are now regulated parties under RFS2
since essentially all gasoline will be blended with ethanol. Thus the
rationale in RFS1 for placing the obligation on just the upstream
refiners and importers is no longer valid. Nevertheless, based on the
comments we received, we do not believe that the concerns expressed
warrant a change in the designation of obligated parties for the RFS2
program at this time. We continue to believe that the market will
provide opportunities for parties who are in need of RINs to acquire
them from parties who have excess. Refiners who market considerably
less gasoline or diesel than they produce can establish contracts with
splash blenders to purchase RINs. Such refiners can also purchase
ethanol from producers directly, separate the RINs, and then sell the
ethanol without RINs to blenders. Since the RFS program is based upon
ownership of RINs rather than custody of volume, refiners need never
take custody of the ethanol in order to separate RINs from volumes that
they own. Moreover, a change in the designation of obligated parties
would result in a significant change in the number of obligated parties
and the movement of RINs, changes that could disrupt the operation of
the RFS program during the transition from RFS1 to RFS2.
    We will continue to evaluate the functionality of the RIN market.
Should we determine that the RIN market is not operating as intended,
driving up prices for obligated parties and fuel prices for consumers,
we will consider revisiting this provision in future regulatory
efforts.
    In the NPRM we also took comment on several other possible ways to
help ensure that obligated parties can demonstrate compliance. For
instance, one alternative approach would have left our proposed
definitions for obligated parties in place, but would have added a
regulatory requirement that any party who blends ethanol into RBOB or
CBOB must transfer the RINs associated with the ethanol to the original
producer of the RBOB or CBOB. Stakeholders generally opposed this
change, agreeing with our assessment that it would be extremely
difficult to implement given that RBOB and CBOB are often transferred
between multiple parties prior to ethanol blending. As a result, a
regulatory requirement for RIN transfers back to the original producer
would have necessitated an additional tracking requirement for RBOB and
CBOB so that the blender would know the identity of the original
producer. It would also be difficult to ensure that RINs representing
the specific category of renewable fuel blended were transferred to the
producer of the RBOB or CBOB, given the fungible nature of RINs
assigned to batches of renewable fuel. For these reasons, we have not
finalized this alternative approach.
    Another alternative approach on which we took comment would have
allowed use of RINs that expire without being used for compliance by an
obligated party to be used to reduce the nationwide volume of renewable
fuel required in the following year. This alternative approach could
have helped to prevent the hoarding of RINs from driving up demand for
renewable fuel. However, it would also effectively alter the valid life
limit for RINs. Comments from stakeholders did not change our position
that such an approach is not warranted at this time, and thus we have
not finalized it.
2. Determination of RVOs Corresponding to the Four Standards
    In order for an obligated party to demonstrate compliance, the
percentage standards described in Section II.E.1 which are applicable
to all obligated parties must be converted into the volumes of
renewable fuel each obligated party is required to satisfy. These
volumes of renewable fuel are the volumes for which the obligated party
is responsible under the RFS program, and are referred to here as its
RVO. Under RFS2, each obligated party will need to acquire sufficient
RINs each year to meet each of the four RVOs corresponding to the four
renewable fuel standards.
    The calculation of the RVOs under RFS2 follows the same format as
the formulas in the RFS1 regulations at Sec.  80.1107(a), with one
modification. The standards for a particular compliance year must be
multiplied by the sum of the gasoline and diesel volume produced or
imported by an obligated party in that year rather than only the
gasoline volume as under the RFS1 program.\23\ To the degree that an
obligated party did not demonstrate full compliance with its RVOs for
the previous year, the shortfall will be included as a deficit
carryover in the calculation. CAA section 211(o)(5) only permits a
deficit carryover from one year to the next if the obligated party
achieves full compliance with each of its RVOs including the deficit
carryover

in the second year. Thus deficit carryovers cannot occur two years in
succession for any of the four individual standards. They can, however,
occur as frequently as every other year for a given obligated party for
each standard.
---------------------------------------------------------------------------

    \23\ As discussed above, the diesel fuel that is used to
calculate the RVO is any diesel designated as MVNRLM or a
subcategory of MVNRLM.
---------------------------------------------------------------------------

    Note that a party that produces only diesel fuel will have an
obligation for all four standards even though he will not have the
opportunity to blend ethanol into his own gasoline. Likewise, a party
that produces only gasoline will have an obligation for all four
standards even though he will not have an opportunity to blend biomass-
based diesel into his own diesel fuel.
3. RINs Eligible To Meet Each RVO
    Under RFS1, all RINs had the same compliance value and thus it did
not matter what the RR or D code was for a given RIN when using that
RIN to meet the total renewable fuel standard. In contrast, under RFS2
only RINs with specified D codes can be used to meet each of the four
standards.
    As described in Section I.A.1, the volume requirements in EISA are
generally nested within one another, so that any fuel that satisfies
the advanced biofuel requirement also satisfies the total renewable
fuel requirement, and fuel that meets either the cellulosic biofuel or
the biomass-based diesel requirements also satisfies the advanced
biofuel requirement. As a result, the RINs that can be used to meet the
four standards are likewise nested. Using the D codes defined in Table
II.A-1, the RFS2 RINs that can be used to meet each of the four
standards are shown in Table II.G.3-1. RFS1 RINs generated in 2010 and
identified by a D code of 1 or 2 can also be applied to these standards
using the protocol described in Section II.G.4 below.

       Table II.G.3-1--RINs That Can Be Used To Meet Each Standard
------------------------------------------------------------------------
           Standard                 Obligation       Allowable D codes
------------------------------------------------------------------------
Cellulosic biofuel............  RVOCB............  3 and 7.
Biomass-based diesel..........  RVOBBD...........  4 and 7.
Advanced biofuel..............  RVOAB............  3, 4, 5, and 7.
Renewable fuel................  RVORF............  3, 4, 5, 6, and 7.
------------------------------------------------------------------------

    The nested nature of the four standards also means that in some
cases we must allow the same RIN to be used to meet more than one
standard in the same year. Thus, for instance, a RIN with a D code of 3
can be used to meet three of the four standards, while a RIN with a D
code of 5 can be used to meet both the advanced biofuel and total
renewable fuel standards. However, a D code of 6 can only be used to
meet the renewable fuel standard. Consistent with our proposal, we are
continuing to prohibit the use of a single RIN for compliance purposes
in more than one year or by more than one party.\24\
---------------------------------------------------------------------------

    \24\ Note that we are finalizing an exception to this general
prohibition for the specific and limited case of 2008 and 2009
biodiesel and renewable diesel RINs used to demonstrate compliance
with both the 2009 total renewable fuel standard and the 2010
biomass-based diesel standard. See Section II.E.2.a.
---------------------------------------------------------------------------

4. Treatment of RFS1 RINs Under RFS2
    As described in the introduction to this section, we are
implementing a number of changes to the RFS program as a result of the
requirements in EISA. These changes will go into effect on July 1, 2010
and, among other things, will affect the conditions under which RINs
are generated and their applicability to each of the four standards. As
a result, RINs generated in 2010 under these RFS2 regulations will not
be exactly the same as RINs generated under RFS1 regulations. Given the
valid RIN life that allows a RIN to be used in the year generated or
the year after, we must address circumstances in which excess 2009 RINs
are used for compliance purposes in 2010. Also, since RINs generated in
January through June of 2010 will be generated under RFS1 regulations,
we must provide a means for them to be used to meet the annual 2010
RFS2 standards. Finally, we must address deficit carryovers from 2009
to 2010, since the total renewable fuel standards in these two years
will be defined differently.
a. Use of RFS1 RINs To Meet Standards Under RFS2
    In 2009 and the first three months of 2010, the RFS1 regulations
will continue to apply and thus producers will not be required to
demonstrate that their renewable fuel is made from renewable biomass as
defined by EISA, nor that their combination of fuel type, feedstock,
and process meets the GHG thresholds specified in EISA. Moreover, there
is no practical way to determine after the fact if RINs generated under
RFS1 regulations meet any of these criteria. However, we believe that
the vast majority of RFS1 RINs generated in 2009 and the first two
months of 2010 will in fact meet the RFS2 requirements. First, while
ethanol made from corn must meet a 20% GHG threshold under RFS2 if
produced by a facility that commenced construction after December 19,
2007, facilities that were already built or had commenced construction
as of December 19, 2007 are exempt from this requirement. Essentially
all ethanol produced in 2009 and the first three months of 2010 will
meet the prerequisites for this exemption. Second, it is unlikely that
renewable fuels produced in 2009 or the first three months of 2010 will
have been made from feedstocks that do not meet the new renewable
biomass definition. It is very unlikely that new land would have been
cleared or cultivated since December 19, 2007 for use in growing crops
for renewable fuel production, and thus the land use restrictions
associated with the renewable biomass definition will very likely be
met. Finally, the text of section 211(o)(5) states that a ``credit
generated under this paragraph shall be valid to show compliance for
the 12 months as of the date of generation,'' and EISA did not change
this provision and did not specify any particular transition protocol
to follow. A straightforward interpretation of this provision is to
allow RFS1 RINs generated in 2009 and early 2010 to be valid to show
compliance for the annual 2010 obligations.
    The separate definitions for cellulosic biofuel and biomass-based
diesel require GHG thresholds of 60% and 50%, respectively. While we do
not have a mechanism in place to determine if these thresholds have
been met for RFS1 RINs generated in 2009 or early 2010, any shortfall
in GHG performance for this one transition period is unlikely to have a
significant impact on long-term GHG benefits of the program. Few
stakeholders commented on our proposed treatment of RFS1 RINs under
RFS2. Of those that did, most supported our proposed approach to the
use of RFS1 RINs to meet RFS2 obligations. Based on our belief that it
is critical to

the smooth operation of the program that excess 2009 RINs be allowed to
be used for compliance purposes in 2010, we are allowing RFS1 RINs that
were generated in 2009 or 2010 representing cellulosic biomass ethanol
to be valid for use in satisfying the 2010 cellulosic biofuel standard.
Likewise, we are allowing RFS1 RINs that were generated in 2009 or 2010
representing biodiesel and renewable diesel to be valid for use in
satisfying the 2010 biomass-based diesel standard.
    Consistent with our proposal, we have used information contained in
the RR and D codes of RFS1 RINs to determine how those RINs should be
treated under RFS2. The RR code is used to identify the Equivalence
Value of each renewable fuel, and under RFS1 these Equivalence Values
are unique to specific types of renewable fuel. For instance, biodiesel
(mono alkyl ester) has an Equivalence Value of 1.5, and non-ester
renewable diesel has an Equivalence Value of 1.7, and both of these
fuels may be valid for meeting the biomass-based diesel standard under
RFS2. Likewise, RINs generated for cellulosic biomass ethanol under
RFS1 regulations must be identified with a D code of 1, and these fuels
will be valid for meeting the cellulosic biofuel standard under RFS2.
Our final treatment of RFS1 RINs for compliance under RFS2 is shown in
Table II.G.4.a-1.

                      Table II.G.4.a-1--Treatment of RFS1 RINs for RFS2 Compliance Purposes
----------------------------------------------------------------------------------------------------------------
      RINs generated under RFS1 \a\                               Treatment under RFS2 \b\
----------------------------------------------------------------------------------------------------------------
Any RIN with D code of 2 and RR code of    Equivalent to RFS2 RINs with D code of 4.
 15 or 17.
All other RINs with D code of 2..........  Equivalent to RFS2 RINs with D code of 6.
Any RIN with D code of 1.................  Equivalent to RFS2 RINs with D code of 3.
----------------------------------------------------------------------------------------------------------------
\a\ See RFS1 RIN code definitions at Sec.   80.1125.
\b\ See RFS2 RIN code definitions at Sec.   80.1425.

b. Deficit Carryovers From the RFS1 Program to RFS2
    The calculation of RVOs in 2010 under the RFS2 regulations will be
somewhat different than the calculation of RVOs in 2009 under RFS1. In
particular, 2009 RVOs were based on gasoline production only, while
2010 RVOs will be based on volumes of gasoline and diesel. As a result,
2010 compliance demonstrations that include a deficit carried over from
2009 will combine obligations calculated on two different bases.
    We do not believe that deficits carried over from 2009 to 2010 will
undermine the goals of the program in requiring specific volumes of
renewable fuel to be used each year. Although RVOs in 2009 and 2010
will be calculated differently, obligated parties must acquire
sufficient RINs in 2010 to cover any deficit carried over from 2009 in
addition to that portion of their 2010 obligation which is based on
their 2010 gasoline and diesel production. As a result, the 2009
nationwide volume requirement of 11.1 billion gallons of renewable fuel
will be consumed over the two year period concluding at the end of
2010. Thus, we are not implementing any special treatment for deficits
carried over from 2009 to 2010.
    A deficit carried over from 2009 to 2010 will only affect a party's
total renewable fuel obligation in 2010, as the 2009 obligation is for
total renewable fuel use, not a subcategory. The RVOs for biomass-based
diesel or advanced biofuel will not be affected, as they do not have
parallel obligations in 2009 under RFS1.\25\
---------------------------------------------------------------------------

    \25\ There is no cellulosic biofuel standard for 2010.
---------------------------------------------------------------------------

H. Separation of RINs

    As we proposed in the NPRM, we are requiring the RFS1 provisions
regarding the separation of RINs from volumes of renewable fuel to be
retained for RFS2. However, the modifications in EISA required changes
to the treatment of RINs associated with nonroad renewable fuel and
renewable fuels used in heating oil and jet fuel. Our approach to the
separation of RINs by exporters must also be modified to account for
the fact that there would be four categories of renewable fuel under
RFS2.
1. Nonroad
    Under RFS1, RINs associated with renewable fuels used in nonroad
vehicles and engines downstream of the renewable fuel producer were
required to be retired by the party who owned the renewable fuel at the
time of blending. This provision derived from the EPAct definition of
renewable fuel which was limited to fuel used to replace fossil fuel
used in a motor vehicle. However, EISA expands the definition of
renewable fuel, and ties it to the definition of transportation fuel
which is defined as any ``fuel for use in motor vehicles, motor vehicle
engines, nonroad vehicles, or nonroad engines (except for ocean-going
vessels).'' To implement these changes, the RFS2 program eliminates the
RFS1 RIN retirement requirement for renewable fuels used in nonroad
applications, with the exception of RINs associated with renewable
fuels used in ocean-going vessels.
    Since RINs have a valid life of two years, the NPRM proposed that a
2009 RFS1 RIN that is retired because the renewable fuel associated
with it was used in nonroad vehicles or engines could be reinstated in
2010 for use in compliance with the 2010 standards. Stakeholders
supported this approach, and we are finalizing it in today's action.
2. Heating Oil and Jet Fuel
    EISA defines ``additional renewable fuel'' as ``fuel that is
produced from renewable biomass and that is used to replace or reduce
the quantity of fossil fuel present in home heating oil or jet fuel.''
\26\ While we are not requiring fossil-based heating oil and jet fuel
to be included in the fuel used by a refiner or importer to calculate
their RVOs, we are allowing renewable fuels used as or in heating oil
and jet fuel to generate RINs. Similarly, RINs associated with a
renewable fuel, such as biodiesel, that is blended into heating oil
will continue to be valid for compliance purposes. See also discussion
in Section II.B.1.e.
---------------------------------------------------------------------------

    \26\ EISA, Title II, Subtitle A--Renewable Fuel Standard,
Section 201.
---------------------------------------------------------------------------

3. Exporters
    Under RFS1, exporters were assigned an RVO representing the volume
of renewable fuel that was exported, and they were required to separate
all RINs that were assigned to fuel that was exported. Since there was
only one standard, there was only one possible RVO applicable to
exporters.
    Under RFS2, there are four possible RVOs corresponding to the four
categories of renewable fuel (cellulosic biofuel, biomass-based diesel,
advanced biofuel, and total renewable fuel). However, given the
fungible nature of the RIN system and the fact that an

assigned RIN transferred with a volume of renewable fuel may not be the
same RIN that was originally generated to represent that volume, RINs
from different fuel types can accompany volumes. Thus, there may be no
way for an exporter to determine from an assigned RIN which of the four
categories applies to an exported volume. In order to determine its
RVOs, the only information available to the exporter may be the type of
renewable fuel that he is exporting.
    However, if an exporter knows, or has reason to know, that the
renewable fuel that it is exporting is either cellulosic biofuel or
advanced biofuel, we are requiring the exporter to determine an RVO for
the exported fuel based upon these fuel types. For instance, if an
exporter purchases cellulosic biofuel or advanced biofuel directly from
a producer or if the fuel has been segregated from other fuels, we
would expect the exporter to know or have reason to know the type of
fuel that it is exporting. Another example of when we would expect an
exporter to know or have reason to know that the fuel that it is
exporting is cellulosic or advanced biofuel would be if the commercial
documents that accompany the purchase or sale of the renewable fuel
identify the product as cellulosic or advanced biofuel.
    EPA recognizes that in many situations, exporters will not know or
have reason to know which of the four categories of renewable fuel
apply to the exported fuel. If this is the case, we are requiring
exporters to follow the approach proposed in the NPRM. Exported volumes
of biodiesel (mono alkyl esters) and renewable diesel must be used to
determine the exporter's RVO for biomass-based diesel. For all other
types of renewable fuel, the most likely category is general renewable
fuel. Thus, we are requiring that all renewable fuels be used to
determine the exporter's RVO for total renewable fuel. Our final
approach is provided at Sec.  80.1430.
    In the NPRM we took comment on an alternative approach in which the
total nationwide volumes required in each year (see Table I.A.1-1)
would be used to apportion specific types of renewable fuel into each
of the four categories. For example, exported ethanol may have
originally been produced from cellulose to meet the cellulosic biofuel
requirement, from corn to meet the total renewable fuel requirement, or
may have been imported as advanced biofuel. If ethanol were exported,
we could divide the exported volume into three RVOs for cellulosic
biofuel, advanced biofuel, and total renewable fuel using the same
proportions represented by the national volume requirements for that
year. However, as described in the NPRM, we believe that this
alternative approach would have added considerable complexity to the
compliance determinations for exporters without necessarily adding more
precision. Given the expected small volumes of exported renewable fuel,
we continue to believe that this added complexity is not warranted at
this time.
    As described above, exporters must separate any RINs assigned to
renewable fuel that they export. However, since RINs are fungible and
the owner of a batch of renewable fuel has the flexibility to assign
between zero and 2.5 gallon-RINs to each gallon, we have made this
flexibility explicit for exporters. Thus, an exporter can separate up
to 2.5 gallon-RINs for each gallon of renewable fuel that he exports.
While the exporter is not required to retain these separated RINs for
use in complying with his RVOs calculated on the basis of the exported
volumes, this would be the most straightforward approach and would
ensure that the exporter has sufficient RINs to comply. However, we are
aware of some exporters who sell RINs that they separate as a source of
revenue, with the intention to purchase replacement RINs on the open
RIN market later in the year to comply with their RVOs. At this time we
are not aware of such activities resulting in noncompliance, and thus
the RFS2 regulations promulgated today will continue to allow this.
However, we may revisit this issue in the future if there is evidence
that exporters are failing to comply because they are selling RINs that
they separate from exported volumes.
4. Requirement To Transfer RINs With Volume
    In the NPRM, we proposed that the approach to RIN transfers
established under RFS1--that RINs generated by renewable fuel producers
and importers must be assigned to batches of renewable fuel and
transferred along with those batches--be continued under RFS2. However,
given the higher volumes required under RFS2 and the resulting
expansion in the number of regulated parties, we also took comment on
two alternative approaches to RIN transfers. Along with the alternative
approaches for designation of obligated parties as described in Section
II.G.1 above, a change to the requirement to transfer RINs with batches
had the potential to more evenly align a party's access to RINs with
that party's obligations under the RFS2 program. Nevertheless, for the
reasons described below, we have determined that it would not be
appropriate to implement these alternative approaches at this time.
    In the first alternative approach, we would have removed the
restriction established under the RFS1 rule requiring that RINs be
assigned to batches of renewable fuel and transferred with those
batches. Instead, renewable fuel producers could have sold RINs (with a
K code of 2 rather than 1) separately from volumes of renewable fuel to
any party.
    In the second alternative approach, producers and importers of
renewable fuels would be required to separate and transfer the RIN, but
only to an obligated party. This ``direct transfer'' approach would
require renewable fuel producers to transfer RINs with renewable fuel
for all transactions with obligated parties, and sell all other RINs
directly to obligated parties on a quarterly basis for any renewable
fuel volumes that were not sold directly to obligated parties. Any RINs
not sold in this way would be required to be offered for sale to any
obligated party through a public auction. Only renewable fuel
producers, importers, and obligated parties would be allowed to own
RINs.
    Many renewable fuel producers supported the concept of allowing
them to separate the RINs from renewable fuel that they produce. They
generally argued in favor of a free market approach to RINs in which
there would be no restrictions on whom they could sell RINs to, or in
what timeframe. The direct transfer approach was unnecessary, they
argued, since the market would compel them to sell all RINs they
generated, and all RINs would eventually end up in the hands of the
obligated parties that need them. However, other renewable fuel
producers opposed any change to the requirement that RINs be assigned
to volumes of renewable and transferred with those volumes through the
distribution system. They argued that the system established under RFS1
has proven to work and it would create an unwarranted burden to require
producers to modify their IT systems for RFS2.
    Marketers and distributors were generally opposed to our proposed
alternative approaches to RIN transfers. Moreover, SIGMA and NACS, as
in the RFS1 rulemaking process, recommended that RINs not be generated
by producers at all, but rather by the party that blends renewable fuel
into gasoline or diesel, or uses renewable fuel in its neat form as a
transportation fuel.

    Obligated parties generally opposed any change to the RFS1
requirement that RINs be assigned to volumes of renewable fuel by the
producer or importer, and transferred with volumes through the
distribution system. They reiterated their concern, first raised in the
RFS1 rulemaking, that a free market approach would place them at
greater risk of market manipulation by renewable fuel producers.
Moreover, while generally expressing support for the concept of a
direct transfer approach, they also expressed doubt that the auctions
could be regulated in such a way as to ensure that RIN generators could
not withhold RINs from the market by such means as failing to
adequately advertise the time and location of an auction, by setting
the selling price too high, by specifying a minimum number of bids
before selling, by conducting auctions infrequently, by having unduly
short bidding windows, etc. These concerns were exacerbated by the
nested standards required by EISA, under which many obligated parties
have expressed concern about being able to acquire sufficient RINs for
compliance.
    Given the significant challenges associated with a change to the
requirement that RINs be transferred with volume and the opposing views
among stakeholders, we are not making any change in today's final rule.
5. Neat Renewable Fuel and Renewable Fuel Blends Designated as
Transportation Fuel, Heating Oil, or Jet Fuel
    Under RFS1, RINs must, with limited exceptions, be separated by an
obligated party taking ownership of the renewable fuel, or by a party
that blends renewable fuel with gasoline or diesel. In addition, a
party that designates neat renewable fuel as motor vehicle fuel may
separate RINs associated with that fuel if the fuel is in fact used in
that manner without further blending. One exception to these provisions
is that biodiesel blends in which diesel constitutes less than 20
volume percent are ineligible for RIN separation by a blender. While
EPA understands that in the vast majority of cases, biodiesel is
blended with diesel in concentrations of 80 volume percent or less,
there may be instances in which biodiesel is blended with diesel in
concentrations of more than 80 percent biodiesel, but the blender is
prohibited from separating RINs under the RFS1 regulations.
    Thus, in order to account for situations in which biodiesel blends
of 81 percent or greater may be used as transportation fuel, heating
oil, or jet fuel without ever having been owned by an obligated party,
EPA proposed, and is finalizing a change to the applicability of the
RIN separation provisions for RFS2. Section 80.1429(b)(4) will allow
for separation of RINs for neat renewable fuel or blends of renewable
fuel and diesel fuel that the party designates as transportation fuel,
heating oil, or jet fuel, provided the neat renewable fuel or blend is
used in the designated form, without further blending, as
transportation fuel, heating oil, or jet fuel. Those parties that blend
renewable fuel with gasoline or diesel fuel (in a blend containing 80
percent or less biodiesel) must separate RINs pursuant to Sec.
80.1429(b)(2).
    Thus, for example, if a party intends to separate RINs from a
volume of B85, the party must designate the blend for use as
transportation fuel, heating oil, or jet fuel and the blend must be
used in its designated form without further blending. The party is also
required to maintain records of this designation pursuant to Sec.
80.1454(b)(5). Finally, the party is required to comply with the
proposed PTD requirements in Sec.  80.1453(a)(11)(iv), which serve to
notify downstream parties that the volume of fuel has been designated
for use as transportation fuel, heating oil, or jet fuel, and must be
used in that designated form without further blending. Parties may
separate RINs at the time they comply with the designation and PTD
requirements, and do not need to physically track ultimate fuel use.

I. Treatment of Cellulosic Biofuel

1. Cellulosic Biofuel Standard
    EISA requires that the Administrator set the cellulosic biofuel
standard each November for the next year based on the lesser of the
volume specified in the Act or the projected volume of cellulosic
biofuel production based on EIA estimates for that year. In the event
that the projected volume is less than the amount required in the Act,
EPA may also reduce the applicable volume of the total renewable fuel
and advanced biofuels requirement by the same or a lesser volume. We
will examine EIA's projected volumes and other available data including
the required production outlook reports discussed in Section II.K to
decide the appropriate standard for the following year. The outlook
reports from all renewable fuel producers will assist EPA in
determining what the cellulosic biofuel standard should be and if the
total renewable fuel and/or advanced biofuel standards should be
adjusted. For years where EPA determines that the projected volume of
cellulosic biofuels is not sufficient to meet the levels in EISA we
will consider the availability of other advanced biofuels in deciding
whether to lower the advanced biofuel standard as well.
    In determining whether the advanced biofuel and/or total renewable
fuel volume requirements should also be adjusted downward in the event
that projected volumes of cellulosic biofuel fall short of the
statutorily required volumes, we believe it may be appropriate to allow
excess advanced biofuels to make up some or all of the shortfall in
cellulosic biofuel. For instance, if we determined that sufficient
biomass-based diesel was available, we could decide that the required
volume of advanced biofuel need not be lowered, or that it should be
lowered to a smaller degree than the required cellulosic biofuel
volume. Thus, the Act requires EPA to examine the total and advanced
renewable fuel standards and volumes in the event of a cellulosic
volume waiver. EPA will look at projections for each year on an
individual yearly basis to determine if the standards should be
adjusted. EPA believes that since the standards are nested and the
total and advanced renewable fuel volume mandates are met in part by
the cellulosic volume mandate, Congress gave EPA the flexibility to
lower the required total and advanced volumes, but Congress also wanted
to encourage the development of advanced renewable fuels as well and
allow in appropriate circumstances for the use of those fuels in the
event they can meet that year's required volumes that would have been
met by the cellulosic mandate.
2. EPA Cellulosic Biofuel Waiver Credits for Cellulosic Biofuel
    Whenever EPA sets the cellulosic biofuel standard at a level lower
than that required in EISA, but greater than zero, EPA is required to
provide a number of cellulosic credits for sale that is no more than
the volume used to set the standard. Congress also specified the price
for such credits: Adjusted for inflation, they must be offered at the
price of the higher of 25 cents per gallon or the amount by which $3.00
per gallon exceeds the average wholesale price of a gallon of gasoline
in the United States. The inflation adjustment will be for years after
2008. The inflation adjustment will be based on the standard US
inflation measure Consumer Price Index for All Urban Consumers (CPI-U)
for All Items

expenditure category as provided by the Bureau of Labor Statistics.\27\
---------------------------------------------------------------------------

    \27\ See U.S. Department of Labor, Bureau of Labor Statistics
(BLS), Consumer Price Index Web site at: http://www.bls.gov/cpi/.
---------------------------------------------------------------------------

    Congress afforded the Agency considerable flexibility in
implementing the system of cellulosic biofuel credits. EISA states EPA;
``shall include such provisions, including limiting the credits' uses
and useful life, as the Administrator deems appropriate to assist
market liquidity and transparency, to provide appropriate certainty for
regulated entities and renewable fuel producers, and to limit any
potential misuse of cellulosic biofuel credits to reduce the use of
other renewable fuels, and for such other purposes as the Administrator
determines will help achieve the goals of this subsection.''
    We have fashioned a number of limitations on the use of cellulosic
that reflect these considerations. Specifically, the credits will be
called ``Cellulosic Biofuel Waiver Credits'' (or ``waiver credits'') so
that there is no confusion with RINs or allowances used in the acid
rain program. Such waiver credits will only be available for the
current compliance year for which we have waived some portion of the
cellulosic biofuel standard, they will only be available to obligated
parties, and they will be nontransferable and nonrefundable. Further,
obligated parties may only purchase waiver credits up to the level of
their cellulosic biofuel RVO less the number of cellulosic biofuel RINs
that they own. A company owning cellulosic biofuel RINs and cellulosic
waiver credits may use both types of credits if desired to meet their
RVOs, but unlike RINs obligated parties will not be able to carry
waiver credits over to the next calendar year. Obligated parties may
not use waiver credits to meet a prior year deficit obligation. These
restrictions help ensure that waiver credits are not overutilized at
the expense of actual renewable volume.
    In the NPRM, EPA proposed that the credits could be usable for the
advanced and total renewable standards similarly to cellulosic biofuel
RINs. Several commenters stated this provision could displace advanced
and total renewable fuel that was actually produced which would be
against the intent of the Act, and that unlike RINs a company should
only be permitted to use waiver credits to meet its cellulosic biofuel
obligation. We agree, and are limiting the use of waiver credits for
compliance with only a company's cellulosic biofuel RVO.
    In the event the total volume of conventional gasoline and diesel
fuel produced or imported in the country exceeds the projections used
to set the standard, companies will still be able to purchase waiver
credits up to their cellulosic volume obligation. When setting a
reduced cellulosic biofuel standard EPA makes a determination that the
cellulosic volume specified in EISA will not be met and that
determination is not based on how much nonrenewable motor fuel will be
produced. EPA sets the standard based on the volumes in the Act and a
projection of gasoline production to ensure the obligation is broken up
most equitably. EPA believes that Congress wanted all obligated parties
to have equal access to the waiver credits in the event of the waiver
and did not want obligated parties to incur a deficit due to the timing
of when they purchased waiver credits.
    Cellulosic Biofuel Waiver Credits, in the event of a waiver, will
be offered in a generic format rather than a serialized format, like
RINs. Waiver credits can be purchased using procedures defined by the
EPA, and at the time that an obligated party submits its annual
compliance demonstration to the EPA and establishes that it owns
insufficient cellulosic biofuel RINs to meet its cellulosic biofuel
RVO. EPA will define these procedures with the U.S. Treasury before the
end of the first annual compliance period. EPA will publish these
procedures with the obligated party annual compliance report template.
EPA will provide the forms necessary to purchase the credits. EPA
intends to provide options for obligated parties to use Pay.Gov or if
desired to mail payment to the U.S. Treasury.
    The wholesale price of gasoline used by EPA in setting the price of
the waiver credits will be based on the average monthly bulk (refinery
gate) price of gasoline using data from the most recent twelve months
of data from EIA available to EPA at the time it develops the
cellulosic biofuel standard.\28\ EPA will use refinery gate price, U.S.
Total Gasoline Bulk Sales (Price) by Refiners from EIA in calculating
the average, since it is the price most reflective of what most
obligated parties are selling their fuel. EPA will use the most recent
twelve months of data provided by EIA to develop an average price on
actual volumes produced in the year prior to the compliance year. In
order to provide regulatory certainty, we will set the waiver credits
price for the following year each November when and if we set a
cellulosic biofuel standard for the following year that is based on
achieving a lower volume of cellulosic biofuel use than is specified in
EISA.
---------------------------------------------------------------------------

    \28\ More information on wholesale gasoline prices can be found
on the Department of Energy's (DOE), Energy Information
Administration's (EIA) Web site at: http://tonto.eia.doe.gov/dnav/
pet/hist/LeafHandler.ashx?n=PET&s=A103B00002&f=M.
---------------------------------------------------------------------------

    For the 2010 compliance period, since the cellulosic standard is
lower than the level otherwise required by EISA, we are also making
cellulosic waiver credits available to obligated parties for end-of-
year compliance should they need them at a price of $1.56 per gallon-
RIN.'' The price for the 2011 compliance period, if necessary will be
set when we announce the 2011 cellulosic biofuel standard.
3. Application of Cellulosic Biofuel Waiver Credits
    While the credit provisions of section 202(e) of EISA ensure that
there is a predictable upper limit to the price that cellulosic biofuel
producers can charge for a gallon of cellulosic biofuel and its
assigned RIN, there may be circumstances in which this provision has
other unintended consequences. This could occur in situations where the
cost of total renewable fuel RINs exceeds the cost of the cellulosic
waiver credits. To prevent this, we sought comment on and are
finalizing an additional restriction: An obligated party may only
purchase waiver credits from the EPA to the degree that it establishes
it owns insufficient cellulosic biofuel RINs to meet its cellulosic
biofuel RVO. This approach forces obligated parties to apply all their
cellulosic biofuel RINs to their cellulosic biofuel RVO before applying
any waiver credits to their cellulosic biofuel RVO.
    Even with this restriction the approach in the NPRM might not have
operated as intended. For instance, if the combination of cellulosic
biofuel volume price and RIN price were to become low compared to that
for general renewable fuel, a small number of obligated parties could
have purchased more cellulosic biofuel than they need to meet their
cellulosic biofuel RVOs and could have used the additional cellulosic
biofuel RINs to meet their advanced biofuel and total renewable fuel
RVOs. Other obligated parties would then have had no access to
cellulosic biofuel volume nor cellulosic biofuel RINs, and would have
been forced to purchase waiver credits from the EPA. This situation
would have had the net effect of waiver credits replacing advanced
biofuels and/or general renewable fuel rather than cellulosic biofuel.
Based on comments received on the NPRM, EPA is placing the additional
restriction of only allowing the waiver credits to count

towards the cellulosic biofuel standard and not the advanced or
renewable fuel standards.
    Moreover, under certain conditions it may be possible for the
market price of general renewable fuel RINs to be significantly higher
than the market price of cellulosic biofuel RINs, as the latter is
limited in the market by the price of EPA-generated waiver credits
according to the statutory formula described in Section II.I.2 above.
Under some conditions, this could result in a competitive disadvantage
for cellulosic biofuel in comparison to corn ethanol, for example. For
instance, if gasoline prices at the pump are significantly higher than
ethanol production costs, while at the same time corn-ethanol
production costs are lower than cellulosic ethanol production costs,
profit margins for corn-ethanol producers will be larger than for
cellulosic ethanol producers. Under these conditions, while obligated
parties may still purchase cellulosic ethanol volume and its associated
RINs rather than waiver credits, cellulosic ethanol producers will
realize lower profits than corn-ethanol producers due to the upper
limit placed on the price of cellulosic biofuel RINs through the
pricing formula for waiver credits. For a newly forming and growing
cellulosic biofuel industry, this competitive disadvantage could make
it more difficult for investors to secure funding for new projects,
threatening the ability of the industry to reach the statutorily
mandated volumes.
    Finally, in the NPRM we sought comment on a ``dual RIN'' approach
to cellulosic biofuel. In this approach, both cellulosic biofuel RINs
(with a D code of 3) and waiver credits would have only been applied to
an obligated party's cellulosic biofuel RVO, but producers of
cellulosic biofuel would also generate an additional RIN representing
advanced biofuel (with a D code of 5). The producer would have only
been required to transfer the advanced biofuel RIN with a batch of
cellulosic biofuel, and could retain the cellulosic biofuel RIN for
separate sale to any party.\29\ The cellulosic biofuel and its attached
advanced biofuel RIN would then have competed directly with other
advanced biofuel and its attached advanced biofuel RIN, while the
separate cellulosic biofuel RIN would have an independent market value
that would have been effectively limited by the pricing formula for
waiver credits as described in Section II.I.2. However, this approach
would have been a more significant deviation from the RIN generation
and transfer program structure that was developed cooperatively with
stakeholders during RFS1. It would have provided cellulosic biofuel
producers with significantly more control over the sale and price of
cellulosic biofuel RINs, which was one of the primary concerns of
obligated parties during the development of RFS1. Therefore, EPA is
treating the transfer of cellulosic RINs in the same manner as the
other required volumes.
---------------------------------------------------------------------------

    \29\ The cellulosic biofuel RIN would be a separated RIN with a
K code of 2 immediately upon generation.
---------------------------------------------------------------------------

J. Changes to Recordkeeping and Reporting Requirements

1. Recordkeeping
    Recordkeeping, including product transfer documents (PTDs), will
support the enforcement of the use of RINs for compliance purposes.
Parties are afforded significant freedom with regard to the form that
PTDs take. Product codes may be used as long as they are understood by
all parties, but they may not be used for transfers to truck carriers
or to retailers or wholesale purchaser-consumers. Parties must keep
copies of all PTDs they generate and receive, as well as copies of all
reports submitted to EPA and all records related to the sale, purchase,
brokering or transfer or RINs, for five (5) years. Parties must keep
copies of records that relate to program flexibilities, such as small
business-oriented provisions. Upon request, parties are responsible for
providing their records to the Administrator or the Administrator's
authorized representative. We reserve the right to request to receive
documents in a format that we can read and use.
    In Section III.A. of this preamble, we describe an EPA-Moderated
Transaction System (EMTS) for RINs. The new system allows for ``real-
time'' recording of transactions involving RINs.
2. Reporting
    Producers and importers who generate or take ownership of RINs
shall submit RIN Transaction Reports \30\ and/or RIN Generation Reports
quarterly. Renewable fuel exporters and obligated parties shall submit
their RIN Transaction Reports quarterly, and RIN owners shall submit
their RIN Transaction Reports quarterly. EMTS will be used by all
parties to record ``real time'' generation of RINs and transactions
involving RINs starting July 1, 2010. ``Real time'' means recordation
within five (5) business days of generation or any transaction
involving a RIN.
---------------------------------------------------------------------------

    \30\ For ease of reference, the current RFS (i.e. RFS1) form may
be viewed at the EPA Fuels Reporting Web site at the following URL:
http://www.epa.gov/otaq/regs/fuels/rfsforms.htm (accessed November
16, 2009). These forms will be updated for RFS2.
---------------------------------------------------------------------------

    Quarterly reports are to be submitted on the following schedule.
Quarterly reports include RIN Activity Reports and, with EMTS,
simplified reporting and certification of the RIN Generation and RIN
Transaction Reports.

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

    Annual reports (covering January through December) would continue
to be due on February 28. The only annual report is the Obligated Party
Annual Compliance Report.\31\
---------------------------------------------------------------------------

    \31\ For RFS1, this form is numbered RFS0300.
---------------------------------------------------------------------------

    Simplified, secure reporting is currently available through our
Central Data Exchange (CDX). CDX permits us to accept reports that are
electronically signed and certified by the submitter in a secure and
robustly encrypted fashion. Using CDX eliminates the need for wet ink
signatures and reduces the reporting burden on regulated parties. EMTS
will also make use of the CDX environment.
    Due to the criteria that renewable fuel producers and importers
must meet in order to generate RINs under RFS2, and due to the fact
that renewable fuel producers and importers must have documentation
about whether their feedstock(s) meets the definition of ``renewable
biomass,'' we proposed several changes to the RIN Generation
Report.\32\ We proposed to make the report a more general report on
renewable fuel production in order to capture information on all
batches of renewable fuel, whether or not RINs are generated for them.
This final rule adopts the proposed approach. All renewable fuel
producers and importers above 10,000 gallons per year must report to
EPA on each batch of their fuel and indicate whether or not RINs are
generated for the batch. If RINs are generated, the producer or
importer is required to certify that his feedstock meets the definition
of ``renewable biomass.'' If RINs are not generated, the producer or
importer must state the reason for not generating RINs, such as they
have documentation that states that

their feedstock did not meet the definition of ``renewable biomass,''
or the fuel pathway used to produce the fuel was such that the fuel did
not qualify to generate RINs as a renewable fuel. For each batch of
renewable fuel produced, we require information about the types and
volumes of feedstock used and the types and volumes of co-products
produced, as well as information about the process or processes used.
This information is necessary to confirm that the producer or importer
assigned the appropriate D code to their fuel and that the D code was
consistent with their registration information. In this final rule, we
adopt the approach set forth in the notice of proposed rulemaking.
---------------------------------------------------------------------------

    \32\ For RFS1, this form is numbered RFS0400.
---------------------------------------------------------------------------

    In addition, we proposed two changes for the RIN Transaction
Report.\33\ First, for reports of RINs assigned to a volume of
renewable fuel, the volume of renewable fuel must be reported. Second,
RIN price information must be submitted for transactions involving both
separated RINs and RINs assigned to a renewable volume. This
information was not collected under RFS1, but because we believe this
information has great programmatic value to EPA, we proposed to collect
it for RFS2. As we explained in the proposed rule, price information
may help us to anticipate and appropriately react to market disruptions
and other compliance challenges, will be beneficial when setting future
renewable standards, and will provide additional insight into the
market when assessing potential waivers. Our incomplete knowledge
regarding RIN pricing for RFS1 adversely affected our ability to assess
the general health and direction of the market and overall liquidity of
RINs. Because we believe the inclusion of price information in reports
will be beneficial to both EPA and to regulated parties, this final
rule includes that information element in reports, as well as
incorporating it as part of the ``real time'' transactional information
collected via EMTS.
---------------------------------------------------------------------------

    \33\ For RFS1, this form is numbered RFS0200.
---------------------------------------------------------------------------

3. Additional Requirements for Producers of Renewable Natural Gas,
Electricity, and Propane
    In addition to the general reporting requirement listed above, we
are requiring an additional item of reporting for producers of
renewable natural gas, electricity, and propane who choose to generate
and assign RINs. While producers of renewable natural gas, electricity,
and propane who generate and assign RINs are responsible for filing the
same reports as other producers of RIN-generating renewable fuels, we
are requiring that additional reporting for these producers support the
actual use of their products in the transportation sector. We believe
that one simple way to achieve this may be to add a requirement that
producers of renewable natural gas, electricity, and propane add the
name of the purchaser (e.g., the name of the wholesale purchaser-
consumer (WPC) or fleet) to their RIN generation reports and then
maintain appropriate records that further identify the purchaser and
the details of the transaction. We are not requiring that a purchaser
who is either a WPC or an end user would have to register under this
scenario, unless that party engages in other activities requiring
registration under this program.
4. Attest Engagements
    The purpose of an attest engagement is to receive third party
verification of information reported to EPA. An attest engagement,
which is similar to a financial audit, is conducted by a Certified
Public Accountant (CPA) or Certified Independent Auditor (CIA)
following agreed-upon procedures. We have found the information in
attest engagements submitted under RFS1 to be extremely valuable as a
compliance monitoring tool. The approach adopted in this final rule is
identical to the approach adopted under the RFS1 program,\34\ although
the universe of obligated parties and renewable fuels producers is
broader under this final rule for RFS2.
---------------------------------------------------------------------------

    \34\ See ``Regulation of Fuel and Fuel Additives: Renewable Fuel
Standard Program,'' 72 FR 23900, 23949-23950 (May 1, 2007) for a
detailed discussion of attest engagement requirements under RFS1.
---------------------------------------------------------------------------

    As with the RFS1 program, an attest engagement must be conducted by
an individual who is a Certified Public Accountant (CPA) or Certified
Internal Auditor (CIA), who is independent of the party whose records
are being reviewed, and who will follow agreed-upon procedures to
determine whether underlying records, reported items, and transactions
agree. The CPA or CIA will generate a report as to their findings.
    We have received numerous questions and comments related to how
attest engagements apply to foreign companies and whether or not a
foreign accountant may perform the required agreed-upon procedures. EPA
will accept an attest engagement performed by a foreign accountant who
holds an equivalent credential to an American CPA or CIA. A written
explanation as to the foreign accountant's qualifications and the
equivalency of the credential must accompany the attest engagement.
    Producers of renewable fuels, obligated parties, exporters, and any
party who owns RINs must arrange for an annual attest engagement. The
attest engagement report for any given year must be submitted to EPA by
no later than May 31 of the following year. Section 80.1464 of the
regulations specifies the attest engagement procedures to be followed.

K. Production Outlook Reports

    Under this program we are requiring the submission, starting in
2010, of annual production outlook reports from all domestic renewable
fuel producers, foreign renewable fuel producers who register to
generate RINs, and importers of renewable fuels. These production
outlook reports will be similar in nature to the pre-compliance reports
required under the Highway and Nonroad Diesel programs. These reports
will contain information about existing and planned production
capacity, long-range plans, and feedstocks and production processes to
be used at each production facility. For expanded production capacity
that is planned or underway at each existing facility, or new
production facilities that are planned or underway, the progress
reports will require information on: (1) Strategic planning; (2)
Planning and front-end engineering; (3) Detailed engineering and
permitting; (4) Procurement and construction; (5) Commissioning and
startup; (6) Projected volumes; (7) Contracts currently in place
(feedstocks, sales, delivery, etc.); and (8) Whether or not feedstocks
have been purchased. The first five project phases are described in
EPA's June 2002 Highway Diesel Progress Review report (EPA document
number EPA420-R-02-016, located at: www.epa.gov/otaq/regs/hd2007/
420r02016.pdf). In the proposed rule, we asked for comment on the first
five project phases, and whether or not they were appropriate for
renewable fuels production. We also proposed additional phases in order
to provide better specificity for ascertaining industry status. EPA
plans to use this information in order to provide annual summary
reports regarding such planned capacity.
    The full list of requirements for the production outlook reports is
provided in the regulations at Sec.  80.1449. The information submitted
in the reports will be used to evaluate the progress that the industry
is making towards the renewable fuels volume goals mandated by EISA.
They will help EPA set the annual cellulosic biofuel standard and
consider whether waivers would be

appropriate with respect to the advanced biofuel, biomass-based diesel,
and total renewable fuel standards (see Section II.I of this preamble
for more discussion on this). Production outlook reports will be due
annually by March 31 (except that for the year 2010, the report will be
due September 1) and each annual report must provide projected
information, including any updated information from the previous year's
report.
    As mentioned in the preamble to the proposed rule, EPA currently
receives data on projected flexible-fuel vehicle (FFV) sales and
conversions from vehicle manufacturers. These are helpful in providing
EPA with information regarding the potential market for renewable
fuels. We requested comment on whether we should require the annual
submission of data to facilitate our evaluation of the ability of the
distribution system to deliver the projected volumes of biofuels to
petroleum terminals that are needed to meet the RFS2 standards, the
extent to which such information is already publicly available or can
be purchased from a proprietary source, and the extent to which such
publicly available or purchasable data would be sufficient for EPA to
make its determination. We further requested comment on the parties
that should be required to report to EPA, and data requirements. We
believe that publicly available information on E15, E85, and other
refueling facilities is sufficient for us to make a determination about
the adequacy of such facilities to support the projected volumes that
would be used to satisfy the RFS2 standards. Therefore, we are not
finalizing such a requirement.
    While we understand that the types of projections we request in the
Outlook Reports could be somewhat speculative in nature, we believe
that the projections will provide us with the most reliable information
possible to inform the annual RFS standards and waiver considerations.
Further, we believe this information will be more useful to us than
other public information that is released in other contexts (e.g.,
announcements for marketing purposes). As mentioned above in Section
II.I, we believe that we can use this information to supplement other
available information (such as volume projections from EIA) to help set
the standard for the following year. Specifically, it will provide more
accurate information for setting the cellulosic biofuel and biomass-
based diesel standards, and any adjustments to the advanced biofuel and
total renewable fuel standards.
    We received comments that both support and oppose the Production
Outlook Reports, or some element of them. One commenter stated that EPA
provided no reasonable explanation to require the information being
requested for the reports; the commenter further stated that such
information is not needed to assist parties to come into compliance.
Another commenter stated that the renewable fuels industry cannot
confidently project what will happen in 2010, or even 2020, because
there are too many unknowns, no previous history of renewable fuels
mandates, and no sense of continued tax rebate. The commenter suggested
that until the industry operates for a few years under the RFS2 carve-
outs and the issues on the tax rebates for renewables are resolved, the
industry cannot develop a meaningful outlook forecast. The commenter
further suggested that EPA instead hire a consultant who can look at
the big picture and provide a more meaningful evaluation than could the
individual members of the biofuels industry. However, as discussed
above, while these reports will have their limitations, we believe they
will provide the best and most up to date information available for us
to use in setting the standards and considering any waiver requests. We
will of course also look to other publicly available information, and
may consider using contractors to help out in this regard, but it
cannot replace the need for the production outlook report data.
    A commenter noted that this provision is similar to reports
required under the diesel program. The commenter further stated that if
the required information can be captured by EMTS, the commenter fully
supports this requirement. However, the commenter stated that it is
opposed to some of the required elements of the reports for planned
expanded or new production (strategic planning, planning and front-end
engineering, detailed engineering and permitting, procurement and
construction, and commissioning and start-up); these are an aspect of
financial planning that the commenter believes EPA has no jurisdiction
over and cannot derive basis from EISA in any form regardless of
interpretation. As explained above, this information will be used by
EPA to inform us for setting the standards on an annual basis and in
responding to any waiver petitions. It will not be used to assess
compliance with the program. The other provisions for registration,
recordkeeping and reporting serve that purpose.
    Another commenter stated that the reports should be required, but
that EPA should not rely too heavily upon the data (particularly for
new biofuel technologies). Some commenters noted that they believe that
requiring Production Outlook Reports is duplicative in nature and/or a
burden to the industry. These commenters also believe that EPA already
receives such information through the reporting that currently exists,
and that EPA could also obtain this information from DOE's Energy
Information Administration (EIA) and the National Biodiesel Board
(NBB). Other commenters expressed concern over reporting such
confidential and strategic information (even as confidential business
information (CBI)), and that information out to 2022 seems excessive
and useless; and that the reports should be limited to just domestic
and foreign producers of renewable fuels but not importers (as they
tend to import renewable fuels based on variable economic conditions
and will not likely have the ability to reliably predict their future
import volumes). The information that currently exists from other
sources is current and historical information. For the purposes of
setting future standards, we need to have information on future plans
and projections. We understand that reality will always be different
from the projections, but they will still give us the best possible
source of information. Furthermore, by having projections five years
out into the future, and then obtaining new reports every year, we will
be able to assess the trends in the data and reports to better utilize
them over time.
    Some commenters have expressed concern that the information
required for Production Outlook Reports is not needed, won't provide
useful information because it is speculative, or asks for information
that could be sensitive/confidential. However, we continue to believe
that such information is essential to our annual cellulosic biofuel
standard setting, and consideration of whether waivers should be
provided for other standards. All information submitted to EPA will be
treated as confidential business information (CBI), and if used by EPA
in a regulatory context will only be reported out in very general
terms. As with our Diesel Pre-compliance Reports, we fully expect that
the information will be somewhat speculative in the early reports, and
we will weight it accordingly. As the program progresses, however,
information submitted for the reports will continue to improve. We
believe that any information, whether speculative or concrete, will be
helpful for the purposes described above. Thus

we are finalizing Production Outlook Reports, and the required elements
at Sec.  80.1449.

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

    The prohibition and liability provisions under this rule are
similar to those of the RFS1 program and other fuels programs in 40 CFR
part 80. The rule identifies certain prohibited acts, such as a failure
to acquire sufficient RINs to meet a party's RVOs, producing or
importing a renewable fuel that is not assigned a proper RIN category
(or D Code), improperly assigning RINs to renewable fuel that was not
produced with renewable biomass, failing to assign RINs to qualifying
fuel, or creating or transferring invalid RINs. Any person subject to a
prohibition is liable for violating that prohibition. Thus, for
example, an obligated party is liable if the party failed to acquire
sufficient RINs to meet its RVO. A party who produces or imports
renewable fuels is liable for a failure to assign proper RINs to
qualifying batches of renewable fuel produced or imported. Any party,
including an obligated party, is liable for transferring a RIN that was
not properly identified.
    In addition, any person who is subject to an affirmative
requirement under this program is liable for a failure to comply with
the requirement. For example, an obligated party is liable for a
failure to comply with the annual compliance reporting requirements. A
renewable fuel producer or importer is liable for a failure to comply
with the applicable batch reporting requirements. Any party subject to
recordkeeping or product transfer document (PTD) requirements is liable
for a failure to comply with these requirements. Like other EPA fuels
programs, this rule provides that a party who causes another party to
violate a prohibition or fail to comply with a requirement may also be
found liable for the violation.
    EPAct amended the penalty and injunction provisions in section
211(d) of the Clean Air Act to apply to violations of the renewable
fuels requirements in section 211(o). Accordingly, any person who
violates any prohibition or requirement of this rule is subject to
civil penalties of up to $37,500 per day and per each individual
violation, plus the amount of any economic benefit or savings resulting
from each violation. Under this rule, a failure to acquire sufficient
RINs to meet a party's renewable fuels obligation constitutes a
separate day of violation for each day the violation occurred during
the annual averaging period.
    As discussed above, the regulations prohibit any party from
creating or transferring invalid RINs. These invalid RIN provisions
apply regardless of the good faith belief of a party that the RINs are
valid. These enforcement provisions are necessary to ensure the RFS2
program goals are not compromised by illegal conduct in the creation
and transfer of RINs.
    As in other motor vehicle fuel credit programs, the regulations
address the consequences if an obligated party is found to have used
invalid RINs to demonstrate compliance with its RVO. In this situation,
the obligated party that used the invalid RINs will be required to
deduct any invalid RINs from its compliance calculations. An obligated
party is liable for violating the standard if the remaining number of
valid RINs was insufficient to meet its RVO, and the obligated party
might be subject to monetary penalties if it used invalid RINs in its
compliance demonstration. In determining what penalty is appropriate,
if any, we would consider a number of factors, including whether the
obligated party did in fact procure sufficient valid RINs to cover the
deficit created by the invalid RINs, and whether the purchaser was
indeed a good faith purchaser based on an investigation of the RIN
transfer. A penalty might include both the economic benefit of using
invalid RINs and/or a gravity component.
    Although an obligated party is liable under our proposed program
for a violation if it used invalid RINs for compliance purposes, we
would normally look first to the generator or seller of the invalid
RINs both for payment of penalty and to procure sufficient valid RINs
to offset the invalid RINs. However, if, for example, that party was
out of business, then attention would turn to the obligated party who
would have to obtain sufficient valid RINs to offset the invalid RINs.

III. Other Program Changes

    In addition to the regulatory changes we are finalizing today in
response to comments received on the proposed rule and EISA (which are
designed to implement the provisions of RFS2), there are a number of
other changes to the RFS program that we are making. We believe that
these changes will increase flexibility, simplify compliance, or
address RIN transfer issues that have arisen since the start of the
RFS1 program. Throughout the rulemaking process, we also investigated
impacts on small businesses and we are finalizing provisions to address
the impacts of the program on them.

A. The EPA Moderated Transaction System (EMTS)

    The EPA Moderated Transaction System (EMTS) emerged as a result of
our experiences with and lessons learned from implementing RFS1.
Recognizing that the addition of significant volumes of renewable fuels
and expansion of renewable fuel categories were adding complexity to an
already stressed system, EMTS was introduced as a new approach for
managing RINs in our NPRM. We received broad acceptance of the EMTS
concept in the public comments as well as support for its expeditious
implementation. This section describes the need for EMTS,
implementation of EMTS, and an explanation of how EMTS will work. By
implementing EMTS, we believe that we will be able to greatly reduce
RIN-related errors while efficiently and accurately managing the
universe of RINs. EMTS will save considerable time and resources for
both industry and EPA. This is most evident considering that the system
virtually eliminates multiple sources of administrative errors,
resulting in a reduction of costs and effort expended to correct and
regenerate product transfer documents, documentation and recordkeeping,
and resubmitting reports to EPA. Use of EMTS will result in fewer
report resubmissions and easier reporting for industry, while leaving
fewer reports to be processed by EPA. Industry will spend less time and
effort validating the RINs they procure with greater assurance and
confidence in the RIN market. EPA will spend less time tracking down
invalid RINs and working with regulated parties on complex remedial
actions. This is possible because EMTS removes management of the 38-
digit RIN from the hands of the reporting community. At the same time,
EPA and the reporting community will be working with a standardized
system, reducing stresses and development costs on IT systems.
    We received comments suggesting that EPA remove the attest
engagement requirements and certain recordkeeping requirements due to
the use of EMTS. While we believe that EMTS will simplify and reduce
burdens on the regulated community, it is important to point out that
EMTS is strictly a RIN tracking and managing tool designed to
facilitate reporting under the Renewable Fuel Standard program. Product
transfer documents are the commercial documents used to memorialize
transactions of RINs between a buyer and a seller in the market. The
EMTS will rely on references to these

documents, which can take many forms, but it is not capable of
replacing those documents. Attest engagements are used to verify that
the records required to be kept by regulated parties, including
information retained by a regulated party as well as information
reported to EPA such as laboratory test results, contracts between
renewable fuel/RIN buyers and sellers, feedstock documentation, etc. is
correctly maintained or reported. The information reported via EMTS is
but a subset of the information required to be maintained in a
regulated party's records, and both PTDs and attest engagements are
necessary to ensure that the information collected and tracked in EMTS
concurs with actual events.
1. Need for the EPA Moderated Transaction System
    In implementing RFS1, we found that the 38-digit standardized RINs
proved to be confusing to many parties in the distribution chain.
Parties made various errors in generating and using RINs. For example,
parties transposed digits within the RIN and incorrectly referenced
volume numbering. Also, parties created alphanumeric RINs, despite the
fact that RINs were supposed to consist of all numbers.
    Once an error is made within a RIN, the error propagates throughout
the distribution system. Correcting an error can require significant
time and resources and usually involves many steps. Not only must
reports to EPA be corrected, underlying records and reports reflecting
RIN transactions must also be located and corrected to reflect
discovery of an error. Because reporting related to RIN transactions
under RFS1 was only on a quarterly basis, a RIN error could exist for
several months before being discovered.
    Incorrect RINs are invalid RINs. If parties in the distribution
system cannot track down and correct errors in a timely manner, then
all downstream parties that traded the invalid RIN are in violation.
Because RINs are the basic unit of compliance for the RFS program, it
is important that parties have confidence when generating and using
them.
    All parties in the RFS1 and the RFS2 regulated community are
required to use RINs. Under RFS2, we foresee that regulated party
community will substantially expand. Newer regulated parties of an
already complex system necessitate EMTS. These parties include
renewable fuel producers and importers, obligated parties, exporters,
and other RIN owners; (typically marketers of renewable fuels and
blenders). Under RFS1, all RINs were used to comply with a single
standard. With RFS2, there are four standards. RINs must be generated
to identify one of the fuel categories: cellulosic biofuel, cellulosic
diesel, biomass-based diesel, advanced biofuel, and renewable fuels
(e.g., corn ethanol). (For a more detailed discussion of RINs, see
Section II.A of this preamble.) The different types of RINs will be
managed in the EMTS.
2. Implementation of the EPA Moderated Transaction System
    We proposed that EMTS would be an opt-in for the calendar year 2010
and mandatory for calendar year 2011. We received many comments
strongly supporting EMTS implementation with the start of the RFS2
program to ensure confidence and simplicity in an increasingly complex
program. We also received comments that EMTS implementation with RFS2
is necessary so industry would not have to create a new system to
handle RFS2 RINs for 2010 and then move to EMTS for 2011 while still
handling RFS1 RINs. Potentially, three RIN transaction systems would
exist during transition from RFS1 to RFS2 if EMTS could not be
implemented with the start of the RFS2 program. EPA agrees that this
three system issue would be an undue burden to industry as it would
require industry to create two systems within a 12 month period. EMTS
development started with the introduction of the NPRM, and has been in
beta testing since early November with a select group of different
industry stakeholders. Industry feedback has been overwhelmingly strong
for the implementation of EMTS with the start of RFS2. With this final
rule, EPA decided that EMTS will start on the same date when RFS2 RINs
are required to be generated. In addition, to ensure that parties will
have enough time to incorporate RFS2 and EMTS requirements into private
RIN tracking systems, the generation of RFS2 RINs will begin on July 1,
2010. Therefore, all RFS regulated parties are required to use EMTS
starting July 1, 2010.
    RIN transactions are required to be verified and certified on a
quarterly basis. EMTS will provide summaries for parties to verify,
report, and certify transactions to EPA through the fuels reporting
system, DCFuels. Additional information may be required to be added to
the EMTS provided summary. This additional certification step allows
parties to verification that the information sent to EMTS is accurate.
However, parties may choose to review their data by checking their EMTS
account at anytime.
    With EMTS, RIN transactions are required to be verified and
certified on a quarterly basis. EMTS will provide summaries for parties
to verify, report, and certify transactions to EPA through the fuels
reporting system, DCFuels. Additional information may be required to be
added to the EMTS provided report. This additional certification step
allows parties to verify that the information sent to EMTS is accurate.
However, parties may choose to review their data by checking their EMTS
account at any time.
3. How EMTS Will Work
    EMTS will be a closed, EPA-moderated system that provides a
mechanism for screening RINs and a structured environment for
conducting RIN transactions. ``Screening'' of RINs means that parties
can have greater confidence that the RINs they handle are genuine.
Although screening cannot remove all human error, we believe it can
remove most of it.
    We received comments opposing the 3 day time window for reporting
transactions to the EMTS. One commenter requested 7 days from the event
for sellers to report a transaction and 7 days after that for the buyer
to accept the transaction. In order for this to be a ``real time''
system, we must require that the information comes in a timely manner.
One commenter requested 10 days from the event to send information to
EMTS. EPA has concluded that five days, or a business week, is an
appropriate amount of time for both parties to receive or provide
necessary documentation in order to interact with EMTS accurately and
timely. ``Real time'' will be defined as within five (5) business days
of a reportable event (e.g., generation and assignment of RINs,
transfer of RINs).
    Parties who use EMTS must first register with EPA in accordance
with the RFS2 registration program described in Section II.C of this
preamble. Parties will also have to create an account (i.e., register)
via EPA's Central Data Exchange (CDX), as users will access EMTS via
CDX. CDX is a secure and central electronic portal through which
parties may submit compliance reports. Parties must establish an
account with EMTS by July 1, 2010 or 60 days prior to engaging in any
transaction involving RINs, whichever is later. Once registration
occurs, individual accounts will be established within EMTS and the
system will enable a party to submit transactions based on their
registration information.
    In EMTS, the screening and assignment of RINs will be made at the
logical point, i.e., the point when RINs

are generated through production or importation of renewable fuel. A
renewable producer will electronically submit, in ``real time,'' a
volume of renewable fuel produced or imported, as well as a number of
the RINs generated and assigned. EMTS will automatically screen each
batch and either reject the information or allow RINs created in the
RIN generator's account as one of the five types of RINs.
    We received comments supporting the RFS1 approach that allows
producers and importers to generate RINs at the renewable fuel point of
sale. EPA realizes that this is an industry practice and this
flexibility will still be allowed for RIN generators, but only if
applied consistently.
    After RINs have entered the system, parties may then trade them
based on agreements outside of EMTS. One major advantage of EMTS, over
the RFS1 system, is that the system will simplify trading by allowing
RINs to be traded generically. Only some specifying information will be
needed to trade RINs, such as RIN quantity, fuel type, RIN assignment,
RIN year, RIN price or price per gallon. The unique identification of
the RIN will exist within EMTS, but parties engaging in RIN
transactions will no longer have to worry about incorrectly recording
or using 38-digit RIN numbers. The actual items of transactional
information covered under RFS2 are very similar to those reported under
RFS1. The RIN price is one of the new pieces of transactional
information required to be submitted under RFS2.
    We received several adverse comments strongly opposing the
collection of price information due to Confidential Business
Information (CBI) concerns, other services being able to provide this
information, marketplace delays and undue stress on the EMTS from
disagreements in RIN price. We received one comment strongly supporting
EPA collecting this information. EPA decided that the price information
has great programmatic value because it will help us anticipate and
appropriately react to market disruptions and other compliance
challenges, assess and develop responses to potential waivers, and
assist in setting future renewable fuel standards. In addition, EPA
decided that highly summarized price information (e.g., the average
price of RINs traded nationwide) may be valuable to regulated parties,
as well, and may help them to anticipate and avoid market disruptions.
Also, EPA will not require the matching of the exact RIN price to
alleviate the burden of resubmission due to price mistakes. However,
the price information must be accurate and rounded to the nearest cent
(U.S. Dollar) at the time of sending the transactional information to
EMTS.
    We received one comment requesting publication of security
precautions taken by EPA to protect EMTS from attacks. EPA cannot
provide security information to the public because providing such
information may create security vulnerabilities. However, EMTS will be
compliant with the appropriate security requirements for all federal
agency information technology systems.
    Also as with RFS1, there is no ``good faith'' provision to RIN
ownership. An underlying principle of RIN ownership is still one of
``buyer beware'' and RINs may be prohibited from use at any time if
they are found to be invalid. Because of the ``buyer beware'' aspect,
we will offer the option for a buyer to accept or reject RINs from
specific RIN generators or from classes of RIN generators.
4. A Sample EMTS Transaction
    This sample illustrates how two parties may trade RINs in EMTS:
    (1) Seller logs into EMTS and posts a sale of 10,000 RINs to Buyer
at X price. For this example, assume the RINs were generated in 2010
and were assigned to 10,000 gallons of ``Renewable fuel (D=6)''.
Seller's RIN account for ``Renewable fuel (D=6)'' is put into a
``pending'' status of 10,000 with the posting of the sale to Buyer.
Buyer receives automatic notification of the pending transaction.
    (2) Buyer logs into EMTS. Buyer sees the sale transaction pending.
Assuming it is correct, Buyer accepts it. Upon acceptance, Buyer's RIN
account for ``Renewable fuel (D=6)'' RINs is automatically increased by
10,000 2010 assigned RINs sold at X price.
    (3) After Seller has posted the sale and Buyer has accepted it,
EMTS automatically notifies both Buyer and Seller that the transaction
has been fully completed.
    Under EMTS, the seller will always have to initiate any
transaction. The specific amount of RINs are put into a pending status
when the seller posts the sale. The buyer must confirm the sale in
order to have the RINs transferred to the buyer's account. Transactions
will always be limited to available RINs. Notification will
automatically be sent to both the buyer and the seller upon completion
of the transaction. EPA considers any sale or transfer as complete upon
acknowledgement by the buyer. We will also allow buyers to submit their
acknowledgement prior to a seller initiating the transaction. However,
these buy transactions will not initiate any RINs being put into a
pending status from a seller's account. Instead, the buy transactions
will be queued and checked periodically to see if a ``sell''
transaction was posted by the seller. If a buy is posted without a
matching sell transaction, then the seller will be notified that a buy
transaction is pending. Both buy and sell transactions must be matched
within a set number of days from the submission date or they will
expire. Transactions will expire 7 days after the submission of the
file. Since both parties are required to submit information within 5
days, we allow the full 5 days to expire plus 2 days in the case of
late submissions.
    In summary, the advantage to implementing EMTS is that parties may
engage in RIN transactions with a high degree of confidence, errors
will be virtually eliminated, and everyone engaging in RIN transactions
will have a simplified environment in which to work, which should
minimize the level of resources needed for implementation.

B. Upward Delegation of RIN-Separating Responsibilities

    Since the start of the RFS program on September 1, 2007, there have
been a number of instances in which a party who receives RINs with a
volume of renewable fuel is required to either separate or retire those
RINs, but views the recordkeeping and reporting requirements under the
RFS program as an unnecessary burden. Such circumstances typically
might involve a renewable fuel blender, a party that uses renewable
fuel in its neat form, or a party that uses renewable fuel in a non-
highway application and is therefore required to retire the RINs (under
RFS1) associated with the volume. In some of these cases, the affected
party may purchase and/or use only small volumes of renewable fuel and,
absent the RFS program, would be subject to few (if any other) EPA
regulations governing fuels.
    This situation will become more prevalent with the RFS2 rule, as
EISA added diesel fuel to the RFS program. With the RFS1 rule, small
blenders (generally farmers and other parties that use nonroad diesel
fuel) blending small amounts of biodiesel were not covered under the
rule as EPAct mandated renewable fuel blending for highway gasoline
only. EISA mandates certain amounts of renewable fuels to be blended
into all transportation fuels--which includes highway and nonroad
diesel fuel. Thus, parties that were not regulated under the RFS1 rule
who only blend a small amount of renewable fuel (and, as mentioned
above, are generally not subject to EPA fuels regulations) will now be
regulated by the RFS program.

    Consequently, we believe it is appropriate, and thus we are
finalizing as proposed, to permit blenders who only blend a small
amount of renewable fuel to allow the party directly upstream to
separate RINs on their behalf. Such a provision is consistent with the
fact that the RFS program already allows marketers of renewable fuels
to assign more RINs to some of their sold product and no RINs to the
rest of their sold product. We believe that this provision will
eliminate undue burden on small parties who would otherwise not be
regulated by this program. This provision is solely for the case of
blenders who blend and trade less than 125,000 total gallons of
renewable fuel per year (i.e., a company that blends 100,000 gallons
and trades another 100,000 gallons would not be able to use this
provision) and is available to any blender who must separate RINs from
a volume of renewable fuel under Sec.  80.1429(b)(2).
    We requested comment in the NPRM on this concept, the 125,000
gallon threshold, and appropriate documentation to authorize this
upward delegation. In general, those that commented on this provision
support the idea of upward delegation for small blenders, though one
commenter stated that EPA should not allow small entities to delegate
their RIN-related responsibilities upward. Those commenters that
support the upward delegation provision stated that it should be
limited to small blenders only and should only be for delegating to the
party directly upstream. A few commenters stated that they believe the
125,000 gallon threshold is appropriate; while others commented that it
should be higher. We believe that the 125,000 gallon limit strikes the
correct balance between providing relief to small blenders, while still
ensuring that non-obligated parties cannot unduly influence the RIN
market.
    We did not receive any comments on appropriate documentation,
however a couple commenters suggested that we retain the proposed
annual authorization between the blender and the party directly
upstream, as well as allowing a small blender to enter into
arrangements with multiple suppliers on a transaction-by-transaction
basis. Please see Chapter 5 of the Summary and Analysis of Comments
Document for more discussion on the comments received and our responses
to those comments.
    We are also finalizing, as stated in the preamble to the proposed
rule, that for upstream delegation, both parties must sign a quarterly
written statement (which must be included with the reporting party's
reports) authorizing the upward delegation. Copies of these statements
must be retained as records by both parties. The supplier would then be
allowed to retain ownership of RINs assigned to a volume of renewable
fuel when that volume is transferred, under the condition that the RINs
be separated or retired concurrently with the transfer of the volume.
This statement would apply to all volumes of renewable fuel transferred
between the two parties. Thus, the two parties would enter into a
contract stating that the supplier has RIN-separation responsibilities
for all transferred volumes between the two parties, and no additional
permissions from the small blender would be needed for any volumes
transferred. A blender may enter into such an agreement with as many
parties as they wish.

C. Small Producer Exemption

    Under the RFS1 rule, parties who produce or import less than 10,000
gallons of renewable fuel in a year are not required to generate RINs
for that volume, and are not required to register with the EPA if they
do not take ownership of RINs generated by other parties. These
producers and importers are also exempt from registration, reporting,
recordkeeping, and attest engagement requirements. In the preamble to
the proposed rule, we requested comment on whether or not this 10,000
gallon threshold was appropriate. One commenter suggested that we
retain the 10,000 gallon threshold as-is. Another commenter supported
the concept of less burdensome requirements for small producers, but
suggested that these entities should, at a minimum, be required to
generate RINs for all qualifying renewables. We are maintaining this
exemption under the RFS2 rule for parties who produce or import less
than 10,000 gallons of renewable fuel per year.
    In addition to the permanent exemption for those producers and
importers who produce or import less than 10,000 gallons of renewable
fuel per year, we are also finalizing a temporary exemption for
renewable fuel producers who produce less than 125,000 gallons of
renewable fuel each year from new production facilities. These
producers are not required to generate and assign RINs to batches of
renewable fuel for a period of up to three years, beginning with the
calendar year in which the production facility produces its first
gallon of renewable fuel. Such producers are also exempt from
registration, reporting, recordkeeping, and attest engagement
requirements as long as they do not own RINs or voluntarily generate
and assign RINs. This provision is intended to allow pilot and
demonstration plants of new renewable fuel technologies to focus on
developing the technology and obtaining financing during these early
stages of their development without having to comply with the RFS2
regulations.

D. 20% Rollover Cap

    EISA does not change the language in CAA section 211(o)(5) stating
that renewable fuel credits must be valid for showing compliance for 12
months as of the date of generation. As discussed in the RFS1 final
rulemaking, we interpreted the statute such that credits would
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, obligated parties
determine compliance shortly after the end of the year, and credits
would be identified at that time. In the context of our RIN-based
program, we have accomplished the statute's objective 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 for the
following year. RINs not used for compliance purposes in the year in
which they were generated will by definition be in excess of the RINs
needed by obligated parties in that year, making excess RINs equivalent
to the credits referred to in section 211(o)(5). Excess RINs are valid
for compliance purposes in the year following the one in which they
initially came into existence. RINs not used within their valid life
will thereafter cease to be valid for compliance purposes.
    In the RFS1 final rulemaking, we also discussed the potential
``rollover'' of excess RINs over multiple years. 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 excess RINs generated in one year
could be used to show compliance in the next year, leading to the
generation of new excess RINs in the next year, causing the total
number of excess RINs in the market to accumulate over multiple years
despite the limit on RIN life. When renewable fuel volumes are being
produced that exceed the RFS2 standards, the rollover issue could
undermine the ability of a limit on credit life to guarantee an ongoing
market for renewable fuels.

    To implement EISA's restriction on the life of credits and address
the rollover issue, the RFS1 final rulemaking implemented a 20% cap on
the amount of an obligated party's RVO that can be met using previous-
year RINs. Thus each obligated party is required to use current-year
RINs to meet at least 80% of its RVO, with a maximum of 20% being
derived from previous-year RINs. Any previous-year RINs that an
obligated party may have that are in excess of the 20% cap can be
traded to other obligated parties that need them. If the previous-year
RINs in excess of the 20% cap are not used by any obligated party for
compliance, they will thereafter cease to be valid for compliance
purposes.
    As described in the NPRM, EISA does not modify the statutory
provisions regarding credit life, and the volume changes by EISA also
do not change at least the possibility of large rollovers of RINs for
individual obligated parties. As a result we proposed to maintain the
regulatory requirement for a 20% rollover cap under the new RFS2
program, and to apply this cap separately to all four RVOs under RFS2.
However, we took comment on changing the level of the cap to some
alternative value lower or higher than 20%.
    A lower cap could provide a greater incentive for parties with
excess RINs to sell them rather than hold onto them, increasing the
availability of RINs for parties that need them for compliance
purposes. But a lower cap would also reduce flexibility for obligated
parties attempting to minimize the costs of compliance with increasing
annual volume requirements, particularly if there are concerns that the
RIN market may be tighter in the future than it is currently.
    Conversely, the increasing annual volume requirements in EISA make
it less likely that renewable fuel producers will overcomply, and as a
result it is less likely that there will be an excess of RINs in the
market. Under these circumstances, there is little opportunity for RINs
to build up in the market, and the rollover cap would have less of an
impact on the market as a whole. Thus a higher cap might be warranted.
However, while a higher cap would create greater flexibility for some
obligated parties, it could also create disruptions in the RIN market
as parties with excess RINs would have a greater opportunity to hold
onto them rather than sell them. Parties without direct access to RINs
through the purchase and blending of renewable fuels would be placed at
a competitive disadvantage in comparison to parties with excess RINs.
In the extreme, removal of the cap entirely would allow obligated
parties to roll over up to one year's worth of their obligations
indefinitely.
    In general, commenters on the NPRM reiterated the positions that
they raised during development of the RFS1 program. While one renewable
fuel producer requested that the rollover cap be left at 20%, most
producers requested that the rollover cap be reduced to 0%, such that
compliance with the standards applicable in a given year could only be
demonstrated using RINs generated in that year. In contrast, refiners
requested that the rollover cap be either eliminated, such that any
number of previous year RINs could be used for current year compliance,
or at least raised to 40 or 50 percent. Small refiners requested that
the cap be raised for small refiners only to accommodate the
competitive disadvantage with respect to the RIN market that they
believe they experience in comparison to larger refiners.
    Based on the comments received, we believe that the 20% level
continues to provide 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 EISA. Therefore, we are continuing the 20% rollover cap for
obligated parties for the RFS program.

E. Small Refinery and Small Refiner Flexibilities

    This section discusses flexibilities for small refineries and small
refiners for the RFS2 rule. As explained in the discussion of our
compliance with the Regulatory Flexibility Act below in Section XI.C
and in the Final Regulatory Flexibility Analysis in Chapter 7 of the
RIA, we considered the impacts of the RFS2 regulations on small
businesses (small refiners). Most of our analysis of small business
impacts was performed as a part of the work of the Small Business
Advocacy Review Panel (SBAR Panel, or ``the Panel'') convened by EPA
for this rule, pursuant to the Regulatory Flexibility Act as amended by
the Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA). The Final Report of the Panel is available in the rulemaking
docket. For the SBREFA process, we conducted outreach, fact-finding,
and analysis of the potential impacts of our regulations on small
business refiners.
1. Background--RFS1
a. Small Refinery Exemption
    CAA section 211(o)(9), enacted as part of EPAct, provides a
temporary exemption to small refineries (those refineries with a crude
throughput of no more than 75,000 barrels of crude per day, as defined
in section 211(o)(1)(K)) through December 31, 2010.\35\ Accordingly,
the RFS1 program regulations exempt gasoline produced by small
refineries from the renewable fuels standard (unless the exemption was
waived), see 40 CFR 80.1141. EISA did not alter the small refinery
exemption in any way.
---------------------------------------------------------------------------

    \35\ Small refineries are also allowed to waive this exemption.
---------------------------------------------------------------------------

b. Small Refiner Exemption
    As mentioned above, EPAct granted a temporary exemption from the
RFS program to small refineries through December 31, 2010. In the RFS1
final rule, we exercised our discretion under section 211(o)(3)(B) and
extended this temporary exemption to the few remaining small refiners
that met the Small Business Administration's (SBA) definition of a
small business (1,500 employees or less company-wide) but did not meet
the EPAct small refinery definition as noted above.
2. Statutory Options for Extending Relief
    There are two provisions in section 211(o)(9) that allow for an
extension of the temporary exemption for small refineries beyond
December 31, 2010.
    One provision involves a study by the Department of Energy (DOE)
concerning whether compliance with the renewable fuel requirements
would impose disproportionate economic hardship on small refineries,
and would grant an automatic extension of at least two years for small
refineries that DOE determines would be subject to such
disproportionate hardship (per section 211(o)(9)(A)(ii)). If the DOE
study determines that such hardship exists, then section
211(o)(9)(A)(ii) (which was retained in EISA) provides that EPA shall
extend the exemption for a period of at least two years.
    The second provision, at section 211(o)(9)(B), authorizes EPA to
grant an extension for a small refinery based upon disproportionate
economic hardship, on a case-by-case basis. A small refinery may, at
any time, petition EPA for an extension of the small refinery exemption
on the basis of disproportionate economic hardship. EPA is to consult
with DOE and consider the findings of the DOE small

refinery study in evaluating such petitions. These petitions may be
filed at any time, and EPA has discretion to determine the length of
any exemption that may be granted in response.
3. The DOE Study/DOE Study Results
    As discussed above, EPAct required that DOE perform a study by
December 31, 2008 on the impact of the renewable fuel requirements on
small refineries (section 211(o)(9)(A)(ii)(I)), and whether or not the
requirements would impose a disproportionate economic hardship on these
refineries. In the small refinery study, ``EPACT 2005 Section 1501
Small Refineries Exemption Study,'' DOE's finding was that there is no
reason to believe that any small refinery would be disproportionately
harmed by inclusion in the proposed RFS2 program. This finding was
based on the fact that there appeared to be no shortage of RINs
available under RFS1, and EISA has provided flexibility through waiver
authority (per section 211(o)(7)). Further, in the case of the
cellulosic biofuel standard, cellulosic biofuel allowances can be
provided from EPA at prices established in EISA (see regulation section
80.1456). DOE thus determined that small refineries would not be
subject to disproportionate economic hardship under the proposed RFS2
program, and that the exemption should not, on the basis of the study,
be extended for small refineries (including those small refiners who
own refineries meeting the small refinery definition) beyond December
31, 2010. DOE noted in the study that, if circumstances were to change
and/or the RIN market were to become non-competitive or illiquid,
individual small refineries have the ability to petition EPA for an
extension of their small refinery exemption (pursuant to Section
211(o)(9)(B)).
4. Ability To Grant Relief Beyond 211(o)(9)
    The SBREFA panel made a number of recommendations for regulatory
relief and additional flexibility for small refineries and small
refiners. These are described in the Final Panel Report (located in the
rulemaking docket), and summarized below. During the development of
this final rule, we again evaluated the various options recommended by
the Panel and also comments on the proposed rule. We also consulted the
small refinery study prepared by DOE.
    As described in the Final Panel Report, EPA early-on identified
limitations on its authority to issue additional flexibility and
exemptions to small refineries. In section 211(o)(9) Congress
specifically addressed the issue of an extension of time for compliance
for small refineries, temporarily exempting them from renewable fuel
obligations through December 31, 2010. As discussed above, the statute
also includes two specific provisions describing the basis and manner
in which further extensions of this exemption can be provided. In the
RFS1 rulemaking, EPA considered whether it should provide additional
relief to the limited number of small refiners who were not covered by
the small refinery provision, by providing them a temporary exemption
consistent with that provided by Congress for small refineries. EPA
exercised its discretion under section 211(o)(3) and provided such
relief. Thus, in RFS1, EPA did not modify the relief provided by
Congress for small refineries, but did exercise its discretion to
provide the same relief specified by statute to a few additional
parties.
    In RFS2 we are faced with a different issue--the extent to which
EPA should provide additional relief to small refineries beyond the
relief specified by statute, and whether it should provide such further
relief to small refiners as well. There is considerable overlap between
entities that are small refineries and those that are small refiners.
Providing additional relief just to small refiners would, therefore,
also extend additional relief to at least a number of small refineries.
Congress spoke directly to the relief that EPA may provide for small
refineries, including those small refineries operated by small
refiners, and limited that relief to a blanket exemption through
December 31, 2010, with additional extensions if the criteria specified
by Congress are met. EPA believes that an additional or different
extension, relying on a more general provision in section 211(o)(3)
would be inconsistent with Congressional intent. Further, we do not
believe that the statute allows us the discretion to give relief to
small refiners only--as this would result in a subset of small
refineries (those that also qualify as small refiners) receiving relief
that is greater than the relief already given to all small refineries
under EISA.
    EPA also notes that the criteria specified by statute for providing
a further compliance extension to small refineries is a demonstration
of ``disproportionate economic hardship.'' The statute provides that
such hardship can be identified through the DOE study, or in individual
petitions submitted to the Agency. However, the DOE study has concluded
that no disproportionate economic hardship exists, at least under
current conditions and for the foreseeable future under RFS2.
Therefore, absent further information that may be provided through the
petition process, there does not currently appear to be a basis under
the statute for granting further compliance extensions to small
refineries. If DOE revises its study and comes to a different
conclusion, EPA can revisit this issue.
5. Congress-Requested Revised DOE Study
    In their written comments, as well as in discussions we had with
them on the proposed rule, small refiners indicated that they did not
believe that EPA should rely on the results of the DOE small refinery
study to inform any decisions on small refiner provisions. Small
refiners generally commented that they believe that the study was
flawed and that the conclusions of the study were reached without
adequate analysis of, or outreach with, small refineries (as the
majority of the small refiners own refineries that meet the
Congressional small refinery definition). One commenter stated that
such a limited investigation into the impact on small refineries could
not have resulted in any in-depth analysis on the economic impacts of
the program on these entities. Another commenter stated that it
believes that DOE should be directed to reopen and reassess the small
refinery study be June 30, 2010, as suggested by the Senate
Appropriations Committee.
    We are aware that there have been expressions of concern from
Congress regarding the DOE Study. Specifically, in Senate Report 111-
45, the Senate Appropriations Committee ``directed [DOE] to reopen and
reassess the Small Refineries Exemption Study by June 30, 2010,''
noting a number of factors that the Committee intended that DOE
consider in the revised study. The Final Conference Report 111-278 to
the Energy & Water Development Appropriations Act (H.R. 3183),
referenced the language in the Senate Report, noting that the conferees
``support the study requested by the Senate on RFS and expect the
Department to undertake the requested economic review.'' At the present
time, however, the DOE study has not been revised. If DOE prepares a
revised study and the revised study finds that there is a
disproportionate economic impact, we will revisit the exemption
extension at that point in accordance with section 211(o)(9)(A)(ii).

6. What We're Finalizing
a. Small Refinery and Small Refiner Temporary Exemptions
    As mentioned above, the RFS1 program regulations exempt gasoline
produced by small refineries from the renewable fuels standard through
December 31, 2010 (at 40 CFR 80.1141), per EPAct. As EISA did not alter
the small refinery exemption in any way, we are retaining this small
refinery temporary exemption in the RFS2 program without change (except
for the fact that all transportation fuel produced by small refineries
will be exempt, as EISA also covers diesel and nonroad fuels).
    Likewise, as we extended under RFS1 the small refinery temporary
exemption to the few remaining small refiners that met the Small
Business Administration's (SBA) definition of a small business (1,500
employees or less company-wide), we are also finalizing a continuation
of the small refiner temporary exemption through December 31, 2010.
b. Case-by-Case Hardship for Small Refineries and Small Refiners
    As discussed in Section III.E.2, EPAct also authorizes EPA to grant
an extension for a small refinery based upon disproportionate economic
hardship, on a case-by-case basis. We believe that these avenues of
relief can and should be fully explored by small refiners who are
covered by the small refinery provision. In addition, we believe that
it is appropriate to allow petitions to EPA for an extension of the
temporary exemption based on disproportionate economic hardship for
those small refiners who are not covered by the small refinery
provision (again, per our discretion under section 211(o)(3)(B)); this
would ensure that all small refiners have the same relief available to
them as small refineries do. Thus, we are finalizing a hardship
provision for small refineries in the RFS2 program, that any small
refinery may apply for a case-by-case hardship at any time on the basis
of disproportionate economic hardship per CAA section 211(o)(9)(B). We
are also finalizing a case-by-case hardship provision for those small
refiners that do not operate small refineries using our discretion
under CAA section 211(o)(3)(B). This provision will allow those small
refiners that do not operate small refineries to apply for the same
kind of hardship extension as a small refinery. In evaluating
applications for this hardship provision EPA will take into
consideration information gathered from annual reports and RIN system
progress updates, as recommended by the SBAR Panel, as well as
information provided by the petitioner and through consultation with
DOE.
c. Program Review
    During the SBREFA process, the small refiner Small Entity
Representatives (SERs) also requested that EPA perform an annual
program review, to begin one year before small refiners are required to
comply with the program, to provide information on RIN system progress.
As mentioned in the preamble to the proposed rule, we were concerned
that such a review could lead to some redundancy with the notice of the
applicable RFS standards that EPA will publish in the Federal Register
annually, and this annual process will inevitably include an evaluation
of the projected availability of renewable fuels. Nevertheless, some
Panel members commented that they believe a program review could be
beneficial to small entities in providing them some insight to the RFS
program's progress and alleviate some uncertainty regarding the RIN
system. As we will be publishing a Federal Register notice annually,
the Panel recommended, and we proposed, that an update of RIN system
progress (e.g., RIN trading, publicly-available information on RIN
availability, etc.) be included in this annual notice.
    Based on comments received on the proposed rule, we believe that
such information could be helpful to industry, especially to small
businesses to help aid the proper functioning of the RIN market,
especially in the first years of the program. However, during the
development of the final rule, it became evident that there could be
instances where we would want to report out RIN system information on a
more frequent basis than just once a year. Thus we are finalizing that
we will periodically report out elements of RIN system progress; but
such information will be reported via other means (e.g., the RFS Web
site (http://www.epa.gov/otaq/renewablefuels/index.htm), EMTS homepage,
etc.).
7. Other Flexibilities Considered for Small Refiners
    During the SBREFA process, and in their comments on the proposed
rule, small refiners informed us that they would need to rely heavily
on RINs and/or make capital improvements to comply with the RFS2
requirements. These refiners raised concerns about the RIN program
itself, uncertainty (with the required renewable fuel volumes, RIN
availability, and costs), the desire for an annual RIN system review,
and the difficulty in raising capital and competing for engineering
resources to make capital improvements.
    The Panel recommended that EPA consider the issues raised by the
small refiner SERs and discussions had by the Panel itself, and that
EPA should consider comments on flexibility alternatives that would
help to mitigate negative impacts on small businesses to the extent
allowable by the Clean Air Act. A summary of further recommendations of
the Panel are discussed in Section XI.C of this preamble, and a full
discussion of the regulatory alternatives discussed and recommended by
the Panel can be found in the SBREFA Final Panel Report. Also, a
complete discussion of comments received on the proposed rule regarding
small refinery and small refiner flexibilities can be found in Chapter
5 of the Summary and Analysis of Comments document.
a. Extensions of the RFS1 Temporary Exemption for Small Refiners
    As previously stated, the RFS1 program regulations provide small
refiners who operate small refineries, as well as those small refiners
who do not operate small refineries, with a temporary exemption from
the standards through December 31, 2010. This provided an exemption for
small refineries (and small refiners) for the first five years of the
RFS program. Small refiner SERs suggested that an additional temporary
exemption for the RFS2 program would be beneficial to them in meeting
the RFS standards as increased by Congress in EISA. The Panel
recommended that EPA propose a delay in the effective date of the
standards until 2014 (for a total of eight years) for small entities,
to the extent allowed by the statute.
    During the development of both the Final Panel Report and the
proposed rule, we evaluated various options for small refiners,
including an additional temporary exemption for small refiners from the
required RFS2 standards. As discussed above, we concluded that we do
not have the statutory authority to provide such extensions through
means other than those specified in the statute. Thus, further
extensions will be as a result of any revised DOE study, or in response
to a petition, pursuant to the authorities specified in section
211(o)(9).
    We proposed to continue the temporary exemption finalized in RFS1--
through December 31, 2010. Commenters that oppose an extension of the
temporary exemption generally stated that an extension is not
warranted, and some commenters expressed concerns about allowing

provisions for small refiners. One commenter also stated that it
believes that the small refinery exemption should not be extended and
that the small refiner exemption should be eliminated completely. Two
commenters supported the continuation of the exemption through December
31, 2010 only, and one stated that it does not support an extension as
it believes that all parties have been well aware of the passage of
EISA and small refineries and small refiners should have been striving
to achieve compliance by the end of 2010. Two commenters also expressed
views that the exemption should not have been offered to small refiners
in RFS1 as this was not provided by EPAct, and that an extension of the
exemption should not be finalized for small refineries at all. The
commenters further commented that an economic hardship provision was
included in EPAct, and any exemption extension should be limited to
such cases, and only to the specific small refinery (not small refiner)
that has petitioned for such an extension.
    Commenters supporting an extension of the exemption commented that
they believe that the statutes (EPAct and EISA) do not prohibit EPA
from providing relief to regulated small entities on which the rule
will have a significant economic impact, and that such a delay could
lessen the burden on these entities. One commenter stated that it
believes EPA denied or ignored much of the relief recommended by the
Panel in the proposal. Another commenter stated that it believes EPA's
concerns regarding the legal authority are unsustainable considering
EPA's past exercises of discretion under the RFS1 program, and with the
discretion afforded to EPA under section 211(o) of the CAA. Some
commenters requested a delay until 2014 for small refiners. One
additional commenter expressed support for an extension of the small
refinery exemption only, and that these small refineries should be
granted a permanent exemption.
    During the development of this final rule, we again evaluated the
various options recommended by the Panel, the legality of offering an
extension of the exemption to small refiners only, and also comments on
the proposed rule. Specifically in the case of an extension of the
exemption for small refiners, we also consulted the small refinery
study prepared by DOE, as the statute directs us to use this as a basis
for providing an additional two year exemption. As discussed above in
Sections III.E.4 and 5, we do not believe that we can provide an
extension of the exemption considering the outcome of the DOE small
refinery study, which did not find that there was a disproportionate
economic hardship. Further, we do not believe that the statute allows
us the discretion to give relief to a subset of small refineries (those
that also qualify as small refiners) that is greater than the relief
already given to all small refineries under EPAct. However, it is
important to recognize that the 211(o)(9) small refinery provision does
allow for extensions beyond December 31, 2010, as discussed above in
Section III.E.2. Thus, refiners may apply for individual hardship
relief.
b. Phase-in
    The small refiner SERs suggested that a phase-in of the obligations
applicable to small refiners would be beneficial for compliance, such
that small refiners would comply by gradually meeting the standards on
an incremental basis over a period of time, after which point they
would comply fully with the RFS2 standards. However we stated in the
NPRM that we had serious concerns about our legal authority to provide
such a phase-in. CAA section 211(o)(3)(B) states that the renewable
fuel obligation shall ``consist of a single applicable percentage that
applies to all categories of persons specified'' as obligated parties.
A phase-in approach would essentially result in different applicable
percentages being applied to different obligated parties. Further, such
a phase-in approach would provide more relief to small refineries
operated by small refiners than that provided under the statutory small
refinery provisions.
    Some commenters stated that they believe that EPA has the ability
to consider a phase-in of the standards for small refiners. One
commenter suggested that a temporary phase-in could help lessen the
burden of regulation on small entities and promote compliance. Another
commenter stated that it believes EPA's legal concerns regarding a
phase-in are unsustainable considering EPA's past exercises of
discretion under the RFS1 program and with the discretion afforded to
EPA under section 211(o) of the CAA.
    After considering the comments on this issue, EPA continues to
believe that allowing a phase-in of regulatory requirements for small
refineries and/or small refiners would be inconsistent with the
statute, for the reasons mentioned above. Any individual entities that
are experiencing hardship that could justify a phase-in of the
standards have the ability to petition EPA for individualized relief.
Therefore we are not including a phase-in of standards for small
refiners in today's rule.
c. RIN-Related Flexibilities
    The small refiner SERs requested that the RFS2 rule contain
provisions for small refiners related to the RIN system, such as
flexibilities in the RIN rollover cap percentage and allowing small
refiners only to use RINs interchangeably. In the RFS1 rule, up to 20%
of a previous year's RINs may be ``rolled over'' and used for
compliance in the following year. In the preamble to the proposed rule,
we discussed the concept of allowing for flexibilities in the rollover
cap, such as a higher RIN rollover cap for small refiners for some
period of time or for at least some of the four standards. As the
rollover cap is the means through which we are implementing the limited
credit lifetime provisions in section 211(o) of the CAA, and therefore
cannot simply be eliminated, we requested comment on the concept of
increasing the RIN rollover cap percentage for small refiners and an
appropriate level of that percentage. In response to the Panel's
recommendation, we also sought comment on allowing small refiners to
use the four types of RINs interchangeably.
    In their comments on the proposed rule, one small refiner commented
that, in regards to small refiners' concerns about RIN pricing and
availability, there is no mechanism in the rule to address the
possibility that the RIN market will not be viable. The commenter
further suggested that more ``durable'' RINs are needed for small
refiners that can be carried over from year to year, to alleviate some
of the potentially market volatility for renewable fuels. Another
commenter suggested that RINs should be interchangeable for small
refiners, or alternatively, some mechanism should be implemented to
ensure that RIN prices are affordable for small refiners. Further, with
regard to interchangeable RINs, one commenter stated that small
refiners do not have the staff or systems to manage and account for
four different categories of RINs and rural small refiners will suffer
economic hardship and disadvantage because of the unavailability of
biofuels. The commenter also requested an increase in the rollover cap
to 50% for small refiners.
    We are not finalizing additional RIN-related flexibilities for
small refiners in today's action. As highlighted in the NPRM, we
continue to believe that the concept of interchangeable RINs for small
refiners only fails to require the four different standards mandated by
Congress (e.g., conventional biofuel

could not be used instead of cellulosic biofuel or biomass-based
diesel), and is not consistent with section 211(o) of the Clean Air
Act. Essentially, it would circumvent the explicit direction of
Congress in EISA to require that the four RFS2 standards be met
separately. Further, given the findings from the DOE study that small
refineries (and thus, most small refiners) do not currently face
disproportionate economic hardship, and are not expected to do so as
RFS2 is implemented, we do not believe that a basis exists to justify
providing small refiners with a larger rollover cap than other
regulated entities. Thus, small refiners will be held to the same RIN
rollover cap as other obligated parties.